LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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



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

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



	September 30, 2017
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	—	$	—	$	—	$	—	$	3,617,062	$	1,927	$	3,618,989
Commercial and industrial	—		—		—		20,423		1,093,997		802		1,115,222
Commercial real estate - owner occupied	—		—		—		2,949		472,832		10,786		486,567
Commercial real estate - non-owner occupied	—		—		—		184		1,232,212		5,453		1,237,849
Construction	—		—		—		—		73,203		—		73,203
Residential real estate	1,607		—		1,607		4,269		423,551		5,761		435,188
Manufactured housing (5)	2,937		2,505		5,442		1,959		82,896		2,641		92,938
Other consumer	67		—		67		58		3,474		220		3,819
Total	$	4,611	$	2,505	$	7,116	$	29,842	$	6,999,227	$	27,590	$	7,063,775
	December 31, 2016
	30-89 Days Past Due (1)		90 Days Or More Past Due(1)		Total Past Due (1)		Non- Accrual		Current (2)		Purchased- Credit- Impaired Loans (3)		Total Loans (4)
(amounts in thousands)
Multi-family	$	12,573	$	—	$	12,573	$	—	$	3,200,322	$	2,104	$	3,214,999
Commercial and industrial	350		—		350		8,443		978,881		1,037		988,711
Commercial real estate - owner occupied	137		—		137		2,039		379,227		12,229		393,632
Commercial real estate - non-owner occupied	—		—		—		2,057		1,185,331		6,327		1,193,715
Construction	—		—		—		—		64,789		—		64,789
Residential real estate	4,417		—		4,417		2,959		178,559		7,567		193,502
Manufactured housing (5)	3,761		2,813		6,574		2,236		89,850		3,070		101,730
Other consumer	12		—		12		58		3,177		236		3,483
Total	$	21,250	$	2,813	$	24,063	$	17,792	$	6,080,136	$	32,570	$	6,154,561


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


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

(3)

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


(4)	Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.


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

As of September 30, 2017 and December 31, 2016, the Bank had $0.3 million and $0.5 million, respectively, of residential real estate held in other real estate owned. As of September 30, 2017 and December 31, 2016, the Bank had initiated foreclosure proceedings of $1.5 million and $0.4 million, respectively, on loans secured by residential real estate.

Allowance for loan losses

The changes in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 and the loans and allowance for loan losses by loan class based on impairment evaluation method as of September 30, 2017 and December 31, 2016 were as follows. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans for periods prior to the termination of the FDIC loss sharing arrangements.



Three Months Ended September 30, 2017	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, 2017	$	12,028	$	11,585		$	2,976	$	7,786		$	716		$	2,995		$	268		$	104		$	38,458
Charge-offs	—		(2,032		)	—		(77		)	—			(120		)	—			(356		)	(2,585		)
Recoveries	—		54			—		—			27			7			—			1			89
Provision for loan losses	668		966			262		(53		)	104			72			(77		)	410			2,352
Ending Balance, September 30, 2017	$	12,696	$	10,573		$	3,238	$	7,656		$	847		$	2,954		$	191		$	159		$	38,314
Nine Months Ended September 30, 2017
Ending Balance, December 31, 2016	$	11,602	$	11,050		$	2,183	$	7,894		$	840		$	3,342		$	286		$	118		$	37,315
Charge-offs	—		(4,079		)	—		(485		)	—			(410		)	—			(602		)	(5,576		)
Recoveries	—		337			9		—			157			34			—			101			638
Provision for loan losses	1,094		3,265			1,046		247			(150		)	(12		)	(95		)	542			5,937
Ending Balance, September 30, 2017	$	12,696	$	10,573		$	3,238	$	7,656		$	847		$	2,954		$	191		$	159		$	38,314

As of September 30, 2017
Loans:
Individually evaluated for impairment	$	—	$	20,493		$	2,950	$	184		$	—		$	8,178		$	10,340		$	56		$	42,201
Collectively evaluated for impairment	3,617,062		1,093,927			472,831		1,232,212			73,203			421,249			79,957			3,543			6,993,984
Loans acquired with credit deterioration	1,927		802			10,786		5,453			—			5,761			2,641			220			27,590
	$	3,618,989	$	1,115,222		$	486,567	$	1,237,849		$	73,203		$	435,188		$	92,938		$	3,819		$	7,063,775
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	625		$	740	$	—		$	—		$	142		$	5		$	15		$	1,527
Collectively evaluated for impairment	12,696		9,462			2,481		4,732			847			2,222			83			93			32,616
Loans acquired with credit deterioration	—		486			17		2,924			—			590			103			51			4,171
	$	12,696	$	10,573		$	3,238	$	7,656		$	847		$	2,954		$	191		$	159		$	38,314



Three Months Ended September 30, 2016	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, 2016	$	12,368		$	10,370		$	1,582	$	8,483		$	1,209		$	3,535		$	440		$	110		$	38,097
Charge-offs	—			(237		)	—		(140		)	—			(43		)	—			(246		)	(666		)
Recoveries	—			62			—		—			8			298			—			10			378
Provision for loan losses	(695		)	832			305		3			(168		)	(411		)	(18		)	240			88
Ending Balance, September 30, 2016	$	11,673		$	11,027		$	1,887	$	8,346		$	1,049		$	3,379		$	422		$	114		$	37,897
Nine Months Ended September 30, 2016
Ending Balance, December 31, 2015	$	12,016		$	8,864		$	1,348	$	8,420		$	1,074		$	3,298		$	494		$	133		$	35,647
Charge-offs	—			(774		)	—		(140		)	—			(456		)	—			(478		)	(1,848		)
Recoveries	—			173			—		8			465			299			—			10			955
Provision for loan losses	(343		)	2,764			539		58			(490		)	238			(72		)	449			3,143
Ending Balance, September 30, 2016	$	11,673		$	11,027		$	1,887	$	8,346		$	1,049		$	3,379		$	422		$	114		$	37,897
As of December 31, 2016
Loans:
Individually evaluated for impairment	$	—		$	8,516		$	2,050	$	2,151		$	—		$	6,972		$	9,665		$	57		$	29,411
Collectively evaluated for impairment	3,212,895			979,158			379,353		1,185,237			64,789			178,963			88,995			3,190			6,092,580
Loans acquired with credit deterioration	2,104			1,037			12,229		6,327			—			7,567			3,070			236			32,570
	$	3,214,999		$	988,711		$	393,632	$	1,193,715		$	64,789		$	193,502		$	101,730		$	3,483		$	6,154,561
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	1,024		$	287	$	14		$	—		$	35		$	—		$	—		$	1,360
Collectively evaluated for impairment	11,602			9,686			1,896		4,626			772			2,414			88			60			31,144
Loans acquired with credit deterioration	—			340			—		3,254			68			893			198			58			4,811
	$	11,602		$	11,050		$	2,183	$	7,894		$	840		$	3,342		$	286		$	118		$	37,315

Certain manufactured housing loans were purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At September 30, 2017 and December 31, 2016, funds available for reimbursement, if necessary, were $0.7 million and $1.0 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.

Impaired Loans - Individually Evaluated for Impairment

The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for impaired loans that were individually evaluated for impairment as of September 30, 2017 and December 31, 2016 and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2017 and 2016. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.



	September 30, 2017						Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Commercial and industrial	$	19,433	$	22,354	$	—	$	13,345	$	354	$	8,796	$	450
Commercial real estate owner occupied	1,669		1,936		—		1,744		15		1,589		18
Commercial real estate non-owner occupied	184		428		—		184		91		989		93
Other consumer	32		32		—		44		—		50		—
Residential real estate	7,457		7,664		—		5,228		125		4,865		126
Manufactured housing	10,340		10,340		—		10,243		164		10,038		457
With an allowance recorded:
Commercial and industrial	1,060		1,331		625		1,963		—		5,400		22
Commercial real estate owner occupied	1,281		1,281		740		1,056		1		950		3
Commercial real estate non-owner occupied	—		—		—		51		—		94		—
Other consumer	24		24		15		12		—		6		—
Residential real estate	721		741		142		2,862		—		2,729		84
Manufactured housing	—		—		5		114		—		108		8
Total	$	42,201	$	46,131	$	1,527	$	36,846	$	750	$	35,614	$	1,261



	December 31, 2016						Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Recorded Investment Net of Charge offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(amounts in thousands)
With no related allowance recorded:
Multi-family	$	—	$	—	$	—	$	2,080	$	38	$	1,205	$	38
Commercial and industrial	2,396		3,430		—		21,859		406		18,681		879
Commercial real estate owner occupied	1,210		1,210		—		10,182		201		9,651		403
Commercial real estate non-owner occupied	2,002		2,114		—		7,983		118		6,081		133
Other consumer	57		57		—		43		—		45		—
Residential real estate	6,682		6,749		—		3,835		39		4,039		83
Manufactured housing	9,665		9,665		—		8,971		9		8,785		290
With an allowance recorded:
Multi-family	—		—		—		383		5		290		15
Commercial and industrial	6,120		6,120		1,024		7,561		43		7,256		155
Commercial real estate - owner occupied	840		840		287		—		—		6		—
Commercial real estate non-owner occupied	149		204		14		328		2		438		6
Other consumer	—		—		—		—		—		36		—
Residential real estate	290		303		35		300		—		421		—
Total	$	29,411	$	30,692	$	1,360	$	63,525	$	861	$	56,934	$	2,002

Troubled Debt Restructurings

At September 30, 2017 and December 31, 2016, there were $20.8 million and $16.4 million, respectively, in loans reported as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month performance requirement, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status.

Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if 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.

The following table presents loans modified in a troubled debt restructuring by type of concession for the three and nine months ended September 30, 2017 and 2016. There were no modifications that involved forgiveness of debt.



	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	1	$	60	—	$	—
Interest-rate reductions	3	122		10	533
Total	4	$	182	10	$	533



	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Extensions of maturity	4	$	6,263	3	$	1,995
Interest-rate reductions	32	1,297		49	1,932
Total	36	$	7,560	52	$	3,927

The following table provides, by loan type, the number of loans modified in troubled debt restructurings, and the related recorded investment, during the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	—	$	—	—	$	—
Manufactured housing	4	182		10	533
Residential real estate	—	—		—	—
Total loans	4	$	182	10	$	533



	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
(dollars in thousands)
Commercial and industrial	3	$	6,203	1	$	76
Commercial real estate non-owner occupied	—	—		1	1,844
Manufactured housing	33	1,357		47	1,716
Residential real estate	—	—		3	291
Total loans	36	$	7,560	52	$	3,927

As of September 30, 2017, except for one commercial and industrial loan with an outstanding commitment of $2.3 million, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs. There were no commitments to lend additional funds to debtors whose loans have been modified in TDRs at December 31, 2016.

As of September 30, 2017, ten manufactured housing loans totaling $0.5 million that were modified in TDRs within the past twelve months, defaulted on payments. As of September 30, 2016, five manufactured housing loans totaling $0.1 million, that were modified in TDRs within the past twelve months, defaulted on payments.

Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. There was no allowance recorded as a result of TDR modifications during the three months ended September 30, 2017. For the nine months ended September 30, 2017, there was one allowance recorded resulting from TDR modifications, totaling $1 thousand for one manufactured housing loan. There was one specific allowance totaling $29 thousand for one commercial real estate non-owner occupied loan resulting from TDR modifications during the three and nine months ended September 30, 2016.

Purchased Credit Impaired Loans

The changes in accretable yield related to purchased-credit-impaired loans for the three and nine months ended September 30, 2017 and 2016 were as follows:



	Three Months Ended September 30,
	2017			2016
(amounts in thousands)
Accretable yield balance as of June 30,	$	9,006		$	11,165
Accretion to interest income	(368		)	(460		)
Reclassification from nonaccretable difference and disposals, net	(276		)	107
Accretable yield balance as of September 30,	$	8,362		$	10,812



	Nine Months Ended September 30,
	2017			2016
(amounts in thousands)
Accretable yield balance as of December 31,	$	10,202		$	12,947
Accretion to interest income	(1,326		)	(1,429		)
Reclassification from nonaccretable difference and disposals, net	(514		)	(706		)
Accretable yield balance as of September 30,	$	8,362		$	10,812

Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability

Losses incurred on covered loans were eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC indemnification asset was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could be reversed, the Bank recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows from the FDIC loss sharing receivable, when there were no previously recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of other real estate owned covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an increase to other real estate owned expense (a component of non-interest expense).

On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.

The following table presents changes in the allowance for loan losses and the FDIC loss sharing receivable, including the effects of the estimated clawback liability and the termination agreement, for the three and nine months ended September 30, 2017 and 2016.



	Allowance for Loan Losses
	Three Months Ended September 30,
(amounts in thousands)	2017			2016
Ending balance as of June 30,	$	38,458		$	38,097
Provision for loan losses (1)	2,352			88
Charge-offs	(2,585		)	(666		)
Recoveries	89			378
Ending balance as of September 30,	$	38,314		$	37,897



	FDIC Loss Sharing Receivable/ Clawback Liability
	Three Months Ended September 30,
(amounts in thousands)	2017		2016
Ending balance as of June 30,	$	—	$	(1,381	)
Cash payments to the FDIC	—		1,381
Ending balance as of September 30,	$	—	$	—

(1) Provision for loan losses	$	2,352	$	88
Net amount reported as provision for loan losses	$	2,352	$	88



	Allowance for Loan Losses
	Nine Months Ended September 30,
(amounts in thousands)	2017			2016
Ending balance as of December 31,	$	37,315		$	35,647
Provision for loan losses (1)	5,937			3,143
Charge-offs	(5,576		)	(1,848		)
Recoveries	638			955
Ending balance as of September 30,	$	38,314		$	37,897



	FDIC Loss Sharing Receivable/ Clawback Liability
	Nine Months Ended September 30,
(amounts in thousands)	2017		2016
Ending balance as of December 31,	$	—	$	(2,083	)
Increased estimated cash flows (2)	—		289
Other activity, net (a)	—		(255		)
Cash payments to the FDIC	—		2,049
Ending balance as of September 30,	$	—	$	—

(1) Provision for loan losses	$	5,937	$	3,143
(2) Effect attributable to FDIC loss share arrangements	—		(289		)
Net amount reported as provision for loan losses	$	5,937	$	2,854

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

Credit Quality Indicators

Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, construction, and residential real estate 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. 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, construction and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective loan portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.

The risk rating grades are defined as follows:

“1” – Pass/Excellent

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

“2” – Pass/Superior

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

“3” – Pass/Strong

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

“4” – Pass/Good

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

“5” – Satisfactory

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

“6” – Satisfactory/Bankable with Care

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

“7” – Special Mention

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

“8” – Substandard

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

“9” – Doubtful

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

“10” – Loss

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

Risk ratings are not established for certain consumer loans, including 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 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 receivable as of September 30, 2017 and December 31, 2016.



	September 30, 2017
	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)
Pass/Satisfactory	$	3,577,304	$	1,080,797	$	468,389	$	1,212,945	$	73,203	$	431,364	$	—	$	—	$	6,844,002
Special Mention	36,604		8,663		9,716		22,008		—		—		—		—		76,991
Substandard	5,081		25,762		8,462		2,896		—		3,824		—		—		46,025
Performing (1)	—		—		—		—		—		—		85,537		3,694		89,231
Non-performing (2)	—		—		—		—		—		—		7,401		125		7,526
Total	$	3,618,989	$	1,115,222	$	486,567	$	1,237,849	$	73,203	$	435,188	$	92,938	$	3,819	$	7,063,775



	December 31, 2016
	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)
Pass/Satisfactory	$	3,198,290	$	954,846	$	375,919	$	1,175,850	$	50,291	$	189,919	$	—	$	—	$	5,945,115
Special Mention	—		19,552		12,065		10,824		14,498		—		—		—		56,939
Substandard	16,709		14,313		5,648		7,041		—		3,583		—		—		47,294
Performing (1)	—		—		—		—		—		—		92,920		3,413		96,333
Non-performing (2)	—		—		—		—		—		—		8,810		70		8,880
Total	$	3,214,999	$	988,711	$	393,632	$	1,193,715	$	64,789	$	193,502	$	101,730	$	3,483	$	6,154,561


(1)	Includes consumer and other installment loans not subject to risk ratings.


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

Loan Purchases and Sales

In first quarter 2017, Customers purchased $174.2 million of thirty-year fixed-rate residential mortgage loans from Florida-based Everbank. The purchase price was 98.5% of loans outstanding. In second quarter 2017, Customers purchased an additional $90.0 million of thirty-year fixed-rate residential mortgage loans from Everbank. The purchase price was 101.0% of loans outstanding. There were no loan purchases during the three months ended September 30, 2017 and during the three or nine months ended September 30, 2016.

In first quarter 2017, Customers sold $94.9 million of multi-family loans for $95.4 million resulting in a gain on sale of $0.5 million and $8.7 million of Small Business Administration (SBA) loans resulting in a gain on sale of $0.8 million. In second quarter 2017, Customers sold $7.0 million of SBA loans resulting in a gain on sale of $0.6 million. In third quarter 2017, Customers sold $11.0 million of SBA loans resulting in a gain on sale of $1.1 million. In first quarter 2016, Customers sold $6.9 million of SBA loans resulting in a gain on sale of $0.6 million. In second quarter 2016, Customers sold one commercial loan amounting to $5.7 million resulting in a loss on sale of $0.1 million and $3.6 million of SBA loans resulting in a gain on sale of $0.4 million. There were no loan sales during the third quarter 2016.

None of these purchases and sales during the nine months ended September 30, 2017 and 2016 materially affected the credit profile of Customers’ related loan portfolio.

Loans Pledged as Collateral

Customers has pledged eligible real estate loans as collateral for potential borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") in the amount of $5.5 billion at September 30, 2017, compared to $4.8 billion at December 31, 2016.