Edgar Filing: Customers Bancorp, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (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 June 30, 2014

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

For the transition period from to .

001-35542

(Commission File number)

LOGO

(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

(Registrant’s telephone number, including area code)

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 August 1, 2014, 25,607,630 shares of Voting Common Stock and 1,121,730 shares of Class B Non-Voting Common Stock were issued and outstanding.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Table of Contents


Part I

Item 1.	Consolidated Financial Statements as of June 30, 2014 and for the three and six month periods ended June 30, 2014 (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	61

PART II

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		64

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

(amounts in thousands, except share and per share data)


	June 30, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	48,521		$	60,709
Interest-earning deposits		217,013			172,359

Cash and cash equivalents		265,534			233,068
Investment securities available for sale, at fair value		425,061			497,573
Loans held for sale, at fair value		1,061,395			747,593
Loans receivable not covered under Loss Sharing Agreements with the FDIC		3,589,630			2,398,353
Loans receivable covered under Loss Sharing Agreements with the FDIC		54,474			66,725
Allowance for loan losses		(28,186	)		(23,998	)

Total loans receivable, net of allowance for loan losses		3,615,918			2,441,080
FHLB, Federal Reserve Bank, and other restricted stock		75,558			43,514
Accrued interest receivable		11,613			8,362
FDIC loss sharing receivable		8,919			10,046
Bank premises and equipment, net		11,075			11,625
Bank-owned life insurance		106,668			104,433
Other real estate owned (includes $6,177 and $6,953, respectively, covered under Loss Sharing Agreements with the FDIC)		12,885			12,265
Goodwill and other intangibles		3,670			3,676
Other assets		37,432			39,938

Total assets	$	5,635,728		$	4,153,173

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	555,936		$	478,103
Interest bearing		3,134,958			2,481,819

Total deposits		3,690,894			2,959,922
Federal funds purchased		0			13,000
FHLB advances		1,301,500			706,500
Other borrowings		88,250			63,250
Subordinated debt		112,000			2,000
Accrued interest payable and other liabilities		29,344			21,878

Total liabilities		5,221,988			3,766,550
Shareholders’ equity:
Preferred stock, no par value or as set by the board; 100,000,000 shares authorized, none issued		0			0
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 27,261,620 and 24,756,411 shares issued as of June 30, 2014 and December 31, 2013; 26,729,360 and 24,224,151 shares outstanding as of June 30, 2014 and December 31, 2013		27,262			24,756
Additional paid in capital		353,371			307,231
Retained earnings		43,581			71,008
Accumulated other comprehensive loss, net		(2,220	)		(8,118	)
Treasury stock, at cost (532,260 shares as of June 30, 2014 and December 31, 2013)		(8,254	)		(8,254	)

Total shareholders’ equity		413,740			386,623

Total liabilities and shareholders’ equity	$	5,635,728		$	4,153,173

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED

(amounts in thousands, except share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Interest income:
Loans receivable	$	35,220	$	19,196	$	63,576	$	35,295
Loans held for sale		6,715		11,157		11,798		22,041
Investment securities		2,543		1,082		5,583		1,911
Other		614		238		1,011		447

Total interest income		45,092		31,673		81,968		59,694

Interest expense:
Deposits		5,727		5,136		11,142		10,272
Other borrowings		1,184		74		2,340		79
FHLB advances		1,141		330		1,637		568
Subordinated debt		110		17		126		33

Total interest expense		8,162		5,557		15,245		10,952

Net interest income		36,930		26,116		66,723		48,742
Provision for loan losses		2,886		2,116		7,253		1,998

Net interest income after provision for loan losses		34,044		24,000		59,470		46,744
Non-interest income:
Mortgage warehouse transactional fees		2,215		3,868		3,974		7,536
Mortgage loan and banking income		1,554		0		1,963		0
Bank-owned life insurance		836		567		1,670		1,043
Gain on sale of SBA loans		572		358		571		408
Gain on sale of investment securities		359		0		3,191		0
Deposit fees		212		159		426		289
Other		1,163		598		2,425		1,070

Total non-interest income		6,911		5,550		14,220		10,346

Non-interest expense:
Salaries and employee benefits		11,591		8,508		20,942		15,905
FDIC assessments, taxes, and regulatory fees		3,078		1,058		5,209		2,405
Occupancy		2,595		2,110		5,231		4,020
Professional services		1,881		1,252		4,163		1,958
Technology, communications and bank operations		1,621		1,061		3,181		1,902
Other real estate owned		890		525		1,242		561
Loan workout		477		72		918		746
Advertising and promotion		428		408		843		523
Loss contingency		0		0		0		2,000
Other		2,644		1,901		4,642		3,355

Total non-interest expense		25,205		16,895		46,371		33,375

Income before income tax expense		15,750		12,655		27,319		23,715
Income tax expense		5,517		4,429		8,945		8,300

Net income	$	10,233	$	8,226	$	18,374	$	15,415

Basic earnings per share (1)	$	0.38	$	0.35	$	0.69	$	0.71
Diluted earnings per share (1)		0.37		0.34		0.66		0.69

(1)	Earnings per share amounts have been adjusted to give effect to the 10% stock dividend declared on May 15, 2014 and issued on June 30, 2014.

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(amounts in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	10,233		$	8,226		$	18,374		$	15,415

Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period (1)		4,101			(5,976	)		13,222			(7,069	)
Income tax effect (1)		(1,435	)		2,092			(4,628	)		2,475
Less: reclassification adjustment for gains on securities included in net income		(359	)		0			(3,191	)		0
Income tax effect		125			0			1,117			0

Net unrealized gains (losses)		2,432			(3,884	)		6,520			(4,594	)
Unrealized losses on cash flow hedges:
Unrealized losses on cash flow hedges arising during the period		(1,621	)		0			(957	)		0
Income tax effect		567			0			335			0

Net unrealized losses		(1,054	)		0			(622	)		0
Other comprehensive income (loss), net of tax		1,378			(3,884	)		5,898			(4,594	)

Comprehensive income	$	11,611		$	4,342		$	24,272		$	10,821

(1)	Includes immaterial gains or losses on foreign currency items for the three and six months ended June 30, 2014.

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

(amounts in thousands, except share data)


	For the six months ended June 30, 2014
	Shares of Common Stock Outstanding		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income/(loss)			Treasury Stock			Total
Balance, January 1, 2014		24,224,151	$	24,756	$	307,231	$	71,008		$	(8,118	)	$	(8,254	)	$	386,623
Net income								18,374									18,374
Other comprehensive income											5,898						5,898
Stock dividend		2,429,375		2,429		43,364		(45,801	)								(8	)
Share-based compensation expense						2,034											2,034
Issuance of common stock under share-based compensation arrangements		75,834		77		742											819

Balance, June 30, 2014		26,729,360	$	27,262	$	353,371	$	43,581		$	(2,220	)	$	(8,254	)	$	413,740


	For the six months ended June 30, 2013
	Shares of Common Stock Outstanding		Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(loss)			Treasury Stock			Total
Balance, January 1, 2013		18,459,502	$	18,507	$	212,090	$	38,314	$	1,064		$	(500	)	$	269,475
Net income								15,415								15,415
Other comprehensive loss										(4,594	)					(4,594	)
Share-based-compensation expense						1,535										1,535
Public offering of common stock, net of costs of $5,811		6,179,104		6,179		91,511										97,690
Issuance of common stock under share-based-compensation arrangements		23,413		24		228										252

Balance, June 30, 2013		24,662,019	$	24,710	$	305,364	$	53,729	$	(3,530	)	$	(500	)	$	379,773

See accompanying notes to the unaudited consolidated financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(amounts in thousands)


	Six Months Ended June 30,
	2014			2013
Cash Flows from Operating Activities
Net income	$	18,374		$	15,415
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses, net of change to FDIC receivable		7,253			1,998
Loss contingency		0			2,000
Provision for depreciation and amortization		1,807			1,279
Share-based compensation		2,034			1,535
Deferred taxes		2,216			1
Net amortization of investment securities premiums and discounts		370			228
Gain on sale of investment securities		(3,191	)		0
Gain on sale of loans		(2,424	)		(408	)
Origination of loans held for sale		(6,893,530	)		(12,445,164	)
Proceeds from the sale of loans held for sale		6,581,581			12,467,413
Increase in FDIC loss sharing receivable		(1,972	)		(1,093	)
Amortization (accretion) of fair value discounts		(203	)		(273	)
Net loss on sales of other real estate owned		555			180
Valuation and other adjustments to other real estate owned		442			13
Earnings on investment in bank-owned life insurance		(1,670	)		(1,043	)
Increase in accrued interest receivable and other assets		(5,048	)		(3,492	)
Increase (decrease) in accrued interest payable and other liabilities		7,303			(1,913	)

Net Cash (Used In) Provided by Operating Activities		(286,103	)		36,676
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of investment securities available for sale		22,055			9,252
Proceeds from sales of investment securities available for sale		213,249			0
Purchases of investment securities available for sale		(149,940	)		(69,770	)
Net increase in loans		(897,928	)		(377,601	)
Purchase of loan portfolios		(294,615	)		(155,306	)
Proceeds from sales of SBA loans		5,967			3,900
Purchases of bank-owned life insurance		(465	)		(10,465	)
Net purchases of FHLB, Federal Reserve Bank, and other restricted stock		(32,044	)		(3,025	)
Reimbursements from the FDIC on loss sharing agreements		1,477			3,128
Purchases of bank premises and equipment		(644	)		(1,344	)
Proceeds from sales of other real estate owned		5,281			2,599

Net Cash Used In Investing Activities		(1,127,607	)		(598,632	)
Cash Flows from Financing Activities
Net increase in deposits		730,954			334,935
Net increase in short-term borrowed funds		382,000			99,000
Proceeds from long-term FHLB borrowings		200,000			50,000
Net proceeds from issuance of long-term debt		133,222			0
Net proceeds from stock offering		0			97,690

Net Cash Provided by Financing Activities		1,446,176			581,625

Net Increase in Cash and Cash Equivalents		32,466			19,669
Cash and Cash Equivalents – Beginning		233,068			186,016

Cash and Cash Equivalents – Ending	$	265,534		$	205,685

Supplementary Cash Flows Information
Interest paid	$	15,084		$	10,955
Income taxes paid		11,038			5,574
Non-cash items:
Transfer of loans to other real estate owned	$	6,898		$	5,424
Issuance of common stock under share-based compensation arrangements		819			252

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

Customers Bancorp, Inc. (the “Bancorp”, “Customers Bancorp”, or the “Company”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”). Customers Bancorp also has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.

Customers Bancorp, Inc. and its wholly owned subsidiary, Customers Bank, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties), Rye, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; and Providence, Rhode Island. The Bank has 14 branches and provides commercial and consumer banking products, primarily loans and deposits. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Customers Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities.

NOTE 2 — ACQUISITION ACTIVITY

Acquisition Activity

New England Lending Acquisitions

On January 15, 2014, Customers Bank purchased $277.9 million of residential adjustable-rate jumbo mortgage loans (indexed to one-year LIBOR) from Michigan-based Flagstar Bank. The purchase price was 100.75% of loans outstanding.

On March 28, 2013, Customers Bank completed the purchase of certain commercial loans from Flagstar Bank. Under the terms of the agreement, Customers Bank acquired $182.3 million in commercial loan and related commitments, of which $155.1 million was drawn at the date of acquisition. Also, as part of the agreement, Customers Bank assumed the leases for two of Flagstar’s commercial lending offices in New England. The purchase price was 98.7% of loans outstanding.

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The interim unaudited consolidated financial statements of Customers Bancorp, Inc. and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 2013 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2013 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2013 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers’ Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 12, 2014. That Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents; Restrictions on Cash and Amounts due from Banks; Investment Securities; Loan Accounting Framework; Allowance for Loan Losses; Goodwill; Investments in FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable; Bank Owned Life Insurance; Bank Premises and Equipment; Treasury Stock; Income Taxes; Share-Based Compensation; Comprehensive Income; Earnings per Share; Segment Information; and Accounting Changes. Certain prior period amounts have been reclassified to conform to current period presentation. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Customers Bancorp’s significant accounting policies that were updated during the six months ended June 30, 2014 to address new or evolving activities and recently issued accounting standards and updates that were issued or effective during 2014.

Derivative Instruments and Hedging Activities

The Financial Accounting Standards Board (“FASB”) ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Bancorp’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, Customers Bancorp records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether Customers has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Bancorp may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Prior to first quarter 2014, none of Customer Bancorp’s financial derivatives were designated in qualifying hedge relationships in accordance with the applicable accounting guidance. As such, all changes in fair value of the financial derivatives were recognized directly in earnings. In March 2014, Customers Bancorp entered into a $150.0 million notional balance forward starting pay fixed interest rate swap to hedge the variable cash flows associated with the forecasted issuance of debt. The Bancorp documented and designated this swap as a cash flow hedge. The effective portion of changes in the fair value of financial derivatives designated and qualifying as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivatives is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to financial derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

Customers Bancorp purchased credit derivatives with a notional balance of $13.4 million to hedge the performance risk of one of its counterparties during first quarter 2014. These derivatives were not designated in hedge relationships for accounting purposes and are being recorded at their fair value, with fair value changes recorded directly in earnings.

In accordance with the FASB’s fair value measurement guidance, Customers Bancorp made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Recently Issued Accounting Standards

In June 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-12, Compensation—Stock Compensation. The guidance in this ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite period, the remaining unrecognized cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2015. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing. The amendments in this update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2014. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.

In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate and construction industries. The revenue standard’s core principal is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. The guidance in this ASU is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2016. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU also requires additional related interim and annual disclosures. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2014. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.

In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, a consensus of the FASB Emerging Issues Task Force. The ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The guidance in this ASU is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.

In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, a consensus of the FASB Emerging Issues Task Force. The guidance in this ASU requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU was effective in first quarter 2014. This ASU has not had a significant impact on the Bancorp’s financial condition or results of operation.

NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT (1)

The following tables present the changes in accumulated other comprehensive income by component for the three months and six months ended June 30, 2014 and 2013.


	For the three months ended June 30, 2014
(amounts in thousands)	Unrealized Gains and (Losses) on Available-for-sale Securities			Unrealized Gains and (Losses) on Cash Flow Hedges			Total
Beginning balance - April 1, 2014	$	(4,030	)	$	432		$	(3,598	)

Other comprehensive income (loss) before reclassifications		2,666			(1,054	)		1,612
Amounts reclassified from accumulated other comprehensive loss to net income (2)		(234	)		0			(234	)

Net current-period other comprehensive income (loss)		2,432			(1,054	)		1,378

Ending balance - June 30, 2014	$	(1,598	)	$	(622	)	$	(2,220	)


	For the six months ended June 30, 2014
(amounts in thousands)	Unrealized Gains and (Losses) on Available-for-sale Securities			Unrealized Losses on Cash Flow Hedges			Total
Beginning balance - January 1, 2014	$	(8,118	)	$	0		$	(8,118	)

Other comprehensive income (loss) before reclassifications		8,594			(622	)		7,972
Amounts reclassified from accumulated other comprehensive loss to net income (2)		(2,074	)		0			(2,074	)

Net current-period other comprehensive income (loss)		6,520			(622	)		5,898

Ending balance - June 30, 2014	$	(1,598	)	$	(622	)	$	(2,220	)


	For the three months ended June 30, 2013
(amounts in thousands)	Unrealized Gains and (Losses) on Available-for-sale Securities (3)
Beginning balance - April 1, 2013	$	354

Other comprehensive loss before reclassifications		(3,884	)
Amounts reclassified from accumulated other comprehensive loss to net income		0

Net current-period other comprehensive (loss)		(3,884	)

Ending balance – June 30, 2013	$	(3,530	)


For the six months ended June 30, 2013
(amounts in thousands)	Unrealized Gains and (Losses) on Available-for-sale Securities (3)
Beginning balance - January 1, 2013	$	1,064

Other comprehensive loss before reclassifications		(4,594	)
Amounts reclassified from accumulated other comprehensive loss to net income		0

Net current-period other comprehensive (loss) income		(4,594	)

Ending balance – June 30, 2013	$	(3,530	)

(1)	All amounts are net of tax. Amounts in parentheses indicate debits.

(2)	Reclassification amounts are reported as gain on sale of investment securities on the Consolidated Statements of Income.

(3)	Prior to first quarter 2014, all amounts deferred in accumulated other comprehensive income/(loss) were related to available-for-sale securities.

NOTE 5 — EARNINGS PER SHARE

The following are the components and results of the Bancorp’s earnings per share calculation for the periods presented. Share and per share amounts have been adjusted to give effect to the 10% stock dividend declared on May 15, 2014 and issued on June 30, 2014.


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
(dollars in thousands, except per share data)
Net income available to common shareholders	$	10,233	$	8,226	$	18,374	$	15,415

Weighted-average number of common shares outstanding - basic		26,724,499		23,393,557		26,705,620		21,864,419
Share-based compensation plans		997,012		438,052		924,398		376,221
Warrants		260,893		208,468		251,796		190,007

Weighted-average number of common shares - diluted		27,982,404		24,040,077		27,881,814		22,430,647

Basic earnings per share	$	0.38	$	0.35	$	0.69	$	0.71
Diluted earnings per share	$	0.37	$	0.34	$	0.66	$	0.69

The following is a summary of securities that could potentially dilute basic earnings per share in future periods that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Share-based compensation awards and warrants have been adjusted to give effect to the 10% stock dividend declared on May 15, 2014 and issued on June 30, 2014.


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Anti-dilutive securities:
Share-based compensation awards		118,386		61,117		86,786		89,729
Warrants		118,745		130,620		118,745		130,620

Total anti-dilutive securities		237,131		191,737		205,531		220,349

NOTE 6 — INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities as of June 30, 2014 and December 31, 2013 are summarized in the tables below:


	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(amounts in thousands)
*Available for Sale:*
Mortgage-backed securities (1)	$	404,445	$	2,181	$	(5,015	)	$	401,611
Equity securities (2)		23,074		377		(1	)		23,450

	$	427,519	$	2,558	$	(5,016	)	$	425,061


	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(amounts in thousands)
*Available for Sale:*
Mortgage-backed securities (1)	$	461,988	$	207	$	(10,659	)	$	451,536
Corporate notes		25,000		344		(21	)		25,323
Equity securities(2)		23,074		0		(2,360	)		20,714

	$	510,062	$	551	$	(13,040	)	$	497,573

(1)	Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA.

(2)	Comprised primarily of equity securities in a foreign entity.

The following table presents proceeds from the sale of available-for-sale investment securities and gross gains and gross losses realized on those sales for the three and six months ended June 30, 2014 and 2013:


	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
(amounts in thousands)

Proceeds from sale of available-for-sale securities	$	25,359	$	0	$	213,249	$	0

Gross gains	$	359	$	0	$	3,191	$	0
Gross losses		0		0		0		0

Net gains	$	359	$	0	$	3,191	$	0

These gains and losses were determined using the specific identification method and were reported as gains on sale of investment securities included in non-interest income.

The following table presents available-for-sale 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:


	June 30, 2014
	Amortized Cost		Fair Value
(amounts in thousands)
Due in one year or less	$	0	$	0
Due after one year through five years		0		0
Due after five years through ten years		0		0
Due after ten years		0		0
Mortgage-backed securities		404,445		401,611

Total debt securities	$	404,445	$	401,611

The Bancorp’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(amounts in thousands)
*Available for Sale:*
Mortgage-backed securities (1)	$	59,038	$	(613	)	$	121,905	$	(4,402	)	$	180,943	$	(5,015	)
Equity securities (2)		0		0			5		(1	)		5		(1	)

Total	$	59,038	$	(613	)	$	121,910	$	(4,403	)	$	180,948	$	(5,016	)


	December 31, 2013
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(amounts in thousands)
*Available for Sale:*
Mortgage-backed securities (1)	$	425,623	$	(10,061	)	$	5,274	$	(598	)		430,897	$	(10,659	)
Corporate notes		4,982		(18	)		4,997		(3	)		9,979		(21	)
Equity securities (2)		20,714		(2,360	)		0		0			20,714		(2,360	)

Total	$	451,319	$	(12,439	)	$	10,271	$	(601	)	$	461,590	$	(13,040	)

(1)	Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA.

(2)	Comprised primarily of equity securities in a foreign entity.

At June 30, 2014, there were five available-for-sale investment securities in the less-than-twelve-month category and twenty-one available-for-sale investment securities in the twelve-month-or-more category. The unrealized losses on the mortgage backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. All amounts are expected to be recovered when market prices recover or at maturity. The Company intends to hold these securities for the foreseeable future, and does not intend to sell the securities before the price recovers. Customers considers it more likely than not that it will not be required to sell the securities. Accordingly, Customers has concluded that the securities are not other-than-temporarily impaired as of June 30, 2014.

At June 30, 2014 and December 31, 2013, Customers Bank had pledged investment securities aggregating $401.2 million and $451.1 million fair value, respectively, as collateral against its borrowings primarily with the FHLB. The FHLB does not have the ability to sell or repledge these securities.

NOTE 7 – LOANS HELD FOR SALE

The composition of loans held for sale as of June 30, 2014 and December 31, 2013 was as follows:


	June 30, 2014		December 31, 2013
(amounts in thousands)
Mortgage warehouse loans at fair value	$	1,053,641	$	740,694
Residential mortgage loans at fair value		7,754		6,899

Loans held for sale	$	1,061,395	$	747,593

NOTE 8 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of June 30, 2014 and December 31, 2013:


	June 30, 2014			December 31, 2013
(amounts in thousands)
Construction	$	11,544		$	14,627
Commercial real estate/multi-family		21,150			24,258
Commercial and industrial		4,039			5,814
Residential real estate		14,600			18,733
Manufactured housing		3,141			3,293

Total loans receivable covered under FDIC loss sharing agreements (1)		54,474			66,725
Construction		51,377			36,901
Commercial real estate/multi-family		2,820,492			1,835,186
Commercial and industrial		299,122			239,509
Mortgage warehouse		9			866
Manufactured housing		133,307			139,471
Residential real estate		283,713			145,188
Consumer		2,015			2,144

Total loans receivable not covered under FDIC loss sharing agreements		3,590,035			2,399,265
Total loans receivable		3,644,509			2,465,990
Deferred (fees) costs, net		(405	)		(912	)
Allowance for loan losses		(28,186	)		(23,998	)

Loans receivable, net	$	3,615,918		$	2,441,080

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

Non-Covered Loans

The following tables summarize non-covered loans by class and performance status as of June 30, 2014 and December 31, 2013:


	June 30, 2014
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Commercial and industrial	$	478	$	0	$	478	$	1,974	$	295,073	$	1,597	$	299,122
Commercial real estate		267		0		267		8,714		2,777,671		33,840		2,820,492
Construction		0		0		0		451		50,419		507		51,377
Residential real estate		597		0		597		834		272,555		9,727		283,713
Consumer		4		0		4		0		1,673		338		2,015
Mortgage warehouse		0		0		0		0		9		0		9
Manufactured housing (5)		6,228		4,208		10,436		727		117,817		4,327		133,307

Total	$	7,574	$	4,208	$	11,782	$	12,700	$	3,515,217	$	50,336	$	3,590,035


	December 31, 2013
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Commercial and industrial	$	10	$	0	$	10	$	123	$	237,453	$	1,923	$	239,509
Commercial real estate		0		0		0		9,924		1,788,144		37,118		1,835,186
Construction		0		0		0		2,049		33,922		930		36,901
Residential real estate		555		0		555		969		133,158		10,506		145,188
Consumer		0		0		0		0		1,728		416		2,144
Mortgage warehouse		0		0		0		0		866		0		866
Manufactured housing (5)		7,921		3,772		11,693		448		122,416		4,914		139,471

Total	$	8,486	$	3,772	$	12,258	$	13,513	$	2,317,687	$	55,807	$	2,399,265

(1)	Includes past due loans that are accruing interest because collection is considered probable.

(2)	Loans where next payment due is less than 30 days from the report date.

(3)

Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.

(4)	Amounts exclude deferred costs and fees and the allowance for loan losses.

(5)	Manufactured housing loans purchased in 2010 are subject to cash reserves held at the Bank that are used to fund 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.

Covered Loans

The following tables summarize covered loans by class and performance status as of June 30, 2014 and December 31, 2013:


	June 30, 2014
	30-89 Days Past Due (1)		90 Days Or More Past Due (1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased - Credit Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Commercial and industrial	$	0	$	0	$	0	$	217	$	3,304	$	518	$	4,039
Commercial real estate		0		0		0		628		13,070		7,452		21,150
Construction		0		0		0		2,412		526		8,606		11,544
Residential real estate		3		0		3		1,012		11,770		1,815		14,600
Manufactured housing		53		0		53		83		2,863		142		3,141

Total	$	56	$	0	$	56	$	4,352	$	31,533	$	18,533	$	54,474


	December 31, 2013
	30-89 Days Past Due (1)		90 Days Or More Past Due (1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Commercial and industrial	$	295	$	0	$	295	$	2	$	3,172	$	2,345	$	5,814
Commercial real estate		245		0		245		1,691		13,586		8,736		24,258
Construction		0		0		0		3,382		1,967		9,278		14,627
Residential real estate		90		0		90		564		14,108		3,971		18,733
Manufactured housing		56		0		56		11		3,081		145		3,293

Total	$	686	$	0	$	686	$	5,650	$	35,914	$	24,475	$	66,725

(1)	Includes past due loans that are accruing interest because collection is considered probable.

(2)	Purchased loans in FDIC assisted transactions with no evidence of credit deterioration since origination.

(3)

(4)	Amounts exclude deferred costs and fees and allowance for loan losses.

Allowance for Loan Losses and FDIC Loss Sharing Receivable

Losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans are subject to evaluation. Decreases in the present value of expected cash flows on the covered loans are recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC indemnification asset is increased reflecting an estimated future collection from the FDIC with a related credit to the provision for loan losses. If the expected cash flows on the covered loans increase such that a previously recorded impairment can be reversed, the Bancorp records a reduction in the allowance for loan losses with a related credit to the provision for loan losses accompanied by a reduction in the FDIC receivable and a charge to the provision for loan losses. Increases in expected cash flows of covered loans and decreases in expected cash flows of the FDIC loss sharing receivable, when there are no previously recorded impairments, are considered together and recognized over the remaining life of the loans as interest income.

The following tables present changes in the allowance for loan losses and the FDIC loss sharing receivable for the three and six months ended June 30, 2014 and 2013.


	Allowance for Loan Losses
	For the three months ended June 30,
(amounts in thousands)	2014			2013
Beginning balance	$	26,704		$	26,439
Provision for loan losses (1)		2,730			4,620
Charge-offs		(1,405	)		(3,093	)
Recoveries		157			176

Ending balance	$	28,186		$	28,142


	FDIC Loss Sharing Receivable
	For the three months ended June 30,
(amounts in thousands)	2014			2013
Beginning balance	$	8,272		$	12,043
(Decreased)/Increased estimated cash flows (2)		(156	)		2,504
Other activity, net (a)		983			380
Cash receipts from FDIC		(180	)		(758	)

Ending balance	$	8,919		$	14,169

(1) Provision for loan losses	$	2,730		$	4,620
(2) Effect attributable to FDIC loss share arrangements		156			(2,504	)

Net amount reported as provision for loan losses	$	2,886		$	2,116

(a)	Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualify for reimbursement under loss sharing arrangements


	Allowance for Loan Losses
	For the six months ended June 30,
(amounts in thousands)	2014			2013
Beginning balance	$	23,998		$	25,837
Provision for loan losses (1)		5,631			5,720
Charge-offs		(1,941	)		(3,656	)
Recoveries		498			241

Ending balance	$	28,186		$	28,142


	FDIC Loss Sharing Receivable
	For the six months ended June 30,
(amounts in thousands)	2014			2013
Beginning balance	$	10,046		$	12,343
(Decreased)/Increased estimated cash flows (2)		(1,622	)		3,722
Other activity, net (a)		1,972			1,232
Cash receipts from FDIC		(1,477	)		(3,128	)

Ending balance	$	8,919		$	14,169

(1) Provision for loan losses	$	5,631		$	5,720
(2) Effect attributable to FDIC loss share arrangements		1,622			(3,722	)

Net amount reported as provision for loan losses	$	7,253		$	1,998

(a)	Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualify for reimbursement under loss sharing arrangements.

Impaired Loans — Covered and Non-Covered

The following tables present the recorded investment (net of charge-offs), unpaid principal balance and related allowance for impaired loans as of June 30, 2014 and December 31, 2013 and the average recorded investment and interest income recognized for the three and six months ended June 30, 2014 and 2013. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.


	June 30, 2014						For the three months ended June 30, 2014				For the six months ended June 30, 2014
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Commercial and industrial	$	14,988	$	15,406	$	—	$	12,949	$	57	$	12,998	$	66
Commercial real estate		17,640		18,491		—		18,761		45		17,306		103
Construction		2,325		3,594		—		2,325		—		2,476		—
Consumer		83		83		—		44		—		29		—
Residential real estate		1,934		1,934		—		1,943		—		2,239		6
With an allowance recorded:
Commercial and industrial		1,655		1,655		915		1,246		7		1,653		12
Commercial real estate		2,913		2,913		812		2,676		—		2,537		1
Construction		1,553		1,553		671		1,561		—		1,418		—
Consumer		53		53		5		59		1		60		2
Residential real estate		248		248		175		249		1		250		2

Total	$	43,392	$	45,930	$	2,578	$	41,813	$	111	$	40,966	$	192


	December 31, 2013						For the three months ended June 30, 2013				For the six months ended June 30, 2013
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Commercial and industrial	$	13,097	$	13,159	$	—	$	6,068	$	92	$	5,249	$	118
Commercial real estate		14,397		15,249		—		27,251		206		24,277		337
Construction		2,777		4,046		—		6,214		10		7,075		10
Consumer		—		—		—		89		—		100		—
Residential real estate		2,831		2,831		—		2,168		6		2,436		10
With an allowance recorded:
Commercial and industrial		2,469		3,739		829		1,419		32		886		63
Commercial real estate		2,261		3,167		946		5,838		19		8,095		34
Construction		1,132		1,132		351		5,238		—		6,172		—
Consumer		64		64		17		50		—		45		—
Residential real estate		252		252		199		1,023		1		1,035		2

Total	$	39,280	$	43,639	$	2,342	$	55,358	$	366	$	55,370	$	574

Troubled Debt Restructurings

At June 30, 2014 and 2013, there were $5.3 million and $9.2 million, respectively, in loans reported as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, the Bancorp requires sustained performance for nine months before returning a TDR to accrual status.

Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs.

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and six months ended June 30, 2014 and 2013. There were no modifications that involved forgiveness of debt.


	TDRs in Compliance with Their Modified Terms and Accruing Interest		TDRs in Compliance with Their Modified Terms and Not Accruing Interest		Total
(amounts in thousands)
Three months ended June 30, 2014
Extended under forbearance	$	167	$	0	$	167
Multiple extensions resulting from financial difficulty		0		0		0
Interest-rate reductions		0		176		176

Total	$	167	$	176	$	343

Six months ended June 30, 2014
Extended under forbearance	$	167	$	0	$	167
Multiple extensions resulting from financial difficulty		0		0		0
Interest-rate reductions		247		303		550

Total	$	414	$	303	$	717

Three months ended June 30, 2013
Extended under forbearance	$	0	$	0	$	0
Multiple extensions resulting from financial difficulty		0		0		0
Interest-rate reductions		93		910		1,003

Total	$	93	$	910	$	1,003

Six months ended June 30, 2013
Extended under forbearance	$	0	$	0	$	0
Multiple extensions resulting from financial difficulty		0		0		0
Interest-rate reductions		93		1,167		1,260

Total	$	93	$	1,167	$	1,260

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 six months ended June 30, 2014 and 2013.


	TDRs in Compliance with Their Modified Terms and Accruing Interest				TDRs in Compliance with Their Modified Terms and Not Accruing Interest
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
(amounts in thousands)
Three months ended June 30, 2014
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		0		0		3		176
Residential real estate		0		0		0		0
Consumer		4		167		0		0

Total		4	$	167		3	$	176


	TDRs in Compliance with Their Modified Terms and Accruing Interest				TDRs in Compliance with Their Modified Terms and Not Accruing Interest
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
(amounts in thousands)
Six months ended June 30, 2014
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		1		47		5		303
Residential real estate		3		200		0		0
Consumer		4		167		0		0

Total		8	$	414		5	$	303

Three months ended June 30, 2013
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		2		60		7		910
Residential real estate		0		0		0		0
Consumer		1		33		0		0

Total		3	$	93		7	$	910

Six months ended June 30, 2013
Commercial and industrial		0	$	0		0	$	0
Commercial real estate		0		0		0		0
Construction		0		0		0		0
Manufactured housing		2		60		10		1,167
Residential real estate		0		0		0		0
Consumer		1		33		0		0

Total		3	$	93		10	$	1,167

At June 30, 2014 and 2013, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructuring.

For the three and six months ended June 30, 2014 and 2013, the recorded investment of loans determined to be TDRs was $0.3 million, $0.7 million, $1.0 million and $1.2 million, respectively, both before and after restructuring. During the three month period ended June 30, 2014, three TDR loans defaulted with a recorded investment of $0.2 million. During the six month period ended June 30, 2014, six TDR loans defaulted with a recorded investment of $0.5 million. There were no TDRs that defaulted in the three and six month periods ended June 30, 2013.

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 allowances resulting from TDR modifications during the three and six months ended June 30, 2014 and 2013.

Credit Quality Indicators

Commercial and industrial, commercial real estate, residential real estate and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of 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 and are not assigned internal risk ratings.

To facilitate the monitoring of credit quality within the commercial and industrial, commercial real estate, construction, and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating

definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.

The risk rating grades are defined as follows:

“1” – Pass/Excellent

Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.

“2” – Pass/Superior

Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, borrowers are virtually immune to local economies in stable growing industries, and where management is well respected and the company has ready access to public markets.

“3” – Pass/Strong

Loans rated 3 are those loans for which the borrower has above average financial condition and flexibility; more than satisfactory debt service coverage, balance sheet and operating ratios are consistent with or better than industry peers, have little industry risk, move in diversified markets and are experienced and competent in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.

“4” – Pass/Good

Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.

“5” – Satisfactory

Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.

“6” – Satisfactory/Bankable with Care

Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.

“7” – Special Mention

Loans rated Special Mention are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event that potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.

“8” – Substandard

Loans are classified Substandard when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the weaknesses are not corrected.

“9” – Doubtful

The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

“10” – Loss

The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.

Risk ratings are not established for home equity loans, consumer loans, and installment loans, mainly because these portfolios consist of a larger number of homogenous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and nonperforming.

The following tables present the credit ratings of the non-covered loan portfolio as of June 30, 2014 and December 31, 2013:


	June 30, 2014
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
(amounts in thousands)
Pass/Satisfactory	$	283,044	$	2,793,438	$	50,899	$	281,713
Special Mention		13,750		14,838		27		467
Substandard		2,328		12,216		451		1,533

Total loans receivable, non-covered	$	299,122	$	2,820,492	$	51,377	$	283,713


	Consumer		Mortgage Warehouse		Manufactured Housing
(amounts in thousands)
Performing	$	2,015	$	9	$	122,144
Nonperforming (1)		0		0		11,163

Total loans receivable, non-covered	$	2,015	$	9	$	133,307


	December 31, 2013
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
(amounts in thousands)
Pass/Satisfactory	$	228,748	$	1,808,804	$	34,822	$	142,588
Special Mention		10,314		12,760		29		940
Substandard		447		13,622		2,050		1,660

Total loans receivable, non-covered	$	239,509	$	1,835,186	$	36,901	$	145,188


	Consumer		Mortgage Warehouse		Manufactured Housing
(amounts in thousands)
Performing	$	2,144	$	866	$	127,330
Nonperforming (1)		0		0		12,141

Total loans receivable, non-covered	$	2,144	$	866	$	139,471

(1)	Includes loans that are past due and still accruing interest and loans on nonaccrual status.

The following tables present the credit ratings of the covered loan portfolio as of June 30, 2014 and December 31, 2013:


	June 30, 2014
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
(amounts in thousands)
Pass/Satisfactory	$	3,700	$	13,325	$	526	$	12,194
Special Mention		0		3,159		0		0
Substandard		339		4,666		11,018		2,406

Total loans receivable, covered	$	4,039	$	21,150	$	11,544	$	14,600


	Manufactured Housing
(amounts in thousands)
Performing	$	3,005
Nonperforming (1)		136

Total loans receivable, covered	$	3,141


	December 31, 2013
	Commercial and Industrial		Commercial Real Estate		Construction		Residential Real Estate
(amounts in thousands)
Pass/Satisfactory	$	3,688	$	14,330	$	1,967	$	14,137
Special Mention		223		2,989		0		455
Substandard		1,903		6,939		12,660		4,141

Total loans receivable, covered	$	5,814	$	24,258	$	14,627	$	18,733


	Manufactured Housing
(amounts in thousands)
Performing	$	3,226
Nonperforming (1)		67

Total loans receivable, covered	$	3,293

(1)	Includes loans that are past due and still accruing interest and loans on nonaccrual status.

Allowance for loan losses

The changes in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 and the loans and allowance for loan losses by loan class based on impairment evaluation method are as follows. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.


	Commercial and Industrial			Commercial Real Estate			Construction			Residential Real Estate			Manufactured Housing			Consumer			Mortgage Warehouse		Residual Reserve		Total
(amounts in thousands)
Three months ended June 30, 2014
Beginning Balance, April 1, 2014	$	2,443		$	18,852		$	2,342		$	2,307		$	593		$	127		$	40	$	0	$	26,704
Charge-offs		(445	)		(912	)		0			(15	)		0			(33	)		0		0		(1,405	)
Recoveries		135			1			3			18			0			0			0		0		157
Provision for loan losses		1,060			2,148			(158	)		(282	)		(192	)		44			110		0		2,730

Ending Balance, June 30, 2014	$	3,193		$	20,089		$	2,187		$	2,028		$	401		$	138		$	150	$	0	$	28,186

Six months ended June 30, 2014
Beginning Balance, January 1, 2014	$	2,638		$	15,705		$	2,385		$	2,490		$	614		$	130		$	36	$	0	$	23,998
Charge-offs		(445	)		(1,160	)		0			(303	)		0			(33	)		0		0		(1,941	)
Recoveries		225			26			3			242			0			2			0		0		498
Provision for loan losses		775			5,518			(201	)		(401	)		(213	)		39			114		0		5,631

Ending Balance, June 30, 2014	$	3,193		$	20,089		$	2,187		$	2,028		$	401		$	138		$	150	$	0	$	28,186

At June 30, 2014
Loans:
Individually evaluated for impairment	$	16,643		$	20,553		$	3,878		$	2,182		$	0		$	136		$	0	$	0	$	43,392
Collectively evaluated for impairment		284,403			2,779,797			49,930			284,589			131,979			1,541			9		0		3,532,248
Loans acquired with credit deterioration		2,115			41,292			9,113			11,542			4,469			338			0		0		68,869

Total loans receivable, excluding deferred fees and costs	$	303,161		$	2,841,642		$	62,921		$	298,313		$	136,448		$	2,015		$	9		0	$	3,644,509

Allowance for loan losses:
Individually evaluated for impairment	$	915		$	812		$	671		$	175		$	0		$	5		$	0	$	0	$	2,578
Collectively evaluated for impairment		2,017			14,270			390			861			86			32			150		0		17,806
Loans acquired with credit deterioration		261			5,007			1,126			992			315			101			0		0		7,802

Total Allowance for loan losses	$	3,193		$	20,089		$	2,187		$	2,028		$	401		$	138		$	150	$	0	$	28,186


	Commercial and Industrial			Commercial Real Estate			Construction			Residential Real Estate			Manufactured Housing			Consumer			Mortgage Warehouse			Residual Reserve			Total
(amounts in thousands)
Three months ended June 30, 2013
Beginning Balance, April 1, 2013	$	1,990		$	15,223		$	4,279		$	3,248		$	846		$	141		$	54		$	658		$	26,439
Charge-offs		(76	)		(1,481	)		(1,471	)		(65	)		0			0			0			0			(3,093	)
Recoveries		154			8			0			10			0			4			0			0			176
Provision for loan losses		417			2,935			1,509			359			(168	)		(39	)		2			(395	)		4,620

Ending Balance, June 30, 2013	$	2,485		$	16,685		$	4,317		$	3,552		$	678		$	106		$	56		$	263		$	28,142

Six months ended June 30, 2013
Beginning Balance, January 1, 2013	$	1,477		$	15,439		$	3,991		$	3,233		$	750		$	154		$	71		$	722		$	25,837
Charge-offs		(96	)		(1,891	)		(1,471	)		(198	)		0			0			0			0			(3,656	)
Recoveries		165			60			0			7			0			9			0			0			241
Provision for loan losses		939			3,077			1,797			510			(72	)		(57	)		(15	)		(459	)		5,720

Ending Balance, June 30, 2013	$	2,485		$	16,685		$	4,317		$	3,552		$	678		$	106		$	56		$	263		$	28,142


At June 30, 2013
Loans:
Individually evaluated for impairment	$	10,147		$	33,344		$	10,970		$	2,901		$	0		$	77		$	0		$	0		$	57,439
Collectively evaluated for impairment		180,933			1,200,004			31,695			121,973			143,925			1,228			7,560			0			1,687,318
Loans acquired with credit deterioration		5,159			58,034			16,563			15,121			5,507			503			0			0			100,887

Total loans receivable, excluding deferred fees and costs	$	196,239		$	1,291,382		$	59,228		$	139,995		$	149,432		$	1,808		$	7,560		$	0		$	1,845,644

Allowance for loan losses:
Individually evaluated for impairment	$	602		$	1,818		$	1,533		$	327		$	0		$	0		$	0		$	0		$	4,280
Collectively evaluated for impairment		1,477			9,402			279			1,022			76			48			56			263			12,623
Loans acquired with credit deterioration		406			5,465			2,505			2,203			602			58			0			0			11,239

Total Allowance for loan losses	$	2,485		$	16,685		$	4,317		$	3,552		$	678		$	106		$	56		$	263		$	28,142

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. At June 30, 2014 and 2013, funds available for reimbursement, if necessary, were $3.2 million and $2.7 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.

The changes in accretable yield related to purchased-credit-impaired loans for the three and six months ended June 30, 2014 and 2013 were as follows:


For the three months ended June 30,	2014			2013
(amounts in thousands)
Accretable yield balance, beginning of period	$	20,619		$	29,665
Accretion to interest income		(543	)		(1,601	)
Reclassification from nonaccretable difference and disposals, net		(385	)		(415	)

Accretable yield balance, end of period	$	19,691		$	27,649


For the six months ended June 30,	2014			2013
(amounts in thousands)
Accretable yield balance, beginning of period	$	22,557		$	32,174
Accretion to interest income		(1,623	)		(3,672	)
Reclassification from nonaccretable difference and disposals, net		(1,243	)		(853	)

Accretable yield balance, end of period	$	19,691		$	27,649

NOTE 9 — BORROWINGS

On June 26, 2014, Customers Bancorp, Inc. closed a private placement transaction in which it issued $25 million of 4.625% senior notes due 2019, and Customers Bank closed a private placement transaction in which it issued $110 million of fixed-to-floating-rate subordinated notes due 2029. The aggregate net proceeds from the sale of the notes totaled $133.2 million.

The senior notes bear interest at a rate of 4.625%, and interest will be paid semi-annually in arrears in June and December. The subordinated notes will bear interest at an annual fixed rate of 6.125% until June 26, 2024, and interest will be paid semiannually. From June 26, 2024, the subordinated notes will bear an annual interest rate equal to three-month LIBOR plus 344.3 basis points until maturity on June 26, 2029. Customers Bank has the ability to call the subordinated notes, in whole or in part, at a redemption price equal to 100 percent of the principal balance at certain times on or after June 26, 2024.

The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.

During second quarter 2014, Customers Bank borrowed $200 million of long-term FHLB advances. On May 13, 2014, $100 million was issued at a fixed rate of 1.04% with a maturity on May 15, 2017. On May 20, 2014, there were two additional issuances of $50 million, at fixed rates of 0.54 % and 1.44%, maturing on May 20, 2016 and May 21, 2018, respectively.

NOTE 10 — SHARE-BASED COMPENSATION

The following information includes the effects of changes in stock options and exercise prices and restricted stock units resulting from the 10% stock dividend declared on May 15, 2014 and issued on June 30, 2014.

Stock Options

During the six months ended June 30, 2014, options to purchase an aggregate of 114,978 shares of voting common stock were granted to certain officers and team members. The options are subject to five-year cliff vesting. The fair values of the options were estimated using the Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of the options granted.


	June 30, 2014
Weighted-average risk-free interest rate		2.20	%
Expected dividend yield		0.00	%
Weighted-average expected volatility		17.55	%
Weighted-average expected life (in years)		7.00
Weighted-average fair value of each option granted	$	4.45

The following table summarizes stock option activity for the six months ended June 30, 2014.


	Number of Options			Weighted- average Exercise Price		Weighted- average Remaining Contractual Term in Years		Aggregate Intrinsic Value
	(dollars in thousands, except Weighted-average exercise price)
Outstanding at January 1, 2014		3,057,435		$	12.42
Granted		114,978			17.71
Forfeited		(7,696	)		17.69

Outstanding at June 30, 2014		3,164,717		$	12.60		7.70	$	23,478

Exercisable at June 30, 2014		13,683		$	16.67		3.04	$	71

Also during the six months ended June 30, 2014, 157,459 restricted stock units were granted to certain officers and team members. Of the aggregate restricted stock units, 52,537 were granted under the Bonus Recognition and Retention Program and are subject to five-year cliff vesting. The remainders are subject to three-year cliff vesting. The following table summarizes restricted stock activity for the six months ended June 30, 2014.


	Restricted Stock Units			Weighted- average grant- date fair value
Outstanding and unvested at January 1, 2014		674,810		$	11.81
Granted		157,459			17.65
Vested		(37,857	)		10.91
Forfeited		(2,901	)		11.45

Outstanding and unvested at June 30, 2014		791,511		$	13.01

Total share-based compensation expense for the six months ended June 30, 2014 and 2013 was $2.0 million and $1.5 million, respectively.

Customers Bancorp has a policy that permits its directors to elect to receive shares of voting common stock in lieu of their cash retainers. In January 2014, Customers Bancorp issued 28,095 shares of voting common stock with a fair value of $0.5 million to the directors as compensation for their services during 2013. During the six months ended June 30, 2014, Customers Bancorp issued 16,885 shares of voting common stock with a fair value of $0.3 million to directors as compensation for their services during the first six months of 2014. The fair values were determined based on the opening price of the common stock on the day the shares were issued.

NOTE 11 — REGULATORY MATTERS

The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and Bancorp to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations). At June 30, 2014 and December 31, 2013, the Bank and Bancorp met all capital adequacy requirements to which they were subject.

To be categorized as well capitalized, an institution must maintain minimum total risk based, Tier 1 risk based and Tier 1 leveraged ratios as set forth in the following table:


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2014:
Total capital (to risk weighted assets)
Customers Bancorp, Inc.	$	548,583		12.82	%	$	342,299		8.0	%		N/A		N/A
Customers Bank	$	572,550		13.47	%	$	339,919		8.0	%	$	424,899		10.0	%
Tier 1 capital (to risk weighted assets)
Customers Bancorp, Inc.	$	410,397		9.59	%	$	171,149		4.0	%		N/A		N/A
Customers Bank	$	434,364		10.22	%	$	169,960		4.0	%	$	254,939		6.0	%
Tier 1 capital (to average assets)
Customers Bancorp, Inc.	$	410,397		7.82	%	$	209,853		4.0	%		N/A		N/A
Customers Bank	$	434,364		8.33	%	$	208,696		4.0	%	$	260,870		5.0	%
As of December 31, 2013:
Total capital (to risk weighted assets)
Customers Bancorp, Inc.	$	411,527		13.21	%	$	249,196		8.0	%		N/A		N/A
Customers Bank	$	435,432		14.11	%	$	246,936		8.0	%	$	308,670		10.0	%
Tier 1 capital (to risk weighted assets)
Customers Bancorp, Inc.	$	387,529		12.44	%	$	124,598		4.0	%		N/A		N/A
Customers Bank	$	411,434		13.33	%	$	123,468		4.0	%	$	185,202		6.0	%
Tier 1 capital (to average assets)
Customers Bancorp, Inc.	$	387,529		10.11	%	$	153,310		4.0	%		N/A		N/A
Customers Bank	$	411,434		10.81	%	$	152,191		4.0	%	$	190,239		5.0	%

NOTE 12 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bancorp uses fair value measurements to record fair value adjustments to certain assets and liabilities to disclose the fair value of its financial instruments. FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Bancorp, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair value disclosure purposes, the Bancorp utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurements and Disclosures, as explained below.

In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bancorp’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.


Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:		Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used to estimate the fair values of the Bancorp’s financial instruments as of June 30, 2014 and December 31, 2013:

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values. These assets are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Investment securities:

The fair value of investment securities available for sale are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are included as Level 1, 2, or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

The carrying amount of FHLB, Federal Reserve Bank, and other restricted stock approximates fair value, and considers the limited marketability of such securities. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans held for sale - Residential mortgage loans:

The Bancorp generally estimates the fair values of loans held for sale based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans held for sale - Mortgage warehouse loans:

The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not expected to be recognized since at inception of the transaction the underlying loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 17 days from purchase to sale. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans receivable, net of allowance for loan losses:

The fair values of loans held for investment are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Impaired loans:

Impaired loans are those that are accounted for under ASC 450, Contingencies, in which the Bancorp has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

FDIC loss sharing receivable:

The FDIC loss sharing receivable is measured separately from the related covered assets, as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. Fair value is estimated using projected cash flows related to the loss sharing agreements based on the estimated losses to be incurred on the loans and the expected reimbursements for losses using the applicable loss share percentages. These cash flows are discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC. This asset is included as Level 3 fair value, based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned:

The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs). All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”). Appraisals are certified to the Bancorp and performed by appraisers on the Bancorp’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. These assets and liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Deposit liabilities:

The fair values disclosed for deposits (e.g., interest and noninterest checking, passbook savings and money market deposit accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). These liabilities are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. These liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Federal funds purchased:

For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value. These liabilities are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Borrowings:

Borrowings consist of long-term and short-term FHLB advances, five-year senior unsecured notes, and subordinated debt. For the short-term borrowings, the carrying amount is considered a reasonable estimate of fair value and is included as Level 1. Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk

characteristics, terms and remaining maturity. For the newly issued $25 million senior unsecured notes, the carrying value was considered a reasonable estimate of fair value as of second quarter 2014 because the notes were issued in an orderly transaction between willing market participants on June 26, 2014. These liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements. The $63 million senior unsecured notes issued during third quarter 2013 are traded on The NASDAQ Stock Market, and their price can be obtained daily. This fair value measurement is classified as Level 1.

Derivatives (Assets and Liabilities):

The fair values of interest rate swaps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future fixed cash receipts and the discounted expected variable cash payments. The discounted variable cash payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Bancorp and its counterparties. These assets and liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. The Bancorp uses commitments on hand from third party investors to estimate an exit price, and adjusts for the probability of the commitment being exercised based on the Bancorp’s internal experience (i.e., pull-through rate). These assets and liabilities are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Off-balance-sheet financial instruments:

Fair values for the Bancorp’s off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. These financial instruments are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements. At June 30, 2014 and December 31, 2013, there were no off-balance-sheet financial instruments in excess of their contract value.

The following information should not be interpreted as an estimate of the fair value of the entire Bancorp since a fair value calculation is only provided for a limited portion of the Bancorp’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between the Bancorp’s disclosures and those of other companies may not be meaningful.

The estimated fair values of the Bancorp’s financial instruments were as follows at June 30, 2014 and December 31, 2013.


					Fair Value Measurements at June 30, 2014
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(amounts in thousands)
Assets:
Cash and cash equivalents	$	265,534	$	265,534	$	265,534	$	0	$	0
Investment securities, available for sale		425,061		425,061		23,450		401,611		0
Loans held for sale		1,061,395		1,061,395		0		1,061,395		0
Loans receivable, net of allowance for loan losses		3,615,918		3,642,418		0		0		3,642,418
FHLB, Federal Reserve Bank and other restricted stock		75,558		75,558		0		75,558		0
Accrued interest receivable		11,613		11,613		0		11,613		0
FDIC loss sharing receivable		8,919		8,919		0		0		8,919
Derivatives		6,097		6,097		0		6,043		54
Liabilities:
Deposits	$	3,690,894	$	3,656,978	$	555,936	$	3,101,042	$	0
FHLB advances		1,301,500		1,303,876		991,500		312,376		0
Other borrowings		88,250		90,780		65,780		25,000		0
Subordinated debt		112,000		111,987		0		111,987		0
Derivatives		7,189		7,189		0		7,189		0
Accrued interest payable		1,836		1,836		0		1,836		0


					Fair Value Measurements at December 31, 2013
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(amounts in thousands)
Assets:
Cash and cash equivalents	$	233,068	$	233,068	$	233,068	$	0	$	0
Investment securities, available for sale		497,573		497,573		20,714		476,859		0
Loans held for sale		747,593		747,593		0		747,593		0
Loans receivable, net of allowance for loan losses		2,441,080		2,444,900		0		0		2,444,900
FHLB, Federal Reserve Bank and other stock		43,514		43,514		0		43,514		0
Accrued interest receivable		8,362		8,362		0		8,362		0
FDIC loss sharing receivable		10,046		10,046		0		0		10,046
Derivatives		3,763		3,763		0		3,523		240
Liabilities:
Deposits	$	2,959,922	$	2,919,935	$	478,103	$	2,441,832	$	0
Federal funds purchased		13,000		13,000		13,000		0		0
FHLB advances		706,500		708,025		596,500		111,525		0
Other borrowings		63,250		64,768		64,768		0		0
Subordinated debt		2,000		2,000		0		2,000		0
Derivatives		3,537		3,537		0		3,537		0
Accrued interest payable		1,675		1,675		0		1,675		0

For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014
	Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
(amounts in thousands)
Measured at Fair Value on a Recurring Basis:
Assets
Available-for-sale securities:
Mortgage-backed securities	$	0	$	401,611	$	0	$	401,611
Equity securities		23,450		0		0		23,450
Derivatives (1)		0		6,043		54		6,097
Loans held for sale – fair value option		0		1,061,395		0		1,061,395

Total assets - recurring fair value measurements	$	23,450	$	1,469,049	$	54	$	1,492,553

Liabilities
Derivatives (2)	$	0	$	7,189	$	0	$	7,189

Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $2,578	$	0	$	0	$	3,844	$	3,844
Other real estate owned		0		0		793		793

Total assets - nonrecurring fair value measurements	$	0	$	0	$	4,637	$	4,637


	December 31, 2013
	Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
(amounts in thousands)
Measured at Fair Value on a Recurring Basis:
Assets
Available-for-sale securities:
Mortgage-backed securities	$	0	$	451,536	$	0	$	451,536
Corporate notes		0		25,323		0		25,323
Equity securities		20,714		0		0		20,714
Derivatives (1)		0	$	3,523		240	$	3,736
Loans held for sale – fair value option		0		747,593		0		747,593

Total assets - recurring fair value measurements	$	20,714	$	1,227,975	$	240	$	1,248,929


Liabilities
Derivatives (2)		0	$	3,537		0	$	3,537


	December 31, 2013
	Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
(amounts in thousands)
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $2,342	$	0	$	0	$	3,836	$	3,836
Other real estate owned		0		0		335		335

Total assets - nonrecurring fair value measurements	$	0	$	0	$	4,171	$	4,171

(1)	Included in Other Assets

(2)	Included in Other Liabilities

The changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2014 and 2013 are summarized as follows.


	Residential Mortgage Loan Commitments
(amounts in thousands)
Balance at April 1, 2014	$	103
Issuances		54
Settlements		(103	)

Balance at June 30, 2014	$	54


	Loans Held for Sale (1)
(amounts in thousands)
Balance at April 1, 2013	$	3,173
Recoveries		(1,463	)
Sales		(1,013	)
Transfer from loans held for sale to other assets (1)		(697	)

Balance at June 30, 2013	$	0


	Residential Mortgage Loan Commitments
(amounts in thousands)
Balance at January 1, 2014	$	240
Issuances		157
Settlements		(343	)

Balance at June 30, 2014	$	54


	Loans Held for Sale (1)
(amounts in thousands)
Balance at January 1, 2013	$	0
Transfer from Level 2 to Level 3 (1)		3,173
Recoveries		(1,463	)
Sales		(1,013	)
Transfer from loans held for sale to other assets (1)		(697	)

Balance at June 30, 2013	$	0

(1)

The Bancorp’s policy is to recognize transfers between levels when events or circumstances warrant transfers. There were no transfers between levels during the first six months of 2014. During first quarter 2013, a suspected fraud was discovered in the Bank’s loans held-for-sale portfolio. Total loans involved in this fraud initially appeared to be $5.2 million, and management believed the range of possible loss to have been between $1.5 million and $3.2 million. Accordingly, management provided a loss contingency of $2.0 million at March 31, 2013. Due to the uncertainty surrounding the amount of loss, management transferred these loans and the related loss contingency from Level 2 to Level 3. During second quarter 2013, the Bank determined that an aggregate of $1.0 million of the loans were not involved in the fraud, and these loans were subsequently sold. In addition, the Bank recovered $1.5 million in cash from the alleged perpetrator. Since it was determined that these assets no longer met the definition of a loan, and since the Bank is pursuing restitution through the involved parties, the Bank determined this to be a receivable. As a result, the remaining aggregate $2.7 million of loans and the related $2.0 million reserve were transferred to other assets.

The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2014 and December 31, 2013 on a recurring and nonrecurring basis for which the Bancorp utilized Level 3 inputs to measure fair value.

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2014

Fair Value
Estimate

Valuation Technique

Unobservable Input

Range (Weighted
Average) (3)

(amounts in thousands)

Impaired loans

3,844

Collateral appraisal (1)

Liquidation expenses (2)

-8

Other real estate owned

793

Collateral appraisal (1)

Liquidation expenses (2)

-8

Residential mortgage loan commitments

Adjusted market bid

Pull-through rate

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2013

Fair Value
Estimate

Valuation Technique

Unobservable Input

Range (Weighted
Average) (3)

(amounts in thousands)

Impaired loans

3,836

Collateral appraisal (1)

Liquidation expenses (2)

-3% to -8% (-5.5%)

Other real estate owned

335

Collateral appraisal (1)

Liquidation expenses (2)

-3% to -8% (-5.5%)

Residential mortgage loan commitments

240

Adjusted market bid

Pull-through rate

80%

(1)	Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. The Bancorp does not discount appraisals.

(2)	Fair value is adjusted for costs to sell.

(3)	Presented as a percentage of the value determined by appraisal.

NOTE 13 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objectives of Using Derivatives

Customers Bancorp is exposed to certain risks arising from both its business operations and economic conditions. Customers Bancorp manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. Specifically, Customers Bancorp enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Customers Bancorp’s derivative financial instruments are used to manage differences in the amount, timing, and duration of Customers Bancorp’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed-rate borrowings. Customers Bancorp also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage the Bank’s interest-rate risk in assets or liabilities. The Bank manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions.

Cash Flow Hedges of Interest Rate Risk

Customers Bancorp’s objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Bancorp primarily uses interest rate swaps as part of its interest-rate-risk management strategy. Interest-rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Bancorp making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2014, such derivatives were used to hedge the variable cash flows associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2014, Customers Bancorp did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Bancorp’s variable-rate debt. The Bancorp does not expect to reclassify any amounts from accumulated other comprehensive income to interest expense during the next 12 months as Customers Bancorp’s derivatives are effective after April 2016.

Customers Bancorp is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

At June 30, 2014, Customers Bancorp had one outstanding interest rate derivative with a notional amount of $150.0 million that was designated as a cash flow hedge of interest rate risk.

Derivatives Not Designated as Hedging Instruments

The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies (typically the loan customers will swap a floating rate loan to a fixed rate loan). The customer interest rate swaps are simultaneously offset by interest rate swaps that the Bank executes with a third party in order to minimize interest rate risk exposure resulting from such transactions. Since the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting third-party market swaps are recognized directly in earnings. At June 30, 2014, the Bancorp had 42 interest rate swaps with an aggregate notional amount of $251.1 million related to this program. At December 31, 2013, the Bancorp had 28 interest rate swaps with an aggregate notional amount of $150.3 million related to this program.

The Bank enters into residential mortgage loan commitments in connection with its mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly to earnings. At June 30, 2014 and December 31, 2013, the Bank had an outstanding notional balance of residential mortgage loan commitments of $7.6 million and $7.1 million, respectively.

During first quarter 2014, the Bank purchased credit derivatives to hedge the performance risk associated with one of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly in earnings. At June 30, 2014, the Bank had an outstanding notional balance of credit derivatives of $13.4 million.

Fair Value of Derivative Instruments on the Balance Sheet

The following table presents the fair value of the Bancorp’s derivative financial instruments as well as the classification on the balance sheet as of June 30, 2014 and December 31, 2013.


	June 30, 2014
	Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(amounts in thousands)
Derivatives designated as cash flow hedges:
Interest rate swaps	Other assets	$	0	Other liabilities	$	957

Total		$	0		$	957

Derivatives not designated as hedging instruments:
Interest rate swaps	Other assets	$	5,910	Other liabilities	$	6,232
Credit contracts	Other assets		133	Other liabilities		0
Residential mortgage loan commitments	Other assets		54	Other liabilities		0

Total		$	6,097		$	6,232

December 31, 2013

Derivative Assets

Derivative Liabilities

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair Value

(amounts in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

3,523

Other liabilities

3,537

Residential mortgage loan commitments

Other assets

240

Other liabilities

Total

3,763

3,537

Effect of Derivative Instruments on Comprehensive Income

The following tables present the effect of the Bancorp’s derivative financial instruments on comprehensive income for the three and six months ended June 30, 2014 and 2013.


	Three Months Ended June 30, 2014
	Income Statement Location	Amount of income (loss) recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	(250	)
Credit contracts	Other non-interest income		14
Residential mortgage loan commitments	Mortgage loan and banking income		(49	)

Total		$	(285	)


	Three Months Ended June 30, 2013
	Income Statement Location	Amount of income (loss) recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	155


	Six Months Ended June 30, 2014
	Income Statement Location	Amount of income (loss) recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	(309	)
Credit contracts	Other non-interest income		(135	)
Residential mortgage loan commitments	Mortgage loan and banking income		(186	)

Total		$	(630	)


	Six Months Ended June 30, 2013
	Income Statement Location	Amount of income (loss) recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	198


	Three Months Ended June 30, 2014
				Location of Loss	Amount of Loss
	Amount of Loss			Reclassified from	Reclassified from
	Recognized in OCI on			Accumulated OCI into	Accumulated OCI into
	Derivatives (Effective Portion) (1)			Income (Effective Portion)	Income (Effective Portion)
(amounts in thousands)
Derivative in cash flow hedging relationships:
Interest rate swaps	$	(1,054	)	Interest expense	$	0


	Six Months Ended June 30, 2014
				Location of Loss	Amount of Loss
	Amount of Loss			Reclassified from	Reclassified from
	Recognized in OCI on			Accumulated OCI into	Accumulated OCI into
	Derivatives (Effective Portion) (1)			Income (Effective Portion)	Income (Effective Portion)
(amounts in thousands)
Derivative in cash flow hedging relationships:
Interest rate swaps	$	(622	)	Interest expense	$	0

(1)	Net of taxes

Credit-risk-related Contingent Features

By entering into derivative contracts, the Bank is exposed to credit risk. The credit risk associated with derivatives executed with Bank customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, the Bancorp only enters into agreements with those counterparties that maintain credit ratings of high quality.

Agreements with major derivative dealer counterparties contain provisions whereby default on any of the Bancorp’s indebtedness would be considered a default on its derivative obligations. The Bancorp also has entered into agreements that contain provisions under which the counterparty could require the Bancorp to settle its obligations if the Bancorp fails to maintain its status as a well/adequately-capitalized institution. As of June 30, 2014, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $7.3 million. In addition, the Bancorp has minimum collateral posting thresholds with certain of these counterparties, and at June 30, 2014 had posted $7.4 million as collateral. The Bancorp records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.

Disclosures about Offsetting Assets and Liabilities

The following tables present derivative instruments that are subject to enforceable master netting arrangements. The Bancorp’s interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table below.

Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. The Bancorp has not made a policy election to offset its derivative positions.

Offsetting of Financial Assets and Derivative Assets

At June 30, 2014

Gross Amounts

Net Amounts of

Gross Amounts not Offset in the

Offset in the

Assets Presented

Consolidated Balance Sheet

Gross Amount of

Consolidated

in the Consolidated

Financial

Cash Collateral

Recognized Assets

Balance Sheet

Instruments

Received

Net Amount

(amounts in thousands)

Description

Interest rate swap derivatives with institutional counterparties

Offsetting of Financial Liabilities and Derivative Liabilities

At June 30, 2014

Gross Amounts

Net Amounts of

Gross Amounts not Offset in the

Offset in the

Liabilities Presented

Consolidated Balance Sheet

Gross Amount of

Consolidated

in the Consolidated

Financial

Cash Collateral

Recognized Liabilities

Balance Sheet

Instruments

Pledged

Net Amount

(amounts in thousands)

Description

Interest rate swap derivatives with institutional counterparties

7,141

7,088

Offsetting of Financial Assets and Derivative Assets

At December 31, 2013

Gross Amounts

Net Amounts of

Gross Amounts not Offset in the

Offset in the

Assets Presented

Consolidated Balance Sheet

Gross Amount of

Consolidated

in the Consolidated

Financial

Cash Collateral

Recognized Assets

Balance Sheet

Instruments

Received

Net Amount

(amounts in thousands)

Description

Interest rate swap derivatives with institutional counterparties

392

Offsetting of Financial Liabilities and Derivative Liabilities

At December 31, 2013

Gross Amounts

Net Amounts of

Gross Amounts not Offset in the

Offset in the

Liabilities Presented

Consolidated Balance Sheet

Gross Amount of

Consolidated

in the Consolidated

Financial

Cash Collateral

Recognized Liabilities

Balance Sheet

Instruments

Pledged

Net Amount

(amounts in thousands)

Description

Interest rate swap derivatives with institutional counterparties

3,191

392

2,799

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

Cautionary Note Regarding Forward-Looking Statements

This report and all attachments hereto as well as other written or oral communications made from time to time by Customers Bancorp may contain certain forward-looking information within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “plan,” “intend,” “anticipates,” “strategies” or the negative thereof or comparable terminology, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions and estimates regarding future events and circumstances and involve known and unknown risks, uncertainties and other factors, including the risks described under “Risk Factors” that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. This information is based on various assumptions that may not prove to be correct. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Bancorp and the Bank. Although the expectations reflected in the forward-looking statements are currently believed to be reasonable, future results, levels of activity, performance or achievements cannot be guaranteed. Accordingly, there can be no assurance that actual results will meet expectations or will not be materially lower than the results contemplated in this report and attachments hereto. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents referred to, the dates of those documents. Neither Customers Bancorp nor the Bank undertakes any obligation to release publicly or otherwise provide any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.

Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, a financial holding company, and its wholly owned subsidiaries, including Customers Bank. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers Bancorp’s financial condition and results of operations as of and for the three and six months ended June 30, 2014. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in Customers Bancorp’s filing on Form 10-K for the fiscal year ended December 31, 2013.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in “NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” to our audited financial statements included in our 2013 Form 10-K and updated in this report on Form 10-Q for the quarterly period ended June 30, 2014.

Certain accounting policies involve significant judgments and assumptions by Customers Bancorp that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. There have been no material changes in our critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in our 2013 Form 10-K.

Second Quarter Events of Note

Following a successful 2013 and first quarter of 2014, Customers Bancorp continued its strong performance through second quarter 2014. Most notably, total assets were $5.6 billion as of June 30, 2014, an increase of $0.6 billion from March 31, 2014 and $1.5 billion from December 31, 2013. During second quarter 2014, the Bancorp achieved significant organic loan growth in its multi-family loans (up $246 million) and commercial real estate and commercial and industrial loans (up $157 million). Loans held for sale grew $364 million during second quarter 2014 driven by increased lending to mortgage companies as home sales and refinancing activity rebounded nationally. Asset quality remained high and capital ratios exceeded levels established for “well-capitalized” banks. During second quarter 2014, the Bank issued $110 million in fixed-to-floating rate subordinated debt, which increased the Tier 2 capital for the Bank and the Bancorp, and the Bancorp issued $25 million in senior unsecured debt. Financial results for second quarter 2014 included strong earnings of $10.2 million, a record high, or $0.37 per diluted share. Customers Bancorp also declared a 10 percent stock dividend on May 15, 2014 which was issued on June 30, 2014. Amounts reported in common stock, additional paid in capital and retained earnings as of June 30, 2014, as well as all per share amounts in this Form 10-Q for the quarterly period ended June 30, 2014, have been adjusted to give effect to this stock dividend.

Results of Operations

Second Quarter 2014 Compared to Second Quarter 2013

Net income available to common shareholders increased $2.0 million (24.4%) to $10.2 million for the three months ended June 30, 2014, compared to $8.2 million for the three months ended June 30, 2013. The increased net income resulted from increased net interest income of $10.8 million and increased non-interest income of $1.4 million, partially offset by increased non-interest expense of $8.3 million, increased income tax expense of $1.1 million, and increased provision for loan losses of $0.8 million.

Net interest income increased $10.8 million (41.4%) for the three months ended June 30, 2014 to $36.9 million, compared to $26.1 million for the three months ended June 30, 2013. This increase resulted principally from an increase in average loan balances of $1.8 billion, offset in part by a 33 basis point decrease in average yields on interest earning assets to 3.60% net of a 5 basis point decrease in the cost of funding. The reduced yields are primarily driven by a decrease in market interest rates on loans, payoffs on maturing higher yielding loans, and growth of multi-family loans, which have high credit quality but yield less than the average yield on the current loan portfolio.

The provision for loan losses increased by $0.8 million to $2.9 million for the three months ended June 30, 2014, compared to $2.1 million for the same period in 2013. The increase in the provision for loan losses during second quarter 2014 was primarily driven by growth in the portfolio of loans held for investment and reduced estimated benefits from the FDIC loss sharing receivable.

Non-interest income increased $1.4 million during the three months ended June 30, 2014 to $6.9 million, compared to $5.6 million for the three months ended June 30, 2013. The increase in 2014 was attributable to mortgage loan and banking income, which includes a gain realized from the sale of loans acquired from Flagstar Bank (up $1.6 million), management advisory fees earned in conjunction with an equity investment in a foreign entity (up $0.5 million), gains realized from sales of investment securities (up $0.4 million), increased income from bank owned life insurance (up $0.3 million), and increased gains realized from sales of SBA loans (up $0.2 million), offset in part by decreased mortgage warehouse transactional fees (down $1.7 million).

Non-interest expense increased $8.3 million during the three months ended June 30, 2014 to $25.2 million, compared to $16.9 million during the three months ended June 30, 2013. Expenses increased in 2014 principally for salaries and employee benefits as staffing levels grew to support the growing business (up $3.1 million), assessment for FDIC insurance and other regulatory fees as the bank grew and other costs were incurred (up $2.0 million), professional services for loan workout, litigation, and development of materials to respond to increased regulatory inquiries triggered by increasing levels of growth and complexity (up $1.0 million), technology, communication and bank operations to further support and build infrastructure (up $0.6 million), occupancy as the business expansion into new markets and increased activity in existing markets required additional facilities (up $0.5 million), and increased expenses associated with other real estate owned (up $0.4 million).

Income tax expense increased $1.1 million in the three months ended June 30, 2014 to $5.5 million compared to $4.4 million in the same period of 2013. The increase in the income tax expense was primarily due to an increase of $3.1 million in net income before taxes over the same period in 2013.

Net Interest Income

Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers Bancorp’s earnings. The following table summarizes the Bancorp’s net interest income and related spread and margin for the periods indicated.


	Three Months Ended June 30,
	2014								2013
	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost
(amounts in thousands)
Assets
Interest earning deposits	$	211,438		$	133		0.25	%	$	178,628		$	114		0.25	%
Investment securities, taxable (A)		448,059			2,543		2.27	%		181,557			1,082		2.38	%
Loans held for sale		777,000			6,715		3.47	%		1,158,974			11,157		3.86	%
Loans, taxable (B)		3,520,211			35,042		3.99	%		1,696,979			19,099		4.51	%
Loans, non-taxable (B)		24,653			178		2.90	%		14,525			97		2.68	%
Less: Allowance for loan losses		(27,452	)							(26,533	)
Other interest-earning assets		64,063			481		3.01	%		29,523			124		1.69	%

Total interest earning assets		5,017,972			45,092		3.60	%		3,233,653			31,673		3.93	%

Non-interest earning assets		230,017								144,794

Total assets	$	5,247,989							$	3,378,447
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