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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☒			Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended ~~September~~June 30, ~~2019~~2020


☐			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)


Customers Bancorp, Inc.

Pennsylvania

27-2290659

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

~~1015 Penn~~701 Reading Avenue

~~Suite 103~~

~~Wyomissing~~West Reading PA ~~19610~~19611

(Address of principal executive offices)

(610) 933-2000

(Registrant’s telephone number, including area code)

~~N/A~~1015 Penn Avenue Suite 103 Wyomissing, PA 19610

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbols

Name of Each Exchange on which Registered

Voting Common Stock, par value $1.00 per share

CUBI

New York Stock Exchange

Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series C, par value $1.00 per share

CUBI/PC

New York Stock Exchange

Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series D, par value $1.00 per share

CUBI/PD

New York Stock Exchange

Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series E, par value $1.00 per share

CUBI/PE

New York Stock Exchange

Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series F, par value $1.00 per share

CUBI/PF

New York Stock Exchange

5.375% Subordinated Notes due 2034

CUBB

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 every Interactive Data File required to be submitted 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 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

Non-accelerated filer

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~~July 31, ~~2019, 31,320,284~~2020, 31,514,485 shares of Voting Common Stock were outstanding.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Table of Contents


Part I

Item 1.	Customers Bancorp, Inc. Consolidated Financial Statements as of ~~September~~June 30, ~~2019~~2020 and for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	45

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5054

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7483

Item 4.	Controls and Procedures	7685

PART II

Item 1.	Legal Proceedings	7786

Item 1A.	Risk Factors	7786

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7787

Item 3.	Defaults Upon Senior Securities	7888

Item 4.	Mine Safety Disclosures	7888

Item 5.	Other Information	7888

Item 6.	Exhibits	7989

SIGNATURES			8191

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The following list of abbreviations and acronyms may be used throughout this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements.


2004 Plan			2012 Amendment and Restatement of the Customers Bancorp, Inc. Amended and Restated 2004 Incentive Equity and Deferred Compensation Plan
2010 Plan			2010 Stock Option Plan
2019 Plan			2019 Stock Incentive Plan
ACL			Allowance for credit losses
ASC			~~Accountings~~Accounting Standards Codification
ALLL			Allowance for loan and lease losses
AOCI			Accumulated other comprehensive income
ASU			Accounting Standards Update
ATM			Automated teller machine
Bancorp			Customers Bancorp, Inc.
Bank			Customers Bank
BBB spread			BBB rated corporate bond spreads to U.S. Treasury securities
BHCA			Bank Holding Company Act of 1956, as amended
BMT			BankMobile Technologies, Inc.
BOLI			Bank-owned life insurance
BRRP			Bonus Recognition and Retention Program
CARES Act			Coronavirus Aid, Relief and Economic Security Act
CCF			Customers Commercial Finance, LLC
CECL			Current expected credit loss
CEO			Chief Executive Officer
CFO			Chief Financial Officer
CFPB			Consumer Financial Protection Bureau
COSO			Committee of Sponsoring Organizations of the Treadway Commission
COVID-19			Coronavirus Disease 2019
CRA			Community Reinvestment Act
CPI			Consumer Price Index
CUBI			Symbol for Customers Bancorp, Inc. common stock traded on the NYSE
Customers			Customers Bancorp, Inc. and Customers Bank, collectively
Customers Bancorp			Customers Bancorp, Inc.
Department			Pennsylvania Department of Banking and Securities
DIF			Deposit Insurance Fund
Dodd-Frank Act			Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOE			United States Department of Education
EGRRCPA			The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
EPS			Earnings per share
ESPP			Employee Stock Purchase Plan
EVE			Economic value of equity
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FDICIA			Federal Deposit Insurance Corporation Improvement Act of 1991
Federal Reserve Board			Board of Governors of the Federal Reserve System
FERPA			Family Educational Rights and Privacy Act of 1975
FHA			Federal Housing Administration
FHLB			Federal Home Loan Bank
~~FMV~~			~~Fair Market Value~~
FPRD			Final Program Review Determination
FRB			Federal Reserve Bank of Philadelphia
FTC Act			Federal Trade Commission Act
GDP			Gross domestic product
GNMA			Government National Mortgage Association
GLBA			Gramm-Leach-Bliley Act of 1999
HECM			Home Equity Conversion Mortgage
HTM			Held to maturity
Interest-only GNMA securities			Interest-only classes of Ginnie Mae guaranteed home equity conversation mortgage-backed securities

Tab le of Contents


IRS			Internal Revenue Service
Legacy Loans			Total 2009 and prior loans
LIBOR			London Interbank Offered Rate
LIHTC			Low-Income Housing Tax Credit
LPO			Limited Purpose Office
MMDA			Money market deposit accounts
NIM			Net interest margin, tax equivalent
NM			Not meaningful
Non-QM			Non-qualified mortgage
NPA			Non-performing asset
NPL			Non-performing loan
NPRM			Notice of Proposed Rulemaking
NYSE			New York Stock Exchange
OCC			Office of the Comptroller of the Currency
OCI			Other comprehensive income
OFAC			Office of Foreign Assets Control
OIS			Overnight index swap
Order			Federal Deposit Insurance Act, as amended
OREO			Other real estate owned
OTTI			Other-than-temporary impairment
PATRIOT Act			Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
PCAOB			Public Accounting Oversight Board (United States)
PCD			Purchased with Credit Deterioration
PCI			Purchased Credit-Impaired
PPP			Paycheck Protection Program
PPPLF			FRB Paycheck Protection Program Liquidity Facility
ROU			Right-of-use
SAB			Staff Accounting Bulletin
SAG			Special Assets Group
Sales Agreement			At Market Issuance Sales Agreement between Customers Bancorp and FBR Capital Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC
SBA			Small Business Administration
SBA loans			Loans originated pursuant to the rules and regulations of the SBA
SEC			U.S. Securities and Exchange Commission








TDR			Troubled debt restructuring
TRAC			Terminal Rental Adjustment Clause

U.S. GAAP			Accounting principles generally accepted in the United States of America
VA			United States Department of Veterans Affairs

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

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


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	12,555	$	17,696	Cash and due from banks	$	44,577	$	33,095
Interest-earning deposits		169,663		44,439
Interest earning deposits						Interest earning deposits	1,022,753		179,410
Cash and cash equivalents	Cash and cash equivalents	182,218		62,135		Cash and cash equivalents	1,067,330		212,505
Investment securities, at fair value	Investment securities, at fair value	608,714		665,012		Investment securities, at fair value	681,382		595,876

Loans held for sale (includes $1,755 and $1,507, respectively, at fair value)		502,854		1,507
Loans held for sale (includes $21,107 and $2,130, respectively, at fair value)						Loans held for sale (includes $21,107 and $2,130, respectively, at fair value)	464,164		486,328
Loans receivable, mortgage warehouse, at fair value	Loans receivable, mortgage warehouse, at fair value	2,438,530		1,405,420		Loans receivable, mortgage warehouse, at fair value	2,793,164		2,245,758
Loans receivable, PPP						Loans receivable, PPP	4,760,427		—
Loans and leases receivable	Loans and leases receivable	7,336,237		7,138,074		Loans and leases receivable	7,272,447		7,318,988
Allowance for loan and lease losses		(51,053)		(39,972)
Total loans and leases receivable, net of allowance for loan and lease losses		9,723,714		8,503,522
Allowance for credit losses on loans and leases						Allowance for credit losses on loans and leases	(159,905)		(56,379)
Total loans and leases receivable, net of allowance for credit losses on loans and leases						Total loans and leases receivable, net of allowance for credit losses on loans and leases	14,666,133		9,508,367
FHLB, Federal Reserve Bank, and other restricted stock	FHLB, Federal Reserve Bank, and other restricted stock	81,853		89,685		FHLB, Federal Reserve Bank, and other restricted stock	91,023		84,214
Accrued interest receivable	Accrued interest receivable	38,412		32,955		Accrued interest receivable	49,911		38,072

Bank premises and equipment, net	Bank premises and equipment, net	14,075		11,063		Bank premises and equipment, net	8,380		9,389
Bank-owned life insurance	Bank-owned life insurance	270,526		264,559		Bank-owned life insurance	275,842		272,546
Other real estate owned	Other real estate owned	204		816		Other real estate owned	131		173
Goodwill and other intangibles	Goodwill and other intangibles	15,521		16,499		Goodwill and other intangibles	14,575		15,195

Other assets	Other assets	285,699		185,672		Other assets	584,247		298,052
Total assets	Total assets	$	11,723,790	$	9,833,425	Total assets	$	17,903,118	$	11,520,717
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:	Liabilities:					Liabilities:
Deposits:	Deposits:					Deposits:
Demand, non-interest bearing	Demand, non-interest bearing	$	1,569,918	$	1,122,171	Demand, non-interest bearing	$	1,879,789	$	1,343,391
Interest-bearing		7,355,767		6,020,065
Interest bearing						Interest bearing	9,086,086		7,305,545
Total deposits	Total deposits	8,925,685		7,142,236		Total deposits	10,965,875		8,648,936

Federal funds purchased	Federal funds purchased	373,000		187,000		Federal funds purchased	—		538,000
FHLB advances	FHLB advances	1,040,800		1,248,070		FHLB advances	850,000		850,000
Other borrowings	Other borrowings	123,528		123,871		Other borrowings	123,833		123,630
Subordinated debt	Subordinated debt	109,050		108,977		Subordinated debt	181,255		181,115
FRB PPP liquidity facility						FRB PPP liquidity facility	4,419,967		—

Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	132,577		66,455		Accrued interest payable and other liabilities	354,341		126,241
Total liabilities	Total liabilities	10,704,640		8,876,609		Total liabilities	16,895,271		10,467,922
Commitments and contingencies (NOTE 14)
Commitments and contingencies (NOTE 15)						Commitments and contingencies (NOTE 15)
Shareholders’ equity:	Shareholders’ equity:					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, 2019 and December 31, 2018		217,471		217,471
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,526,395 and 32,252,488 shares issued as of September 30, 2019 and December 31, 2018; 31,245,776 and 31,003,028 shares outstanding as of September 30, 2019 and December 31, 2018		32,526		32,252
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, 2020 and December 31, 2019						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, 2020 and December 31, 2019	217,471		217,471
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,790,906 and 32,614,410 shares issued as of June 30, 2020 and December 31, 2019; 31,510,287 and 31,336,791 shares outstanding as of June 30, 2020 and December 31, 2019						Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,790,906 and 32,614,410 shares issued as of June 30, 2020 and December 31, 2019; 31,510,287 and 31,336,791 shares outstanding as of June 30, 2020 and December 31, 2019	32,791		32,617
Additional paid in capital	Additional paid in capital	441,499		434,314		Additional paid in capital	450,665		444,218
Retained earnings	Retained earnings	357,608		316,651		Retained earnings	338,665		381,519
Accumulated other comprehensive loss, net	Accumulated other comprehensive loss, net	(8,174)		(22,663)		Accumulated other comprehensive loss, net	(9,965)		(1,250)
Treasury stock, at cost (1,280,619 and 1,249,460 shares as of September 30, 2019 and December 31, 2018)		(21,780)		(21,209)
Treasury stock, at cost (1,280,619 shares as of June 30, 2020 and December 31, 2019)						Treasury stock, at cost (1,280,619 shares as of June 30, 2020 and December 31, 2019)	(21,780)		(21,780)
Total shareholders’ equity	Total shareholders’ equity	1,019,150		956,816		Total shareholders’ equity	1,007,847		1,052,795
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	11,723,790	$	9,833,425	Total liabilities and shareholders’ equity	$	17,903,118	$	11,520,717

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) — UNAUDITED

(amounts in thousands, except per share data)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Interest income:	Interest income:									Interest income:
Loans and leases	Loans and leases	$	118,444	$	97,815	$	315,126	$	278,986	Loans and leases	$	118,447	$	103,567	$	234,527	$	196,683

Investment securities	Investment securities	5,867		8,495		18,589		26,932		Investment securities	6,155		6,481		11,132		12,722
Other	Other	2,407		3,735		6,030		8,731		Other	616		1,902		4,902		3,620
Total interest income	Total interest income	126,718		110,045		339,745		314,649		Total interest income	125,218		111,950		250,561		213,025
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	38,267		32,804		105,472		76,779		Deposits	23,238		35,980		57,591		67,204
FHLB advances	FHLB advances	7,563		9,125		20,463		27,381		FHLB advances	4,736		7,607		10,127		12,900
Subordinated debt	Subordinated debt	1,684		1,684		5,053		5,053		Subordinated debt	2,689		1,684		5,378		3,369
Other borrowings		3,469		2,431		9,039		9,082
Federal funds purchased and other borrowings										Federal funds purchased and other borrowings	2,573		2,000		4,163		5,569
Total interest expense	Total interest expense	50,983		46,044		140,027		118,295		Total interest expense	33,236		47,271		77,259		89,042
Net interest income	Net interest income	75,735		64,001		199,718		196,354		Net interest income	91,982		64,679		173,302		123,983
Provision for loan and lease losses		4,426		2,924		14,539		4,257
Net interest income after provision for loan and lease losses		71,309		61,077		185,179		192,097
Provision for credit losses on loans and leases										Provision for credit losses on loans and leases	20,946		5,346		52,732		10,113
Net interest income after provision for credit losses on loans and leases										Net interest income after provision for credit losses on loans and leases	71,036		59,333		120,570		113,870
Non-interest income:	Non-interest income:									Non-interest income:

Interchange and card revenue	Interchange and card revenue	6,869		7,084		22,435		23,127		Interchange and card revenue	6,478		6,760		13,287		15,565

Deposit fees	Deposit fees	3,642		2,002		9,199		5,726		Deposit fees	3,321		3,348		6,782		5,557
Commercial lease income	Commercial lease income	3,080		1,419		8,212		3,372		Commercial lease income	4,508		2,730		8,776		5,131
Bank-owned life insurance	Bank-owned life insurance	1,824		1,869		5,477		5,769		Bank-owned life insurance	1,757		1,836		3,519		3,653
Mortgage warehouse transactional fees	Mortgage warehouse transactional fees	2,150		1,809		5,145		5,663		Mortgage warehouse transactional fees	2,582		1,681		4,533		2,995
Gain on sale of SBA and other loans		—		1,096		—		3,404
Gain (loss) on sale of SBA and other loans										Gain (loss) on sale of SBA and other loans	23		—		34		—
Mortgage banking income	Mortgage banking income	283		207		701		532		Mortgage banking income	38		250		334		417
Loss upon acquisition of interest-only GNMA securities	Loss upon acquisition of interest-only GNMA securities	—		—		(7,476)		—		Loss upon acquisition of interest-only GNMA securities	—		(7,476)		—		(7,476)

Gain (loss) on sale of investment securities	Gain (loss) on sale of investment securities	1,001		(18,659)		1,001		(18,659)		Gain (loss) on sale of investment securities	4,353		—		8,328		—
Unrealized gain (loss) on investment securities	Unrealized gain (loss) on investment securities	1,333		(1,236)		988		(1,532)		Unrealized gain (loss) on investment securities	1,200		(347)		(178)		(345)
Other	Other	3,187		6,493		9,443		11,718		Other	(2,024)		3,254		(1,248)		6,257
Total non-interest income	Total non-interest income	23,369		2,084		55,125		39,120		Total non-interest income	22,236		12,036		44,167		31,754
Non-interest expense:	Non-interest expense:									Non-interest expense:
Salaries and employee benefits	Salaries and employee benefits	27,193		25,462		79,936		78,135		Salaries and employee benefits	31,296		26,920		59,607		52,743
Technology, communication, and bank operations		8,755		11,657		33,110		32,923
Technology, communication and bank operations										Technology, communication and bank operations	13,310		12,402		26,360		24,355
Professional services	Professional services	8,348		4,743		18,639		14,563		Professional services	4,552		5,718		12,223		10,291
Occupancy	Occupancy	3,661		2,901		9,628		8,876		Occupancy	3,025		3,064		6,057		5,967
Commercial lease depreciation	Commercial lease depreciation	2,459		1,103		6,633		2,838		Commercial lease depreciation	3,643		2,252		7,070		4,174
FDIC assessments, non-income taxes, and regulatory fees	FDIC assessments, non-income taxes, and regulatory fees	(777)		2,415		3,368		6,750		FDIC assessments, non-income taxes, and regulatory fees	2,368		2,157		5,235		4,145
Provision for operating losses	Provision for operating losses	3,998		1,171		8,223		3,930		Provision for operating losses	1,068		2,446		1,980		4,225
Advertising and promotion	Advertising and promotion	976		820		3,145		1,529		Advertising and promotion	582		1,360		2,222		2,169
Merger and acquisition related expenses	Merger and acquisition related expenses	—		2,945		—		3,920		Merger and acquisition related expenses	25		—		75		—
Loan workout	Loan workout	495		516		1,458		1,823		Loan workout	1,808		643		2,175		963
Other real estate owned expenses		108		66		151		164
Other real estate owned										Other real estate owned	12		(14)		20		43
Other	Other	4,376		3,305		8,869		7,683		Other	1,817		2,634		6,941		4,491
Total non-interest expense	Total non-interest expense	59,592		57,104		173,160		163,134		Total non-interest expense	63,506		59,582		129,965		113,566
Income before income tax expense	Income before income tax expense	35,086		6,057		67,144		68,083		Income before income tax expense	29,766		11,787		34,772		32,058
Income tax expense	Income tax expense	8,020		28		15,343		14,250		Income tax expense	7,048		2,491		8,955		7,323

Net income	Net income	27,066		6,029		51,801		53,833		Net income	22,718		9,296		25,817		24,735
Preferred stock dividends	Preferred stock dividends	3,615		3,615		10,844		10,844		Preferred stock dividends	3,581		3,615		7,196		7,229
Net income available to common shareholders		$	23,451	$	2,414	$	40,957	$	42,989
Net income (loss) available to common shareholders										Net income (loss) available to common shareholders	$	19,137	$	5,681	$	18,621	$	17,506

Basic earnings per common share		$	0.75	$	0.08	$	1.32	$	1.36
Basic earnings (loss) per common share										Basic earnings (loss) per common share	$	0.61	$	0.18	$	0.59	$	0.56

Diluted earnings per common share		$	0.74	$	0.07	$	1.30	$	1.33
Diluted earnings (loss) per common share										Diluted earnings (loss) per common share	$	0.61	$	0.18	$	0.59	$	0.55

See accompanying notes to the unaudited consolidated financial statements.

~~Table~~Tab le of ~~Contents~~Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED

(amounts in thousands)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019

Net income	Net income	$	27,066	$	6,029	$	51,801	$	53,833	Net income	$	22,718	$	9,296	$	25,817	$	24,735
Unrealized gains (losses) on available-for-sale debt securities:
Unrealized gains (losses) on available for sale debt securities:										Unrealized gains (losses) on available for sale debt securities:
Unrealized gains (losses) arising during the period	Unrealized gains (losses) arising during the period	7,858		(1,629)		46,430		(47,917)		Unrealized gains (losses) arising during the period	35,315		20,755		26,217		38,572
Income tax effect	Income tax effect	(2,043)		423		(12,072)		12,458		Income tax effect	(9,182)		(5,397)		(6,816)		(10,029)
Reclassification adjustments for (gains) losses on securities included in net income		(1,001)		18,659		(1,001)		18,659
Reclassification adjustments for (gains) losses included in net income										Reclassification adjustments for (gains) losses included in net income	(4,353)		—		(8,328)		—
Income tax effect	Income tax effect	260		(4,851)		260		(4,851)		Income tax effect	1,131		—		2,165		—
Net unrealized gains (losses) on available-for-sale debt securities		5,074		12,602		33,617		(21,651)
Net unrealized gains (losses) on available for sale debt securities										Net unrealized gains (losses) on available for sale debt securities	22,911		15,358		13,238		28,543
Unrealized gains (losses) on cash flow hedges:	Unrealized gains (losses) on cash flow hedges:									Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) arising during the period	Unrealized gains (losses) arising during the period	(5,163)		4,062		(26,204)		6,830		Unrealized gains (losses) arising during the period	(6,369)		(14,102)		(34,066)		(21,041)
Income tax effect	Income tax effect	1,342		(1,056)		6,813		(1,775)		Income tax effect	1,684		3,667		9,035		5,471
Reclassification adjustment for (gains) losses included in net income	Reclassification adjustment for (gains) losses included in net income	764		(2,519)		355		(2,647)		Reclassification adjustment for (gains) losses included in net income	2,718		4		4,196		(409)
Income tax effect	Income tax effect	(198)		655		(92)		688		Income tax effect	(734)		(1)		(1,118)		106
Net unrealized gains (losses) on cash flow hedges	Net unrealized gains (losses) on cash flow hedges	(3,255)		1,142		(19,128)		3,096		Net unrealized gains (losses) on cash flow hedges	(2,701)		(10,432)		(21,953)		(15,873)
Other comprehensive income (loss), net of income tax effect	Other comprehensive income (loss), net of income tax effect	1,819		13,744		14,489		(18,555)		Other comprehensive income (loss), net of income tax effect	20,210		4,926		(8,715)		12,670
Comprehensive income (loss)	Comprehensive income (loss)	$	28,885	$	19,773	$	66,290	$	35,278	Comprehensive income (loss)	$	42,928	$	14,222	$	17,102	$	37,405

See accompanying notes to the unaudited consolidated financial statements.

~~Table~~Tab le of ~~Contents~~Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

(amounts in thousands, except shares outstanding data)


		Three Months Ended September 30, 2019
		Preferred Stock				Common Stock																Three Months Ended June 30, 2020
		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			Preferred Stock				Common Stock
Balance, June 30, 2019		9,000,000	$	217,471	31,202,023	$	32,483	$	439,067	$	334,157	$	(9,993)	$	(21,780)	$	991,405
																			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, March 31, 2020																		Balance, March 31, 2020	9,000,000	$	217,471	31,470,026	$	32,751	$	446,840	$	319,529	$	(30,175)	$	(21,780)	$	964,636

Net income	Net income	—	—		—	—		—		27,066		—		—		27,066		Net income	—	—		—	—		—		22,718		—		—		22,718

Other comprehensive income (loss)	Other comprehensive income (loss)	—	—		—	—		—		—		1,819		—		1,819		Other comprehensive income (loss)	—	—		—	—		—		—		20,210		—		20,210

Preferred stock dividends		—	—		—	—		—		(3,615)		—		—		(3,615)
Preferred stock dividends⁽¹⁾																		Preferred stock dividends⁽¹⁾	—	—		—	—		—		(3,581)		—		—		(3,581)
Share-based compensation expense	Share-based compensation expense	—	—		—	—		2,133		—		—		—		2,133		Share-based compensation expense	—	—		—	—		3,599		—		—		—		3,599

Issuance of common stock under share-based compensation arrangements	Issuance of common stock under share-based compensation arrangements	—	—		43,753	43		299		—		—		—		342		Issuance of common stock under share-based compensation arrangements	—	—		40,261	40		225		—		—		—		265
Balance, September 30, 2019		9,000,000	$	217,471	31,245,776	$	32,526	$	441,499	$	357,608	$	(8,174)	$	(21,780)	$	1,019,150
Balance, June 30, 2020																		Balance, June 30, 2020	9,000,000	$	217,471	31,510,287	$	32,791	$	450,664	$	338,665	$	(9,965)	$	(21,780)	$	1,007,847

		Three Months Ended September 30, 2018																															Three Months Ended June 30, 2019
		Preferred Stock				Common Stock																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			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, June 30, 2018		9,000,000	$	217,471	31,669,643	$	32,200	$	428,796	$	299,990	$	(33,997)	$	(8,233)	$	936,227
Balance, March 31, 2019																		Balance, March 31, 2019	9,000,000	$	217,471	31,131,247	$	32,412	$	436,713	$	328,476	$	(14,919)	$	(21,780)	$	978,373
Net income	Net income	—	—		—	—		—		6,029		—		—		6,029		Net income	—	—		—	—		—		9,296		—		—		9,296

Other comprehensive income (loss)	Other comprehensive income (loss)	—	—		—	—		—		—		13,744		—		13,744		Other comprehensive income (loss)	—	—		—	—		—		—		4,926		—		4,926

Preferred stock dividends		—	—		—	—		—		(3,615)		—		—		(3,615)
Preferred stock dividends⁽¹⁾																		Preferred stock dividends⁽¹⁾	—	—		—	—		—		(3,615)		—		—		(3,615)
Share-based compensation expense	Share-based compensation expense	—	—		—	—		1,980		—		—		—		1,980		Share-based compensation expense	—	—		—	—		2,315		—		—		—		2,315

Issuance of common stock under share-based compensation arrangements	Issuance of common stock under share-based compensation arrangements	—	—		17,697	18		429		—		—		—		447		Issuance of common stock under share-based compensation arrangements	—	—		70,776	71		39		—		—		—		110
Balance, September 30, 2018		9,000,000	$	217,471	31,687,340	$	32,218	$	431,205	$	302,404	$	(20,253)	$	(8,233)	$	954,812
Balance, June 30, 2019																		Balance, June 30, 2019	9,000,000	$	217,471	31,202,023	$	32,483	$	439,067	$	334,157	$	(9,993)	$	(21,780)	$	991,405

(1)Dividends per share of $0.4375, $0.40625, $0.403125, and $0.375 per share were declared on Series C, D, E, and F preferred stock for the three months ended June 30, 2020 and 2019, respectively.

Tab le of Contents



	Six Months Ended June 30, 2020
	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, 2019	9,000,000	$	217,471	31,336,791	$	32,617	$	444,218	$	381,519	$	(1,250)	$	(21,780)	$	1,052,795


Cumulative effect from change in accounting principle - CECL	—	—		—	—		—		(61,475)		—		—		(61,475)
Net income	—	—		—	—		—		25,817		—		—		25,817

Other comprehensive income (loss)	—	—		—	—		—		—		(8,715)		—		(8,715)


Preferred stock dividends⁽¹⁾	—	—		—	—		—		(7,196)		—		—		(7,196)
Share-based compensation expense	—	—		—	—		6,827		—		—		—		6,827

Issuance of common stock under share-based compensation arrangements	—	—		173,496	174		(380)		—		—		—		(206)

Balance, June 30, 2020	9,000,000	$	217,471	31,510,287	$	32,791	$	450,665	$	338,665	$	(9,965)	$	(21,780)	$	1,007,847

	Six Months Ended June 30, 2019
	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, 2018	9,000,000	$	217,471	31,003,028	$	32,252	$	434,314	$	316,651	$	(22,663)	$	(21,209)	$	956,816


Net income	—	—		—	—		—		24,735		—		—		24,735

Other comprehensive income (loss)	—	—		—	—		—		—		12,670		—		12,670


Preferred stock dividends⁽¹⁾	—	—		—	—		—		(7,229)		—				(7,229)
Share-based compensation expense	—	—		—	—		4,425		—		—		—		4,425

Issuance of common stock under share-based compensation arrangements	—	—		230,154	231		328		—		—		—		559
Repurchase of common shares	—	—		(31,159)	—		—		—		—		(571)		(571)
Balance, June 30, 2019	9,000,000	$	217,471	31,202,023	$	32,483	$	439,067	$	334,157	$	(9,993)	$	(21,780)	$	991,405

(1)Dividends per share of $0.8750, $0.81250, $0.806250, and $0.750 per share were declared on Series C, D, E, and F preferred stock for the six months ended June 30, 2020 and 2019, respectively.

See accompanying notes to the unaudited consolidated financial statements.

~~Table~~Tab le of ~~Contents~~Contents

~~CUSTOMERS BANCORP, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED (CONTINUED)~~

~~(amounts in thousands, except shares outstanding data)~~

Nine Months Ended September 30, 2019
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, 2018 9,000,000 $ 217,471 31,003,028 $ 32,252 $ 434,314 $ 316,651 $ (22,663) $ (21,209) $ 956,816
Net income — — — — — 51,801 — — 51,801
Other comprehensive income (loss) — — — — — — 14,489 — 14,489
Preferred stock dividends — — — — — (10,844) — — (10,844)
Share-based compensation expense — — — — 6,557 — — — 6,557
Issuance of common stock under share-based compensation arrangements — — 273,907 274 628 — — — 902
Repurchase of common shares — — (31,159) — — — — (571) (571)
Balance, September 30, 2019 9,000,000 $ 217,471 31,245,776 $ 32,526 $ 441,499 $ 357,608 $ (8,174) $ (21,780) $ 1,019,150
Nine Months Ended September 30, 2018
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, 2017 9,000,000 $ 217,471 31,382,503 $ 31,913 $ 422,096 $ 258,076 $ (359) $ (8,233) $ 920,964
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive loss — — — — — 298 (298) — —
Reclassification of net unrealized gains on equity securities from accumulated other comprehensive loss — — — — — 1,041 (1,041) — —
Net income — — — — — 53,833 — — 53,833
Other comprehensive income (loss) —�� — — — — — (18,555) — (18,555)
Preferred stock dividends — — — — — (10,844) — (10,844)
Share-based compensation expense — — — — 5,641 — — — 5,641
Exercise of warrants — — 5,242 5 107 — — — 112
Issuance of common stock under share-based compensation arrangements — — 299,595 300 3,361 — — — 3,661
Balance, September 30, 2018 9,000,000 $ 217,471 31,687,340 $ 32,218 $ 431,205 $ 302,404 $ (20,253) $ (8,233) $ 954,812

~~See accompanying notes to the unaudited consolidated financial statements.~~

~~Table of Contents~~

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(amounts in thousands)

Nine Months Ended
September 30,
2019 2018
Cash Flows from Operating Activities
Net income $ 51,801 $ 53,833
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan and lease losses 14,539 4,257
Depreciation and amortization 15,167 10,235
Share-based compensation expense 7,289 6,595
Deferred taxes 8,701 6,238
Net amortization of investment securities premiums and discounts 691 1,205
Unrealized (gain) loss on investment securities (988) 1,532
(Gain) loss on sale of investment securities (1,001) 18,659
Loss upon acquisition of interest-only GNMA securities 7,476 —
(Gain) loss on sale of SBA and other loans (602) (3,880)
Origination of loans held for sale (35,760) (22,978)
Proceeds from the sale of loans held for sale 36,115 23,936
Amortization of fair value discounts and premiums 561 164
Net (gain) loss on sales of other real estate owned 137 (35)
Valuation and other adjustments to other real estate owned 31 124
Earnings on investment in bank-owned life insurance (5,477) (5,769)
(Increase) decrease in accrued interest receivable and other assets (79,299) (21,525)
Increase (decrease) in accrued interest payable and other liabilities 15,302 25,774
Net Cash Provided By (Used In) Operating Activities 34,683 98,365
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of investment securities 22,627 38,926
Proceeds from sales of investment securities available for sale 97,555 476,182
Purchases of investment securities available for sale — (763,242)
Origination of mortgage warehouse loans (22,167,517) (21,739,744)
Proceeds from repayments of mortgage warehouse loans 21,049,044 22,016,825
Net (increase) decrease in loans and leases, excluding mortgage warehouse loans (6,808) (20,476)
Proceeds from sales of loans — 42,211
Purchase of loans (636,366) (347,740)
Proceeds from bank-owned life insurance — 529
Net proceeds from FHLB, Federal Reserve Bank, and other restricted stock 7,832 31,712
Purchases of bank premises and equipment (5,397) (1,344)
Proceeds from sales of other real estate owned 735 421
Purchase of university relationship intangible asset — (1,502)
Purchases of leased assets under lessor operating leases (27,239) (21,849)
Net Cash Provided By (Used In) Investing Activities (1,665,534) (289,091)
Cash Flows from Financing Activities
Net increase in deposits 1,783,449 1,713,572
Net increase (decrease) in short-term borrowed funds from the FHLB (557,270) (776,860)
Net increase (decrease) in federal funds purchased 186,000 (155,000)
Proceeds from long-term borrowed funds from the FHLB 350,000 —
Proceeds from issuance of other long-term borrowings 25,000 —
Repayments of other borrowings (25,000) (63,250)
Preferred stock dividends paid (10,844) (10,844)
Exercise of warrants — 112
Purchase of treasury stock (571) —
Payments of employee taxes withheld from share-based awards (1,366) (711)
Proceeds from issuance of common stock 1,536 3,418
Net Cash Provided By (Used In) Financing Activities 1,750,934 710,437
Net Increase (Decrease) in Cash and Cash Equivalents 120,083 519,711
Cash and Cash Equivalents – Beginning 62,135 146,323
Cash and Cash Equivalents – Ending $ 182,218 $ 666,034
(continued)

~~Table of Contents~~

Supplementary Cash Flows Information:
Interest paid $ 134,234 $ 114,973
Income taxes paid 3,047 4,156
Non-cash items:
Transfer of loans to other real estate owned $ 291 $ 234
Transfer of loans held for investment to held for sale 499,774 —
Transfer of loans held for sale to held for investment — 129,691
Acquisition of interest-only GNMA securities securing a mortgage warehouse loan 17,157 —
Acquisition of residential reverse mortgage loans securing a mortgage warehouse loan 1,325 —


	Six Months Ended June 30,
	2020		2019
Cash Flows from Operating Activities
Net income	$	25,817	$	24,735
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses on loan and lease losses	52,732		10,113
Depreciation and amortization	15,009		8,884
Share-based compensation expense	7,278		4,900
Deferred taxes	(28,104)		(681)
Net amortization (accretion) of investment securities premiums and discounts	(364)		421
Unrealized (gain) loss on investment securities	178		345
(Gain) loss on sale of investment securities	(8,328)		—

Loss upon acquisition of interest-only GNMA securities	—		7,476
(Gain) loss on sale of SBA and other loans	(426)		(304)
Fair value adjustment on loans held for sale	1,450		—
Origination of loans held for sale	(22,730)		(22,152)
Proceeds from the sale of loans held for sale	21,745		19,591

Amortization (accretion) of fair value discounts and premiums	(1,137)		232
Net (gain) loss on sales of other real estate owned	(4)		—
Valuation and other adjustments to other real estate owned	—		31
Earnings on investment in bank-owned life insurance	(3,519)		(3,653)
(Increase) decrease in accrued interest receivable and other assets	(108,325)		(63,311)
Increase (decrease) in accrued interest payable and other liabilities	88,305		16,502
Net Cash Provided By Operating Activities	39,577		3,129
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of investment securities	78,485		11,616
Proceeds from sales of investment securities available for sale	109,207		—
Purchases of investment securities available for sale	(280,410)		—
Origination of mortgage warehouse loans	(23,573,962)		(12,246,471)
Proceeds from repayments of mortgage warehouse loans	23,033,058		11,624,062
Net (increase) decrease in loans and leases, excluding mortgage warehouse loans	(4,515,097)		(22,665)

Purchase of loans	(211,096)		(555,587)


Net proceeds from sale of (purchases of) FHLB, Federal Reserve Bank, and other restricted stock	(6,809)		(12,262)

Purchases of bank premises and equipment	(214)		(345)
Proceeds from sales of other real estate owned	77		—

Purchases of leased assets under lessor operating leases	(9,011)		(11,672)
Net Cash Used In Investing Activities	(5,375,772)		(1,213,324)
Cash Flows from Financing Activities
Net increase in deposits	2,316,939		1,043,541

Net increase (decrease) in short-term borrowed funds from the FHLB	—		(335,970)

Net increase (decrease) in federal funds purchased	(538,000)		219,000
Proceeds from borrowed funds from PPP liquidity facility	4,419,967		—
Proceeds from long-term borrowed funds from the FHLB	—		350,000


Repayments of other borrowings	—		(25,000)

Preferred stock dividends paid	(7,229)		(7,229)

Purchase of treasury stock	—		(571)
Payments of employee taxes withheld from share-based awards	(1,067)		(1,210)
Proceeds from issuance of common stock	410		1,294
Net Cash Provided By Financing Activities	6,191,020		1,243,855





Net Increase (Decrease) in Cash and Cash Equivalents	854,825		33,660
Cash and Cash Equivalents – Beginning	212,505		62,135
Cash and Cash Equivalents – Ending	$	1,067,330	$	95,795

	(continued)


	Six Months Ended June 30,
	2020		2019



Non-cash Operating and Investing Activities:
Transfer of loans to other real estate owned	$	31	$	291

Transfer of loans held for investment to held for sale	19,050		—
Unsettled sales of investment securities	33,615		—


Acquisition of interest-only GNMA securities securing a mortgage warehouse loan	—		17,157
Acquisition of residential reverse mortgage loans securing a mortgage warehouse loan	—		1,325

See accompanying notes to the unaudited consolidated financial statements.

~~Table~~Tab le of ~~Contents~~Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS

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

Customers Bancorp ~~Inc.~~ and its wholly owned subsidiaries, ~~Customers~~the Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products. The Bank has 13 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan ~~equipment leases~~ and other financial products, including equipment finance leases, to customers through its limited-purpose offices in Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire; Manhattan and Melville, New York; Philadelphia, Pennsylvania; Washington, D.C.; and Chicago, Illinois. The Bank also ~~provides liquidity to residential mortgage originators~~serves specialty niche businesses nationwide, ~~through~~including its commercial loans to mortgage banking businesses, commercial equipment financing, specialty lending and consumer loans through relationships with fintech companies. ~~Through~~In addition, BankMobile, a division of Customers Bank, ~~Customers~~ offers ~~state of the art high tech~~state-of-the-art high-tech digital banking services to consumers, students and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners.

~~Customers~~The Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. 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 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The interim unaudited consolidated financial statements ~~of Customers Bancorp and subsidiaries~~ have been prepared in conformity with U.S. GAAP and 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, ~~2018~~2019 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited ~~2018~~2019 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 ~~2018~~2019 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on March ~~1, 2019~~2, 2020 (the ~~"2018~~"2019 Form 10-K"). The ~~2018~~2019 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; Loans Held for Sale and Loans at Fair Value; Loans Receivable - Mortgage Warehouse, at Fair Value; Loans and Leases Receivable; Purchased Loans; ALLL; Goodwill and Other Intangible Assets; FHLB, Federal Reserve Bank, and Other Restricted Stock; OREO; BOLI; Bank Premises and Equipment; Lessor Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Segment Information; Derivative Instruments and Hedging; Comprehensive Income (Loss); EPS; Loss Contingencies; and Collaborative Arrangements. There have been no material changes to Customers Bancorp's significant accounting policies noted above for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, with the exception of~~2020, except for the adoption of ASU ~~2016-02,~~ ~~Leases~~ ~~as described~~2016-13 Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, which is discussed below in ~~accounting standards adopted in 2019~~Adoption of New Accounting Standard, and the election of the fair value option, upon acquisition on June 28, 2019, for certain interest-only GNMA securities that served as the primary collateral for loans made to one commercial mortgage warehouse customer, as further described in NOTE 5 - INVESTMENT SECURITIES. As the interest-only GNMA securities are carried at their current fair value, changes in fair value are reported as unrealized gain (loss) on investment securities within non-interest income. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.replaces our prior ALLL policy.

New Accounting Standards

~~Table of Contents~~

Presented below are recently issued accounting standards that Customers has adopted as well as those that the FASB has issued but are not yet effective.

~~Recently Issued Accounting Standards~~

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Accounting Standards Adopted in 2020

Allowance for Credit Losses

On January 1, 2020, Customers adopted ASC 326, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and net investments in leases recognized by Customers as a lessor in accordance with ASC 842. CECL also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for AFS debt securities, which now requires credit losses to be presented as an allowance, rather than as a write-down on AFS debt securities that management does not intend to sell or believes that it is more likely than not they will not be required to sell.

Customers adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases, and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2019 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Customers recorded a net decrease to retained earnings of $61.5 million, net of deferred taxes of $21.5 million, as of January 1, 2020 for the cumulative effect of adopting ASC 326. Customers adopted ASC 326 using the prospective transition approach for PCD financial assets that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020.

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The following table illustrates the impact of adopting ASC 326:

(amounts in thousands)



	Pre-ASC 326 Adoption		Impact of ASC 326 Adoption		As Reported Under ASC 326
Assets
Loans receivable, mortgage warehouse, at fair value	$	2,245,758	$	—	$	2,245,758
Loans and leases receivable
Multi-family	1,907,331		7		1,907,338
Commercial and industrial	1,891,152		3		1,891,155
Commercial real estate owner occupied	551,948		100		552,048
Commercial real estate non-owner occupied	1,222,772		41		1,222,813
Construction	117,617		—		117,617
Total commercial loans and leases receivable	5,690,820		151		5,690,971
Residential real estate	382,634		32		382,666
Manufactured housing	71,359		37		71,396
Other consumer	1,174,175		12		1,174,187
Total consumer loans receivable	1,628,168		81		1,628,249
Loans and leases receivable	7,318,988		232		7,319,220
Allowance for credit losses on loans and leases	(56,379)		(79,829)		(136,208)
Total loans and leases receivable, net of allowance for credit losses on loans and leases	9,508,367		(79,596)		9,428,771
Liabilities
Allowance for credit losses on lending-related commitments	49		3,388		3,437
Net deferred tax (asset) liability	11,740		(21,510)		(9,770)
Equity
Retained earnings	$	381,519	$	(61,475)	$	320,044

Allowance for Credit Losses on Loans and Leases

The allowance for credit losses on loans and leases is a valuation account that is deducted from the loan or lease’s amortized cost basis to present the net amount expected to be collected on the loans and leases. Loans and leases deemed to be uncollectible are charged against the allowance for credit losses on loans and leases, and subsequent recoveries, if any, are credited to the allowance for credit losses on loans and leases. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Changes to the allowance for credit losses on loans and leases are recorded through the provision for credit losses on loans and leases. The allowance for credit losses on loans and leases is maintained at a level considered appropriate to absorb expected credit losses over the expected life of the portfolio as of the reporting date.

The allowance for credit losses on loans and leases is measured on a collective (pool) basis when similar risk characteristics exist. Customers' loan portfolio segments include commercial and consumer. Each of these two loan portfolio segments is comprised of multiple loan classes. Loan classes are characterized by similarities in loan type, collateral type, risk attributes and the manner in which credit risk is assessed and monitored. The commercial segment is composed of multi-family, commercial and industrial, commercial real estate owner occupied, commercial real estate non-owner occupied and construction loan classes. The consumer segment is composed of residential real estate, manufactured housing and other consumer. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For individually assessed loans, see related details in the Individually Assessed Loans section below.

The allowance for credit losses on collectively assessed loans and leases is measured over the expected life of the loan or lease using lifetime loss rate models which consider historical loan performance, loan or borrower attributes and forecasts of future economic

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conditions in addition to information about past events and current conditions. Significant loan/borrower attributes utilized in the models include origination date, maturity date, collateral property type, internal risk rating, delinquency status, borrower state and FICO score at origination. Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool. The lifetime loss rate models also incorporate prepayment assumptions into estimated lifetime loss rates. Customers runs the CECL impairment models on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the models but which are relevant in assessing the expected credit losses within the loan and lease pools. Management generally considers the following qualitative factors:

•Volume and severity of past-due loans, non-accrual loans and classified loans;

•Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices;

•Nature and volume of the portfolio;

•Existence and effect of any credit concentrations and changes in the level of such concentrations;

•Risk ratings;

•The value of the underlying collateral for loans that are not collateral dependent;

•Changes in the quality of the loan review system;

•Experience, ability and depth of lending management and staff;

•Other external factors, such as changes in legal, regulatory or competitive environment; and

•Model and data limitations.

Customers has elected to not estimate an allowance for credit losses on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, in a timely manner. Accrued interest receivable is presented as a separate financial statement line item in the consolidated balance sheet.

Purchased Credit Deteriorated (“PCD”) Loans and Leases

PCD assets are acquired individual loans and leases (or acquired groups of loans and leases with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. PCD loans and leases are recorded at their purchase price plus the allowance for credit losses expected at the time of acquisition, or “gross up” of the amortized cost basis. The January 1, 2020 transition adjustment discussed above was established for these loans and leases without affecting the income statement or retained earnings. Changes in the current estimate of the allowance for credit losses after acquisition from the estimated allowance previously recorded are reported in the income statement as provision for credit losses expense or reversal of provision for credit losses in subsequent periods as they arise. Purchased loans or leases that do not qualify as PCD assets are accounted for similar to originated assets, whereby an allowance for credit losses is recognized with a corresponding increase to the income statement provision for credit losses. Evidence that purchased loans and leases, measured at amortized cost, have more-than-insignificant deterioration in credit quality since origination and, therefore meet the PCD definition, may include loans and leases that are past-due, in non-accrual status, poor borrower credit score, recent loan-to-value percentages and other standard indicators (i.e., TDR, charge-offs and bankruptcy).

Allowance for Credit Losses on Lending-Related Commitments

Customers estimates expected credit losses over the contractual period in which it is exposed to credit risk on contractual obligations to extend credit, unless the obligation is unconditionally cancellable by Customers. The allowance for credit losses on lending-related commitments is recorded in accrued interest payable and other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses within other non-interest expense in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Customers estimates the expected credit losses for undrawn commitments using a usage given default calculation. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same models and economic forecasts, adjusted for the estimated likelihood that funding will occur.

Individually Assessed Loans and Leases

ASC 326 provides that a loan or lease is measured individually if it does not share similar risk characteristics with other financial assets. For Customers, loans and leases which are identified to be individually assessed under CECL typically would have been evaluated

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individually as impaired loans using accounting guidance in effect in periods prior to the adoption of CECL and include troubled debt restructurings (TDRs) and collateral dependent loans.

TDRs

A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except in cases when the value of a concession cannot be measured using a method other than the discounted cash flow (“DCF”) method. When the value of a concession is measured using the DCF method, the allowance for credit loss is determined by discounting the expected future cash flows at the original effective interest rate of the loan.

The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications.

Collateral Dependent Loans

Customers considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Customers has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.

Allowance for Credit Losses on Available for Sale Securities

For AFS debt securities in an unrealized loss position, Customers first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, Customers evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses on AFS securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses on AFS securities is recognized in other comprehensive income.

Changes in the allowance for credit losses on AFS securities are recorded as provision, or reversal of provision for credit losses on AFS securities in other non-interest income within the consolidated income statement. Losses are charged against the allowance for credit losses on AFS securities when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS debt securities totaled $3.2 million at June 30, 2020 and is excluded from the estimate of credit losses.

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Other Accounting Standards Adopted in 2020

Standard

Summary of guidance

Effects on Financial Statements

ASU ~~2016-02,~~2019-04,

~~Leases~~

~~Issued February 2016~~

• ~~Supersedes the lease accounting guidance for both lessees and lessors under ASC 840,~~ ~~Leases.~~

• From the lessee's perspective, the new standard establishes a 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.~~

• ~~This ASU requires 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.~~

• ~~Effective January 1, 2019.~~

• In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard to all open leases as of the adoption date. Prior to this ASU issuance, a modified retrospective transition approach was required.

• In December 2018, the FASB issued ASU 2018-20 "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which provides lessors a policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude from variable payments lessor costs paid by lessees directly to third parties.

• In March 2019, the FASB issued ASU 2019-01 "Codification Improvements," which clarifies that lessors who are not manufacturers or dealers should use the original cost of the underlying asset in a lease as its fair value. Additionally, the update states that lessors who are depository or lending institutions within the scope of ASC 942 should present all principal payments received under leases under investing activities in their Statement of Cash Flows and that interim disclosures under ASC 250-10-50-3 are not required in the interim reports of issuers adopting ASC 842.

• ~~Customers adopted on January 1, 2019.~~

• ~~The adoption did not materially change Customers' recognition of operating lease expense in its consolidated statements of income.~~

• Customers adopted certain practical expedients available under the new guidance, which did not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for any expired or existing leases, (3) reassess initial direct costs for any existing leases, (4) separate non-lease components from the associated lease components, (5) evaluate whether certain sales taxes and other similar taxes are lessor costs, and (6) capitalize short-term leases. Additionally, Customers elected to apply the new lease guidance at the adoption date, rather than at the beginning of the earliest period presented and will continue to present comparative periods prior to January 1, 2019 under Topic 840. Customers did not adopt the hindsight practical expedient.

• The adoption of the ASU for Customers' lessor equipment finance business did not have a significant impact on Customers' financial condition, results of operations, and consolidated financial statements.

• ~~See NOTE 8 - LEASES.~~

~~ASU 2017-08,~~

~~Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities~~

~~Issued March 2017~~

• ~~Requires that premiums for certain callable debt securities held be amortized to their earliest call date.~~

• ~~Effective on January 1, 2019.~~

• ~~Adoption of this new guidance must be applied on a modified retrospective approach.~~

• ~~Customers adopted on January 1, 2019.~~

• ~~The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.~~

~~Table of Contents~~

~~Accounting Standards Adopted in 2019 (continued)~~

~~Standard~~

~~Summary of guidance~~

~~Effects on Financial Statements~~

~~ASU 2017-11,~~

~~Accounting for Certain Financial Instruments with Down Round Features~~

~~Issued July 2017~~

• ~~Changes 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 net income available to common shareholders in basic EPS.

• ~~Effective January 1, 2019.~~

• ~~Customers adopted on January 1, 2019.~~

• ~~The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.~~

~~ASU 2018-07,~~

~~Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting~~

~~Issued June 2018~~

• Expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.

• Applies to all share-based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor's own operations by issuing share-based payment awards.

• With the amended guidance from ASU 2018-07, non-employees share-based payments are measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award).

• ~~Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods or services instead of stock.~~

• ~~Effective January 1, 2019.~~

• ~~Customers adopted on January 1, 2019.~~

• ~~The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.~~

~~Table of Contents~~

~~Accounting Standards Issued But Not Yet Adopted~~

~~Standard~~

~~Summary of guidance~~

~~Effects on Financial Statements~~

~~ASU 2019-04,~~
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

Issued April 2019

• Clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments.

• Addresses partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements.

• Addresses recognizing and measuring financial instruments, specifically the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates.

• Topic 326 Amendments - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. Topic 815 Amendments - Effective for first annual period beginning after the issuance date of this ASU (i.e., fiscal year 2020). Entities that have already adopted the amendments in ASU 2017-12 may elect either to retrospectively apply all the amendments or to prospectively apply all amendments as of the date of adoption. Topic 825 Amendments - Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

• Customers ~~intends to adopt~~adopted on January 1, 2020.

• The adoption of this guidance relating to Topics 815 and 825 did not have a material impact on ~~its effective date and is currently evaluating the expected impact of this ASU on its~~Customers' financial condition, results of operations and consolidated financial statements. Please refer ~~below~~ to ASU 2016-13 for further discussion on Customers' adoption of ASU 2016-13 (Topic 326).

ASU 2018-18,

Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606

Issued November 2018

• Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.

• Adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within scope of Topic 606.

• Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer.

• Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.

• Customers ~~intends to adopt this guidance~~adopted on ~~its effective date and does not expect the~~January 1, 2020.

• The adoption of this guidance ~~to materially~~did not have a material impact ~~its~~on Customers' financial condition, results of operations and consolidated financial statements.

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Other Accounting Standards ~~Issued But Not Yet~~ Adopted in 2020 (continued)

Standard

Summary of guidance

Effects on Financial Statements

ASU 2018-15,

Internal-Use Software (Subtopic 350-40): Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Issued August 2018

• Clarifies that service contracts with hosting arrangements must follow internal-use software guidance Subtopic 350-40 when determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense.

• Also clarifies that capitalized implementation costs of a hosting arrangement that is a service contract are to be amortized over the term of the hosting arrangement, which includes the noncancelable period of the arrangement plus options to extend the arrangement if reasonably certain to exercise.

• Clarifies that existing impairment guidance in Subtopic 350-40 must be applied to the capitalized implementation costs as if they were long-lived assets.

• Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

• Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.

• Customers ~~intends to adopt this guidance~~adopted on ~~its effective date and does not expect the~~January 1, 2020.
• The adoption of this guidance ~~to materially~~did not have a material impact ~~its~~on Customers' financial condition, results of operations and consolidated financial statements.

~~ASU 2016-13,~~

~~Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments~~

~~Issued June 2016~~

• Requires an entity to utilize a new impairment model known as the 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 held-to-maturity debt securities), presents the net amount expected to be collected on the financial asset.

• ~~Replaces today's "incurred loss" approach and 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.

• ~~Simplifies the accounting model for PCI debt securities and loans.~~

• In May 2019, the FASB issued ASU 2019-05 "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which provides entities that have certain instruments within the scope of Topic 326 with an option to irrevocably elect the fair value option in Subtopic 825, Financial Instruments. This relief is to be applied on an instrument-by-instrument basis for eligible instruments upon adoption of Topic 326.

• ~~Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted.~~

• ~~Adoption to 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 has established a company-wide, cross-discipline governance structure, which provides implementation oversight and continues evaluating the impact of this ASU and reviewing the loss modeling requirements consistent with expected credit loss estimates.

• ~~Customers has selected a third-party vendor to assist in the implementation process of its new model.~~

• Customers will utilize lifetime loss rate models for its commercial real estate, commercial and industrial, and consumer portfolios. As Customers' loan portfolios have not been subject to a full economic credit cycle, lifetime loss rates will be based on its peer groups' historical loss rates for each of these portfolios of loans. Additionally, the loss rates will include reasonable and supportable forecasts of macroeconomic conditions.

• ~~Customers began to perform parallel runs of the new models to its current ALLL model during second quarter 2019 and continues to evaluate the results and assumptions.~~

• Implementation efforts are continuing to focus on model validation, model calibration, qualitative factors, developing new disclosures, finalizing formal policies and procedures and other governance and control enhancements and documentation.

• The FASB recently issued two ASUs that clarified treatment of several topics in the CECL standard, including recoveries and accrued interest, which we plan to implement. The FASB also recently proposed an ASU providing additional guidance on selected topics and we are awaiting final guidance to implement any necessary changes.

• The adoption of this ASU will result in an increase to Customers' ALLL which will depend upon the nature and characteristics of Customers' loan and lease portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date.

• ~~Customers will adopt this new guidance on January 1, 2020.~~

Accounting Standards Issued But Not Yet Adopted

Standard

Summary of guidance

Effects on Financial Statements

ASU 2020-04,

Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Issued March 2020

• Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

• Effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022.

• Customers intends to adopt this guidance during adoption period and is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements.

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Accounting and Reporting Considerations related to COVID-19

On March 27, 2020, the CARES Act was signed into law and contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic and stimulate the economy. The CARES Act includes the PPP designed to aid small-and medium-sized businesses through federally guaranteed loans distributed through banks. Customers is a participant in the PPP. Section 4013 of the CARES act also gives entities temporary relief from the accounting and disclosure requirements for TDRs under ASC 310-40 in certain situations.

Accounting for PPP Loans

In April 2020, Customers began to originate loans to qualified small businesses under the PPP administered by the SBA. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and terms of two or five years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5% based on the size of the loan. Customers classified the PPP loans as held for investment and these loans are carried at amortized cost and interest income is recognized using the interest method. The origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the yield of the related loans over their contractual life using the interest method. As PPP is newly created, Customers does not have historical prepayment data to accurately estimate principal prepayments and therefore has elected to not estimate prepayments as a policy election. No allowance for credit losses has been recognized for PPP loans as these loans are 100% guaranteed by the SBA. See Note 7 - Loans and Leases Receivable and Allowance for Credit Losses on Loans and Leases for additional information.

Loan Modifications

As mentioned above, Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for TDRs. In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are TDRs. To qualify for TDR accounting and disclosure relief under the CARES Act, the applicable loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of December 31, 2020, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The CARES Act applies to modifications made as a result of COVID-19 including: forbearance agreements, interest rate modifications, repayment plans, and other arrangements to defer or delay payment of principal or interest. The interagency statement does not require the modification to be completed within a certain time period if it is related to COVID-19 and can be provided to borrowers either individually or as part of a loan modification program. Moreover, the interagency statement applies to short-term modifications (e.g. not more than six months deferral) including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19.

Customers applied Section 4013 of the CARES Act and the interagency statement in connection with applicable modifications. For modifications that qualify under either the CARES Act or the interagency statement, TDR accounting and reporting is suspended. These modifications generally involve principal and/or interest payment deferrals for a period of 90 days at a time and can be extended to six months if requested by the borrower as long as the reason is still related to COVID-19. These modified loans would not also be reported as past due or nonaccrual during the deferral period. See Note 7 - Loans and Leases Receivable and Allowance for Credit Losses on Loans and Leases for additional information.

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NOTE 3 — EARNINGS (LOSS) PER SHARE

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

Three Months Ended
September 30, Nine Months Ended
September 30,
(amounts in thousands, except share and per share data) 2019 2018 2019 2018
Net income available to common shareholders $ 23,451 $ 2,414 $ 40,957 $ 42,989
Weighted-average number of common shares outstanding - basic 31,223,777 31,671,122 31,142,400 31,554,407
Share-based compensation plans 420,951 601,622 438,629 750,573
Warrants — 4,846 — 7,475
Weighted-average number of common shares - diluted 31,644,728 32,277,590 31,581,029 32,312,455
Basic earnings per common share $ 0.75 $ 0.08 $ 1.32 $ 1.36
Diluted earnings per common share $ 0.74 $ 0.07 $ 1.30 $ 1.33


	Three Months Ended June 30,						Six Months Ended June 30,
(amounts in thousands, except share and per share data)	2020		2019		2020		2019


Net income available to common shareholders	$	19,137	$	5,681	$	18,621	$	17,506

Weighted-average number of common shares outstanding – basic	31,477,591		31,154,292		31,434,371		31,101,037
Share-based compensation plans	148,180		471,449		191,298		446,985

Weighted-average number of common shares – diluted	31,625,771		31,625,741		31,625,669		31,548,022



Basic earnings (loss) per common share	$	0.61	$	0.18	$	0.59	$	0.56


Diluted earnings (loss) per common share	$	0.61	$	0.18	$	0.59	$	0.55

The following ~~is a summary of~~are 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 either the performance conditions for certain of the share-based compensation awards have not been met or to do so would have been anti-dilutive for the periods presented.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Share-based compensation awards 2,181,195 1,787,670 2,233,160 1,105,287


	Three Months Ended June 30,			Six Months Ended June 30,
	2020	2019	2020	2019
Share-based compensation awards	3,813,959	2,246,181	3,674,506	2,301,663

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

The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. All amounts are presented net of tax. Amounts in parentheses indicate reductions to AOCI.


													Three Months Ended June 30, 2020
(amounts in thousands)												(amounts in thousands)	Unrealized Gains (Losses) on Available for Sale Securities ⁽¹⁾		Unrealized Gains (Losses) on Cash Flow Hedges ⁽²⁾		Total
Balance - March 31, 2020												Balance - March 31, 2020	$	4,614	$	(34,789)	$	(30,175)

		Three Months Ended September 30, 2019
		Available-for-Sale Debt Securities
(amounts in thousands)		Unrealized Gains (Losses)		Foreign Currency Items		Total Unrealized Gains (Losses)		Unrealized Gains (Losses) on Cash Flow Hedges		Total
Balance - June 30, 2019		$	6,802	$	—	$	6,802	$	(16,795)	$	(9,993)

Unrealized gains (losses) arising during period, before tax												Unrealized gains (losses) arising during period, before tax	35,315		(6,369)		28,946
Income tax effect												Income tax effect	(9,182)		1,684		(7,498)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	5,815		—		5,815		(3,821)		1,994		Other comprehensive income (loss) before reclassifications	26,133		(4,685)		21,448
Amounts reclassified from accumulated other comprehensive income (loss) to net income ⁽¹⁾		(741)		—		(741)		566		(175)
Reclassification adjustments for (gains) losses included in net income, before tax												Reclassification adjustments for (gains) losses included in net income, before tax	(4,353)		2,718		(1,635)
Income tax effect												Income tax effect	1,131		(734)		397
Amounts reclassified from accumulated other comprehensive income (loss) to net income												Amounts reclassified from accumulated other comprehensive income (loss) to net income	(3,222)		1,984		(1,238)
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	5,074		—		5,074		(3,255)		1,819		Net current-period other comprehensive income (loss)	22,911		(2,701)		20,210
Balance - September 30, 2019		$	11,876	$	—	$	11,876	$	(20,050)	$	(8,174)
Balance - June 30, 2020												Balance - June 30, 2020	$	27,525	$	(37,490)	$	(9,965)


												Six Months Ended June 30, 2020
(amounts in thousands)											(amounts in thousands)	Unrealized Gains (Losses) Available for Sale Securities ⁽¹⁾		Unrealized Gains (Losses) on Cash Flow Hedges ⁽²⁾		Total
Balance - December 31, 2019											Balance - December 31, 2019	$	14,287	$	(15,537)	$	(1,250)

	Nine Months Ended September 30, 2019
	Available-for-Sale Debt Securities
(amounts in thousands)	Unrealized Gains (Losses)		Foreign Currency Items		Total Unrealized Gains (Losses)		Unrealized Gains (Losses) on Cash Flow Hedges		Total
Balance - December 31, 2018	$	(21,741)	$	—	$	(21,741)	$	(922)	$	(22,663)
Unrealized gains (losses) arising during period, before tax											Unrealized gains (losses) arising during period, before tax	26,217		(34,066)		(7,849)
Income tax effect											Income tax effect	(6,816)		9,035		2,219
Other comprehensive income (loss) before reclassifications											Other comprehensive income (loss) before reclassifications	19,401		(25,031)		(5,630)
Reclassification adjustments for (gains) losses included in net income, before tax											Reclassification adjustments for (gains) losses included in net income, before tax	(8,328)		4,196		(4,132)
Income tax effect											Income tax effect	2,165		(1,118)		1,047
Amounts reclassified from accumulated other comprehensive income (loss) to net income											Amounts reclassified from accumulated other comprehensive income (loss) to net income	(6,163)		3,078		(3,085)
Net current-period other comprehensive income (loss)											Net current-period other comprehensive income (loss)	13,238		(21,953)		(8,715)
Balance - June 30, 2020											Balance - June 30, 2020	$	27,525	$	(37,490)	$	(9,965)

Other comprehensive income (loss) before reclassifications	34,358		—		34,358		(19,391)		14,967
Amounts reclassified from accumulated other comprehensive income (loss) to net income ⁽¹⁾	(741)		—		(741)		263		(478)
Net current-period other comprehensive income (loss)	33,617		—		33,617		(19,128)		14,489
Balance - September 30, 2019	$	11,876	$	—	$	11,876	$	(20,050)	$	(8,174)

(1)Reclassification amounts for ~~available-for-sale~~available for sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income. During both the three and nine months ended September 30, 2019 reclassification amounts of $1.0 million ($0.7 million net of taxes) were reported as gain on sale of investment securities on the consolidated statements of income.

(2)Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income. During the three and nine months ended September 30, 2019, reclassification amounts of $0.8 million ($0.6 million net of taxes) and $0.4 million ($0.3 million net of taxes), respectively, were reported as increases to interest expense for the applicable hedged items on the consolidated statements of income.

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		Three Months Ended September 30, 2018
													Three Months Ended June 30, 2019
		Available-for-Sale Debt Securities
(amounts in thousands)	(amounts in thousands)	Unrealized Gains (Losses)		Foreign Currency Items		Unrealized Gains (Losses) on Available-For-Sale Securities		Unrealized Gains (Losses) on Cash Flow Hedges		Total		(amounts in thousands)	Unrealized Gains (Losses) on Available for Sale Securities ⁽¹⁾		Unrealized Gains (Losses) on Cash Flow Hedges ⁽²⁾		Total
Balance - June 30, 2018		$	(35,711)	$	—	$	(35,711)	$	1,714	$	(33,997)
Balance - March 31, 2019												Balance - March 31, 2019	$	(8,556)	$	(6,363)	$	(14,919)

Unrealized gains (losses) arising during period, before tax												Unrealized gains (losses) arising during period, before tax	20,755		(14,102)		6,653
Income tax effect												Income tax effect	(5,397)		3,667		(1,730)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	(1,206)		—		(1,206)		3,006		1,800		Other comprehensive income (loss) before reclassifications	15,358		(10,435)		4,923
Amounts reclassified from accumulated other comprehensive income (loss) to net income ⁽¹⁾		13,808		—		13,808		(1,864)		11,944
Reclassification adjustments for losses (gains) included in net income, before tax												Reclassification adjustments for losses (gains) included in net income, before tax	—		4		4
Income tax effect												Income tax effect	—		(1)		(1)
Amounts reclassified from accumulated other comprehensive income (loss) to net income												Amounts reclassified from accumulated other comprehensive income (loss) to net income	—		3		3
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	12,602		—		12,602		1,142		13,744		Net current-period other comprehensive income (loss)	15,358		(10,432)		4,926
Balance - September 30, 2018		$	(23,109)	$	—	$	(23,109)	$	2,856	$	(20,253)
Balance - June 30, 2019												Balance - June 30, 2019	$	6,802	$	(16,795)	$	(9,993)

Nine Months Ended September 30, 2018
Available-for-Sale Debt Securities
(amounts in thousands) Unrealized Gains (Losses) Foreign Currency Items Unrealized Gains (Losses) on Available-For-Sale Securities Unrealized
Gains (Losses) on Cash Flow Hedges Total
Balance - December 31, 2017 $ (249) $ 88 $ (161) $ (198) $ (359)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act ⁽²⁾
(256) — (256) (42) (298)
Reclassification of net unrealized gains on equity securities ⁽²⁾
(953) (88) (1,041) — (1,041)
Balance after reclassifications on January 1, 2018 (1,458) — (1,458) (240) (1,698)
Other comprehensive income (loss) before reclassifications (35,459) — (35,459) 5,055 (30,404)
Amounts reclassified from accumulated other comprehensive income (loss) to net income ⁽¹⁾
13,808 — 13,808 (1,959) 11,849
Net current-period other comprehensive income (21,651) — (21,651) 3,096 (18,555)
Balance - September 30, 2018 $ (23,109) $ — $ (23,109) $ 2,856 $ (20,253)


	Six Months Ended June 30, 2019

(amounts in thousands)	Unrealized Gains (Losses) on Available for Sale Securities ⁽¹⁾		Unrealized Gains (Losses) on Cash Flow Hedges ⁽²⁾		Total
Balance - December 31, 2018	$	(21,741)	$	(922)	$	(22,663)



Unrealized gains (losses) arising during period, before tax	38,572		(21,041)		17,531
Income tax effect	(10,029)		5,471		(4,558)
Other comprehensive income (loss) before reclassifications	28,543		(15,570)		12,973
Reclassification adjustments for losses (gains) included in net income, before tax	—		(409)		(409)
Income tax effect	—		106		106
Amounts reclassified from accumulated other comprehensive income (loss) to net income	—		(303)		(303)
Net current-period other comprehensive income	28,543		(15,873)		12,670
Balance - June 30, 2019	$	6,802	$	(16,795)	$	(9,993)

(1)Reclassification amounts for ~~available-for-sale~~available for sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income. During both the three and nine months ended September 30, 2018, reclassification amounts of $18.7 million ($13.8 million net of taxes), were reported as loss on sale of investment securities on the consolidated statements of income.

(2)Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income or other non-interest income on the consolidated statements of income for gains from the discontinuance of cash flow hedge accounting for certain interest rate swaps. During the three and nine months ended September 30, 2018, reclassification amounts of $303 thousand ($224 thousand net of taxes) and $175 thousand ($129 thousand net of taxes) were reported as interest expense on hedged items on the the consolidated statements of income. During the three and nine months ended September 30, 2018, reclassification amounts of $2.8 million ($2.1 million net of taxes), respectively, were reported as other non-interest income on the consolidated statements of income from the discontinuance of cash flow hedge accounting for certain interest rate swaps.

~~(2)~~Amounts reclassified from accumulated other comprehensive income (loss) on January 1, 2018 as a result of the adoption of ASU 2018-02 and ASU 2016-01 resulted in a decrease in AOCI of $1.3 million and a corresponding increase in retained earnings for the same amount.

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NOTE 5 — INVESTMENT SECURITIES

The amortized cost and ~~approximate~~ fair value of investment securities as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are summarized in the tables below:

September 30, 2019
(amounts in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Available-for-sale debt securities:
Agency-guaranteed residential mortgage-backed securities $ 288,829 $ 3,514 $ — $ 292,343
Corporate notes ⁽¹⁾
284,663 12,535 — 297,198
Available-for-sale debt securities $ 573,492 $ 16,049 $ — 589,541
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities ⁽²⁾
17,078
Equity securities ⁽³⁾
2,095
Total investment securities, at fair value $ 608,714


	June 30, 2020 ⁽¹⁾
(amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities	$	140,019	$	4,291	$	—	$	144,310

Agency-guaranteed collateralized mortgage obligations	145,061		765		—		145,826
State and political subdivision debt securities ⁽²⁾	17,496		893		—		18,389

Corporate notes ⁽³⁾	324,986		31,286		(39)		356,233

Available for sale debt securities	$	627,562	$	37,235	$	(39)	664,758
Interest-only GNMA securities ⁽⁴⁾							14,396
Equity securities ⁽⁵⁾							2,228
Total investment securities, at fair value							$	681,382


		December 31, 2018															December 31, 2019
(amounts in thousands)	(amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale debt securities:
Available for sale debt securities:										Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities	Agency-guaranteed residential mortgage-backed securities	$	311,267	$	—	$	(5,893)	$	305,374	Agency-guaranteed residential mortgage-backed securities	$	273,252	$	5,069	$	—	$	278,321

Corporate notes ⁽¹⁾⁽³⁾	Corporate notes ⁽¹⁾⁽³⁾	381,407		920		(24,407)		357,920		Corporate notes ⁽¹⁾⁽³⁾	284,639		14,238		—		298,877
Available-for-sale debt securities		$	692,674	$	920	$	(30,300)	663,294
Equity securities ⁽³⁾								1,718
Available for sale debt securities										Available for sale debt securities	$	557,891	$	19,307	$	—	577,198
Interest-only GNMA securities ⁽⁴⁾										Interest-only GNMA securities ⁽⁴⁾							16,272
Equity securities ⁽⁵⁾										Equity securities ⁽⁵⁾							2,406
Total investment securities, at fair value	Total investment securities, at fair value							$	665,012	Total investment securities, at fair value							$	595,876

(1)~~At September~~Accrued interest on AFS debt securities totaled $3.2 million at June 30, ~~2019, includes~~2020 and is included in accrued interest receivable on the consolidated balance sheet.

(2)Includes both taxable and non-taxable municipal securities.

(3)Includes corporate securities issued by ~~other~~ domestic ~~bank holding companies. At December 31, 2018, includes corporate securities issued by other domestic and foreign~~ bank holding companies.

~~(2)~~(4)Reported at fair value with fair value changes recorded in non-interest income based on a fair value option election.

~~(3)~~(5)Includes equity securities issued by a foreign entity.

On June 28, 2019, Customers obtained ownership of certain interest-only GNMA securities that served as the primary collateral for loans made to one commercial mortgage warehouse customer through a Uniform Commercial Code private sale transaction. In connection with the acquisition of the interest-only GNMA securities, Customers recognized a pre-tax loss of $7.5 million for the ~~nine~~three months ended ~~September~~June 30, 2019 for the shortfall in the fair value of the interest-only GNMA securities compared to its credit exposure to this commercial mortgage warehouse customer. ~~On June 28, 2019,~~Upon acquisition, Customers elected the fair value option for these interest-only GNMA ~~securities acquired on such date.~~securities. The fair value of these securities at ~~September~~June 30, ~~2019~~2020 was ~~$17.1~~$14.4 million.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, Customers recognized unrealized gains of ~~$1.3~~$1.2 million and ~~$1.0~~unrealized losses of $0.2 million, respectively, on its ~~interest-only GNMA securities and~~ equity securities. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, Customers recognized unrealized losses of ~~$1.2~~$0.3 million and ~~$1.5~~$0.3 million, respectively, on its equity securities. These unrealized gains and losses are reported as unrealized gain (loss) on investment securities within non-interest income on the consolidated statements of income.

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~~The following table presents proceeds~~Proceeds from the sale of ~~available-for-sale~~available for sale debt securities ~~and gross gains and gross losses realized on those sales~~were $109.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020. Realized gains from the sale of available for sale debt securities were $4.4 million and ~~2018.~~

Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands) 2019 2018 2019 2018
Proceeds from sale of available-for-sale securities $ 97,555 $ 476,182 $ 97,555 $ 476,182
Gross gains $ 1,936 $ — $ 1,936 $ —
Gross losses (935) (18,659) (935) (18,659)
Net gains / (losses) $ 1,001 $ (18,659) $ 1,001 $ (18,659)

$8.3 million for the three and six months ended June 30, 2020, respectively. There were 0 sales of available for sale debt securities for the three and six months ended June 30, 2019. These ~~gains/~~gains (losses) were determined using the specific identification method and were reported as gain (loss) on sale of investment securities within non-interest income on the consolidated statements of income.

The following table shows debt securities by stated maturity. Debt securities backed by mortgages and interest-only GNMA securities 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, 2019							June 30, 2020
(amounts in thousands)	(amounts in thousands)	Amortized Cost		Fair Value		(amounts in thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	—	$	—	Due in one year or less	$	7,954	$	8,003
Due after one year through five years	Due after one year through five years	5,000		5,238		Due after one year through five years	62,687		64,280
Due after five years through ten years	Due after five years through ten years	277,662		289,862		Due after five years through ten years	252,845		282,450
Due after ten years	Due after ten years	2,000		2,098		Due after ten years	18,996		19,889
Agency-guaranteed residential mortgage-backed securities	Agency-guaranteed residential mortgage-backed securities	288,830		292,343		Agency-guaranteed residential mortgage-backed securities	140,019		144,310
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities		—		17,078
Agency-guaranteed collateralized mortgage obligations						Agency-guaranteed collateralized mortgage obligations	145,061		145,826

Interest-only GNMA securities						Interest-only GNMA securities	—		14,396

Total debt securities	Total debt securities	$	573,492	$	606,619	Total debt securities	$	627,562	$	679,154

~~At September 30, 2019, there were 0 available-for-sale debt securities in an unrealized loss position.~~

Gross unrealized losses and fair value of Customers' ~~available-for-sale~~available for sale debt securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at ~~December 31, 2018~~June 30, 2020 were as follows:



	June 30, 2020
	Less Than 12 Months						12 Months or More						Total
(amounts in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale debt securities:


Corporate notes	4,961		(39)		—		—		4,961		(39)

Total	$	4,961	$	(39)	$	—	$	—	$	4,961	$	(39)

At June 30, 2020, there was 1 available for sale debt security with unrealized losses in the less-than-twelve-month category and 0 available for sale debt securities with unrealized losses in the twelve-month-or-more category. The unrealized loss was principally due to changes in market interest rates that resulted in a negative impact on the respective note's fair value. All amounts related to the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell the security, and it is not more likely than not that Customers will be required to sell the security before recovery of the amortized cost basis. At December 31, 2019, there were 0 available for sale debt securities in an unrealized loss position.

December 31, 2018
Less Than 12 Months 12 Months or More Total
(amounts in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Available-for-sale debt securities:
Agency-guaranteed residential mortgage-backed securities $ 305,374 $ (5,893) $ — $ — $ 305,374 $ (5,893)
Corporate notes 310,036 (24,407) — — 310,036 (24,407)
Total $ 615,410 $ (30,300) $ — $ — $ 615,410 $ (30,300)

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers Bank had pledged investment securities aggregating ~~$21.8~~$16.9 million and ~~$23.0~~$20.4 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.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, no securities holding of any one issuer, other than the U.S. Government and its agencies, amounted to greater than 10% of shareholders' equity.

~~Table~~Tab le of ~~Contents~~Contents

NOTE 6 – LOANS HELD FOR SALE

The composition of loans held for sale as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was as follows:


		September 30, 2019		December 31, 2018
(amounts in thousands)	(amounts in thousands)					(amounts in thousands)	June 30, 2020		December 31, 2019
Commercial loans:	Commercial loans:					Commercial loans:

Multi-family loans, at lower of cost or fair value	Multi-family loans, at lower of cost or fair value	$	499,774	$	—	Multi-family loans, at lower of cost or fair value	$	441,732	$	482,873
Commercial mortgage loans, at lower of cost or fair value						Commercial mortgage loans, at lower of cost or fair value	17,600		—
Total commercial loans held for sale	Total commercial loans held for sale	499,774		—		Total commercial loans held for sale	459,332		482,873
Consumer loans:	Consumer loans:					Consumer loans:
Home equity conversion mortgages, at lower of cost or fair value	Home equity conversion mortgages, at lower of cost or fair value	1,325		—		Home equity conversion mortgages, at lower of cost or fair value	1,325		1,325
Residential mortgage loans, at fair value	Residential mortgage loans, at fair value	1,755		1,507		Residential mortgage loans, at fair value	3,507		2,130
Total consumer loans held for sale	Total consumer loans held for sale	3,080		1,507		Total consumer loans held for sale	4,832		3,455
Loans held for sale	Loans held for sale	$	502,854	$	1,507	Loans held for sale	$	464,164	$	486,328

~~Effective September 30, 2019, Customers transferred $499.8 million of multi-family loans from loans receivable (held for investment) to~~Total loans held for ~~sale. Customers transferred these loans at their carrying value, which was lower than the estimated fair value at the time~~sale as of ~~transfer.~~

June 30, 2020 and December 31, 2019 included NPLs of $18.9 million and $1.3 million, respectively.

NOTE 7 — LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES ON LOANS AND ~~LEASE LOSSES~~LEASES

The following table presents loans and leases receivable as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


(amounts in thousands)	(amounts in thousands)	September 30, 2019		December 31, 2018		(amounts in thousands)	June 30, 2020		December 31, 2019
Loans receivable, mortgage warehouse, at fair value		$	2,438,530	$	1,405,420
Loans and leases receivable, mortgage warehouse, at fair value						Loans and leases receivable, mortgage warehouse, at fair value	$	2,793,164	$	2,245,758
Loans receivable, PPP						Loans receivable, PPP	4,760,427		—
Loans receivable:	Loans receivable:					Loans receivable:
Commercial:	Commercial:					Commercial:
Multi-family	Multi-family	2,300,244		3,285,297		Multi-family	1,581,839		1,907,331
Commercial and industrial (including owner occupied commercial real estate) ⁽¹⁾		2,363,599		1,951,277
Commercial and industrial ⁽¹⁾						Commercial and industrial ⁽¹⁾	2,099,442		1,891,152
Commercial real estate owner occupied						Commercial real estate owner occupied	544,772		551,948
Commercial real estate non-owner occupied	Commercial real estate non-owner occupied	1,268,557		1,125,106		Commercial real estate non-owner occupied	1,244,773		1,222,772
Construction	Construction	61,200		56,491		Construction	128,834		117,617
Total commercial loans and leases receivable	Total commercial loans and leases receivable	5,993,600		6,418,171		Total commercial loans and leases receivable	5,599,660		5,690,820
Consumer:	Consumer:					Consumer:
Residential real estate	Residential real estate	628,786		566,561		Residential real estate	348,109		382,634
Manufactured housing	Manufactured housing	72,616		79,731		Manufactured housing	66,865		71,359
Other consumer	Other consumer	643,553		74,035		Other consumer	1,257,813		1,174,175
Total consumer loans receivable	Total consumer loans receivable	1,344,955		720,327		Total consumer loans receivable	1,672,787		1,628,168
Loans and leases receivable		7,338,555		7,138,498
Deferred (fees) costs and unamortized (discounts) premiums, net		(2,318)		(424)
Allowance for loan and lease losses		(51,053)		(39,972)
Total loans and leases receivable, net of allowance for loan and lease losses		$	9,723,714	$	8,503,522
Loans and leases receivable ⁽²⁾						Loans and leases receivable ⁽²⁾	7,272,447		7,318,988

Allowance for credit losses						Allowance for credit losses	(159,905)		(56,379)
Total loans and leases receivable, net of allowance for credit losses						Total loans and leases receivable, net of allowance for credit losses	$	14,666,133	$	9,508,367

(1)Includes direct finance equipment leases of ~~$75.2~~$96.4 million and ~~$54.5~~$89.2 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(83.1) million and $2.1 million at June 30, 2020 and December 31, 2019, respectively.

Customers' total loans and leases receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at fair value and loans and leases receivable which are predominately reported at their outstanding unpaid principal balance, net of charge-offs and deferred costs and fees and unamortized premiums and discounts and are evaluated for impairment.

The total amount of accrued interest recorded for total loans was $47.1 million and $34.8 million at June 30, 2020 and December 31, 2019, respectively, and is presented in accrued interest receivable in the consolidated balance sheet. At June 30, 2020, there were $55.9 million of individually evaluated loans that were collateral-dependent. Substantially all individually evaluated loans are collateral-dependent and consisted primarily of commercial and industrial, commercial real estate, and residential real estate loans.

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Collateral-dependent commercial and industrial loans were secured by accounts receivable, inventory and equipment; collateral-dependent commercial real estate loans were secured by commercial real estate assets; and residential real estate loans were secured by residential real estate assets.

Loans receivable, PPP:

On March 27, 2020, the CARES Act was signed into law and created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers had $4.8 billion of PPP loans outstanding as of June 30, 2020, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $11.7 million for the three and six months ended June 30, 2020, respectively.

Loans receivable, mortgage warehouse, at fair value:

Mortgage warehouse loans consist of commercial loans to mortgage companies. These mortgage warehouse lending transactions are subject to master repurchase agreements. As a result of the contractual provisions, for accounting purposes control of the underlying mortgage loan has not transferred and the rewards and risks of the mortgage loans are not assumed by Customers. The mortgage warehouse loans ~~receivable~~ are designated as loans held for investment 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 mortgage loans and receives proceeds directly from third party investors when the underlying mortgage loans are sold into the secondary market. 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 under 30 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, all of Customers' commercial mortgage warehouse loans were current in terms of payment. As these loans are reported at their fair value, they do not have an ~~allowance for loan and lease loss~~ACL and are therefore excluded from ~~ALLL-related~~ACL-related disclosures.

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Loans and leases receivable:

The following tables summarize loans and leases receivable by loan and lease type and performance status as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


		September 30, 2019																											June 30, 2020
(amounts in thousands)	(amounts in thousands)	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 and leases ⁽⁴⁾		(amounts in thousands)	30-59 Days past due		60-89 Days past due		90 Days or more past due		Total past due		Loans and leases not past due ⁽²⁾		Total loans and leases⁽³⁾
Multi-family	Multi-family	$	3,662	$	—	$	3,662	$	—	$	2,294,926	$	1,656	$	2,300,244	Multi-family	$	—	$	16,790	$	7,013	$	23,803	$	1,558,036	$	1,581,839
Commercial and industrial	Commercial and industrial	860		—		860		5,314		1,881,586		374		1,888,134		Commercial and industrial	523		123		9,974		10,620		2,088,822		2,099,442

Commercial real estate owner occupied	Commercial real estate owner occupied	686		—		686		2,068		465,934		6,777		475,465		Commercial real estate owner occupied	—		4,888		4,022		8,910		535,862		544,772
Commercial real estate non-owner occupied	Commercial real estate non-owner occupied	—		—		—		83		1,264,361		4,113		1,268,557		Commercial real estate non-owner occupied	97		—		30,257		30,354		1,214,419		1,244,773
Construction	Construction	—		—		—		—		61,200		—		61,200		Construction	—		—		—		—		128,834		128,834
Residential real estate	Residential real estate	2,485		—		2,485		6,093		616,533		3,675		628,786		Residential real estate	8,631		441		7,857		16,929		331,180		348,109
Manufactured housing ⁽⁵⁾	Manufactured housing ⁽⁵⁾	3,153		1,943		5,096		1,567		64,362		1,591		72,616		Manufactured housing ⁽⁵⁾	1,172		—		5,069		6,241		60,624		66,865
Other consumer	Other consumer	3,810		—		3,810		1,140		638,400		203		643,553		Other consumer	11,415		—		4,887		16,302		1,241,511		1,257,813
Total	Total	$	14,656	$	1,943	$	16,599	$	16,265	$	7,287,302	$	18,389	$	7,338,555	Total	$	21,838	$	22,242	$	69,079	$	113,159	$	7,159,288	$	7,272,447

		December 31, 2018
(amounts in thousands)		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 and leases ⁽⁴⁾
Multi-family		$	—	$	—	$	—	$	1,155	$	3,282,452	$	1,690	$	3,285,297
Commercial and industrial		1,914		—		1,914		17,764		1,353,586		536		1,373,800
Commercial real estate owner occupied		193		—		193		1,037		567,809		8,438		577,477
Commercial real estate non-owner occupied		1,190		—		1,190		129		1,119,443		4,344		1,125,106
Construction		—		—		—		—		56,491		—		56,491
Residential real estate		5,940		—		5,940		5,605		550,679		4,337		566,561
Manufactured housing ⁽⁵⁾		3,926		2,188		6,114		1,693		69,916		2,008		79,731
Other consumer		200		—		200		111		73,503		221		74,035
Total		$	13,363	$	2,188	$	15,551	$	27,494	$	7,073,879	$	21,574	$	7,138,498


	December 31, 2019
(amounts in thousands)	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 ⁽⁴⁾		Total loans and leases ⁽⁵⁾
Multi-family	$	2,133	—		$	2,133	$	4,117	$	1,901,336	$	1,688	$	1,909,274
Commercial and industrial	2,395		—		2,395		4,531		1,882,700		354		1,889,980
Commercial real estate owner occupied	5,388		—		5,388		1,963		537,992		6,664		552,007
Commercial real estate non-owner occupied	8,034		—		8,034		76		1,211,892		3,527		1,223,529
Construction	—		—		—		—		118,418		—		118,418
Residential real estate	5,924		—		5,924		6,128		359,491		3,471		375,014
Manufactured housing	3,699		1,794		5,493		1,655		61,649		1,601		70,398
Other consumer	5,756		$	—	5,756		1,551		1,170,793		183		1,178,283
Total	$	33,329	$	1,794	$	35,123	$	20,021	$	7,244,271	$	17,488	$	7,316,903

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

(2)Loans and leases where next payment due is less than 30 days from the report date. The June 30, 2020 table excludes PPP loans of $4.8 billion which are all current as of June 30, 2020.

(3)Includes purchased credit deteriorated loans of $15.7 million at June 30, 2020.

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

~~(4)~~(5)Amounts exclude deferred costs and fees and unamortized premiums and ~~discounts, and the ALLL.~~

~~(5)~~Certain manufactured housing loans purchased in 2010 are supported by cash reserves held at the Bank of $24 thousand and $0.5 million at September 30, 2019 and December 31, 2018, respectively, which are used to fund past-due payments when the loan becomes 90 days or more delinquent. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.discounts.

As of ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank had $0.1 million and $0.2 million, respectively, of residential real estate held in OREO. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank had initiated foreclosure proceedings on ~~$0.8~~$0.7 million and ~~$2.1~~$0.9 million, respectively, in loans secured by residential real estate.

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Nonaccrual Loans and Leases

The following table presents the amortized cost of loans and leases on nonaccrual status.


	June 30, 2020 ⁽¹⁾										December 31, 2019 ⁽²⁾
(amounts in thousands)	Nonaccrual loans with no related allowance		Nonaccrual loans with related allowance		Total nonaccrual loans		Nonaccrual loans with no related allowance		Nonaccrual loans with related allowance		Total nonaccrual loans
Multi-family	$	4,004	$	3,009	$	7,013	$	4,117	$	—	$	4,117
Commercial and industrial	9,000		974		9,974		3,083		1,448		4,531

Commercial real estate owner occupied	3,933		89		4,022		1,109		854		1,963
Commercial real estate non-owner occupied	30,257		—		30,257		76		—		76
Construction	—		—		—		—		—		—
Residential real estate	7,857		—		7,857		4,559		1,569		6,128
Manufactured housing	536		2,795		3,331		—		1,655		1,655
Other consumer	1,808		3,079		4,887		140		1,411		1,551
Total	$	57,395	$	9,946	$	67,341	$	13,084	$	6,937	$	20,021

(1) Presented at amortized cost basis.

(2) Amounts exclude deferred costs and fees and unamortized premiums and discounts.

Interest income of $0.6 million and $0.3 million was recognized on nonaccrual loans for the three months ended June 30, 2020 and 2019, respectively. Interest income of $0.7 million and $0.5 million was recognized on nonaccrual loans for the six months ended June 30, 2020 and 2019, respectively.

Allowance for ~~loan~~credit losses on loans and ~~lease losses~~leases

The changes in the ~~ALLL~~allowance for credit losses on loans and leases for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, and the loans and leases and ALLL by loan and lease type based on impairment-evaluation method as of September 30,~~ 2019 ~~and December 31, 2018~~ are presented in the tables below.

Three Months Ended September 30, 2019 Multi-family Commercial and industrial Commercial real estate owner occupied Commercial real estate non-owner occupied Construction Residential real estate Manufactured housing Other consumer Total
(amounts in thousands)
Ending Balance,
June 30, 2019 $ 9,926 $ 13,736 $ 3,360 $ 6,159 $ 649 $ 4,168 $ 123 $ 10,267 $ 48,388
Charge-offs — (349) (45) — — — — (1,806) (2,200)
Recoveries — 369 10 — 8 5 — 47 439
Provision for loan and lease losses (2,428) 2,119 (435) 281 1 (90) 904 4,074 4,426
Ending Balance,
September 30, 2019 $ 7,498 $ 15,875 $ 2,890 $ 6,440 $ 658 $ 4,083 $ 1,027 $ 12,582 $ 51,053
Nine Months Ended
September 30, 2019
Ending Balance,
December 31, 2018 $ 11,462 $ 12,145 $ 3,320 $ 6,093 $ 624 $ 3,654 $ 145 $ 2,529 $ 39,972
Charge-offs (541) (532) (119) — — (109) — (3,493) (4,794)
Recoveries 7 826 235 — 128 20 — 120 1,336
Provision for loan and lease losses (3,430) 3,436 (546) 347 (94) 518 882 13,426 14,539
Ending Balance,
September 30, 2019 $ 7,498 $ 15,875 $ 2,890 $ 6,440 $ 658 $ 4,083 $ 1,027 $ 12,582 $ 51,053
As of September 30, 2019
(amounts in thousands)
Loans and leases receivable:
Individually evaluated for impairment $ — $ 5,375 $ 2,084 $ 83 $ — $ 9,057 $ 9,929 $ 1,140 $ 27,668
Collectively evaluated for impairment 2,298,588 1,882,385 466,604 1,264,361 61,200 616,054 61,096 642,210 7,292,498
Loans acquired with credit deterioration 1,656 374 6,777 4,113 — 3,675 1,591 203 18,389
Total loans and leases receivable $ 2,300,244 $ 1,888,134 $ 475,465 $ 1,268,557 $ 61,200 $ 628,786 $ 72,616 $ 643,553 $ 7,338,555
Allowance for loan and lease losses:
Individually evaluated for impairment $ — $ 167 $ — $ — $ — $ 40 $ 123 $ 65 $ 395
Collectively evaluated for impairment 7,498 15,448 2,882 4,555 658 3,727 904 12,362 48,034
Loans acquired with credit deterioration — 260 8 1,885 — 316 — 155 2,624
Total allowance for loan and lease losses $ 7,498 $ 15,875 $ 2,890 $ 6,440 $ 658 $ 4,083 $ 1,027 $ 12,582 $ 51,053


Three Months Ended June 30, 2020	Multi-family		Commercial and industrial		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Construction		Residential real estate		Manufactured housing		Other consumer		Total
(amounts in thousands)
Beginning balance, at March 31, 2020	$	8,750	$	18,806	$	8,527	$	18,530	$	1,934	$	4,180	$	4,987	$	83,569	$	149,283


Charge-offs	—		(20)		—		(2,801)		—		—		—		(8,304)		(11,125)
Recoveries	—		25		2		—		113		26		—		635		801
Provision for credit loss expense	5,947		(6,509)		2,876		10,764		3,250		344		1,027		3,247		20,946
Ending Balance, June 30, 2020	$	14,697	$	12,302	$	11,405	$	26,493	$	5,297	$	4,550	$	6,014	$	79,147	$	159,905
Six Months Ended June 30, 2020
Ending Balance, December 31, 2019	$	6,157	$	15,556	$	2,235	$	6,243	$	1,262	$	3,218	$	1,060	$	20,648	$	56,379
Cumulative effect of change in accounting principle	2,171		759		5,773		7,918		(98)		1,518		3,802		57,986		79,829
Charge-offs	—		(117)		—		(15,598)		—		—		—		(14,550)		(30,265)
Recoveries	—		79		5		—		116		55		—		975		1,230
Provision for loan and lease losses	6,369		(3,975)		3,392		27,930		4,017		(241)		1,152		14,088		52,732
Ending Balance, June 30, 2020	$	14,697	$	12,302	$	11,405	$	26,493	$	5,297	$	4,550	$	6,014	$	79,147	$	159,905

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Three Months Ended September 30, 2018 Multi-family Commercial and industrial Commercial real estate owner occupied Commercial real estate non-owner occupied Construction Residential real estate Manufactured housing Other consumer Total
(amounts in thousands)
Ending Balance,
June 30, 2018 $ 12,069 $ 12,258 $ 2,988 $ 6,698 $ 992 $ 2,908 $ 149 $ 226 $ 38,288
Charge-offs — (90) — — — — — (437) (527)
Recoveries — 30 — 5 11 6 — 4 56
Provision for loan and lease losses (240) 516 164 (254) 59 987 (55) 1,747 2,924
Ending Balance,
September 30, 2018 $ 11,829 $ 12,714 $ 3,152 $ 6,449 $ 1,062 $ 3,901 $ 94 $ 1,540 $ 40,741
Nine Months Ended
September 30, 2018
Ending Balance,
December 31, 2017 $ 12,168 $ 10,918 $ 3,232 $ 7,437 $ 979 $ 2,929 $ 180 $ 172 $ 38,015
Charge-offs — (314) (501) — — (407) — (1,155) (2,377)
Recoveries — 205 326 5 231 69 — 10 846
Provision for loan and lease losses (339) 1,905 95 (993) (148) 1,310 (86) 2,513 4,257
Ending Balance,
September 30, 2018 $ 11,829 $ 12,714 $ 3,152 $ 6,449 $ 1,062 $ 3,901 $ 94 $ 1,540 $ 40,741
As of December 31, 2018
(amounts in thousands)
Loans and leases receivable:
Individually evaluated for impairment $ 1,155 $ 17,828 $ 1,069 $ 129 $ — $ 8,631 $ 10,195 $ 111 $ 39,118
Collectively evaluated for impairment 3,282,452 1,355,436 567,970 1,120,633 56,491 553,593 67,528 73,703 7,077,806
Loans acquired with credit deterioration 1,690 536 8,438 4,344 — 4,337 2,008 221 21,574
Total loans and leases receivable $ 3,285,297 $ 1,373,800 $ 577,477 $ 1,125,106 $ 56,491 $ 566,561 $ 79,731 $ 74,035 $ 7,138,498
Allowance for loan and lease losses:
Individually evaluated for impairment $ 539 $ 261 $ 1 $ — $ — $ 41 $ 3 $ — $ 845
Collectively evaluated for impairment 10,923 11,516 3,319 4,161 624 3,227 89 2,390 36,249
Loans acquired with credit deterioration — 368 — 1,932 — 386 53 139 2,878
Total allowance for loan and lease losses $ 11,462 $ 12,145 $ 3,320 $ 6,093 $ 624 $ 3,654 $ 145 $ 2,529 $ 39,972


Three Months Ended June 30, 2019	Multi-family		Commercial and industrial		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Construction		Residential real estate		Manufactured housing		Other consumer		Total
(amounts in thousands)
Ending Balance, March 31, 2019	$	10,630	$	12,647	$	3,425	$	6,015	$	584	$	6,572	$	117	$	3,689	$	43,679
Charge-offs	—		(183)		(66)		—		—		(69)		—		(932)		(1,250)

Recoveries	7		338		97		—		114		8		—		49		613
Provision for loan and lease losses	(711)		934		(96)		144		(49)		(2,343)		6		7,461		5,346
Ending Balance, June 30, 2019	$	9,926	$	13,736	$	3,360	$	6,159	$	649	$	4,168	$	123	$	10,267	$	48,388
Six Months Ended June 30, 2019
Ending Balance, December 31, 2018	$	11,462	$	12,145	$	3,320	$	6,093	$	624	$	3,654	$	145	$	2,529	$	39,972
Charge-offs	(541)		(183)		(74)		—		—		(109)		—		(1,687)		(2,594)

Recoveries	7		457		225		—		120		15		—		73		897
Provision for loan and lease losses	(1,002)		1,317		(111)		66		(95)		608		(22)		9,352		10,113
Ending Balance, June 30, 2019	$	9,926	$	13,736	$	3,360	$	6,159	$	649	$	4,168	$	123	$	10,267	$	48,388

At June 30, 2020, the ACL was $159.9 million, an increase of $23.7 million from the January 1, 2020 balance of $136.2 million. The increase resulted primarily from the impact of reserve build for the COVID-19 pandemic including the change in macroeconomic forecasts, an increase in net charge-offs, mostly attributed to the commercial real estate non-owner occupied and other consumer portfolios, and portfolio growth mainly in the other consumer portfolio. Commercial real estate non-owner occupied charge-offs are attributable to two collateral dependent loans. Other consumer charge-offs are attributable to delinquencies and defaults of originated and purchased unsecured other consumer loans through arrangements with fintech companies and other market place lenders.

~~Table~~PPP loans include an embedded credit enhancement guarantee from the SBA, which guarantees 100% of ~~Contents~~

~~Impaired Loans - Individually Evaluated~~all principal and interest owed by the borrower. Therefore, Customers did not include an ACL for ~~Impairment~~

~~The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for impaired~~PPP loans ~~that were individually evaluated for impairment~~ as of ~~September~~June 30, 2019 and December 31, 2018 and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2019 and 2018. Customers had no impaired lease receivables as of September 30, 2019 and December 31, 2018, respectively. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.

September 30, 2019 Three Months Ended
September 30, 2019 Nine Months Ended
September 30, 2019
(amounts in thousands) Recorded investment net of charge-offs Unpaid principal balance Related allowance Average recorded investment Interest income recognized Average recorded investment Interest income recognized
With no related allowance recorded:
Multi-family $ — $ — $ — $ — $ 149 $ 499 $ 149
Commercial and industrial 4,602 6,245 — 4,631 991 8,528 1,009
Commercial real estate owner occupied 2,068 2,849 — 1,425 74 1,111 95
Commercial real estate non-owner occupied 83 194 — 89 7 102 7
Residential real estate 4,686 5,007 — 4,526 21 4,654 82
Manufactured housing 4,496 4,496 — 7,229 97 8,656 335
Other consumer 195 195 — 164 76 137 84
With an allowance recorded:
Multi-family — — — — — 289 —
Commercial and industrial 773 773 167 3,358 — 4,277 97
Commercial real estate owner occupied 16 16 — 91 — 131 1
Residential real estate 4,371 4,371 40 4,057 47 3,937 101
Manufactured housing 5,433 5,433 123 2,799 45 1,483 49
Other consumer 945 945 65 586 — 293 —
Total $ 27,668 $ 30,524 $ 395 $ 28,955 $ 1,507 $ 34,097 $ 2,009

December 31, 2018 Three Months Ended
September 30, 2018 Nine Months Ended
September 30, 2018
(amounts in thousands) Recorded investment net of charge-offs Unpaid principal balance Related allowance Average recorded investment Interest income recognized Average recorded investment Interest income recognized
With no related allowance recorded:
Multi-family $ — $ — $ — $ 1,343 $ — $ 672 $ 8
Commercial and industrial 13,660 15,263 — 7,765 166 7,623 168
Commercial real estate owner occupied 1,037 1,766 — 711 — 711 —
Commercial real estate non-owner occupied 129 241 — 1,347 — 774 8
Residential real estate 4,842 5,128 — 4,281 23 3,952 25
Manufactured housing 10,027 10,027 — 10,147 144 10,011 421
Other consumer 111 111 — 103 1 83 1
With an allowance recorded:
Multi-family 1,155 1,155 539 — — — —
Commercial and industrial 4,168 4,351 261 5,787 27 7,089 39
Commercial real estate owner occupied 32 32 1 336 9 546 11
Residential real estate 3,789 3,789 41 4,398 61 4,760 124
Manufactured housing 168 168 3 227 4 225 10
Total $ 39,118 $ 42,031 $ 845 $ 36,445 $ 435 $ 36,446 $ 815

~~Table of Contents~~

2020.

Troubled Debt Restructurings

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were ~~$13.5~~$14.8 million and ~~$19.2~~$13.3 million, respectively, in loans reported as TDRs. TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum performance requirement of six months, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status. Modifications of PCI loans that are accounted for within loan pools in accordance with the accounting standards for PCI loans do not result in the removal of these loans from the pool even if the modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs. Customers had 0 lease receivables that had been restructured as a TDR as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The ~~following table presents total~~CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs ~~based on~~under U.S GAAP. For COVID-19 related loan ~~type~~modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. At June 30, 2020, commercial and ~~accrual status at September 30, 2019~~consumer deferments related to COVID-19 were $974.0 million and ~~December 31, 2018. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.~~

September 30, 2019 December 31, 2018
(amounts in thousands) Accruing TDRs Nonaccrual TDRs Total Accruing TDRs Nonaccrual TDRs Total
Commercial and industrial $ 61 $ 29 $ 90 $ 64 $ 5,273 $ 5,337
Commercial real estate owner occupied 16 — 16 32 — 32
Residential real estate 2,964 639 3,603 3,026 667 3,693
Manufactured housing 8,362 1,424 9,786 8,502 1,620 10,122
Other consumer — 11 11 — 12 12
Total TDRs $ 11,403 $ 2,103 $ 13,506 $ 11,624 $ 7,572 $ 19,196
$81.1 million, respectively.

The following table presents loans modified in a TDR by type of concession for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. There were 0 modifications that involved forgiveness of debt for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


		Three Months Ended September 30,										Nine Months Ended September 30,												Three Months Ended June 30,				Six Months Ended June 30,
		2019				2018					2019						2018				2020				2019		2020	2019
(dollars in thousands)	(dollars in thousands)	Number of loans	Recorded investment		Number of loans	Recorded investment		Number of loans	Recorded investment		Number of loans	Recorded investment		(dollars in thousands)	Number of loans	Recorded investment		Number of loans	Recorded investment		Number of loans	Recorded investment		Number of loans	Recorded investment
Extensions of maturity	Extensions of maturity	—	$	—	—	$	—	2	$	514	1	$	56	Extensions of maturity	2	$	140	—	$	—	6	$	385	2	$	514
Interest-rate reductions	Interest-rate reductions	7	196		8	473		19	628		32	1,402		Interest-rate reductions	20	843		2	47		32	1,373		12	432
Total	Total	7	$	196	8	$	473	21	$	1,142	33	$	1,458	Total	22	$	983	2	$	47	38	$	1,758	14	$	946

~~The following table provides, by loan type, the number~~

Tab le of ~~loans modified in TDRs and the related recorded investment for the three and nine months ended September 30, 2019 and 2018.~~Contents

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(dollars in thousands) Number of loans Recorded investment Number of loans Recorded investment Number of loans Recorded investment Number of loans Recorded investment
Commercial and industrial — $ — — $ — 1 $ 431 — $ —
Manufactured housing 7 196 7 321 19 628 30 1,093
Residential real estate — — 1 152 1 83 2 352
Other consumer — — — — — — 1 13
Total loans 7 $ 196 8 $ 473 21 $ 1,142 33 $ 1,458

As of ~~September~~June 30, ~~2019,~~2020, there were 0 commitments to lend additional funds to debtors whose loans have been modified in TDRs. As of December 31, ~~2018, except for 1 commercial and industrial loan with an outstanding commitment of $1.5 million,~~2019, there were ~~no other~~0 commitments to lend additional funds to debtors whose loans have been modified in TDRs.

~~Table of Contents~~

The following table presents, by loan type, the number of loans modified in TDRs and the related recorded investment, for which there was a payment default within twelve months following the modification:


		September 30, 2019				September 30, 2018						June 30, 2020			June 30, 2019
(dollars in thousands)	(dollars in thousands)	Number of loans	Recorded investment		Number of loans	Recorded investment		(dollars in thousands)	Number of loans	Recorded investment		Number of loans	Recorded investment
Manufactured housing	Manufactured housing	3	$	76	—	$	—	Manufactured housing	—	$	—	3	$	108
Commercial and industrial								Commercial and industrial	—	—		1	—
Commercial real estate owner occupied								Commercial real estate owner occupied	1	958		—	—
Residential real estate	Residential real estate	1	82		—	—		Residential real estate	4	313		—	—

Total loans	Total loans	4	$	158	—	$	—	Total loans	5	$	1,271	4	$	108

Loans modified in TDRs are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of ~~ALLL. During~~ACL.

Purchased Credit-Deteriorated Loans

Customers adopted ASC 326 using the ~~three~~prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and ~~nine months ended September~~accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020. As of June 30, ~~2019, allowances totaling $3 thousand and $6 thousand, respectively, were recorded on 4 and 9 loans, respectively, that had been modified in TDRs. There were 0 allowances recorded as a result~~2020, the amortized cost basis of ~~TDR modifications during the three and nine months ended September 30, 2018.~~PCD assets amounted to $15.7 million.

~~Purchased-Credit-Impaired Loans~~

~~The changes in accretable yield related to PCI loans for the three and nine months ended September 30, 2019 and 2018 were as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands) 2019 2018 2019 2018
Accretable yield balance, beginning of period $ 5,807 $ 7,403 $ 6,178 $ 7,825
Accretion to interest income (256) (310) (911) (1,164)
Reclassification from nonaccretable difference and disposals, net (67) (4) 217 428
Accretable yield balance, end of period $ 5,484 $ 7,089 $ 5,484 $ 7,089

Credit Quality Indicators

The ~~ALLL~~ACL represents management's estimate of ~~probable~~expected losses in Customers' loans and leases receivable portfolio, excluding commercial mortgage warehouse loans reported at fair value pursuant to a fair value option ~~election.~~election and PPP loans receivable. Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.

To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loan portfolios, and ~~for purposes of analyzing historical loss rates used~~as an input in the ~~determination of the ALLL~~ACL lifetime loss rate model for the ~~respective loan portfolios,~~C&I portfolio, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans and leases. The ~~2018~~2019 Form 10-K describes Customers Bancorp’s risk rating grades.

~~Table of Contents~~

Risk ratings are not established for certain consumer loans, including residential real estate, ~~other consumer loans,~~ home equity, manufactured housing, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history ~~and~~ through the monitoring of delinquency levels and trends and are classified as performing and non-performing. The following tables present the credit ratings of loans and leases receivable as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~

September 30, 2019
(amounts in thousands) Multi-family Commercial and industrial Commercial real estate owner occupied Commercial real estate non-owner occupied Construction Residential real estate Manufactured housing Other consumer
Total ⁽³⁾
Pass/Satisfactory $ 2,259,366 $ 1,836,857 $ 459,549 $ 1,200,664 $ 61,200 $ — $ — $ — $ 5,817,636
Special Mention 21,449 27,454 8,342 11,633 — — — — 68,878
Substandard 19,429 23,823 7,574 56,260 — — — — 107,086
Performing ⁽¹⁾
— — — — — 620,208 65,953 638,603 1,324,764
Non-performing ⁽²⁾
— — — — — 8,578 6,663 4,950 20,191
Total $ 2,300,244 $ 1,888,134 $ 475,465 $ 1,268,557 $ 61,200 $ 628,786 $ 72,616 $ 643,553 $ 7,338,555
2019. PPP loans are excluded in the tables below as these loans are fully guaranteed by the SBA.

December 31, 2018
(amounts in thousands) Multi-family Commercial and industrial Commercial real estate owner occupied Commercial real estate non-owner occupied Construction Residential real estate Manufactured housing Other consumer
Total ⁽³⁾
Pass/Satisfactory $ 3,201,822 $ 1,306,466 $ 562,639 $ 1,054,493 $ 56,491 $ — $ — $ — $ 6,181,911
Special Mention 55,696 30,551 9,730 30,203 — — — — 126,180
Substandard 27,779 36,783 5,108 40,410 — — — — 110,080
Performing ⁽¹⁾
— — — — — 555,016 71,924 73,724 700,664
Non-performing ⁽²⁾
— — — — — 11,545 7,807 311 19,663
Total $ 3,285,297 $ 1,373,800 $ 577,477 $ 1,125,106 $ 56,491 $ 566,561 $ 79,731 $ 74,035 $ 7,138,498

Tab le of Contents


	Term Loans Amortized Cost Basis by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total






Multi-family loans:
Pass	$	124,920	$	23,534	$	170,856	$	417,942	$	264,780	$	507,568	$	—	$	—	$	1,509,600
Special mention	—		—		—		19,509		1,960		17,753		—		—		39,222
Substandard	—		—		—		12,006		13,862		7,149		—		—		33,017
Doubtful	—		—		—		—		—		—		—		—		—
Total multi-family loans	$	124,920	$	23,534	$	170,856	$	449,457	$	280,602	$	532,470	$	—	$	—	$	1,581,839
Commercial and industrial loans and leases:
Pass	$	439,083	$	462,717	$	152,557	$	109,701	$	52,470	$	94,383	$	698,721	$	—	$	2,009,632
Special mention	—		7,258		2,297		17,402		116		25		17,957		—		45,055
Substandard	6,360		5,327		12,776		1,663		7,530		3,042		8,057		—		44,755
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans and leases	$	445,443	$	475,302	$	167,630	$	128,766	$	60,116	$	97,450	$	724,735	$	—	$	2,099,442
Commercial real estate owner occupied loans:
Pass	$	31,240	$	184,684	$	86,611	$	72,708	$	48,643	$	95,921	$	1,628	$	—	$	521,435
Special mention	—		—		480		9,484		—		392		—		—		10,356
Substandard	—		—		—		350		2,255		10,376		—		—		12,981
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial real estate owner occupied loans	$	31,240	$	184,684	$	87,091	$	82,542	$	50,898	$	106,689	$	1,628	$	—	$	544,772






Commercial real estate non-owner occupied:
Pass	$	117,101	$	117,140	$	117,600	$	249,173	$	199,822	$	376,641	$	—	$	—	$	1,177,477
Special mention	—		—		—		—		—		10,477		—		—		10,477
Substandard	—		—		—		—		2,437		26,461		—		—		28,898
Doubtful	—		—		27,921		—		—		—		—		—		27,921
Total commercial real estate non-owner occupied loans	$	117,101	$	117,140	$	145,521	$	249,173	$	202,259	$	413,579	$	—	$	—	$	1,244,773
Construction:
Pass	$	4,862	$	88,550	$	23,358	$	—	$	9,803	$	—	$	2,261	$	—	$	128,834
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total construction loans	$	4,862	$	88,550	$	23,358	$	—	$	9,803	$	—	$	2,261	$	—	$	128,834
Total commercial loans and leases receivable	$	723,566	$	889,210	$	594,456	$	909,938	$	603,678	$	1,150,188	$	728,624	$	—	$	5,599,660
Residential real estate loans:
Performing	$	2,349	$	54,663	$	64,362	$	67,128	$	46,654	$	83,669	$	21,803	$	—	$	340,628
Non-performing	66		—		857		823		865		4,441		429		—		7,481
Total residential real estate loans	$	2,415	$	54,663	$	65,219	$	67,951	$	47,519	$	88,110	$	22,232	$	—	$	348,109
Manufactured housing loans:
Performing	$	—	$	311	$	640	$	80	$	43	$	62,072	$	—	$	—	$	63,146
Non-performing	—		—		—		—		—		3,719		—		—		3,719
Total manufactured housing loans	$	—	$	311	$	640	$	80	$	43	$	65,791	$	—	$	—	$	66,865
Other consumer loans:
Performing	$	165,436	$	943,581	$	135,926	$	6,034	$	648	$	1,292	$	32	$	—	$	1,252,949
Non-performing	243		3,610		853		23		—		135		—		—		4,864
Total other consumer loans	$	165,679	$	947,191	$	136,779	$	6,057	$	648	$	1,427	$	32	$	—	$	1,257,813
Total consumer loans	$	168,094	$	1,002,165	$	202,638	$	74,088	$	48,210	$	155,328	$	22,264	$	—	$	1,672,787
Loans and leases receivable	$	891,660	$	1,891,375	$	797,094	$	984,026	$	651,888	$	1,305,516	$	750,888	$	—	$	7,272,447

Tab le of Contents


	December 31, 2019
(amounts in thousands)	Multi-family		Commercial and industrial		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Construction		Residential real estate		Manufactured housing		Other consumer		Total ⁽³⁾
Pass/Satisfactory	$	1,816,200	$	1,841,074	$	536,777	$	1,129,838	$	118,418	$	—	$	—	$	—	$	5,442,307
Special Mention	69,637		26,285		8,286		6,949		—		—		—		—		111,157
Substandard	23,437		22,621		6,944		86,742		—		—		—		—		139,744
Performing ⁽¹⁾	—		—		—		—		—		362,962		63,250		1,170,976		1,597,188
Non-performing ⁽²⁾	—		—		—		—		—		12,052		7,148		7,307		26,507
Total	$	1,909,274	$	1,889,980	$	552,007	$	1,223,529	$	118,418	$	375,014	$	70,398	$	1,178,283	$	7,316,903

(1)Includes residential real estate, manufactured housing, and other consumer loans not assigned internal ratings.

(2)Includes residential real estate, manufactured housing, and other consumer loans that are past due and still accruing interest or on nonaccrual status.

(3)Excludes commercial mortgage warehouse loans reported at fair value.

Loan Purchases and Sales

Purchases and sales of loans were as follows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	2019		2018		2019		2018		(amounts in thousands)	2020		2019		2020		2019
Purchases ⁽¹⁾	Purchases ⁽¹⁾									Purchases ⁽¹⁾

Residential real estate	Residential real estate	$	—	$	25,807	$	105,858	$	303,181	Residential real estate	$	—	$	39,474	$	495	$	105,858

Other consumer ⁽²⁾	Other consumer ⁽²⁾	83,898		46,843		534,150		46,843		Other consumer ⁽²⁾	18,008		384,116		209,768		450,252
Total	Total	$	83,898	$	72,650	$	640,008	$	350,024	Total	$	18,008	$	423,590	$	210,263	$	556,110
Sales ⁽³⁾	Sales ⁽³⁾									Sales ⁽³⁾

Commercial and industrial ⁽⁴⁾		$	—	$	(6,691)	$	—	$	(23,840)
Commercial real estate owner occupied ⁽⁴⁾		—		(5,387)		—		(14,968)

Other consumer										Other consumer	—		—		1,822		—
Total	Total	$	—	$	(12,078)	$	—	$	(38,808)	Total	$	—	$	—	$	1,822	$	—

(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was ~~96.3%~~98.5% and ~~95.3%~~100.6% of loans outstanding for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The purchase price was ~~99.4%~~100.4% and ~~99.3%~~99.9% of loans outstanding for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

(2)Other consumer loan purchases for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of ~~origination or purchase.~~origination. Customers considers sub-prime borrowers to be those with FICO scores below 660.

(3)Amounts reported in the above table are the unpaid principal balance at time of sale. There were 0no loan sales ~~for~~in the three and ~~nine~~six months ended ~~September~~June 30, 2019. ~~For the three and nine months ended September 30, 2018, loan sales resulted in gains of $1.1 million and $3.4 million, respectively.~~

~~(4)Primarily sales of SBA loans.~~

~~Table of Contents~~

Loans Pledged as Collateral

Customers has pledged eligible real estate and commercial and industrial loans as collateral for ~~potential~~ borrowings from the FHLB and FRB in the amount of ~~$5.2~~$8.5 billion and ~~$5.4~~$4.6 billion at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The increase in loans pledged as collateral relates to $4.4 billion of PPP loans that were pledged to the FRB in accordance with borrowing from the PPPLF.

NOTE 8 — LEASES

Lessee

Customers has operating leases for its branches, LPOs, and administrative offices, with remaining lease terms ranging between ~~2 months~~1 month and 87 years. These operating leases comprise substantially all of Customers' obligations in which Customers is the lessee. Most lease agreements consist of initial lease terms ranging between 1 and 5 years, with options to renew the leases or extend the term up to 15 years at Customers' sole discretion. Some operating leases include variable lease payments that are based on an index or rate, such as the CPI. Variable lease payments are not included in the liability or right of use asset and are recognized in the period in which the obligation for those payments are incurred. Customers' operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. Pursuant to these agreements, Customers does not have any commitments that would meet the definition of a finance lease.

As most of Customers' operating leases do not provide an implicit rate, Customers utilized its incremental borrowing rate based on the information available at either the adoption of ASC 842 or the commencement date of the lease, whichever was later, when determining the present value of lease payments. ~~Customers does not present ROU assets and corresponding liabilities for operating leases for fiscal years prior to the adoption~~

Tab le of ~~this standard.~~Contents

~~A ROU asset of $23.8 million, net of $1.1 million in accrued rent, was recognized in exchange for lease liabilities of $24.9 million with the adoption of ASU 2016-02 on January 1, 2019.~~

The following table summarizes operating lease ROU assets and operating lease liabilities and their corresponding balance sheet location:

~~(amounts in thousands)~~

~~Classification~~

~~September 30, 2019~~

~~ASSETS~~

~~Operating lease ROU assets~~

~~Other assets~~

~~20,826~~

~~LIABILITIES~~

~~Operating lease liabilities~~

~~Other liabilities~~

~~22,002~~


(amounts in thousands)	Classification	June 30, 2020		December 31, 2019
ASSETS
Operating lease ROU assets	Other assets	$	20,570	$	20,232
LIABILITIES
Operating lease liabilities	Other liabilities	$	21,725	$	21,358

The following table summarizes operating lease cost and its corresponding income statement location for the periods presented:


			Three Months Ended September 30,		Nine Months Ended September 30,				Three Months Ended June 30,						Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	Classification	2019		2019		(amounts in thousands)	Classification	2020		2019		2020		2019
Operating lease cost ⁽¹⁾	Operating lease cost ⁽¹⁾	Occupancy expenses	$	1,470	$	4,400	Operating lease cost ⁽¹⁾	Occupancy expenses	$	1,474	$	1,462	$	2,954	$	2,931

(1) There were 0 variable lease costs for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, and sublease income for operating leases is immaterial.

Maturities of non-cancelable operating lease liabilities were as follows at ~~September~~June 30, ~~2019:~~2020:

(amounts in thousands) September 30, 2019
2019 $ 1,472
2020 5,504
2021 4,708
2022 4,079
2023 3,121
Thereafter 4,918
Total minimum payments 23,802
Less: interest 1,800
Present value of lease liabilities $ 22,002

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(amounts in thousands)	June 30, 2020
2020	$	2,794
2021	5,357
2022	4,744
2023	3,702
2024	2,613
Thereafter	3,001
Total minimum payments	22,211
Less: interest	486
Present value of lease liabilities	$	21,725

Customers isdoes not ~~currently~~have leases where it is involved with the construction or design of an underlying asset. Customers has legally binding minimum lease payments of ~~$2.7~~$0.3 million for leases signed but not yet commenced as of ~~September~~June 30, ~~2019.~~2020. Cash paid pursuant to the operating lease liability was $1.5 million and $3.0 million for the three and six months ended June 30, 2020, respectively. Cash paid pursuant to the operating lease liability was $1.4 million and ~~$4.2~~$2.8 million for the three and ~~nine~~six months ended ~~September~~June 30, 2019, ~~respectively, and is~~respectively. These payments were reported as cash flows used in operating activities in the statement of cash flows.

The following table summarizes the weighted average remaining lease term and discount rate for Customers' operating leases at ~~September~~June 30, ~~2019:~~


~~(amounts in thousands)~~	~~September 30, 2019~~
~~Weighted average remaining lease term (years)~~
~~Operating leases~~	~~5.2 years~~

~~Weighted average discount rate~~
~~Operating leases~~	~~2.92~~	%

~~Future minimum rental commitments pursuant to non-cancelable operating leases as of~~2020 and December 31, ~~2018, were as follows:~~2019:

(amounts in thousands) December 31, 2018
2019 $ 5,577
2020 5,135
2021 4,513
2022 3,885
2023 2,856
Thereafter 4,699
Total minimum payments $ 26,665

~~Rent expense was approximately $1.4 million and $4.3 million for the three and nine months ended September 30, 2018, respectively.~~

(amounts in thousands)

June 30, 2020

December 31, 2019

Weighted average remaining lease term (years)

Operating leases

5.1 years

5.0 years

Weighted average discount rate

Operating leases

2.96

2.90

Equipment Lessor

CCF is a wholly-owned subsidiary of Customers Bank and is referred to as the Equipment Finance Group. CCF is primarily focused on originating equipment operating and direct finance equipment leases for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. Lease terms typically range from 24 months to 120 months. CCF offers the following lease products: Capital Lease, Purchase Upon Termination, TRAC, Split-TRAC, and FMV. Direct finance equipment leases are included in commercial and industrial loans and leases receivable.

The estimated residual values for direct finance and operating leases are established by utilizing internally developed ~~analysis,~~analyses, external studies, and/or third-party appraisals to establish a residual position. For the direct finance leases, only for a Split-TRAC is there a

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residual risk and the unguaranteed portions are typically nominal. Expected credit losses on direct financing leases and the related estimated residual values are included in the allowance for credit losses on loans and leases.

Leased assets under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and are presented in other assets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the leases up to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense, may change throughout the term of the lease. Operating lease rental income for leased assets is recognized in commercial lease income on a straight-line basis over the lease term. Customers periodically reviews its operating leased assets for impairment. An impairment loss is recognized if the carrying amount of the operating leased asset exceeds its fair value and is not recoverable. The carrying amount of operating leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.

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The following table summarizes lease receivables and investment in operating leases and their corresponding balance sheet location at ~~September~~June 30, 2020 and December 31, 2019:


(amounts in thousands)	Classification	June 30, 2020		December 31, 2019
ASSETS
Direct financing leases
Lease receivables	Loans and leases receivable	$	96,924	$	91,762
Guaranteed residual assets	Loans and leases receivable	7,730		7,435
Unguaranteed residual assets	Loans and leases receivable	3,271		1,260
Deferred initial direct costs	Loans and leases receivable	666		721
Unearned income	Loans and leases receivable	(11,569)		(11,300)
Net investment in direct financing leases		$	97,022	$	89,878

Operating leases
Investment in operating leases	Other assets	$	116,850	$	107,850
Accumulated depreciation	Other assets	(21,310)		(14,251)
Deferred initial direct costs	Other assets	1,148		1,052
Net investment in operating leases		96,688		94,651
Total lease assets		$	193,710	$	184,529

COVID-19 Impact on Leases

Customers granted concessions to lessees as a result of the business impact of the COVID-19 pandemic. At June 30, 2020, the book value of finance and operating leases with payment deferments were $31.7 million and $16.7 million, respectively. The concessions did not have a material impact in interest income from leases for the three months ended June 30, 2020. Additionally, Customers did not receive any concessions on its operating leases in which Customers is the lessee.

~~(amounts in thousands)~~

~~Classification~~

~~September 30, 2019~~

~~ASSETS~~

~~Direct financing leases~~

~~Lease receivables~~

~~Loans and leases receivable~~

~~75,785~~

~~Guaranteed residual assets~~

~~Loans and leases receivable~~

~~5,673~~

~~Unguaranteed residual assets~~

~~Loans and leases receivable~~

~~1,260~~

~~Deferred initial direct costs~~

~~Loans and leases receivable~~

~~667~~

~~Unearned income~~

~~Loans and leases receivable~~

~~(7,556)~~

~~Net investment in direct financing leases~~

~~75,829~~

~~Operating leases~~

~~Investment in operating leases~~

~~Other assets~~

~~86,539~~

~~Accumulated depreciation~~

~~Other assets~~

~~(11,413)~~

~~Deferred initial direct costs~~

~~Other assets~~

~~952~~

~~Net investment in operating leases~~

~~76,078~~

~~Total lease assets~~

~~151,907~~

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NOTE 9 - BORROWINGS

Short-term debt

Short-term debt at June 30, 2020 and December 31, 2019 was as follows:


	June 30, 2020						December 31, 2019
(dollars in thousands)	Amount		Rate		Amount		Rate

FHLB advances	$	850,000	1.48	%	$	500,000	2.15	%
Federal funds purchased	—		—	%	538,000		1.60	%
Total short-term debt	$	850,000			$	1,038,000

The following is a summary of additional information relating to Customers' short-term debt:



	June 30, 2020			December 31, 2019
(dollars in thousands)
FHLB advances
Maximum outstanding at any month end	$	910,000		$	1,190,150
Average balance during the year	667,212			793,304
Weighted-average interest rate during the year	0.89		%	2.66		%
Federal funds purchased
Maximum outstanding at any month end	842,000			600,000
Average balance during the year	379,549			271,400
Weighted-average interest rate during the year	0.21		%	2.28		%

At June 30, 2020 and December 31, 2019, Customers Bank had aggregate availability under federal funds lines totaling $1.2 billion and $0.6 billion, respectively.

Long-term debt

FHLB and FRB advances

Long-term FHLB and FRB advances at June 30, 2020 and December 31, 2019 were as follows:



	June 30, 2020						December 31, 2019
(dollars in thousands)	Amount		Rate		Amount		Rate

FHLB advances	$	—	0.00	%	$	350,000	2.36	%
FRB PPP Liquidity Facility advances	4,419,967		0.35	%	—		—	%
Total long-term FHLB and FRB advances	$	4,419,967			$	350,000

Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Reserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and interest that are originated by an eligible institution, may be pledged as collateral to the Federal Reserve Banks.

The maximum borrowing capacity with the FHLB and FRB at June 30, 2020 and December 31, 2019 was as follows:



(amounts in thousands)	June 30, 2020		December 31, 2019
Total maximum borrowing capacity with the FHLB	$	2,958,717	$	3,445,416
Total maximum borrowing capacity with the FRB ⁽¹⁾	152,410		136,842
Qualifying loans serving as collateral against FHLB and FRB advances	3,814,247		4,496,983

(1) Amounts reported in the above table exclude borrowings under the PPPLF, which are limited to the face value of the loans originated under the PPP. At June 30, 2020, Customers had $4.4 billion of borrowings under the PPPLF, with a borrowing capacity of up to $4.8 billion, which is the face value of the qualifying loans Customers has originated under the PPP.

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Senior and Subordinated Debt

Long-term senior notes and subordinated debt at June 30, 2020 and December 31, 2019 were as follows:


		June 30, 2020		December 31, 2019
(dollars in thousands)
Issued by	Ranking	Amount		Amount		Rate			Issued Amount		Date Issued	Maturity	Price
Customers Bancorp	Senior	$	24,492	$	24,432	4.500		%	$	25,000	September 2019	September 2024	100.000	%
Customers Bancorp	Senior	99,341		99,198		3.950		%	100,000		June 2017	June 2022	99.775	%

Total other borrowings		123,833		123,630

Customers Bancorp	Subordinated ⁽¹⁾⁽²⁾	72,131		72,040		5.375		%	74,750		December 2019	December 2034	100.000	%
Customers Bank	Subordinated ⁽¹⁾⁽³⁾	109,124		109,075		6.125		%	110,000		June 2014	June 2029	100.000	%
Total subordinated debt				$	181,255	$	181,115

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

(2)Customers Bancorp has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after December 30, 2029.

(3)The subordinated notes will bear an annual fixed rate of 6.125% until June 26, 2024. From June 26, 2024 until maturity, the notes will bear an annual interest rate equal to the three-month LIBOR plus 344.3 basis points. Customers Bank has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after June 26, 2024.

NOTE 910 — REGULATORY CAPITAL

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

In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.

In April 2020, the U.S. federal banking regulatory agencies issued an interim final rule that permits banks to exclude the impact of participating in the SBA PPP program in their regulatory capital ratios. Specifically, PPP loans are zero percent risk weighted and a bank can exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for purposes of calculating the Tier 1 capital to average assets ratio (i.e. leverage ratio). Customers applied this regulatory guidance in the calculation of its regulatory capital ratios presented below.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank and the Bancorp satisfied all capital requirements to which they were subject.

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Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1 and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios as set forth in the following table:


						Minimum Capital Levels to be Classified as:																												Minimum Capital Levels to be Classified as:
		Actual						Adequately Capitalized						Well Capitalized								Basel III Compliant						Actual						Adequately Capitalized		Well Capitalized	Basel III Compliant
(amounts in thousands)	(amounts in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(amounts in thousands)	Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019:
As of June 30, 2020:																		As of June 30, 2020:
Common equity Tier 1 capital (to risk-weighted assets)	Common equity Tier 1 capital (to risk-weighted assets)																	Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	794,745	7.811	%	$	457,840	4.500	%	N/A		N/A		$	712,195	7.000	%	Customers Bancorp, Inc.	$	853,818	7.765		%	$	494,780	4.500	%	N/A		N/A		$	769,657	7.000	%
Customers Bank	Customers Bank	$	1,103,341	10.847	%	$	457,748	4.500	%	$	661,192	6.500	%	$	712,053	7.000	%	Customers Bank	$	1,168,276	10.636		%	$	494,291	4.500	%	$	713,976	6.500	%	$	768,897	7.000	%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)																	Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,012,216	9.949	%	$	610,453	6.000	%	N/A		N/A		$	864,809	8.500	%	Customers Bancorp, Inc.	$	1,071,289	9.743		%	$	659,706	6.000	%	N/A		N/A		$	934,584	8.500	%
Customers Bank	Customers Bank	$	1,103,341	10.847	%	$	610,331	6.000	%	$	813,775	8.000	%	$	864,636	8.500	%	Customers Bank	$	1,168,276	10.636		%	$	659,055	6.000	%	$	878,740	8.000	%	$	933,661	8.500	%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)																	Total capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,155,499	11.357	%	$	813,938	8.000	%	N/A		N/A		$	1,068,293	10.500	%	Customers Bancorp, Inc.	$	1,311,527	11.928		%	$	879,608	8.000	%	N/A		N/A		$	1,154,486	10.500	%
Customers Bank	Customers Bank	$	1,263,490	12.421	%	$	813,775	8.000	%	$	1,017,218	10.000	%	$	1,068,079	10.500	%	Customers Bank	$	1,351,665	12.305		%	$	878,740	8.000	%	$	1,098,424	10.000	%	$	1,153,346	10.500	%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)																	Tier 1 capital (to average assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,012,216	9.013	%	$	449,217	4.000	%	N/A		N/A		$	449,217	4.000	%	Customers Bancorp, Inc.	$	1,071,289	8.790		%	$	487,512	4.000	%	N/A		N/A		$	487,512	4.000	%
Customers Bank	Customers Bank	$	1,103,341	9.829	%	$	448,997	4.000	%	$	561,246	5.000	%	$	448,997	4.000	%	Customers Bank	$	1,168,276	9.593		%	$	487,151	4.000	%	$	608,938	5.000	%	$	487,151	4.000	%
As of December 31, 2018:
As of December 31, 2019:																		As of December 31, 2019:
Common equity Tier 1 capital (to risk-weighted assets)	Common equity Tier 1 capital (to risk-weighted assets)																	Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	745,795	8.964	%	$	374,388	4.500	%	N/A		N/A		$	530,384	6.375	%	Customers Bancorp, Inc.	$	821,810	7.984		%	$	463,211	4.500	%	N/A		N/A		$	720,551	7.000	%
Customers Bank	Customers Bank	$	1,066,121	12.822	%	$	374,160	4.500	%	$	540,453	6.500	%	$	530,059	6.375	%	Customers Bank	$	1,164,652	11.323		%	$	462,842	4.500	%	$	668,549	6.500	%	$	719,976	7.000	%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)																	Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	963,266	11.578	%	$	499,185	6.000	%	N/A		N/A		$	655,180	7.875	%	Customers Bancorp, Inc.	$	1,039,281	10.096		%	$	617,615	6.000	%	N/A		N/A		$	874,955	8.500	%
Customers Bank	Customers Bank	$	1,066,121	12.822	%	$	498,879	6.000	%	$	665,173	8.000	%	$	654,779	7.875	%	Customers Bank	$	1,164,652	11.323		%	$	617,122	6.000	%	$	822,829	8.000	%	$	874,256	8.500	%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)																	Total capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,081,962	13.005	%	$	665,580	8.000	%	N/A		N/A		$	821,575	9.875	%	Customers Bancorp, Inc.	$	1,256,309	12.205		%	$	823,487	8.000	%	N/A		N/A		$	1,080,827	10.500	%
Customers Bank	Customers Bank	$	1,215,522	14.619	%	$	665,173	8.000	%	$	831,466	10.000	%	$	821,072	9.875	%	Customers Bank	$	1,330,155	12.933		%	$	822,829	8.000	%	$	1,028,537	10.000	%	$	1,079,964	10.500	%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)																	Tier 1 capital (to average assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	963,266	9.665	%	$	398,668	4.000	%	N/A		N/A		$	398,668	4.000	%	Customers Bancorp, Inc.	$	1,039,281	9.258		%	$	449,026	4.000	%	N/A		N/A		$	449,026	4.000	%
Customers Bank	Customers Bank	$	1,066,121	10.699	%	$	398,570	4.000	%	$	498,212	5.000	%	$	398,570	4.000	%	Customers Bank	$	1,164,652	10.379		%	$	448,851	4.000	%	$	561,064	5.000	%	$	448,851	4.000	%

The Basel III ~~risk-based capital rules adopted effective January 1, 2015~~Capital Rules require that ~~banks and holding companies~~we maintain a "capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio" or certain elective distributions would be limited. The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The2.500% capital conservation buffer ~~was phased in over four years beginning on January~~with respect to each of CET1, Tier 1 ~~2016,~~and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a ~~maximum~~conservation buffer of ~~0.625% of risk weighted assets for 2016, 1.250% for 2017, 1.875% for 2018, and 2.500% for 2019 and thereafter.~~

~~Effective January 1, 2019, the capital level required to avoid limitation on elective distributions applicable to the Bancorp and the Bank were as follows:~~

~~(i) a common equity Tier 1 risk-based capital ratio of 7.000%;~~

~~(ii) a Tier 1 risk-based capital ratio of 8.500%; and~~

~~(iii) a Total risk-based capital ratio of 10.500%.~~

~~Failure to maintain~~less than the required ~~capital conservation buffer will result in~~amount is subject to limitations on capital distributions, including dividend payments and onstock repurchases, and certain discretionary ~~bonuses~~bonus payments to executive officers.

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NOTE 1011 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.

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

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

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

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

The following methods and assumptions were used to estimate the fair values of Customers' financial instruments as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

Financial Instruments Recorded at Fair Value on a Recurring Basis

Investment securities:

The fair values of equity securities, ~~available-for-sale~~available for sale debt securities and debt securities reported at fair value based on a fair value option election are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), quoted prices in markets that are not active (Level 2), ~~and~~ matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or internally and externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are classified as Level 1, 2 or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans held for sale - ~~residential~~Residential mortgage loans (fair value option):

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

~~Table of Contents~~

Loans receivable - ~~commercial~~Commercial mortgage warehouse loans (fair value option):

The fair value of commercial mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies ~~primarily~~ as short-term bridge financing between the funding of the mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not generally expected to be recognized because at inception of the transaction the underlying mortgage loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of under 30 days from purchase to sale. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Derivatives (assets and liabilities):

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

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

Derivative assets and liabilities are presented in "Other assets" and "Accrued interest payable and other liabilities" on the consolidated balance sheet.

The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customers' disclosures and those of other companies may not be meaningful.

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

~~Impaired~~Collateral-dependent loans:

~~Impaired~~Collateral-dependent loans are those loans that are accounted for under ASC ~~310, Receivables,~~326, Financial Instruments - Credit Losses, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, or discounted cash flows based upon the expected ~~proceeds.~~proceeds, sales agreements or letters of intent with third parties. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned:

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

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The estimated fair values of Customers' financial instruments at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows.


						Fair Value Measurements at September 30, 2019															Fair Value Measurements at June 30, 2020
(amounts in thousands)	(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	182,218	$	182,218	$	182,218	$	—	$	—	Cash and cash equivalents	$	1,067,330	$	1,067,330	$	1,067,330	$	—	$	—
Debt securities, available for sale	Debt securities, available for sale	589,541		589,541		—		589,541		—		Debt securities, available for sale	664,758		664,758		—		664,758		—
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities, reported at fair value based on a fair value option election		17,078		17,078		—		—		17,078
Interest-only GNMA securities												Interest-only GNMA securities	14,396		14,396		—		—		14,396
Equity securities	Equity securities	2,095		2,095		2,095		—		—		Equity securities	2,228		2,228		2,228		—		—
Loans held for sale	Loans held for sale	502,854		502,854		—		1,755		501,099		Loans held for sale	464,164		464,164		—		21,107		443,057

Total loans and leases receivable, net of allowance for loan and lease losses		9,723,714		9,991,132		—		2,438,530		7,552,602
Total loans and leases receivable, net of allowance for credit losses on loans and leases												Total loans and leases receivable, net of allowance for credit losses on loans and leases	14,666,133		15,287,585		—		2,793,164		12,494,421
FHLB, Federal Reserve Bank and other restricted stock	FHLB, Federal Reserve Bank and other restricted stock	81,853		81,853		—		81,853		—		FHLB, Federal Reserve Bank and other restricted stock	91,023		91,023		—		91,023		—
Derivatives	Derivatives	29,174		29,174		—		29,024		150		Derivatives	65,127		65,127		—		65,075		52

Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	8,925,685	$	8,929,025	$	6,502,812	$	2,426,213	$	—	Deposits	$	10,965,875	$	10,972,163	$	9,095,495	$	1,876,668	$	—

Federal funds purchased		373,000		373,000		373,000		—		—
FRB advances												FRB advances	4,419,967		4,419,967		—		4,419,967		—

FHLB advances	FHLB advances	1,040,800		1,042,813		190,800		852,013		—		FHLB advances	850,000		855,519		—		855,519		—
Other borrowings	Other borrowings	123,528		124,961		—		124,961		—		Other borrowings	123,833		100,200		—		100,200		—
Subordinated debt	Subordinated debt	109,050		114,686		—		114,686		—		Subordinated debt	181,255		174,572		—		174,572		—
Derivatives	Derivatives	58,316		58,316		—		58,316		—		Derivatives	125,304		125,304		—		125,304		—


						Fair Value Measurements at December 31, 2018															Fair Value Measurements at December 31, 2019
(amounts in thousands)	(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	62,135	$	62,135	$	62,135	$	—	$	—	Cash and cash equivalents	$	212,505	$	212,505	$	212,505	$	—	$	—
Debt securities, available for sale	Debt securities, available for sale	663,294		663,294		—		663,294		—		Debt securities, available for sale	577,198		577,198		—		577,198		—
Interest-only GNMA securities												Interest-only GNMA securities	16,272		16,272		—		—		16,272
Equity securities	Equity securities	1,718		1,718		1,718		—		—		Equity securities	2,406		2,406		2,406		—		—
Loans held for sale	Loans held for sale	1,507		1,507		—		1,507		—		Loans held for sale	486,328		486,328		—		2,130		484,198

Total loans and leases receivable, net of allowance for loan and lease losses		8,503,522		8,481,128		—		1,405,420		7,075,708
Total loans and leases receivable, net of allowance for credit losses on loans and leases												Total loans and leases receivable, net of allowance for credit losses on loans and leases	9,508,367		9,853,037		—		2,245,758		7,607,279
FHLB, Federal Reserve Bank and other restricted stock	FHLB, Federal Reserve Bank and other restricted stock	89,685		89,685		—		89,685		—		FHLB, Federal Reserve Bank and other restricted stock	84,214		84,214		—		84,214		—
Derivatives	Derivatives	14,693		14,693		—		14,624		69		Derivatives	23,608��		23,608		—		23,529		79

Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	7,142,236	$	7,136,009	$	5,408,055	$	1,727,954	$	—	Deposits	$	8,648,936	$	8,652,340	$	6,980,402	$	1,671,938	$	—

Federal funds purchased	Federal funds purchased	187,000		187,000		187,000		—		—		Federal funds purchased	538,000		538,000		538,000		—		—
FHLB advances	FHLB advances	1,248,070		1,248,046		998,070		249,976		—		FHLB advances	850,000		852,162		—		852,162		—
Other borrowings	Other borrowings	123,871		121,718		—		121,718		—		Other borrowings	123,630		127,603		—		127,603		—
Subordinated debt	Subordinated debt	108,977		110,550		—		110,550		—		Subordinated debt	181,115		192,217		—		192,217		—
Derivatives	Derivatives	16,286		16,286		—		16,286		—		Derivatives	45,939		45,939		—		45,939		—

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For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:


		September 30, 2019															June 30, 2020
		Fair Value Measurements at the End of the Reporting Period Using															Fair Value Measurements at the End of the Reporting Period Using
(amounts in thousands)	(amounts in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(amounts in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Measured at Fair Value on a Recurring Basis:	Measured at Fair Value on a Recurring Basis:									Measured at Fair Value on a Recurring Basis:
Assets	Assets									Assets
Available-for-sale debt securities:
Available for sale debt securities:										Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities	Agency-guaranteed residential mortgage-backed securities	$	—	$	292,343	$	—	$	292,343	Agency-guaranteed residential mortgage-backed securities	$	—	$	144,310	$	—	$	144,310
Agency-guaranteed collateralized mortgage obligations										Agency-guaranteed collateralized mortgage obligations	—		145,826		—		145,826

State and political subdivision debt securities										State and political subdivision debt securities	—		18,389		—		18,389

Corporate notes	Corporate notes	—		297,198		—		297,198		Corporate notes	—		356,233		—		356,233
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities, reported at fair value based on a fair value option election		—		—		17,078		17,078
Interest-only GNMA securities										Interest-only GNMA securities	—		—		14,396		14,396
Equity securities	Equity securities	2,095		—		—		2,095		Equity securities	2,228		—		—		2,228
Derivatives	Derivatives	—		29,024		150		29,174		Derivatives	—		65,075		52		65,127
Loans held for sale – fair value option	Loans held for sale – fair value option	—		1,755		—		1,755		Loans held for sale – fair value option	—		3,507		—		3,507
Loans receivable, mortgage warehouse – fair value option	Loans receivable, mortgage warehouse – fair value option	—		2,438,530		—		2,438,530		Loans receivable, mortgage warehouse – fair value option	—		2,793,164		—		2,793,164
Total assets – recurring fair value measurements	Total assets – recurring fair value measurements	$	2,095	$	3,058,850	$	17,228	$	3,078,173	Total assets – recurring fair value measurements	$	2,228	$	3,526,504	$	14,448	$	3,543,180
Liabilities	Liabilities									Liabilities
Derivatives	Derivatives	$	—	$	58,316	$	—	$	58,316	Derivatives	$	—	$	125,304	$	—	$	125,304
Measured at Fair Value on a Nonrecurring Basis:	Measured at Fair Value on a Nonrecurring Basis:									Measured at Fair Value on a Nonrecurring Basis:
Assets	Assets									Assets

Impaired loans, net of reserves of $395		—		—		12,754		12,754
Other real estate owned		—		—		78		78
Loans held for sale										Loans held for sale	$	—	$	17,600	$	—	$	17,600
Collateral-dependent loans										Collateral-dependent loans	—		—		45,208		45,208

Total assets – nonrecurring fair value measurements	Total assets – nonrecurring fair value measurements	$	—	$	—	$	12,832	$	12,832	Total assets – nonrecurring fair value measurements	$	—	$	17,600	$	45,208	$	62,808

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		December 31, 2018															December 31, 2019
		Fair Value Measurements at the End of the Reporting Period Using															Fair Value Measurements at the End of the Reporting Period Using
(amounts in thousands)	(amounts in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(amounts in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Measured at Fair Value on a Recurring Basis:	Measured at Fair Value on a Recurring Basis:									Measured at Fair Value on a Recurring Basis:
Assets	Assets									Assets
Available-for-sale securities:
Available for sale debt securities:										Available for sale debt securities:
Agency-guaranteed residential mortgage–backed securities	Agency-guaranteed residential mortgage–backed securities	$	—	$	305,374	$	—	$	305,374	Agency-guaranteed residential mortgage–backed securities	$	—	$	278,321	$	—	$	278,321

Corporate notes	Corporate notes	—		357,920		—		357,920		Corporate notes	—		298,877		—		298,877
Interest-only GNMA securities										Interest-only GNMA securities	—		—		16,272		16,272
Equity securities	Equity securities	1,718		—		—		1,718		Equity securities	2,406		—		—		2,406
Derivatives	Derivatives	—		14,624		69		14,693		Derivatives	—		23,529		79		23,608
Loans held for sale – fair value option	Loans held for sale – fair value option	—		1,507		—		1,507		Loans held for sale – fair value option	—		2,130		—		2,130
Loans receivable, mortgage warehouse – fair value option	Loans receivable, mortgage warehouse – fair value option	—		1,405,420		—		1,405,420		Loans receivable, mortgage warehouse – fair value option	—		2,245,758		—		2,245,758
Total assets – recurring fair value measurements	Total assets – recurring fair value measurements	$	1,718	$	2,084,845	$	69	$	2,086,632	Total assets – recurring fair value measurements	$	2,406	$	2,848,615	$	16,351	$	2,867,372
Liabilities	Liabilities									Liabilities
Derivatives	Derivatives	$	—	$	16,286	$	—	$	16,286	Derivatives	$	—	$	45,939	$	—	$	45,939
Measured at Fair Value on a Nonrecurring Basis:	Measured at Fair Value on a Nonrecurring Basis:									Measured at Fair Value on a Nonrecurring Basis:
Assets	Assets									Assets
Impaired loans, net of reserves of $845		$	—	$	—	$	10,876	$	10,876
Impaired loans, net of specific reserves of $852										Impaired loans, net of specific reserves of $852	$	—	$	—	$	14,272	$	14,272
Other real estate owned	Other real estate owned	—		—		621		621		Other real estate owned	—		—		78		78
Total assets – nonrecurring fair value measurements	Total assets – nonrecurring fair value measurements	$	—	$	—	$	11,497	$	11,497	Total assets – nonrecurring fair value measurements	$	—	$	—	$	14,350	$	14,350

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The interest-only GNMA securities are Level 3 assets measured at fair value on a recurring basis. For the three and nine months ended September 30, 2019, Customers recorded an increase in fair value of $0.6 million on the interest-only GNMA securities in unrealized gains on investments securities in the consolidated statements of operations. For the three and nine months ended September 30, 2019, cash settlements of $0.7 million were applied to the carrying value of the interest-only GNMA securities, net of premium amortization expense.

The changes in residential mortgage loan commitments (Level 3 assets) measured at fair value on a recurring basis for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are summarized in the tables below. Additional information about residential mortgage loan commitments can be found in NOTE 1112 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES.


		Residential Mortgage Loan Commitments							Residential Mortgage Loan Commitments
		Three Months Ended September 30,							Three Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	2019		2018		(amounts in thousands)	2020		2019
Balance at June 30		$	145	$	133
Balance at March 31						Balance at March 31	$	215	$	77
Issuances	Issuances	150		122		Issuances	52		145
Settlements	Settlements	(145)		(133)		Settlements	(215)		(77)
Balance at September 30		$	150	$	122
Balance at June 30						Balance at June 30	$	52	$	145


		Residential Mortgage Loan Commitments							Residential Mortgage Loan Commitments
		Nine Months Ended September 30,							Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	2019		2018		(amounts in thousands)	2020		2019

Balance at December 31	Balance at December 31	$	69	$	60	Balance at December 31	$	79	$	69
Issuances	Issuances	372		338		Issuances	267		222
Settlements	Settlements	(291)		(276)		Settlements	(294)		(146)
Balance at September 30		$	150	$	122
Balance at June 30						Balance at June 30	$	52	$	145

There were no transfers between levels during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

Tab le of Contents

The following table summarizes financial assets and financial liabilities measured at fair value as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value. The unobservable Level 3 inputs noted below contain a level of uncertainty that may differ from what is realized in an immediate settlement of the assets. Therefore, Customers may realize a value higher or lower than the current estimated fair value of the assets. ~~On June 28, 2019, Customers obtained ownership of~~The interest-only GNMA securities ~~that served as the primary collateral for loans made to one commercial mortgage warehouse customer through~~are Level 3 assets measured at fair value on a ~~Uniform Commercial Code ("UCC") private sale transaction. On June 28, 2019, Customers elected the~~recurring basis under a fair value option ~~for these~~election. For the three and six months ended June 30, 2020, cash settlements of $0.9 million and $1.9 million were applied to the carrying value of the interest-only GNMA securities, ~~acquired on such date. The fair value~~net of ~~these securities at~~premium amortization expense. At June 30, ~~2019 was $17.2 million which reflects the valuation obtained from the third party binding bids obtained through the UCC private sale transaction. At September 30, 2019~~2020, Customers used an internally developed discounted cash flow model to value the interest-only GNMA securities. The significant unobservable input used in the discounted cash flow model ~~includes~~included prepayment speed. Significant increases (decreases) in this input would result in a significantly lower (higher) fair value measurement.

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2020

Fair Value
Estimate

Valuation Technique

Unobservable Input

Range

(Weighted Average) ⁽⁴⁾

(amounts in thousands)

Collateral-dependent – real estate

44,244

Collateral appraisal ⁽¹⁾

Business asset valuation⁽³⁾

Liquidation expenses ⁽²⁾

Business asset valuation⁽⁴⁾

8% - 10%

(8%)

11% - 45%

(20%)

Collateral-dependent loans – commercial & industrial

964

Collateral appraisal ⁽¹⁾

Business asset valuation ⁽³⁾

Liquidation expenses⁽²⁾

Business asset valuation adjustments ⁽⁴⁾

8% - 8%

(8%)

8% - 45%

(25%)

Interest-only GNMA securities

14,396

Discounted cash flow

Constant prepayment rate

4% - 15%

(10%)

Residential mortgage loan commitments

Adjusted market bid

Pull-through rate

78% - 78%

(78%)

(1)Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals.   Fair value is also estimated based on sale agreements or letters of intent with third parties.

(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.

(3)Business asset valuation obtained from independent party.

(4)Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation.

3943

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Quantitative Information about Level 3 Fair Value Measurements

~~September 30,~~December 31, 2019

Fair Value
Estimate

Valuation Technique

Unobservable Input

Range

(Weighted Average)⁽⁴⁾

(amounts in thousands)

Impaired loans -– real estate

~~11,207~~12,767

Collateral appraisal ⁽¹⁾

Business asset valuation⁽³⁾

Liquidation expenses ⁽²⁾

Business asset valuation⁽⁴⁾

8% - 8%10%

(8%)

34% - 45%

(37%)

Impaired loans -– commercial & industrial

~~1,547~~1,505

Collateral appraisal ⁽¹⁾

Business asset valuation ⁽³⁾

Liquidation expenses ⁽²⁾

Business asset valuation adjustments ⁽⁴⁾

8% - ~~20%~~8%

~~(15%~~(8%)

8% - 50%

(22%)

Interest-only ~~classes of agency-guaranteed home equity conversion mortgage-backed~~GNMA securities ~~reported at fair value based on a fair value option election~~

~~17,078~~16,272

Discounted cash flow

Constant prepayment rate

9% - 14%

~~(12%)~~12%

Other real estate owned

Collateral appraisal ⁽¹⁾

Liquidation expenses ⁽²⁾

8% - 9%

(9%)

Residential mortgage loan commitments

~~150~~79

Adjusted market bid

Pull-through rate

~~83%~~85% - ~~83%~~85%

~~(83%~~(85%)

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

(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.

(3)Business asset valuation obtained from independent party.

~~Quantitative Information about Level 3 Fair Value Measurements~~

~~December 31, 2018~~

Fair Value
Estimate

~~Valuation Technique~~

~~Unobservable Input~~

Range
(Weighted Average)

~~(amounts in thousands)~~

~~Impaired loans - real estate~~

~~10,260~~

~~Collateral appraisal~~ ⁽¹⁾

~~Liquidation expenses~~ ⁽²⁾

~~8% - 8%~~

~~(8%)~~

~~Impaired loans - commercial & industrial~~

~~616~~

~~Business asset valuation~~ ⁽³⁾

~~Business asset valuation adjustments~~ ⁽⁴⁾

~~8% - 50%~~

~~(26%)~~

~~Other real estate owned~~

~~621~~

~~Collateral appraisal~~ ⁽¹⁾

~~Liquidation expenses~~ ⁽²⁾

~~8% - 8%~~

~~(8%)~~

~~Residential mortgage loan commitments~~

~~Adjusted market bid~~

~~Pull-through rate~~

~~90% - 90%~~

~~(90%)~~

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

~~(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.~~

~~(3)Business asset valuation obtained from independent party.~~

~~(4)~~Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percentage of the business asset valuation.

NOTE 1112 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objectives of Using Derivatives

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

~~Table of Contents~~

Cash Flow Hedges of ~~Interest Rate~~Interest-Rate Risk

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

The changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in ~~AOCI~~accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged item affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt and a certain variable-rate deposit relationship.

Customers discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in ~~AOCI~~accumulated other comprehensive income (loss) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings.

Tab le of Contents

Amounts reported in ~~AOCI~~accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt and a variable-rate deposit relationship. Customers expects to reclassify ~~$5.8~~$16.8 million of losses from ~~AOCI~~accumulated other comprehensive income (loss) to interest expense during the next 12 months.

Customers is hedging its exposure to the variability in future cash flows for forecasted transactions (3-month FHLB ~~advances)~~advances and federal funds purchased) and a variable-rate deposit relationship over a maximum period of 5770 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

At ~~September~~June 30, 2020, Customers had 5 outstanding interest rate derivatives with notional amounts totaling $1.1 billion that were designated as cash flow hedges of interest-rate risk. At December 31, 2019, Customers had 4 outstanding interest rate derivatives with notional amounts totaling $725.0 million that were designated as cash flow hedges of interest ~~rate risk. At December 31, 2018, Customers had 6 outstanding interest rate derivatives with notional amounts totaling $750.0 million that were designated as cash flow hedges of interest rate risk.~~rate-risk. The outstanding cash flow hedges at ~~September~~June 30, ~~2019~~2020 expire between June 2021 and ~~July 2024.~~May 2026.

Derivatives Not Designated as Hedging Instruments

Customers executes interest rate swaps ~~with commercial banking customers to facilitate their respective risk management strategies~~ (typically the loan customers will swap a floating-rate loan for a fixed-rate loan). and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. The customer interest rate swaps and interest rate caps are simultaneously offset by interest rate swaps and interest rate caps that Customers executes with a third party in order to minimize ~~interest rate~~interest-rate risk exposure resulting from such transactions. As the interest rate swaps and interest rate caps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and caps and the offsetting third-party market swaps and caps are recognized directly in earnings. At ~~September~~June 30, ~~2019,~~2020, Customers had ~~124~~158 interest rate swaps with an aggregate notional amount of ~~$1.2~~$1.6 billion and 4 interest rate caps with an aggregated notional amount of $76.6 million related to this program. At December 31, ~~2018,~~2019, Customers had 98140 interest rate swaps with an aggregate notional amount of ~~$1.0~~$1.4 billion and 4 interest rate caps with an aggregate notional amount of $78.6 million related to this program.

Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under ~~the~~ applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly in earnings. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers had an outstanding notional balance of residential mortgage loan commitments of ~~$7.6~~$3.6 million and ~~$3.6~~$4.5 million, respectively.

Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value ~~recorded~~reported directly in earnings. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers had outstanding notional balances of credit derivatives of ~~$114.9~~$171.3 million and ~~$94.9~~$167.1 million, respectively.

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Fair Value of Derivative Instruments on the Balance Sheet

The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


		September 30, 2019											June 30, 2020
		Derivative Assets				Derivative Liabilities						Derivative Assets			Derivative Liabilities
(amounts in thousands)	(amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		(amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:	Derivatives designated as cash flow hedges:							Derivatives designated as cash flow hedges:
Interest rate swaps	Interest rate swaps	Other assets	$	—	Other liabilities	$	27,409	Interest rate swaps	Other assets	$	—	Other liabilities	$	51,589
Total	Total		$	—		$	27,409	Total		$	—		$	51,589
Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:							Derivatives not designated as hedging instruments:
Interest rate swaps	Interest rate swaps	Other assets	$	28,718	Other liabilities	$	30,778	Interest rate swaps	Other assets	$	63,224	Other liabilities	$	73,067
Interest rate caps								Interest rate caps	Other assets	18		Other liabilities	18
Credit contracts	Credit contracts	Other assets	306		Other liabilities	129		Credit contracts	Other assets	1,833		Other liabilities	630
Residential mortgage loan commitments	Residential mortgage loan commitments	Other assets	150		Other liabilities	—		Residential mortgage loan commitments	Other assets	52		Other liabilities	—
Total	Total		$	29,174		$	30,907	Total		$	65,127		$	73,715

December 31, 2018
Derivative Assets Derivative Liabilities
(amounts in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as cash flow hedges:
Interest rate swaps Other assets $ 256 Other liabilities $ 1,502
Total $ 256 $ 1,502
Derivatives not designated as hedging instruments:
Interest rate swaps Other assets $ 14,300 Other liabilities $ 14,730
Credit contracts Other assets 68 Other liabilities 54
Residential mortgage loan commitments Other assets 69 Other liabilities —
Total $ 14,437 $ 14,784

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	December 31, 2019
	Derivative Assets				Derivative Liabilities
(amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Interest rate swaps	Other assets	$	—	Other liabilities	$	21,374
Total		$	—		$	21,374
Derivatives not designated as hedging instruments:
Interest rate swaps	Other assets	$	23,301	Other liabilities	$	24,797
Interest rate caps	Other assets	9		Other liabilities	9
Credit contracts	Other assets	219		Other liabilities	(241)
Residential mortgage loan commitments	Other assets	79		Other liabilities	—
Total		$	23,608		$	24,565

Effect of Derivative Instruments on Net Income

The following tables present amounts included in the consolidated statements of income related to derivatives not designated as hedges for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

~~Three Months Ended September 30, 2019~~

~~(amounts in thousands)~~

~~Income Statement Location~~

~~Amount of Income (Loss) Recognized in Earnings~~

~~Derivatives not designated as hedging instruments:~~

~~Interest rate swaps~~

~~Other non-interest income~~

~~(35)~~

~~Credit contracts~~

~~Other non-interest income~~

~~Residential mortgage loan commitments~~

~~Mortgage banking income~~

~~Total~~

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~~Three Months Ended September 30, 2018~~

~~(amounts in thousands)~~

~~Income Statement Location~~

~~Amount of Income (Loss) Recognized in Earnings~~

~~Derivatives not designated as hedging instruments:~~

~~Interest rate swaps~~

~~Other non-interest income~~

~~1,139~~

~~Credit contracts~~

~~Other non-interest income~~

~~156~~

~~Residential mortgage loan commitments~~

~~Mortgage banking income~~

~~(11)~~

~~Total~~

~~1,284~~

~~Nine Months Ended September 30, 2019~~

~~(amounts in thousands)~~

~~Income Statement Location~~

Amount of Income
Recognized in Earnings

~~Derivatives not designated as hedging instruments:~~

~~Interest rate swaps~~

~~Other non-interest income~~

~~Credit contracts~~

~~Other non-interest income~~

~~228~~

~~Residential mortgage loan commitments~~

~~Mortgage banking income~~

~~Total~~

~~373~~

~~Nine Months Ended September 30, 2018~~

~~(amounts in thousands)~~

~~Income Statement Location~~

Amount of Income (Loss)
Recognized in Earnings

~~Derivatives not designated as hedging instruments:~~

~~Interest rate swaps~~

~~Other non-interest income~~

~~1,472~~

~~Credit contracts~~

~~Other non-interest income~~

~~119~~

~~Residential mortgage loan commitments~~

~~Mortgage banking income~~

~~Total~~

~~1,653~~


		Amount of Income (Loss) Recognized in Earnings
		Three Months Ended June 30,						Six Months Ended June 30,
(amounts in thousands)	Income Statement Location	2020		2019		2020		2019
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-interest income	$	(5,563)	$	386	$	(6,578)	$	98
Interest rate caps	Other non-interest income	—		—		—		—
Credit contracts	Other non-interest income	1,405		41		1,274		144
Residential mortgage loan commitments	Mortgage banking income	(164)		68		(27)		76
Total		$	(4,322)	$	495	$	(5,331)	$	318

Effect of Derivative Instruments on Comprehensive Income

The following ~~tables present~~table presents the effect of Customers' derivative financial instruments on comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

Three Months Ended September 30, 2019
(amounts in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivatives ⁽¹⁾
Location of Gain (Loss) Reclassified from Accumulated OCI into Income Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
Derivatives in cash flow hedging relationships:
Interest rate swaps $ (3,821) Interest expense $ (764)


								Amount of Gain (Loss) Recognized in OCI on Derivatives ⁽¹⁾					Location of Gain (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
		Three Months Ended September 30, 2018										Three Months Ended June 30,					Three Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivatives ⁽¹⁾		Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income		(amounts in thousands)	2020		2019			2020		2019
Derivatives in cash flow hedging relationships:	Derivatives in cash flow hedging relationships:						Derivatives in cash flow hedging relationships:
Interest rate swaps	Interest rate swaps	$	3,006	Interest expense	$	(303)	Interest rate swaps	$	(4,685)	$	(10,435)	Interest expense	$	(2,718)	$	(4)
				Other non-interest income ⁽²⁾	2,822
					$	2,519

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Nine Months Ended September 30, 2019
(amounts in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivatives ⁽¹⁾
Location of Gain (Loss) Reclassified from Accumulated OCI into Income Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
Derivative in cash flow hedging relationships:
Interest rate swaps $ (19,391) Interest expense $ (355)


								Amount of Gain (Loss) Recognized in OCI on Derivatives ⁽¹⁾					Location of Gain (Loss) Reclassified from Accumulated OCI into Income			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
		Nine Months Ended September 30, 2018										Six Months Ended June 30,						Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivatives (1)		Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income		(amounts in thousands)	2020		2019				2020		2019
Derivative in cash flow hedging relationships:
Derivatives in cash flow hedging relationships:							Derivatives in cash flow hedging relationships:
Interest rate swaps	Interest rate swaps	$	5,055	Interest expense	$	(175)	Interest rate swaps	$	(25,031)	$	(15,570)	Interest expense		$	(4,196)	$	409
				Other non-interest income ⁽²⁾	2,822
					$	2,647

(1) Amounts presented are net of taxes. See NOTE 4 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.

~~(2) Includes income recognized from discontinued cash flow hedges.~~

Credit-risk-related Contingent Features

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

Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized institution. As of ~~September~~June 30, ~~2019,~~2020, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for ~~nonperformance risk)~~nonperformance-risk) related to these agreements was ~~$58.4~~$127.7 million. In addition, Customers, which has collateral posting thresholds with certain of these counterparties, ~~and at September 30, 2019,~~ had posted ~~$57.8~~$124.6 million of cash as ~~collateral.~~collateral at June 30, 2020. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.

Disclosures about Offsetting Assets and Liabilities

The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps and interest rate caps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps and interest rate caps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.

~~Offsetting of Financial Assets and Derivative Assets~~

~~At September 30, 2019~~

Gross Amount of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheet Net Amounts of Assets Presented in the Consolidated Balance Sheet Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands) Financial Instruments Cash Collateral Received Net Amount
Description
Interest rate swap derivatives with institutional counterparties $ 131 $ — $ 131 $ — $ — $ 131


	Gross Amounts Recognized on the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)					Financial Instruments		Cash Collateral Received/(Posted)		Net Amount
June 30, 2020
Interest rate derivative assets with institutional counterparties	$	—	$	—	$	—	$	—

Interest rate derivative liabilities with institutional counterparties	$	124,561	$	—	$	(124,561)	$	—

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~~Offsetting of Financial Assets and Derivative Assets~~

~~At December 31, 2018~~

~~Offsetting of Financial Liabilities and Derivative Liabilities~~

~~At September 30, 2019~~

Gross Amount of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheet Net Amounts of Liabilities Presented in the Consolidated Balance Sheet Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands) Financial Instruments Cash Collateral Pledged Net Amount
Description
Interest rate swap derivatives with institutional counterparties $ 58,056 $ — $ 58,056 $ — $ 57,832 $ 224

~~Offsetting of Financial Liabilities and Derivative Liabilities~~

~~At December 31, 2018~~

Gross Amount of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheet Net Amounts of Liabilities Presented in the Consolidated Balance Sheet Gross Amounts Not Offset in the Consolidated Balance Sheet Net Amount
(amounts in thousands) Financial Instruments Cash Collateral Pledged
Description
Interest rate swap derivatives with institutional counterparties $ 9,077 $ — $ 9,077 $ — $ 702 $ 8,375


	Gross Amounts Recognized on the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)					Financial Instruments		Cash Collateral Received/(Posted)		Net Amount
December 31, 2019
Interest rate derivative assets with institutional counterparties	$	432	$	—	$	—	$	432

Interest rate derivative liabilities with institutional counterparties	$	45,727	$	—	$	(45,727)	$	—

NOTE 1213 — BUSINESS SEGMENTS

~~Customers'~~Customers’ segment financial reporting reflects the manner in which its chief operating decision makers allocate resources and assess performance. Management has determined that ~~Customers'~~Customers’ operations consist of 2 reportable segments - Customers Bank Business Banking and BankMobile. Each segment generates revenues, manages risk, and offers distinct products and services to targeted customers through different delivery channels. The strategy, marketing and analysis of these segments vary considerably.

The Customers Bank Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island, New Hampshire, Washington, D.C., and Illinois through a single-point-of-contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending and deposit gathering activities are focused primarily on privately held businesses, high-net-worth families, selected commercial real estate lending, commercial mortgage companies, and equipment finance. Revenues are generated primarily through net interest income (the difference between interest earned on loans and leases, investments, and other interest earning assets and interest paid on deposits and other borrowed funds) and other non-interest income, such as mortgage warehouse transactional fees and BOLI.

The BankMobile segment provides state-of-the-art high-tech digital banking and disbursement services to consumers, students, and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners. BankMobile is a full-service fintech banking platform that is accessible to customers anywhere and anytime through the customer's smartphone or other web-enabled device. Revenues are currently being generated primarily through interest income on other consumer loans, interchange and card revenue, deposit and wire transfer fees and university fees. The majority of expenses for BankMobile are related to the segment's operation of the

~~Table of Contents~~

ongoing business acquired through the Disbursement business acquisition and costs associated with the development of white label products for its partner.

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The following tables present the operating results for Customers' reportable business segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The segment financial results include directly attributable revenues and expenses. Consistent with the presentation of segment results to Customers' chief operating decision makers, overhead costs and preferred stock dividends are assigned to the Customers Bank Business Banking segment. The tax benefit assigned to BankMobile was based on an estimated effective tax rate of 23.20% for 2020 and 23.15% for 2019, ~~and 24.57% for 2018,~~ respectively.

Three Months Ended September 30, 2019
(amounts in thousands) Customers Bank Business Banking BankMobile Consolidated
Interest income ⁽¹⁾
$ 113,995 $ 12,723

$ 126,718
Interest expense 50,734 249 50,983
Net interest income 63,261 12,474 75,735
Provision for loan and lease losses 2,475 1,951 4,426
Non-interest income 11,757 11,612 23,369
Non-interest expense 38,347 21,245 59,592
Income (loss) before income tax expense (benefit) 34,196 890 35,086
Income tax expense (benefit) 7,814 206 8,020
Net income (loss) 26,382 684 27,066
Preferred stock dividends 3,615 — 3,615
Net income (loss) available to common shareholders $ 22,767 $ 684 $ 23,451


		Three Months Ended September 30, 2018											Three Months Ended June 30, 2020								Three Months Ended June 30, 2019
(amounts in thousands)	(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		Customers Bank Business Banking		BankMobile		Consolidated
Interest income ⁽¹⁾	Interest income ⁽¹⁾	$	106,156	$	3,889	$	110,045	Interest income ⁽¹⁾	$	112,455	$	12,763	$	125,218	$	103,014	$	8,936	$	111,950
Interest expense	Interest expense	45,982		62		46,044		Interest expense	32,856		380		33,236		47,061		210		47,271
Net interest income	Net interest income	60,174		3,827		64,001		Net interest income	79,599		12,383		91,982		55,953		8,726		64,679
Provision for loan and lease losses		2,502		422		2,924
Provision for credit losses on loans and leases								Provision for credit losses on loans and leases	19,623		1,323		20,946		(2,206)		7,552		5,346
Non-interest income	Non-interest income	(7,756)		9,840		2,084		Non-interest income	11,683		10,553		22,236		970		11,066		12,036
Non-interest expense	Non-interest expense	36,115		20,989		57,104		Non-interest expense	44,270		19,236		63,506		38,107		21,475		59,582
Income (loss) before income tax expense (benefit)	Income (loss) before income tax expense (benefit)	13,801		(7,744)		6,057		Income (loss) before income tax expense (benefit)	27,389		2,377		29,766		21,022		(9,235)		11,787
Income tax expense (benefit)	Income tax expense (benefit)	1,930		(1,902)		28		Income tax expense (benefit)	6,611		437		7,048		4,629		(2,138)		2,491
Net income (loss)	Net income (loss)	11,871		(5,842)		6,029		Net income (loss)	20,778		1,940		22,718		16,393		(7,097)		9,296
Preferred stock dividends	Preferred stock dividends	3,615		—		3,615		Preferred stock dividends	3,581		—		3,581		3,615		—		3,615
Net income (loss) available to common shareholders	Net income (loss) available to common shareholders	$	8,256	$	(5,842)	$	2,414	Net income (loss) available to common shareholders	$	17,197	$	1,940	$	19,137	$	12,778	$	(7,097)	$	5,681

(1) Amounts reported include funds transfer pricing of ~~$0.3~~$1.6 million and ~~$3.9~~$2.2 million, for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, credited to BankMobile for the value provided to the Customers Bank Business Banking segment for the use of excess low/no cost deposits.

~~Table of Contents~~

Nine Months Ended September 30, 2019
(amounts in thousands) Customers Bank Business Banking BankMobile Consolidated
Interest income ⁽¹⁾
$ 309,882 $ 29,863 $ 339,745
Interest expense 139,402 625 140,027
Net interest income 170,480 29,238 199,718
Provision for loan and lease losses 3,245 11,294 14,539
Non-interest income 20,304 34,821 55,125
Non-interest expense 111,840 61,320 173,160
Income (loss) before income tax expense (benefit) 75,699 (8,555) 67,144
Income tax expense (benefit) 17,324 (1,981) 15,343
Net income (loss) 58,375 (6,574) 51,801
Preferred stock dividends 10,844 — 10,844
Net income (loss) available to common shareholders $ 47,531 $ (6,574) $ 40,957
As of September 30, 2019
Goodwill and other intangibles $ 3,629 $ 11,892 $ 15,521
Total assets ⁽²⁾
$ 11,131,914 $ 591,876 $ 11,723,790
Total deposits $ 8,260,080 $ 665,605 $ 8,925,685
Total non-deposit liabilities ⁽²⁾
$ 1,747,846 $ 31,109 $ 1,778,955


		Nine Months Ended September 30, 2018											Six Months Ended June 30, 2020								Six Months Ended June 30, 2019
(amounts in thousands)	(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		Customers Bank Business Banking		BankMobile		Consolidated
Interest income ⁽¹⁾	Interest income ⁽¹⁾	$	302,820	$	11,829	$	314,649	Interest income ⁽¹⁾	$	225,171	$	25,390	$	250,561	$	195,885	$	17,140	$	213,025
Interest expense	Interest expense	118,081		214		118,295		Interest expense	76,533		726		77,259		88,666		376		89,042
Net interest income	Net interest income	184,739		11,615		196,354		Net interest income	148,638		24,664		173,302		107,219		16,764		123,983
Provision for loan and lease losses		3,128		1,129		4,257
Provision for credit losses on loans and leases								Provision for credit losses on loans and leases	46,921		5,811		52,732		770		9,343		10,113
Non-interest income	Non-interest income	8,147		30,973		39,120		Non-interest income	22,819		21,348		44,167		8,547		23,207		31,754
Non-interest expense	Non-interest expense	108,168		54,966		163,134		Non-interest expense	88,130		41,835		129,965		73,491		40,075		113,566
Income (loss) before income tax expense (benefit)	Income (loss) before income tax expense (benefit)	81,590		(13,507)		68,083		Income (loss) before income tax expense (benefit)	36,406		(1,634)		34,772		41,505		(9,447)		32,058
Income tax expense (benefit)	Income tax expense (benefit)	17,567		(3,317)		14,250		Income tax expense (benefit)	9,334		(379)		8,955		9,510		(2,187)		7,323
Net income (loss)	Net income (loss)	64,023		(10,190)		53,833		Net income (loss)	27,072		(1,255)		25,817		31,995		(7,260)		24,735
Preferred stock dividends	Preferred stock dividends	10,844		—		10,844		Preferred stock dividends	7,196		—		7,196		7,229		—		7,229
Net income (loss) available to common shareholders	Net income (loss) available to common shareholders	$	53,179	$	(10,190)	$	42,989	Net income (loss) available to common shareholders	$	19,876	$	(1,255)	$	18,621	$	24,766	$	(7,260)	$	17,506

As of September 30, 2018
As of June 30, 2020 and 2019								As of June 30, 2020 and 2019
Goodwill and other intangibles	Goodwill and other intangibles	$	3,629	$	13,196	$	16,825	Goodwill and other intangibles	$	3,629	$	10,946	$	14,575	$	3,629	$	12,218	$	15,847
Total assets ⁽²⁾	Total assets ⁽²⁾	$	10,542,175	$	74,929	$	10,617,104	Total assets ⁽²⁾	$	17,316,394	$	586,724	$	17,903,118	$	10,555,141	$	627,286	$	11,182,427
Total deposits	Total deposits	$	7,781,225	$	732,489	$	8,513,714	Total deposits	$	10,303,112	$	662,763	$	10,965,875	$	7,729,580	$	456,197	$	8,185,777
Total non-deposit liabilities ⁽²⁾	Total non-deposit liabilities ⁽²⁾	$	1,134,251	$	14,327	$	1,148,578	Total non-deposit liabilities ⁽²⁾	$	5,895,690	$	33,706	$	5,929,396	$	1,970,391	$	34,854	$	2,005,245

(1) Amounts reported include funds transfer pricing of ~~$8.1~~$3.1 million and ~~$11.8~~$7.8 million, for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, credited to BankMobile for the value provided to the Customers Bank Business Banking segment for the use of excess low/no cost deposits.

(2) Amounts reported exclude inter-segment receivables/payables.

~~Table of Contents~~

~~NOTE 13 - NON-INTEREST REVENUES~~

~~Customers' revenue from contracts with customers in scope of ASC 606 is recognized within non-interest income.~~

~~The following tables present Customers' non-interest revenues affected by ASC 606 by business segment for the three and nine months ended September 30, 2019 and 2018:~~

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
(amounts in thousands) Customers Bank Business Banking BankMobile Consolidated Customers Bank Business Banking BankMobile Consolidated
Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue $ 181 $ 6,688 $ 6,869 $ 181 $ 6,903 $ 7,084
Deposit fees 457 3,185 3,642 311 1,691 2,002
University fees - card and disbursement fees — 262 262 — 261 261
Total revenue recognized at point in time 638 10,135 10,773 492 8,855 9,347
Revenue recognized over time:
University fees - subscription revenue — 1,006 1,006 — 950 950
Total revenue recognized over time — 1,006 1,006 — 950 950
Total revenue from contracts with customers $ 638 $ 11,141 $ 11,779 $ 492 $ 9,805 $ 10,297

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
(amounts in thousands) Customers Bank Business Banking BankMobile Consolidated Customers Bank Business Banking BankMobile Consolidated
Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue $ 580 $ 21,855 $ 22,435 $ 588 $ 22,539 $ 23,127
Deposit fees 1,190 8,009 9,199 892 4,834 5,726
University fees - card and disbursement fees — 783 783 — 772 772
Total revenue recognized at point in time 1,770 30,647 32,417 1,480 28,145 29,625
Revenue recognized over time:
University fees - subscription revenue — 2,953 2,953 — 2,727 2,727
Total revenue recognized over time — 2,953 2,953 — 2,727 2,727
Total revenue from contracts with customers $ 1,770 $ 33,600 $ 35,370 $ 1,480 $ 30,872 $ 32,352

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NOTE 14 - NON-INTEREST REVENUES

Customers' revenue from contracts with customers in scope of ASC 606 is recognized within non-interest income.

The following table presents Customers' non-interest revenues affected by ASC 606 by business segment for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended June 30, 2020										Three Months Ended June 30, 2019
(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		Customers Bank Business Banking		BankMobile		Consolidated











Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue	$	193	$	6,285	$	6,478	$	219	$	6,541	$	6,760
Deposit fees	502		2,819		3,321		433		2,915		3,348
University fees - card and disbursement fees	—		389		389		—		167		167


Total revenue recognized at point in time	695		9,493		10,188		652		9,623		10,275
Revenue recognized over time:
University fees - subscription revenue	—		1,007		1,007		—		968		968
Total revenue recognized over time	—		1,007		1,007		—		968		968
Total revenue from contracts with customers	$	695	$	10,500	$	11,195	$	652	$	10,591	$	11,243


	Six Months Ended June 30, 2020										Six Months Ended June 30, 2019
(amounts in thousands)	Customers Bank Business Banking		BankMobile		Consolidated		Customers Bank Business Banking		BankMobile		Consolidated











Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue	$	463	$	12,824	$	13,287	$	398	$	15,167	$	15,565
Deposit fees	1,054		5,728		6,782		733		4,824		5,557
University fees - card and disbursement fees	—		681		681		—		522		522


Total revenue recognized at point in time	1,517		19,233		20,750		1,131		20,513		21,644
Revenue recognized over time:
University fees - subscription revenue	—		1,999		1,999		—		1,947		1,947
Total revenue recognized over time	—		1,999		1,999		—		1,947		1,947
Total revenue from contracts with customers	$	1,517	$	21,232	$	22,749	$	1,131	$	22,460	$	23,591

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NOTE 1415 — LOSS CONTINGENCIES

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution may have a material adverse effect on Customers’ results of operations for a particular period, and future changes in circumstances or additional information could result in accruals or resolution in excess of established accruals, which could adversely affect Customers’ results of operations, potentially materially.

~~Halbreiner Matter~~

~~On December 16, 2016, Elizabeth Halbreiner and Robert Halbreiner (“Plaintiffs”) filed a Second Amended Complaint captioned~~ Elizabeth Halbreiner and Robert Halbreiner, v. Customers Bank, Robert B.White, Richard A. Ehst, Thomas Jastrem, Timothy D. Romig, Andrew Bowman, Michael Fuoco, Saldutti Law Group f/k/a Saldutti, LLC a/k/a Saldutti Law, LLC, Robert L. Saldutti, LLC, Robert L. Saldutti, Esquire, Brian J. Schaffer, Esquire, Robert Lieber, Jr., Esquire, Jay Sidhu, James Zardecki, Zardecki Associates LLC, No. 01419 in the First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia, Trial Division. In this Second Amended Complaint, the Plaintiffs generally allege that Customers Bank, and the other named defendants, conspired to misuse the legal system for improper purposes and it also alleges defamation, false light, tortious interference with contractual relations, infliction of emotional distress, negligent infliction of emotional distress and loss of consortium. On January 6, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of the Plaintiff’s claims against Customers Bank and the employees of Customers Bank named as co-defendants.On April 6, 2017, the Court dismissed certain counts and determined to allow certain other counts to proceed. On October 1, 2019, Customers and the Plaintiff came to a preliminary agreement to settle the matter for $1.0 million. Customers established a legal reserve in the amount of $1.0 million based on the preliminary agreement during third quarter 2019.

Lifestyle Healthcare Group, Inc. Matter

On January 9, 2017, Lifestyle Healthcare Group, Inc., et al (“Plaintiffs”) filed a Complaint captioned Lifestyle Healthcare Group, Inc.; Fred Rappaport; Victoria Rappaport; Lifestyle Management Group, LLC Trading as Lifestyle Real Estate I, LP; Lifestyle Real Estate I GP, LLC; Daniel Muck; Lifestyle Management Group, LLC; Lifestyle Management Group, LLC Trading as Lifestyle I, LP D/B/A Lifestyle Medspa, Plaintiffs v. Customers Bank, Robert White; Saldutti Law, LLC a/k/a Saldutti Law Group; Robert L. Saldutti, Esquire; and Michael Fuoco, Civil Action No. 01206, in the First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia. In this Complaint, ~~which is related to the Halbreiner Matter described above,~~ the Plaintiffs generally allege wrongful use of civil proceedings and abuse of process in connection with a case filed and later dismissed in federal court, titled, Customers Bank v. Fred Rappaport, et al., U.S.D.C.E.D. Pa., No. 15-6145. On January 30, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of Plaintiff’s claims against Customers Bank and Robert White, named as co-defendants. In response to the Preliminary Objections, Lifestyle filed an Amended Complaint against Customers Bank and Robert White. Customers Bank has filed Preliminary Objections to the Second Amended Complaint seeking dismissal of Plaintiff's claim against Customers Bank and Robert White, named as co-defendants. The Court has dismissed certain counts and determined to allow certain other counts to proceed. Customers Bank intends to vigorously defend itself against these allegations but is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

United States Department of Education Matter

In third quarter 2018, Customers received a ~~FPRD~~Final Program Review Determination ("FPRD") letter dated September 5, 2018 from the DOE regarding a focused program review of Higher One's/Customers Bank's administration, as a third party servicer, of the programs authorized pursuant to Title IV of the Higher Education Act of 1965. The DOE program review covered the award years beginning in 2013 through the FPRD issuance date, including the time period when Higher One was acting as the third party servicer prior to Customers' acquisition of the Disbursement business on June 15, 2016. The FPRD determined that, with respect to students enrolled at specified partner institutions, Higher One/Customers did not provide convenient fee-free access to ATMs or bank branch offices in such locations as required by the DOE’s cash management regulations. Those regulations, which were in effect during the period covered by the program review and were revised during that period, seek, among other purposes, to ensure that students can make fee-free cash withdrawals. The FPRD determined that students incurred prohibited costs in accessing Title IV credit balance funds, and the FPRD classifies those costs as financial liabilities of Customers. The FPRD also requires Customers to take prospective action to increase ATM access for students at certain of its partner institutions. Customers ~~disagrees~~disagreed with the FPRD and ~~has elected to appeal the FPRD, including~~appealed the asserted financial liabilities of $6.5 million, and a request for review has been submitted to trigger an administrative process before the DOE’s Office of Hearing and Appeals.

On March 26, 2020, the DOE and Customers ~~intends~~filed a Joint Motion to ~~vigorously defend itself against~~Dismiss with Prejudice (the "Joint Motion") with the ~~financial~~United States Department of Education. The Joint Motion states that the DOE and Customers reached an agreement that resolves the liabilities ~~established~~at issue in the appeal. The Joint Motion was granted on April 27, 2020. As part of the settlement, the liabilities assessed in the FPRD through that administrative appeals process and it further intends to pursue resolution of the FPRD’s prospective action requirements during the appeals resolution process. Based on preliminary discussions with the DOE and further analysis performed by Customers and certain partner institutions, Customers has estimated the range of possible loss to be $1.0 millionwere reduced to $3.0 million ~~as of September 30, 2019.~~

~~Table of Contents~~

(the "settlement amount"). Customers ~~established~~had previously recorded a ~~legal reserve~~liability in the amount of $1.0 million during third quarter 2019 ~~as no amount within~~and increased its liability by an additional $1.0 million in first quarter 2020. The remaining $1.0 million is expected to be funded from funds in an escrow account set-up at the ~~range is more likely than any other amount~~time of Customers' acquisition of the Disbursement business from Higher One in ~~the range.~~2016.

Bureau of the Fiscal Service Notice of Direct Debit (U.S. Treasury Check Reclamation)

On June 21, 2019, Customers received a Notice of Direct Debit (U.S. Treasury Check Reclamation) from the Bureau of the Fiscal Service (“Reclamation Notice”). The Reclamation Notice ~~represents~~represented a demand to Customers for the return of funds on a U.S. Treasury check for approximately $5.4 million. Customers filed a written protest pursuant to Code of Federal Regulations, Title 31, Chapter II, Part 240, which resulted in a suspension of the direct debit by the Bureau of the Fiscal Service. On January 31, 2020, Customers ~~is currently unable~~received an Abandonment Notice from the Bureau of Fiscal Service instructing Customers to ~~predict~~disregard the ~~outcome~~Notice of Direct Debit as the ~~written protest, and therefore cannot determine the likelihood~~Bureau of ~~loss nor estimate a range~~Fiscal Service would not be seeking reclamation of loss. Customers intends to vigorously defend itself against the Reclamation Notice. Customers does not believe that this matter will have a material effect on the consolidated financial statements.these funds.

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NOTE 16 – SUBSEQUENT EVENTS

On August 6, 2020, BankMobile Technology, Inc. ("BMT"), a subsidiary of Customers Bank, and Megalith Financial Acquisition Corp. (“MFAC”), a special purpose acquisition company, entered into a definitive merger agreement. BMT is the technology arm of Customers' BankMobile reporting segment. Upon closing of the transaction, the combined company will operate as BM Technologies Inc. (the "Company") and expects to be listed on the New York Stock Exchange. All BMT serviced deposits and loans will remain at Customers Bank immediately after the closing of the transaction. Upon the closing of the transaction, BM Technologies will be a financial technology company bringing banks and business partners together through its digital banking platform.

Merger Consideration

The aggregate consideration to be paid pursuant to the merger to the Bank will be an amount (the “Merger Consideration”) equal to: (i) $140.0 million minus (ii) $9.3 million (representing a sponsor equity adjustment), plus (or minus, if negative) (iii) BMT’s net working capital less a target net working capital of $10.0 million, minus (iv) the aggregate amount of any outstanding indebtedness of BMT at closing, and minus (v) the amount of any unpaid transaction expenses of BMT, Megalith’s transaction expenses and other liabilities of Megalith due and owing at the closing.

The Merger Consideration will consist of cash and stock. The cash portion of the Merger Consideration (“Cash Consideration”) will be equal to (i) the amount of any proceeds of the PIPE Investment; plus (ii) an amount equal to one-half (1/2) of the difference between the (A) cash and cash equivalents of Megalith, including any funds in the trust account after giving effect to the completion of the redemption of shares of Megalith’s public stockholders (“Redemption”), less (B) a cash reserve to be used for the benefit of the Company in the Merger, in the amount of $10.0 million (such difference between clause (A) and (B) which resulting amount if otherwise negative shall be equal to zero, being which resulting amount if otherwise negative shall be equal to zero, being the “Remaining Trust Account Amount”); minus (iii) Megalith’s transaction expenses and other liabilities of Megalith due and owing at the closing; plus (iv) the cash and cash equivalents of BMT; minus (v) BMT’s unpaid transaction expenses; minus (vi) a cash reserve in the amount of $5.0 million. The stock portion of the Merger Consideration consists of a number of shares of Megalith’s Class A common stock with an aggregate value (the “Merger Consideration Share Amount”) equal to (a) the Merger Consideration, minus (b) the Cash Consideration, with the Bank receiving a number of shares of Megalith Class A common stock equal to the Merger Consideration Share Amount, divided by $10.38 (the “Per Share Price”).

The Merger Consideration is subject to adjustment after the closing based on confirmed amounts of the net working capital, the outstanding indebtedness of BMT and any unpaid transaction expenses of BMT, as of the closing date. If the adjustment is a negative adjustment in favor of Megalith, the Bank will deliver to Megalith a number of shares of Class A common stock of Megalith with a value equal to the absolute value of the adjustment amount (with each share valued at the Per Share Price). If the adjustment is a positive adjustment in favor of BMT, Megalith will issue to the Bank an additional number of shares of Class A common Stock of Megalith with a value equal to the adjustment amount (with each share valued at the Per Share Price). The Merger Consideration is also subject to reduction for the indemnification obligations of the Bank.

Certain Relationships

Mr. Jay Sidhu, who currently serves as Chief Executive Officer and Chairman of the Board of Customers Bancorp and Executive Chairman of the Bank, also serves as Executive Chairman of Megalith, is one of the managing members of Megalith’s sponsor and is a Megalith stockholder. Mr. Bhanu Choudhrie, who currently serves as a member of the board of directors of Customers Bancorp and the Bank also serves as a director of Megalith, is one of the managing members of Megalith’s sponsor and is a Megalith stockholder. Mr. Samvir Sidhu, the son of Jay Sidhu, currently serves as the Bank’s Vice Chairman and Chief Operating Officer and as Customers Bancorp’s Head of Corporate Development, previously served as the Chief Executive Officer of Megalith, currently serves as a director of Megalith and is a Megalith stockholder. Ms. Luvleen Sidhu, the daughter of Jay Sidhu, currently serves as the Chief Executive Officer and as a director of BMT and is expected to continue to serve in those roles with the Company. Certain of these individuals also expect to participate in the private placement by Megalith of shares of its Class A common stock to be completed in connection with the closing.

In light of these relationships, Customers Bancorp appointed a special committee consisting of independent directors with their own counsel and financial advisors. The special committee reviewed the transaction, obtained a fairness opinion in connection with the transaction, and made a unanimous recommendation to Customers Bancorp’s board of directors for approval. Customers Bancorp’s board of directors approved the transaction by a majority vote, with the above-mentioned directors recusing themselves from the deliberation and voting process and no director voting against the transaction.

The business combination is expected to close in the fourth quarter 2020, pending MFAC stockholder approval, regulatory approval and the satisfaction or waiver of additional conditions to closing.

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

Cautionary Note Regarding Forward-Looking Statements

This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements ~~relate~~include statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words ”may,” ”could,” ”should,” ”pro forma,” ”looking forward,” ”would,” ”believe,” ”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events ~~or future predictions, including events or predictions relating to future~~and factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. Forward-looking statements reflect numerous assumptions, estimates and forecasts as to future events. No assurance can be given that the assumptions, estimates and forecasts underlyingexpectations expressed in such forward-looking statements, ~~will accurately reflect future conditions,~~including: the adverse impact on the U.S. economy, including the markets in which we operate, of the coronavirus outbreak, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the demand for our products and services and the availability of sources of funding; the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that affect market interest rates and the money supply; actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships; the effects of changes in accounting standards or policies, including Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (CECL) and matters relating to the announced merger of BankMobile Technologies, Inc. (“BMT”), including the possibility of events, changes or other circumstances occurring or existing that ~~any guidance, goals, targets or projected results will~~could result in the planned merger of BMT not being completed, the possibility that the planned merger of BMT may be ~~realized. The assumptions, estimates~~more expensive to complete than anticipated, the risks associated with Customers' significant ownership of BM Technologies, Inc. common stock and ~~forecasts underlying such forward-looking statements involve judgments with respect~~BM Technologies, Inc.'s ability to ~~among other things, future economic, competitive, regulatory~~service its debt following completion of the merger, the possibility that the expected benefits to Customers and ~~financial market conditions and future business decisions, which~~our shareholders of the planned merger may not be ~~realized and which are inherently subject~~achieved, the possibility of Customers incurring liabilities relating to ~~significant business, economic, competitive and regulatory uncertainties and known and unknown risks,~~the disposition of BMT, the costs of providing certain ongoing services to BM Technologies following completion of the merger, including the ~~risks described under “Risk Factors”~~time commitment of Customers' management and other personnel in providing such services, or the possible effects on Customers' results of operations if the planned merger of BMT is not completed in a timely fashion or at all. Customers Bancorp, Inc.~~'s Annual Report on Form 10-K for~~ cautions that the ~~fiscal year ended December 31, 2018 (the “2018 Form 10-K”), as~~foregoing factors are not exclusive, and neither such factors ~~may be updated from time to time in our filings with~~nor any such forward-looking statement takes into account the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance onimpact of any future events. All forward-looking statements ~~we make, which~~and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. ~~We do~~For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2019, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake ~~any obligation~~ to ~~release publicly or otherwise provide any revisions to~~update any forward-looking ~~statements we~~statement whether written or oral, that may ~~make, including any forward-looking financial information,~~be made from time to ~~reflect events~~time by Customers Bancorp, Inc. or ~~circumstances occurring after the date hereof~~by or ~~to reflect the occurrence~~on behalf of ~~unanticipated events,~~Customers Bank, except as may be required under applicable law.

Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers' ~~2018~~2019 Form 10-K.

Overview

Like most financial institutions, Customers derives the majority of its income from interest it receives on its interest-earning assets, such as loans, leases and investments. Customers' primary source of funds for making these loans, leases and investments are its deposits and borrowings, on which it pays interest. Consequently, one of the key measures of Customers' success is the amount of its net interest income, or the difference between the income on its interest-earning assets and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the difference between the interest income generated by interest earning assets and the interest expense on interest-bearing liabilities, relative to the amount of average interest earning assets, which is referred to as net interest margin.

BankMobile, a division of Customers Bank, derives a majority of its revenue from interest income on other consumer loans, interchange and card revenue and deposit fees.

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There is credit risk inherent in loans and leases requiring Customers to maintain an ACL to absorb credit losses on existing loans and leases that may become uncollectible. Customers maintains this allowance by charging a provision for credit losses on loan and lease losses against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing its ACL, in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION and NOTE 7 - LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES to Customers' unaudited quarterly financial statements.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that Customers serves. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Customers has taken deliberate actions to ensure that it has the necessary balance sheet strength to serve its clients and communities, including increases in liquidity and reserves supported by a strong capital position. Customers' business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue in coming months. In order to protect the health of its customers and team members, and to comply with applicable government directives, Customers has modified its business practices, including restricting team member travel, directing team members to work from home insofar as is possible and implementing its business continuity plans and protocols to the extent necessary. Customers also has made donations that have resulted in more than $1 million, either directly or indirectly, to communities in its footprint for urgent basic needs and has been re-targeting existing sponsorship and grants to non-profit organizations to support COVID-19 related activities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the SBA Paycheck Protection Program ("PPP"), a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee an eight-week or 24-week period of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On April 16, 2020, the SBA announced that all available funds had been exhausted and applications were no longer being accepted. As of that date, Customers had obtained approvals for approximately 1,267 clients totaling approximately $385 million in approved PPP loans. On April 22, 2020, an additional $310 billion of funds for the PPP was signed into law. As of June 30, 2020, Customers has helped thousands of small businesses by originating about $4.8 billion in PPP loans directly or through fintech partnerships.

In response to the COVID-19 pandemic, Customers has also implemented a short-term loan modification program to provide temporary payment relief to certain of its borrowers who meet the program's qualifications. This program allows for a deferral of payments for a maximum of 90 days at a time. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through July 24, 2020, total commercial deferments declined to less than $700 million, or down to about 8.0%, from a peak of $1.2 billion and total consumer deferments declined to $60 million, or 3.7%, from a peak of $108 million.

The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020. The FRB has also established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19, including among others, Main Street Lending facilities to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses and the PPPLF, which was created to bolster the effectiveness of the PPP by taking loans as collateral at face value. While Customers has not participated in all of these facilities or programs to date, it may participate in some or all of these facilities or programs, including as a lender, agent, or intermediary on behalf of clients or customers at various times in the future. As of June 30, 2020, Customers borrowed $4.4 billion from the PPPLF to fund the origination of about $4.8 billion of PPP loans.

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Significant uncertainties as to future economic conditions exist, and Customers has taken deliberate actions in response, including higher levels of on-balance sheet liquidity and maintaining strong capital ratios. Additionally, the economic pressures, coupled with the implementation of an expected lifetime loss methodology for determining our provision for credit losses as required by CECL have contributed to an increased provision for credit losses on loans and leases and off-balance sheet credit exposures in 2020. Customers continues to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact Customers' operations and financial results during the remainder of 2020 is highly uncertain.

New Accounting Pronouncements

For information about the impact that recently adopted, including CECL, or issued accounting guidance will have on us, please refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements.

Critical Accounting Policies

Customers has adopted various accounting policies that govern the application of ~~accounting principles generally accepted in the United States of America~~U.S. GAAP and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. Customers' significant accounting policies are described in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its ~~2018~~2019 Form 10-K and updated in this Form 10-Q for the quarterly period ended ~~September~~June 30, ~~2019~~2020 in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION."

Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain ~~assets and liabilities.~~assets. Customers considers these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances.

~~Table of Contents~~

Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of Customers' ~~assets~~assets.

The critical accounting policies that are both important to the portrayal of Customers' financial condition and ~~liabilities~~results of operations and require complex, subjective judgments are the accounting policies for the following: ACL and the Valuation of Interest-Only GNMA Securities. These critical accounting policies and material estimates, along with the related disclosures, are reviewed by Customers' Audit Committee of the Board of Directors.

Allowance for Credit Losses

Customers' ACL at June 30, 2020 represents Customers' current estimate of the lifetime credit losses expected from its loan and lease portfolio and its ~~results~~unfunded lending-related commitments that are not unconditionally cancellable. Management estimates the ACL by projecting a lifetime loss rate conditional on a forecast of ~~operations.~~economic parameters and other qualitative adjustments, for the loans and leases' expected remaining term.

~~Overview~~

~~Customers' strategic priorities include creating shareholder value through improved profitability, targeting a core return on average assets~~Customers uses external sources in the creation of ~~1.25% or higher~~its forecasts, including current economic conditions and ~~a double-digit return on tangible common equity~~forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the ~~next 2 - 3 years. Favorable shifts~~expected life of the pool, while also incorporating prepayment assumptions into its lifetime loss rates. Internal factors that impact the quarterly allowance estimate include the level of outstanding balances, portfolio performance and assigned risk ratings. Significant loan/borrower attributes utilized in ~~asset~~the models include property type, initial loan to value, assigned risk ratings, delinquency status, origination date, maturity date, initial FICO scores, and ~~funding mix resulted~~borrower state.

The ACL may be affected materially by a variety of qualitative factors that Customers considers to reflect its current judgement of various events and risks that are not measured in our statistical procedures, including uncertainty related to the economic forecasts used in the modeled credit loss estimates, nature and volume, credit underwriting policy exceptions, peer comparison, industry data, and model and data limitations. The qualitative allowance for economic forecast risk is further informed by multiple alternative scenarios to arrive at a composite scenario supporting the period-end ACL balance. The evaluation process is inherently imprecise and subjective as it requires significant ~~NIM expansion over~~management judgment based on underlying factors that are susceptible to changes, sometimes materially and rapidly. Customers recognizes that this approach may not be suitable in certain economic environments such that additional analysis may be performed at management's discretion. Due in part to its subjectivity, the ~~past twelve months~~qualitative evaluation may be materially impacted during periods of economic uncertainty and ~~are~~late breaking events that could lead to revision of reserves to reflect management's best estimate of expected ~~to drive further NIM expansion~~credit losses.

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The ACL is established in ~~fourth~~accordance with our ACL policy. The ACL Committee, which includes the Chief Financial Officer, Chief Risk Officer, and Chief Credit Officer, among others, reviews the adequacy of the ACL each quarter, ~~2019, resulting in an expected full-year 2019 NIM of 2.70% or higher. Superior expense~~together with Customers' risk management ~~combined with cost saving initiatives~~team. The ACL policy, significant judgements and the related disclosures are reviewed by Customers' Audit Committee of the Board of Directors.

The significant increase in our estimated ACL as of June 30, 2020 as compared to our January 1, 2020 estimate was primarily attributable to the significant economic impact of COVID-19, along with loan growth and maturity of BankMobile are also expected to enhance profitability. Total assets at year-end 2019 are expected to be under $10 billion, while the average balance of interest-earning assets for 2019 is expected to be comparable to 2018 average interest-earning assets. Customers intends to continue to de-emphasize its multi-family loan portfolio through a planned sale of approximately $500 million of multi-family loans and continued expected run-off of $300 million or more in ~~fourth quarter 2019. Customers will continue to invest in higher-yielding~~Customers' commercial and ~~industrial and other~~ consumer loan portfolios. ~~Similarly, Customers plans to replace higher-rate non-core deposits and borrowings with less expensive core deposits.~~

~~In late November 2018, BankMobile's first White Label banking partnership went live in beta test phase, offering BankMobile's best in class banking products to~~The total reserve build for the partner's broad customer base. On April 18, 2019, the partner made a public announcement regarding the partnership and began the first phase of national digital marketing efforts. At September 30, 2019, the partnership had generated $67.5 million in total deposits.

~~Third Quarter Events of Note~~

~~Customers reported record net income available to common shareholders of $23.5 million, or $0.74 per diluted share,~~ACL for the three months and six months ended ~~September~~June 30, ~~2019. NIM expanded 19 basis points to 2.83% in third quarter 2019, which marks Customers' fourth consecutive quarter~~2020 was $20.4 million and $53.1 million, with an ending balance of NIM expansion from the trough of 2.47% reported in third quarter 2018. BankMobile also reached profitability one quarter earlier than expected, with earnings of $0.7 million (or $0.02 per diluted share) and is expected to remain profitable in fourth quarter 2019 and in 2020. The return on average assets was 0.95% in third quarter 2019, up significantly from 0.36% in second quarter 2019 and 0.22% in third quarter 2018. The return on average common equity was 11.81% in third quarter 2019, up significantly from 2.96% in second quarter 2019 and 1.31% in third quarter 2018. Total deposits also increased $412 million, or 4.8%, year-over-year, which included a $538 million, or 24.8%, increase in demand deposits. On September 25, 2019, Customers Bancorp issued $25 million of 5-year senior notes at a rate of 4.50%, the net proceeds of which were contributed to Customers Bank as Tier 1 capital.

~~The third quarter 2019 financial results included certain notable charges, including legal contingency accruals totaling $2.0~~$163.7 million ($~~0.05 per diluted share) relating to the previously disclosed Halbreiner and United States Department of Education matters. The legal contingency accruals were offset by a $1.0~~159.9 million ($0.02 per diluted share) gain realized from the sale of $95 million of available-for-sale corporate note securities and $1.3 million ($0.04 per diluted share) unrealized gains from fair value adjustments on investment securities.

Total assets were $11.7 billion at September 30, 2019, an increase of $1.9 billion from December 31, 2018. The increase in total assets was primarily driven by a $1.7 billion increase in total loans and leases. Mortgage warehouse loans, at fair value, increased $1.0 billion, or 73.5%, commercial and industrial loans (including owner occupied commercial real estate) increased $412.3 million, or 21.1%, commercial real estate non-owner occupied loans increased $143.5 million, or 12.7%, residential real estate loans increased $63.8 million, or 11.2%, and other consumer loans increased $569.5 million, or 769%. As planned, multi-family loans decreased $485.3 million, or 14.8%. Total asset growth reflected a stronger-than-expected seasonal increase in mortgage warehouse loans in third quarter 2019 primarily resulting from increased refinancing activity caused by a decline in market rates on mortgages. Total assets are still expected to be less than $10 billion at year-end and approximately $500 million of multi-family loans have been reclassified to held for sale at September 30, 2019 and additional run-off of the multifamily portfolio of $300 million or more is expected in fourth quarter 2019. The natural contraction in mortgage warehouse balances during the fourth quarter combined with residential mortgage loan run-off or possible sale is expected to bring total assets below $10 billion.

~~Asset quality remains strong with NPLs of $17.6 million, or 0.17% of total~~ loans and leases and ~~total non-performing assets (NPLs~~$3.8 million for unfunded lending-related commitments) as of June 30, 2020.

To determine the ACL as of June 30, 2020, Customers utilized the Moody's June 2020 Baseline forecast to generate its modelled expected losses and ~~OREO) only 0.15%~~considered Moody's other alternative economic forecast scenarios to qualitatively adjust the modelled ACL by loan portfolio in order to reflect management's reasonable expectations of ~~total assets at September 30, 2019, reflecting~~current and future economic conditions. The Baseline forecast assumed a deep recession in second quarter 2020, which included a significant drop in GDP and elevated unemployment compared to the first quarter 2020 forecast for current market conditions, followed by a strong recovery in the second half of 2020. The qualitative adjustment considered a more optimistic scenario that aligned with management's expectation of expected credit losses that resulted in a reduction to the modelled ACL. Customers continues to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and, if the depth of the recession or pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.

There is no certainty that Customers' ~~disciplined lending practices~~ACL will be appropriate over time to cover losses in our portfolio as economic and ~~continued focus~~market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or Customers' markets, such as the current COVID-19 pandemic, could severely impact our current expectations. If the credit quality of Customers' customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, Customers' net income and capital could be materially adversely affected which, in turn could have a material adverse effect on ~~credit risk management.~~ Customers' ~~level~~financial condition and results of ~~NPLs~~operations. The extent to ~~total loans~~which the current COVID-19 pandemic has and leases at September 30, 2019 remained well below industry average NPLs to total loans and leases of 1.07% and Customers' peer group NPLs to total loans and leases of 0.71% (peer data is the most recent period available from S&P Global Market Intelligence). Capital ratios at the Bankwill continue to ~~exceed~~negatively impact Customers' businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time.

For more information, see NOTE 7 - LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES to the ~~minimum “well-capitalized” threshold established by regulation and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at September 30, 2019.~~unaudited consolidated financial statements.

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Results of Operations

The following table sets forth the condensed statements of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:

Three Months Ended September 30, QTD Nine Months Ended September 30, YTD
(dollars in thousands) 2019 2018 Change % Change 2019 2018 Change % Change
Net interest income $ 75,735 $ 64,001 $ 11,734 18.3 % $ 199,718 $ 196,354 $ 3,364 1.7 %
Provision for loan and lease losses 4,426 2,924 1,502 51.4 % 14,539 4,257 10,282 241.5 %
Total non-interest income 23,369 2,084 21,285 NM 55,125 39,120 16,005 40.9 %
Total non-interest expense 59,592 57,104 2,488 4.4 % 173,160 163,134 10,026 6.1 %
Income before income tax expense 35,086 6,057 29,029 479.3 % 67,144 68,083 (939) (1.4) %
Income tax expense 8,020 28 7,992 NM 15,343 14,250 1,093 7.7 %
Net income 27,066 6,029 21,037 348.9 % 51,801 53,833 (2,032) (3.8) %
Preferred stock dividends 3,615 3,615 — — % 10,844 10,844 — — %
Net income available to common shareholders $ 23,451 $ 2,414 $ 21,037 871.5 % $ 40,957 $ 42,989 $ (2,032) (4.7) %


	Three Months Ended June 30,						QTD						Six Months Ended June 30,				YTD
(dollars in thousands)	2020		2019		Change		% Change		2020		2019		Change		% Change
Net interest income	$	91,982	$	64,679	$	27,303	42.2	%	$	173,302	$	123,983	$	49,319	39.8	%
Provision for credit losses	20,946		5,346		15,600		291.8	%	52,732		10,113		42,619		421.4	%
Total non-interest income	22,236		12,036		10,200		84.7	%	44,167		31,754		12,413		39.1	%
Total non-interest expense	63,506		59,582		3,924		6.6	%	129,965		113,566		16,399		14.4	%
Income before income tax expense	29,766		11,787		17,979		152.5	%	34,772		32,058		2,714		8.5	%
Income tax expense	7,048		2,491		4,557		182.9	%	8,955		7,323		1,632		22.3	%
Net income	22,718		9,296		13,422		144.4	%	25,817		24,735		1,082		4.4	%
Preferred stock dividends	3,581		3,615		(34)		(0.9)	%	7,196		7,229		(33)		(0.5)	%
Net income available to common shareholders	$	19,137	$	5,681	$	13,456	236.9	%	$	18,621	$	17,506	$	1,115	6.4	%

Customers reported net income available to common shareholders of ~~$23.5~~$19.1 million and ~~$41.0~~$18.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, compared to ~~$2.4~~net income available to common shareholders of $5.7 million and ~~$43.0~~$17.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. Factors contributing to the change in net income available to common shareholders for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 were as follows:

Net interest income

Net interest income increased ~~$11.7~~$27.3 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 as average interest-earning assets increased by ~~$348.3 million~~$4.1 billion and NIM expanded by 36one basis ~~points~~point to ~~2.83%~~2.65% for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~2.47%~~2.64% for the three months ended ~~September~~June 30, ~~2018 as~~2019 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 4896 basis point increase in the yield on interest-earnings assets for the three months ended September 30, 2019, partially offset by higher funding costs as the cost of interest-bearing liabilities increased by 20 basis points for the three months ended September 30, 2019. Compared to the three months ended September 30, 2018, total loan and lease yields increased 41 basis points to 4.79% mostly due to the purchase of other consumer loans totaling $534.2 million during the nine months ended September 30, 2019 and an increase of 41 basis points in the yield on commercial and industrial loans and leases. Total investment securities yields increased 30 basis points to 3.60% mostly due to the sale of $495 million of lower-yielding securities during the three months ended September 30, 2018. Given the Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, which were partially offset by two Federal Reserve interest rate cuts in third quarter 2019, the cost of interest-bearing deposits increased 25 basis points to 2.20% and borrowing costs increased 12 basis points to 2.86% for the three months ended September 30, 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.82% and 1.67% for the three months ended September 30, 2019 and 2018, respectively, an increase of 15 basis points.

Net interest income increased $3.4 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 as NIM expanded eleven basis points to 2.69%, partially offset by a decrease of $240.8 million in average interest-earning assets. The NIM expansion largely resulted from a 44 basis point increasedecline in the yield on interest-earning assets ~~for the nine months ended September 30, 2019, partially offset by higher funding costs as~~and a 124 basis point decline in the cost of interest-bearing liabilities increased by 47 basis points. Compared to the nine months ended September 30, 2018, total loan and lease yields increased 36 basis points to 4.64% mostly due to the purchase of other consumer loans totaling $534.2 million during the nine months ended September 30, 2019 and an increase of 54 basis points in the yield on commercial and industrial loans and leases. Total investment securities yields increased 42 basis points to 3.66% mostly due to the sale of $495 million of lower-yielding securities duringfor the three months ended ~~September~~June 30, ~~2018. Given~~2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($2.8 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.9 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 0.99% and 2.04% for the three months ended June 30, 2020 and 2019, respectively.

Net interest income increased $49.3 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 as average interest-earning assets increased by $2.9 billion and NIM expanded by 18 basis points to 2.80% for the six months ended June 30, 2020 from 2.62% for the six months ended June 30, 2019 resulting from the Federal Reserve interest rate ~~hikes~~cuts of 225 basis points beginning in ~~2018~~August 2019 and the ~~associated increases~~shift in ~~market interest rates, which were partially offset by two Federal Reserve interest rate cuts~~the mix of interest-earning assets and interest-bearing liabilities drove a 45 basis point decline in ~~third quarter 2019,~~the yield on interest-earning assets and an 83 basis point decline in the cost of interest-bearing ~~deposits increased 52 basis points to 2.20% and borrowing costs increased 53 basis points to 2.97%~~liabilities for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($1.4 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.5 billion average balance) costing 0.35%. Customers' total ~~costs~~cost of funds, including non-interest bearing deposits ~~(including interest-bearing~~was 1.30% and ~~non-interest-bearing) were 1.81% and 1.41%~~2.00% for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018, respectively, an increase of 40 basis points.~~respectively.

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Provision for ~~loan and lease~~credit losses

The ~~$1.5~~$15.6 million increase in the provision for ~~loan and lease~~credit losses for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018,~~2019, reflects Customers' ~~initiatives to increase commercial~~adoption of CECL and ~~industrial~~the impact of COVID-19. Upon adoption of the CECL standard on January 1, 2020, the allowance for credit losses for loans and leases and off-balance sheet credit exposures increased by $79.8 million and $3.4 million, respectively. The allowance for credit losses on off-balance sheet credit exposures is presented within accrued interest payable and other ~~consumer loans. The provision for loan and lease losses for the three months ended September 30, 2019 included $2.0 million for net loan growth~~liabilities in the consolidated balance sheet and the related provision is presented as part of other ~~non multi-family portfolios (primarily commercial and industrial), $2.3 million~~non-interest expense on the consolidated income statement. The allowance for ~~net growth in the other consumer loan portfolio, $0.8 million for manufactured housing~~credit losses on loans and $1.7 million for specifically identified loans. These increases were offset in part by a $2.4 million release for multi-family loans due to runoff and the effect of $0.5 billion of multi-family loans transferred toleases held for ~~sale as a result~~investment, represented 2.20% of ~~Customers' intent~~total loans and leases receivable, excluding PPP loans (non-GAAP measure, please refer to ~~sell these loans. The provision for loan~~the non-GAAP reconciliation within Loans and ~~lease losses for the three months ended September~~Leases - Asset Quality), at June 30, 2018 included provisions of $2.3 million for consumer loan portfolio growth and $0.9 million for impaired loan provisions, offset in part by a release of reserve of $0.2 million resulting from improved asset quality and lower incurred losses than previously estimated.2020, compared to 0.63% at June 30, 2019. Net charge-offs for the three months ended ~~September~~June 30, ~~2019~~2020 were ~~$1.8~~$10.3 million, or ~~seven~~32 basis points of average loans and leases on an annualized basis, compared to net charge-offs of ~~$0.5~~$0.6 million, or ~~two~~three basis points on an annualized basis for the three months ended ~~September~~June 30, ~~2018.~~2019. The increase in net charge-offs for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, was primarily due to a partial charge-off of $2.8 million for one commercial real estate collateral dependent loan during the three months ended June 30, 2020 and an increase in charge-offs of other consumer loans, coinciding with the growth of the portfolio year-over-year.

The ~~$10.3~~$42.6 million increase in the provision for ~~loan and lease~~credit losses for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, reflects Customers' initiatives to increase commercial and industrial loans and leases and other consumer loans. The provision for loan and lease losses for the nine months ended September 30, 2019 included $11.2 million for net loan growth (primarily in the commercial and industrial and other consumer loan portfolios, netadoption of ~~multi-family run-off~~CECL and the ~~effect~~impact of $0.5 billion of multi-family loans transferred to held for sale as a result of Customers' intent to sell these loans), $0.8 million for manufactured housing loans and $2.4 million for specifically identified loans. The provision for loan and lease losses for the nine months ended September 30, 2018 included $3.5 million for loan and lease portfolio growth and $1.9 million for impaired loans, offset in part by a release of $1.2 million resulting from improved asset quality and lower incurred losses than previously estimated.COVID-19. Net charge-offs for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 were ~~$3.5~~$29.0 million, or ~~five~~52 basis points of average loans and leases on an annualized basis, compared to net charge-offs of ~~$1.5~~$1.7 million, or ~~two~~4 basis points on an annualized basis for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in net charge-offs for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily due to partial charge-offs of $15.6 million for two commercial real estate collateral dependent loans during the six months ended June 30, 2020 and an increase in charge-offs of other consumer loans, coinciding with the growth of the portfolio year-over-year.

Non-interest income

The ~~$21.3~~$10.2 million increase in non-interest income for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~an $18.7~~a $7.5 million loss realized ~~from~~upon the ~~sale~~acquisition of ~~$495 million of lower-yielding investment~~certain interest-only GNMA securities ~~for~~during the three months ended ~~September~~June 30, ~~2018, a $1.0~~2019, $4.4 million in realized gain ~~realized from the~~on sale of ~~$95 million of available-for-sale corporate note~~investment securities ~~for~~during the three months ended ~~September~~June 30, ~~2019,~~2020 and increases of ~~$2.6 million in unrealized gains from fair value adjustments on investment securities,~~ $1.7 million in commercial lease income, ~~$1.6~~$1.5 million in ~~deposit fees,~~unrealized gain on equity securities issued by a foreign entity and ~~$0.3~~$0.9 million in mortgage warehouse ~~transactional~~transactions fees. These increases were offset in part by decreases of ~~$3.3~~$5.3 million in other non-interest income and ~~$1.1~~$0.3 million in ~~gains on sales of SBA loans~~interchange and card revenue for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018.~~2019.

The ~~$16.0~~$12.4 million increase in non-interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~an $18.7~~a $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the six months ended June 30, 2019, $8.3 million of gains realized from the sale of ~~$495 million of lower-yielding~~ investment securities ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2018, a $1.0 million gain realized from the sale of $95 million of available-for-sale corporate note securities for the nine months ended September 30, 2019,~~2020 and increases of ~~$4.8~~$3.6 million in commercial lease income, ~~$3.5~~$1.5 million in mortgage warehouse transactional fees, and $1.2 million in deposit ~~fees, and $2.5 million in unrealized gains from fair value adjustments on investment securities.~~fees. These increases were offset in part by ~~a $7.5 million loss upon acquisition of interest-only GNMA securities for the nine months ended September 30, 2019 and~~ decreases of ~~$2.3~~$7.5 million in other non-interest income ~~$0.7~~and $2.3 million in interchange and card revenue ~~$0.5 million in mortgage warehouse transactional fees, and $0.3 million in bank-owned life insurance~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~

2020.

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Non-interest expense

The ~~$2.5~~$3.9 million increase in non-interest expense for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from increases of ~~$3.6 million in professional services, $2.8 million in provision for operating losses, $1.7~~$4.4 million in salaries and employee benefits, $1.4 million in commercial lease depreciation, ~~$1.1~~$1.2 million in loan workout, and $0.9 million in technology, communication and bank operations. These increases were offset in part by decreases of $1.4 million in provision for operating losses, $1.2 million in professional services, $0.8 million in other non-interest expense, and $0.8 million in ~~occupancy.~~advertising and promotion for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The $16.4 million increase in non-interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from increases of $6.9 million in salaries and employee benefits, $2.9 million in commercial lease depreciation, $2.5 million in other non-interest expense, $2.0 million in technology, communication and bank operations, $1.9 million in professional services, $1.2 million in loan workout, and $1.1 million in FDIC assessments, taxes and regulatory fees. These increases were offset in part by ~~decreases~~a decrease of $3.2 million in FDIC assessments, non-income taxes and regulatory fees, $2.9 million in merger and acquisition related expenses, and $2.9 million in technology, communication and bank operations for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

~~The $10.0 million increase in non-interest expense for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily resulted from increases of $4.3~~$2.2 million in provision for operating losses $4.1 million in professional services, $3.8 million in commercial lease depreciation, $1.8 million in salaries and employee benefits, $1.6 million in advertising and promotion, $1.2 million in other non-interest expense, and $0.8 million in occupancy. These increases were offset in part by decreases of $3.9 million in merger and acquisition related expenses, $3.4 million in FDIC assessments, non-income taxes and regulatory fees, and $0.4 million in loan workout for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Income tax expense

Customers' effective tax rate was ~~22.9%~~23.7% for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~0.5%~~21.1% for the three months ended ~~September~~June 30, ~~2018.~~2019. The increase in the effective tax rate primarily resulted from a favorable return to provision adjustment ~~which included the benefit of a research and development tax credit, during~~for the three months ended ~~September~~June 30, ~~2018.~~2019.

Customers' effective tax rate was ~~22.9%~~25.75% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~20.9%~~22.84% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in the effective tax rate primarily resulted from discrete provision items, which increased income tax expense, for the six months ended June 30, 2020, compared to a favorable return to provision adjustment, which ~~included~~lowered income tax expense, for the ~~benefit of a research and development tax credit, during the nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Preferred stock dividends

Preferred stock dividends were $3.6 million ~~and $10.8 million~~ for both the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, or 5.60%, compared to a fixed rate of 7.00%.

Preferred stock dividends were $7.2 million for both the six months ended June 30, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the six months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, or 5.60%, compared to a fixed rate of 7.00%.

NET INTEREST INCOME

Net interest income (the difference between the interest earned on loans and leases, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings. The following tables summarize Customers' net interest income, related interest spread, net interest margin and the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

5459

~~Table~~Tab le of ~~Contents~~Contents


		Three Months Ended September 30,																								Three Months Ended September 30,										Three Months Ended June 30,						Three Months Ended June 30,
		2019										2018												2019 vs. 2018										2020						2019	2020 vs. 2019
(dollars in thousands)	(dollars in thousands)	Average balance		Interest income or expense		Average yield or cost		Average balance		Interest income or expense		Average yield or cost		Due to rate		Due to volume		Total		(dollars in thousands)	Average balance		Interest income or expense		Average yield or cost			Average balance		Interest income or expense		Average yield or cost		Due to rate		Due to volume		Total
Assets	Assets																			Assets
Interest-earning deposits	Interest-earning deposits	$	100,343	$	826	3.26	%	$	309,588	$	1,538	1.97	%	$	672	$	(1,384)	$	(712)	Interest-earning deposits	$	384,622	$	113	0.12		%	$	78,666	$	590	3.01	%	$	(1,001)	$	524	$	(477)
Investment securities ⁽¹⁾	Investment securities ⁽¹⁾	652,142		5,867		3.60	%	1,029,857		8,495		3.30	%	726		(3,354)		(2,628)		Investment securities ⁽¹⁾	705,389		6,155		3.49		%	687,048		6,481		3.77	%	(493)		167		(326)
Loans and leases:	Loans and leases:																			Loans and leases:
Commercial loans to mortgage companies	Commercial loans to mortgage companies	2,103,612		24,260		4.58	%	1,680,441		21,274		5.02	%	(1,994)		4,980		2,986		Commercial loans to mortgage companies	2,456,067		17,740		2.91		%	1,658,070		19,678		4.76	%	(9,305)		7,367		(1,938)
Multi-family loans	Multi-family loans	2,929,650		28,871		3.91	%	3,555,223		34,901		3.89	%	177		(6,207)		(6,030)		Multi-family loans	2,009,847		19,345		3.87		%	3,097,537		29,630		3.84	%	228		(10,513)		(10,285)
Commercial and industrial loans and leases ⁽²⁾	Commercial and industrial loans and leases ⁽²⁾	2,159,067		28,522		5.24	%	1,782,500		21,692		4.83	%	1,958		4,872		6,830		Commercial and industrial loans and leases ⁽²⁾	2,460,060		24,775		4.05		%	2,041,315		26,411		5.19	%	(6,434)		4,798		(1,636)
PPP loans																				PPP loans	2,754,920		11,706		1.71		%	—		—		—	%	—		11,706		11,706
Non-owner occupied commercial real estate loans	Non-owner occupied commercial real estate loans	1,294,246		14,902		4.57	%	1,255,206		13,784		4.36	%	679		439		1,118		Non-owner occupied commercial real estate loans	1,392,131		13,179		3.81		%	1,181,455		13,329		4.53	%	(2,307)		2,157		(150)
Residential mortgages	Residential mortgages	729,603		7,565		4.11	%	582,910		5,904		4.02	%	136		1,525		1,661		Residential mortgages	429,609		3,771		3.53		%	723,160		7,724		4.28	%	(1,192)		(2,761)		(3,953)
Other consumer loans	Other consumer loans	600,256		14,324		9.47	%	11,618		260		8.88	%	18		14,046		14,064		Other consumer loans	1,288,999		27,931		8.72		%	289,511		6,795		9.41	%	(533)		21,669		21,136
Total loans and leases ⁽³⁾	Total loans and leases ⁽³⁾	9,816,434		118,444		4.79	%	8,867,898		97,815		4.38	%	9,627		11,002		20,629		Total loans and leases ⁽³⁾	12,791,633		118,447		3.72		%	8,991,048		103,567		4.62	%	(22,850)		37,730		14,880
Other interest-earning assets	Other interest-earning assets	98,279		1,581		6.39	%	111,600		2,197		7.81	%	(372)		(244)		(616)		Other interest-earning assets	98,377		503		2.06		%	94,388		1,312		5.58	%	(862)		53		(809)
Total interest-earning assets	Total interest-earning assets	10,667,198		126,718		4.72	%	10,318,943		110,045		4.24	%	12,844		3,829		16,673		Total interest-earning assets	13,980,021		125,218		3.60		%	9,851,150		111,950		4.56	%	(26,868)		40,136		13,268
Non-interest-earning assets	Non-interest-earning assets	591,946						409,396												Non-interest-earning assets	695,563							520,692
Total assets	Total assets	$	11,259,144					$	10,728,339											Total assets	$	14,675,584						$	10,371,842
Liabilities	Liabilities																			Liabilities
Interest checking accounts	Interest checking accounts	$	1,014,590	4,687		1.83	%	$	696,827	2,690		1.53	%	601		1,396		1,997		Interest checking accounts	$	2,482,222	4,605		0.75		%	$	836,154	4,078		1.96	%	(3,705)		4,232		527
Money market deposit accounts	Money market deposit accounts	3,100,975		17,344		2.22	%	3,564,148		17,855		1.99	%	1,946		(2,457)		(511)		Money market deposit accounts	3,034,457		6,449		0.85		%	3,168,957		17,842		2.26	%	(10,667)		(726)		(11,393)
Other savings accounts	Other savings accounts	561,790		3,108		2.19	%	116,172		464		1.59	%	237		2,407		2,644		Other savings accounts	1,177,554		5,677		1.94		%	484,303		2,608		2.16	%	(291)		3,360		3,069
Certificates of deposit	Certificates of deposit	2,227,817		13,128		2.34	%	2,288,237		11,795		2.05	%	1,649		(316)		1,333		Certificates of deposit	1,734,062		6,507		1.51		%	1,972,792		11,452		2.33	%	(3,680)		(1,265)		(4,945)
Total interest-bearing deposits ⁽⁴⁾	Total interest-bearing deposits ⁽⁴⁾	6,905,172		38,267		2.20	%	6,665,384		32,804		1.95	%	4,266		1,197		5,463		Total interest-bearing deposits ⁽⁴⁾	8,428,295		23,238		1.11		%	6,462,206		35,980		2.23	%	(21,512)		8,770		(12,742)
FRB PPP liquidity facility																				FRB PPP liquidity facility	942,258		822		0.35		%	—		—		—	%	—		822		822
Borrowings	Borrowings	1,770,459		12,716		2.86	%	1,918,577		13,240		2.74	%	551		(1,075)		(524)		Borrowings	2,282,761		9,176		1.62		%	1,462,362		11,291		3.09	%	(6,755)		4,640		(2,115)
Total interest-bearing liabilities	Total interest-bearing liabilities	8,675,631		50,983		2.33	%	8,583,961		46,044		2.13	%	4,435		504		4,939		Total interest-bearing liabilities	11,653,314		33,236		1.15		%	7,924,568		47,271		2.39	%	(30,600)		16,565		(14,035)
Non-interest-bearing deposits ⁽⁴⁾	Non-interest-bearing deposits ⁽⁴⁾	1,431,810						1,109,819												Non-interest-bearing deposits ⁽⁴⁾	1,890,955							1,345,494
Total deposits and borrowings	Total deposits and borrowings	10,107,441				2.00	%	9,693,780				1.89	%							Total deposits and borrowings	13,544,269				0.99		%	9,270,062				2.04	%
Other non-interest-bearing liabilities	Other non-interest-bearing liabilities	146,347						84,786												Other non-interest-bearing liabilities	142,181							115,717
Total liabilities	Total liabilities	10,253,788						9,778,566												Total liabilities	13,686,450							9,385,779
Shareholders' equity	Shareholders' equity	1,005,356						949,773												Shareholders' equity	989,134							986,063
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	11,259,144					$	10,728,339											Total liabilities and shareholders' equity	$	14,675,584						$	10,371,842
Net interest income	Net interest income			75,735						64,001				$	8,409	$	3,325	$	11,734	Net interest income			91,982							64,679				$	3,732	$	23,571	$	27,303
Tax-equivalent adjustment ⁽⁵⁾	Tax-equivalent adjustment ⁽⁵⁾			184						172										Tax-equivalent adjustment ⁽⁵⁾			225							183
Net interest earnings	Net interest earnings			$	75,919					$	64,173									Net interest earnings			$	92,207						$	64,862
Interest spread	Interest spread					2.71	%					2.35	%							Interest spread					2.61		%					2.51	%
Net interest margin	Net interest margin					2.82	%					2.46	%							Net interest margin					2.65		%					2.63	%
Net interest margin tax equivalent ⁽⁵⁾	Net interest margin tax equivalent ⁽⁵⁾					2.83	%					2.47	%							Net interest margin tax equivalent ⁽⁵⁾					2.65		%					2.64	%
Net interest margin tax equivalent, excluding PPP loans ⁽⁶⁾																				Net interest margin tax equivalent, excluding PPP loans ⁽⁶⁾					2.97		%					2.64	%

(1)For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(2)Includes owner occupied commercial real estate loans.

(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.

(4)Total costs of deposits (including interest bearing and non-interest-bearing) were ~~1.82%~~0.91% and ~~1.67%~~1.85% for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

~~Net interest income~~

Tab le of Contents

(6)Non-GAAP tax-equivalent basis, as described in note (5) for the three months ended ~~September~~June 30, 2020 and 2019, ~~was $75.7 million, an increase of $11.7 million, or 18.3%, from~~excluding net interest income from PPP loans and related borrowings, along with the related PPP loan balances and PPP fees receivable from interest-earning assets. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of ~~$64.0~~these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

Net interest income increased $27.3 million for the three months ended ~~September~~June 30, ~~2018. This increase primarily resulted from an increase in~~2020 compared to the three months ended June 30, 2019 as average interest-earning assets ~~of $348.3 million~~increased by $4.1 billion and NIM ~~expansion of 36~~expanded by one basis ~~points~~point to ~~2.83%~~2.65% for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~2.47%~~2.64% for the three months ended ~~September~~June 30, ~~2018 as~~2019 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 4896 basis point ~~increase~~decline in the yield on ~~interest-earnings~~interest-earning assets and a 124 basis point decline in the cost of interest-bearing liabilities for the three months ended ~~September~~June 30, ~~2019, partially offset~~2020. The largest shift in ~~part by higher~~

~~Table~~the mix of ~~Contents~~

~~funding costs as~~interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($2.8 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.9 billion average balance) costing 0.35%. Customers' total cost of ~~interest-bearing liabilities increased by 20 basis points~~funds, including non-interest bearing deposits was 0.99% and 2.04% for the three months ended ~~September~~June 30, 2019. Compared to the three months ended September 30, 2018, total loan yields increased 41 basis points to 4.79% mostly due to the purchase of other consumer loans totaling $534.2 million during the nine months ended September 30,2020 and 2019, an increase of 59 basis points in the yield on other consumer loans, and an increase of 41 basis points in the yield on commercial and industrial loans. Total investment securities yields increased 30 basis points to 3.60% mostly due to the sale of $495 million of lower-yielding securities during the three months ended September 30, 2018. Given the Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, which were partially offset by two Federal Reserve interest rate cuts in Q3 2019, the cost of interest-bearing deposits increased 25 basis points to 2.20% and borrowing costs increased 12 basis points to 2.86% for the three months ended September 30, 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.82% and 1.67% for the three months ended September 30, 2019 and 2018, respectively, an increase of 15 basis points.respectively.

5661

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		Nine Months Ended September 30,																								Nine Months Ended September 30,										Six Months Ended June 30,						Six Months Ended June 30,
		2019										2018												2019 vs. 2018										2020						2019	2020 vs. 2019
(dollars in thousands)	(dollars in thousands)	Average Balance		Interest Income or Expense		Average Yield or Cost (%)		Average Balance		Interest Income or Expense		Average Yield or Cost		Due to rate		Due to volume		Total		(dollars in thousands)	Average Balance		Interest Income or Expense		Average Yield or Cost (%)			Average Balance		Interest Income or Expense		Average Yield or Cost		Due to rate		Due to volume		Total
Assets	Assets																			Assets
Interest-earning deposits	Interest-earning deposits	$	88,146	$	1,945	2.95	%	$	227,960	$	3,071	1.80	%	1,346		(2,472)		(1,126)		Interest-earning deposits	$	578,435	$	2,974	1.03		%	$	81,947	$	1,120	2.76	%	(1,104)		2,958		1,854
Investment securities ⁽¹⁾	Investment securities ⁽¹⁾	676,859		18,589		3.66	%	1,109,555		26,932		3.24	%	3,151		(11,494)		(8,343)		Investment securities ⁽¹⁾	635,838		11,132		3.50		%	689,422		12,722		3.69	%	(633)		(957)		(1,590)
Loans and leases:	Loans and leases:																			Loans and leases:
Commercial loans to mortgage companies	Commercial loans to mortgage companies	1,678,461		59,691		4.75	%	1,677,895		61,294		4.88	%	(1,624)		21		(1,603)		Commercial loans to mortgage companies	2,148,863		35,254		3.30		%	1,462,362		35,430		4.89	%	(13,734)		13,558		(176)
Multi-family loans	Multi-family loans	3,092,473		88,877		3.84	%	3,584,640		102,859		3.84	%	—		(13,982)		(13,982)		Multi-family loans	2,111,853		41,712		3.97		%	3,175,233		60,006		3.81	%	2,451		(20,745)		(18,294)
Commercial and industrial loans and leases ⁽²⁾	Commercial and industrial loans and leases ⁽²⁾	2,041,379		79,265		5.19	%	1,716,907		59,682		4.65	%	7,453		12,130		19,583		Commercial and industrial loans and leases ⁽²⁾	2,460,435		53,513		4.37		%	1,981,559		50,744		5.16	%	(8,456)		11,225		2,769
PPP loans																				PPP loans	1,377,460		11,706		1.71		%	—		—		—	%	—		11,706		11,706
Non-owner occupied commercial real estate loans	Non-owner occupied commercial real estate loans	1,215,469		41,127		4.52	%	1,268,597		40,737		4.29	%	2,133		(1,743)		390		Non-owner occupied commercial real estate loans	1,363,795		27,616		4.07		%	1,175,428		26,225		4.50	%	(2,629)		4,020		1,391
Residential mortgages	Residential mortgages	716,294		22,423		4.19	%	463,389		14,061		4.06	%	464		7,898		8,362		Residential mortgages	437,782		8,171		3.75		%	709,529		14,859		4.22	%	(1,506)		(5,182)		(6,688)
Other consumer loans	Other consumer loans	337,126		23,743		9.42	%	6,488		353		7.27	%	135		23,255		23,390		Other consumer loans	1,274,024		56,555		8.93		%	203,381		9,419		9.34	%	(433)		47,569		47,136
Total loans and leases ⁽³⁾	Total loans and leases ⁽³⁾	9,081,202		315,126		4.64	%	8,717,916		278,986		4.28	%	24,167		11,973		36,140		Total loans and leases ⁽³⁾	11,174,212		234,527		4.22		%	8,707,492		196,683		4.55	%	(15,039)		52,883		37,844
Other interest-earning assets	Other interest-earning assets	91,135		4,085		5.99	%	122,736		5,660		6.17	%	(160)		(1,415)		(1,575)		Other interest-earning assets	89,890		1,928		4.31		%	87,503		2,500		5.76	%	(639)		67		(572)
Total interest-earning assets	Total interest-earning assets	9,937,342		339,745		4.57	%	10,178,167		314,649		4.13	%	32,710		(7,614)		25,096		Total interest-earning assets	12,478,375		250,561		4.04		%	9,566,364		213,025		4.49	%	(22,912)		60,448		37,536
Non-interest-earning assets	Non-interest-earning assets	531,656						398,570												Non-interest-earning assets	646,120							501,013
Total assets	Total assets	$	10,468,998					$	10,576,737											Total assets	$	13,124,495						$	10,067,377
Liabilities	Liabilities																			Liabilities
Interest checking accounts	Interest checking accounts	$	889,336	12,580		1.89	%	$	584,228	6,305		1.44	%	2,349		3,926		6,275		Interest checking accounts	$	1,888,160	9,221		0.98		%	$	825,672	7,893		1.93	%	(5,276)		6,604		1,328
Money market deposit accounts	Money market deposit accounts	3,138,112		52,523		2.24	%	3,426,620		42,769		1.67	%	13,606		(3,852)		9,754		Money market deposit accounts	3,335,006		22,662		1.37		%	3,156,988		35,179		2.25	%	(14,422)		1,905		(12,517)
Other savings accounts	Other savings accounts	476,331		7,616		2.14	%	63,772		514		1.08	%	936		6,166		7,102		Other savings accounts	1,159,479		11,483		1.99		%	432,893		4,508		2.10	%	(248)		7,223		6,975
Certificates of deposit	Certificates of deposit	1,920,063		32,753		2.28	%	2,041,721		27,191		1.78	%	7,261		(1,699)		5,562		Certificates of deposit	1,629,416		14,225		1.76		%	1,763,634		19,624		2.24	%	(3,984)		(1,415)		(5,399)
Total interest-bearing deposits ⁽⁴⁾	Total interest-bearing deposits ⁽⁴⁾	6,423,842		105,472		2.20	%	6,116,341		76,779		1.68	%	24,684		4,009		28,693		Total interest-bearing deposits ⁽⁴⁾	8,012,061		57,591		1.45		%	6,179,187		67,204		2.19	%	(26,378)		16,765		(9,613)
FRB PPP liquidity facility																				FRB PPP liquidity facility	471,129		822		0.35		%	—		—		—	%	—		822		822
Borrowings	Borrowings	1,556,405		34,555		2.97	%	2,278,262		41,516		2.44	%	7,948		(14,909)		(6,961)		Borrowings	1,756,080		18,846		2.16		%	1,447,606		21,838		2.19	%	(7,095)		4,103		(2,992)
Total interest-bearing liabilities	Total interest-bearing liabilities	7,980,247		140,027		2.35	%	8,394,603		118,295		1.88	%	27,880		(6,148)		21,732		Total interest-bearing liabilities	10,239,270		77,259		1.52		%	7,626,793		89,042		2.35	%	(36,978)		25,195		(11,783)
Non-interest-bearing deposits ⁽⁴⁾	Non-interest-bearing deposits ⁽⁴⁾	1,379,633						1,165,478												Non-interest-bearing deposits ⁽⁴⁾	1,732,163							1,353,112
Total deposits and borrowings	Total deposits and borrowings	9,359,880				2.00	%	9,560,081				1.65	%							Total deposits and borrowings	11,971,433				1.30		%	8,979,905				2.00	%
Other non-interest-bearing liabilities	Other non-interest-bearing liabilities	122,309						81,663												Other non-interest-bearing liabilities	145,818							110,090
Total liabilities	Total liabilities	9,482,189						9,641,744												Total liabilities	12,117,251							9,089,995
Shareholders' equity	Shareholders' equity	986,809						934,993												Shareholders' equity	1,007,244							977,382
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	10,468,998					$	10,576,737											Total liabilities and shareholders' equity	$	13,124,495						$	10,067,377
Net interest income	Net interest income			199,718						196,354				$	4,830	$	(1,466)	$	3,364	Net interest income			173,302							123,983				$	14,066	$	35,253	$	49,319
Tax-equivalent adjustment ⁽⁵⁾	Tax-equivalent adjustment ⁽⁵⁾			548						514										Tax-equivalent adjustment ⁽⁵⁾			430							364
Net interest earnings	Net interest earnings			$	200,266					$	196,868									Net interest earnings			$	173,732						$	124,347
Interest spread	Interest spread					2.57	%					2.48	%							Interest spread					2.74		%					2.49	%
Net interest margin	Net interest margin					2.69	%					2.58	%							Net interest margin					2.79		%					2.61	%
Net interest margin tax equivalent ⁽⁵⁾	Net interest margin tax equivalent ⁽⁵⁾					2.69	%					2.58	%							Net interest margin tax equivalent ⁽⁵⁾					2.80		%					2.62	%
Net interest margin tax equivalent, excluding PPP loans ⁽⁶⁾																				Net interest margin tax equivalent, excluding PPP loans ⁽⁶⁾					2.98		%					2.62	%

(2)Includes owner occupied commercial real estate loans.

(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.

(4)Total costs of deposits (including interest bearing and non-interest-bearing) were ~~1.81%~~1.19% and ~~1.41%~~1.80% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. Please refer to the reconciliation schedule that follows this table.

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(6)Non-GAAP tax-equivalent basis, as described in note (5) for the six months ended June 30, 2020 and 2019, excluding net interest income from PPP loans and related borrowings, along with the related PPP loan balances and PPP fees receivable from interest-earning assets. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. Please refer to the reconciliation schedule that follows this table.

Net interest income ~~for the nine months ended September 30, 2019 was $199.7 million, an increase of $3.4 million, or 1.7%, from net interest income of $196.4~~increased $49.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018. This increase primarily resulted~~2020 compared to the six months ended June 30, 2019 as average interest-earning assets increased by $2.9 billion and NIM expanded by 18 basis points to 2.80% for the six months ended June 30, 2020 from ~~an eleven~~2.62% for the six months ended June 30, 2019, resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets drove a 45 basis point ~~expansion of NIM to 2.69%, partially offset by a decrease of $240.8 million in average interest-earning assets. The NIM expansion largely resulted from a 44 basis point increase~~decline in the yield on ~~interest-earning~~interest-earnings assets ~~for the nine months ended September 30, 2019, partially offset by higher funding costs as~~and an 83 basis point decline in the cost of interest-bearing liabilities for the six months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($1.4 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.5 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 1.30% and 2.00% for the six months ended June 30, 2020 and 2019, respectively.

Customers’ net interest margin tables contain non-GAAP financial measures calculated using non-GAAP amounts. These measures include net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans. Management uses these non-GAAP measures to present the current period presentation to historical periods in prior filings. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing the Bancorp’s financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

A reconciliation of net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans for the three and six months ended June 30, 2020 and 2019 are set forth below.


	Three Months Ended June 30,									Six Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019
Net interest income (GAAP)	$	91,982		$	64,679		$	173,302		$	123,983
Tax-equivalent adjustment	225			183			430			364
Net interest income tax equivalent (Non-GAAP)	$	92,207		$	64,862		$	173,732		$	124,347
Loans receivable, PPP net interest income	(9,308)			—			(9,308)			—
Net interest income tax equivalent, excluding PPP loans (Non-GAAP)	$	82,899		$	64,862		$	164,424		$	124,347

Average total interest-earning assets (GAAP)	$	13,980,021		$	9,851,150		$	12,478,375		$	9,566,364
Average PPP loans	(2,754,920)			—			(1,377,460)			—
Adjusted average total interest-earning assets (Non-GAAP)	$	11,225,101		$	9,851,150		$	11,100,915		$	9,566,364

Net interest margin (GAAP)	2.65		%	2.63		%	2.79		%	2.61		%
Net interest margin tax equivalent (Non-GAAP)	2.65		%	2.64		%	2.80		%	2.62		%
Net interest margin tax equivalent, excluding PPP loans (Non-GAAP)	2.97		%	2.64		%	2.98		%	2.62		%

PROVISION FOR CREDIT LOSSES

The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan and lease portfolio at the balance sheet date. During first quarter 2020, Customers adopted ASU 2016-13. Upon adoption, the allowance for credit losses for loans and leases and lending-related unfunded commitments increased by ~~47 basis points. Compared~~$79.8 million and $3.4 million, respectively, with the after-tax cumulative effect recorded to retained earnings. Customers recorded $20.9 million and a credit of $0.4 million of provision for credit losses for loans and leases and lending-related commitments, respectively, for the ~~nine~~three months ended ~~September~~June 30, ~~2018, total loan yields increased 36 basis points to 4.64% mostly due to~~2020 utilizing the purchase of other consumer loans totaling $534.2 million during the nine months ended September 30, 2019 and an increase of 54 basis points in the yield on commercial and industrial loans. Total investment securities yields increased 42 basis points to 3.66% mostly due to the sale of $495 million of lower-yielding securitiesCECL methodology. The additional provision for credit losses during the three months ended September 30, 2018. Given the Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, which were partially offset by two Federal Reserve interest rate cuts this quarter, the cost of interest-bearing deposits increased 52 basis points to 2.20% and borrowing costs increased 53 basis points to 2.97% for the nine months ended September 30, 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.81% and 1.41% for the nine months ended September 30, 2019 and 2018, respectively, an increase of 40 basis points.

Total loans increased $1.5 billion, or 17.4%, to $10.3 billion at September 30, 2019 compared to September 30, 2018. Mortgage warehouse loans increased $975 million to $2.5 billion; other consumer loans increased $592 million to $644 million; commercial and industrial loans increased $470 million to $2.3 billion; residential mortgages increased $121 million to $632 million; and commercial real estate non-owner-occupied loans increased $111 million to $1.3 billion. These increases were offset in part by a planned decrease in multi-family loans of $704 million, or 20.1%, to $2.8 billion.

Total deposits increased $412 million, or 4.8%, to $8.9 billion at September 30, 2019 compared to September 30, 2018. Total demand deposits increased $538 million, or 24.8%, to $2.7 billion, certificates of deposit accounts increased $29 million, or 1.2%, to $2.4 billion, and savings deposits increased $316 million to $591 million. In July 2018, Customers launched a new digital, on-line savings banking product with a goal of gathering retail deposits. As of September 30, 2019, this new product generated $534 million in retail deposits, an increase of $55 million since June 30, ~~2019 and $303 million over~~2020 resulted primarily from the ~~year ago period. Higher cost money market deposits decreased $471 million, or 12.8%,~~impact of the reserve build due to ~~$3.2 billion at September 30, 2019 compared~~changes in management's economic forecast since March 31, 2020 due to the ~~year-ago period.~~

~~PROVISION FOR LOAN AND LEASE LOSSES~~

~~The $1.5~~COVID-19 pandemic, portfolio growth, and net charge-offs. Customers recorded $52.7 million ~~increase in the~~and $0.4 million of provision for ~~loan and lease~~credit losses for ~~the three months ended September 30, 2019 compared to the three months ended September 30, 2018, reflects Customers' initiatives to increase commercial and industrial~~ loans and leases and ~~other consumer loans. The provision for loan and lease losses~~lending-related commitments, respectively, for the ~~three~~six months ended ~~September~~June 30, ~~2019 included $2.0 million for net loan growth in~~2020. The increase resulted primarily from the other non multi-family portfolios (primarily commercial and industrial), $2.3 million for net growth in the other consumer loan portfolio, $0.8 million for manufactured housing loans, and $1.7 million for specifically identified loans. These increases were offset in part by a $2.4 million release for multi-family loans due to runoff and the effectimpact of ~~$0.5 billion of multi-family loans transferred to held for sale as a result of Customers' intent to sell these loans. The provision for loan and lease losses~~reserve build for the ~~three months ended September 30, 2018 included provisions~~COVID-19 pandemic,

Tab le of ~~$2.3 million for consumer loan~~ Contents

portfolio growth, and $0.9 million for impaired loan provisions, offset in part by a release of reserve of $0.2 million resulting from improved asset quality and lower incurred losses than previously estimated. Net charge-offs for the three months ended September 30, 2019 were $1.8 million, or seven basis points of average loans and leases on an annualized basis, compared to net charge-offs of $0.5 million, or two basis points on an annualized basis for the three months ended September 30, 2018.net-charge-offs.

The $10.3 million increase in the provision for loan and lease losses for the nine months ended September 30, 2019 compared to nine months ended September 30, 2018, reflects Customers' initiatives to increase commercial and industrial loans and leases and other consumer loans. The provision for loan and lease losses for the nine months ended September 30, 2019 included $11.2 million for net loan growth (primarily in the commercial and industrial and other consumer loan portfolios, net of multi-family run-off and the effect of $0.5 billion of multi-family loans transferred to held for sale as a result of Customers' intent to sell these loans), $0.8 million for manufactured housing loans and $2.4 million for specifically identified loans. The provision for loan and lease losses for the nine months ended September 30, 2018 included $3.5 million for loan and lease portfolio growth and $1.9 million for impaired loans, offset in part by a release of $1.2 million resulting from improved asset quality and lower incurred losses than previously estimated. Net charge-offs for the nine months ended September 30, 2019 were $3.5 million, or five basis points of average loans and leases on an annualized basis, compared to net charge-offs of $1.5 million, or two basis points on an annualized basis for the nine months ended September 30, 2018.

For more information about the provision and ~~ALLL~~ACL and our loss experience, see “Credit Risk” and “Asset Quality” herein.

~~Table of Contents~~

NON-INTEREST INCOME

The table below presents the components of non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


		Three Months Ended September 30,						QTD						Nine Months Ended September 30,								YTD					Three Months Ended June 30,						QTD		Six Months Ended June 30,	YTD
(dollars in thousands)	(dollars in thousands)	2019		2018		Change		% Change		2019		2018		Change		% Change		(dollars in thousands)	2020		2019		Change		% Change		2020		2019		Change		% Change
Interchange and card revenue	Interchange and card revenue	$	6,869	$	7,084	$	(215)	(3.0)	%	$	22,435	$	23,127	$	(692)	(3.0)	%	Interchange and card revenue	$	6,478	$	6,760	$	(282)	(4.2)	%	$	13,287	$	15,565	$	(2,278)	(14.6)	%
Deposit fees	Deposit fees	3,642		2,002		1,640		81.9	%	9,199		5,726		3,473		60.7	%	Deposit fees	3,321		3,348		(27)		(0.8)	%	6,782		5,557		1,225		22.0	%
Commercial lease income	Commercial lease income	3,080		1,419		1,661		117.1	%	8,212		3,372		4,840		143.5	%	Commercial lease income	4,508		2,730		1,778		65.1	%	8,776		5,131		3,645		71.0	%
Bank-owned life insurance	Bank-owned life insurance	1,824		1,869		(45)		(2.4)	%	5,477		5,769		(292)		(5.1)	%	Bank-owned life insurance	1,757		1,836		(79)		(4.3)	%	3,519		3,653		(134)		(3.7)	%
Mortgage warehouse transactional fees	Mortgage warehouse transactional fees	2,150		1,809		341		18.9	%	5,145		5,663		(518)		(9.1)	%	Mortgage warehouse transactional fees	2,582		1,681		901		53.6	%	4,533		2,995		1,538		51.4	%
Gain on sale of SBA and other loans		—		1,096		(1,096)		(100.0)	%	—		3,404		(3,404)		(100.0)	%
Gain (loss) on sale of SBA and other loans																		Gain (loss) on sale of SBA and other loans	23		—		23		NM		34		—		34		NM
Mortgage banking income	Mortgage banking income	283		207		76		36.7	%	701		532		169		31.8	%	Mortgage banking income	38		250		(212)		(84.8)	%	334		417		(83)		(19.9)	%
Loss upon acquisition of interest-only GNMA securities	Loss upon acquisition of interest-only GNMA securities	—		—		—		NM		(7,476)		—		(7,476)		NM		Loss upon acquisition of interest-only GNMA securities	—		(7,476)		7,476		NM		—		(7,476)		7,476		NM
Gain (loss) on sale of investment securities	Gain (loss) on sale of investment securities	1,001		(18,659)		19,660		NM		1,001		(18,659)		19,660		NM		Gain (loss) on sale of investment securities	4,353		—		4,353		NM		8,328		—		8,328		NM
Unrealized gain (loss) on investment securities	Unrealized gain (loss) on investment securities	1,333		(1,236)		2,569		NM		988		(1,532)		2,520		NM		Unrealized gain (loss) on investment securities	1,200		(347)		1,547		NM		(178)		(345)		167		NM
Other	Other	3,187		6,493		(3,306)		(50.9)	%	9,443		11,718		(2,275)		(19.4)	%	Other	(2,024)		3,254		(5,278)		(162.2)	%	(1,248)		6,257		(7,505)		(119.9)	%
Total non-interest income	Total non-interest income	$	23,369	$	2,084	$	21,285	NM		$	55,125	$	39,120	$	16,005	40.9	%	Total non-interest income	$	22,236	$	12,036	$	10,200	84.7	%	$	44,167	$	31,754	$	12,413	39.1	%

Interchange and card revenue

The ~~$0.2~~$0.3 million decrease in interchange and card revenue for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from lower activity volumes at the BankMobile ~~segment.~~segment, primarily due to COVID-19.

The ~~$0.7~~$2.3 million decrease in interchange and card revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from lower activity volumes at the BankMobile ~~segment.~~segment, primarily due to COVID-19.

Deposit fees

The ~~$1.6 million increase~~$27 thousand decrease in deposit fees for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~an increase in service charges on certain deposit accounts relating to a change in the fee structure at the BankMobile segment.~~lower activity volumes.

The ~~$3.5~~$1.2 million increase in deposit fees for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from an increase in service charges on certain deposit accounts relating to a change in the fee structure at the BankMobile segment.

Commercial lease income

Commercial lease income represents income earned on commercial operating leases originated by Customers' Equipment Finance Group in which Customers is the lessor. The ~~$1.7~~$1.8 million increase in commercial lease income for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from the continued growth of Customers' equipment finance business.

The ~~$4.8~~$3.6 million increase in commercial lease income for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from the continued growth of Customers' equipment finance business.

Mortgage warehouse transactional fees

The ~~$0.3~~$0.9 million increase in mortgage warehouse transactional fees for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from an increase in refinancing activity driven by the ~~number of loans funded~~decline in market interest rates during the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018, as a decline in market rates for mortgages for the three months ended September 30, 2019 increased the volume of mortgage loan refinancings.~~

2019.

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The ~~$0.5~~$1.5 million ~~decrease~~increase in mortgage warehouse transactional fees for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~a decrease~~an increase in refinancing activity driven by the ~~number of loans funded~~decline in market interest rates during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Gain (loss) on sale of ~~SBA and other loans~~investment securities

The ~~$1.1~~$4.4 million ~~decrease~~increase in ~~gains~~gain (loss) on ~~sales~~sale of ~~SBA and other loans~~investment securities for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 reflects ~~a strategic shift to retain SBA loans on our balance sheet.~~$4.4 million of gains realized from the sale of $30.0 million of corporate bonds and $6.3 million in non-agency-guaranteed collateralized mortgage obligations during the three months ended June 30, 2020.

The ~~$3.4~~$8.3 million increase in gain (loss) on sale of investment securities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 reflects the gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities, $30.0 million of corporate bonds, and $6.3 million in non-agency-guaranteed collateralized mortgage obligations during the six months ended June 30, 2020.

Unrealized gain (loss) on investment securities

The $1.5 million increase in unrealized gain (loss) on investment securities for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 reflects an increase in the fair value of equity securities issued by a foreign entity for the three months ended June 30, 2020, respectively.

The $0.2 million decrease in ~~gains~~unrealized gain (loss) on ~~sales of SBA and other loans~~investment securities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 reflects a ~~strategic shift to retain SBA loans on our balance sheet.~~smaller decline in the fair value of equity securities issued by a foreign entity for the six months ended June 30, 2020.

Loss on acquisition of interest-only GNMA securities

The $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the ~~nine~~three and six months ended ~~September~~June 30, 2019 resulted from a mortgage warehouse customer that unexpectedly ceased operations in second quarter 2019. Customers took possession of the interest-only GNMA securities that served as the primary collateral for loans made to this mortgage warehouse customer. The shortfall in the fair value of the interest-only GNMA securities upon acquisition resulted in a write-down of $7.5 million ~~for~~in second quarter 2019. Customers views this as an isolated event that is not indicative of the ~~nine months ended September 30, 2019.~~

~~Gain (loss) on sale~~overall credit quality of ~~investment securities~~

~~The $19.7 million increase in gain (loss) on sale of investment securities for~~ the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 reflects the $1.0 million gain realized from the sale of $95 million of available-for-sale corporate note securities for the three and nine months ended September 30, 2019, compared to an $18.7 million loss realized from the sale of $495 million of lower-yielding investment securities for the three and nine months ended September 30, 2018.

~~Unrealized gain (loss) on investment securities~~

~~The $2.6 million increase in unrealized gain (loss) on investment securities for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 reflects improvements~~mortgage warehouse portfolio. There are no other loans in the ~~fair values of the~~mortgage warehouse portfolio secured by interest-only ~~GNMA securities and equity securities issued by a foreign entity.~~

The $2.5 million increase in unrealized gain (loss) on investment securities for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 reflects improvements in the fair values of the interest-only GNMA securities and equity securities issued by a foreign entity.securities.

Other non-interest income

The ~~$3.3~~$5.3 million decrease in other non-interest income for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from a ~~$2.8~~negative mark-to-market derivative credit valuation adjustment of $3.3 million ~~gain recognized~~mostly resulting from ~~discontinuing cash flow hedge accounting for three~~an interest rate ~~swaps~~swap associated with a non-performing borrower, a market value adjustment loss on one loan held for ~~the three months ended September 30, 2018~~sale of $1.5 million, and ~~negative mark-to-market adjustments for derivatives for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to changes~~a decline in ~~the yield curve.~~swap premiums of $0.9 million.

The ~~$2.3~~$7.5 million decrease in other non-interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from a ~~$2.8~~negative credit value adjustment of $6.2 million, gain recognized from discontinuing cash flow hedge accounting for three interest rate swaps for the nine months ended September 30, 2018 and mark-to-market adjustments for derivatives for the nine months ended September 30, 2019 due to changes in ~~the yield curve.~~market interest rates and from an interest rate swap associated with a non-performing borrower, and a market value adjustment loss on one loan held for sale of $1.5 million, partially offset by an increase in swap premiums of $0.6 million.

~~Table~~Tab le of ~~Contents~~Contents

NON-INTEREST EXPENSE

The table below presents the components of non-interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


		Three Months Ended September 30,						QTD						Nine Months Ended September 30,								YTD					Three Months Ended June 30,						QTD		Six Months Ended June 30,	YTD
(dollars in thousands)	(dollars in thousands)	2019		2018		Change		% Change		2019		2018		Change		% Change		(dollars in thousands)	2020		2019		Change		% Change		2020		2019		Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	27,193	$	25,462	$	1,731	6.8	%	$	79,936	$	78,135	$	1,801	2.3	%	Salaries and employee benefits	$	31,296	$	26,920	$	4,376	16.3	%	$	59,607	$	52,743	$	6,864	13.0	%
Technology, communication, and bank operations		8,755		11,657		(2,902)		(24.9)	%	33,110		32,923		187		0.6	%
Technology, communication and bank operations																		Technology, communication and bank operations	13,310		12,402		908		7.3	%	26,360		24,355		2,005		8.2	%
Professional services	Professional services	8,348		4,743		3,605		76.0	%	18,639		14,563		4,076		28.0	%	Professional services	4,552		5,718		(1,166)		(20.4)	%	12,223		10,291		1,932		18.8	%
Occupancy	Occupancy	3,661		2,901		760		26.2	%	9,628		8,876		752		8.5	%	Occupancy	3,025		3,064		(39)		(1.3)	%	6,057		5,967		90		1.5	%
Commercial lease depreciation	Commercial lease depreciation	2,459		1,103		1,356		122.9	%	6,633		2,838		3,795		133.7	%	Commercial lease depreciation	3,643		2,252		1,391		61.8	%	7,070		4,174		2,896		69.4	%
FDIC assessments, non-income taxes, and regulatory fees		(777)		2,415		(3,192)		NM		3,368		6,750		(3,382)		(50.1)	%
FDIC assessments, non-income taxes and regulatory fees																		FDIC assessments, non-income taxes and regulatory fees	2,368		2,157		211		8.9	%	5,235		4,145		1,090		26.3	%
Provision for operating losses	Provision for operating losses	3,998		1,171		2,827		241.4	%	8,223		3,930		4,293		109.2	%	Provision for operating losses	1,068		2,446		(1,378)		(56.3)	%	1,980		4,225		(2,245)		(53.1)	%
Advertising and promotion	Advertising and promotion	976		820		156		19.0	%	3,145		1,529		1,616		105.7	%	Advertising and promotion	582		1,360		(778)		(57.2)	%	2,222		2,169		53		2.4	%
Merger and acquisition related expenses	Merger and acquisition related expenses	—		2,945		(2,945)		(100.0)	%	—		3,920		(3,920)		(100.0)	%	Merger and acquisition related expenses	25		—		25		NM		75		—		75		NM
Loan workout	Loan workout	495		516		(21)		(4.1)	%	1,458		1,823		(365)		(20.0)	%	Loan workout	1,808		643		1,165		181.2	%	2,175		963		1,212		125.9	%
Other real estate owned expenses		108		66		42		63.6	%	151		164		(13)		(7.9)	%
Other real estate owned																		Other real estate owned	12		(14)		26		(185.7)	%	20		43		(23)		(53.5)	%
Other	Other	4,376		3,305		1,071		32.4	%	8,869		7,683		1,186		15.4	%	Other	1,817		2,634		(817)		(31.0)	%	6,941		4,491		2,450		54.6	%
Total non-interest expense	Total non-interest expense	$	59,592	$	57,104	$	2,488	4.4	%	$	173,160	$	163,134	$	10,026	6.1	%	Total non-interest expense	$	63,506	$	59,582	$	3,924	6.6	%	$	129,965	$	113,566	$	16,399	14.4	%

Salaries and employee benefits

The ~~$1.7~~$4.4 million increase in salaries and employee benefits for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from an increase in average full-time equivalent team members and annual merit increases.

The ~~$1.8~~$6.9 million increase in salaries and employee benefits for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from an increase in average full-time equivalent team members and annual merit ~~increases, partially offset by a reduction in incentive accruals given overall performance.~~increases.

Technology, communication, and bank operations

The ~~$2.9~~$0.9 million ~~decrease~~increase in technology, communication, and bank operations expense for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~successful concentrated cost savings initiatives, partially offset by~~the continued investment ~~to improve~~in Customers' white label partnership and ~~maintain Customers'~~ digital ~~information technology infrastructure and support expanded products and services offered through our White Label partnership.~~transformation efforts.

The ~~$0.2~~$2.0 million increase in technology, communication, and bank operations expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from the continued investment ~~to improve~~in Customers' white label partnership and ~~maintain Customers'~~ digital ~~information technology infrastructure and support expanded products and services offered through our White Label partnership, partially offset by successful concentrated cost savings initiatives.~~transformation efforts.

Professional services

The ~~$3.6~~$1.2 million ~~increase~~decrease in professional services for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from management's continued efforts to monitor and control expenses.

The $1.9 million increase in professional services for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from consulting services associated with supporting ~~our White Label~~Customers' white label partnership and digital transformation ~~efforts.~~

~~The $4.1 million increase in professional services for the nine months ended September 30, 2019 compared~~efforts, partially offset by management's continued efforts to ~~the nine months ended September 30, 2018 primarily resulted from consulting services associated with supporting our White Label partnership~~monitor and ~~digital transformation efforts.~~

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~~Occupancy~~

The $0.8 increase in occupancy for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily resulted from an increase in depreciation expense on information technology equipment.

The $0.8 increase in occupancy for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily resulted from an increase in depreciation expense on information technology equipment.control expenses.

Commercial lease depreciation

The $1.4 million increase in commercial lease depreciation for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.

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The ~~$3.8~~$2.9 million increase in commercial lease depreciation for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.

FDIC assessments, non-income taxes, and regulatory fees

The ~~$3.2~~$0.2 million ~~decrease~~increase in FDIC assessments, non-income taxes, and regulatory fees for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~a $2.6 million small bank assessment credit provided by~~higher fees resulting from management's decision to grow the ~~FDIC for the three months ended September 30, 2019 related to Customers' contributions to the growth of the FDIC's deposit insurance fund since July 2016.~~balance sheet beyond $10 billion in assets, as higher premiums become applicable.

The ~~$3.4~~$1.1 million ~~decrease~~increase in FDIC assessments, non-income taxes, and regulatory fees for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~a $2.6 million small bank assessment credit provided by~~higher fees resulting from management's decision to grow the ~~FDIC for the nine months ended September 30, 2019 related to Customers' contributions to the growth of the FDIC's deposit insurance fund since July 2016.~~balance sheet beyond $10 billion in assets, as higher premiums become applicable.

Provision for operating losses

The provision for operating losses primarily consists of losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders. The ~~$2.8~~$1.4 million ~~increase~~decrease in provision for operating losses for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~an internet-based organized crime ring which targeted BankMobile checking accounts~~initiatives implemented by management to reduce fraud and theft-based losses during the three months ended ~~September~~June 30, ~~2019.~~2020.

The ~~$4.3~~$2.2 million ~~increase~~decrease in provision for operating losses for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~an internet-based organized crime ring which targeted BankMobile checking accounts~~initiatives implemented by management to reduce fraud and theft-based losses during the ~~nine~~six months ended ~~September~~June 30, ~~2019 and increased other disputed charges.~~2020.

Advertising and promotion expenses

The ~~$0.2~~$0.8 million ~~increase~~decrease in advertising and promotion expenses for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from a reduction in the promotion of Customers' digital banking products and service offerings available through BankMobile and its white label partnership.

The $0.1 million increase in advertising and promotion expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from the promotion of Customers' digital banking products and service offerings available through ~~our White Label partnership.~~

~~The $1.6 million increase~~BankMobile and its white label partnership, primarily in advertising and promotion for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily resulted from the promotion of Customers' digital banking products and service offerings available through our White Label partnership.

~~Merger and acquisition related expenses~~

The $2.9 million decrease in merger and acquisition related expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 resulted from the spin-off and merger agreement between Customers and Flagship Community Bank, which was terminated in October 2018.

The $3.9 million decrease in merger and acquisition related expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 resulted from the spin-off and merger agreement between Customers and Flagship Community Bank, which was terminated in October 2018.

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first quarter 2020.

Other non-interest expense

The ~~$1.1~~$0.8 million ~~increase~~decrease in other non-interest expense for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from ~~legal contingency accruals totaling $2.0 million relating~~a reduction in certain product development costs related to ~~the previously disclosed Halbreiner and United States Department of Education matters, partially offset by management's continued efforts to monitor and control expenses.~~Customers' white label partnership.

The ~~$1.2~~$2.5 million increase in other non-interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily resulted from a legal contingency ~~accruals totaling $2.0~~accrual of $1.0 million ~~relating~~related to the settlement of the previously disclosed ~~Halbreiner~~DOE matter during the three months ended March 31, 2020, certain product development costs related to our white label partnership, and ~~United States Department~~an increase in the provision for credit losses on off-balance sheet credit exposures of ~~Education matters, partially offset by management's continued efforts to monitor~~$0.4 million coinciding with the adoption of CECL and ~~control expenses.~~the impact of COVID-19.

INCOME TAXES

The table below presents income tax expense and the effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

Three Months Ended September 30, QTD Nine Months Ended September 30, YTD
(dollars in thousands) 2019 2018 Change % Change 2019 2018 Change % Change
Income before income tax expense $ 35,086 $ 6,057 $ 29,029 NM $ 67,144 $ 68,083 $ (939) (1.4) %
Income tax expense $ 8,020 $ 28 $ 7,992 NM $ 15,343 $ 14,250 $ 1,093 7.7 %
Effective tax rate 22.86 % 0.46 % 22.85 % 20.93 %


	Three Months Ended June 30,								QTD								Six Months Ended June 30,				YTD
(dollars in thousands)	2020			2019			Change		% Change		2020			2019			Change		% Change
Income before income tax expense	$	29,766		$	11,787		$	17,979	152.5	%	$	34,772		$	32,058		$	2,714	8.5	%
Income tax expense	$	7,048		$	2,491		$	4,557	182.9	%	$	8,955		$	7,323		$	1,632	22.3	%
Effective tax rate	23.68		%	21.13		%					25.75		%	22.84		%

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The ~~$8.0~~$4.6 million increase in income tax expense for the three months ended ~~September~~June 30, ~~2019,~~2020, when compared to the same period in the prior year, primarily resulted from ~~increased~~an increase in pre-tax ~~income.~~income and a favorable return to provision adjustment for the three months ended June 30, 2019. The ~~$1.1~~increase in the effective tax for the three months ended June 30, 2020, when compared to the same period in the prior year, primary resulted from the favorable return to provision adjustment, which decreased tax expense for the three months ended June 30, 2019.

The $1.6 million increase in income tax expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, when compared to the same period in the prior year, primarily resulted from an increase in pre-tax income and the discrete provision items which increased income tax expense for the six months ended June 30, 2020, compared to a ~~$1.7 million~~ favorable return to provision adjustment ~~which included~~for the ~~benefit of a research and development tax credit, recorded during the nine~~six months ended ~~September~~June 30, ~~2018 upon the completion of the 2017 income tax returns.~~2019. The increase in the effective tax for the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020, when compared to the same ~~periods~~period in the prior year, ~~primarily~~primary resulted from the discrete provision items, which increased income tax expense for the six months ended June 30, 2020, compared to a favorable return to provision adjustment, which ~~included~~lowered income tax expense for the ~~benefit of a research and development tax credit, during the three and nine~~six months ended ~~September~~June 30, ~~2018.~~

2019.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends were $3.6 million ~~and $10.8 million~~ for both the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019. There were no changes to the amount of preferred stock outstanding or the ~~dividend rates from third quarter 2018~~dividends paid during the three months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, compared to ~~third quarter 2019 or from~~a fixed rate of 7.00%.

Preferred stock dividends were $7.2 million for both the ~~first nine~~six months ~~in 2018~~ended June 30, 2020 and 2019. There were no changes to the ~~first nine~~amount of preferred stock outstanding or the dividends paid during the six months inended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, compared to a fixed rate of 7.00%.

Financial Condition

General

Customers' total assets were ~~$11.7~~$17.9 billion at ~~September~~June 30, ~~2019.~~2020. This represented a ~~$1.9~~$6.4 billion increase from total assets of ~~$9.8~~$11.5 billion at December 31, ~~2018.~~2019. The increase in total assets was primarily driven by increases of ~~$1.7~~$4.8 billion in ~~total~~PPP loans, ~~and leases, $120.1~~$854.8 million in cash and cash equivalents, ~~and $100.0~~$547.4 million in loans receivable, mortgage warehouse, at fair value, $286.2 million in other assets, and $85.5 million in investment securities, partially offset by ~~a decrease~~an increase in ~~investment securities~~allowance for loan and lease losses of ~~$56.3~~$103.5 million.

Total liabilities were ~~$10.7~~$16.9 billion at ~~September~~June 30, ~~2019.~~2020. This represented a ~~$1.8~~$6.4 billion increase from ~~$8.9~~$10.5 billion at December 31, ~~2018.~~2019. The increase in total liabilities primarily resulted from increases of $4.4 billion in the PPPLF, $2.3 billion in total deposits, ~~of $1.8 billion, federal funds purchased of $186.0~~and $228.1 million ~~and~~in accrued interest payable and other liabilities, ~~of $66.1 million, partially~~ offset in part by a reduction in ~~FHLB advances~~federal funds purchased of ~~$207.3 million.~~

$0.5 billion.

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The following table presents certain key condensed balance sheet data as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

(dollars in thousands) September 30,
2019 December 31,
2018 Change % Change
Cash and cash equivalents $ 182,218 $ 62,135 $ 120,083 193.3 %
Investment securities, at fair value 608,714 665,012 (56,298) (8.5) %
Loans held for sale 502,854 1,507 501,347 NM
Loans receivable, mortgage warehouse, at fair value 2,438,530 1,405,420 1,033,110 73.5 %
Loans and leases receivable 7,336,237 7,138,074 198,163 2.8 %
Allowance for loan and lease losses (51,053) (39,972) (11,081) 27.7 %
Total assets 11,723,790 9,833,425 1,890,365 19.2 %
Total deposits 8,925,685 7,142,236 1,783,449 25.0 %
Federal funds purchased 373,000 187,000 186,000 99.5 %
FHLB advances 1,040,800 1,248,070 (207,270) (16.6) %
Other borrowings 123,528 123,871 (343) (0.3) %
Subordinated debt 109,050 108,977 73 0.1 %
Total liabilities 10,704,640 8,876,609 1,828,031 20.6 %
Total shareholders’ equity 1,019,150 956,816 62,334 6.5 %
Total liabilities and shareholders’ equity $ 11,723,790 $ 9,833,425 $ 1,890,365 19.2 %


(dollars in thousands)	June 30, 2020		December 31, 2019		Change		% Change
Cash and cash equivalents	$	1,067,330	$	212,505	$	854,825	402.3	%
Investment securities, at fair value	681,382		595,876		85,506		14.3	%
Loans held for sale	464,164		486,328		(22,164)		(4.6)	%
Loans receivable, mortgage warehouse, at fair value	2,793,164		2,245,758		547,406		24.4	%
Loans receivable, PPP	4,760,427		—		4,760,427		NM
Loans and leases receivable	7,272,447		7,318,988		(46,541)		(0.6)	%
Allowance for credit losses on loan and lease losses	(159,905)		(56,379)		(103,526)		183.6	%
Total assets	17,903,118		11,520,717		6,382,401		55.4	%
Total deposits	10,965,875		8,648,936		2,316,939		26.8	%

Federal funds purchased	—		538,000		(538,000)		(100.0)	%
FHLB advances	850,000		850,000		—		—	%
Other borrowings	123,833		123,630		203		0.2	%
Subordinated debt	181,255		181,115		140		0.1	%
FRB PPP liquidity facility	4,419,967		—		4,419,967		NM
Total liabilities	16,895,271		10,467,922		6,427,349		61.4	%
Total shareholders’ equity	1,007,847		1,052,795		(44,948)		(4.3)	%
Total liabilities and shareholders’ equity	$	17,903,118	$	11,520,717	$	6,382,401	55.4	%

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. Cash and due from banks were ~~$12.6~~$44.6 million and ~~$17.7~~$33.1 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ deposit activities with the Bank.

Interest-earning deposits consist of cash deposited at other banks, primarily the FRB. Interest-earning deposits were ~~$169.7 million~~$1.0 billion and ~~$44.4~~$179.4 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers' deposits with Customers, payment of checks drawn on customers' accounts and strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity. The increase in interest-earning deposits since December 31, 2019 primarily resulted from increased brokered deposits used as bridge financing for the origination of PPP loans until the loans were pledged as eligible collateral to the FRB PPPLF.

Investment Securities

The investment securities portfolio is an important source of interest income and liquidity. It consists primarily of mortgage-backed securities (guaranteed by an agency of the United States government), state and political subdivision debt securities, corporate securities, interest-only GNMA securities, and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, serve as collateral for other borrowings, and diversify the credit risk of interest-earning assets. The portfolio is structured to optimize net interest income, given changes in the economic environment, liquidity position and balance sheet mix.

At ~~September~~June 30, ~~2019,~~2020, investment securities totaled ~~$608.7~~$681.4 million compared to ~~$665.0~~$595.9 million at December 31, ~~2018.~~2019. The ~~decrease~~increase in investment securities primarily resulted from the ~~sale of $95 million of available-for-sale corporate note securities, partially offset by a market-driven recovery in the fair value~~purchases of agency-guaranteed mortgage-backed securities, state and political subdivision debt securities, and corporate securities totaling $280.4 million, and ~~from obtaining ownership~~unrealized gains of ~~certain interest-only GNMA~~$17.9 million, partially offset by the sale of $142.8 million of agency-guaranteed mortgage-backed securities, corporate bonds, of which $33.6 million was settled in July 2020, and non-agency-guaranteed collateralized mortgage obligations, maturities, calls and principal repayments totaling $78.5 million for the six months ended June ~~2019 with a fair value of $17.1 million as of September~~ 30, 2019. These securities served as the primary collateral for loans made to one commercial mortgage warehouse customer. These securities are reported at fair value, with fair value changes recorded directly in earnings based on a fair value option election.2020.

For financial reporting purposes, ~~available-for-sale~~available for sale debt securities are carried at fair value. Unrealized gains and losses on ~~available-for-sale~~available for sale debt securities are included in ~~OCI~~other comprehensive income (loss) and reported as a separate component of shareholders’ equity, net of the related tax effect. Changes in the fair value of marketable equity securities and securities reported at fair value based on a fair value option election are recorded in non-interest income in the period in which they occur.

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LOANS AND LEASES

Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County);

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Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; and Chicago, Illinois. The portfolio of loans to mortgage banking businesses is nationwide. The loan portfolio consists primarily of loans to support mortgage banking companies’ funding needs, multi-family/commercial real estate and commercial and industrial loans. Customers continues to focus on small and middle market business loans to grow its commercial lending efforts, particularly its commercial and industrial loan and lease portfolio and its specialty mortgage lending business. ~~In addition,~~ Customers ~~has been deemphasizing~~also focuses its ~~multi-family business,~~lending efforts on local-market mortgage and home equity lending and the origination and purchase of unsecured consumer loans (other consumer loans), including personal, student loan refinancing, and home improvement loans through arrangements with ~~plans to sell approximately $500 million~~fintech companies and ~~run-off approximately $300 million or more in fourth quarter 2019.~~other market place lenders for both the Customers Bank Business Banking and BankMobile segments nationwide.

Commercial Lending

Customers' commercial lending is divided into five groups: Business Banking, Small and Middle Market Business Banking, Multi-Family and Commercial Real Estate Lending, Mortgage Banking Lending, and Equipment Finance. This grouping is designed to allow for greater resource deployment, higher standards of risk management, strong asset quality, lower interest-rate risk and higher productivity levels.

The commercial lending group focuses primarily on companies with annual revenues ranging from $1 million to $100 million, which typically have credit requirements between $0.5 million and $10 million.

As of ~~September~~June 30, ~~2019,~~2020, Customers had ~~$8.9~~$13.6 billion in commercial loans outstanding, totaling approximately ~~86.9%~~89.0% of its total loan and lease portfolio, which includes loans held for sale and loans receivable, mortgage warehouse, at fair value and PPP loans, compared to commercial loans outstanding of ~~$7.8~~$8.4 billion, comprising approximately ~~91.6%~~83.8% of its total loan and lease portfolio, at December 31, ~~2018.~~2019. Included in the $13.6 billion in commercial loans outstanding as of June 30, 2020 was $4.8 billion of PPP loans that Customers originated during the three months ended June 30, 2020. The PPP loans are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%.

The small and middle market business banking platform originates loans, including SBA loans, through the branch network sales force and a team of dedicated relationship managers. The support administration of this platform is centralized, including risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on industries that offer high asset quality and are deposit rich to drive profitability.

Customers' lending to mortgage banking ~~business~~businesses primarily provides financing to mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of liquidity in this segment exited the business in 2009 during a period of market turmoil. Customers saw an opportunity to provide liquidity to this business segment at attractive spreads, generate fee income and attract escrow deposits. The underlying residential loans are taken as collateral for Customers' commercial loans to the mortgage companies. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, commercial loans to mortgage banking businesses totaled ~~$2.4~~$2.8 billion and ~~$1.4~~$2.2 billion, respectively, and are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.

Customers intends to continue to deemphasize its lower-yielding multi-family loan portfolio, and invest in high credit quality higher-yielding commercial and industrial ~~and other consumer loan portfolios~~loans with the multi-family run-off. Customers' multi-family lending group continues to focus on retaining a portfolio of high-quality multi-family loans within Customers' covered markets while cross-selling other products and services. These lending activities primarily target the refinancing of loans with other banks using conservative underwriting standards and provide purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of ~~September~~June 30, ~~2019,~~2020, Customers had multi-family loans of ~~$2.8~~$2.0 billion outstanding, comprising approximately ~~27.2%~~13.2% of the total loan and lease portfolio, compared to ~~$3.3~~$2.4 billion, or approximately ~~38.4%~~23.8% of the total loan and lease portfolio, at December 31, ~~2018.~~2019.

The Equipment Finance Group offers equipment financing and leasing products and services for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers

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had ~~$240.8~~$283.1 million and ~~$172.9~~$263.9 million, respectively, of equipment finance loans outstanding. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers had ~~$75.2~~$96.4 million and ~~$54.5~~$89.2 million of equipment finance leases, respectively. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers had ~~$75.1~~$95.5 million and ~~$54.5~~$93.6 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of ~~$11.4~~$21.3 million and ~~$4.8~~$14.3 million, respectively.

On March 27, 2020, the CARES Act was signed by President Trump, which created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers, directly or through fintech partnerships, had $4.8 billion of PPP loans outstanding as of June 30, 2020, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. The average loan size of the PPP portfolio is approximately $50 thousand.

Consumer Lending

Customers provides unsecured consumer loans, residential mortgage, and home equity loans to customers. The other consumer loan portfolio consists largely of ~~third-party~~ originated ~~unsecured consumer~~and purchased personal, student loan refinancing and home improvement loans. None of the loans are considered sub-prime at the time of ~~origination or purchase.~~origination. Customers considers sub-prime borrowers to be those with FICO scores below 660. Customers has been selective in the consumer loans it has been purchasing. Home equity lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in Customers' efforts to grow total relationship revenues for its

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consumer households. As of ~~September~~June 30, ~~2019,~~2020, Customers had ~~$1.3~~$1.7 billion in consumer loans outstanding, or ~~13.1%~~11.0% of the total loan and lease portfolio, compared to ~~$721.8 million,~~$1.6 billion, or ~~8.4%~~16.2% of the total loan and lease portfolio, as of December 31, ~~2018.~~2019. Customers ~~purchased $83.9 million and $534.2 million of other~~intends to temper its growth in consumer loans ~~through arrangements with third-party fintech companies during~~for the remainder of 2020.

Purchases and sales of consumer loans were as follows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively. Customers did not~~2020 and 2019:


	Three Months Ended June 30,						Six Months Ended June 30,
(amounts in thousands)	2020		2019		2020		2019
Purchases ⁽¹⁾





Residential real estate	$	—	$	39,474	$	495	$	105,858

Other consumer⁽²⁾	18,008		384,116		209,768		450,252
Total	$	18,008	$	423,590	$	210,263	$	556,110
Sales⁽³⁾







Other consumer	—		—		1,822		—
Total	$	—	$	—	$	1,822	$	—

(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase ~~any residential mortgage~~price was 98.5% and 100.6% of loans ~~from third-party financial institutions during~~outstanding for the three months ended ~~September~~June 30, 2020 and 2019, respectively. The purchase price was 100.4% and ~~purchased $105.9 million~~99.9% of ~~residential mortgage~~ loans ~~from third-party financial institutions during~~outstanding for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, respectively.

(2)Other consumer loan purchases for the three and six months ended June 30, 2020 and 2019 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660.

(3)Amounts reported in the above table are the unpaid principal balance at time of sale. There were no loan sales in the three and six months ended June 30, 2019.

Loans Held for Sale

The composition of loans held for sale as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was as follows:


(amounts in thousands)	(amounts in thousands)	September 30, 2019		December 31, 2018		(amounts in thousands)	June 30, 2020		December 31, 2019
Commercial loans:	Commercial loans:					Commercial loans:
Multi-family loans at lower of cost or fair value		$	499,774	$	—
Multi-family loans, at lower of cost or fair value						Multi-family loans, at lower of cost or fair value	$	441,732	$	482,873
Commercial mortgage loans, at lower of cost or fair value						Commercial mortgage loans, at lower of cost or fair value	17,600		—
Total commercial loans held for sale	Total commercial loans held for sale	499,774		—		Total commercial loans held for sale	459,332		482,873
Consumer loans:	Consumer loans:					Consumer loans:
Home equity conversion mortgages, at lower of cost or fair value	Home equity conversion mortgages, at lower of cost or fair value	$	1,325	$	—	Home equity conversion mortgages, at lower of cost or fair value	1,325		1,325
Residential mortgage loans, at fair value	Residential mortgage loans, at fair value	1,755		1,507		Residential mortgage loans, at fair value	3,507		2,130
Total consumer loans held for sale	Total consumer loans held for sale	3,080		1,507		Total consumer loans held for sale	4,832		3,455
Loans held for sale	Loans held for sale	$	502,854	$	1,507	Loans held for sale	$	464,164	$	486,328

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At ~~September~~June 30, ~~2019,~~2020, loans held for sale totaled ~~$502.9~~$464.2 million, or ~~4.89%~~3.04% of the total loan and lease portfolio, and ~~$1.5~~$486.3 million, or ~~0.02%~~4.84% of the total loan and lease portfolio, at December 31, ~~2018.~~2019. Loans held for sale are carried on the balance sheet at either fair value (due to the election of the fair value option) or at the lower of cost or fair value. An ~~ALLL~~ACL is not recorded on loans that are classified as held for sale.

Total Loans and Leases Receivable

The composition of total loans and leases receivable (excluding loans held for sale) was as follows:


(amounts in thousands)	(amounts in thousands)	September 30, 2019		December 31, 2018		(amounts in thousands)	June 30, 2020		December 31, 2019
Loans receivable, mortgage warehouse, at fair value		$	2,438,530	$	1,405,420
Loans and leases receivable, mortgage warehouse, at fair value						Loans and leases receivable, mortgage warehouse, at fair value	$	2,793,164	$	2,245,758
Loans receivable, PPP						Loans receivable, PPP	4,760,427		—
Loans receivable:	Loans receivable:					Loans receivable:
Commercial:	Commercial:					Commercial:
Multi-family	Multi-family	2,300,244		3,285,297		Multi-family	1,581,839		1,907,331
Commercial and industrial (including owner occupied commercial real estate) ⁽¹⁾		2,363,599		1,951,277
Commercial and industrial ⁽¹⁾						Commercial and industrial ⁽¹⁾	2,099,442		1,891,152
Commercial real estate owner occupied						Commercial real estate owner occupied	544,772		551,948
Commercial real estate non-owner occupied	Commercial real estate non-owner occupied	1,268,557		1,125,106		Commercial real estate non-owner occupied	1,244,773		1,222,772
Construction	Construction	61,200		56,491		Construction	128,834		117,617
Total commercial loans and leases receivable	Total commercial loans and leases receivable	5,993,600		6,418,171		Total commercial loans and leases receivable	5,599,660		5,690,820
Consumer:	Consumer:					Consumer:
Residential real estate	Residential real estate	628,786		566,561		Residential real estate	348,109		382,634
Manufactured housing	Manufactured housing	72,616		79,731		Manufactured housing	66,865		71,359
Other consumer	Other consumer	643,553		74,035		Other consumer	1,257,813		1,174,175
Total consumer loans receivable	Total consumer loans receivable	1,344,955		720,327		Total consumer loans receivable	1,672,787		1,628,168
Loans and leases receivable		7,338,555		7,138,498
Deferred (fees) costs and unamortized (discounts) premiums, net		(2,318)		(424)
Allowance for loan and lease losses		(51,053)		(39,972)
Total loans and leases receivable, net of allowance for loan and lease losses		$	9,723,714	$	8,503,522
Loans and leases receivable ⁽²⁾						Loans and leases receivable ⁽²⁾	7,272,447		7,318,988
Allowance for credit losses						Allowance for credit losses	(159,905)		(56,379)
Total loans and leases receivable, net of allowance for credit losses						Total loans and leases receivable, net of allowance for credit losses	$	14,666,133	$	9,508,367

(1)Includes direct finance equipment leases of ~~$75.2~~$96.4 million and ~~$54.5~~$89.2 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

~~Customers' total~~(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(83.1) million and $2.1 million at June 30, 2020 and December 31, 2019, respectively.

Loans receivable, PPP

On March 27, 2020, the CARES Act was signed into law and which created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers had $4.8 billion of PPP loans ~~and leases receivable portfolio includes loans receivable~~outstanding as of June 30, 2020, which are ~~reported at fair value based on an election made to account~~fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $11.7 million for ~~these loans at their fair value~~the three and ~~loans and leases receivable which are primarily reported at their outstanding~~

~~Table of Contents~~

~~unpaid principal balance, net of charge-offs, deferred costs and fees, and unamortized premiums and discounts and are evaluated for impairment.~~six months ended June 30, 2020, respectively.

Loans receivable, mortgage warehouse, at fair value

The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of origination of the underlying mortgage loans until the mortgage loans are sold into the secondary market. As a mortgage warehouse lender, Customers provides a form of financing to mortgage bankers by purchasing for resale the underlying residential mortgages on a short-term basis under a master repurchase agreement. These loans are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets. Because these loans are reported at their fair value, they do not have an ~~allowance for loan and lease losses~~ACL and are therefore excluded from ~~allowance for loan and lease losses related~~ACL-related disclosures. At ~~September~~June 30, ~~2019,~~2020, all of Customers' commercial mortgage warehouse loans were current in terms of payment.

Customers is subject to the risks associated with such lending, including, but not limited to, the risks of fraud, bankruptcy and default of the mortgage banker or of the underlying residential borrower, any of which could result in credit losses. Customers' mortgage warehouse lending team members monitor these mortgage originators by obtaining financial and other relevant information to reduce these risks during the lending period. Loans receivable, mortgage warehouse, at fair value totaled ~~$2.4~~$2.8 billion and ~~$1.4~~$2.2 billion at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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Credit Risk

Customers manages credit risk by maintaining diversification in its loan and lease portfolio, establishing and enforcing prudent underwriting standards and collection efforts, and continuous and periodic loan and lease classification reviews. Management also considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate ~~ALLL.~~ACL. Credit losses are charged-off when they are identified, and provisions are added when it is estimated that a loss has occurred, to the ~~ALLL~~ACL at least quarterly. The ~~ALLL~~ACL is estimated at least quarterly.

The provision for ~~loan~~credit losses on loans and ~~lease losses~~leases was ~~$4.4~~$20.9 million and ~~$2.9~~$5.3 million for the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018, respectively, and $14.5 million and $4.3 million for the nine months ended September 30, 2019 and 2018.~~respectively. The ~~ALLL~~ACL maintained for loans and leases receivable (excluding loans held for sale and loans receivable, mortgage warehouse, at fair ~~value)~~value and PPP loans) was ~~$51.1~~$159.9 million, or ~~0.70%~~2.20% of loans and leases receivable, excluding PPP loans, at ~~September~~June 30, ~~2019~~2020 and ~~$40.0~~$56.4 million, or ~~0.56%~~0.77% of loans and leases receivable, at December 31, ~~2018.~~2019. Net charge-offs were ~~$1.8~~$10.3 million for the three months ended ~~September~~June 30, ~~2019,~~2020, an increase of ~~$1.3~~$9.7 million compared to the same period in ~~2018.~~2019. The increase in the ACL resulted primarily from the impact of reserve build for the COVID-19 pandemic, an increase in net charge-offs, period over period was mainly driven by higher net charge-offs in the other consumer loan portfolio. Net charge-offs were $3.5 million for the nine months ended September 30, 2019, an increase of $1.9 million comparedmostly attributable to the same period in 2018. The increase in net charge-offs period over period was mainly driven by higher net charge-offs in the other consumer loan portfolio, partially offset by lower net charge-offs in the commercial real estate ~~owner~~non-owner occupied and ~~residential~~other consumer portfolios, and portfolio growth. Commercial real estate ~~loan portfolios.~~

~~Table~~non-owner occupied charge-offs were attributable to the partial charge-off of ~~Contents~~

two collateral dependent loans, which are not indicative of the overall commercial real estate portfolio. Other consumer charge-offs were attributable to originated and purchased unsecured consumer loans through arrangements with fintech companies and other market place lenders.

The table below presents changes in the Bank’s ~~ALLL~~ACL for the periods indicated.

Analysis of the Allowance for Credit Losses on Loan and Lease Losses


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	2019		2018		2019		2018		(amounts in thousands)	2020		2019		2020		2019
Balance at the beginning of the period		$	48,388	$	38,288	$	39,972	$	38,015
Balance at beginning of the period										Balance at beginning of the period	$	149,283	$	43,679	$	56,379	$	39,972
Cumulative effect of change in accounting principle										Cumulative effect of change in accounting principle	—		—		79,829		—
Loan and lease charge-offs ⁽¹⁾	Loan and lease charge-offs ⁽¹⁾									Loan and lease charge-offs ⁽¹⁾
Multi-family	Multi-family	—		—		541		—		Multi-family	—		—		—		541
Commercial and industrial	Commercial and industrial	349		90		532		314		Commercial and industrial	20		183		117		183
Commercial real estate owner occupied	Commercial real estate owner occupied	45		—		119		501		Commercial real estate owner occupied	—		66		—		74

Commercial real estate non-owner occupied										Commercial real estate non-owner occupied	2,801		—		15,598		—

Residential real estate	Residential real estate	—		—		109		407		Residential real estate	—		69		—		109
Other consumer	Other consumer	1,806		437		3,493		1,155		Other consumer	8,304		932		14,550		1,687
Total Charge-offs	Total Charge-offs	2,200		527		4,794		2,377		Total Charge-offs	11,125		1,250		30,265		2,594
Loan and lease recoveries ⁽¹⁾	Loan and lease recoveries ⁽¹⁾									Loan and lease recoveries ⁽¹⁾
Multi-family	Multi-family	—		—		7		—		Multi-family	—		7		—		7
Commercial and industrial	Commercial and industrial	369		30		826		205		Commercial and industrial	25		338		79		457
Commercial real estate owner occupied	Commercial real estate owner occupied	10		—		235		326		Commercial real estate owner occupied	2		97		5		225
Commercial real estate non-owner occupied		—		5		—		5

Construction	Construction	8		11		128		231		Construction	113		114		116		120
Residential real estate	Residential real estate	5		6		20		69		Residential real estate	26		8		55		15
Other consumer	Other consumer	47		4		120		10		Other consumer	635		49		975		73
Total Recoveries	Total Recoveries	439		56		1,336		846		Total Recoveries	801		613		1,230		897
Total net charge-offs	Total net charge-offs	1,761		471		3,458		1,531		Total net charge-offs	10,324		637		29,035		1,697
Provision for loan and lease losses	Provision for loan and lease losses	4,426		2,924		14,539		4,257		Provision for loan and lease losses	20,946		5,346		52,732		10,113
Balance at the end of the period	Balance at the end of the period	$	51,053	$	40,741	$	51,053	$	40,741	Balance at the end of the period	$	159,905	$	48,388	$	159,905	$	48,388

(1)Charge-offs and recoveries on ~~PCI~~PCD loans that are accounted for in pools are recognized on a net basis when the pool matures.

The ~~ALLL~~ACL is based on a quarterly evaluation of the loan and lease portfolio and is maintained at a level that management considers adequate to absorb ~~probable~~expected lifetime credit losses ~~incurred~~ as of the balance sheet date. All commercial loans, with the exception of PPP loans and commercial mortgage warehouse loans, which are reported at fair value, are assigned internal credit-risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans and leases are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows

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management to identify problem loans and leases timely. Management considers a variety of factors and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate an appropriate level of ~~ALLL.~~ACL. Refer to Critical Accounting Policies herein and NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements for Customers' adoption of CECL, also, refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements in its ~~2018~~2019 Form 10-K for further discussion on management's prior incurred loss methodology for estimating the ALLL.

Approximately 75% of Customers' commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”), primarily in the form of a first lien position. Current appraisals providing current value estimates of the property are received when Customers' credit group determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real estate values have deteriorated. The credit committee and loan officers review loans that are 15 or more days delinquent and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest” are discussed to determine if additional analysis is necessary to apply the risk-rating criteria properly. The risk ratings for the real estate loan portfolio are determined based upon the current information available, including but not limited to discussions with the borrower, updated financial information, economic conditions within the geographic area and other factors that may affect the cash flow of the loan. If a loan is individually evaluated for impairment, the collateral value or discounted cash flow analysis is generally used to determine the estimated fair value of the underlying collateral, net of estimated selling costs, and compared to the outstanding loan balance to determine the amount of reserve necessary, if any. Appraisals used in this evaluation process are typically less than two years aged. For loans where real estate is not the primary source of collateral, updated financial information is obtained, including accounts receivable and inventory aging reports and relevant supplemental financial data to estimate the fair value of the loan, net of estimated selling costs, and compared to the outstanding loan balance to estimate the required reserve.

~~Table of Contents~~

These impairment measurements are inherently subjective as they require material estimates, including, among others, estimates of property values in appraisals, the amounts and timing of expected future cash flows on individual loans, and general considerations for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which require judgment and may be susceptible to significant change over time and as a result of changing economic conditions or other factors. Pursuant to ASC ~~310-10-35~~ ~~Loan Impairment~~ ~~and ASC 310-40~~ ~~Troubled Debt Restructurings by Creditors, impaired~~326, individually assessed loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the ~~ALLL. Impaired~~ACL. Individually assessed loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the ~~sale~~operation or ~~operation~~sale of such collateral. Shortfalls in the underlying collateral value for loans or leases determined to be collateral dependent are charged off immediately. Subsequent to an appraisal or other fair value estimate, management will assess whether there was a further decline in the value of the collateral based on changes in market conditions or property use that would require additional impairment to be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases.

Asset Quality

Customers segments the loan and lease receivables by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. ~~Credit losses~~Charge-offs from originated and acquired loans and leases are absorbed by the ~~ALLL. Credit losses from acquired loans are absorbed~~ACL. The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the ~~ALLL, nonaccretable difference fair value marks~~regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. At June 30, 2020, commercial and ~~cash reserves.~~consumer deferments related to COVID-19 were $974 million and $81.3 million, respectively. The schedule that follows includes both loans held for sale and loans held for investment.

~~Asset Quality at September 30, 2019~~

(dollars in thousands) Total Loans and Leases Current 30-89 Days Past Due 90 Days or More Past Due and Accruing Non-accrual/NPL (a) OREO (b) NPA (a)+(b) NPL to Loan and Lease Type (%) NPA to Loans and Leases + OREO (%)
Loan and Lease Type
Multi-family $ 2,300,244 $ 2,296,582 $ 3,662 $ — $ — $ — $ — — % — %
Commercial & industrial ⁽¹⁾
2,363,599 2,354,344 1,546 327 7,382 — 7,382 0.31 % 0.31 %
Commercial real estate non-owner occupied 1,268,557 1,268,443 31 — 83 — 83 0.01 % 0.01 %
Construction 61,200 61,200 — — — — — — % — %
Total commercial loans and leases receivable 5,993,600 5,980,569 5,239 327 7,465 — 7,465 0.12 % 0.12 %
Residential 628,786 619,981 2,660 52 6,093 78 6,171 0.97 % 0.98 %
Manufactured housing 72,616 65,233 3,292 2,524 1,567 126 1,693 2.16 % 2.33 %
Other consumer 643,553 638,568 3,827 18 1,140 — 1,140 0.18 % 0.18 %
Total consumer loans receivable 1,344,955 1,323,782 9,779 2,594 8,800 204 9,004 0.65 % 0.67 %
Deferred (fees) costs and unamortized (discounts) premiums, net (2,318) (2,318) — — — — —
Loans and Leases Receivable 7,336,237 7,302,033 15,018 2,921 16,265 204 16,469 0.22 % 0.22 %
Loans Receivable, Mortgage Warehouse, at Fair Value 2,438,530 2,438,530 — — — — —
Total Loans Held for Sale 502,854 501,529 — — 1,325 — 1,325 0.26 % 0.26 %
Total Portfolio $ 10,277,621 $ 10,242,092 $ 15,018 $ 2,921 $ 17,590 $ 204 $ 17,794 0.17 % 0.17 %

~~(1)Commercial & industrial loans, including owner occupied commercial real estate loans.~~

6974

~~Table~~Tab le of ~~Contents~~Contents

Asset Quality at ~~September~~June 30, ~~2019~~2020


(dollars in thousands)	Total Loans and Leases		Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Non-accrual/NPL (a)		OREO (b)		NPA (a)+(b)		NPL to Loan and Lease Type (%)		NPA to Loans and Leases + OREO (%)
Loan and Lease Type
Multi-family	$	1,581,839	$	1,558,036	$	16,790	$	—	$	7,013	$	—	$	7,013	0.44	%	0.44	%
Commercial & industrial ⁽¹⁾	2,099,442		2,088,822		646		—		9,974		—		9,974		0.48	%	0.48	%
Commercial real estate owner occupied	544,772		535,861		4,889		—		4,022		—		4,022		0.74	%	0.74	%
Commercial real estate non-owner occupied	1,244,773		1,214,419		97		—		30,257		—		30,257		2.43	%	2.43	%
Construction	128,834		128,834		—		—		—		—		—		—	%	—	%
Total commercial loans and leases receivable	5,599,660		5,525,972		22,422		—		51,266		—		51,266		0.92	%	0.92	%
Residential	348,109		331,180		9,072		—		7,857		35		7,892		2.26	%	2.27	%
Manufactured housing	66,865		60,625		1,171		1,738		3,331		96		3,427		4.98	%	5.12	%
Other consumer	1,257,813		1,241,511		11,415		—		4,887		—		4,887		0.39	%	0.39	%
Total consumer loans receivable	1,672,787		1,633,316		21,658		1,738		16,075		131		16,206		0.96	%	0.97	%
Loans and leases receivable ⁽¹⁾	7,272,447		7,159,288		44,080		1,738		67,341		131		67,472		0.93	%	0.93	%
Loans receivable, PPP	4,760,427		4,760,427		—		—		—		—		—		—	%	—	%
Loans receivable, mortgage warehouse, at fair value	2,793,164		2,793,164		—		—		—		—		—
Total loans held for sale	464,164		445,239		—		—		18,925		—		18,925		4.08	%	4.08	%
Total portfolio	$	15,290,202	$	15,158,118	$	44,080	$	1,738	$	86,266	$	131	$	86,397	0.56	%	0.57	%

Asset Quality at June 30, 2020 (continued)


(dollars in thousands)	(dollars in thousands)	Total Loans and Leases		Non-accrual / NPL		ALLL		Cash Reserve		Total Credit Reserves		Reserves to Loans and Leases (%)		Reserves to NPLs (%)		(dollars in thousands)	Total Loans and Leases		Non-accrual / NPL		ACL		Reserves to Loans and Leases (%)			Reserves to NPLs (%)
Loan and Lease Type	Loan and Lease Type																								Loan and Lease Type
Multi-family	Multi-family	$	2,300,244	$	—	$	7,498	$	—	$	7,498	0.33	%	—	%	Multi-family	$	1,581,839	$	7,013	$	14,697	0.93	%		209.57	%
Commercial & industrial ⁽¹⁾	Commercial & industrial ⁽¹⁾	2,363,599		7,382		18,765		—		18,765		0.79	%	254.20	%	Commercial & industrial ⁽¹⁾	2,099,442		9,974		12,302		0.59	%		123.34	%
Commercial real estate owner occupied																Commercial real estate owner occupied	544,772		4,022		11,405		2.09	%		283.57	%
Commercial real estate non-owner occupied	Commercial real estate non-owner occupied	1,268,557		83		6,440		—		6,440		0.51	%	7759.04	%	Commercial real estate non-owner occupied	1,244,773		30,257		26,493		2.13	%		87.56	%
Construction	Construction	61,200		—		658		—		658		1.08	%	—	%	Construction	128,834		—		5,297		4.11	%		—	%
Total commercial loans and leases receivable	Total commercial loans and leases receivable	5,993,600		7,465		33,361		—		33,361		0.56	%	446.90	%	Total commercial loans and leases receivable	5,599,660		51,266		70,194		1.25	%		136.92	%
Residential	Residential	628,786		6,093		4,083		—		4,083		0.65	%	67.01	%	Residential	348,109		7,857		4,550		1.31	%		57.91	%
Manufactured housing	Manufactured housing	72,616		1,567		1,027		24		1,051		1.45	%	67.07	%	Manufactured housing	66,865		3,331		6,014		8.99	%		180.55	%
Other consumer	Other consumer	643,553		1,140		12,582		—		12,582		1.96	%	1103.68	%	Other consumer	1,257,813		4,887		79,147		6.29	%		1619.54	%
Total consumer loans receivable	Total consumer loans receivable	1,344,955		8,800		17,692		24		17,716		1.32	%	201.32	%	Total consumer loans receivable	1,672,787		16,075		89,711		5.36	%		558.08	%
Deferred (fees) costs and unamortized (discounts) premiums, net		(2,318)		—		—		—		—
Loans and Leases Receivable		7,336,237		16,265		51,053		24		51,077		0.70	%	314.03	%
Loans Receivable, Mortgage Warehouse, at Fair Value		2,438,530		—		—		—		—
Total Loans Held for Sale		502,854		1,325		—		—		—		—	%	—	%
Total Portfolio		$	10,277,621	$	17,590	$	51,053	$	24	$	51,077	0.50	%	290.38	%
Loans and leases receivable ⁽¹⁾																Loans and leases receivable ⁽¹⁾	7,272,447		67,341		159,905		2.20	%		237.46	%
Loans receivable, PPP																Loans receivable, PPP	4,760,427		—		—		—	%		—	%
Loans receivable, mortgage warehouse, at fair value																Loans receivable, mortgage warehouse, at fair value	2,793,164		—		—
Total loans held for sale																Total loans held for sale	464,164		18,925		—		—	%		—	%
Total portfolio																Total portfolio	$	15,290,202	$	86,266	$	159,905	1.05	%		185.36	%

(1) Excluding loans receivable, PPP from total loans and leases receivable is a non-GAAP measure. Management believes the use of these non-GAAP measures provides additional clarity when assessing Customers' financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. Please refer to the reconciliation schedules that follow this table.

~~(1)~~

~~Commercial & industrial~~Tab le of Contents

Customers’ asset quality table contains non-GAAP financial measures calculated using non-GAAP amounts. These measures all exclude loans ~~including owner occupied commercial real estate loans.~~receivable, PPP from their calculations. Management uses these non-GAAP measures to present the current period presentation to historical periods in prior filings. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing the Bancorp’s financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

A reconciliation of loans and leases receivable, excluding loans receivable, PPP and other related amounts, at June 30, 2020, are set forth below.


(dollars in thousands)	Total Loans and Leases		Current		30-89 Days Past Due		90 Days or More Past Due and Accruing		Non-accrual/NPL (a)		OREO (b)		NPA (a)+(b)		NPL to Loan and Lease Type (%)		NPA to Loans and Leases + OREO (%)
Loans and leases receivable (GAAP)	$	12,032,874	$	11,919,715	$	44,080	$	1,738	$	67,341	$	131	$	67,472	0.56	%	0.56	%
Less: Loans receivable, PPP	4,760,427		4,760,427		—		—		—		—		—		—	%	—	%
Loans receivable, excluding loans receivable, PPP (Non-GAAP)	$	7,272,447	$	7,159,288	$	44,080	$	1,738	$	67,341	$	131	$	67,472	0.93	%	0.93	%


(dollars in thousands)	Total Loans and Leases		Non-accrual / NPL		ACL		Reserves to Loans and Leases (%)		Reserves to NPLs (%)
Loans and leases receivable (GAAP)	$	12,032,874	$	67,341	$	159,905	1.33	%	237.46	%
Less: Loans receivable, PPP	4,760,427		—		—		—	%	—	%
Loans receivable, excluding loans receivable, PPP (Non-GAAP)	7,272,447		67,341		159,905		2.20	%	237.46	%

The total loan and lease portfolio was ~~$10.3~~$15.3 billion at ~~September~~June 30, ~~2019~~2020 compared to ~~$8.5~~$10.1 billion at December 31, ~~2018~~2019 and ~~$17.6~~$86.3 million, or ~~0.17%~~0.56% of loans and leases, were non-performing at ~~September~~June 30, ~~2019~~2020 compared to ~~$27.5~~$21.3 million, or ~~0.32%~~0.21% of loans and leases, at December 31, ~~2018.~~2019. The loan and lease portfolio was supported by ~~credit reserves~~an ACL of ~~$51.1~~$159.9 million ~~(290.38%~~(185.36% of NPLs and ~~0.50%~~1.05% of total loans and leases) and ~~$40.5~~$56.5 million ~~(147.16%~~(264.67% of NPLs and ~~0.47%~~0.56% of total loans and leases), at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

DEPOSITS

Customers offers a variety of deposit accounts, including checking, savings, MMDA, and time deposits. Deposits are primarily obtained from Customers' geographic service area and nationwide through branchless digital banking, our ~~White Label~~white label relationship, deposit brokers, listing services and other relationships.

The components of deposits were as follows at the dates indicated:


(dollars in thousands)	(dollars in thousands)	September 30, 2019		December 31, 2018		Change		% Change		(dollars in thousands)	June 30, 2020		December 31, 2019		Change		% Change
Demand, non-interest bearing	Demand, non-interest bearing	$	1,569,918	$	1,122,171	$	447,747	39.9	%	Demand, non-interest bearing	$	1,879,789	$	1,343,391	$	536,398	39.9	%
Demand, interest bearing	Demand, interest bearing	1,139,675		803,948		335,727		41.8	%	Demand, interest bearing	2,666,209		1,235,292		1,430,917		115.8	%
Savings, including MMDA	Savings, including MMDA	3,793,219		3,481,936		311,283		8.9	%	Savings, including MMDA	4,549,497		4,401,719		147,778		3.4	%
Non-time deposits	Non-time deposits	6,502,812		5,408,055		1,094,757		20.2	%	Non-time deposits	9,095,495		6,980,402		2,115,093		30.3	%
Time, $100,000 and over	Time, $100,000 and over	834,741		792,370		42,371		5.3	%	Time, $100,000 and over	503,405		402,161		101,244		25.2	%
Time, other	Time, other	1,588,132		941,811		646,321		68.6	%	Time, other	1,366,975		1,266,373		100,602		7.9	%
Time deposits										Time deposits	1,870,380		1,668,534		$	201,846	12.1	%
Total deposits	Total deposits	$	8,925,685	$	7,142,236	$	1,783,449	25.0	%	Total deposits	$	10,965,875	$	8,648,936	$	2,316,939	26.8	%

Total deposits were ~~$8.9~~$11.0 billion at ~~September~~June 30, ~~2019,~~2020, an increase of ~~$1.8~~$2.3 billion, or ~~25.0%~~26.8%, from ~~$7.1~~$8.6 billion at December 31, ~~2018.~~2019. Non-time deposits increased by ~~$1.1~~$2.1 billion, or ~~20.2%~~30.3%, to ~~$6.5~~$9.1 billion at ~~September~~June 30, ~~2019,~~2020, from ~~$5.4~~$7.0 billion at December 31, ~~2018.~~2019. This increase primarily resulted from Customers' initiative to improve its net interest margin by expanding its sources of lower-cost funding. These efforts led to increases in non-interest bearing demand deposits of ~~$447.7 million,~~$0.5 billion and interest bearing demand deposits of ~~$335.7 million.~~$1.4 billion. Savings, including MMDA increased ~~$311.3 million,~~$0.1 billion, or ~~8.9%~~3.4%, to ~~$3.8~~$4.5 billion at ~~September~~June 30, ~~2019,~~2020, from ~~$3.5~~$4.4 billion at December 31, ~~2018.~~2019. Time deposits increased ~~$688.7 million,~~$0.2 billion, or ~~39.7%~~12.1%, to ~~$2.4~~$1.9 billion at ~~September~~June 30, ~~2019,~~2020, from $1.7 billion at December 31, ~~2018.~~2019.

Tab le of Contents

At ~~September~~June 30, ~~2019,~~2020, the Bank had ~~$1.7~~$1.0 billion in state and municipal deposits to which it had pledged ~~$1.7~~$1.0 billion of available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement.

~~Table of Contents~~

FHLB ADVANCES AND OTHER BORROWINGS

Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings ~~generally~~ include short-term and long-term advances from the FHLB, FRB, including from the PPPLF, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. ~~As of September~~

Short-term debt

Short-term debt at June 30, ~~2019~~2020 and December 31, ~~2018, total outstanding~~2019 was as follows:


	June 30, 2020						December 31, 2019
(dollars in thousands)	Amount		Rate		Amount		Rate

FHLB advances	$	850,000	1.48	%	$	500,000	2.15	%
Federal funds purchased	—		—	%	538,000		1.60	%
Total short-term debt	$	850,000			$	1,038,000

Long-term debt

FHLB and FRB Advances

Long-term FHLB and FRB advances at June 30, 2020 and December 31, 2019, was as follows:



	June 30, 2020						December 31, 2019
(dollars in thousands)	Amount		Rate		Amount		Rate

FHLB advances	$	—	—	%	$	350,000	2.36	%
FRB PPP Liquidity Facility advances	4,419,967		0.35	%	—		—	%
Total long-term FHLB and FRB advances	$	4,419,967			$	350,000

The maximum borrowing capacity with the FHLB and FRB at June 30, 2020 and December 31, 2019 was as follows:


(dollars in thousands)	June 30, 2020		December 31, 2019
Total maximum borrowing capacity with the FHLB	$	2,958,717	$	3,445,416
Total maximum borrowing capacity with the FRB ⁽¹⁾	152,410		136,842
Qualifying loans serving as collateral against FHLB and FRB advances	3,814,247		4,496,983

(1) Amounts reported in the above table exclude borrowings ~~were $1.6~~under the PPPLF, which are limited to the face value of the loans originated under the PPP. At June 30, 2020, Customers had $4.4 billion of borrowings under the PPPLF, with a borrowing capacity of up to $4.8 billion, which is the face value of the qualifying loans Customers has originated under the PPP.

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Senior Notes and ~~$1.7 billion, respectively, which represented a decrease of $21.5 million, or 1.3%. In June 2019, $25.0 million of~~Subordinated Debt

Long-term senior notes ~~bearing~~and subordinated debt at June 30, 2020 and December 31, 2019 were as follows:


		June 30, 2020		December 31, 2019
(dollars in thousands)
Issued by	Ranking	Amount		Amount		Rate			Issued Amount		Date Issued	Maturity	Price
Customers Bancorp	Senior	$	24,492	$	24,432	4.500		%	$	25,000	September 2019	September 2024	100.000	%
Customers Bancorp	Senior	99,341		99,198		3.950		%	100,000		June 2017	June 2022	99.775	%

Total other borrowings		123,833		123,630

Customers Bancorp	Subordinated ⁽¹⁾⁽²⁾	72,131		72,040		5.375		%	74,750		December 2019	December 2034	100.000	%
Customers Bank	Subordinated ⁽¹⁾⁽³⁾	109,124		109,075		6.125		%	110,000		June 2014	June 2029	100.000	%
Total subordinated debt				$	181,255	$	181,115

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

(2)Customers Bancorp has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after December 30, 2029.

(3)The subordinated notes will bear an annual fixed rate of 6.125% until June 26, 2024. From June 26, 2024 until maturity, the notes will bear an annual interest rate ~~of 4.625%, which were originally issued in June 2014 by~~equal to the Bancorp, matured and were repaid in full. On September 25, 2019, Customers Bancorp completed a public offering in which it issued $25.0 million of 4.50% senior notes due September 2024. Interest is paid semi-annually in arrears in March and September. Net proceeds of $24.8 million from this transaction were contributed tothree-month LIBOR plus 344.3 basis points. Customers Bank ~~as qualifying Tier 1 capital.~~has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after June 26, 2024.

SHAREHOLDERS' EQUITY

The components of ~~shareholder's~~shareholders' equity were as follows at the dates indicated:


(dollars in thousands)	(dollars in thousands)	September 30, 2019		December 31, 2018		Change		% Change		(dollars in thousands)	June 30, 2020		December 31, 2019		Change		% Change
Preferred stock	Preferred stock	$	217,471	$	217,471	$	—	—	%	Preferred stock	$	217,471	$	217,471	$	—	—	%
Common stock	Common stock	32,526		32,252		274		0.8	%	Common stock	32,791		32,617		174		0.5	%
Additional paid in capital	Additional paid in capital	441,499		434,314		7,185		1.7	%	Additional paid in capital	450,665		444,218		6,447		1.5	%
Retained earnings	Retained earnings	357,608		316,651		40,957		12.9	%	Retained earnings	338,665		381,519		(42,854)		(11.2)	%
Accumulated other comprehensive loss, net	Accumulated other comprehensive loss, net	(8,174)		(22,663)		14,489		(63.9)	%	Accumulated other comprehensive loss, net	(9,965)		(1,250)		(8,715)		697.2	%
Treasury stock	Treasury stock	(21,780)		(21,209)		(571)		2.7	%	Treasury stock	(21,780)		(21,780)		—		—	%
Total shareholders' equity	Total shareholders' equity	$	1,019,150	$	956,816	$	62,334	6.5	%	Total shareholders' equity	$	1,007,847	$	1,052,795	$	(44,948)	(4.3)	%

Shareholders’ equity ~~increased $62.3~~decreased $44.9 million, or ~~6.5%~~4.3%, to $1.0 billion at ~~September~~June 30, ~~2019~~2020 when compared to shareholders' equity of ~~$956.8 million~~$1.1 billion at December 31, ~~2018.~~2019. The ~~increase~~decrease primarily resulted from ~~net income~~a decrease in retained earnings of ~~$51.8~~$42.9 million ~~for the nine months ended September 30, 2019, a reduction~~and an increase in accumulated other comprehensive loss, net of ~~$14.5~~$8.7 million, ~~and increases~~partially offset by an increase of ~~$7.2~~$6.4 million in additional paid in ~~capital,~~capital. The decrease in retained earnings primarily resulted from the adoption of CECL on January 1, 2020, which reduced retained earnings by $61.5 million, and $7.2 million in preferred stock dividends, partially offset by ~~preferred stock dividends~~net income of ~~$10.8 million for the nine months ended September 30, 2019 and repurchases of shares of Customers' common stock totaling $0.6~~$25.8 million. The ~~reduction~~increase in accumulated other comprehensive loss, net primarily resulted from ~~an increase in the fair value of available-for-sale debt securities, partially offset by~~ a decline in the fair value of cash flow hedges ~~both~~ due to ~~the decline~~changes in market interest rates during the ~~year.~~six months ended June 30, 2020, partially offset by an increase in the fair value of available for sale debt securities due to the timing of purchases and changes in market interest rates during the six months ended June 30, 2020. The ~~increases~~increase in additional paid in capital resulted primarily from the issuance of common stock under share-based compensation arrangements for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan and lease commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.

Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional funding. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans and

Tab le of Contents

leases, other funds from operations, and proceeds from common and preferred stock issuances. Borrowing arrangements are maintained with the FHLB and the FRB to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the ~~FHLB.~~FHLB and FRB. As of ~~September~~June 30, ~~2019,~~2020, Customers' borrowing capacity with the FHLB was ~~$3.9~~$3.0 billion, of which ~~$1.0~~$0.9 billion was utilized in borrowings and ~~$1.8~~$1.0 billion of available capacity was utilized to collateralize state and municipal deposits. As of December 31, ~~2018,~~2019, Customers' borrowing capacity with the FHLB was ~~$4.1~~$3.4 billion, of which ~~$1.2~~$0.9 billion was utilized in borrowings and ~~$1.7~~$1.4 billion of available capacity was utilized to collateralize state and municipal deposits. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Customers' borrowing capacity with the FRB was ~~$183.9~~$152.4 million and ~~$102.5~~$136.8 million, respectively.

~~Table of Contents~~

The table below summarizes Customers' cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


		Nine Months Ended September 30,											Six Months Ended June 30,
(amounts in thousands)	(amounts in thousands)	2019		2018		Change		% Change		(amounts in thousands)	2020		2019		Change		% Change
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	$	34,683	$	98,365	$	(63,682)	(64.7)	%	Net cash provided by (used in) operating activities	$	39,577	$	3,129	$	36,448	1,164.8	%
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	(1,665,534)		(289,091)		(1,376,443)		476.1	%	Net cash provided by (used in) investing activities	(5,375,772)		(1,213,324)		(4,162,448)		343.1	%
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	1,750,934		710,437		1,040,497		146.5	%	Net cash provided by (used in) financing activities	6,191,020		1,243,855		4,947,165		397.7	%
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	$	120,083	$	519,711	$	(399,628)	(76.9)	%	Net increase (decrease) in cash and cash equivalents	$	854,825	$	33,660	$	821,165	2,439.6	%

Cash flows provided by (used in) operating activities

Cash provided by operating activities of ~~$34.7~~$39.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 primarily resulted from an increase accrued interest payable and other liabilities of $88.3 million, net income of $25.8 million, partially offset by an increase of $108.3 million in accrued interest receivable and other assets.

Cash provided by operating activities of $3.1 million for the six months ended June 30, 2020 primarily resulted from net income of ~~$51.8~~$24.7 million, non-cash operating adjustments of ~~$46.9~~$25.2 million, and an increase of ~~$15.3~~$16.5 million in accrued interest payable and other liabilities, partially offset by an increase of ~~$79.3~~$63.3 million in accrued interest receivable and other assets. Cash provided by operating activities of $98.4 million for the nine months ended September 30, 2018 primarily resulted in net income of $53.8 million, and non-cash operating adjustments of $40.3 million.

Cash flows provided by (used in) investing activities

Cash used in investing activities of ~~$1.7~~$5.4 billion for the ~~nine~~six months ended ~~September~~June 30, 2020 primarily resulted from a net increase in loans and leases, excluding mortgage warehouse loans of $4.5 billion primarily related to PPP loan originations, net originations of mortgage warehouse loans of $540.9 million, purchases of loans of $211.1 million, and purchases of investment securities available for sale of $280.4 million, partially offset by proceeds from sales, maturities, calls, and principal repayments of investment securities of $109.2 million.

Cash used in investing activities of $1.2 billion for the six months ended June 30, 2019 primarily resulted from net originations of mortgage warehouse loans of ~~$1.1 billion and purchases of loans of $636.4 million, partially offset by proceeds from sale of investment securities available for sale of $97.6 million.~~

~~Cash used in investing activities of $289.1 million for the nine months ended September 30, 2018 primarily resulted from purchases of investment securities available for sale of $763.2~~$622.4 million and purchases of loans of ~~$347.7 million, offset in part by proceeds from sales of investment securities available for sale of $476.2 million and net proceeds from mortgage warehouse loans of $277.1~~$555.6 million.

Cash flows provided by (used in) financing activities

Cash provided by financing activities of ~~$1.8~~$6.2 billion for the ~~nine~~six months ended ~~September~~June 30, 2020 primarily resulted from net increases in long-term borrowed funds from the FRB of $4.4 billion primarily to finance the PPP loan originations and deposits of $2.3 billion, partially offset by a net decrease in federal funds purchased of $538.0 million.

Cash provided by financing activities of $1.2 billion for the six months ended June 30, 2019 primarily resulted from ~~an increase~~increases in deposits of ~~$1.8~~$1.0 billion, proceeds from long-term FHLB borrowings of $350.0 million, and federal funds purchased of ~~$186.0~~$219.0 million, partially offset by repayments of short-term borrowed funds from the FHLB of ~~$557.3~~$336.0 million, repayments of long-term debt of $25.0 million, and preferred stock dividends paid of ~~$10.8 million.~~

Cash provided by financing activities of $710.4 million for the nine months ended September 30, 2018 primarily resulted from an increase in deposits of $1.7 billion, partially offset by short-term borrowed funds from the FHLB of $776.9 million, federal funds purchased of $155.0 million, long-term debt of $63.3 million, and preferred stock dividends paid of $10.8$7.2 million.

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CAPITAL ADEQUACY

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank and the Bancorp met all capital adequacy requirements to which they were subject.

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~~Table~~Tab le of ~~Contents~~Contents

Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios set forth in the following table:


						Minimum Capital Levels to be Classified as:																												Minimum Capital Levels to be Classified as:
		Actual						Adequately Capitalized						Well Capitalized								Basel III Compliant						Actual						Adequately Capitalized		Well Capitalized	Basel III Compliant
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(dollars in thousands)	Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019:
As of June 30, 2020:																		As of June 30, 2020:
Common equity Tier 1 capital (to risk-weighted assets)	Common equity Tier 1 capital (to risk-weighted assets)																	Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	794,745	7.811	%	$	457,840	4.500	%	N/A		N/A		$	712,195	7.000	%	Customers Bancorp, Inc.	$	853,818	7.765		%	$	494,780	4.500	%	N/A		N/A		$	769,657	7.000	%
Customers Bank	Customers Bank	$	1,103,341	10.847	%	$	457,748	4.500	%	$	661,192	6.500	%	$	712,053	7.000	%	Customers Bank	$	1,168,276	10.636		%	$	494,291	4.500	%	$	713,976	6.500	%	$	768,897	7.000	%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)																	Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,012,216	9.949	%	$	610,453	6.000	%	N/A		N/A		$	864,809	8.500	%	Customers Bancorp, Inc.	$	1,071,289	9.743		%	$	659,706	6.000	%	N/A		N/A		$	934,584	8.500	%
Customers Bank	Customers Bank	$	1,103,341	10.847	%	$	610,331	6.000	%	$	813,775	8.000	%	$	864,636	8.500	%	Customers Bank	$	1,168,276	10.636		%	$	659,055	6.000	%	$	878,740	8.000	%	$	933,661	8.500	%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)																	Total capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,155,499	11.357	%	$	813,938	8.000	%	N/A		N/A		$	1,068,293	10.500	%	Customers Bancorp, Inc.	$	1,311,527	11.928		%	$	879,608	8.000	%	N/A		N/A		$	1,154,486	10.500	%
Customers Bank	Customers Bank	$	1,263,490	12.421	%	$	813,775	8.000	%	$	1,017,218	10.000	%	$	1,068,079	10.500	%	Customers Bank	$	1,351,665	12.305		%	$	878,740	8.000	%	$	1,098,424	10.000	%	$	1,153,346	10.500	%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)																	Tier 1 capital (to average assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,012,216	9.013	%	$	449,217	4.000	%	N/A		N/A		$	449,217	4.000	%	Customers Bancorp, Inc.	$	1,071,289	8.790		%	$	487,512	4.000	%	N/A		N/A		$	487,512	4.000	%
Customers Bank	Customers Bank	$	1,103,341	9.829	%	$	448,997	4.000	%	$	561,246	5.000	%	$	448,997	4.000	%	Customers Bank	$	1,168,276	9.593		%	$	487,151	4.000	%	$	608,938	5.000	%	$	487,151	4.000	%
As of December 31, 2018:
As of December 31, 2019:																		As of December 31, 2019:
Common equity Tier 1 capital (to risk-weighted assets)	Common equity Tier 1 capital (to risk-weighted assets)																	Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	745,795	8.964	%	$	374,388	4.500	%	N/A		N/A		$	530,384	6.375	%	Customers Bancorp, Inc.	$	821,810	7.984		%	$	463,211	4.500	%	N/A		N/A		$	720,551	7.000	%
Customers Bank	Customers Bank	$	1,066,121	12.822	%	$	374,160	4.500	%	$	540,453	6.500	%	$	530,059	6.375	%	Customers Bank	$	1,164,652	11.323		%	$	462,842	4.500	%	$	668,549	6.500	%	$	719,976	7.000	%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)																	Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	963,266	11.578	%	$	499,185	6.000	%	N/A		N/A		$	655,180	7.875	%	Customers Bancorp, Inc.	$	1,039,281	10.096		%	$	617,615	6.000	%	N/A		N/A		$	874,955	8.500	%
Customers Bank	Customers Bank	$	1,066,121	12.822	%	$	498,879	6.000	%	$	665,173	8.000	%	$	654,779	7.875	%	Customers Bank	$	1,164,652	11.323		%	$	617,122	6.000	%	$	822,829	8.000	%	$	874,256	8.500	%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)																	Total capital (to risk-weighted assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	1,081,962	13.005	%	$	665,580	8.000	%	N/A		N/A		$	821,575	9.875	%	Customers Bancorp, Inc.	$	1,256,309	12.205		%	$	823,487	8.000	%	N/A		N/A		$	1,080,827	10.500	%
Customers Bank	Customers Bank	$	1,215,522	14.619	%	$	665,173	8.000	%	$	831,466	10.000	%	$	821,072	9.875	%	Customers Bank	$	1,330,155	12.933		%	$	822,829	8.000	%	$	1,028,537	10.000	%	$	1,079,964	10.500	%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)																	Tier 1 capital (to average assets)
Customers Bancorp, Inc.	Customers Bancorp, Inc.	$	963,266	9.665	%	$	398,668	4.000	%	N/A		N/A		$	398,668	4.000	%	Customers Bancorp, Inc.	$	1,039,281	9.258		%	$	449,026	4.000	%	N/A		N/A		$	449,026	4.000	%
Customers Bank	Customers Bank	$	1,066,121	10.699	%	$	398,570	4.000	%	$	498,212	5.000	%	$	398,570	4.000	%	Customers Bank	$	1,164,652	10.379		%	$	448,851	4.000	%	$	561,064	5.000	%	$	448,851	4.000	%

The capital ratios above reflect the capital requirements under "Basel III" adopted effective first quarter 2015 and the capital conservation buffer phased in beginning January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of ~~September~~June 30, ~~2019,~~2020, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "NOTE 910 - REGULATORY CAPITAL" to Customers' unaudited financial statements for additional discussion regarding regulatory capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

Customers is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of the Bank's customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet.

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With commitments to extend credit, exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and

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conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan orand lease, ~~commitments to extend credit~~these financial instruments are subject to the Bank’s credit policy and other underwriting standards.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:


(amounts in thousands)	(amounts in thousands)	September 30, 2019		December 31, 2018		(amounts in thousands)	June 30, 2020		December 31, 2019
Commitments to fund loans and leases	Commitments to fund loans and leases	$	374,038	$	345,608	Commitments to fund loans and leases	$	404,528	$	261,902
Unfunded commitments to fund mortgage warehouse loans	Unfunded commitments to fund mortgage warehouse loans	1,041,770		1,537,900		Unfunded commitments to fund mortgage warehouse loans	1,226,333		1,378,364
Unfunded commitments under lines of credit and credit cards	Unfunded commitments under lines of credit and credit cards	982,446		867,131		Unfunded commitments under lines of credit and credit cards	1,172,313		1,065,474
Letters of credit	Letters of credit	48,774		55,659		Letters of credit	26,419		48,856
Other unused commitments	Other unused commitments	3,562		4,822		Other unused commitments	2,466		2,736

Commitments to fund loans and leases, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit, letters of credit, and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.

Commitments to fund loans and leases and unfunded commitments under lines of credit may be obligations of the Bank as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or guaranteed by the U.S. government through one of its programs such as FHA, VA, or are conventional loans eligible for sale to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance activity, new home sales and laws and regulation.

Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers.

Effect of Government Monetary Policies

Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and leases, investments, and deposits, and their use may also affect rates charged on loans and leases or paid for deposits.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The largest component of Customers' net income is net interest income, and the majority of its financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to optimize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Customers' asset/liability committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.

Customers uses two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of interest rate risk; they are income ~~simulation~~scenario modeling and estimates of EVE. The combination of these two methods provides a

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reasonably comprehensive summary of the levels of interest rate risk of Customers' exposure to time factors and changes in interest rate environments.

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Income ~~simulation~~scenario modeling is used to measure interest rate sensitivity and manage interest rate risk. Income ~~simulation~~scenario considers not only the impact of changing market interest rates upon forecasted net interest income but also other factors such as yield-curve relationships, the volume and mix of assets and liabilities, customer preferences and general market conditions.

Through the use of income ~~simulation~~scenario modeling, Customers has estimated the net interest income for the periods ending ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, based upon the assets, liabilities and off-balance sheet financial instruments in existence at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Customers has also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate shocks”). For upward rate shocks modeling a rising rate environment at June 30, 2020, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were only decreased immediately by 100 ~~and 200~~ basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. The following table reflects the estimated percentage change in estimated net interest income for the periods ending ~~September~~June 30, 2020 and December 31, 2019, resulting from changes in interest rates.

Net change in net interest income


		% Change				% Change
Rate Shocks	Rate Shocks	September 30, 2020	December 31, 2019	Rate Shocks	June 30, 2020	December 31, 2019
Up 3%	Up 3%	4.5%	(15.7)%	Up 3%	7.8%	3.3%
Up 2%	Up 2%	3.5%	(9.8)%	Up 2%	5.8%	2.7%
Up 1%	Up 1%	2.0%	(4.5)%	Up 1%	3.2%	1.6%
Down 1%	Down 1%	(2.4)%	3.9%	Down 1%	4.2%	(1.9)%
Down 2%		(5.6)%	6.7%

The net changes in net interest income in all scenarios are within Customers Bank's interest rate risk policy guidelines.

EVE estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for comparable assets and liabilities. Upward and downward rate shocks are used to measure volatility of EVE in relation to a constant rate environment. For upward rate shocks modeling a rising rate environment at June 30, 2020, current market interest rates were were only increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were decreased immediately by 100 ~~and 200~~ basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. This method of measurement primarily evaluates the longer term repricing risks and options in Customers Bank’s balance sheet. The following table reflects the estimated EVE at risk and the ratio of EVE to EVE adjusted assets at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, resulting from shocks to interest rates.


		From base				From base
Rate Shocks	Rate Shocks	September 30, 2019	December 31, 2018	Rate Shocks	June 30, 2020	December 31, 2019
Up 3%	Up 3%	(5.3)%	(22.8)%	Up 3%	(5.8)%	(5.6)%
Up 2%	Up 2%	(1.3)%	(13.3)%	Up 2%	(2.3)%	(2.0)%
Up 1%	Up 1%	0.6%	(5.7)%	Up 1%	(0.6)%	(1.0)%
Down 1%	Down 1%	(1.5)%	3.8%	Down 1%	(0.9)%	(1.1)%
Down 2%		(4.3)%	6.5%

The net changes in EVE in all scenarios are within Customers Bank's interest rate risk policy guidelines.

Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from the assumptions used in the model.

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Item 4. Controls and Procedures

(a) Management's Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, Customers Bancorp carried out an evaluation, under the supervision and with the participation of Customers Bancorp’s management, including Customers Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Customers Bancorp’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Customers Bancorp’s disclosure controls and procedures were effective as of ~~September~~June 30, ~~2019.~~2020.

(b) Changes in Internal Control Over Financial Reporting. During the quarter ended ~~September~~June 30, ~~2019,~~2020, there have been no changes in Customers ~~Bancorp’s~~Bancorp's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Customers ~~Bancorp’s~~Bancorp's internal control over financial reporting.

The emergence of the COVID-19 pandemic during first quarter 2020 necessitated the execution of several Customers Bancorp contingency plans. Beginning in March 2020 and continuing through this filing date, Customers Bancorp had a substantial number of its team members working remotely under such contingency plans.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on Customers' legal proceedings, refer to “NOTE 1415 – LOSS CONTINGENCIES” to the unaudited consolidated financial statements.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the ~~2018~~2019 Form 10-K. There are no material changes from the risk factors included within the ~~2018~~2019 Form 10-K, other than the ~~risk~~risks described below. The risks described within the ~~2018~~2019 Form 10-K and below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements.”

~~Our New York State multi-family loan portfolio could~~The COVID-19 pandemic has impacted our business, and the ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be ~~adversely impacted by changes in legislation or regulation.~~

~~On June 14, 2019,~~predicted, including the ~~New York State legislature passed the Housing Stability~~scope and Tenant Protection Act of 2019, impacting about one million rent regulated apartment units. Among other things, the new legislation: (i) curtails rent increases from Material Capital Improvements and Individual Apartment Improvements; (ii) all but eliminates the ability for apartments to exit rent regulation; (iii) does away with vacancy decontrol and high-income deregulation; and (iv) repealed the 20% vacancy bonus. While it is too early to measure the full impactduration of the ~~legislation,~~pandemic and actions taken by governmental authorities in ~~total, it generally limits a landlord's ability~~response to ~~increase rents on rent regulated apartments~~the pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and ~~makes it more difficult to convert rent regulated apartments to market rate apartments.~~disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan and lease portfolios and has increased and could further increase our allowance for credit losses, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, we have also enacted hardship relief assistance for customers experiencing financial difficulty as a result of COVID-19, including fee and penalty waivers, loan deferrals or other scenarios that may help our customers. In addition, we are a lender for the Small Business Administration's Paycheck Protection Program ("PPP") and other SBA, Federal Reserve or United States Treasury programs that have been or may be created in the future in response to the pandemic. These programs are new and their effects on Customers' business are uncertain. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

To the extent the COVID-19 pandemic continues to adversely affect the economy, and/or adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned "Risk Factors" in our 2019 Form 10-K, including those risks related to business operations, industry/market, our securities and credit, or risks described in our other filings with the SEC.

Risks Related to the Proposed Sale of BankMobile Technologies to Megalith Financial Acquisition Corp.

We face a number of risks relating to our announced plans to sell BankMobile Technologies.

We have announced our plans to dispose of the technology arm of our BankMobile business through a merger transaction through which Megalith Financial Acquisition Corp. (“MFAC”), a special purpose acquisition company, will acquire the Bank’s subsidiary, BankMobile Technologies, Inc. (“BMT”). The completion of the merger will be subject to a number of conditions, including receipt by MFAC of stockholder approval of the transaction, receipt of all necessary regulatory approvals, MFAC meeting certain net tangible assets and minimum cash requirements and other conditions. Certain of the conditions will not be within our control, and we cannot guarantee you that we will be able to complete the merger on the terms we have agreed to with MFAC, or at all. The steps we take to complete this transaction may adversely affect our business and the value of Customers and/or BMT. Uncertainty as to our ability to complete the transaction and uncertainty as to the timing of the completion of the transaction may adversely affect analyst and shareholder views of our business and prospects, which could adversely affect our share price. Executing the merger may also result in the diversion of our management’s attention from Customers’ day-to-day operations generally, and the expenses we incur in executing the transaction may exceed our expectations, which may adversely affect our results of operations. In addition, even if we are successful

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in completing the sale of BMT, it is possible that we and our shareholders may not receive the benefits we presently anticipate from this transaction.

Failure to complete the proposed sale of BMT could negatively impact our share price, our future business and financial results.

We cannot assure you that our proposed sale of BMT will be completed in the time frame we currently anticipate, or at all. If we do not complete the proposed sale, we and our shareholders will not receive the expected benefits of such proposed transactions, but we will have incurred significant costs in connection with our pursuit of the transaction. In addition, we cannot assure you that alternative opportunities to sell or otherwise divest BMT will be available to us, or, if available, will be on terms at least as favorable to us and our shareholders as the terms of the proposed merger with MFAC. Market conditions, the possible need to secure regulatory, shareholder or other approvals and other factors will affect our ability to pursue alternative opportunities. In addition, the value of our common and preferred stock may decline if the proposed transactions are not completed, and uncertainty as to whether alternative transactions may be available for the disposition of BMT, and as to the timing, form and terms of any such alternative disposition may adversely affect analyst and shareholder views as to the value of BMT, which could further adversely affect the value of our securities.

If we are unable to complete the proposed sale of BMT in a timely fashion, or at all, we will continue to face the risks and challenges associated with the BankMobile business.

If we do not complete the proposed sale of BMT in a timely fashion, or at all, we will continue to face the risks and challenges associated with the BankMobile business, including those risks described in the “Risk Factors” discussion in our 2019 Form 10-K. We cannot assure you that we will be able to address and manage these risks so as to preserve or increase the value of the ~~collateral located~~BankMobile business, and any failure to preserve or increase the value of the BankMobile business could adversely affect our business as a whole and our ability to divest BMT in ~~New York State securing our multi-family loans~~an alternative transaction on favorable terms, or at all.

We will continue to own a significant amount of the resulting company following the completion of BMT’s merger with MFAC and, as such, the future ~~net operating income~~value of such properties could potentially become impaired. At September 30, 2019, Customers' total multi-family exposure in New York State is approximately $1.7 billion, of which approximately $1.2 million, or 68%, is provided for loans to rent regulated propertiesthe stock consideration we receive in the ~~multi-family community, primarily~~merger and our ability to realize the value of our own ownership of BM Technologies shares will be subject to a number of risks and challenges.

Following completion of the proposed merger, we expect to own approximately 47% of the outstanding stock of BM Technologies, depending on the amount of shares MFAC stockholders elect to have redeemed in ~~New York City.~~connection with the completion of the merger. As a result, the benefits we obtain from the stock consideration we will receive in the merger will depend on BM Technologies’s future performance, as well as factors impacting the value of fintech companies generally, conditions in the financial markets and other factors affecting public companies. Although our BankMobile division, as an operating segment of ours, recently became profitable, there can be no assurance that BMT, a component of our BankMobile division, will be profitable following completion of the merger or that BM Technologies will be able to successfully execute its business plan, address competitive conditions in its markets and take other actions necessary to increase its value and the value of our shareholdings. In addition, although we have stated that it is our plan to reduce our ownership stake in the post-merger company gradually following the closing of the transaction, we cannot assure you that we will be able to do so on favorable terms or in the time frame we currently anticipate. We also are subject to a lock-up agreement that will prevent us from disposing of any of the shares, except in limited circumstances, for a period of up to 180 days from the closing of the transaction.

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

On November 26, 2013, the Bancorp's board of directors authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstanding shares not to exceed a 20% premium over the then current book value. On December 11, 2018, the Bancorp's board of directors amended the terms of the 2013 stock repurchase plan to adjust the repurchase terms and book value measurement date such that Customers was authorized to purchase shares of common stock at prices not to exceed the book value per share of Customers' common stock measured as of September 30, 2018. Customers repurchased all remaining authorized shares pursuant to this program in January 2019. Accordingly, there were no common shares repurchased during ~~third~~second quarter ~~2019.~~2020.

Dividends on Common Stock

Customers Bancorp historically has not paid any cash dividends on its shares of common stock and does not expect to do so in the foreseeable future.

Any future determination relating to our dividend policy will be made at the discretion of Customers Bancorp’s board of directors and will depend on a number of factors, including earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, ability to service any equity or debt obligations senior to our common stock, including obligations to pay dividends to the holders of Customers Bancorp's issued and outstanding shares of preferred stock and other factors deemed relevant by the Board of Directors.

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In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that bank subsidiaries can pay to their parent holding company without regulatory approval. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels, and limits exist on paying dividends in excess of net income for specified periods.

Beginning January 1, 2015, the ability to pay dividends and the amounts that can be paid will be limited to the extent the Bank's capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements were phased in through January 1, 2019.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

None

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Item 6. Exhibits


Exhibit No.		Description

2.1	*	Agreement and Plan of Merger by and between Megalith Financial Acquisition Corp., MFAC Merger Sub Inc., Customers Bank, and BankMobile Technologies, Inc., as the Company, incorporated by reference to Exhibit 2.1 to the Customers Bancorp 8-K filed with the SEC on August 6,2020

3.1		Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 30, 2012

3.2		Amended and Restated Bylaws of Customers Bancorp, incorporated by reference to Exhibit 3.2 to the Customers Bancorp Form 8-K filed with the SEC on April 30, 2012

3.3		Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on July 2, 2012

3.4		Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, Inc., incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on June 3, 2019

3.5		Amendment to Amended and Restated Bylaws of Customers Bancorp, Inc., incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on June 19, 2019

3.6		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on May 18, 2015

3.7		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on January 29, 2016

3.8		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 28, 2016

3.9		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on September 16, 2016

4.1		Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013

4.2		Form of Note Subscription Agreement (including form of Subordinated Note Certificate and Senior Note Certificate), incorporated by reference to Exhibit 10.1 to the Customers Bancorp Form 8-K filed with the SEC on June 26, 2014

4.3		~~Form of Warrant issued by Berkshire Bancorp, Inc., incorporated by reference to Exhibit 10.23 to the Customers Bancorp Form S-1/A filed with the SEC on April 25, 2012~~

~~4.4~~		Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on June 30, 2017

~~4.5~~4.4		Third Supplemental Indenture, dated as of September 25, 2019, by and between Customers Bancorp, Inc., as Issuer and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on September 25, 2019

~~10.1~~4.5		~~Customers Bancorp, Inc. 2019 Stock Incentive Plan,~~Form of 4.50% Senior Note due 2024, incorporated by reference to Exhibit ~~4.6~~4.2 to the Customers Bancorp Form ~~S-8~~8-K filed with the SEC on ~~July~~September 25, 2019

~~10.2~~4.6		~~Employment~~ A ~~greement,~~Subordinated Indenture, dated as of ~~October 23,~~December 9, 2019, bybetween the Registrant and ~~between Customers Bancorp, Inc. and Carla Leibold,~~Wilmington Trust, National Association, as Trustee incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed December 9, 2019

E4.7		~~xhibit~~First Supplemental Indenture, dated as of December 9, 2019, between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on December 9, 2019

4.8		Form of 5.375% Subordinated Note due 2034, incorporated by reference to Exhibit 4.3 to the Customers Bancorp Form 8-K filed with the SEC on December 9, 2019

10.1		Sponsor Share Letter, dated August 6, 2020, by and among Sponsor, Megalith and Customers Bank, incorporated by reference to Exhibit 10.1 to the Customers Bancorp Form 8-K filed with the SEC on ~~October 25, 2019~~August 6, 2020

Tab le of Contents


10.2						Form of Lock-up Agreement, incorporated by reference to Exhibit 10.2 to the Customers Bancorp Form 8-K filed with the SEC on August 6,2020

10.3						Form of Non-Competition Agreement, incorporated by reference to Exhibit 10.3 to the Customers ~~Bank~~ Bancorp Form 8-K filed with the SEC on August 6, 2020

~~Death Benefit~~10.4						~~Plan, dated as~~Form of ~~October 23, 2019,~~Registration Rights Agreement, incorporated by reference to Exhibit 10.4 to the Customers Bancorp Form 8-K filed ~~herewith~~with the SEC on August 6, 2020

31.1						Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)

31.2						Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)

32.1						Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2						Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

~~Table of Contents~~


101		The ~~Exhibits filed~~following financial statements from the Customers’ Annual Report on Form 10-Q as ~~part~~ of ~~this report are as follows:~~and for the year ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

~~101.INS~~104	~~XBRL Instance Document~~Cover Page Interactive Data File - ~~The instance document does not appear in~~ the ~~interactive data file because its~~cover page XBRL tags are embedded within the ~~inline~~Inline XBRL document

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon its request.

8089

~~Table~~Tab le of ~~Contents~~Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Customers Bancorp, Inc.

~~November 7, 2019~~August 10, 2020

By:

/s/ Jay S. Sidhu

Name:

Jay S. Sidhu

Title:

Chairman and Chief Executive Officer
(Principal Executive Officer)

~~November 7, 2019~~August 10, 2020

By:

/s/ Carla A. Leibold

Name:

Carla A. Leibold

Title:

Chief Financial Officer ~~and Treasurer~~
(Principal Financial Officer)

8190

~~Table~~Tab le of ~~Contents~~Contents

Exhibit Index


Exhibit No.		Description

2.1	*	Agreement and Plan of Merger by and between Megalith Financial Acquisition Corp., MFAC Merger Sub Inc.,Customers Bank , and BankMobile Technologies, Inc., incorporated by reference to Exhibit 2.1 to the Customers Bancorp 8-K filed with the SEC on August 6, 2020

3.1		Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 30, 2012

3.2		Amended and Restated Bylaws of Customers Bancorp, incorporated by reference to Exhibit 3.2 to the Customers Bancorp Form 8-K filed with the SEC on April 30, 2012

3.3		Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on July 2, 2012

3.4		Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, Inc., incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on June 3, 2019

3.5		Amendment to Amended and Restated Bylaws of Customers Bancorp, Inc., incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on June 19, 2019

3.6		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on May 18, 2015

3.7		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on January 29, 2016

3.8		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 28, 2016

3.9		Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on September 16, 2016

4.1		Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013

4.2		Form of Note Subscription Agreement (including form of Subordinated Note Certificate and Senior Note Certificate), incorporated by reference to Exhibit 10.1 to the Customers Bancorp Form 8-K filed with the SEC on June 26, 2014

4.3		~~Form of Warrant issued by Berkshire Bancorp, Inc., incorporated by reference to Exhibit 10.23 to the Customers Bancorp Form S-1/A filed with the SEC on April 25, 2012~~

~~4.4~~		Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on June 30, 2017

~~4.5~~4.4		Third Supplemental Indenture, dated as of September 25, 2019, by and between Customers Bancorp, Inc., as Issuer and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on September 25, 2019

~~10.1~~4.5		~~Customers Bancorp, Inc. 2019 Stock Incentive Plan,~~Form of 4.50% Senior Note due 2024, incorporated by reference to Exhibit ~~4.6~~4.2 to the Customers Bancorp Form ~~S-8~~8-K filed with the SEC on ~~July~~September 25, 2019

~~10.2~~4.6		Subordinated Indenture, dated as of December 9, 2019, between the Registrant and Wilmington Trust, National Association, as Trustee incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed December 9, 2019

4.7		First Supplemental Indenture, dated as of December 9, 2019, between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on December 9, 2019

4.8		Form of 5.375% Subordinated Note due 2034, incorporated by reference to Exhibit 4.3 to the Customers Bancorp Form 8-K filed with the SEC on December 9, 2019

10.1		~~Employment Agreement,~~Sponsor Share Letter, dated ~~as of October 23, 2019,~~August 6, 2020, by and ~~between~~among Sponsor, Megalith and Customers ~~Bancorp, Inc. and Carla Leibold,~~Bank, incorporated by reference to Exhibit 10.1 to the Customers Bancorp Form 8-K filed with the SEC on ~~October 25, 2019~~August 6, 2020

10.2		Form of Lock-up Agreement, incorporated by reference to Exhibit 10.2 to the Customers Bancorp Form 8-K filed with the SEC on August 6, 2020

Tab le of Contents


10.3	Form of Non-Competition Agreement, incorporated by reference to Exhibit 10.3 to the Customers ~~Bank Death Benefit Plan, dated as~~Bancorp Form 8-K filed with the SEC on August 6, 2020

10.4	Form of ~~October 23, 2019,~~Registration Rights Agreement, incorporated by reference to Exhibit 10.4 to the Customers Bancorp Form 8-K filed ~~herewith~~with the SEC on August 6, 2020

31.1	Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)

31.2	Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)

32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101		The ~~Exhibits filed~~following financial statements from the Customers’ Annual Report on Form 10-Q as ~~part~~ of ~~this report are as follows:~~and for the year ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

~~Table of Contents~~


~~101.INS~~104						~~XBRL Instance Document~~Cover Page Interactive Data File - ~~The instance document does not appear in~~ the ~~interactive data file because its~~cover page XBRL tags are embedded within the ~~inline~~Inline XBRL document

101.SCH						XBRL Taxonomy Extension Schema Document.

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						XBRL Taxonomy Extension Definitions Linkbase Document.

101.LAB						XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.

* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon its request.

8392




Supplementary Cash Flows Information:
Interest paid	$	134,234	$	114,973
Income taxes paid	3,047		4,156
Non-cash items:
Transfer of loans to other real estate owned	$	291	$	234
Transfer of loans held for investment to held for sale	499,774		—
Transfer of loans held for sale to held for investment	—		129,691
Acquisition of interest-only GNMA securities securing a mortgage warehouse loan	17,157		—
Acquisition of residential reverse mortgage loans securing a mortgage warehouse loan	1,325		—


	September 30, 2019										Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
(amounts in thousands)	Recorded investment net of charge-offs		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	—	$	149	$	499	$	149
Commercial and industrial	4,602		6,245		—		4,631		991		8,528		1,009
Commercial real estate owner occupied	2,068		2,849		—		1,425		74		1,111		95
Commercial real estate non-owner occupied	83		194		—		89		7		102		7
Residential real estate	4,686		5,007		—		4,526		21		4,654		82
Manufactured housing	4,496		4,496		—		7,229		97		8,656		335
Other consumer	195		195		—		164		76		137		84
With an allowance recorded:
Multi-family	—		—		—		—		—		289		—
Commercial and industrial	773		773		167		3,358		—		4,277		97
Commercial real estate owner occupied	16		16		—		91		—		131		1

Residential real estate	4,371		4,371		40		4,057		47		3,937		101
Manufactured housing	5,433		5,433		123		2,799		45		1,483		49
Other consumer	945		945		65		586		—		293		—
Total	$	27,668	$	30,524	$	395	$	28,955	$	1,507	$	34,097	$	2,009


	December 31, 2018										Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
(amounts in thousands)	Recorded investment net of charge-offs		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	1,343	$	—	$	672	$	8
Commercial and industrial	13,660		15,263		—		7,765		166		7,623		168
Commercial real estate owner occupied	1,037		1,766		—		711		—		711		—
Commercial real estate non-owner occupied	129		241		—		1,347		—		774		8

Residential real estate	4,842		5,128		—		4,281		23		3,952		25
Manufactured housing	10,027		10,027		—		10,147		144		10,011		421
Other consumer	111		111		—		103		1		83		1
With an allowance recorded:
Multi-family	1,155		1,155		539		—		—		—		—
Commercial and industrial	4,168		4,351		261		5,787		27		7,089		39
Commercial real estate owner occupied	32		32		1		336		9		546		11

Residential real estate	3,789		3,789		41		4,398		61		4,760		124
Manufactured housing	168		168		3		227		4		225		10

Total	$	39,118	$	42,031	$	845	$	36,445	$	435	$	36,446	$	815


	Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)													Financial Instruments	Cash Collateral Received	Net Amount
Description
Interest rate swap derivatives with institutional counterparties	$	131	$	—	$	131	$	—	$	—	$	131


	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)													Financial Instruments	Cash Collateral Pledged	Net Amount
Description
Interest rate swap derivatives with institutional counterparties	$	58,056	$	—	$	58,056	$	—	$	57,832	$	224