SHARE-BASED COMPENSATION PLANS

Summary

During 2010, the shareholders of Customers Bank approved the 2010 Stock Option Plan (“2010 Plan”), and during 2012, the shareholders of Customers Bancorp approved the 2012 Amendment and Restatement of the Customers Bancorp, Inc. Amended and Restated 2004 Incentive Equity and Deferred Compensation Plan (“2004 Plan”). The purpose of these plans is to promote the success and enhance the value of the Bancorp by linking the personal interests of the members of the Board of Directors and employees, officers, and executives of Customers Bank to those of the shareholders of the Bancorp and by providing such individuals with an incentive for outstanding performance in order to generate superior returns to shareholders of the Bancorp. The 2010 Plan and 2004 Plan are intended to provide flexibility to the Bancorp in its ability to motivate, attract, and retain the services of members of the Board of Directors, and employees, officers, and executives of Customers Bank. Stock options and restricted stock units normally vest on the third or fifth anniversary of the grant date provided the grantee remains employed by the Bancorp or continues to serve on the Board. With respect to stock options granted under the 2010 Plan, vested options shall be exercisable only when the Bancorp’s fully diluted tangible book value will have increased by 50% from the date of grant. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). No stock options may be exercisable for more than 10 years from the date of grant.

The 2010 and 2004 Plans are administered by the Compensation Committee of the Board of Directors. The 2010 Plan provides exclusively for the grant of stock options, some or all of which may be structured to qualify as Incentive Stock Options, to employees, officers and executives. The maximum number of shares of common stock which may be issued under the 2010 Plan is 3,666,667 shares. The 2004 Plan provides for the grant of options, some or all of which may be structured to qualify as Incentive Stock Options if granted to employees, stock appreciation rights, restricted stock, restricted stock units, and unrestricted stock to employees, officers, executives, and members of the Board of Directors. The maximum number of shares of common stock which may be issued under the 2004 Plan is 2,750,000 shares. At December 31, 2014, the aggregate number of shares of common stock available for grant under these plans was 2,510,117 shares.

On January 1, 2011, the Bancorp initiated a Bonus Recognition and Retention Program (“BRRP”). This is a restricted stock unit plan. Employees eligible to participate in the BRRP include the Chief Executive Officer and other management and highly compensated employees as determined by the Compensation Committee in its sole discretion. Under the BRRP, a participant may elect to defer not less than 25%, nor more than 50%, of his or her bonus payable with respect to each year of participation. Shares of Voting Common Stock having a value equal to the portion of the bonus deferred by a participant are allocated to an annual deferral account, and a matching amount equal to an identical number of shares of common stock is also allocated to the annual deferral account. A participant becomes 100% vested in the annual deferral account on the fifth anniversary date of the initial funding of the account, provided he or she remains continuously employed by the Bancorp from the date of funding to the anniversary date.

Vesting is accelerated in the event of involuntary termination other than for cause, retirement at or after age 65, death, termination on account of disability, or a change in control of the Bancorp. Participants were first eligible to make elections under the BRRP with respect to their bonuses for 2011 which were payable in the first quarter of 2012. The BRRP does not provide for a specific number of shares to be reserved; by its terms, the award of restricted stock units under this plan is limited by the amount of cash bonuses paid to the participants in the plan. At December 31, 2014, restricted stock units outstanding under this plan totaled 170,429.

Share-based compensation expense relating to stock options and restricted stock units is recognized on a straight-line basis over the vesting periods of the awards and is a component of salaries and employee benefits expense. Total share-based compensation expense for 2014, 2013, and 2012 was 5.2 million, 3.4 million, and 2.0 million, respectively. At December 31, 2014, there was $9.3 million of unrecognized compensation cost related to all non-vested share-based compensation awards. This cost is expected to be recognized through December 2017.

In 2014, the shareholders of Customers Bancorp approved the 2014 Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to encourage team member participation in the ownership and economic progress of the Bancorp. This plan is intended to qualify as an employee stock purchase plan within the meaning of the Internal Revenue Code and is administered by the Compensation Committee of the Board of Directors.

Under the ESPP, team members may elect to purchase shares of the Bancorp's common stock through payroll deduction. Since the purchase price under the plan is 85% of (a 15% discount to) the fair market value of a share of common stock on the first day of each quarterly subscription period, the Bancorp's ESPP is considered to be a compensatory plan under current accounting guidance. Therefore, the entire amount of the discount is recognizable compensation expense. ESPP expense for 2014 was $12.0 thousand.

Stock Options

The Bancorp estimated the fair value of each option on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate was based upon the zero-coupon Treasury rates in effect on the grant date of the options. Expected volatility was based upon limited historical information because the Bancorp’s common stock has only been traded since February 2012. Expected life was management’s estimate which took into consideration the five-year vesting requirement and the fact that there have been no exercises since 2010. The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of an option.



	2014			2013			2012
Weighted-average risk-free interest rate	2.16		%	1.42		%	1.15		%
Expected dividend yield	—		%	—		%	—		%
Weighted-average expected volatility	18.00		%	13.77		%	17.47		%
Weighted-average expected life (in years)	7.00			7.00			6.98
Weighted-average fair value of each option granted	$	4.52		$	3.17		$	3.04

The following summarizes stock option activity for the year ended December 31, 2014:



	Number of Shares		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term in Years	Aggregate Intrinsic Value
	(dollars in thousands, except Weighted-average Exercise Price)
Outstanding, January 1, 2014	3,051,939		$	12.42
Issued	130,978		17.78
Forfeited	(12,650	)	17.72
Expired	(2,200	)	27.95
Outstanding, December 31, 2014	3,168,067		$	12.61	7.20	$	21,735
Exercisable at December 31, 2014	13,683		$	16.67	2.53	$	65

A summary of the status of the Bancorp’s non-vested options at December 31, 2014 and changes during the year ended December 31, 2014 is as follows:



	Options		Weighted- average exercise price
Non-vested at January 1, 2014	3,036,056		$	12.42
Granted	130,978		17.78
Forfeited	(12,650	)	17.72
Non-vested at December 31, 2014	3,154,384		12.59

Restricted Stock Units

The fair value of restricted stock units granted under the 2004 Plan is determined based on the market price of the Bancorp’s common stock on the date of grant. The fair value of restricted stock units granted under the BRRP is measured as of the date on which such portion of the bonus would have been paid but for the deferral.

In February 2012, the Compensation Committee recommended and the Board of Directors approved a restricted stock reward program that has two vesting requirements. The first requirement is that the recipient remains an employee or director through December 31, 2016. The second requirement is that the Bancorp’s Voting Common Stock will have traded at a price greater than $17.18 per share (adjusted for any stock splits or stock dividends) for at least 5 consecutive trading days during the five-year period ending December 31, 2016. This second requirement was satisfied during the fourth quarter of 2013.

The table below presents the status of the restricted stock units at December 31, 2014 and changes during the year ended December 31, 2014:



	Restricted Stock Units		Weighted- average grant- date fair value
Outstanding and unvested at January 1, 2014	675,638		$	11.81
Granted	156,624		17.65
Vested	(37,857	)	10.91
Forfeited	(5,434	)	13.87
Outstanding and unvested at December 31, 2014	788,971		$	13.00

Customers Bancorp has a policy that permits its directors to elect to receive shares of Voting Common Stock in lieu of their cash retainers. In January 2014, Customers Bancorp issued 28,095 shares of Voting Common Stock with a fair value of $0.5 million to the directors as compensation for their services during 2013. During the year ended December 31, 2014, Customers Bancorp issued 28,235 shares of Voting Common Stock with a fair value of $0.5 million to directors as compensation for their services during 2014. The fair values were determined based on the opening price of the common stock on the day the shares were issued.