Edgar Filing: Customers Bancorp, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended September 30, 2017



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

For the transition period from to .

001-35542

(Commission File number)

(Exact name of registrant as specified in its charter)



Pennsylvania		27-2290659
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1015 Penn Avenue

Suite 103

Wyomissing PA 19610

(Address of principal executive offices)

(610) 933-2000

(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 (§232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

		Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

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 October 31, 2017, 30,806,122 shares of Voting Common Stock were outstanding.

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Table of Contents



Part I

Item 1.	Customers Bancorp, Inc. Consolidated Financial Statements as of September 30, 2017 and for the three and nine month periods ended September 30, 2017 and 2016 (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77


Item 4.	Controls and Procedures	78

PART II

Item 1.	Legal Proceedings	79

Item 1A.	Risk Factors	79

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81

Item 3.	Defaults Upon Senior Securities	81

Item 4.	Mine Safety Disclosures	81

Item 5.	Other Information	81

Item 6.	Exhibits	82

SIGNATURES		84

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

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



	September 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	13,318		$	37,485
Interest-earning deposits	206,162			227,224
Cash and cash equivalents	219,480			264,709
Investment securities available for sale, at fair value	584,823			493,474
Loans held for sale (includes $1,963,076 and $2,117,510, respectively, at fair value)	2,113,293			2,117,510
Loans receivable	7,061,338			6,154,637
Allowance for loan losses	(38,314		)	(37,315		)
Total loans receivable, net of allowance for loan losses	7,023,024			6,117,322
FHLB, Federal Reserve Bank, and other restricted stock	98,611			68,408
Accrued interest receivable	27,135			23,690
Bank premises and equipment, net	12,369			12,769
Bank-owned life insurance	255,683			161,494
Other real estate owned	1,059			3,108
Goodwill and other intangibles	16,604			17,621
Other assets	119,748			102,631
Total assets	$	10,471,829		$	9,382,736
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	1,427,304		$	966,058
Interest-bearing	6,169,772			6,337,717
Total deposits	7,597,076			7,303,775
Federal funds purchased	147,000			83,000
FHLB advances	1,462,343			868,800
Other borrowings	186,258			87,123
Subordinated debt	108,856			108,783
Accrued interest payable and other liabilities	59,654			75,383
Total liabilities	9,561,187			8,526,864
Shareholders’ equity:
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016	217,471			217,471
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 31,317,892 and 30,820,177 shares issued as of September 30, 2017 and December 31, 2016; 30,787,632 and 30,289,917 shares outstanding as of September 30, 2017 and December 31, 2016	31,318			30,820
Additional paid in capital	429,633			427,008
Retained earnings	240,076			193,698
Accumulated other comprehensive income (loss), net	377			(4,892		)
Treasury stock, at cost (530,260 shares as of September 30, 2017 and December 31, 2016)	(8,233		)	(8,233		)
Total shareholders’ equity	910,642			855,872
Total liabilities and shareholders’ equity	$	10,471,829		$	9,382,736

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED

(amounts in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest income:
Loans receivable	$	67,107		$	60,362		$	195,605		$	173,847
Loans held for sale	21,633			18,737			53,103			50,272
Investment securities	7,307			3,528			21,017			10,875
Other	2,238			1,585			5,507			3,937
Total interest income	98,285			84,212			275,232			238,931
Interest expense:
Deposits	18,381			13,009			48,934			34,365
Other borrowings	3,168			1,642			6,767			4,867
FHLB advances	7,032			3,291			15,433			9,274
Subordinated debt	1,685			1,685			5,055			5,055
Total interest expense	30,266			19,627			76,189			53,561
Net interest income	68,019			64,585			199,043			185,370
Provision for loan losses	2,352			88			5,937			2,854
Net interest income after provision for loan losses	65,667			64,497			193,106			182,516
Non-interest income:
Interchange and card revenue	9,570			11,547			31,729			13,806
Gain (loss) on sale of investment securities	5,349			(1		)	8,532			25
Deposit fees	2,659			4,218			7,918			5,260
Mortgage warehouse transactional fees	2,396			3,080			7,139			8,702
Bank-owned life insurance	1,672			1,386			5,297			3,629
Gain on sale of SBA and other loans	1,144			1,206			3,045			2,135
Mortgage banking income	257			287			703			737
Impairment loss on investment securities	(8,349		)	—			(12,934		)	—
Other	3,328			5,763			7,741			6,943
Total non-interest income	18,026			27,486			59,170			41,237
Non-interest expense:
Salaries and employee benefits	24,807			22,681			69,569			58,051
Technology, communication and bank operations	14,401			12,525			33,227			19,021
Professional services	7,403			7,006			21,142			13,213
Occupancy	2,857			2,450			8,228			7,248
FDIC assessments, taxes, and regulatory fees	2,475			2,726			6,615			11,191
Provision for operating losses	1,509			1,406			4,901			1,943
Loan workout	915			592			1,844			1,497
Other real estate owned	445			1,192			550			1,663
Advertising and promotion	404			591			1,108			1,178
Acquisition related expenses	—			144			—			1,195
Other	5,824			4,905			13,634			12,106
Total non-interest expense	61,040			56,218			160,818			128,306
Income before income tax expense	22,653			35,765			91,458			95,447
Income tax expense	14,899			14,558			34,236			36,572
Net income	7,754			21,207			57,222			58,875
Preferred stock dividends	3,615			2,552			10,844			5,900
Net income available to common shareholders	$	4,139		$	18,655		$	46,378		$	52,975
Basic earnings per common share	$	0.13		$	0.68		$	1.52		$	1.95
Diluted earnings per common share	$	0.13		$	0.63		$	1.42		$	1.80

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(amounts in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	7,754		$	21,207		$	57,222		$	58,875
Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains on securities arising during the period	(3,570		)	329			15,192			15,256
Income tax effect	1,393			(124		)	(5,924		)	(5,721		)
Reclassification adjustments for (gains) losses on securities included in net income	(5,349		)	1			(8,532		)	(25		)
Income tax effect	2,086			—			3,327			9
Net unrealized (losses) gains on available-for-sale securities	(5,440		)	206			4,063			9,519
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) arising during the period	171			890			(189		)	(2,523		)
Income tax effect	(67		)	(334		)	74			946
Reclassification adjustment for losses included in net income	572			703			2,166			1,306
Income tax effect	(223		)	(264		)	(845		)	(490		)
Net unrealized gains (losses) on cash flow hedges	453			995			1,206			(761		)
Other comprehensive (loss) income, net of income tax effect	(4,987		)	1,201			5,269			8,758
Comprehensive income	$	2,767		$	22,408		$	62,491		$	67,633

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

(amounts in thousands, except shares outstanding data)



	Nine Months Ended September 30, 2017
	Preferred Stock			Common Stock
	Shares of Preferred Stock Outstanding	Preferred Stock		Shares of Common Stock Outstanding	Common Stock		Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Treasury Stock			Total
Balance, December 31, 2016	9,000,000	$	217,471	30,289,917	$	30,820	$	427,008		$	193,698		$	(4,892	)	$	(8,233	)	$	855,872
Net income	—	—		—	—		—			57,222			—			—			57,222
Other comprehensive income	—	—		—	—		—			—			5,269			—			5,269
Preferred stock dividends	—	—		—	—		—			(10,844		)	—			—			(10,844		)
Share-based compensation expense	—	—		—	—		4,536			—			—			—			4,536
Exercise of warrants	—	—		50,387	50		507			—			—			—			557
Issuance of common stock under share-based compensation arrangements	—	—		447,328	448		(2,418		)	—			—			—			(1,970		)
Balance, September 30, 2017	9,000,000	$	217,471	30,787,632	$	31,318	$	429,633		$	240,076		$	377		$	(8,233	)	$	910,642

	Nine Months Ended September 30, 2016
	Preferred Stock			Common Stock
	Shares of Preferred Stock Outstanding	Preferred Stock		Shares of Common Stock Outstanding	Common Stock		Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Treasury Stock			Total
Balance, December 31, 2015	2,300,000	$	55,569	26,901,801	$	27,432	$	362,607		$	124,511		$	(7,984	)	$	(8,233	)	$	553,902
Net income	—	—		—	—		—			58,875			—			—			58,875
Other comprehensive income	—	—		—	—		—			—			8,758			—			8,758
Issuance of common stock, net of offering costs of $217	—	—		226,677	227		5,450			—			—			—			5,677
Issuance of preferred stock, net of offering costs of $5,520	6,700,000	161,980		—	—		—			—			—			—			161,980
Preferred stock dividends	—	—		—	—		—			(5,900		)	—						(5,900		)
Share-based compensation expense	—	—		—	—		4,569			—			—			—			4,569
Exercise of warrants	—	—		259,851	259		862			—			—			—			1,121
Issuance of common stock under share-based compensation arrangements	—	—		155,888	156		673			—			—			—			829
Balance, September 30, 2016	9,000,000	$	217,549	27,544,217	$	28,074	$	374,161		$	177,486		$	774		$	(8,233	)	$	789,811

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(amounts in thousands)



	Nine Months Ended September 30,
	2017			2016
Cash Flows from Operating Activities
Net income	$	57,222		$	58,875
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses, net of change to FDIC receivable and clawback liability	5,937			2,854
Depreciation and amortization	7,476			4,138
Share-based compensation expense	5,377			5,213
Deferred taxes	286			(4,846		)
Net amortization of investment securities premiums and discounts	520			664
Gain on sale of investment securities	(8,532		)	(25		)
Impairment loss on investment securities	12,934			—
Gain on sale of SBA and other loans	(3,553		)	(2,674		)
Origination of loans held for sale	(22,770,726		)	(27,092,862		)
Proceeds from the sale of loans held for sale	22,925,668			26,473,789
Decrease in FDIC loss sharing receivable net of clawback liability	—			255
Amortization of fair value discounts and premiums	93			312
Net loss on sales of other real estate owned	154			85
Valuation and other adjustments to other real estate owned, net of FDIC receivable	298			1,261
Earnings on investment in bank-owned life insurance	(5,297		)	(3,629		)
Increase in accrued interest receivable and other assets	(27,862		)	(38,672		)
(Decrease) increase in accrued interest payable and other liabilities	(14,106		)	66,577
Net Cash Provided By (Used In) Operating Activities	185,889			(528,685		)
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of securities available for sale	36,461			46,097
Proceeds from sales of investment securities available for sale	698,451			2,853
Purchases of investment securities available for sale	(796,594		)	(5,000		)
Net increase in loans	(921,049		)	(641,093		)
Proceeds from sales of loans	124,703			91,868
Purchase of loans	(262,641		)	—
Purchases of bank-owned life insurance	(90,000		)	—
Proceeds from bank-owned life insurance	1,418			619
Net (purchases of) proceeds from FHLB, Federal Reserve Bank, and other restricted stock	(30,203		)	19,220
Payments to the FDIC on loss sharing agreements	—			(2,049		)
Purchases of bank premises and equipment	(1,725		)	(3,343		)
Proceeds from sales of other real estate owned	1,680			419
Acquisition of Disbursements business, net	—			(17,000		)
Net Cash Used In Investing Activities	(1,267,428		)	(507,409		)
Cash Flows from Financing Activities
Net increase in deposits	293,301			1,479,471
Net increase (decrease) in short-term borrowed funds from the FHLB	593,543			(663,600		)
Net increase (decrease) in federal funds purchased	64,000			(18,000		)
Proceeds from long-term FHLB borrowings	—			75,000
Net proceeds from issuance of long-term debt	98,564			—
Net proceeds from issuance of preferred stock	—			161,980
Preferred stock dividends paid	(10,844		)	(5,450		)
Exercise of warrants	557			1,121
Payments of employee taxes withheld from share-based awards	(4,923		)	(702		)
Proceeds from issuance of common stock	2,112			7,269
Net Cash Provided By Financing Activities	1,036,310			1,037,089
Net (Decrease) Increase in Cash and Cash Equivalents	(45,229		)	995
Cash and Cash Equivalents – Beginning	264,709			264,593
Cash and Cash Equivalents – Ending	$	219,480		$	265,588



	(continued)

Supplementary Cash Flows Information
Interest paid	$	70,706		$	50,410
Income taxes paid	31,545			40,966
Non-cash items:
Transfer of loans to other real estate owned	$	83		$	605
Transfer of loans held for investment to loans held for sale	150,638			—

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS

Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”), collectively referred to as “Customers” herein. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

Customers Bancorp, Inc. and its wholly owned subsidiaries, Customers Bank, and non-bank subsidiaries, 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; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan, New York; and nationally for certain loan and deposit products. The Bank has 14 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products to customers through its limited-purpose offices in Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York, and Philadelphia, Pennsylvania. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies.

Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. The combination of the BankMobile technology software platform with the Vibe Student Checking and Refund Management Disbursement Services business (the "Disbursement business") acquired from Higher One Holdings, Inc. and Higher One, Inc. (together, "Higher One") in June 2016 propelled BankMobile to one of the largest mobile banking services in the United States by number of customers. Customers has announced its intent to spin-off BankMobile to Customers’ shareholders through a tax-free spin-off/merger transaction. Accordingly, the assets and liabilities of BankMobile will not be reported separately as held for sale, and its operating results and associated cash flows will not be reported as discontinued operations, until execution of the spin-off/merger transaction and will be considered held and used for all periods presented. Previously reported held-for-sale balances in the consolidated balance sheet as of December 31, 2016, and corresponding operating results and cash flows for the periods presented, have been reclassified to conform with the current period consolidated financial statement presentation. See NOTE 3 TAX-FREE SPIN-OFF AND MERGER.

Customers 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. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.

NOTE 2 - ACQUISITION ACTIVITY

On June 15, 2016, Customers completed the acquisition of substantially all of the assets and the assumption of certain liabilities of the Disbursement business from Higher One. The acquisition was completed pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement") dated as of December 15, 2015 between Customers and Higher One. Under the terms of the Purchase Agreement, Customers also acquired all existing relationships with vendors and educational institutions, and all intellectual property and assumed normal business related liabilities. In conjunction with the acquisition, Customers hired approximately 225 Higher One employees primarily located in New Haven, Connecticut that manage the Disbursement business and serve the Disbursement business customers.

The transaction contemplates aggregate guaranteed payments to Higher One of $42 million. The aggregate purchase price payable by Customers is $37 million in cash, with the payments to be made as follows: (i) $17 million in cash paid upon the closing of the acquisition, (ii) $10 million in cash upon the first anniversary of the closing and (iii) $10 million in cash paid upon the second anniversary of the closing. In accordance with the terms of the agreement, $10 million was paid to Higher One in June 2017. In addition, concurrently with the closing, the parties entered into a Transition Services Agreement pursuant to which Higher One provided certain transition services to Customers through June 30, 2017. As consideration for these services, Customers paid Higher One an additional $5 million in cash. Customers also will be required to make additional payments to Higher One if, during the three years following the closing, revenues from the acquired Disbursement business exceed $75 million in a year. The potential payment is equal to 35% of the amount the Disbursement business related revenue exceeds $75 million in each year. As of September 30, 2017, Customers has not recorded a liability for any additional contingent consideration payable under the Purchase Agreement.

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As specified in the Purchase Agreement, the payments of $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing were placed into an escrow account with a third party. The escrow account with $10 million and $20 million, respectively, as of September 30, 2017 and December 31, 2016 in aggregate restricted cash and the corresponding obligation to pay Higher One pursuant to the terms of the Purchase Agreement have been assigned to BankMobile and are included with "Cash and cash equivalents" and "Accrued interest payable and other liabilities" on the September 30, 2017 and December 31, 2016 consolidated balance sheets. For more information regarding Customers' plans for BankMobile and the presentation of BankMobile within the consolidated financial statements, see NOTE 3 - TAX-FREE SPIN-OFF AND MERGER.

The assets acquired and liabilities assumed were initially presented at their estimated fair values based on a preliminary

allocation of the purchase price. In many cases, the determination of these fair values required management to make estimates

about discount rates, future expected cash flows, market conditions and other future events that were highly subjective and

subject to change. The fair value estimates were considered preliminary and subject to change for up to one year after the

closing date of the acquisition as additional information became available. Based on a preliminary purchase price allocation, Customers recorded $4.3 million in goodwill as a result of the acquisition. At December 31, 2016, Customers recorded adjustments to the estimated fair values of prepaid expenses and other liabilities, which resulted in a $1.0 million increase in goodwill. The adjusted amount of goodwill of $5.3 million reflects the excess purchase price over the estimated fair value of

the net assets acquired. The goodwill recorded is deductible for tax purposes. The purchase price allocation was considered final as of June 30, 2017. The following table summarizes the final adjusted amounts recognized for assets acquired and liabilities assumed:



(amounts in thousands)
Fair value of assets acquired:
Developed software	$	27,400
Other intangible assets	9,300
Accounts receivable	2,784
Prepaid expenses	418
Fixed assets, net	229
Total assets acquired	40,131

Fair value of liabilities assumed:
Other liabilities	5,735
Deferred revenue	2,655
Total liabilities assumed	8,390

Net assets acquired	$	31,741

Transaction cash consideration (1)	$	37,000

Goodwill recognized	$	5,259

(1) Includes $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing, which has been placed into an escrow account with a third party (aggregate amount of $20 million at December 31, 2016). Customers paid the first $10 million due to Higher One in June 2017.

The fair value for the developed software was estimated based on expected revenue attributable to the software utilizing a discounted cash flow methodology giving consideration to potential obsolescence. The developed software is being amortized over ten years based on the estimated economic benefits received. The fair values for the other intangible assets represent the value of existing student and university relationships and a non-compete agreement with Higher One based on estimated retention rates and discounted cash flows. Other intangible assets are being amortized over an estimated life ranging from four to twenty years. Because BankMobile met the criteria to be classified as held for sale at December 31, 2016, the acquired assets were not depreciated or amortized during first quarter 2017 and second quarter 2017. The reclassification of the acquired assets as held and used as of September 30, 2017 resulted in depreciation and amortization expense for the developed software, other intangible assets, and fixed assets totaling $3.5 million in third quarter 2017. The acquired assets were reclassified to held and used at their carrying amounts, adjusted for depreciation and amortization for the periods they were classified as held for sale, which was lower than their estimated fair values as of September 30, 2017.

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NOTE 3 – TAX-FREE SPIN-OFF AND MERGER

In third quarter 2017, Customers decided that the best strategy for its shareholders for divesting BankMobile was to spin-off BankMobile to Customers’ shareholders through a spin-off/merger transaction. The tax-free spin-off is expected to be followed by a merger of Customers' BankMobile Technologies, Inc. subsidiary ("BMT") into Clearwater Florida based Flagship Community Bank ("Flagship"), with Customers' shareholders receiving shares of Flagship common stock in exchange for shares of BMT they receive in the spin-off. Flagship is expected to separately purchase BankMobile deposits directly from Customers for cash. Following completion of the spin-off and merger and other transactions contemplated in a purchase and sale agreement between Customers and Flagship, Customers' shareholders would receive collectively more than 50% of Flagship common stock, valued at approximately $110 million. The common stock of the merged entities, to be called BankMobile, is expected to be listed on a national securities exchange after completion of the transactions. Customers believes the transactions will be treated as a tax-free exchange for both Customers' shareholders and Customers. Customers expects to execute an Amended and Restated Purchase and Assumption Agreement and Plan of Merger (the “Amended Agreement”) with Flagship to effect the spin-off and merger and Flagship’s purchase of BankMobile deposits from Customers. Customers expects that the Amended Agreement will provide that completion of the transactions will be subject to the receipt of all necessary regulatory approvals, certain Flagship shareholder approvals, successful raising of capital by Flagship, and other customary closing conditions. Customers expects the transaction to close in mid-2018.

At December 31, 2016, BankMobile met the criteria to be classified as held for sale, and accordingly the assets and liabilities of BankMobile were presented as “Assets held for sale,” “Non-interest bearing deposits held for sale,” and “Other liabilities held for sale” and BankMobile’s operating results and associated cash flows were presented as “Discontinued operations”. However, with the third quarter 2017 spin-off/merger decision, generally accepted accounting principles require that assets, liabilities, operating results, and cash flows associated with a business to be disposed of through a spin-off/merger transaction not be reported as held for sale or discontinued operations until execution of the spin-off/merger transaction. Accordingly, BankMobile's assets, liabilities, operating results and cash flows will not be reported separately as held for sale or discontinued operations at September 30, 2017 and December 31, 2016 and for the three and nine month periods ended September 30, 2017 and 2016 and instead will be reported as held and used. As a result, Customers measured the business at the lower of its (i) carrying amount before it was classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used, or (ii) fair value at the date the decision not to sell was made. Customers recorded a charge of $4.2 million in third quarter 2017 relating to the amount of depreciation and amortization expense that would have been recorded had the assets been continuously classified as held and used.

Prior reported December 31, 2016 assets held for sale, non-interest bearing deposits held for sale and other liabilities held for sale have been reclassified to conform with the current period presentation as summarized below. Amounts previously reported as discontinued operations have also been reclassified to conform with the current period presentation within the accompanying consolidated financial statements as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See NOTE 14 - BUSINESS SEGMENTS.

The following summarizes the effect of the reclassification from held for sale classification to held and used classification on the previously reported consolidated balance sheet as of December 31, 2016 and the previously reported consolidated statements of income for the the three and nine months ended September 30, 2016:

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	December 31, 2016 As Previously Reported		Effect of Reclassification From Held For Sale to Held and Used			December 31, 2016 After Reclassification
(amounts in thousands)	December 31, 2016 As Previously Reported					December 31, 2016 After Reclassification
ASSETS
Cash and cash equivalents	$	244,709	$	20,000		$	264,709
Loans receivable	6,142,390		12,247			6,154,637
Bank premises and equipment, net	12,259		510			12,769
Goodwill and other intangibles	3,639		13,982			17,621
Assets held for sale	79,271		(79,271		)	—
Other assets	70,099		32,532			102,631
LIABILITIES
Demand, non-interest bearing deposits	$	512,664	$	453,394		$	966,058
Interest bearing deposits	6,334,316		3,401			6,337,717
Non-interest bearing deposits held for sale	453,394		(453,394		)	—
Other liabilities held for sale	31,403		(31,403		)	—
Accrued interest payable and other liabilities	47,381		28,002			75,383



	Three Months Ended September 30, 2016			Effect of Reclassification From Held For Sale to Held and Used			Three Months Ended September 30, 2016
	As Previously Reported						After Reclassification
Interest income	$	84,212		$	—		$	84,212
Interest expense	19,622			5			19,627
Net interest income	64,590			(5		)	64,585
Provision for loan losses	(161		)	249			88
Non-interest income	11,121			16,365			27,486
Non-interest expenses	36,750			19,468			56,218
Income from continuing operations before income taxes	39,122			(3,357		)	35,765
Provision for income taxes	15,834			(1,276		)	14,558
Net income from continuing operations	23,288			(2,081		)	21,207
Loss from discontinued operations before income taxes	(3,357		)	3,357			—
Income tax benefit from discontinued operations	(1,276		)	1,276			—
Net loss from discontinued operations	(2,081		)	2,081			—
Net income	21,207			—			21,207
Preferred stock dividend	2,552			—			2,552
Net income available to common shareholders	$	18,655		$	—		$	18,655



	Nine Months Ended September 30, 2016			Effect of Reclassification From Held For Sale to Held and Used			Nine Months Ended September 30, 2016
	As Previously Reported						After Reclassification
Interest income	$	238,931		$	—		$	238,931
Interest expense	53,548			13			53,561
Net interest income	185,383			(13		)	185,370
Provision for loan losses	2,605			249			2,854
Non-interest income	22,241			18,996			41,237
Non-interest expenses	100,706			27,600			128,306
Income from continuing operations before income taxes	104,313			(8,866		)	95,447
Provision for income taxes	39,942			(3,370		)	36,572
Net income from continuing operations	64,371			(5,496		)	58,875
Loss from discontinued operations before income taxes	(8,865		)	8,865			—
Income tax benefit from discontinued operations	(3,369		)	3,369			—
Net loss from discontinued operations	(5,496		)	5,496			—
Net income	58,875			—			58,875
Preferred stock dividend	5,900			—			5,900
Net income available to common shareholders	$	52,975		$	—		$	52,975

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NOTE 4 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The interim unaudited consolidated financial statements of Customers Bancorp and subsidiaries have been prepared pursuant to the rules and regulations of 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, 2016 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2016 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 2016 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 8, 2017. That Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; Allowance for Loan Losses; Goodwill and other Intangible Assets; Investments in FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable and Clawback Liability; Bank-Owned Life Insurance; Bank Premises and Equipment; Treasury Stock; Income Taxes; Share-Based Compensation; Segments; Derivative Instruments and Hedging; Comprehensive Income; and Earnings per Share. Certain prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.

Reclassifications

As described in NOTE 3 - TAX-FREE SPIN-OFF AND MERGER, as of September 30, 2017, Customers reclassified BankMobile, a segment previously classified as held for sale to held and used, as it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including NOTE 9 and NOTE 12) have been reclassified to conform with the current period presentation. Except for these reclassifications, there have been no material changes to Customers' significant accounting policies as disclosed in Customers' Annual Report on Form 10-K for the year ended December 31, 2016.

Presented below are recently issued accounting standards that Customers has adopted as well as those that the Financial Accounting Standards Board (“FASB”) has issued but are not yet effective or that Customers has not yet adopted.

Recently Issued Accounting Standards

Accounting Standards Adopted in 2017

Since January 1, 2017, Customers has adopted the following FASB Accounting Standard Updates (“ASUs”), none of which had a material impact to Customers’ consolidated financial statements:

•

Customers adopted ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, on a prospective basis. This ASU clarifies that a change in the counterparties to a derivative contract (i.e., a novation), in and of itself, does not require the de-designation of a hedging relationship provided that all the other hedge accounting criteria continue to be met.

•

Customers also adopted ASU 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarifies that a contingency of put or call exercise does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. However, as required under the existing guidance, companies will still need to evaluate the other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changes in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. As the adoption did not result in any significant impact to Customers’ consolidated financial statements, it did not result in a modified retrospective application.

•

Customers also adopted ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, on a prospective basis. This ASU eliminates the requirement for the retrospective use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence of an investor. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of

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the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method of accounting.

•

Customers also adopted ASU 2016-17, Consolidation - Interests Held Through Related Parties that are Under Common Control. This ASU amends the guidance included in ASU 2015-02, Consolidation: Amendments to Consolidation Analysis which Customers adopted in first quarter 2016. This ASU makes a narrow amendment that requires that a single decision maker considers indirect economic interests in an entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. Prior to this amendment, indirect interests held through related parties that are under common control were to be considered equivalent of the single decision maker’s direct interests in their entirety which could result in a single decision maker consolidating the VIE. As the adoption did not result in any significant impact to Customers’ consolidated financial statements, it did not result in a full or modified retrospective application.

Accounting Standards Issued But Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also changes certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. Customers plans to adopt this ASU by January 1, 2018. Adoption of this new guidance must be applied on a modified retrospective approach. While Customers continues to assess all potential impacts of the standard, Customers does not currently expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features, which will change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share ("EPS"). For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Customers currently does not have any equity-linked financial instruments (or embedded features) with down round features, accordingly Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements, however, Customers will continue to evaluate the potential impact through the adoption date.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification in Accounting Standards Codification (“ASC”) 718. Under this ASU, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions. This ASU does not change the accounting for modifications under ASC 718. The ASU will be effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Adoption of this new guidance must be applied prospectively to an award modified on or after the adoption date. Customers generally does not modify the terms of conditions of its share-based payment awards, accordingly Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements, however, Customers will continue to evaluate the potential impact through the adoption date.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which requires that premiums for certain callable debt securities held be amortized to their earliest call date. This ASU does not affect the accounting for securities purchased at a discount. This ASU will be effective for Customers for its first reporting period beginning after December 15, 2018, with earlier adoption permitted. Adoption of this new guidance must be applied on a modified retrospective approach. Customers currently has an immaterial amount of callable debt securities purchased with premiums, accordingly Customers does not expect the adoption of this ASU to have a significant

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impact on its financial condition, results of operations and consolidated financial statements, however, Customers will continue to evaluate the potential impact through the adoption date.

In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of the accounting guidance on the sale of nonfinancial assets to non-customers, including partial sales. This ASU defines an in-substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This ASU also unifies the guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing the sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This ASU will be effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. The adoption of this new guidance must be applied on a full or modified retrospective basis. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test that requires an entity to determine the implied fair value of its goodwill through a hypothetical purchase price allocation. Instead, under this ASU, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will also be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective for Customers for its first reporting period beginning after December 15, 2019. Early adoption is permitted for impairment tests performed after January 1, 2017. Customers expects to early adopt this ASU upon its next annual goodwill impairment test in 2017 and does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which narrows the definition of a business and clarifies that to be considered a business, the fair value of gross assets acquired (or disposed of) should not be concentrated in a single identifiable asset or a group of similar identifiable assets. In addition, to be considered a business, an acquisition would have to include an input and a substantive process that together will significantly contribute to the ability to create an output. Also, the amendments narrow the definition of the term “output” so that it is consistent with how outputs are defined in ASC Topic 606, Revenue from Contracts with Customers. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017. Adoption of this new guidance must be applied on a prospective basis. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Customers does not expect the adoption to this ASU to have a significant impact on the presentation of its statement of cash flows.

In October 2016, the FASB issued ASU 2016-16-Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use.

This ASU is effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

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In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which aims to reduce the existing diversity in practice with regards to the following specific items in the Statement of Cash Flows:


1.	Cash payments for debt prepayment or extinguishment costs will be classified in financing activities.


2.	Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.

Cash paid by an acquirer soon after a business combination (i.e. approximately three months or less) for the settlement of a contingent consideration liability will be classified in investing activities. Payments made thereafter should be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities.


4.	Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (i.e., the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss component included in the settlement.


5.	Cash proceeds received from the settlement of bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on BOLI may be classified as cash outflows for investing, operating, or a combination of both.


6.	A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a non-cash activity, and cash received from beneficial interests will be classified in investing activities.


7.	Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look-through approach as an accounting policy election.

The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Customers is currently evaluating the impact of this ASU and does not expect the ASU to have a material impact on the presentation of its statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset (including HTM securities), presents the net amount expected to be collected on the financial asset. This ASU will replace today’s “incurred loss” approach. The CECL model is expected to result in earlier recognition of credit losses. For available-for-sale debt securities, entities will be required to record allowances for credit losses rather than reduce the carrying amount, as they do today under the OTTI model, and will be allowed to reverse previously established allowances in the event the credit of the issuer improves. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for Customers for its first reporting period beginning after December 15, 2019. Earlier adoption is also permitted. Adoption of the new guidance can be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Customers is currently evaluating the impact of this ASU, initiating implementation efforts across the company, and planning for loss modeling requirements consistent with lifetime expected loss estimates. It is expected that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to Customers' allowance for loan losses which will depend upon the nature and characteristics of Customers' loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. Customers currently does not intend to early adopt this new guidance.

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In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products, that would require issuers of prepaid stored-value product (such as gift cards, telecommunication cards, and traveler’s checks), to derecognize the financial liability related to those products for breakage. Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services or cash. There is currently a diversity in the methodology used to recognize breakage. Subtopic 405-20, Extinguishment of Liabilities, includes derecognition guidance for both financial liabilities and nonfinancial liabilities, and Topic 606, Revenue from Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities. The amendments in this ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases. The new standard is effective for Customers for its first reporting period beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Customers is currently evaluating the impact of this ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. Customers does not intend to early adopt this ASU.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for Customers for its first reporting period beginning after December 15, 2017, including interim periods within those fiscal years. Customers is in the process of evaluating the impacts of the adoption of this ASU, however, it does not expect the impact to be significant to its financial condition, results of operations and consolidated financial statements given the immaterial amount of its investment in equity securities.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In August 2015, the FASB issued ASU 2015-14, which formalized the deferral of the effective date of the amendment for a period of one-year from the original effective date. Following the issuance of ASU 2015-14, the amendment will be effective for Customers for its first reporting period beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission and the entity is not exposed to credit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In April 2016, the FASB also issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether an entity's promise to grant a license with either a right to use the entity's intellectual property

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(which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and the presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption.

Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), Customers current assessment is that the new guidance will not have a material impact on the elements of its consolidated statements of operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gain). Customers will adopt this ASU on January 1, 2018 using a modified retrospective approach. Customers has completed its identification of all revenue streams that are included in its financial statements and has identified its deposit related fees, service charges, debit card and prepaid card interchange income, and university fees to be within the scope of the standard. Customers is also substantially complete with its review of the related contracts and has also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Customers' overall assessment suggests that adoption of this ASU will not materially change its current method and timing of recognizing revenue for these revenue streams. Customers, however, is still evaluating the ASU’s expanded disclosure requirements. As provided above, Customers current assessment is that the adoption of this ASU will not have a significant impact to its financial condition, results of operations and consolidated financial statements.

NOTE 5 — EARNINGS PER SHARE

The following are the components and results of Customers' earnings per common share calculations for the periods presented.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
(amounts in thousands, except share and per share data)
Net income available to common shareholders	$	4,139	$	18,655	$	46,378	$	52,975

Weighted-average number of common shares outstanding - basic	30,739,671		27,367,551		30,597,314		27,131,960
Share-based compensation plans	1,754,480		2,205,291		2,004,917		2,119,717
Warrants	18,541		124,365		24,392		243,531
Weighted-average number of common shares - diluted	32,512,692		29,697,207		32,626,623		29,495,208

Basic earnings per common share	$	0.13	$	0.68	$	1.52	$	1.95
Diluted earnings per common share	$	0.13	$	0.63	$	1.42	$	1.80

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Anti-dilutive securities:
Share-based compensation awards	409,225	616,995	409,225	616,995
Warrants	52,242	52,242	52,242	52,242
Total anti-dilutive securities	461,467	669,237	461,467	669,237

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NOTE 6 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT (1)

The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30, 2017
(amounts in thousands)	Unrealized Gains (Losses) on Available-For-Sale Securities			Unrealized Loss on Cash Flow Hedges			Total
Balance - June 30, 2017	$	6,822		$	(1,458	)	$	5,364
Other comprehensive income (loss) before reclassifications	(2,177		)	104			(2,073		)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)	(3,263		)	349			(2,914		)
Net current-period other comprehensive (loss) income	(5,440		)	453			(4,987		)
Balance - September 30, 2017	$	1,382		$	(1,005	)	$	377



	Nine Months Ended September 30, 2017
(amounts in thousands)	Unrealized Gains (Losses) on Available-For-Sale Securities			Unrealized Loss on Cash Flow Hedges			Total
Balance - December 31, 2016	$	(2,681	)	$	(2,211	)	$	(4,892	)
Other comprehensive income (loss) before reclassifications	9,268			(115		)	9,153
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)	(5,205		)	1,321			(3,884		)
Net current-period other comprehensive income	4,063			1,206			5,269
Balance - September 30, 2017	$	1,382		$	(1,005	)	$	377


(1)	All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.


(2)	Reclassification amounts for available-for-sale securities are reported as gain on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.



	Three Months Ended September 30, 2016
	Available-for-sale-securities
(amounts in thousands)	Unrealized Gains		Foreign Currency Items			Total Unrealized Gains		Unrealized Loss on Cash Flow Hedge			Total
Balance - June 30, 2016	$	4,895	$	(768	)	$	4,127	$	(4,554	)	$	(427	)
Other comprehensive income (loss) before reclassifications	15		190			205		556			761
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)	1		—			1		439			440
Net current-period other comprehensive income	16		190			206		995			1,201
Balance - September 30, 2016	$	4,911	$	(578	)	$	4,333	$	(3,559	)	$	774

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	Nine Months Ended September 30, 2016
	Available-for-sale-securities
(amounts in thousands)	Unrealized Gains (Losses)			Foreign Currency Items			Total Unrealized Gains (Losses)			Unrealized Loss on Cash Flow Hedge			Total
Balance - December 31, 2015	$	(4,602	)	$	(584	)	$	(5,186	)	$	(2,798	)	$	(7,984	)
Other comprehensive income (loss) before reclassifications	9,529			6			9,535			(1,577		)	7,958
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)	(16		)	—			(16		)	816			800
Net current-period other comprehensive income (loss)	9,513			6			9,519			(761		)	8,758
Balance - September 30, 2016	$	4,911		$	(578	)	$	4,333		$	(3,559	)	$	774


(1)	All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.


(2)	Reclassification amounts for available-for-sale securities are reported as gain (loss) on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.

NOTE 7 — INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities as of September 30, 2017 and December 31, 2016 are summarized in the tables below:



	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-backed securities	$	197,606	$	521	$	(1,800	)	$	196,327
Agency-guaranteed commercial real estate mortgage-backed securities	337,683		2,843		(418		)	340,108
Corporate notes (1)	44,958		1,119		—			46,077
Equity securities (2)	2,311		—		—			2,311
	$	582,558	$	4,483	$	(2,218	)	$	584,823


(1)	Includes subordinated debt issued by other bank holding companies.


(2)	Includes equity securities issued by a foreign entity.

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	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-backed securities	$	233,002	$	918	$	(2,657	)	$	231,263
Agency-guaranteed commercial real estate mortgage-backed securities	204,689		—		(2,872		)	201,817
Corporate notes (1)	44,932		401		(185		)	45,148
Equity securities (2)	15,246		—		—			15,246
	$	497,869	$	1,319	$	(5,714	)	$	493,474


(1)	Includes subordinated debt issued by other bank holding companies.


(2)	Includes equity securities issued by 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 nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
(amounts in thousands)
Proceeds from sale of available-for-sale securities	$	554,540	$	5		$	698,451	$	2,853
Gross gains	$	5,349	$	—		$	8,532	$	26
Gross losses	—		(1		)	—		(1		)
Net gains (losses)	$	5,349	$	(1	)	$	8,532	$	25

These gains (losses) were determined using the specific identification method and were reported as gain (loss) on sale of investment securities included in non-interest income on the consolidated statements of 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, therefore, these debt securities are classified separately with no specific maturity date:



	September 30, 2017
	Amortized Cost		Fair Value
(amounts in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	—		—
Due after five years through ten years	42,958		43,854
Due after ten years	2,000		2,223
Agency-guaranteed residential mortgage-backed securities	197,606		196,327
Agency-guaranteed commercial real estate mortgage-backed securities	337,683		340,108
Total debt securities	$	580,247	$	582,512

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Gross unrealized losses and fair value of Customers' investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016 were as follows:



	September 30, 2017
	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:
Agency-guaranteed residential mortgage-backed securities	$	54,525	$	(279	)	$	45,682	$	(1,521	)	$	100,207	$	(1,800	)
Agency-guaranteed commercial real estate mortgage-backed securities	105,044		(418		)	—		—			105,044		(418		)
Total	$	159,569	$	(697	)	$	45,682	$	(1,521	)	$	205,251	$	(2,218	)



	December 31, 2016
	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:
Agency-guaranteed residential mortgage-backed securities	$	87,433	$	(1,330	)	$	30,592	$	(1,327	)	$	118,025	$	(2,657	)
Agency-guaranteed commercial real estate mortgage-backed securities	201,817		(2,872		)	—		—			201,817		(2,872		)
Corporate notes (1)	9,747		(185		)	—		—			9,747		(185		)
Total	$	298,997	$	(4,387	)	$	30,592	$	(1,327	)	$	329,589	$	(5,714	)


(1)	Includes subordinated debt issued by other bank holding companies.

At September 30, 2017, there were sixteen available-for-sale investment securities in the less-than-twelve-month category and eleven 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. Customers does not intend to sell these securities and it is not more likely than not that Customers will be required to sell the securities before recovery of the amortized cost basis.

At September 30, 2017, management evaluated its equity holdings issued by Religare Enterprises, Ltd. ("Religare") for other-than-temporary impairment. Because management no longer has the intent to hold these securities until a recovery in fair value, Customers recorded an other-than-temporary impairment loss of $8.3 million and $12.9 million, respectively, for the three and nine months ended September 30, 2017 for the full amount of the decline in fair value below the cost basis established at June 30, 2017 and December 31, 2016. The fair value of the equity securities at September 30, 2017 of $2.3 million became the new cost basis of the securities. Because of the change in disposition strategy for BankMobile at September 30, 2017, Customers did not record a deferred tax asset for the other-than-temporary impairment loss recorded in third quarter 2017. In addition, Customers reversed $4.6 million of previously recorded deferred tax assets in third quarter 2017 as the tax-free spin-off/merger strategy for BankMobile does not result in capital gains that could be used to offset any capital losses resulting from the disposition of the Religare equity securities.

At September 30, 2017 and December 31, 2016, Customers Bank had pledged investment securities aggregating $127.6 million and $231.3 million in fair value, respectively, as collateral against its borrowings primarily with the FHLB and an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.

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NOTE 8 – LOANS HELD FOR SALE

The composition of loans held for sale as of September 30, 2017 and December 31, 2016 was as follows:



	September 30, 2017		December 31, 2016
(amounts in thousands)
Commercial loans:
Mortgage warehouse loans, at fair value	$	1,961,248	$	2,116,815
Multi-family loans at lower of cost or fair value	150,217		—
Total commercial loans held for sale	2,111,465		2,116,815
Consumer loans:
Residential mortgage loans, at fair value	1,828		695
Loans held for sale	$	2,113,293	$	2,117,510

Commercial loans held for sale consists predominately of commercial loans to mortgage companies (i.e., mortgage warehouse loans). These mortgage warehouse lending transactions are subject to master repurchase agreements and are designated as held for sale and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded loans (i.e., the purchase event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e., the sale event). The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life of 21 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.

Effective June 30, 2017, Customers Bank transferred $150.8 million of multi-family loans from loans receivable (held for investment) to loans held for sale. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer. At September 30, 2017, the estimated fair value of these loans was higher than their carrying value. Accordingly, a lower of cost or market value adjustment was not recorded in third quarter 2017.

Effective December 31, 2016, Customers Bank transferred $25.1 million of multi-family loans from held for sale to loans receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer.

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NOTE 9 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of September 30, 2017 and December 31, 2016. BankMobile loans receivable previously reported as held for sale have been reclassified as held and used to conform with the current period presentation.



	September 30, 2017			December 31, 2016
(amounts in thousands)
Commercial:
Multi-family	$	3,618,989		$	3,214,999
Commercial and industrial (including owner occupied commercial real estate)	1,601,789			1,382,343
Commercial real estate non-owner occupied	1,237,849			1,193,715
Construction	73,203			64,789
Total commercial loans	6,531,830			5,855,846
Consumer:
Residential real estate	435,188			193,502
Manufactured housing	92,938			101,730
Other	3,819			3,483
Total consumer loans	531,945			298,715
Total loans receivable	7,063,775			6,154,561
Deferred (fees)/costs and unamortized (discounts)/premiums, net	(2,437		)	76
Allowance for loan losses	(38,314		)	(37,315		)
Loans receivable, net of allowance for loan losses	$	7,023,024		$	6,117,322

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The following tables summarize loans receivable by loan type and performance status as of September 30, 2017 and December 31, 2016:



	September 30, 2017
	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)
Multi-family	$	—	$	—	$	—	$	—	$	3,617,062	$	1,927	$	3,618,989
Commercial and industrial	—		—		—		20,423		1,093,997		802		1,115,222
Commercial real estate - owner occupied	—		—		—		2,949		472,832		10,786