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EX-32.2 - EXHIBIT 32.2 - Customers Bancorp, Inc.ex-3226_30x17.htm
EX-32.1 - EXHIBIT 32.1 - Customers Bancorp, Inc.ex-3216_30x17.htm
EX-31.2 - EXHIBIT 31.2 - Customers Bancorp, Inc.ex-3126_30x17.htm
EX-31.1 - EXHIBIT 31.1 - Customers Bancorp, Inc.ex-3116_30x17.htm

 
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 June 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)

cubiedgarlogoa01.jpgcubiedgarlogoa01.jpg
 

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, 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 July 31, 2017, 30,730,784 shares of Voting Common Stock were issued and outstanding.
 





CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
Ex-31.1
 
 
 
 
 
Ex-31.2
 
 
 
 
 
Ex-32.1
 
 
 
 
 
Ex-32.2
 
 
 
 
 
Ex-101
 
 


2



CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Cash and due from banks
$
18,503

 
$
17,485

Interest-earning deposits
383,187

 
227,224

Cash and cash equivalents
401,690

 
244,709

Investment securities available for sale, at fair value
1,012,605

 
493,474

Loans held for sale (includes $2,104,338 and $2,117,510, respectively, at fair value)
2,255,096

 
2,117,510

Loans receivable
6,723,278

 
6,142,390

Allowance for loan losses
(38,458
)
 
(37,315
)
Total loans receivable, net of allowance for loan losses
6,684,820

 
6,105,075

FHLB, Federal Reserve Bank, and other restricted stock
129,689

 
68,408

Accrued interest receivable
26,163

 
23,690

Bank premises and equipment, net
12,028

 
12,259

Bank-owned life insurance
213,902

 
161,494

Other real estate owned
2,358

 
3,108

Goodwill and other intangibles
3,633

 
3,639

Assets held for sale
67,796

 
79,271

Other assets
73,768

 
70,099

Total assets
$
10,883,548

 
$
9,382,736

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Demand, non-interest bearing
$
661,914

 
$
512,664

Interest-bearing
6,360,008

 
6,334,316

Total deposits
7,021,922

 
6,846,980

Non-interest bearing deposits held for sale
447,325

 
453,394

Federal funds purchased
150,000

 
83,000

FHLB advances
1,999,600

 
868,800

Other borrowings
186,030

 
87,123

Subordinated debt
108,831

 
108,783

Other liabilities held for sale
22,394

 
31,403

Accrued interest payable and other liabilities
37,157

 
47,381

Total liabilities
9,973,259

 
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 June 30, 2017 and December 31, 2016
217,471

 
217,471

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 31,261,044 and 30,820,177 shares issued as of June 30, 2017 and December 31, 2016; 30,730,784 and 30,289,917 shares outstanding as of June 30, 2017 and December 31, 2016
31,261

 
30,820

Additional paid in capital
428,488

 
427,008

Retained earnings
235,938

 
193,698

Accumulated other comprehensive income (loss), net
5,364

 
(4,892
)
Treasury stock, at cost (530,260 shares as of June 30, 2017 and December 31, 2016)
(8,233
)
 
(8,233
)
Total shareholders’ equity
910,289

 
855,872

Total liabilities and shareholders’ equity
$
10,883,548

 
$
9,382,736

See accompanying notes to the unaudited consolidated financial statements.

3


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(amounts in thousands, except per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Loans receivable
$
67,036

 
$
59,013

 
$
128,497

 
$
113,485

Loans held for sale
17,524

 
17,429

 
31,470

 
31,534

Investment securities
7,823

 
3,638

 
13,710

 
7,347

Other
1,469

 
1,240

 
3,269

 
2,352

Total interest income
93,852

 
81,320

 
176,946

 
154,718

Interest expense:
 
 
 
 
 
 
 
Deposits
16,218

 
11,138

 
30,535

 
21,347

Other borrowings
1,993

 
1,620

 
3,600

 
3,225

FHLB advances
5,340

 
3,716

 
8,401

 
5,984

Subordinated debt
1,685

 
1,685

 
3,370

 
3,370

Total interest expense
25,236

 
18,159

 
45,906

 
33,926

Net interest income
68,616

 
63,161

 
131,040

 
120,792

Provision for loan losses
535

 
786

 
3,585

 
2,766

Net interest income after provision for loan losses
68,081

 
62,375

 
127,455

 
118,026

Non-interest income:
 
 
 
 
 
 
 
Mortgage warehouse transactional fees
2,523

 
3,074

 
4,743

 
5,622

Bank-owned life insurance
2,258

 
1,120

 
3,624

 
2,243

Gain on sale of SBA and other loans
573

 
285

 
1,901

 
929

Mortgage banking income
291

 
285

 
446

 
450

Deposit fees
258

 
278

 
582

 
531

Interchange and card revenue
126

 
160

 
329

 
304

Gain on sale of investment securities
3,183

 

 
3,183

 
26

Impairment loss on investment securities
(2,882
)
 

 
(4,585
)
 

Other
641

 
651

 
2,175

 
1,016

Total non-interest income
6,971

 
5,853

 
12,398

 
11,121

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,687

 
16,401

 
32,850

 
32,799

Professional services
2,834

 
2,750

 
5,827

 
5,071

Technology, communication and bank operations
2,542

 
2,448

 
5,861

 
4,833

Occupancy
2,536

 
2,363

 
5,121

 
4,600

FDIC assessments, taxes, and regulatory fees
2,320

 
4,289

 
3,953

 
8,130

Loan workout
408

 
487

 
928

 
905

Other real estate owned
160

 
183

 
105

 
470

Advertising and promotion
153

 
194

 
334

 
337

Other
2,927

 
2,970

 
5,735

 
6,812

Total non-interest expense
30,567

 
32,085

 
60,714

 
63,957

Income from continuing operations before income tax expense
44,485

 
36,143

 
79,139

 
65,190

Income tax expense
15,533

 
14,369

 
23,263

 
24,108

Net income from continuing operations
28,952

 
21,774

 
55,876

 
41,082

Loss from discontinued operations before income tax benefit
(8,436
)
 
(3,696
)
 
(10,334
)
 
(5,508
)
Income tax benefit from discontinued operations
(3,206
)
 
(1,405
)
 
(3,927
)
 
(2,093
)
Net loss from discontinued operations
(5,230
)
 
(2,291
)
 
(6,407
)
 
(3,415
)
Net income
23,722

 
19,483

 
49,469

 
37,667

             Preferred stock dividends
3,615

 
2,062

 
7,229

 
3,348

             Net income available to common shareholders
$
20,107

 
$
17,421

 
$
42,240

 
$
34,319

Basic earnings per common share from continuing operations
$
0.83

 
$
0.73

 
$
1.59

 
$
1.40

Basic earnings per common share
$
0.66

 
$
0.64

 
$
1.38

 
$
1.27

Diluted earnings per common share from continuing operations
$
0.78

 
$
0.67

 
$
1.49

 
$
1.28

Diluted earnings per common share
$
0.62

 
$
0.59

 
$
1.29

 
$
1.17

See accompanying notes to the unaudited consolidated financial statements.

4


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
(amounts in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income from continuing operations
$
28,952

 
$
21,774

 
$
55,876

 
$
41,082

Net loss from discontinued operations
(5,230
)
 
(2,291
)
 
(6,407
)
 
(3,415
)
Net income
23,722

 
19,483

 
49,469

 
37,667

Unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
19,885

 
8,059

 
18,762

 
14,926

Income tax effect
(7,755
)
 
(3,022
)
 
(7,317
)
 
(5,597
)
Reclassification adjustments for gains on securities included in net income
(3,183
)
 

 
(3,183
)
 
(26
)
Income tax effect
1,241

 

 
1,241

 
10

Net unrealized gains on available-for-sale securities
10,188

 
5,037

 
9,503

 
9,313

Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized losses arising during the period
(689
)
 
(813
)
 
(360
)
 
(3,413
)
Income tax effect
269

 
305

 
141

 
1,280

Reclassification adjustment for losses included in net income
767

 
603

 
1,594

 
603

Income tax effect
(299
)
 
(226
)
 
(622
)
 
(226
)
Net unrealized gains (losses) on cash flow hedges
48

 
(131
)
 
753

 
(1,756
)
Other comprehensive income, net of income tax effect
10,236

 
4,906

 
10,256

 
7,557

Comprehensive income
$
33,958

 
$
24,389

 
$
59,725

 
$
45,224

 See accompanying notes to the unaudited consolidated financial statements.

5


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
 
 
Six Months Ended June 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 from continuing operations

 

 

 

 

 
55,876

 

 

 
55,876

Net loss from discontinued operations

 

 

 

 

 
(6,407
)
 

 

 
(6,407
)
Other comprehensive income

 

 

 

 

 

 
10,256

 

 
10,256

Preferred stock dividends

 

 

 

 

 
(7,229
)
 

 

 
(7,229
)
Share-based compensation expense

 

 

 

 
2,934

 

 

 

 
2,934

Exercise of warrants

 

 
43,974

 
44

 
376

 

 

 

 
420

Issuance of common stock under share-based compensation arrangements

 

 
396,893

 
397

 
(1,830
)
 

 

 

 
(1,433
)
Balance, June 30, 2017
9,000,000

 
$
217,471

 
30,730,784

 
$
31,261

 
$
428,488

 
$
235,938

 
$
5,364

 
$
(8,233
)
 
$
910,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 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 from continuing operations

 

 

 

 

 
41,082

 

 

 
41,082

Net loss from discontinued operations

 

 

 

 

 
(3,415
)
 

 

 
(3,415
)
Other comprehensive income

 

 

 

 

 

 
7,557

 

 
7,557

Issuance of common stock, net of offering costs of $15

 

 
7,291

 
7

 
152

 

 

 

 
159

Issuance of preferred stock, net of offering costs of $2,799
3,300,000

 
79,701

 

 

 

 

 

 

 
79,701

Preferred stock dividends

 

 

 

 

 
(3,348
)
 

 
 
 
(3,348
)
Share-based compensation expense

 

 

 

 
2,941

 

 

 

 
2,941

Exercise of warrants

 

 
239,478

 
240

 
831

 

 

 

 
1,071

Issuance of common stock under share-based compensation arrangements

 

 
138,263

 
138

 
764

 

 

 

 
902

Balance, June 30, 2016
5,600,000

 
$
135,270

 
27,286,833

 
$
27,817

 
$
367,295

 
$
158,830

 
$
(427
)
 
$
(8,233
)
 
$
680,552

See accompanying notes to the unaudited consolidated financial statements.

6


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands) 
 
Six Months Ended
June 30,
 
2017
 
2016
Cash Flows from Operating Activities of Continuing Operations
 
 
 
Net income from continuing operations
$
55,876

 
$
41,082

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
3,585

 
2,766

Provision for depreciation and amortization
2,393

 
1,728

Share-based compensation
3,153

 
3,294

Deferred taxes
(2,588
)
 
(2,563
)
Net amortization of investment securities premiums and discounts
232

 
424

Gain on sale of investment securities
(3,183
)
 
(26
)
Impairment loss on investment securities
4,585

 

Gain on sale of mortgages and other loans
(2,183
)
 
(1,189
)
Origination of loans held for sale
(14,714,280
)
 
(17,142,862
)
Proceeds from the sale of loans held for sale
14,727,734

 
16,626,639

Decrease in FDIC loss sharing receivable net of clawback liability

 
255

Amortization of fair value discounts and premiums
98

 
235

Net (gain) loss on sales of other real estate owned
(163
)
 
80

Valuation and other adjustments to other real estate owned, net of FDIC receivable
231

 
193

Earnings on investment in bank-owned life insurance
(3,624
)
 
(2,243
)
Increase in accrued interest receivable and other assets
(10,618
)
 
(31,604
)
(Decrease) increase in accrued interest payable and other liabilities
(9,186
)
 
13,148

Net Cash Provided By (Used In) Operating Activities of Continuing Operations
52,062

 
(490,643
)
Cash Flows from Investing Activities of Continuing Operations
 
 
 
Proceeds from maturities, calls and principal repayments of securities available for sale
22,843

 
28,973

Proceeds from sales of investment securities available for sale
115,982

 
2,848

Purchases of investment securities available for sale
(644,011
)
 
(5,000
)
Net increase in loans
(582,571
)
 
(667,584
)
Proceeds from sales of loans
112,927

 
17,527

Purchase of loans
(262,641
)
 

Purchases of bank-owned life insurance
(50,000
)
 

Proceeds from bank-owned life insurance
1,418

 

Net purchases of FHLB, Federal Reserve Bank, and other restricted stock
(61,281
)
 
(20,577
)
Payments to the FDIC on loss sharing agreements

 
(668
)
Purchases of bank premises and equipment
(1,274
)
 
(1,950
)
Proceeds from sales of other real estate owned
682

 
310

Net Cash Used In Investing Activities of Continuing Operations
(1,347,926
)
 
(646,121
)
Cash Flows from Financing Activities of Continuing Operations
 
 
 
Net increase in deposits
174,942

 
848,808

Net increase in short-term borrowed funds from the FHLB
1,130,800

 
206,600

Net increase (decrease) in federal funds purchased
67,000

 
(9,000
)
Proceeds from long-term FHLB borrowings

 
75,000

Net proceeds from issuance of long-term debt
98,574

 

Net proceeds from issuance of preferred stock

 
79,701

        Preferred stock dividends paid
(7,229
)
 
(3,110
)
        Exercise and redemption of warrants
420

 
1,071

        Payments of employee taxes withheld from share-based awards
(3,961
)
 
(702
)
        Proceeds from issuance of common stock
1,900

 
1,553

Net Cash Provided By Financing Activities of Continuing Operations
1,462,446

 
1,199,921

Net Increase in Cash and Cash Equivalents of Continuing Operations
166,582

 
63,157

Discontinued Operations:
 
 
 
Net cash used in operating activities
(16,106
)
 
(20,851
)
Net cash provided by (used in) investing activities
9,860

 
(17,054
)
Net cash used in financing activities
(3,355
)
 
(7,048
)
Net Cash Used in Discontinued Operations
(9,601
)
 
(44,953
)
Net Increase in Cash and Cash Equivalents
156,981

 
18,204

Cash and Cash Equivalents – Beginning
244,709

 
264,593

Cash and Cash Equivalents – Ending
$
401,690

 
$
282,797

 
 
 
 
 
(continued)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplementary Cash Flows Information
 
 
 
Interest paid
$
44,983

 
$
33,137

Income taxes paid
21,715

 
23,539

Non-cash items:
 
 
 
Transfer of loans to other real estate owned
$

 
$
592

Transfer of loans held for investment to loans held for sale
$
150,758

 
$

See accompanying notes to the unaudited consolidated financial statements.

7


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 sell BankMobile and anticipates the sale to close within one year. Accordingly, BankMobile has been classified as "held for sale" in the consolidated balance sheets and BankMobile's operating results and associated cash flows have been presented as discontinued operations in the consolidated financial statements, see NOTE 3 - DISCONTINUED OPERATIONS.
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 June 30, 2017, Customers has not recorded a liability for any additional contingent consideration payable under the Purchase Agreement.

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 June 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

8


BankMobile and are presented as "Assets held for sale" and "Other liabilities held for sale" on the June 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 - DISCONTINUED OPERATIONS.

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 is 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 was 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 were being amortized over an estimated life ranging from four to twenty years. Because BankMobile has been classified as held for sale, these assets are reported at the lower of cost or market on the consolidated balance sheet and are no longer being amortized. At June 30, 2017, Customers estimated the fair values of these assets to be higher than their amortized cost basis. Accordingly, a lower of cost or fair value adjustment was not recorded in second quarter 2017.


9


NOTE 3 – DISCONTINUED OPERATIONS

In third quarter 2016, Customers announced its intent to sell BankMobile. Customers anticipates a sale to close within one year. Because BankMobile met the criteria to be classified as held for sale at June 30, 2017, the assets and liabilities of BankMobile have been presented as "Assets held for sale," "Non-interest bearing deposits held for sale," and "Other liabilities held for sale" on the consolidated balance sheets at June 30, 2017 and December 31, 2016. BankMobile's operating results and associated cash flows have been presented as "Discontinued operations" within the accompanying consolidated financial statements, and prior period amounts have been reclassified to conform with the current period presentation. BankMobile will continue to be presented as "Discontinued operations" until completion of the sale or at such time that BankMobile no longer meets the held-for-sale criteria.

The following summarized financial information related to BankMobile has been segregated from continuing operations and reported as discontinued operations for the periods presented. The amounts presented below exclude the effect of internal allocations made by management when assessing the performance of the BankMobile operating segment. For more information on the BankMobile operating segment, see
NOTE 14 - BUSINESS SEGMENTS.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(amounts in thousands)
2017
 
2016
 
2017
 
2016
Discontinued operations:
 
 
 
 
 
 
 
Interest income
$
1

 
$

 
$
2

 
$

Interest expense
11

 
4

 
18

 
9

Net interest income
(10
)
 
(4
)

(16
)
 
(9
)
Non-interest income
11,420

 
2,403

 
28,746

 
2,630

Non-interest expense
19,846

 
6,095

 
39,064

 
8,129

Loss from discontinued operations before income tax benefit
(8,436
)
 
(3,696
)

(10,334
)

(5,508
)
Income tax benefit from discontinued operations
(3,206
)
 
(1,405
)
 
(3,927
)
 
(2,093
)
              Net loss from discontinued operations
$
(5,230
)
 
$
(2,291
)

$
(6,407
)
 
$
(3,415
)

The assets and liabilities held for sale on the consolidated balance sheets as of June 30, 2017 and December 31, 2016 were as follows:
 
June 30,
2017
 
December 31, 2016
(amounts in thousands)
 
ASSETS
 
 
 
Cash and cash equivalents (1)
$
11,552

 
$
20,000

Loans receivable
1,930

 
12,248

Bank premises and equipment, net
968

 
510

Goodwill and other intangibles
13,982

 
13,982

Other assets
39,364

 
32,531

Assets held for sale
$
67,796

 
$
79,271

LIABILITIES
 
 
 
Demand, non-interest bearing deposits
$
447,325

 
$
453,394

Other liabilities:
 
 
 
   Interest bearing deposits
6,116

 
3,401

   Accrued expenses and other liabilities (1)
16,278

 
28,002

   Other liabilities held for sale
22,394

 
31,403

Liabilities held for sale
$
469,719

 
$
484,797


(1) Includes $10 million and $20 million payable to Higher One with matching amounts in restricted cash held in an escrow account with a third party as of June 30, 2017 and December 31, 2016, respectively.

Customers anticipates that cash, securities or loans (or a combination thereof) with a market value equal to approximately the amount of BankMobile deposits outstanding at the time the anticipated sale closes will be included in the net assets transferred.

10


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.
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 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.


11


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 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 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 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 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 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 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

12


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.

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.
3.
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 (that is, 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.

13


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.
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

14


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 (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 does not expect the new guidance to 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 intends to adopt this ASU on January 1, 2018 using a modified retrospective approach. Customers’ ongoing implementation efforts include the identification of other revenue streams that are within the scope of the new guidance and reviewing the related contracts with customers to determine the effect on certain non-interest income items presented in the consolidated statements of operations. As provided above, Customers does not expect the adoption of this ASU to have a significant impact to its financial condition, results of operations and consolidated financial statements.


15


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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
(amounts in thousands, except share and per share data)
 
 
 
 
 
 
 
Net income from continuing operations available to common shareholders (1)
$
25,337

 
$
19,712

 
$
48,647

 
$
37,734

Net loss from discontinued operations
(5,230
)
 
(2,291
)
 
(6,407
)
 
(3,415
)
Net income available to common shareholders
$
20,107

 
$
17,421

 
$
42,240

 
$
34,319

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding - basic
30,641,554

 
27,080,676

 
30,524,955

 
27,012,869

Share-based compensation plans
1,910,634

 
2,123,745

 
2,129,773

 
2,077,219

Warrants
17,464

 
299,908

 
27,318

 
303,769

Weighted-average number of common shares - diluted
32,569,652

 
29,504,329

 
32,682,046

 
29,393,857

 
 
 
 
 
 
 
 
Basic earnings per common share from continuing operations
$
0.83

 
$
0.73

 
$
1.59

 
$
1.40

Basic loss per common share from discontinued operations
$
(0.17
)
 
$
(0.09
)
 
$
(0.21
)
 
$
(0.13
)
Basic earnings per common share
$
0.66

 
$
0.64

 
$
1.38

 
$
1.27

Diluted earnings per common share from continuing operations
$
0.78

 
$
0.67

 
$
1.49

 
$
1.28

Diluted loss per common share from discontinued operations
$
(0.16
)
 
$
(0.08
)
 
$
(0.20
)
 
$
(0.11
)
Diluted earnings per common share
$
0.62

 
$
0.59

 
$
1.29

 
$
1.17

(1) Net income from continuing operations, net of preferred stock dividends

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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Anti-dilutive securities:
 
 
 
 
 
 
 
Share-based compensation awards
288,325

 
616,995

 
282,725

 
616,995

Warrants
52,242

 
52,242

 
52,242

 
52,242

Total anti-dilutive securities
340,567

 
669,237

 
334,967

 
669,237


16


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 six months ended June 30, 2017 and 2016.
 
Three Months Ended June 30, 2017
(amounts in thousands)
Unrealized Gains (Losses) on Available-For-Sale Securities
 
Unrealized Gain (Loss) on Cash Flow Hedges
 
Total
Balance - March 31 2017
$
(3,366
)
 
$
(1,506
)
 
$
(4,872
)
Other comprehensive income (loss) before reclassifications
12,130

 
(420
)
 
11,710

Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)
(1,942
)
 
468

 
(1,474
)
Net current-period other comprehensive income
10,188

 
48

 
10,236

Balance - June 30, 2017
$
6,822

 
$
(1,458
)
 
$
5,364


 
Six Months Ended June 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
11,445

 
(219
)
 
11,226

Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)
(1,942
)
 
972

 
(970
)
Net current-period other comprehensive income
9,503

 
753

 
10,256

Balance - June 30, 2017
$
6,822

 
$
(1,458
)
 
$
5,364

 
 
 
 
 
 
(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 June 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 - March 31 2016
$
(363
)
$
(547
)
$
(910
)
 
$
(4,423
)
 
$
(5,333
)
Other comprehensive income (loss) before reclassifications
5,258

(221
)
5,037

 
(508
)
 
4,529

Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)



 
377

 
377

Net current-period other comprehensive income (loss)
5,258

(221
)
5,037

 
(131
)
 
4,906

Balance - June 30, 2016
$
4,895

$
(768
)
$
4,127

 
$
(4,554
)
 
$
(427
)


17


 
Six Months Ended June 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
9,513

(184
)
9,329

 
(2,133
)
 
7,196

Amounts reclassified from accumulated other comprehensive loss to net income (2)
(16
)

(16
)
 
377

 
361

Net current-period other comprehensive income (loss)
9,497

(184
)
9,313

 
(1,756
)
 
7,557

Balance - June 30, 2016
$
4,895

$
(768
)
$
4,127

 
$
(4,554
)
 
$
(427
)
 
 
 
 
 
 
 
 
(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.



NOTE 7 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of June 30, 2017 and December 31, 2016 are summarized in the tables below:
 
June 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
210,688

 
$
755

 
$
(1,699
)
 
$
209,744

Agency-guaranteed commercial real estate mortgage-backed securities
735,116

 
11,318

 
(11
)
 
746,423

Corporate notes (1)
44,956

 
821

 

 
45,777

Equity securities (2)
10,661

 

 

 
10,661

 
$
1,001,421

 
$
12,894

 
$
(1,710
)
 
$
1,012,605

(1)
Includes subordinated debt issued by other bank holding companies.
(2) Includes equity securities issued by a foreign entity.


18


 
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 six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
(amounts in thousands)
 
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities
$
115,982

 
$

 
$
115,982

 
$
2,848

Gross gains
$
3,183

 
$

 
$
3,183

 
$
26

Gross losses

 

 

 

Net gains
$
3,183

 
$

 
$
3,183

 
$
26

These gains were determined using the specific identification method and were reported as gains 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:
 
June 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
42,956

 
43,602

Due after ten years
2,000

 
2,175

Agency-guaranteed residential mortgage-backed securities
210,688

 
209,744

Agency-guaranteed commercial real estate mortgage-backed securities
735,116

 
746,423

Total debt securities
$
990,760

 
$
1,001,944



19


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 June 30, 2017 and December 31, 2016 were as follows:
 
June 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
$
76,237

 
$
(660
)
 
$
29,797

 
$
(1,039
)
 
$
106,034

 
$
(1,699
)
Agency-guaranteed commercial real estate mortgage-backed securities
6,172

 
(11
)
 

 

 
6,172

 
(11
)
Total
$
82,409

 
$
(671
)
 
$
29,797

 
$
(1,039
)
 
$
112,206

 
$
(1,710
)
(1) Includes subordinated debt issued by other bank holding companies.
 
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 June 30, 2017, there were twelve available-for-sale investment securities in the less-than-twelve-month category and seven 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 June 30, 2017, management evaluated its equity holdings issued by a foreign entity 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 $2.9 million and $4.6 million, respectively, for the three and six months ended June 30, 2017 for the full amount of the decline in fair value below the cost basis established at March 31, 2017 and December 31, 2016. The fair value of the equity securities at June 30, 2017 of $10.7 million became the new cost basis of the securities. Given that these equity securities continue to experience price declines, Customers is closely monitoring the issuer's stock performance while at the same time studying alternatives to exit the investment. As of July 31, 2017, the equity securities were trading at a price of $1.57 per share which represents an estimated fair value of $6.3 million for the equity securities that Customers still owns.
At June 30, 2017 and December 31, 2016, Customers Bank had pledged investment securities aggregating $642.6 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.

20


NOTE 8 – LOANS HELD FOR SALE
The composition of loans held for sale as of June 30, 2017 and December 31, 2016 was as follows:
 
June 30, 2017
 
December 31, 2016
(amounts in thousands)
 
 
 
Commercial loans:
 
 
 
Mortgage warehouse loans, at fair value
$
2,101,641

 
$
2,116,815

Multi-family loans at lower of cost or fair value
150,758

 

Total commercial loans held for sale
2,252,399

 
2,116,815

Consumer loans:
 
 
 
Residential mortgage loans, at fair value
2,697

 
695

Loans held for sale
$
2,255,096

 
$
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 20 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.

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.


21


NOTE 9 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
(amounts in thousands)
 
 Commercial:
 
 
 
 Multi-family
$
3,399,617

 
$
3,214,999

 Commercial and industrial (including owner occupied commercial real estate)
1,505,487

 
1,370,853

 Commercial real estate non-owner occupied
1,216,012

 
1,193,715

 Construction
61,226

 
64,789

 Total commercial loans
6,182,342

 
5,844,356

 Consumer:
 
 
 
 Residential real estate
444,453

 
193,502

 Manufactured housing
96,148

 
101,730

 Other
2,561

 
2,726