Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended: March 31, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                  to                 .

Commission File Number: 001-34624

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

OREGON   93-1261319

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

One SW Columbia Street, Suite 1200

Portland, Oregon 97258

(Address of Principal Executive Offices)(Zip Code)

(503) 727-4100

(Registrant’s Telephone Number, Including Area Code)

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.

x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

x  Yes     ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

x  Large accelerated filer            ¨  Accelerated filer            ¨  Non-accelerated filer            ¨  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes     x  No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 111,894,082 shares outstanding as of April 30, 2012

 

 

 


Table of Contents

UMPQUA HOLDINGS CORPORATION

FORM 10-Q

Table of Contents

 

 

 

PART I. FINANCIAL INFORMATION

     3   

Item 1.

   Financial Statements (unaudited)      3   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      52   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      85   

Item 4.

   Controls and Procedures      85   
PART II. OTHER INFORMATION      86   

Item 1.

   Legal Proceedings      86   

Item 1A.

   Risk Factors      86   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      86   

Item 3.

   Defaults Upon Senior Securities      87   

Item 4.

   Mine Safety Disclosures      87   

Item 5.

   Other Information      87   

Item 6.

   Exhibits      87   
SIGNATURES      88   
EXHIBIT INDEX      89   

 

2


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except shares)

     March 31,
2012
     December 31,
2011
 

ASSETS

     

Cash and due from banks

     $ 134,202          $ 152,265    

Interest bearing deposits

     403,468           445,954     

Temporary investments

     651           547     
  

 

 

    

 

 

 

Total cash and cash equivalents

     538,321           598,766     

Investment securities

     

Trading, at fair value

     3,156           2,309     

Available for sale, at fair value

     3,095,009           3,168,578     

Held to maturity, at amortized cost

     4,625           4,714     

Loans held for sale

     127,117           98,691     

Non-covered loans and leases

     5,941,270           5,888,098     

Allowance for non-covered loan and lease losses

     (86,670)           (92,968)     
  

 

 

    

 

 

 

Net non-covered loans and leases

     5,854,600           5,795,130     

Covered loans and leases, net of allowance of $12,635 and $14,320

     593,179           622,451     

Restricted equity securities

     32,453           32,581     

Premises and equipment, net

     153,557           152,366     

Goodwill and other intangible assets, net

     676,010           677,224     

Mortgage servicing rights, at fair value

     20,210           18,184     

Non-covered other real estate owned

     34,306           34,175     

Covered other real estate owned

     12,787           19,491     

FDIC indemnification asset

     78,417           91,089     

Other assets

     229,431           247,606     
  

 

 

    

 

 

 

Total assets

     $ 11,453,178        $ 11,563,355    
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Deposits

     

Noninterest bearing

     $ 1,994,995        $ 1,913,121    

Interest bearing

     7,120,170           7,323,569     
  

 

 

    

 

 

 

Total deposits

     9,115,165           9,236,690     

Securities sold under agreements to repurchase

     126,645           124,605     

Term debt

     255,160           255,676     

Junior subordinated debentures, at fair value

     83,453           82,905     

Junior subordinated debentures, at amortized cost

     102,463           102,544     

Other liabilities

     83,240           88,522     
  

 

 

    

 

 

 

Total liabilities

     9,766,126           9,890,942     
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 9)

     

SHAREHOLDERS’ EQUITY

     

Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,892,969 in 2012 and 112,164,891 in 2011

     1,510,774           1,514,913     

Retained earnings

     141,339           123,726     

Accumulated other comprehensive income

     34,939           33,774     
  

 

 

    

 

 

 

Total shareholders’ equity

     1,687,052           1,672,413     
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     $ 11,453,178        $ 11,563,355    
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
March 31,
 
     2012      2011  

INTEREST INCOME

     

Interest and fees on non-covered loans

       $      77,659            $      78,733    

Interest and fees on covered loans

     17,343          21,547    

Interest and dividends on investment securities:

     

Taxable

     18,120          22,043    

Exempt from federal income tax

     2,277          2,165    

Dividends

     6          3    

Interest on temporary investments and interest bearing deposits

     237          401    
  

 

 

    

 

 

 

Total interest income

     115,642          124,892    

INTEREST EXPENSE

     

Interest on deposits

     8,845          15,666    

Interest on securities sold under agreement to repurchase and federal funds purchased

     80          122    

Interest on term debt

     2,304          2,289    

Interest on junior subordinated debentures

     2,058          1,913    
  

 

 

    

 

 

 

Total interest expense

     13,287          19,990    
  

 

 

    

 

 

 

Net interest income

     102,355          104,902    

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES

     3,167          15,030    

PROVISION FOR COVERED LOAN AND LEASE LOSSES

     (31)          7,268    
  

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     99,219          82,604    

NON-INTEREST INCOME

     

Service charges on deposit accounts

     6,666          7,821    

Brokerage commissions and fees

     2,944          3,377    

Mortgage banking revenue, net

     13,082          5,275    

Gain (loss) on investment securities, net:

     

Gain on sale of investment securities, net

     148          -          

Portion of other-than-temporary impairment losses transferred from other comprehensive income

     -                (25)    
  

 

 

    

 

 

 

Total gain (loss) on investment securities, net

     148          (25)    

Loss on junior subordinated debentures carried at fair value

     (548)          (542)    

Change in FDIC indemnification asset

     (1,845)          2,905    

Other income

     6,790          2,774    
  

 

 

    

 

 

 

Total non-interest income

     27,237          21,585    

NON-INTEREST EXPENSE

     

Salaries and employee benefits

     47,093          44,610    

Net occupancy and equipment

     13,498          12,517    

Communications

     2,942          2,810    

Marketing

     990          851    

Services

     6,162          5,882    

Supplies

     665          781    

FDIC assessments

     1,968          3,873    

Net loss on non-covered other real estate owned

     3,187          2,833    

Net loss on covered other real estate owned

     2,454          951    

Intangible amortization

     1,212          1,251    

Merger related expenses

     100          181    

Other expenses

     7,425          7,661    
  

 

 

    

 

 

 

Total non-interest expense

     87,696          84,201    
  

 

 

    

 

 

 

Income before provision for income taxes

     38,760          19,988    

Provision for income taxes

     13,257          6,521    
  

 

 

    

 

 

 

Net income

       $      25,503            $      13,467    
  

 

 

    

 

 

 

 

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
March 31,
 
     2012      2011  

Net income

     $       25,503          $       13,467    

Dividends and undistributed earnings allocated to participating securities

     167          62    
  

 

 

    

 

 

 

Net earnings available to common shareholders

     $       25,336          $       13,405    
  

 

 

    

 

 

 

Earnings per common share:

     

Basic

     $       0.23          $       0.12    

Diluted

     $       0.23          $       0.12    

Weighted average number of common shares outstanding:

     

Basic

     111,989          114,575    

Diluted

     112,160          114,746    

See notes to condensed consolidated financial statements

 

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

     Three months ended
March 31,
 
     2012      2011  

Net income

     $       25,503           $       13,467     
  

 

 

    

 

 

 

Available for sale securities:

     

Unrealized gains arising during the period

     2,022           815     

Reclassification adjustment for net gains realized in earnings (net of tax expense $59 for the three months ended March 31, 2012)

     (89)          -          

Income tax expense related to unrealized gains

     (809)          (326)    
  

 

 

    

 

 

 

Net change in unrealized gains

     1,124           489     
  

 

 

    

 

 

 

Held to maturity securities:

     

Unrealized gains related to factors other than credit (net of tax expense of $6 for the three months ended March 31, 2011 )

     -                8     

Reclassification adjustment for impairments realized in net income (net of tax benefit of $10 for the three months ended March 31, 2011)

     -                15     

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $28 and $18 for the three months ended March 31, 2012 and 2011, respectively)

     41           26     
  

 

 

    

 

 

 

Net change in unrealized losses related to factors other than credit

     41           49     
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     1,165           538     
  

 

 

    

 

 

 

Comprehensive income

     $ 26,668           $ 14,005     
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except shares)

 

     Common Stock             Accumulated
Other
        
     Shares      Amount      Retained
Earnings
     Comprehensive
Income
     Total  

BALANCE AT JANUARY 1, 2011

     114,536,814        $ 1,540,928        $ 76,701        $ 24,945        $ 1,642,574    

Net income

           74,496             74,496    

Other comprehensive income, net of tax

              8,829          8,829    
              

 

 

 

Comprehensive income

               $ 83,325    
              

 

 

 

Stock-based compensation

        3,785                3,785    

Stock repurchased and retired

     (2,557,056)          (29,754)                (29,754)    

Issuances of common stock under stock plans and related net tax deficiencies

     185,133          (46)                (46)    

Cash dividends on common stock ($0.24 per share)

           (27,471)             (27,471)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2011

     112,164,891        $ 1,514,913        $ 123,726        $ 33,774        $ 1,672,413    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BALANCE AT JANUARY 1, 2012

     112,164,891          1,514,913          123,726          33,774        $ 1,672,413    

Net income

           25,503             25,503    

Other comprehensive income, net of tax

              1,165          1,165    
              

 

 

 

Comprehensive income

               $ 26,668    
              

 

 

 

Stock-based compensation

        916                916    

Stock repurchased and retired

     (395,904)          (5,013)                (5,013)    

Issuances of common stock under stock plans and related net tax deficiencies

     123,982          (42)                (42)    

Cash dividends on common stock ($0.07 per share)

           (7,890)             (7,890)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

     111,892,969        $ 1,510,774        $ 141,339        $ 34,939        $ 1,687,052    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Three months ended  
     March 31,  
     2012      2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

   $ 25,503         $ 13,467     

Adjustments to reconcile net income to net cash provided by operating activities:

     

Amortization of investment premiums, net

     10,744           9,111     

Gain on sale of investment securities, net

     (148)          -         

Other-than-temporary impairment on investment securities held to maturity

     -               25     

(Gain) loss on sale of non-covered other real estate owned

     (336)          703     

Gain on sale of covered other real estate owned

     (452)          (305)    

Valuation adjustment on non-covered other real estate owned

     3,523           2,130     

Valuation adjustment on covered other real estate owned

     2,906           1,256     

Provision for non-covered loan and lease losses

     3,167           15,030     

Provision for covered loan and lease losses

     (31)          7,268     

Change in FDIC indemnification asset

     1,845           (2,905)    

Depreciation, amortization and accretion

     4,020           3,031     

Increase in mortgage servicing rights

     (2,948)          (1,334)    

Change in mortgage servicing rights carried at fair value

     922           183     

Change in junior subordinated debentures carried at fair value

     548           532     

Stock-based compensation

     916           1,119     

Net (increase) decrease in trading account assets

     (847)          452     

(Gain) loss on sale of loans

     (6,094)          815     

Origination of loans held for sale

     (352,522)          (139,229)    

Proceeds from sales of loans held for sale

     330,190           161,385     

Excess tax benefits from the exercise of stock options

     (46)          (3)    

Change in other assets and liabilities:

     

Net decrease in other assets

     15,493           137     

Net (decrease) increase in other liabilities

     (5,554)          600     
  

 

 

    

 

 

 

Net cash provided by operating activities

     30,799           73,468     
  

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Purchases of investment securities available for sale

     (266,541)          (521,254)    

Proceeds from investment securities available for sale

     331,374           146,918     

Proceeds from investment securities held to maturity

     170           186     

Redemption of restricted equity securities

     128           180     

Net non-covered loan and lease originations

     (68,883)          (6,455)    

Net covered loan and lease paydowns

     23,956           33,964     

Proceeds from sales of loans

     4,428           5,392     

Proceeds from disposals of furniture and equipment

     653           115     

Purchases of premises and equipment

     (5,863)          (7,926)    

Net proceeds from FDIC indemnification asset

     12,649           33,862     

Proceeds from sales of non-covered other real estate owned

     3,892           5,349     

Proceeds from sales of covered other real estate owned

     5,033           4,259     
  

 

 

    

 

 

 

Net cash provided (used) by investing activities

     40,996           (305,410)    

 

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(in thousands)

 

     Three months ended  
     March 31,  
     2,012      2,011  

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Net decrease in deposit liabilities

     (121,444)          (140,870)    

Net increase in securities sold under agreements to repurchase

     2,040           19,666     

Repayment of term debt

     -               (5,000)    

Dividends paid on common stock

     (7,890)          (5,743)    

Excess tax benefits from stock based compensation

     46           3     

Proceeds from stock options exercised

     21           212     

Retirement of common stock

     (5,013)          (488)    
  

 

 

    

 

 

 

Net cash used by financing activities

     (132,240)          (132,220)    
  

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (60,445)          (364,162)    

Cash and cash equivalents, beginning of period

     598,766           1,004,125     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 538,321           $ 639,963     
  

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

     $ 14,392           $ 21,623     

Income taxes

     $ -               $ 70     

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

     

Change in unrealized gains on investment securities available for sale, net of taxes

     $ 1,124           $ 489     

Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes

     $ 41           $ 49     

Cash dividend declared on common and preferred stock and payable after period-end

     $ 7,887           $ 5,761     

Transfer of non-covered loans to non-covered other real estate owned

     $ 7,209           $ 9,903     

Transfer of covered loans to covered other real estate owned

     $ 784           $ 3,036     

Transfer of covered loans to non-covered loans

     $ 4,563           $ -         

Transfer from FDIC indemnification asset to due from FDIC and other

     $ 10,827           $ 17,445     

See notes to condensed consolidated financial statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “the Company”) conform to accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Umpqua Investments, Inc. (“Umpqua Investments”). All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2011 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2011 Annual Report filed on Form 10-K.

In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2012 for potential recognition or disclosure. In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period. Certain reclassifications of prior period amounts have been made to conform to current classifications.

Note 2 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at March 31, 2012 and December 31, 2011:

March 31, 2012

(in thousands)

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

AVAILABLE FOR SALE:

          

U.S. Treasury and agencies

     $ 45,548           $ 719           $ (1 )        $ 46,266     

Obligations of states and political subdivisions

     236,166           15,830           (116 )        251,880     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,752,535           46,071           (3,945 )        2,794,661     

Other debt securities

     149           -                (14 )        135     

Investments in mutual funds and other equity securities

     1,959           108           -               2,067     
  

 

 

    

 

 

    

 

 

   

 

 

 
     $ 3,036,357           $ 62,728           $ (4,076 )        $ 3,095,009     
  

 

 

    

 

 

    

 

 

   

 

 

 

HELD TO MATURITY:

          

Obligations of states and political subdivisions

     $ 1,315           $ 2           $ -               $ 1,317     

Residential mortgage-backed securities and collateralized mortgage obligations

     3,310           153           (44 )        3,419     
  

 

 

    

 

 

    

 

 

   

 

 

 
     $ 4,625           $ 155           $ (44 )        $ 4,736     
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2011

(in thousands)

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair Value  

AVAILABLE FOR SALE:

          

U.S. Treasury and agencies

     $ 117,232           $ 1,234         $ (1 )        $ 118,465     

Obligations of states and political subdivisions

     237,302           16,264           (13 )        253,553     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,755,153           43,152           (3,950 )        2,794,355     

Other debt securities

     151           -                (17 )        134     

Investments in mutual funds and other equity securities

     1,959           112           -               2,071     
  

 

 

    

 

 

    

 

 

   

 

 

 
     $ 3,111,797           $ 60,762           $ (3,981 )        $ 3,168,578     
  

 

 

    

 

 

    

 

 

   

 

 

 

HELD TO MATURITY:

          

Obligations of states and political subdivisions

     $ 1,335           $ 2           $ -               $ 1,337     

Residential mortgage-backed securities and collateralized mortgage obligations

     3,379           120           (77 )        3,422     
  

 

 

    

 

 

    

 

 

   

 

 

 
     $ 4,714           $ 122           $ (77 )        $ 4,759     
  

 

 

    

 

 

    

 

 

   

 

 

 

Investment securities that were in an unrealized loss position as of March 31, 2012 and December 31, 2011 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

March 31, 2012

(in thousands)

 

     Less than 12 Months      12 Months or Longer      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
                   

AVAILABLE FOR SALE:

                 

U.S. Treasury and agencies

     $ -              $ -              $ 78           $ 1           $ 78           $ 1     

Obligations of states and political subdivisions

     5,409           116           -                -                5,409           116     

Residential mortgage-backed securities and collateralized mortgage obligations

     499,687           3,639           30,573           306           530,260           3,945     

Other debt securities

     -                -                135           14           135           14     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ 505,096           $ 3,755           $ 30,786           $ 321           $ 535,882           $ 4,076     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -              $ -              $ 943           $ 44           $ 943           $ 44     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ -              $ -              $ 943           $ 44           $ 943           $ 44     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2011

(in thousands)

 

     Less than 12 Months      12 Months or Longer      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
                   

AVAILABLE FOR SALE:

                 

U.S. Treasury and agencies

     $ -              $ -              $ 85           $ 1           $ 85           $ 1     

Obligations of states and political subdivisions

     516           13           -              -              516           13     

Residential mortgage-backed securities and collateralized mortgage obligations

     489,475           3,160           52,222           790           541,697           3,950     

Other debt securities

     -              -              134           17           134           17     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ 489,991           $ 3,173           $ 52,441           $ 808           $ 542,432           $ 3,981     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -              $ -              $ 602           $ 77           $ 602           $ 77     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ -              $ -              $ 602           $ 77           $ 602           $ 77     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses on investments in U.S. Treasury and agencies securities were caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of March 31, 2012. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at March 31, 2012 are issued or guaranteed by governmental agencies. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

We review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above.

 

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Table of Contents

The following tables present the OTTI losses for the three months ended March 31, 2012 and 2011:

(in thousands)

     Three months ended
March 31,
 
     2012      2011  

Total other-than-temporary impairment losses

     $ -            $ -      

Portion of other-than-temporary impairment losses transferred from other comprehensive income (1)

     -            25     
  

 

 

    

 

 

 

Net impairment losses recognized in earnings (2)

     $ -            $ 25     
  

 

 

    

 

 

 

 

(1) Represents other-than-temporary impairment losses related to all other factors.
(2) Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities held to maturity relate to non-agency residential collateralized mortgage obligations. Each of these securities holds various levels of credit subordination. The underlying mortgage loans of these securities were originated from 2003 through 2007. At origination, the weighted average loan-to-value of the underlying mortgages was 69%; the underlying borrowers had weighted average FICO scores of 731, and 59% were limited documentation loans. These securities are valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimate cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows are then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on these non-agency collateralized mortgage obligations as of March 31, 2012 and 2011:

 

    2012     2011  
    Range       Weighted       Range      Weighted   
      Minimum         Maximum       Average       Minimum         Maximum       Average  

Constant prepayment rate

    10.0 %          20.0 %          14.0 %          5.0 %          20.0 %          14.9 %     

Collateral default rate

    5.0 %          60.0 %          22.6 %          5.0 %          15.0 %          10.6 %     

Loss severity

    27.5 %          50.0 %          32.5 %          25.0 %          55.0 %          37.9 %     

The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings and the remaining impairment loss related to all other factors recognized in OCI for the three months ended March 31, 2012 and 2011:

(in thousands)

 

    

 

Three months ended

March 31,

  

  

     2012      2011  

Balance, beginning of period

     $ 9,574           $ 12,778     

Subsequent OTTI credit losses

     -              25     
  

 

 

    

 

 

 

Balance, end of period

     $ 9,574           $ 12,803     
  

 

 

    

 

 

 

The following table presents the maturities of investment securities at March 31, 2012:

 

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Table of Contents

(in thousands)

 

     Available For Sale      Held To Maturity  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair
Value
 

AMOUNTS MATURING IN:

           

Three months or less

     $ 28,517         $ 28,689           $ 85           $ 85     

Over three months through twelve months

     335,264           340,008           245           246     

After one year through five years

     2,037,135           2,079,376           345           348     

After five years through ten years

     547,572           557,968           61           63     

After ten years

     85,910           86,901           3,889           3,994     

Other investment securities

     1,959           2,067           -               -         
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 3,036,357           $ 3,095,009           $ 4,625           $ 4,736     
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties.

The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three months ended March 31, 2012 and 2011:

(in thousands)

 

     Three months ended
March 31, 2012
     Three months ended
March 31, 2011
 
     Gains      Losses      Gains      Losses  

U.S. Treasury and agencies

     $ 371           $ -              $ -              $ -        

Obligations of states and political subdivisions

     2           -               2           1     

Residential mortgage-backed securities and collateralized mortgage obligations

     -               230         -               -         

Other debt securities

     5           -               -               -         
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 378           $ 230           $ 2           $ 1     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents, as of March 31, 2012, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(in thousands)

 

     Amortized
Cost
     Fair
Value
 

To Federal Home Loan Bank to secure borrowings

     $ 158,984         $ 164,620   

To state and local governments to secure public deposits

     716,942         738,353   

Other securities pledged principally to secure deposits

     175,226         178,204   
  

 

 

    

 

 

 

Total pledged securities

     $ 1,051,152         $ 1,081,177   
  

 

 

    

 

 

 

 

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Table of Contents

Note 3 – Non-Covered Loans and Leases

The following table presents the major types of non-covered loans recorded in the balance sheets as of March 31, 2012 and December 31, 2011:

(in thousands)

 

     March 31,
2012
    December 31,
2011
 

Commercial real estate

    

Term & multifamily

     $ 3,616,386        $ 3,558,295   

Construction & development

     162,866        165,066   

Residential development

     74,604        90,073   

Commercial

    

Term

     687,242        625,766   

LOC & other

     764,049        832,999   

Residential

    

Mortgage

     345,763        315,927   

Home equity loans & lines

     264,662        272,192   

Consumer & other

     37,082        38,860   
  

 

 

   

 

 

 

Total

     5,952,654        5,899,178   

Deferred loan fees, net

     (11,384     (11,080
  

 

 

   

 

 

 

Total

     $ 5,941,270        $ 5,888,098   
  

 

 

   

 

 

 

As of March 31, 2012, loans totaling $5.2 billion were pledged to secure borrowings and available lines of credit.

Note 4 – Allowance for Non-Covered Loan Loss and Credit Quality

The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank’s Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the ALLL consists of three key elements, which include 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, all risk-based activities within the loan portfolio are simultaneously considered.

Formula Allowance

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance.

The formula allowance is calculated by applying risk factors to various segments of pools of outstanding loans. Risk factors are assigned to each portfolio segment based on management’s evaluation of the losses inherent within each segment. Segments or regions with greater risk of loss will therefore be assigned a higher risk factor.

Base riskThe portfolio is segmented into loan categories, and these categories are assigned a Base Risk factor based on an evaluation of the loss inherent within each segment.

Extra risk – Additional risk factors provide for an additional allocation of ALLL based on the loan risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans.

Changes to risk factors – Risk factors are assigned at origination and may be changed periodically based on management’s evaluation of the following factors: loss experience; changes in the level of non-performing loans; regulatory exam results; changes in the level of adversely classified loans (positive or negative); improvement or deterioration in local economic conditions; and any other factors deemed relevant.

 

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Table of Contents

Specific Allowance

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a Specific Allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. Loans determined to be impaired with a specific allowance are excluded from the formula allowance so as not to double-count the loss exposure. The non-accrual impaired loans as of period end have already been partially charged off to their estimated net realizable value, and are expected to be resolved over the coming quarters with no additional material loss, absent further decline in market prices.

The combination of the formula allowance component and the specific allowance component represent the allocated allowance for loan and lease losses.

Unallocated Allowance

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 10% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed quarterly with consideration of factors including, but not limited to:

 

   

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

 

   

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

 

   

Changes in the nature and volume of the portfolio and in the terms of loans;

 

   

Changes in the experience and ability of lending management and other relevant staff;

 

   

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

 

   

Changes in the quality of the institution’s loan review system;

 

   

Changes in the value of underlying collateral for collateral-depending loans;

 

   

The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

 

   

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions’ existing portfolio.

These factors are evaluated through a management survey of the Chief Credit Officer, Chief Lending Officers, Special Assets Manager, and Credit Review Manager. The survey requests responses to evaluate current changes in the nine qualitative factors. This information is then incorporated into our understanding of the reasonableness of the formula factors and our evaluation of the unallocated portion of the ALLL.

Management believes that the ALLL was adequate as of March 31, 2012. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 80% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our loan portfolio. A continued deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management’s evaluation of numerous factors. For each portfolio segment, these factors include:

 

   

The quality of the current loan portfolio;

 

   

The trend in the loan portfolio’s risk ratings;

 

   

Current economic conditions;

 

   

Loan concentrations;

 

   

Loan growth rates;

 

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Table of Contents
   

Past-due and non-performing trends;

 

   

Evaluation of specific loss estimates for all significant problem loans;

 

   

Historical short (one year), medium (three year), and long-term charge-off rates,

 

   

Recovery experience;

 

   

Peer comparison loss rates.

There have been no significant changes to the Bank’s methodology or policies in the periods presented.

Activity in the Non-Covered Allowance for Loan and Lease Losses

The following table summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan portfolio segment for the three months ended March 31, 2012 and 2011, respectively:

(in thousands)

 

     Three Months Ended March 31, 2012  
     Commercial
    Real Estate    
       Commercial          Residential        Consumer
& Other
       Unallocated        Total  

Balance, beginning of period

     $ 59,574          $ 20,485           $ 7,625           $ 867           $ 4,417           $ 92,968     

Charge-offs

     (5,772)          (3,843)          (2,588)          (488)          -               (12,691)    

Recoveries

     955          2,060          95          116          -               3,226    

Provision

     3,269          (816)          974          367          (627)           3,167    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 58,026          $ 17,886           $ 6,106           $ 862           $ 3,790           $ 86,670     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended March 31, 2011  
     Commercial
    Real Estate    
       Commercial          Residential        Consumer
& Other
       Unallocated          Total    

Balance, beginning of period

     $ 64,405           $ 22,146           $ 5,926           $ 803           $  8,641           $ 101,921     

Charge-offs

     (11,431)          (8,176)          (734)          (534)          -               (20,875)    

Recoveries

     1,246          396          21          94          -               1,757    

Provision

     9,308          6,432          413          493          (1,616)           15,030    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 63,528           $ 20,798           $ 5,626           $ 856           $ 7,025           $ 97,833     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the allowance and recorded investment in non-covered loans by portfolio segment and balances individually or collectively evaluated for impairment as of March 31, 2012 and 2011, respectively:

(in thousands)

 

     March 31, 2012  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Unallocated      Total  

Allowance for non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 57,260        $ 17,886           $ 6,103           $ 862           $ 3,790           $ 85,901     

Individually evaluated for impairment

     766           -               3           -               -               769     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 58,026         $ 17,886           $ 6,106           $ 862           $ 3,790           $ 86,670     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 3,726,385           $ 1,427,710           $ 610,297           $ 37,082              $ 5,801,474     

Individually evaluated for impairment

     127,471           23,581           128           -                  151,180     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

     $ 3,853,856           $ 1,451,291           $ 610,425           $ 37,082              $ 5,952,654     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 
(in thousands)                  
     March 31, 2011  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Unallocated      Total  

Allowance for non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 62,444          $ 20,790          $ 5,619          $ 856          $ 7,025         $ 96,734     

Individually evaluated for impairment

     1,084           8           7           -               -               1,099     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 63,528          $ 20,798          $ 5,626          $ 856          $ 7,025          $ 97,833    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 3,664,735          $ 1,242,883          $ 500,804          $ 31,601             $ 5,440,023    

Individually evaluated for impairment

     174,680           28,766           178           -                  203,624     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

     $ 3,839,415           $ 1,271,649           $ 500,982           $ 31,601  `            $ 5,643,647    
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

The gross non-covered loan and lease balance excludes deferred loans fees of $11.4 million at March 31, 2012 and $11.3 million at March 31, 2011.

 

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Summary of Reserve for Unfunded Commitments Activity

The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”) and unfunded commitments for the three months ended March 31, 2012 and 2011, respectively:

(in thousands)

 

     March 31, 2012  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Balance, beginning of period

     $ 59           $ 633          $ 185          $ 63          $ 940    

Net change to other expense

     38           145           (22)          1           162     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 97          $ 778          $ 163          $ 64          $ 1,102    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2011  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Balance, beginning of period

     $ 33          $ 575          $ 158          $ 52          $ 818    

Net change to other expense

     43           46           4           -               93     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 76          $ 621          $ 162          $ 52          $ 911    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Unfunded loan commitments:

              

March 31, 2012

     $ 86,373          $ 875,399          $ 246,680          $ 49,945          $ 1,258,397    

March 31, 2011

     $ 76,585          $ 591,455          $ 217,810          $ 45,598          $ 931,448    

Non-covered loans sold

In the course of managing the loan portfolio, at certain times, management may decide to sell loans prior to resolution. The following table summarizes loans sold by loan portfolio during the three months ended March 31, 2012 and 2011, respectively:

(In thousands)

 

     Three months ended
March 31,
 
     2012      2011  

Commercial real estate

     

Term & multifamily

     $ 3,652          $ 2,499    

Residential development

     -              2     

Commercial

     

Term

     -              151     

LOC & other

     776           2,740     
  

 

 

    

 

 

 

Total

     $ 4,428           $ 5,392     
  

 

 

    

 

 

 

Asset Quality and Non-Performing Loans

We manage asset quality and control credit risk through diversification of the non-covered loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Quality Group is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due non-covered loans and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors.

A loan is considered impaired when based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when non-covered loans are identified as

 

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impaired they are moved to our Special Assets Division. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to nine months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (a) currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of current real estate market conditions and financing trends, (e) is reputable, and (f) is not on Freddie Mac’s or the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by our Real Estate Valuation Services Group to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by senior credit quality officers and the Company’s Allowance for Loan and Lease Losses (“ALLL”) Committee. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Appraisals or other alternative sources of value received subsequent to the reporting period, but prior to our filing of periodic reports, are considered and evaluated to ensure our periodic filings are materially correct and not misleading. Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.

Loans are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for non-accrual status. Loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain.

Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.

Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. All loans determined to be impaired are individually assessed for impairment except for impaired consumer loans which are collectively evaluated for impairment in accordance with FASB ASC 450, Contingencies (“ASC 450”). The specific factors considered in determining that a loan is impaired include borrower financial capacity, current economic, business and market conditions, collection efforts, collateral position and other factors deemed relevant. Generally, impaired loans are placed on non-accrual status and all cash receipts are applied to the principal balance. Continuation of accrual status and recognition of interest income is generally limited to performing restructured loans.

The Company has written down impaired, non-accrual loans as of March 31, 2012 to their estimated net realizable value, generally based on disposition value, and expects resolution with no additional material loss, absent further decline in market prices.

Non-Covered Non-Accrual Loans and Loans Past Due

The following table summarizes our non-covered non-accrual loans and loans past due by loan class as of March 31, 2012 and December 31, 2011:

 

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Table of Contents

(in thousands)

 

     March 31, 2012  
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than

90 Days
and Accruing
     Total Past
Due
     Nonaccrual      Current      Total
Non-covered
Loans  and

Leases
 

Commercial real estate

                    

Term & multifamily

     $ 7,786         $ 4,293           $ 437           $ 12,516           $ 45,580           $ 3,558,290           $ 3,616,386     

Construction & development

     -             -             -             -             2,102           160,764           162,866     

Residential development

     -             -             -             -             13,110           61,494           74,604     

Commercial

                    

Term

     798           289           62           1,149           10,063           676,030           687,242     

LOC & other

     1,940           910           1,305           4,155           9,666           750,228           764,049     

Residential

                    

Mortgage

     2,851           597           2,380           5,828           -             339,935           345,763     

Home equity loans & lines

     754           361           853           1,968           -             262,694           264,662     

Consumer & other

     242           9           483           734           -             36,348           37,082     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 14,371           $ 6,459           $ 5,520           $ 26,350           $ 80,521           $ 5,845,783           $ 5,952,654     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan fees, net

                       (11,384)     
                    

 

 

 

Total

                       $ 5,941,270     
                    

 

 

 
(in thousands)                     
     December 31, 2011  
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than

90 Days
and Accruing
     Total Past
Due
     Nonaccrual      Current      Total
Non-covered
Loans and
Leases
 

Commercial real estate

                    

Term & multifamily

     $ 7,319           $ 11,184           $ —             $ 18,503           $ 44,486           $ 3,495,306           $ 3,558,295     

Construction & development

     -             662           575           1,237           3,348           160,481           165,066     

Residential development

     4,171           -             -             4,171           15,836           70,066           90,073     

Commercial

                    

Term

     2,075           738           1,179           3,992           8,120           613,654           625,766     

LOC & other

     5,435           1,697           1,397           8,529           8,772           815,698           832,999     

Residential

                    

Mortgage

     215           965           4,343           5,523           -             310,404           315,927     

Home equity loans & lines

     492           191           2,648           3,331           -             268,861           272,192     

Consumer & other

     67           16           679           762           -             38,098           38,860     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 19,774           $ 15,453           $ 10,821           $ 46,048           $ 80,562           $ 5,772,568           $ 5,899,178     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan fees, net

                       (11,080)     
                    

 

 

 

Total

                       $ 5,888,098     
                    

 

 

 

Non-Covered Impaired Loans

The following table summarizes our non-covered impaired loans by loan class as of March 31, 2012 and December 31, 2011:

 

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Table of Contents

(in thousands)

 

     March 31, 2012  
     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
 

With no related allowance recorded:

        

Commercial real estate

        

Term & multifamily

     $ 53,931           $ 45,699           $ -       

Construction & development

     20,613           19,272           -       

Residential development

     23,290           18,527           -       

Commercial

        

Term

     17,307           13,914           -       

LOC & other

     26,013           9,667           -       

Residential

        

Mortgage

     -             -             -       

Home equity loans & lines

     -             -             -       

Consumer & other

     -             -             -       

With an allowance recorded:

        

Commercial real estate

        

Term & multifamily

     23,216           23,216           622     

Construction & development

     3,762           2,742           14     

Residential development

     18,015           18,015           130     

Commercial

        

Term

     -             -             -       

LOC & other

     -             -             -       

Residential

        

Mortgage

     -             -             -       

Home equity loans & lines

     128           128         3     

Consumer & other

     -             -             -       

Total:

        

Commercial real estate

     142,827           127,471           766     

Commercial

     43,320           23,581           -       

Residential

     128           128           3     

Consumer & other

     -             -             -       
  

 

 

    

 

 

    

 

 

 

Total

     $ 186,275           $ 151,180           $ 769     
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

(in thousands)

 

     December 31, 2011  
     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
 

With no related allowance recorded:

        

Commercial real estate

        

Term & multifamily

     $ 54,673           $ 44,486           $ —     

Construction & development

     22,553           20,602           —     

Residential development

     30,575           23,473           —     

Commercial

        

Term

     14,205           11,311           —     

LOC & other

     23,132           8,772           —     

Residential

        

Mortgage

     —           —           —     

Home equity loans & lines

     —           —           —     

Consumer & other

     —           —           —     

With an allowance recorded:

        

Commercial real estate

        

Term & multifamily

     22,611           22,612           680     

Construction & development

     3,762           2,742           27     

Residential development

     26,326           26,326           464     

Commercial

        

Term

     1,851           1,851           608     

LOC & other

     3,975           3,975           2,000     

Residential

        

Mortgage

     —           —           —     

Home equity loans & lines

     129           129           4     

Consumer & other

     —           —           —     

Total:

        

Commercial real estate

     160,500           140,241           1,171     

Commercial

     43,163           25,909           2,608     

Residential

     129           129           4     

Consumer & other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     $ 203,792           $ 166,279           $ 3,783     
  

 

 

    

 

 

    

 

 

 

Loans with no related allowance reported generally represent non-accrual loans. The Company recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans. Therefore, the non-accrual loans as of March 31, 2012 have already been written-down to their estimated net realizable value, based on disposition value, and are expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value.

At March 31, 2012 and December 31, 2011, impaired loans of $70.2 million and $80.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest at each respective date. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligation to lend additional funds on the restructured loans as of March 31, 2012.

The following table summarizes our average recorded investment and interest income recognized on impaired non-covered loans by loan class as of March 31, 2012 and 2011:

 

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(in thousands)

 

      March 31, 2012      March 31, 2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial real estate

           

Term & multifamily

     $ 45,092         $ -            $ 55,558           $ -        

Construction & development

     19,937           -              23,634           -        

Residential development

     21,000           -              38,945           -        

Commercial

           

Term

     12,612           -              8,556           -        

LOC & other

     9,220           -              29,542           -        

Residential

           

Mortgage

     -              -              -              -        

Home equity loans & lines

     -              -              -              -        

Consumer & other

     -              -              -              -        

With an allowance recorded:

           

Commercial real estate

           

Term & multifamily

     22,914           242           23,639           232     

Construction & development

     2,742           246           3,587           72     

Residential development

     22,171           221           44,989           327     

Commercial

           

Term

     925           53           303           11     

LOC & other

     1,988           36           942           3     

Residential

           

Mortgage

     -              -              1,964           1     

Home equity loans & lines

     129           2           11           -        

Consumer & other

     -              -              -           -        

Total:

           

Commercial real estate

     133,856           709           190,352           631     

Commercial

     24,745           89           39,343           14     

Residential

     129           2           1,975           1     

Consumer & other

     -              -              -              -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 158,730         $ 800         $ 231,670           $ 646     
  

 

 

    

 

 

    

 

 

    

 

 

 

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans.

Non-Covered Credit Quality Indicators

As previously noted, the Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Bank differentiates its lending portfolios into homogeneous loans (generally consumer loans) and non-homogeneous loans (generally all non-consumer loans). The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:

Minimal Risk—A minimal risk loan, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty.

Low Risk—A low risk loan, risk rated 2, is similar in characteristics to a minimal risk loan. Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances.

Modest Risk—A modest risk loan, risk rated 3, is a desirable loan with excellent sources of repayment and no currently identifiable risk of collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles.

 

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Average Risk—An average risk loan, risk rated 4, is an attractive loan with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.

Acceptable Risk—An acceptable risk loan, risk rated 5, is a loan with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.

Watch—A watch loan, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time. Borrowers rated Watch are characterized by elements of uncertainty, such as:

 

   

Borrower may be experiencing declining operating trends, strained cash flows or less-than anticipated performance. Cash flow should still be adequate to cover debt service, and the negative trends should be identified as being of a short-term or temporary nature.

 

   

The borrower may have experienced a minor, unexpected covenant violation.

 

   

Companies who may be experiencing tight working capital or have a cash cushion deficiency.

 

   

Loans may also be a Watch if financial information is late, there is a documentation deficiency, the borrower has experienced unexpected management turnover, or if they face industry issues that, when combined with performance factors create uncertainty in their future ability to perform.

 

   

Delinquent payments, increasing and material overdraft activity, request for bulge and/or out-of-formula advances may be an indicator of inadequate working capital and may suggest a lower rating.

 

   

Failure of the intended repayment source to materialize as expected, or renewal of a loan (other than cash/marketable security secured or lines of credit) without reduction are possible indicators of a Watch or worse risk rating.

Special Mention—A Special Mention loan, risk rated 7, has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institutions credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification. A Special Mention loan has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Such weaknesses include:

 

   

Performance is poor or significantly less than expected. There may be a temporary debt-servicing deficiency or inadequate working capital as evidenced by a cash cushion deficiency, but not to the extent that repayment is compromised. Material violation of financial covenants is common.

 

   

Loans with unresolved material issues that significantly cloud the debt service outlook, even though a debt servicing deficiency does not currently exist.

 

   

Modest underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt as structured. Depth of support for interest carry provided by owner/guarantors may mitigate and provide for improved rating.

 

   

This rating may be assigned when a loan officer is unable to supervise the credit properly, an inadequate loan agreement, an inability to control collateral, failure to obtain proper documentation, or any other deviation from prudent lending practices.

 

   

Unlike a Substandard credit, there should be a reasonable expectation that these temporary issues will be corrected within the normal course of business, rather than liquidation of assets, and in a reasonable period of time.

Substandard—A substandard asset, risk rated 8, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans are classified as Substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between Special Mention and Substandard. The following are examples of well-defined weaknesses:

 

   

Cash flow deficiencies or trends are of a magnitude to jeopardize current and future payments with no immediate relief. A loss is not presently expected, however the outlook is sufficiently uncertain to preclude ruling out the possibility.

 

   

Borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.

 

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Material underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt and risk is not mitigated by willingness and capacity of owner/guarantor to support interest payments.

 

   

Management character or honesty has become suspect. This includes instances where the borrower has become uncooperative.

 

   

Due to unprofitable or unsuccessful business operations, some form of restructuring of the business, including liquidation of assets, has become the primary source of loan repayment. Cash flow has deteriorated, or been diverted, to the point that sale of collateral is now the Bank’s primary source of repayment (unless this was the original source of repayment). If the collateral is under the Bank’s control and is cash or other liquid, highly marketable securities and properly margined, then a more appropriate rating might be Special Mention or Watch.

 

   

The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

 

   

There is material, uncorrectable faulty documentation or materially suspect financial information.

Doubtful—Loans classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard 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 reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a Doubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged off. The remaining balance, properly margined, may then be upgraded to Substandard, however must remain on non-accrual.

Loss—Loans classified as loss, risk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future.

Impaired—Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification.

Homogeneous loans are not risk rated until they are greater than 30 days past due, and risk rating is based primarily on the past due status of the loan. The risk rating categories can be generally described by the following groupings for commercial and commercial real estate homogeneous loans:

Special Mention –A homogeneous special mention loan, risk rated 7, is 30-59 days past due from the required payment date at month-end.

Substandard –A homogeneous substandard loan, risk rated 8, is 60-119 days past due from the required payment date at month-end.

Doubtful –A homogeneous doubtful loan, risk rated 9, is 120-149 days past due from the required payment date at month-end.

Loss –A homogeneous loss loan, risk rated 10, is 150 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 150- day time period elapses.

The risk rating categories can be generally described by the following groupings for residential and consumer and other homogeneous loans:

Special Mention – A homogeneous retail special mention loan, risk rated 7, is 30-89 days past due from the required payment date at month-end.

Substandard – A homogeneous retail substandard loan, risk rated 8, is an open-end loan 90-180 days past due from the required payment date at month-end or a closed-end loan 90-120 days past due from the required payment date at month-end.

Loss – A homogeneous retail loss loan, risk rated 10, is a closed-end loan that becomes past due 120 cumulative days or an open-end retail loan that becomes past due 180 cumulative days from the contractual due date. These loans are generally charged-off in the month in which the 120- or 180-day period elapses.

The following table summarizes our internal risk rating by loan class for the non-covered loan portfolio as of March 31, 2012 and December 31, 2011:

 

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Table of Contents

(in thousands)

 

    March 31, 2012  
    Pass/Watch     Special Mention     Substandard     Doubtful     Loss     Impaired     Total  

Commercial real estate

             

Term & multifamily

    $ 3,122,953          $ 279,216          $ 145,302          $ -             $ -           $ 68,915          $ 3,616,386     

Construction & development

    112,845          17,390          10,617          -             -             22,014          162,866     

Residential development

    24,218          6,592          7,252          -             -             36,542          74,604     

Commercial

             

Term

    643,270          18,625          11,433          -             -             13,914          687,242     

LOC & other

    720,055          15,759          18,568          -             -             9,667          764,049     

Residential

             

Mortgage

    339,934          3,448          229          -             2,152          -          345,763     

Home equity loans & lines

    262,566          1,115          488          -             365          128          264,662     

Consumer & other

    36,346          252          82          -             402          -          37,082     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 5,262,188          $ 342,397          $ 193,971          $ -             $ 2,919          $ 151,180          $ 5,952,654     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Deferred loan fees, net

                (11,384)   
             

 

 

 

Total

                $ 5,941,270     
             

 

 

 
    December 31, 2011  
    Pass/Watch     Special Mention     Substandard     Doubtful     Loss     Impaired     Total  

Commercial real estate

             

Term & multifamily

    $ 3,068,803          $ 275,475          $ 146,919          $ -             $ -             $ 67,098          $ 3,558,295     

Construction & development

    109,434          19,946          12,342          -             -             23,344          165,066     

Residential development

    24,801          6,740          8,733          -             -             49,799          90,073     

Commercial

    -                       -        

Term

    586,365          16,631          9,608          -             -             13,162          625,766     

LOC & other

    775,495          22,051          22,706          -             -             12,747          832,999     

Residential

    -                       -        

Mortgage

    309,478          2,106          296          -             4,047          -             315,927     

Home equity loans & lines

    268,731          683          773          -             1,876          129          272,192     

Consumer & other

    38,098          82          254          -             426          -          38,860     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,181,205            $ 343,714          $ 201,631          $ -             $ 6,349          $ 166,279          $ 5,899,178     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Deferred loan fees, net

                (11,080)   
             

 

 

 

Total

                $ 5,888,098     
             

 

 

 

The percentage of non-covered impaired loans classified as special mention, substandard, and loss was 4.2%, 95.8%, and none, respectively, as of March 31, 2012.

Troubled Debt Restructurings

At March 31, 2012 and December 31, 2011, impaired loans of $70.2 million and $80.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance calculated and the allowance on impaired restructured loans is calculated consistently across the portfolios.

As a result of adopting the amendments in Accounting Standards Update No. 2011-02 on January 1, 2011, the Company reassessed all restructurings that occurred on or after the beginning of January 1, 2011 for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as troubled debt restructurings, the Company identified them as impaired under the guidance in Section 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of March 31, 2012 and December 31, 2011, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $3.5 million and $5.4 million, respectively, and there was no allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, respectively. In evaluating concessions made during the year, the Company frequently obtained adequate compensation for concessions made. Adequate compensation includes any or a combination of additional collateral or guarantor(s), pre-funded payment reserves, shortened amortization, principal paydown, and/or adjustment to or above current market interest rate. As a result, few loans qualified as troubled debt restructuring under the new definitions outlined in Section 310-10-35.

There were no available commitments for troubled debt restructurings outstanding as of March 31, 2012 and there were $205,000 as of December 31, 2011.

The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of March 31, 2012 and December 31, 2011:

 

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Table of Contents

(in thousands)

 

     March 31, 2012  
     Accrual
Status
     Non-Accrual
Status
     Total
Modifications
 

Commercial real estate

        

Term & multifamily

     $ 23,336           $ 19,822           $ 43,158     

Construction & development

     19,911           -              19,911     

Residential development

     23,022           11,159           34,181     

Commercial

        

Term

     3,852           1,664           5,516     

LOC & other

     -              6,089           6,089     

Residential

        

Mortgage

     -              -              -        

Home equity loans & lines

     128           -              128     

Consumer & other

     -              -              -        
  

 

 

    

 

 

    

 

 

 

Total

     $ 70,249           $ 38,734           $ 108,983     
  

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Accrual
Status
     Non-Accrual
Status
     Total
Modifications
 

Commercial real estate

        

Term & multifamily

     $ 22,611           $ 21,951         $ 44,562     

Construction & development

     19,996           921           20,917     

Residential development

     33,964           11,969           45,933     

Commercial

        

Term

     3,863           1,762           5,625     

LOC & other

     -              6,973           6,973     

Residential

        

Mortgage

     -              -              -        

Home equity loans & lines

     129           -              129     

Consumer & other

     -              -              -        
  

 

 

    

 

 

    

 

 

 

Total

     $ 80,563           $ 43,576           $ 124,139     
  

 

 

    

 

 

    

 

 

 

The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

The types of modifications offered can generally be described in the following categories:

Rate Modification—A modification in which the interest rate is modified.

Term Modification —A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification—A modification in which the payment amount is changed, other than an interest only modification described above.

Combination Modification—Any other type of modification, including the use of multiple types of modifications.

The following tables present newly non-covered restructured loans that occurred during the three months ended March 31, 2012 and 2011, respectively:

 

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Table of Contents
(in thousands)

 

    Three months ended March 31, 2012  
    Rate
Modifications
    Term
Modifications
    Interest Only
Modifications
    Payment
Modifications
    Combination
Modifications
    Total
Modifications
 

Commercial real estate

           

Term & multifamily

    $ -             $ -             $ -             $ -             $ 803          $ 803     

Construction & development

    -             -             -             -             -             -        

Residential development

    -             -             -             -             -             -        

Commercial

           

Term

    -             -             -             -             -             -        

LOC & other

    -             -             -             -             -             -        

Residential

           

Mortgage

    -             -             -             -             -             -        

Home equity loans & lines

    -             -             -             -             -             -        

Consumer & other

    -             -             -             -             -             -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ -             $ -             $ -             $ -             $ 803          $ 803     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands)

 

    Three months ended March 31, 2011  
    Rate
Modifications
    Term
Modifications
    Interest Only
Modifications
    Payment
Modifications
    Combination
Modifications
    Total
Modifications
 

Commercial real estate

           

Term & multifamily

    $ -             $ -             $ -             $ -             $ 2,693          $ 2,693     

Construction & development

    -             -             -             -             -             -        

Residential development

    -             -             -             -             1,767          1,767     

Commercial

           

Term

    -             -             -             70          70          140     

LOC & other

    -             -             -             -             -             -        

Residential

           

Mortgage

    -             -             -             -             -             -        

Home equity loans & lines

    -             -             -             -             -             -        

Consumer & other

    -             -             -             -             -             -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ -               $ -               $ -             $ 70          $ 4,530          $ 4,600     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification.

The following tables represent financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three months ended March 31, 2012 and 2011, respectively:

(in thousands)

 

     Three months ended
March 31,
 
     2012      2011  

Commercial real estate

     

Term & multifamily

     $ 217           $ 9,446     

Construction & development

     -              -        

Residential development

     -              -        

Commercial

     

Term

     -              -        

LOC & other

     26           -        

Residential

     

Mortgage

     -              -        

Home equity loans & lines

     -              -        

Consumer & other

     -              -        
  

 

 

    

 

 

 

Total

     $ 243           $ 9,446     
  

 

 

    

 

 

 

 

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Table of Contents

Note 5 – Covered Assets and Indemnification Asset

Covered Loans

Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in our statements of financial condition. Covered loans are reported exclusive of the cash flow reimbursements expected from the FDIC.

Acquired loans are valued as of acquisition date in accordance with ASC 805. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Because of the significant fair value discounts associated with the acquired portfolios, the concentration of real estate related loans (to finance or secured by real estate collateral) and the decline in real estate values in the regions serviced, and after considering the underwriting standards of the acquired originating bank, the Company elected to account for all acquired loans under ASC 310-30. Under ASC 805 and ASC 310-30, loans are to be recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. We have aggregated the acquired loans into various loan pools based on multiple layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.

The covered loans acquired are, and will continue to be, subject to the Company’s internal and external credit review and monitoring. To the extent there is experienced or projected credit deterioration on the acquired loan pools subsequent to amounts estimated at the previous remeasurement date, this deterioration will be measured, and a provision for credit losses will be charged to earnings. Additionally, provision for credit losses will be recorded on advances on covered loans subsequent to acquisition date in a manner consistent with the allowance for non-covered loan and lease losses. These provisions will be mostly offset by an increase to the FDIC indemnification asset, which is recognized in non-interest income.

Covered Loans

The following table presents the major types of covered loans as of March 31, 2012 and December 31, 2011:

 

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Table of Contents

(in thousands)

 

     March 31, 2012  
     Evergreen      Rainier      Nevada Security      Total  

Commercial real estate

           

Term & multifamily

     $ 97,127         $ 234,385         $ 123,049         $ 454,561     

Construction & development

     6,995           689           6,267           13,951     

Residential development

     8,791           240           10,316           19,347     

Commercial

           

Term

     12,099           4,472           13,818           30,389     

LOC & other

     7,275           9,239           4,888           21,402     

Residential

           

Mortgage

     4,679           25,587           1,853           32,119     

Home equity loans & lines

     3,905           19,798           3,130           26,833     

Consumer & other

     2,142           5,033           37           7,212     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 143,013         $ 299,443         $ 163,358         $ 605,814     
  

 

 

    

 

 

    

 

 

    

Allowance for covered loans

              (12,635)    
           

 

 

 

Total

            $ 593,179     
           

 

 

 

(in thousands)

 

     December 31, 2011  
     Evergreen      Rainier      Nevada Security      Total  

Commercial real estate

           

Term & multifamily

   $ 99,346         $ 248,206         $ 126,502         $ 474,054     

Construction & development

     7,241           711           6,868           14,820     

Residential development

     7,809           227           9,727           17,763     

Commercial

           

Term

     14,911           5,807           13,432           34,150     

LOC & other

     8,776           8,854           5,796           23,426     

Residential

           

Mortgage

     6,320           27,320           1,863