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 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, Customers utilized certain fair value measurement criteria under ASC 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.

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).

The fair values of equity securities, 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.

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.

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 as short-term bridge financing between the funding of 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.

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.

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 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.

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.

Impaired loans are those loans that are accounted for under ASC 310, Receivables, 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. 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.

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.


	Carrying Amount		Estimated Fair Value		Fair Value Measurements at December 31, 2019
(amounts in thousands)									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	$	212,505	$	212,505	$	212,505	$	—	$	—
Debt securities, available for sale	577,198		577,198		—		577,198		—
Interest-only GNMA securities	16,272		16,272		—		—		16,272
Equity securities	2,406		2,406		2,406		—		—
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	9,508,367		9,853,037		—		2,245,758		7,607,279
FHLB, Federal Reserve Bank and other restricted stock	84,214		84,214		—		84,214		—
Derivatives	23,608		23,608		—		23,529		79

Liabilities:
Deposits	$	8,648,936	$	8,652,340	$	6,980,402	$	1,671,938	$	—

Federal funds purchased	538,000		538,000		538,000		—		—
FHLB advances	850,000		852,162		—		852,162		—
Other borrowings	123,630		127,603		—		127,603		—
Subordinated debt	181,115		192,217		—		192,217		—
Derivatives	45,939		45,939		—		45,939		—


	Carrying Amount		Estimated Fair Value		Fair Value Measurements at December 31, 2018
											Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
(amounts in thousands)
Assets:
Cash and cash equivalents	$	62,135	$	62,135	$	62,135	$	—	$	—
Debt securities, available for sale	663,294		663,294		—		663,294		—
Equity securities	1,718		1,718		1,718		—		—
Loans held for sale	1,507		1,507		—		1,507		—
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
FHLB, Federal Reserve Bank, and other restricted stock	89,685		89,685		—		89,685		—
Derivatives	14,693		14,693		—		14,624		69

Liabilities:
Deposits	$	7,142,236	$	7,136,009	$	5,408,055	$	1,727,954	$	—

Federal funds purchased	187,000		187,000		187,000		—		—
FHLB advances	1,248,070		1,248,046		998,070		249,976		—
Other borrowings	123,871		121,718		—		121,718		—
Subordinated debt	108,977		110,550		—		110,550		—
Derivatives	16,286		16,286		—		16,286		—


	December 31, 2019
	Fair Value Measurements at the End of the Reporting Period Using
(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:
Assets
Available for sale securities:
Agency-guaranteed residential mortgage-backed securities	$	—	$	278,321	$	—	$	278,321

Corporate notes	—		298,877		—		298,877
Interest-only GNMA securities	—		—		16,272		16,272
Equity securities	2,406		—		—		2,406
Derivatives	—		23,529		79		23,608
Loans held for sale – fair value option	—		2,130		—		2,130
Loans receivable, mortgage warehouse – fair value option	—		2,245,758		—		2,245,758
Total assets – recurring fair value measurements	$	2,406	$	2,848,615	$	16,351	$	2,867,372
Liabilities
Derivatives	$	—	$	45,939	$	—	$	45,939
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $852	$	—	$	—	$	14,272	$	14,272
Other real estate owned	—		—		78		78
Total assets – nonrecurring fair value measurements	$	—	$	—	$	14,350	$	14,350


	December 31, 2018
	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
(amounts in thousands)
Measured at Fair Value on a Recurring Basis:
Assets
Available for sale securities:
Agency-guaranteed residential mortgage-backed securities	$	—	$	305,374	$	—	$	305,374

Corporate notes	—		357,920		—		357,920
Equity securities	1,718		—		—		1,718
Derivatives	—		14,624		69		14,693
Loans held for sale – fair value option	—		1,507		—		1,507
Loans receivable, mortgage warehouse – fair value option	—		1,405,420		—		1,405,420
Total assets - recurring fair value measurements	$	1,718	$	2,084,845	$	69	$	2,086,632
Liabilities
Derivatives	$	—	$	16,286	$	—	$	16,286
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $845	$	—	$	—	$	10,876	$	10,876
Other real estate owned	—		—		621		621
Total assets – nonrecurring fair value measurements	$	—	$	—	$	11,497	$	11,497

The changes in residential mortgage loan commitments (Level 3 assets) measured at fair value on a recurring basis for the years ended December 31, 2019 and 2018 are summarized as follows in the tables below. Additional information about residential mortgage loan commitments can be found in NOTE 20 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2019 and 2018 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. The interest-only GNMA securities are Level 3 assets measured at fair value on a recurring basis under a fair value option election. For the year ended December 31, 2019, Customers recorded an increase in fair value of $0.6 million on the interest-only GNMA securities in unrealized gains on investment securities in the consolidated statements of operations. For the year ended December 31, 2019, cash settlements of $1.5 million were applied to the carrying value of the interest-only GNMA securities, net of premium amortization expense. At December 31, 2019, 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 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

December 31, 2019

Fair Value Estimate

Valuation Technique

Unobservable Input

Range (Weighted

Average) ⁽⁴⁾

(dollars in thousands)

Impaired loans – real estate

12,767

Collateral appraisal ⁽¹⁾

Business asset valuation ⁽³⁾

Liquidation expenses ⁽²⁾

Business asset valuation adjustments ⁽⁴⁾

8% - 10%

(8%)

34% - 45%

(37%)

Impaired loans – commercial & industrial

1,505

Collateral appraisal ⁽¹⁾

Business asset valuation ⁽³⁾

Liquidation expenses ⁽²⁾

Business asset valuation adjustments ⁽⁴⁾

8% - 8%

(8%)

8% - 50%

(22%)

Interest-only GNMA securities

16,272

Discounted cash flow

Constant prepayment rate

9% - 14%

(12%)

Other real estate owned

Collateral appraisal ⁽¹⁾

Liquidation expenses ⁽²⁾

8% - 9%

(9%)

Residential mortgage loan commitments

Adjusted market bid

Pull-through rate

85% - 85%

(85%)

(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.

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2018

Fair Value Estimate

Valuation Technique

Unobservable Input

Range (Weighted

Average) ⁽⁴⁾

(dollars 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%)