Edgar Filing: Customers Bancorp, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller Reporting Company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

¨	Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

333-166225

(Commission File number)

(Exact name of registrant as specified in its charter)

Pennsylvania

27-2290659

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

1015 Penn Avenue

Suite 103

Wyomissing PA 19610

(Address of principal executive offices)

(610) 933-2000

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

On November 14, 2012, 13,767,605 shares of Voting Common Stock were outstanding, and 4,691,897 shares of Class B Non-Voting Common Stock were outstanding.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Customers Bancorp, Inc.

Table of Contents


Part I

Item 1.	Customers Bancorp, Inc. Consolidated Financial Statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	60

PART II

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

SIGNATURES		63

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET - UNAUDITED


	September 30, 2012			December 31, 2011
	(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks	$	9,112		$	7,765
Interest earning deposits		148,398			65,805

Cash and cash equivalents		157,510			73,570
Investment securities available for sale, at fair value		130,705			79,137
Investment securities held to maturity (fair value 2011 $330,809)		0			319,547
Loans held for sale (including $1,063,666 of mortgage warehouse loans at fair value in 2012)		1,187,885			174,999
Loans receivable not covered under Loss Sharing Agreements with the FDIC		976,134			1,215,117
Loans receivable covered under Loss Sharing Agreements with the FDIC		110,965			126,276
Less: Allowance for loan losses		(24,974	)		(15,032	)

Total loans receivable, net		1,062,125			1,326,361
FDIC loss sharing receivable		12,306			13,077
Bank premises and equipment, net		9,708			8,448
Bank-owned life insurance		40,303			29,268
Other real estate owned (2012 $7,107; 2011 $6,166 covered under Loss Sharing Agreements with the FDIC)		10,699			11,814
Goodwill and other intangibles		3,697			3,705
Restricted stock		22,581			21,818
Accrued interest receivable and other assets		16,572			15,788

Total assets	$	2,654,091		$	2,077,532

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	213,229		$	114,044
Interest bearing		2,134,955			1,469,145

Total deposits		2,348,184			1,583,189
Federal funds purchased		0			5,000
Other borrowings		36,000			331,000
Subordinated debt		2,000			2,000
Accrued interest payable and other liabilities		6,405			8,595

Total liabilities		2,392,589			1,929,784

Shareholders’ equity:
Preferred stock, par value $1,000 per share; 100,000,000 shares authorized; none issued		0			0
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 18,507,121 shares issued and 18,459,502 outstanding at September 30, 2012 and 11,395,302 shares issued and 11,347,683 outstanding at December 31, 2011		18,507			11,395
Additional paid in capital		211,868			122,602
Retained earnings		30,748			14,496
Accumulated other comprehensive gain (loss)		879			(245	)
Less: cost of treasury stock; 47,619 shares at September 30, 2012 and December 31, 2011		(500	)		(500	)

Total shareholders’ equity		261,502			147,748

Total liabilities and shareholders’ equity	$	2,654,091		$	2,077,532

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
	(Dollars in thousands, except per share data)
Interest income
Loans receivable, taxable, including fees	$	26,990		$	11,280	$	59,963	$	30,958
Loans receivable, non-taxable, including fees		55			17		110		62
Investment securities, taxable		805			3,973		5,936		10,341
Investment securities, non-taxable		21			22		64		65
Other		91			67		225		380

Total interest income		27,962			15,359		66,298		41,806

Interest expense:
Deposits		5,191			5,564		15,687		16,660
Federal funds purchased		5			0		8		0
Securities sold under repurchase agreements		0			21		0		28
Borrowed funds		194			95		434		304
Subordinated debt		17			16		52		49

Total interest expense		5,407			5,696		16,181		17,041

Net interest income		22,555			9,663		50,117		24,765
Provision for loan losses		10,116			900		14,654		6,550

Net interest income after provision for loan losses		12,439			8,763		35,463		18,215

Non-interest income:
Deposit fees		124			114		357		313
Mortgage warehouse transactional fees		3,346			1,366		8,829		3,754
Bank owned life insurance		359			264		948		1,128
Gain on sale of investment securities		0			1,413		9,006		1,413
Accretion of FDIC loss sharing receivable		1,296			0		1,951		1,709
Gain (loss) on sale of loans		(71	)		0		268		377
Other		4,712			85		5,436		388

Total non-interest income		9,766			3,242		26,795		9,082

Non-interest expense:
Salaries and employee benefits		5,978			3,752		17,073		11,840
Occupancy		1,709			1,022		4,937		3,012
Technology, communication and bank operations		699			485		2,037		1,312
Advertising and promotion		270			206		846		639
Professional services		819			1,234		2,474		3,963
FDIC assessments, taxes, and regulatory fees		669			373		2,205		1,626
Other real estate owned		(287	)		102		587		390
Loan workout		617			370		1,519		1,014
Merger related expenses		0			530		28		530
Stock offering expenses		97			0		1,437		0
Other		1,424			656		4,112		1,861

Total non-interest expense		11,995			8,730		37,255		26,187

Income before tax expense		10,210			3,275		25,003		1,110
Income tax expense		3,574			930		8,751		299

Net income		6,636			2,345		16,252		811
Dividends on preferred stock		0			5		0		5

Net income available to common shareholders	$	6,636		$	2,340	$	16,252	$	806

Basic income per share	$	0.53		$	0.24	$	1.39	$	.08

Diluted income per share	$	0.51		$	0.23	$	1.35	$	.08

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Net income	$	6,636		$	2,345		$	16,252		$	811

Other comprehensive income (loss):
Unrealized holding gains on securities arising during the period		1,597			646			2,226			6,573
Income tax effect		(559	)		(220	)		(779	)		(2,235	)
Unrealized holding gain on securities transferred from the held-to-maturity category into the available-for-sale category		0			0			8,509			0
Income tax effect		0			0			(2,978	)		0
Reclassification adjustment for gains included in net income		0			(1,413	)		(9,006	)		(1,413	)
Income tax effect		0			477			3,152			480

Other comprehensive income (loss), net of tax		1,038			(510	)		1,124			3,405

Comprehensive income	$	7,674		$	1,835		$	17,376		$	4,216

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY – UNAUDITED

For the Nine Months Ended September 30, 2012 and 2011

(Dollars in thousands)


	Shares of Preferred Stock Outstanding		Shares of Common Stock Outstanding		Preferred Stock		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2010		0		8,398,015	$	0	$	8,398	$	88,132	$	10,506		$	(1,896	)	$	0		$	105,140
Comprehensive income												811			3,405						4,216
Stock-based compensation expense										515											515
Common stock issued, net of costs				2,373,599				2,374		26,152											28,526
Shares issued in the acquisition of Berkshire Bancorp, Inc		3,037		623,990		3,037		623		7,614											11,274
Dividends – preferred stock												(5	)								(5	)

Balance, September 30, 2011		3,037		11,395,604	$	3,037	$	11,395	$	122,413	$	11,312		$	1,509		$	0		$	149,666


	Shares of Preferred Stock Outstanding		Shares of Common Stock Outstanding		Preferred Stock		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2011		0		11,347,683	$	0	$	11,395	$	122,602	$	14,496		$	(245	)	$	(500	)	$	147,748
Comprehensive income												16,252			1,124						17,376
Stock-based compensation expense										1,616											1,616
Common stock issued, net of costs				7,111,819				7,112		87,650											94,762

Balance, September 30, 2012		0		18,459,502	$	0	$	18,507	$	211,868	$	30,748		$	879		$	(500	)	$	261,502

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED


Nine Months Ended September 30,	2012			2011
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income available to common shareholders	$	16,252		$	806
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		14,654			6,550
Provision for depreciation and amortization		1,447			967
Stock-based compensation		1,616			515
Deferred taxes		(1,112	)		0
Net amortization (accretion) of investment securities premiums and discounts		2,897			(282	)
Gain on sale of investment securities		(9,006	)		(1,413	)
Gain on sale of loans		(268	)		(377	)
Origination of loans held for sale		(7,305,339	)		(1,685,972	)
Proceeds from the sale of loans held for sale		6,292,453			1,680,915
Increase in FDIC loss sharing receivable		(4,537	)		(1,709	)
(Accretion) amortization of fair value discounts		(277	)		330
Net loss (gain) on sales of other real estate owned		985			(235	)
Impairment charges on other real estate owned		468			1,156
Change in investment in bank-owned life insurance		(1,035	)		(1,128	)
Increase in accrued interest receivable and other assets		(1,081	)		(22,459	)
Decrease in accrued interest payable and other liabilities		(2,190	)		(2,456	)

Net Cash Used in Operating Activities		(994,073	)		(24,792	)

Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of investment securities available for sale		26,488			16,847
Proceeds from sales of investment securities available for sale		306,610			112,757
Purchases of investment securities available for sale		(108,249	)		(72,960	)
Purchases of investment securities held to maturity		0			(396,835	)
Proceeds from maturities and principal repayments of investment securities held to maturity		50,968			35,647
Net decrease (increase) in loans		302,275			(220,626	)
Purchase of loan portfolio		(63,246	)		(13,000	)
Proceeds from sales of SBA loans		3,689			5,172
Net cash proceeds from bank acquisition		0			19,207
Proceeds from bank-owned life insurance		0			273
Purchases of bank-owned life insurance		(10,000	)		0
Purchases of restricted stock		(763	)		(10,364	)
Reimbursements from the FDIC on loss sharing agreements		5,308			6,551
Purchases of bank premises and equipment		(2,343	)		(1,725	)
Proceeds from sales of other real estate owned		7,383			5,377

Net Cash Provided by (Used in) Investing Activities		518,120			(513,679	)

Cash Flows from Financing Activities
Net increase in deposits		765,131			214,269
Net (decrease) increase in short-term borrowed funds		(300,000	)		110,000
Payment of preferred dividend		0			(218	)
Proceeds from issuance of common stock, net		94,762			28,526

Net Cash Provided by Financing Activities		559,893			352,577

Net Increase (Decrease) in Cash and Cash Equivalents		83,940			(185,894	)
Cash and Cash Equivalents — Beginning		73,570			238,724

Cash and Cash Equivalents — Ending	$	157,510		$	52,830

Supplementary Cash Flows Information

Interest paid	$	16,257		$	17,212
Income taxes paid		12,625			2,816

Non-cash items:

Transfer of loans to other real estate owned	$	8,293		$	7,793
Transfer of held to maturity investments to available for sale		268,671			0
Berkshire Bancorp, Inc. Acquisition:
Assets acquired	$	0		$	134,110
Liabilities assumed		0			122,836

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Customers Bancorp, Inc. (the “Bancorp”) is a Pennsylvania corporation formed on April 7, 2010 to facilitate the reorganization of Customers Bank (the “Bank”) into a bank holding company structure. The reorganization was completed on September 17, 2011. Any financial information for periods prior to September 17, 2011 contained herein reflects that of Customers Bank as the predecessor entity.

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Bancorp believes that the disclosures made are adequate to make the information not misleading. The Bancorp’s unaudited consolidated interim financial statements reflect all adjustments that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. Certain amounts reported in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications did not significantly impact the Bancorp’s financial position or results of operations.

Operating results for the three-month and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

The accounting policies of Customers Bancorp, Inc. and Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as disclosed on pages 80 through 90 of Customers’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the latest Form 10-K. In addition, the Bancorp has made accounting changes in the third quarter of 2012 that are detailed in the following section entitled “ACCOUNTING CHANGES.”

The Bancorp evaluated its September 30, 2012 consolidated financial statements for subsequent events through the date the financial statements were issued. The Bancorp is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.

ACCOUNTING CHANGES

The Fair Value Option

During the third quarter of 2012, we elected the fair value option for warehouse lending transactions documented under a Master Repurchase Agreement originated after July 1, 2012 in order to more accurately represent the short term nature of the transaction and its inherent credit risk. This adoption is in accordance with the parameters established by Accounting Standards Codification (“ASC”) 825-10-25, Financial Instruments-Overall-Recognition: The Fair Value Option. As a result of this election, new warehouse lending transactions were classified as “Loans held for sale” on the balance sheet. The interest income from the warehouse lending transactions was classified in “Interest Income – Loans receivable, taxable, including fees” on the income statement for the third quarter of 2012. As Loans Receivable, the warehouse lending transactions were accounted for on an amortized cost basis less an allowance for loan loss. An allowance for loan losses is not recorded for the warehouse lending transactions when measured at fair value since under ASC 825, the exit price (the repurchase price) for warehouse lending transactions considers the effect of expected credit losses.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION – (continued)

Change in Accounting Estimates

Estimates of cash flows from purchased credit-impaired (“PCI”) loans were revised during the third quarter of 2012 due to conversion to a more sophisticated and precise loan valuation system. In accordance with the guidance in ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, interest income is based on an acquired loan’s expected cash flows. Acquired loans are generally assessed to be within the scope of ASC 310-30 if: (1) the asset shows evidence of having deteriorated in credit quality since it was originated, and (2) it is probable that the acquirer will be unable to collect all contractually required payments receivable. Complex models are needed to calculate loan-level and/or pool level expected cash flows in accordance with ASC 310-30. The loan data analysis provided by the new software is a more precise quantification of future cash flows than the analysis that was previously calculated manually. Conversion to the new system was completed in September 2012, and as a result, estimates of cash flows from PCI loans were revised. When converting to the new software system, we were required to calculate the estimated cash flows from the various acquisition dates of the PCI loans through the date the software was implemented as it was impracticable to perform these calculations on a monthly or quarterly basis. These changes in estimates are accounted for prospectively as a change in accounting estimate. In the third quarter of 2012, approximately $4.4 million was recognized in other non-interest income related to this change.

Also during the third quarter of 2012, we performed an initial re-estimation of the cash flows for the PCI loans. The re-estimation process updates the existing loan data for current loan assumptions. As a result of the initial re-estimation an increase of $4.5 million was recorded to interest income. As required by ASC 310-30, the recorded loan balance included accrued interest receivable. Due to the higher loan balance, we evaluated the adequacy of the allowance for loan losses and determined that an additional provision for loan losses of $7.5 million was appropriate. In the future, we will re-estimate the cash flows on the PCI loans on a quarterly basis, and adjustments, if any, are not expected to have a material impact on future earnings.

As a result of the changes in estimates, net income increased by $911,000, net of tax, and basic and diluted earnings increased by $0.08 per share.

NOTE 2 — REORGANIZATION AND ACQUISITION ACTIVITY

Reorganization into Customers Bancorp, Inc.

The Bancorp and the Bank entered into a Plan of Merger and Reorganization effective September 17, 2011 pursuant to which all of the issued and outstanding common stock of the Bank was exchanged on a three to one basis for shares of common stock and Class B Non-Voting common stock of the Bancorp. The Bank became a wholly owned subsidiary of the Bancorp (the “Reorganization”). The Bancorp is authorized to issue up to 100,000,000 shares of common stock, 100,000,000 shares of Class B Non-Voting Common Stock and 100,000,000 shares of preferred stock. All share and per share information has been retrospectively restated to reflect the Reorganization, including the three-for-one consideration used in the Reorganization.

In the Reorganization, the Bank’s issued and outstanding shares of common stock of 22,525,825 shares and Class B Non-Voting common stock of 6,834,895 shares converted into 7,508,473 shares of the Bancorp’s common stock and 2,278,294 shares of the Bancorp’s Class B Non-Voting common stock. Cash was paid in lieu of fractional shares. Outstanding warrants to purchase 1,410,732 shares of the Bank’s common stock with a weighted-average exercise price of $3.55 per share and 243,102 shares of the Bank’s Class B Non-Voting common stock with a weighted-average exercise price of $3.50 per share were converted into warrants to purchase 470,260 shares of the Bancorp’s common stock with a weighted-average exercise price of $10.64 per share and warrants to purchase 81,036 shares of the Bancorp’s Class B Non-Voting common stock with a weighted-average exercise price of $10.50 per share. Outstanding stock options to purchase 2,572,404 shares of the Bank’s common stock with a weighted-average exercise price of $3.50 per share and stock options to purchase 231,500 shares of the Bank’s Class B Non-Voting common stock with a weighted-average exercise price of $4.00 per share were converted into stock options to purchase 855,774 shares of the Bancorp’s common stock with a weighted-average exercise price of $10.49 per share and stock options to purchase 77,166 shares of the Bancorp’s Class B Non-Voting common stock with a weighted-average exercise price of $12.00 per share.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 2 — REORGANIZATION AND ACQUISITION ACTIVITY – (continued)

Acacia Federal Savings Bank Acquisition

On June 21, 2012, the Bancorp announced the entry into a definitive agreement to acquire Acacia Federal Savings Bank (Acacia) located in Falls Church, Virginia from two subsidiaries of Ameritas Mutual Holding Company (Ameritas). Acacia serves the metro Washington, D.C. market. Pursuant to the terms of the agreement, the Bancorp will acquire 100% of the stock of Acacia from Ameritas Mutual Holding Company for a total purchase price of $65.0 million to be paid in Voting Common Stock (resulting in a 9.9% voting ownership interest in the Bancorp), Class B Non-Voting Common Stock (resulting in up to 19.9% total common ownership interest (voting and non-voting, taking into account outstanding securities convertible into common stock) in the Bancorp), and Perpetual Non-Cumulative Preferred Stock, Series C (with an aggregate liquidation value of $65.0 million minus the value of the Common Stock and Class B Non-Voting Common Stock to be issued in the acquisition). The Bancorp expects to issue its Voting Common Stock and Class B Non-Voting Common Stock at 115% of GAAP book value at the time of closing.

The Bancorp will not be acquiring any non-performing loans, other real estate owned or other assets that it deems to possess higher risk. In addition, the Bancorp will not be responsible for any severance obligations, charges associated with the early termination of the O.S.I. technology contract or lease termination charges on Acacia’s corporate headquarters beyond one year. The closing is expected to take place during the fourth quarter of 2012.

The consummation of the Acacia Transaction is contingent upon a number of conditions including, but not limited to, receipt of various regulatory approvals.

CMS Bancorp Acquisition

On August 10, 2012, Customers Bancorp Inc. announced the entry into a definitive agreement to acquire via merger CMS Bancorp (CMS Bancorp) located in White Plains, New York and ultimately CMS Bank. CMS Bank, with five branches, serves Westchester County, New York, and the surrounding areas.

The total transaction value is approximately $20.8 million, and the agreement provides for CMS Bancorp stockholders to receive shares of Customers Bancorp voting common stock based upon an exchange ratio to be determined as the quotient of (i) the CMS Valuation, divided by (ii) the Customers Valuation, with fractional shares to be cashed out. The “CMS Valuation” will be calculated as 95% of CMS Bancorp’s common stockholders’ equity as of the month end prior to the closing, while the “Customers Valuation” will be calculated as 125% of Customer Bancorp’s modified stockholder equity as of the month end prior to closing. Modified stockholders’ equity is defined as June 30, 2012 book value plus additions to retained earnings through the month-end prior to closing. Shares issued by Customers Bancorp in capital raises and purchase accounting adjustments from any other acquisitions will not be included in calculating modified stockholders’ equity. By way of example, based on the March 31, 2012 book value per share of CMS Bancorp and the June 30, 2012 modified stockholders’ equity of Customers Bancorp, $11.75 and $13.99, respectively, the exchange ratio would be 0.6383. The foregoing calculation is provided as an example only, and does not purport to be the actual exchange ratio. The actual exchange ratio will likely be different at closing.

The acquisition of CMS will enhance the Bancorp’s New York franchise. Closing of the CMS Bancorp merger, which is subject to regulatory approval, customary closing conditions and the approval of CMS Bancorp’s stockholders, is expected to occur in the first half of 2013.

NOTE 3 — RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-03, Reconsideration of Effective Control for Repurchase Agreements. This ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance was effective for the first interim or annual period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance was effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Adoption of this guidance has not had a material impact on Customers Bancorp’s financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 3 — RECENTLY ISSUED ACCOUNTING STANDARDS - (continued)

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in shareholders’ equity. This amendment is to be applied retrospectively and was effective for fiscal years and interim periods ending after December 15, 2011 for public companies. Adoption of this guidance has not had a significant impact on Customers Bancorp’s financial statements.

In September, 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. The purpose of this ASU is to simplify how entities test goodwill for impairment by adding a new first step to the preexisting goodwill impairment test under ASC Topic 350,

Intangibles – Goodwill and other. This amendment gives the entity the option to first assess a variety of qualitative factors such as economic conditions, cash flows, and competition to determine whether it was more likely than not that the fair value of goodwill has fallen below its carrying value. If the entity determines that it is not likely that the fair value has fallen below its carrying value, then the entity will not have to complete the original two-step test under Topic 350. The amendments in this ASU were effective for impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In December, 2011, the FASB issued ASU 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification. This ASU clarifies previous guidance for situations in which a reporting entity would relinquish control of the assets of a subsidiary in order to satisfy the nonrecourse debt of the subsidiary. The ASU concludes that if control of the assets has been transferred to the lender, but not legal ownership of the assets; then the reporting entity must continue to include the assets of the subsidiary in its consolidated financial statements. The amendments in this ASU were effective for public entities for annual and interim periods beginning on or after June 15, 2012. Adoption of this guidance has not had a material impact on results of operations or financial condition.

In December, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, in an effort to improve comparability between U.S. GAAP and IFRS financial statements with regard to the presentation of offsetting assets and liabilities on the statement of financial position arising from financial and derivative instruments, and repurchase agreements. The ASU establishes additional disclosures presenting the gross amounts of recognized assets and liabilities, offsetting amounts, and the net balance reflected in the statement of financial position. Descriptive information regarding the nature and rights of the offset must also be disclosed. This ASU is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. Customers Bancorp does not expect this ASU to have a significant impact on its consolidated financial statements.

In July 2012, the FASB issued guidance amending the way companies test for indefinite-lived intangible asset impairment, allowing the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. This guidance is effective for interim and annual periods beginning after September 15, 2012, with early adoption permitted. Customers Bancorp will adopt the guidance in connection with its annual indefinite-lived intangible assets impairment test in the fourth quarter of fiscal 2012. Customers Bancorp does not expect the adoption will have a significant impact on its consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 4 — EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if options to purchase common stock were exercised, warrants to purchase common stock were exercised, and restricted stock units vested and common stock was issued. Potential common shares that may be issued related to outstanding stock options are determined using the treasury stock method.

The following are the components of the Bancorp’s earnings per share for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
	(Dollars in thousands, except per share data)
	2012		2011		2012		2011
Net income allocated to common shareholders	$	6,636	$	2,340	$	16,252	$	806

Weighted-average number of common shares — basic		12,465,744		9,876,004		11,723,090		9,621,548
Share-based compensation plans		310,845		144,560		231,674		127,561
Warrants		134,926		73,258		112,265		64,360

Weighted-average number of common shares — diluted		12,911,515		10,093,822		12,067,029		9,813,469

Basic earnings per share	$	0.53	$	0.24	$	1.39	$	0.08

Diluted earnings per share	$	0.51	$	0.23	$	1.35	$	0.08


	Anti-dilutive Securities Excluded from the Computation of Earnings per Share
	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Anti-dilutive securities:
Share-based compensation awards		6,592		34,130		6,592		34,130
Warrants		129,946		130,047		129,946		130,047

Total anti-dilutive securities		136,538		164,177		136,538		164,177

NOTE 5 — INVESTMENT SECURITIES

In May 2012, Customers Bancorp reclassified its $269.0 million held-to-maturity investment portfolio to available for sale. Due to its strong outlook for loan growth, falling interest rates, and its recent decision to postpone its initial public offering of stock, the Bancorp decided to proceed with this reclassification to provide liquidity. The reclassification increased total shareholders’ equity by $5.5 million associated with the recording of the net security gains on the portfolio, net of tax effects, to accumulated other comprehensive income. Subsequently, the Bancorp sold $257.6 million of available-for-sale securities and realized a pre-tax gain of $8.8 million. In accordance with regulatory and accounting requirements, the Bancorp is prohibited from classifying security purchases as held to maturity for a period of two years.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT SECURITIES - (continued)

The amortized cost and approximate fair value of investment securities as of September 30, 2012 and December 31, 2011 are summarized as follows:


	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
*Available for Sale:*
Mortgage-backed securities (1)	$	101,736	$	1,689	$	(27	)	$	103,398
Asset-backed securities		553		10		0			563
Municipal securities		2,058		9		(1	)		2,066
Corporate notes		25,000		0		(328	)		24,672
Equities		6		0		0			6

	$	129,353	$	1,708	$	(356	)	$	130,705

(1)	Includes private-label securities with an aggregate amortized cost of $659 and an aggregate fair value of $636.


	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
*Available for Sale:*
U.S. Treasury and government agencies	$	1,002	$	0	$	(1	)	$	1,001
Mortgage-backed securities (1) (2)		55,818		581		(107	)		56,292
Asset-backed securities		622		5		0			627
Municipal securities		2,071		0		(71	)		2,000
Corporate notes		20,000		0		(783	)		19,217

	$	79,513	$	586	$	(962	)	$	79,137

*Held to Maturity:*
Mortgage-backed securities	$	319,547	$	11,262	$	0		$	330,809

(1)	Includes an interest only strip security of $2,894.

(2)	Includes private-label securities with an aggregate amortized cost of $765 and an aggregate fair value of $662.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT SECURITIES – (continued)

The following tables show proceeds from the sale of available for sale investment securities, gross gains and gross losses on those sales of securities for the three and nine months ended September 30, 2012 and 2011:


	Three Months Ended September 30,
	2012		2011
	(Dollars in thousands)
Proceeds from sale of available-for-sale investment securities	$	0	$	112,757
Gross gains	$	0	$	1,413
Gross losses		0		0

Net gains	$	0	$	1,413


	Nine Months Ended September 30,
	2012		2011
	(Dollars in thousands)
Proceeds from sale of available-for-sale investment securities	$	306,610	$	112,757
Gross gains	$	9,006	$	1,413
Gross losses		0		0

Net gains	$	9,006	$	1,413

These gains and losses were determined using the specific identification method and were included in non-interest income.

The following table shows debt securities by stated maturity. Debt securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and are, therefore, classified separately with no specific maturity date:


	September 30, 2012
	Available for Sale
	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	1,090	$	1,090
Due after one year through five years		26,450		26,139
Due after five years through ten years		38		39
Due after ten years		33		33

		27,611		27,301
Mortgage-backed securities		101,736		103,398

Total debt securities	$	129,347	$	130,699

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 5 — INVESTMENT SECURITIES – (continued)

The Bancorp’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011, were as follows:


	September 30, 2012
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
			(Dollars in thousands)
*Available for Sale:*
Mortgage-backed securities	$	6	$	(1	)	$	440	$	(26	)	$	446	$	(27	)
Municipal securities		0		0			1,005		(1	)		1,005		(1	)
Corporate notes		4,912		(88	)		19,760		(240	)		24,672		(328	)

Total	$	4,918	$	(89	)	$	21,205	$	(267	)	$	26,123	$	(356	)


	December 31, 2011
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
*Available for Sale:*
U.S. Treasury and government agencies	$	1,001	$	(1	)	$	0	$	0		$	1,001	$	(1	)
Mortgage-backed securities		166		(1	)		412		(106	)		578		(107	)
Municipal securities		0		0			2,000		(71	)		2,000		(71	)
Corporate notes		19,218		(783	)		0		0			19,218		(783	)

Total	$	20,385	$	(785	)	$	2,412	$	(177	)	$	22,797	$	(962	)

At September 30, 2012, there were three available-for-sale investment securities in the less-than-twelve-month category and ten available-for-sale investment securities in the twelve-month-or-more category. At December 31, 2011, there were ten available-for-sale investment securities in the less-than-twelve-month category and six available-for-sale investment securities in the twelve-month-or-more category. In management’s opinion, the unrealized losses reflect primarily changes in interest rates due to changes in economic conditions and the liquidity of the market, and not credit quality. In addition, the Bancorp does not believe that it will be more likely than not that the Bancorp will be required to sell the securities prior to maturity or market-price recovery.

During June 2012, Moody’s downgraded all five corporate bonds in the Bancorp’s portfolio. This downgrade was anticipated since Moody’s placed these bonds on negative watch in February 2012. The Bancorp analyzed these bonds in more detail at the time of downgrade. The Bancorp does not intend to sell these debt securities prior to recovery, and it is more likely than not that the Bancorp will not have to sell these debt securities prior to recovery. These bonds continue to pay their scheduled interest payments on time. No additional downgrades are anticipated at this time. The holdings are all in the financial services industry and all are well capitalized.

At September 30, 2012 and December 31, 2011, the Bancorp had pledged investment securities aggregating $105.4 million and $311.4 million, respectively, as collateral for borrowings.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of net loans receivable at September 30, 2012 and December 31, 2011 was as follows:


	2012			2011
	(Dollars in thousands)
Construction	$	28,932		$	37,926
Commercial real estate		45,724			48,789
Commercial and industrial		12,164			13,084
Residential real estate		20,278			22,465
Manufactured housing		3,867			4,012

Total loans receivable covered under FDIC Loss Sharing Agreements (1)		110,965			126,276

Construction		13,242			15,271
Commercial real estate		605,373			350,929
Commercial and industrial		76,641			69,736
Mortgage warehouse (2)		9,321			619,318
Manufactured housing		158,457			104,565
Residential real estate		107,855			53,476
Consumer		2,451			2,211

Total loans receivable not covered under FDIC Loss Sharing Agreements		973,340			1,215,506

Total loans receivable		1,084,305			1,341,782
Deferred (fees) costs, net		2,794			(389	)
Allowance for loan losses		(24,974	)		(15,032	)

Loans receivable, net	$	1,062,125		$	1,326,361

(1)	Loans that were acquired in the two FDIC assisted transactions and are covered under loss sharing agreements with the FDIC are referred to as “covered” loans throughout these financial statements.

(2)

During the third quarter of 2012, we elected the fair value option for warehouse lending transactions documented under a Master Repurchase Agreement originated after July 1, 2012. As a result of this election, new warehouse lending transactions were classified as “Loans held for sale” on the balance sheet. For additional information about our election of the fair value option refer to “Note 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION – The Fair Value Option” in this Form 10-Q. Certain classes of warehouse lending loans were not eligible for fair value option accounting.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Non-Covered Nonaccrual Loans and Loans Past Due

The following tables summarize non-covered loans, by class, at September 30, 2012:


	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due (1)		Non- Accrual		Current (2)		Total Loans (4)
					(Dollars in thousands)
Commercial and industrial
Acquired with credit deterioration	$	1	$	0	$	1	$	129	$	2,288	$	2,418
Remaining loans (5)		85		0		85		655		73,483		74,223
Commercial real estate
Acquired with credit deterioration		1,269		0		1,269		5,279		43,265		49,813
Remaining loans (5)		772		0		772		18,294		536,494		555,560
Construction
Acquired with credit deterioration		0		0		0		0		2,001		2,001
Remaining loans (5)		0		0		0		2,423		8,818		11,241
Residential real estate
Acquired with credit deterioration		477		0		477		947		11,215		12,639
First mortgages (5)		519		0		519		549		69,149		70,217
Home equity (5)		50		0		50		915		24,034		24,999
Consumer
Acquired with credit deterioration		11		0		11		80		459		550
Remaining loans (5)		1		0		1		56		1,844		1,901
Mortgage warehouse
Acquired with credit deterioration		0		0		0		0		0		0
Remaining loans (5)		0		0		0		0		9,321		9,321
Manufactured housing (3)
Acquired with credit deterioration		834		0		834		2,814		3,933		7,581
Remaining loans (5)		6,392		1,473		7,865		652		142,359		150,876

Total	$	10,411	$	1,473	$	11,884	$	32,793	$	928,663	$	973,340

(1)	Loan balances do not include non-accrual loans.

(2)	Loans where payments are due within 29 days of the scheduled payment date.

(3)	Purchased manufactured housing loans, purchased in 2010, are subject to cash reserves held at the Bank that are used to fund the past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers’ delinquencies.

(4)	Loans exclude deferred costs and fees.

(5)	Loans that were not identified at the acquisition date as a loan with credit deterioration.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The following tables summarize non-covered loans, by class, at December 31, 2011:


	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due(1)		Non- Accrual		Current (2)		Total Loans (4)
	(Dollars in thousands)
Commercial and industrial
Acquired with credit deterioration	$	0	$	0	$	0	$	178	$	4,946	$	5,124
Remaining loans (5)		0		0		0		2,817		61,795		64,612
Commercial real estate
Acquired with credit deterioration		89		0		89		8,527		57,542		66,158
Remaining loans (5)		1,025		0		1,025		17,581		266,165		284,771
Construction
Acquired with credit deterioration		0		0		0		0		3,393		3,393
Remaining loans (5)		0		0		0		5,630		6,248		11,878
Residential real estate
Acquired with credit deterioration		1,002		0		1,002		1,423		16,156		18,581
First mortgages (5)		314		0		314		700		14,652		15,666
Home equity (5)		183		0		183		823		18,223		19,229
Consumer
Acquired with credit deterioration		7		0		7		6		233		246
Remaining loans (5)		14		0		14		34		1,917		1,965
Mortgage warehouse		0		0		0		0		619,318		619,318
Manufactured housing (3)
Acquired with credit deterioration		1,681		0		1,681		0		7,048		8,729
Remaining loans (5)		3,481		0		3,481		0		92,355		95,836

Total	$	7,796	$	0	$	7,796	$	37,719	$	1,169,991	$	1,215,506

(1)	Loan balances do not include non-accrual loans.

(2)	Loans where payments are due within 29 days of the scheduled payment date.

(3)	Purchased manufactured housing loans, purchased in 2010, are subject to cash reserves held at the Bank that are used to fund the past-due payments when the loan becomes 90 days or more delinquent.

(4)	Loans exclude deferred costs and fees.

(5)	Loans that were not identified at the acquisition date as a loan with credit deterioration.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Covered Nonaccrual Loans and Loans Past Due

The following tables summarize covered loans, by class, at September 30, 2012 and December 31, 2011


September 30, 2012	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due (1)		Nonaccrual		Current (3)		Total Loans
	(Dollars in thousands)
Commercial and industrial
Acquired with credit deterioration	$	0	$	0	$	0	$	745	$	2,014	$	2,759
Remaining loans (2)		0		0		0		100		9,305		9,405
Commercial real estate
Acquired with credit deterioration		0		0		0		14,737		5,527		20,264
Remaining loans (2)		0		0		0		3,998		21,462		25,460
Construction
Acquired with credit deterioration		0		0		0		15,949		0		15,949
Remaining loans (2)		0		0		0		6,506		6,477		12,983
Residential real estate
Acquired with credit deterioration		0		0		0		4,020		255		4,275
First mortgages (2)		565		0		565		0		6,864		7,429
Home equity (2)		0		0		0		1,364		7,210		8,574
Manufactured housing
Acquired with credit deterioration		0		0		0		66		0		66
Remaining loans (2)		21		0		21		161		3,619		3,801

	$	586	$	0	$	586	$	47,646	$	62,733	$	110,965

(1)	Loans balances do not include nonaccrual loans.

(2)	Loans that were not identified at the acquisition date as a loan with credit deterioration.

(3)	Loans where payments are due within 29 days of the scheduled payment date.


December 31, 2011	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due (1)		Nonaccrual		Current (3)		Total Loans
	(Dollars in thousands)
Commercial and industrial
Acquired with credit deterioration	$	0	$	0	$	0	$	378	$	0	$	378
Remaining loans (2)		2,672		0		2,672		0		7,204		9,876
Commercial real estate
Acquired with credit deterioration		0		0		0		16,204		2,039		18,243
Remaining loans (2)		1,074		0		1,074		1,462		30,840		33,376
Construction
Acquired with credit deterioration		0		0		0		18,896		3,266		22,162
Remaining loans (2)		91		0		91		2,584		13,089		15,764
Residential real estate
Acquired with credit deterioration		0		0		0		4,002		0		4,002
First mortgages (2)		570		0		570		0		8,600		9,170
Home equity (2)		281		0		281		1,532		7,479		9,292
Manufactured housing
Acquired with credit deterioration		0		0		0		77		0		77
Remaining loans (2)		6		0		6		78		3,852		3,936

	$	4,694	$	0	$	4,694	$	45,213	$	76,369	$	126,276

(1)	Loans balances do not include nonaccrual loans.

(2)	Loans receivable that were not identified upon acquisition as a loan with credit deterioration.

(3)	Loans where payments are due within 29 days of the scheduled payment date.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Impaired Loans — Covered and Non-Covered

The following table presents a summary of impaired loans:


	September 30, 2012				For the Nine Months Ended September 30, 2012
	Unpaid Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
			(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,987			$	5,191	$	160
Commercial real estate		27,835				22,205		748
Construction		7,147				7,627		19
Consumer		217				105		3
Residential real estate		3,136				2,382		55
With an allowance recorded:
Commercial and industrial		571	$	349		748		9
Commercial real estate		9,416		2,787		9,071		205
Construction		6,022		2,450		6,903		154
Consumer		55		3		29		4
Residential real estate		1,404		250		967		13

Total	$	59,790	$	5,839	$	55,228	$	1,370

(1)	Also represents the recorded investment.


	December 31, 2011				For the Nine Months Ended September 30, 2011
	Unpaid Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	6,975			$	1,893	$	95
Commercial real estate		20,431				15,096		525
Construction		8,773				3,420		92
Consumer		0				0		2
Residential real estate		343				618		35
With an allowance recorded:
Commercial and industrial		800	$	426		3,320		124
Commercial real estate		12,195		2,047		10,880		473
Construction		7,369		2,986		3,420		46
Consumer		22		22		22		0
Residential real estate		869		195		618		232

Total	$	57,777	$	5,676	$	39,287	$	1,624

(1)	Also represents the recorded investment.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Troubled Debt Restructurings

At September 30, 2012, there was $8.2 million in loans categorized as troubled debt restructurings (“TDR”). Of this amount, $1.5 million was performing in accordance with the modified terms. All TDRs are considered impaired loans at the time of their restructuring. In subsequent years, a TDR may cease being classified as impaired if the loan was modified at a market rate at the time of modification and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six-month performance requirement; however, it will remain classified as impaired.

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and nine months ended September 30, 2012 and 2011. There were no modifications that involved forgiveness of debt.


	TDRs in compliance with their modified terms and accruing interest		TDRs that are not accruing interest		Total
	(Dollars in thousands)
Three months ended September 30, 2012
Extended under forbearance	$	0	$	593	$	593
Multiple extensions resulting from financial difficulty		0		0		0
Interest-rate reductions		0		219		219

Total	$	0	$	812	$	812

Nine months ended September 30, 2012
Extended under forbearance	$	0	$	711	$	711
Multiple extensions resulting from financial difficulty		103		0		103
Interest-rate reductions		69		493		562

Total	$	172	$	1,204	$	1,376

Three months ended September 30, 2011
Extended under forbearance	$	0	$	1,423	$	1,423
Multiple extensions resulting from financial difficulty		72		0		72
Interest-rate reductions		901		0		901

Total	$	973	$	1,423	$	2,396

Nine months ended September 30, 2011
Extended under forbearance	$	3,093	$	5,394	$	8,487
Multiple extensions resulting from financial difficulty		74		0		74
Interest-rate reductions		1,009		132		1,141

Total	$	4,176	$	5,526	$	9,702

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The following table provides, by class, the number of loans modified in troubled debt restructurings and the recorded investments and unpaid principal balances during the three and nine months ended September 30, 2012 and 2011.


	TDRs in compliance with their modified terms and accruing interest				TDRs that are not accruing interest
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
			(Dollars in thousands)
Three months ended September 30, 2012
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		0		0		2		173
Residential real estate		0		0		3		188
Consumer		0		0		2		451

Total		0	$	0		7	$	812

Nine months ended September 30, 2012
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		3		172		8		447
Residential real estate		0		0		4		306
Consumer		0		0		2		451

Total		3	$	172		14	$	1,204

Three months ended September 30, 2011
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		4		1,423
Construction		0		0		0		0
Manufactured housing		12		973		0		0
Residential real estate		0		0		0		0
Consumer		0		0		0		0

Total		12	$	973		4	$	1,423

Nine months ended September 30, 2011
Commercial and industrial		1	$	108		0	$	0
Commercial real estate		3		2,543		18		4,904
Construction		1		550		0		0
Manufactured housing		12		973		0		0
Residential real estate		0		0		1		622
Consumer		1		2		0		0

Total		18	$	4,176		19	$	5,526

As of September 30, 2012 and 2011, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructuring.

All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses. There were no specific reserves resulting from the addition of TDR modifications, and there were no TDRs with subsequent defaults in the three and nine month periods ended September 30, 2012 and September 30, 2011.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Credit Quality Indicators

Credit quality indicators for commercial and industrial, commercial real estate, residential real estate and construction loans are based on an internal risk-rating system and are assigned at the loan origination and reviewed on a periodic or on an “as needed” basis. Consumer, mortgage warehouse and manufactured housing loans are evaluated based on the payment activity of the loan.

The following presents the credit quality tables as of September 30, 2012 and December 31, 2011 for the non-covered loan portfolio.


	September 30, 2012
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
	(Dollars in thousands)
Pass/Satisfactory	$	72,052	$	561,061	$	10,515	$	104,307
Special Mention		3,752		20,064		231		1,229
Substandard		837		23,487		2,044		2,319
Doubtful		0		761		452		0

Total	$	76,641	$	605,373	$	13,242	$	107,855


	Consumer		Mortgage Warehouse		Manufactured Housing
	(Dollars in thousands)
Performing	$	2,398	$	9,321	$	158,457
Nonperforming (1)		53		0		0

Total	$	2,451	$	9,321	$	158,457

(1)	Includes loans that are on nonaccrual status or past due ninety days or more at September 30, 2012.


	December 31, 2011
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
	(Dollars in thousands)
Pass/Satisfactory	$	61,851	$	307,734	$	9,314	$	50,517
Special Mention		57		13,402		237		0
Substandard		7,506		28,131		4,349		2,959
Doubtful		322		1,662		1,371		0

Total	$	69,736	$	350,929	$	15,271	$	53,476


	Consumer		Mortgage Warehouse		Manufactured Housing
	(Dollars in thousands)
Performing	$	2,171	$	619,318	$	104,565
Nonperforming (1)		40		0		0

Total	$	2,211	$	619,318	$	104,565

(1)	Includes loans that are on nonaccrual status or past due ninety days or more at December 31, 2011.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The following presents the credit quality tables as of September 30, 2012 and December 31, 2011 for the covered loan portfolio.


	September 30, 2012
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
			(Dollars in thousands)
Pass/Satisfactory	$	9,609	$	26,755	$	2,438	$	14,336
Special Mention		1,710		235		4,039		3,202
Substandard		845		18,734		22,455		2,740
Doubtful		0		0		0		0

Total	$	12,164	$	45,724	$	28,932	$	20,278


	Manufactured Housing
	(Dollars in thousands)
Performing	$	3,701
Nonperforming (1)		166

Total	$	3,867

(1)	Includes loans that are on nonaccrual status or past due ninety days or more at September 30, 2012.


	December 31, 2011
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
			(Dollars in thousands)
Pass/Satisfactory	$	10,928	$	29,892	$	5,539	$	16,476
Special Mention		1,778		1,633		7,641		455
Substandard		378		17,264		24,746		5,534
Doubtful		0		0		0		0

Total	$	13,084	$	48,789	$	37,926	$	22,465


	Manufactured Housing
	(Dollars in thousands)
Performing	$	3,857
Nonperforming (1)		155

Total	$	4,012

(1)	Includes loans that are on nonaccrual status or past due ninety days or more at December 31, 2011.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

Allowance for loan losses

The changes in the allowance for loan losses for the three and nine months ended September 30, 2012 by loan segment based on impairment method:


Three Months Ended September 30, 2012	Commercial and Industrial			Commercial Real Estate			Construction			Residential Real Estate
				(Dollars in thousands)
Beginning Balance, July 1, 2012	$	1,503		$	8,266		$	4,352		$	1,080
Charge-offs		(266	)		(283	)		(475	)		(365	)
Recoveries		98			33			3			0
Provision for loan losses		387			5,923			1,139			2,262

Ending Balance, September 30, 2012	$	1,722		$	13,939		$	5,019		$	2,977


Three Months Ended September 30, 2012 (continued)	Manufactured Housing		Consumer			Mortgage Warehouse			Unallocated		Total
			(Dollars in thousands)
Beginning Balance, July 1, 2012	$	40	$	75		$	802		$	0	$	16,118
Charge-offs		0		(27	)		0			0		(1,416	)
Recoveries		0		22			0			0		156
Provision for loan losses		858		279			(732	)		0		10,116

Ending Balance, September 30, 2012	$	898	$	349		$	70		$	0	$	24,974


Nine Months Ended September 30, 2012	Commercial and Industrial			Commercial Real Estate			Construction			Residential Real Estate
				(Dollars in thousands)
Beginning Balance, January 1, 2012	$	1,441		$	7,030		$	4,656		$	843
Charge-offs		(300	)		(1,426	)		(2,666	)		(565	)
Recoveries		164			83			3			5
Provision for loan losses		417			8,253			3,026			2,693

Ending Balance, September 30, 2012	$	1,722		$	13,940		$	5,019		$	2,976


Nine Months Ended September 30, 2012 (continued)	Manufactured Housing		Consumer			Mortgage Warehouse			Unallocated			Total
			(Dollars in thousands)
Beginning Balance, January 1, 2012	$	18	$	61		$	929		$	54		$	15,032
Charge-offs		0		(37	)		0			0			(4,994	)
Recoveries		0		27			0			0			282
Provision for loan losses		880		298			(859	)		(54	)		14,654

Ending Balance, September 30, 2012	$	898	$	349		$	70		$	0		$	24,974

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The changes in the allowance for loan losses for the three and nine months ended September 30, 2011 by loan segment based on impairment method:


Three Months Ended September 30, 2011	Commercial and Industrial			Commercial Real Estate			Construction		Residential Real Estate
	(Dollars in thousands)
Beginning Balance, July 1, 2011	$	1,945		$	7,177		$	2,479	$	1,607
Charge-offs		(717	)		(182	)		0		(4	)
Recoveries		9			72			0		0
Provision for loan losses		359			(264	)		1,191		(436	)

Ending Balance, September 30, 2011	$	1,596		$	6,803		$	3,670	$	1,167


Three Months Ended September 30, 2011 (continued)	Manufactured Housing			Consumer			Mortgage Warehouse		Unallocated		Total
	(Dollars in thousands)
Beginning Balance, July 1, 2011	$	39		$	20		$	589	$	90	$	13,946
Charge-offs		0			(1	)		0		0		(904	)
Recoveries		0			2			0		0		83
Provision for loan losses		(39	)		35			36		18		900

Ending Balance, September 30, 2011	$	0		$	56		$	625	$	108	$	14,025


Nine Months Ended September 30, 2011	Commercial and Industrial			Commercial Real Estate			Construction			Residential Real Estate
	(Dollars in thousands)
Beginning Balance, January 1, 2011	$	1,662		$	9,152		$	2,127		$	1,116
Charge-offs		(2,178	)		(4,389	)		(1,069	)		(109	)
Recoveries		15			78			2			0
Provision for loan losses		2,097			1,962			2,610			160

Ending Balance, September 30, 2011	$	1,596		$	6,803		$	3,670		$	1,167


Nine Months Ended September 30, 2011 (continued)	Manufactured Housing		Consumer			Mortgage Warehouse		Unallocated			Total
	(Dollars in thousands)
Beginning Balance, January 1, 2011	$	0	$	11		$	465	$	596		$	15,129
Charge-offs		0		(7	)		0		0			(7,752	)
Recoveries		0		3			0		0			98
Provision for loan losses		0		49			160		(488	)		6,550

Ending Balance, September 30, 2011	$	0	$	56		$	625	$	108		$	14,025

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The following tables summarize the loans and allowance for loan losses by loan segment based on the impairment method at September 30, 2012:


September 30, 2012	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
	(Dollars in thousands)
Loans:
Individually evaluated for impairment	$	4,558	$	37,250	$	13,169	$	4,540
Collectively evaluated for impairment		79,448		543,772		11,056		100,751
Loans acquired with credit deterioration		5,774		70,915		18,904		15,819

Total	$	89,780	$	651,937	$	43,129	$	121,110

Allowance for loan losses:
Individually evaluated for impairment	$	349	$	2,787	$	2,450	$	250
Collectively evaluated for impairment		877		5,379		262		878
Loans acquired with credit deterioration		496		5,773		2,307		1,849

Total	$	1,722	$	13,939	$	5,019	$	2,977


September 30, 2012 (continued)	Manufactured Housing		Consumer		Mortgage Warehouse		Total
	(Dollars in thousands)
Loans:
Individually evaluated for impairment	$	0	$	273	$	0	$	59,790
Collectively evaluated for impairment		150,876		11,356		9,321		906,580
Loans acquired with credit deterioration		13,113		2,125		0		126,650
Market discounts/premiums/valuation adjustments		0		0		0		(5,921	)

Total	$	163,989	$	13,754	$	9,321	$	1,087,099

Allowance for loan losses:
Individually evaluated for impairment	$	0	$	3	$	0	$	5,839
Collectively evaluated for impairment		757		93		70		8,316
Loans acquired with credit deterioration		141		253		0		10,819

Total	$	898	$	349	$	70	$	24,974

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES – (continued)

The following table summarizes the loans and allowance for loan losses by loan segment based on the impairment method at December 31, 2011:


December 31, 2011	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
			(Dollars in thousands)
Loans:
Individually evaluated for impairment	$	7,775	$	32,626	$	16,142	$	1,212
Collectively evaluated for impairment		59,745		287,839		11,863		52,856
Loans acquired with credit deterioration		15,017		86,536		30,590		23,352

Total	$	82,537	$	407,001	$	58,595	$	77,420

Allowance for loan losses:
Individually evaluated for impairment	$	426	$	2,047	$	2,986	$	195
Collectively evaluated for impairment		911		4,063		209		554
Loans acquired with credit deterioration		104		920		1,461		94

Total	$	1,441	$	7,030	$	4,656	$	843


December 31, 2011 (continued)	Manufactured Housing		Consumer		Mortgage Warehouse		Unallocated			Total
	(Dollars in thousands)
Loans:
Individually evaluated for impairment	$	0	$	22	$	0	$	0		$	57,777
Collectively evaluated for impairment		102,876		6,213		619,318		0			1,140,710
Loans acquired with credit deterioration		10,592		333		0		0			166,420
Market discounts/premiums/valuation adjustments								(23,514	)		(23,514	)

Total	$	113,468	$	6,568	$	619,318	$	(23,514	)	$	1,341,393

Allowance for loan losses:
Individually evaluated for impairment	$	0	$	22	$	0	$	0		$	5,676
Collectively evaluated for impairment		1		39		929		54			6,760
Loans acquired with credit deterioration		17		0		0		0			2,596

Total	$	18	$	61	$	929	$	54		$	15,032

The non-covered manufactured housing portfolio was purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the Purchase Agreement for defaults of the underlying borrower and other specified items. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio. At September 30, 2012, funds available for reimbursement, if necessary, were $4.1 million; and the Bancorp has determined that these funds were sufficient to absorb probable losses.

On July 24, 2012, the Bancorp paid $63,246 to acquire manufactured housing loans from Vanderbilt Mortgage and Finance Inc. at par. These loans were originated by Tammac Holding Corporation (“Tammac”), and will be serviced by Tammac on the Bancorp’s behalf. Approximately 85% of the loans are chattel, with the other 15% representing real estate. The loans carry an 11.3% coupon rate, where Tammac earns a 2.0% servicing fee and also retains the rights to a 2.0% IO Strip in relation to this pool of loans. The full recourse for losses on these loans resides with Tammac.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS