DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2012

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bancorp uses fair value measurements to record fair value adjustments to certain assets and to disclose the fair value of its financial instruments.  FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments.  For the Bancorp, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.  However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  For fair value disclosure purposes, the Bancorp utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurements and Disclosures, as explained below.  The following methods and assumptions were used to estimate the fair values of the Bancorp's financial instruments at March 31, 2012 and December 31, 2011:

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.

Investment Securities:

The fair value of investment securities available-for-sale and held-to-maturity are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

The carrying amount of restricted investment in Bancorp stock approximates fair value, and considers the limited marketability of such securities.

Interest-Only Strips:

To obtain fair values, quoted market prices are used if available.  Quotes are generally not available for interests that continue to be held by the transferor, so the Bancorp generally estimates fair value based on the future expected cash flows estimated using management's best estimates of the key assumptions  credit losses and discount rates commensurate with the risks involved.  At March 31, 2012, the Bancorp had interest-only strips measured at fair value on a recurring basis classified within Level 3.

Loans receivable held for sale:

The fair values of loans receivable held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

Loans receivable:

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired loans:

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

Bank-owned life insurance:

The carrying value of bank-owned life insurance represents the cash surrender value of the policies and approximates fair value.

FDIC loss sharing receivable:

The FDIC loss sharing receivable is measured separately from the related covered assets, as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold.  Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment.  These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC.

Other Real Estate Owned ("OREO"):

The fair value was determined using appraisals, which may be discounted based on management's review and changes in market conditions (Level 3 Inputs).  All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice ("USPAP").  Appraisals are certified to the Bancorp and performed by appraisers on the Bancorp 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".

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities:

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

Borrowings:

Borrowings consist of FHLB advances and securities sold under agreements to repurchase.  The carrying amount of short-term FHLB borrowings approximates its fair value.  Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.  Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date.  The fair value of securities sold under agreements to repurchase is estimated by discounting the projected future cash flows using current market rates on similar securities.

Subordinated debt:

Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

Off-balance sheet financial instruments:

Fair values for the Bancorp's off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.

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

The estimated fair values of the Bancorp's financial instruments were as follows at March 31, 2012 and December 31, 2011.

					Fair Value Measurements at March 31, 2012
	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:
Cash and cash equivalents	$	90,824	$	90,824	$	90,824	$	-	$	-
Investment securities, available for sale		27,951		27,951		-		5,615		22,336
Investment securities, held to maturity		281,417		291,663		-		291,663		-
Loans held for sale		175,868		175,868		-		175,868		-
Loans receivable, net		1,297,573		1,305,567		-		-		1,305,567
FDIC loss sharing receivable		14,149		14,149		-		14,149		-
Bank-owned life insurance		29,614		29,614		-		29,614		-
Restricted stock		20,960		20,960		-		20,960		-
Accrued interest receivable		4,358		4,358		4,358		-		-
Liabilities:
Deposits	$	1,804,190	$	1,821,266	$	-	$	1,821,266	$	-
Subordinated debt		2,000		2,000		-		2,000		-
Borrowings		11,000		12,695		-		12,695		-
Accrued interest payable		1,437		1,437		1,437		-		-

	December 31, 2011
	Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	73,570	$	73,570
Investment securities, available for sale		79,137		79,137
Investment securities, held to maturity		319,547		330,809
Loans held for sale		174,999		174,999
Loans receivable, net		1,327,509		1,339,633
FDIC loss sharing receivable		13,077		13,077
Bank-owned life insurance		29,268		29,268
Restricted stock		21,818		21,818
Accrued interest receivable		5,011		5,011
Liabilities:
Deposits	$	1,583,189	$	1,610,977
Federal funds purchased		5,000		5,000
Subordinated debt		2,000		2,000
Borrowings		331,000		332,847
Accrued interest payable		1,478		1,478

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

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

Level 1:	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:	Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012 Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total at March 31, 2012
Recurring fair value measurements
Available-for-sale debt securities:
U.S. Treasury and government agency	$	-	$	-	$	-	$	-
Mortgage-backed securities		-		2,971		2,790		5,761
Asset-backed securities		-		605		-		605
Corporate notes		-		-		19,546		19,546
Municipal securities		-		2,039		-		2,039
Total recurring fair value measurements	$	-	$	5,615	$	22,336	$	27,951
Nonrecurring fair value measurements
Impaired loans, net of specific reserves of $4,897	$	-	$	-	$	12,336	$	12,336
Other real estate owned		-		-		1,276		1,276
Total nonrecurring fair value measurements	$	-	$	-	$	13,612	$	13,612

	December 31, 2011 Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total at December 31, 2011
Recurring fair value measurements
Available-for-sale debt securities:
U.S. Treasury and government agency	$	-	$	1,001	$	-	$	1,001
Mortgage-backed securities		-		53,398		2,894		56,292
Asset-backed securities		-		627		-		627
Corporate notes		-		-		19,217		19,217
Municipal securities		-		2,000		-		2,000
Total recurring fair value measurements	$	-	$	57,026	$	22,111	$	79,137
Nonrecurring fair value measurements
Impaired loans, net of specific reserves of $5,676	$	-	$	-	$	15,579	$	15,579
Other real estate owned		-		-		2,648		2,648
Total nonrecurring fair value measurements	$	-	$	-	$	18,227	$	18,227

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 are summarized as follows:

	Mortgage-backed
	Securities			Corporate Notes		Total
Balance at January 1, 2012	$	2,894		$	19,217	$	22,111
Total gains included in other
comprehensive income (before taxes)		-			329		329
Amortization included in interest income		(104	)		-		(104	)
Balance at March 31, 2012	$	2,790		$	19,546	$	22,336

The Bancorp's policy is to recognize transfers between levels when events or circumstances warrant transfers.  For the quarter ended March 31, 2012, there were no transfers among levels.

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of March 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Quantitative Information about Level 3 Fair Value Measurements (1)
	Fair Value		Valuation	Unobservable	Range (Weighted
March 31, 2012	Estimate		Technique	Input	Average) (4)
Impaired loans	$	12,336	Collateral	Liquidation
			appraisal (2)	expenses (3)	-3% to -8% (-5.5%)
Other real estate owned		1,276	Collateral	Liquidation
			appraisal (2)	expenses (3)	-3% to -8% (-5.5%)
I/O Strip		2,790	Discounted cash flow	Prepayment Rate	10.00%
				Discount Rate	21.62%

(1)	Level 3 fair value measurements relating to the corporate bonds are not included in this table because the measurements are obtained from an independent third-party pricing source and no adjustments are made. While Customers Bancorp reviews the measurements, it has not developed the significant inputs used to measure those securities.  The inputs are not reasonably available to Customers Bancorp.
(2)	Obtained from independent third-parties approved appraisers. Appraisals are current and in compliance with credit policy. Customers Bancorp does not discount appraisals.
(3)	Fair value is adjusted for costs to sell.
(4)	Presented as a percentage of the value determined by appraisal.