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Umpqua Holdings Corporation 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-31.3
  5. Ex-32
  6. Ex-32
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: June 30, 2011

 

¨ 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: 114,538,506 shares outstanding as of July 29, 2011

 

 

 


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      55   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      88   

Item 4.

   Controls and Procedures      88   

PART II. OTHER INFORMATION

     89   

Item 1.

   Legal Proceedings      89   

Item 1A.

   Risk Factors      89   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      89   

Item 3.

   Defaults Upon Senior Securities      89   

Item 4.

   (Removed and Reserved)      90   

Item 5.

   Other Information      90   

Item 6.

   Exhibits      90   

SIGNATURES

     91   

EXHIBIT INDEX

     92   

 

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)

 

     June 30,
2011
     December 31,
2010
 

ASSETS

     

Cash and due from banks

   $ 137,033         $ 111,946     

Interest bearing deposits

     478,221           891,634     

Temporary investments

     628           545     
  

 

 

    

 

 

 

Total cash and cash equivalents

     615,882           1,004,125     

Investment securities

     

Trading, at fair value

     2,522           3,024     

Available for sale, at fair value

     3,177,460           2,919,180     

Held to maturity, at amortized cost

     5,553           4,762     

Loans held for sale

     60,416           75,626     

Non-covered loans and leases

     5,735,553           5,658,987     

Allowance for non-covered loan and lease losses

     (97,795)           (101,921)     
  

 

 

    

 

 

 

Net non-covered loans and leases

     5,637,758           5,557,066     

Covered loans and leases, net of allowance of $10,219 and $2,721

     698,676           785,898     

Restricted equity securities

     32,839           34,475     

Premises and equipment, net

     145,192           136,599     

Goodwill and other intangible assets, net

     679,671           681,969     

Mortgage servicing rights, at fair value

     16,350           14,454     

Non-covered other real estate owned

     34,409           32,791     

Covered other real estate owned

     30,153           29,863     

FDIC indemnification asset

     116,928           146,413     

Other assets

     205,883           242,465     
  

 

 

    

 

 

 

Total assets

   $ 11,459,692         $ 11,668,710     
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Deposits

     

Noninterest bearing

   $ 1,733,640         $ 1,616,687     

Interest bearing

     7,412,772           7,817,118     
  

 

 

    

 

 

 

Total deposits

     9,146,412           9,433,805     

Securities sold under agreements to repurchase

     120,889           73,759     

Term debt

     256,719           262,760     

Junior subordinated debentures, at fair value

     81,766           80,688     

Junior subordinated debentures, at amortized cost

     102,705           102,866     

Other liabilities

     76,880           72,258     
  

 

 

    

 

 

 

Total liabilities

     9,785,371           10,026,136     
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 10)

     

SHAREHOLDERS’ EQUITY

     

Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 114,537,782 in 2011 and 114,536,814 in 2010

     1,540,933           1,540,928     

Retained earnings

     96,434           76,701     

Accumulated other comprehensive income

     36,954           24,945     
  

 

 

    

 

 

 

Total shareholders’ equity

     1,674,321           1,642,574     
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 11,459,692         $ 11,668,710     
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

INTEREST INCOME

           

Interest and fees on loans

     $       101,547           $       97,240           $       201,827           $       187,948     

Interest and dividends on investment securities

           

Taxable

     24,348           15,569           46,391           31,644     

Exempt from federal income tax

     2,178           2,247           4,343           4,434     

Dividends

     4           3           7           3     

Interest on temporary investments and interest bearing deposits

     340           545           741           944     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     128,417           115,604           253,309           224,973     

INTEREST EXPENSE

           

Interest on deposits

     14,698           18,463           30,364           37,252     

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

     131           123           253           246     

Interest on term debt

     2,301           2,779           4,590           4,299     

Interest on junior subordinated debentures

     1,926           1,939           3,839           3,824     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     19,056           23,304           39,046           45,621     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     109,361           92,300           214,263           179,352     

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES

     15,459           29,767           30,489           71,873     

PROVISION FOR COVERED LOAN AND LEASE LOSSES

     3,755           -                11,023           -          
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     90,147           62,533           172,751           107,479     

NON-INTEREST INCOME

           

Service charges on deposit accounts

     8,540           9,585           16,361           17,950     

Brokerage commissions and fees

     3,276           3,139           6,653           5,778     

Mortgage banking revenue, net

     4,807           3,209           10,082           6,687     

Gain (loss) on investment securities, net

           

Gain on sale of investment securities, net

     5,678           -                5,678           1     

Total other-than-temporary impairment losses

     (110)          -                (110)          (5)    

Portion of other-than-temporary impairment losses transferred from

     -                   

other comprehensive income

     63           -                38           (284)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gain (loss) on investment securities, net

     5,631           -                5,606           (288)    

(Loss) gain on junior subordinated debentures carried at fair value

     (547)          -                (1,089)          6,088     

Bargain purchase gain on acquisition

     -                -                -                6,437     
           

Change in FDIC indemnification asset

     (5,551)          263           (2,646)          873     

Other income

     3,471           2,367           6,245           5,085     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     19,627           18,563           41,212           48,610     

NON-INTEREST EXPENSE

           

Salaries and employee benefits

     43,808           39,604           88,418           75,844     

Net occupancy and equipment

     12,547           11,472           25,064           22,148     

Communications

     2,796           2,596           5,606           4,820     

Marketing

     1,798           1,714           2,649           2,723     

Services

     6,026           5,831           11,908           10,746     

Supplies

     843           1,003           1,624           1,729     

FDIC assessments

     2,821           3,555           6,694           6,999     

Net loss (gain) on other real estate owned

     3,917           (952)          7,701           1,359     

Intangible amortization

     1,251           1,368           2,502           2,676     

Merger related expenses

     71           2,169           252           4,075     

Other expenses

     7,329           6,473           14,990           11,585     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     83,207           74,833           167,408           144,704     

Income before provision for income taxes

     26,567           6,263           46,555           11,385     

Provision for (benefit from) income taxes

     8,782           2,800           15,303           (592)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     $       17,785           $       3,463           $       31,252           $       11,977     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

Net income

     $       17,785           $       3,463           $       31,252           11,977     

Preferred stock dividends

     -                -                -                12,192     

Dividends and undistributed earnings allocated to participating securities

     86           16           148           31     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss) available to common shareholders

     $       17,699           $       3,447           $       31,104           $       (246)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share:

           

Basic

     $       0.15           $       0.03           $       0.27           $       -          

Diluted

     $       0.15           $       0.03           $       0.27           $       -          

Weighted average number of common shares outstanding:

           

Basic

     114,611           110,135           114,593           101,205     

Diluted

     114,785           114,733           114,796           101,435     

See notes to condensed consolidated financial statements

 

5


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except shares)

     Preferred
Stock
    

 

 

Common Stock

     Retained
Earnings
     Accumulated
Other
Comprehensive
(Loss) Income
    Total  
        Shares      Amount          

BALANCE AT JANUARY 1, 2010

   $ 204,335          86,785,588        $ 1,253,288        $ 83,939        $ 24,955       $ 1,566,517    

Net income

              28,326            28,326    

Other comprehensive loss, net of tax

                 (10     (10)   
                      

Comprehensive income

                 $ 28,316    
                      

Issuance of common stock

        8,625,000          89,786               89,786    

Stock-based compensation

           3,505               3,505    

Stock repurchased and retired

        (22,541)         (284)              (284)   

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

        173,767          844               844    

Redemption of preferred stock issued to U.S. Treasury

     (214,181)                    (214,181)   

Issuance of preferred stock

     198,289                     198,289    

Conversion of preferred stock to common stock

     (198,289)         18,975,000          198,289               -          

Amortization of discount on preferred stock

     9,846                (9,846)           -          

Dividends declared on preferred stock

              (3,686)           (3,686)   

Repurchase of warrants issued to U.S. Treasury

           (4,500)              (4,500)   

Cash dividends on common stock ($0.20 per share)

              (22,032)           (22,032)   
                                                    

Balance at December 31, 2010

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

BALANCE AT JANUARY 1, 2011

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

Net income

              31,252            31,252    

Other comprehensive income, net of tax

                 12,009         12,009    
                      

Comprehensive income

                 $ 43,261    
                      

Stock-based compensation

           1,987               1,987    

Stock repurchased and retired

        (170,205)         (1,960)              (1,960)   

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

        171,173          (22)              (22)   

Cash dividends on common stock ($0.10 per share)

              (11,519)           (11,519)   
                                                    

Balance at June 30, 2011

   $ -                114,537,782        $ 1,540,933        $ 96,434        $ 36,954       $ 1,674,321    
                                                    

See notes to condensed consolidated financial statements

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

     Three months ended
June 30,
     Six months ended
June  30,
 
     2011      2010      2011      2010  

Net income

       $       17,785           $       3,463           $       31,252             $       11,977     
                                   

Available for sale securities:

           

Unrealized gains arising during the period

     24,835           14,249           25,649           28,094     

Reclassification adjustment for net gains realized in earnings (net of tax expense of $2,271 for the three months ended June 30, 2011 and net of tax expense of $2,271 and $1 for the six months ended June 30, 2011 and 2010, respectively)

     (3,407)          -                (3,407)          (1)    

Income tax expense related to unrealized gains

     (9,934)          (5,699)          (10,259)          (11,238)    
                                   

Net change in unrealized gains

     11,494           8,550           11,983           16,855     
                                   

Held to maturity securities:

           

Unrealized (losses) gains related to factors other than credit (net of tax benefit of $35 and $30 for the three and six months ended June 30, 2011, respectively, and tax expense of $69 for the six months ended June 30, 2010)

     (53)          -                (45)          103     

Reclassification adjustment for impairments realized in net income (net of tax benefit of $10 for the three months ended June 30, 2011, and net of tax benefit of $20 and $116 for the six months ended June 30, 2011 and 2010, respectively)

     15           -                30           173     

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $10 and $34 for the three months ended June 30, 2011 and 2010, respectively, and net of tax benefit of $27 and $74 for the six months ended June 30, 2011 and 2010, respectively)

     15           50           41           112     
                                   

Net change in unrealized losses related to factors other than credit

     (23)          50           26           388     
                                   

Other comprehensive income, net of tax

     11,471           8,600           12,009           17,243     
                                   

Comprehensive income

   $ 29,256         $ 12,063         $ 43,261         $ 29,220     
                                   

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)

 

     Six months ended
June 30,
 
     2011      2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

       $ 31,252           $ 11,977     

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

     

Amortization of investment premiums, net

     16,389           7,196     

Gain on sale of investment securities, net

     (5,678)          (1)    

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

     72           289     

Loss on sale of non-covered other real estate owned

     1,160           1,156     

Gain on sale of covered other real estate owned

     (898)          (1,519)    

Valuation adjustment on non-covered other real estate owned

     5,518           1,721     

Valuation adjustment on covered other real estate owned

     1,921           5     

Provision for non-covered loan and lease losses

     30,489           71,873     

Provision for covered loan and lease losses

     11,023           -          

Bargain purchase gain on acquisition

     -                (6,437)    

Change in FDIC indemnification asset

     2,646           (873)    

Depreciation, amortization and accretion

     6,218           7,186     

Increase in mortgage servicing rights

     (2,407)          (2,008)    

Change in mortgage servicing rights carried at fair value

     511           1,800     

Change in junior subordinated debentures carried at fair value

     1,078           (6,076)    

Stock-based compensation

     1,987           1,425     

Net decrease in trading account assets

     502           530     

Gain on sale of loans

     (1,819)          (3,441)    

Origination of loans held for sale

     (290,058)          (248,744)    

Proceeds from sales of loans held for sale

     307,087           245,788     

Excess tax benefits from the exercise of stock options

     (4)          (56)    

Change in other assets and liabilities:

     

Net decrease in other assets

     5,954           15,369     

Net increase in other liabilities

     4,759           27,810     
  

 

 

    

 

 

 

Net cash provided by operating activities

     127,680           124,970     
  

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Purchases of investment securities available for sale

     (690,720)          (197,709)    

Purchases of investment securities held to maturity

     (1,573)          -          

Proceeds from investment securities available for sale

     441,721           133,573     

Proceeds from investment securities held to maturity

     757           883     

Redemption of restricted equity securities

     1,636           92     

Net non-covered loan and lease (originations) paydowns

     (136,582)          169,418     

Net covered loan and lease paydowns

     63,417           49,379     

Proceeds from sales of loans

     6,777           21,009     

Proceeds from disposals of furniture and equipment

     180           1,096     

Purchases of premises and equipment

     (16,877)          (33,687)    

Net proceeds from FDIC indemnification asset

     48,850           6,764     

Proceeds from sales of non-covered other real estate owned

     17,026           13,931     

Proceeds from sales of covered other real estate owned

     7,355           2,832     

Proceeds from sale of acquired insurance portfolio

     -                5,150     

Cash acquired in merger, net of cash consideration paid

     -                179,046     
  

 

 

    

 

 

 

Net cash (used) provided by investing activities

     (258,033)          351,777     
  

 

 

    

 

 

 

 

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(in thousands)

 

     Six months ended
June 30,
 
     2011      2010  

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Net decrease in deposit liabilities

     (286,867)          (29,686)    

Net increase (decrease) in securities sold under agreements to repurchase

     47,130           (465)    

Repayment of term debt

     (5,000)          (138,719)    

Redemption of preferred stock

     -                (214,181)    

Proceeds from issuance of preferred stock

     -                198,289     

Net proceeds from issuance of common stock

     -                89,786     

Redemption of warrants

     -                (4,500)    

Dividends paid on preferred stock

     -                (3,682)    

Dividends paid on common stock

     (11,506)          (9,137)    

Excess tax benefits from stock based compensation

     4           56     

Proceeds from stock options exercised

     309           918     

Retirement of common stock

     (1,960)          (259)    
  

 

 

    

 

 

 

Net cash used by financing activities

     (257,890)          (111,580)    
  

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (388,243)          365,167     

Cash and cash equivalents, beginning of period

     1,004,125           605,413     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 615,882           $ 970,580     
  

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

     $ 41,302           $ 46,373     

Income taxes

     $ 6,850           $ 150     

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

     

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

     $ 11,983           $ 16,855     

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

     $ 26           $ 388     

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

     $ 5,754           $ 5,743     

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

     $ 25,322           $ 17,895     

Transfer of covered loans to covered other real estate owned

     $ 8,668           $ 2,669     

Transfer from FDIC indemnification asset to due from FDIC and other

     $ 26,839           $ 23,037     

Transfer of covered loans to non-covered loans

     $ 4,114           $ -          

Conversion of preferred stock to common stock

        $ 198,289     

Acquisitions:

     

Assets acquired

     $ -                $ 1,512,048     

Liabilities assumed

     $ -                $ 1,505,611     

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

Basis of Financial Statement Presentation

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. In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2011 for potential recognition or disclosure. A more detailed description of our accounting policies is included in the 2010 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 2010 Annual Report filed on Form 10-K.

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 – Business Combinations

On January 22, 2010, the Washington Department of Financial Institutions closed EvergreenBank (“Evergreen”), Seattle, Washington and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. That same date, Umpqua Bank assumed the banking operations of Evergreen from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (“OREO”) and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $90.0 million on covered assets for Evergreen and absorb 95% of losses and share in 95% of loss recoveries exceeding $90.0 million, except the Bank will incur losses up to $30.2 million before the loss-sharing commences. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, Umpqua Bank assumed six additional store locations in the greater Seattle, Washington market. This acquisition is consistent with our community banking expansion strategy and provides further opportunity to fill in our market presence in the greater Seattle, Washington market.

On February 26, 2010, the Washington Department of Financial Institutions closed Rainier Pacific Bank (“Rainier”), Tacoma, Washington and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Rainier from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $95.0 million of losses on covered assets and absorb 95% of losses and share in 95% of loss recoveries exceeding $95.0 million. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed 14 additional store locations in Pierce County and surrounding areas. This acquisition expands our presence in the south Puget Sound region of Washington State.

The operations of Evergreen and Rainier are included in our operating results from January 23, 2010 and February 27, 2010, respectively, and added combined revenue of $9.8 million and $24.5 million, non-interest expense of $4.8 million and $9.4 million, and earnings of $1.4 million and $5.4 million, net of tax, for the three and six months ended June 30, 2011, and added combined revenue of $10.4 million and $22.8 million, non-interest expense of $6.6 million and $11.3 million, and earnings of $2.5 million and $7.6 million, net of tax, for the three and six months ended June 30, 2010, respectively. These operating results include a bargain purchase gain of $6.4 million, which is not indicative of future operating results. Evergreen’s and Rainiers’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $52,000 and $102,000 for the three and six months ended June 30, 2011, respectively, and $1.6 million and $3.3 million for the three and six months ended June 30, 2010, respectively, have been incurred in connection with these acquisitions and recognized in a separate line item on the Condensed Consolidated Statements of Operations.

On June 18, 2010, the Nevada State Financial Institutions Division closed Nevada Security Bank (“Nevada Security”), Reno, Nevada and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Nevada Security from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO, and accrued interest

 

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on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on all covered assets. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed five additional store locations, including three in Reno, Nevada, one in Incline Village, Nevada, and one in Roseville, California. This acquisition expands our presence into the State of Nevada.

The operations of Nevada Security are included in our operating results from June 19, 2010, and added revenue of $2.8 million and $9.4 million, non-interest expense of $2.6 million and $6.1 million, and loss of $532,000 and $627,000, net of tax, for the three and six months ended, June 30, 2011 and revenue of $529,000, non-interest expense of $582,000, and loss of $34,000, net of tax, for the three and six months ended, June 30, 2010, respectively. Nevada Security’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $12,000 and $23,000 for the three and six months ended June 30, 2011, respectively, and $402,000 for the three and six months ended June 30, 2010, respectively, have been incurred in connection with the acquisition of Nevada Security and recognized as a separate line item on the Condensed Consolidated Statements of Operations.

We refer to the acquired loans and other real estate owned that are subject to the loss-sharing agreements as “covered loans” and “covered other real estate owned”, respectively, and these are presented as separate line items in our consolidated balance sheet. Collectively these balances are referred to as “covered assets.” Certain types of modifications or restructuring activities subsequent to acquisition may disqualify a loan from loss-share coverage under the provisions of the loss-share agreement. Loans that have been disqualified from loss-share coverage are prospectively reported as non-covered loans.

The assets acquired and liabilities assumed from the Evergreen, Rainier, and Nevada Security acquisitions have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the Financial Accounting Standards Board Accounting Standards Codification (the “FASB ASC”). The amounts are subject to adjustments based upon final settlement with the FDIC. In addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreements provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Evergreen, Rainier, and Nevada Security not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $6.4 million in the Evergreen acquisition, $35.8 million of goodwill in the Rainier acquisition and $10.4 million of goodwill in the Nevada Security acquisition.

A summary of the net assets (liabilities) received from the FDIC and the estimated fair value adjustments are presented below:

(in thousands)

 

     Evergreen      Rainier      Nevada Security  
     January 22, 2010      February 26, 2010      June 18, 2010  

Cost basis net assets (liabilities)

     $ 58,811           $ (50,295)          $ 53,629     

Cash payment received from (paid to) the FDIC

     -                59,351           (29,950)    

Fair value adjustments:

        

Loans

     (117,449)          (103,137)          (112,975)    

Other real estate owned

     (2,422)          (6,581)          (17,939)    

Other intangible assets

     440           6,253           322     

FDIC indemnification asset

     71,755           76,603           99,160     

Deposits

     (1,023)          (1,828)          (1,950)    

Term debt

     (2,496)          (13,035)          -          

Other

     (1,179)          (3,139)          (690)    
  

 

 

    

 

 

    

 

 

 

Bargain purchase gain (goodwill)

     $ 6,437           $ (35,808)          $ (10,393)    
  

 

 

    

 

 

    

 

 

 

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make payment to the FDIC.

In the Evergreen acquisition, cost basis net assets of $58.8 million were transferred to the Company. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

In the Rainier acquisition, cost basis net liabilities of $50.3 million and a cash payment received from the FDIC of $59.4 million were transferred to the Company. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $27.5 million and core deposit intangible assets of $1.1 million recognized are deductible for income tax purposes.

 

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In the Nevada Security acquisition, cost basis net assets of $53.6 million were transferred to the Company and a cash payment of $30.0 million was made to the FDIC. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $36.5 million and core deposit intangible assets of $322,000 recognized are deductible for income tax purposes.

The Bank did not immediately acquire all the real estate, banking facilities, furniture or equipment of Evergreen, Rainier, or Nevada Security as part of the purchase and assumption agreements. Rather, the Bank was granted the option to purchase or lease the real estate and furniture and equipment from the FDIC. The term of this option expired 90 days from the acquisition dates, unless extended by the FDIC. Acquisition costs of the real estate and furniture and equipment are based on current mutually agreed upon appraisals. Umpqua exercised the right to purchase approximately $344,000 of furniture and equipment for Evergreen, $26.3 million of real estate and furniture and equipment for Rainier, and $2.0 million of real estate and furniture and equipment for Nevada Security. The Bank had the option to purchase one store location as part of the Nevada Security acquisition and purchased it in the second quarter of 2011.

The statement of assets acquired and liabilities assumed at their estimated fair values of Evergreen, Rainier, and Nevada Security are presented below:

(in thousands)

     Evergreen      Rainier      Nevada Security  
     January 22, 2010      February 26, 2010      June 18, 2010  

Assets Acquired:

        

Cash and equivalents

     $ 18,919           $ 94,067           $ 66,060     

Investment securities

     3,850           26,478           22,626     

Covered loans

     252,493           458,340           215,507     

Premises and equipment

     -                17           50     

Restricted equity securities

     3,073           13,712           2,951     

Goodwill

     -                35,808           10,393     

Other intangible assets

     440           6,253           322     

Mortgage servicing rights

     -                62           -          

Covered other real estate owned

     2,421           6,580           17,938     

FDIC indemnification asset

     71,755           76,603           99,160     

Other assets

     328           3,254           2,588     
                          

Total assets acquired

     $ 353,279           $ 721,174           $ 437,595     
                          

Liabilities Assumed:

        

Deposits

     $ 285,775           $ 425,771           $ 437,299     

Term debt

     60,813             293,191           -          

Other liabilities

     254             2,212           296     
                          

Total liabilities assumed

     346,842             721,174           437,595     
                          

Net assets acquired/bargain purchase gain

     $ 6,437           $ -                $ -          
                          

Rainier’s assets and liabilities were significant at a level to require disclosure of one year of historical financial statements and related pro forma financial disclosure. However, given the pervasive nature of the loss-sharing agreement entered into with the FDIC, the historical information of Rainier is much less relevant for purposes of assessing the future operations of the combined entity. In addition, prior to closure Rainier had not completed an audit of their financial statements, and we determined that audited financial statements were not and would not be reasonably available for the year ended December 31, 2009. Given these considerations, the Company requested, and received, relief from the Securities and Exchange Commission from submitting certain financial information of Rainier. The assets and liabilities of Evergreen and Nevada Security were not at a level that requires disclosure of historical or pro forma financial information.

Note 3 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at June 30, 2011 and December 31, 2010:

 

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June 30, 2011

(in thousands)

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  

AVAILABLE FOR SALE:

           

U.S. Treasury and agencies

     $ 117,392           $ 1,561           $ -                $ 118,953     

Obligations of states and political subdivisions

     213,053           10,072           (227)          222,898     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,782,517           54,657           (3,745)          2,833,429     

Other debt securities

     152           -                (2)          150     

Investments in mutual funds and other equity securities

     1,959           71           -                2,030     
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 3,115,073           $ 66,361         $ (3,974)         $ 3,177,460     
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY:

           

Obligations of states and political subdivisions

     $ 1,945           $ 3           $ -                $ 1,948     

Residential mortgage-backed securities and collateralized mortgage obligations

     3,608           202           (25)          3,785     
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 5,553           $ 205           $ (25)          $ 5,733     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

(in thousands)

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  

AVAILABLE FOR SALE:

           

U.S. Treasury and agencies

     $ 117,551           $ 1,239           $ (1)          $ 118,789     

Obligations of states and political subdivisions

     213,129           4,985           (1,388)          216,726     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,543,974           57,506           (19,976)          2,581,504     

Other debt securities

     152           -                -                152     

Investments in mutual funds and other equity securities

     1,959           50              2,009     
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 2,876,765           $ 63,780           $ (21,365)          $ 2,919,180     
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY:

           

Obligations of states and political subdivisions

     $ 2,370           $ 5           $ -                $ 2,375     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,392           216           (209)          2,399     
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 4,762           $ 221           $ (209)          $ 4,774     
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities that were in an unrealized loss position as of June 30, 2011 and December 31, 2010 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.

 

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(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:

                 

Obligations of states and political subdivisions

   $ 10,716         $ 210         $ 1,831         $ 17         $ 12,547         $ 227     

Residential mortgage-backed securities and collateralized mortgage obligations

     709,167           3,727           4,476           18           713,643           3,745     

Other debt securities

     -                -                150           2           150           2     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ 719,883           $ 3,937           $ 6,457           $ 37           $ 726,340           $ 3,974     

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -                $ -                $ 345           $ 25           $ 345           $ 25     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ -                $ -                $ 345           $ 25           $ 345           $ 25     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

(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

     $ -                $ -                $ 110           $ 1           $ 110           $ 1     

Obligations of states and political subdivisions

     60,110           1,366           1,003           22           61,113           1,388     

Residential mortgage-backed securities and collateralized mortgage obligations

     1,238,483           19,968           1,539           8           1,240,022           19,976     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ 1,298,593           $ 21,334           $ 2,652           $ 31           $ 1,301,245           $ 21,365     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -                $ -                $ 658           $ 209           $ 658           $ 209     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $ -                $ -                $ 658           $ 209           $ 658           $ 209     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2011. 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 June 30, 2011 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 impairment related to factors other than credit 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 accordingly to the procedures described above.

 

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The following tables present the OTTI losses for the three and six months ended June 30, 2011 and 2010:

(in thousands)

 

     Three months ended June 30,  
     2011      2010  

Total other-than-temporary impairment losses

     $ 110           $  -          

Portion of other-than-temporary impairment losses recognized in other comprehensive income (1)

     (63)          -          
  

 

 

    

 

 

 

Net impairment losses recognized in earnings (2)

     $ 47           $ -          
  

 

 

    

 

 

 
     Six months ended June 30,   
     2011      2010  

Total other-than-temporary impairment losses

     $ 110           $ 5     

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

     (38)          284     
  

 

 

    

 

 

 

Net impairment losses recognized in earnings (2)

     $ 72           $ 289     
  

 

 

    

 

 

 

 

(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 June 30, 2011 and 2010:

 

     2011   2010
     Range       Weighted       Range       Weighted    
         Minimum           Maximum       Average       Minimum       Maximum   Average

Constant prepayment rate

   5.0%     20.0%     14.4%     4.0%     25.0%     14.9%  

Collateral default rate

   5.0%     30.0%     13.2%     8.0%     45.0%     16.8%  

Loss severity

   30.0%     65.0%     39.0%     20.0%     50.0%     34.6%  

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 and six months ended June 30, 2011 and 2010:

 

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(in thousands)

 

     Three months ended June 30,  
         2011              2010      

Balance, beginning of period

     $       12,803           $       12,653     

Subsequent OTTI credit losses

     47           -          
  

 

 

    

 

 

 

Balance, end of period

     $ 12,850           $ 12,653     
  

 

 

    

 

 

 

(in thousands)

 

     Six months ended June 30,  
         2011              2010      

Balance, beginning of period

     $       12,778           $       12,364     

Subsequent OTTI credit losses

     72           289     
  

 

 

    

 

 

 

Balance, end of period

     $ 12,850           $ 12,653     
  

 

 

    

 

 

 

The following table presents the maturities of investment securities at June 30, 2011:

(in thousands)

 

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

AMOUNTS MATURING IN:

           

Three months or less

     $ 17,296           $ 17,379           $ 590           $ 591     

Over three months through twelve months

     287,207           294,045           85           85     

After one year through five years

     1,992,369           2,037,495           613           618     

After five years through ten years

     750,874           761,393           49           50     

After ten years

     65,368           65,118           4,216           4,389     

Other investment securities

     1,959           2,030           -                -          
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 3,115,073           $ 3,177,460           $ 5,553           $ 5,733     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2011 and 2010:

(in thousands)

 

     Three months ended June 30, 2011      Three months ended June 30, 2010  
     Gains      Losses      Gains      Losses  

Obligations of states and political subdivisions

   $       7       $ -              $ -              $ -          

Residential mortgage-backed securities and collateralized mortgage obligations

     6,475         804         -                -          
  

 

 

    

 

 

    

 

 

    

 

 

 
   $       6,482       $       804       $ -              $ -          
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended June 30, 2011      Six months ended June 30, 2010  
     Gains      Losses      Gains      Losses  

Obligations of states and political subdivisions

   $       7       $ -              $       2       $       1   

Residential mortgage-backed securities and collateralized mortgage obligations

     6,475         804         -                -          
  

 

 

    

 

 

    

 

 

    

 

 

 
   $       6,482       $       804       $       2       $       1   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents, as of June 30, 2011, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

 

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(in thousands)

 

     Amortized
Cost
     Fair
Value
 

To Federal Home Loan Bank to secure borrowings

   $ 226,584       $ 237,852   

To state and local governments to secure public deposits

     599,429         622,425   

Other securities pledged

     163,987         165,943   
  

 

 

    

 

 

 

Total pledged securities

   $ 990,000       $ 1,026,220   
  

 

 

    

 

 

 

Note 4 – Non-covered Loans and Leases

The following table presents the major types of non-covered loans recorded in the balance sheets as of June 30, 2011 and December 31, 2010:

(in thousands)

 

     June 30,
2011
    December 31,
2010
 

Commercial real estate

    

Term & multifamily

   $ 3,532,134      $ 3,483,475   

Construction & development

     184,707        247,814   

Residential development

     112,657        147,813   

Commercial

    

Term

     572,402        509,453   

LOC & other

     788,268        747,419   

Residential

    

Mortgage

     245,034        222,416   

Home equity loans & lines

     277,453        278,585   

Consumer & other

     34,584        33,043   
  

 

 

   

 

 

 

Total

     5,747,239        5,670,018   

Deferred loan fees, net

     (11,686     (11,031
  

 

 

   

 

 

 

Total

   $ 5,735,553      $ 5,658,987   
  

 

 

   

 

 

 

As of June 30, 2011, loans totaling $3.5 billion were pledged to secure borrowings and available lines of credit.

Note 5 – Allowance for Non-Covered Loan Loss and Credit Quality

Allowance for Non-Covered Loan and Lease Losses

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.

 

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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.

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 lead to an 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 Asset 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 June 30, 2011. 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 residential development, commercial real estate, commercial construction and commercial loan portfolios. 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.

 

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Table of Contents

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;

 

   

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 tables summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan portfolio segment for the three and six months ended June 30, 2011 and 2010, respectively:

 

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(in thousands)

 

     Three Months Ended June 30, 2011  
     Commercial
     Real Estate    
       Commercial          Residential        Consumer
  & Other  
       Unallocated       Total  

Balance, beginning of period

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

Charge-offs

     (12,883)         (3,179)         (2,195)         (354)         -           (18,611)   

Recoveries

     2,208          695          100          111          -           3,114    

Provision

     9,129          5,436          1,623          255          (984     15,459    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

     $ 61,982          $ 23,750          $ 5,154          $ 868          $ 6,041         $ 97,795    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Three Months Ended June 30, 2010  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Unallocated     Total  

Balance, beginning of period

     $ 70,460         $ 20,890          $ 8,235          $ 863          $ 10,336         $ 110,784    

Charge-offs

     (19,605)         (9,961)         (1,201)         (787)         -           (31,554)   

Recoveries

     4,312          370          50          185          -           4,917    

Provision

     13,048          8,548          2,689          587          4,895         29,767    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

     $ 68,215          $ 19,847          $ 9,773          $ 848          $ 15,231         $ 113,914    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended June 30, 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

     (24,314)         (11,355)         (2,929)         (888)         -           (39,486)   

Recoveries

     3,453          1,091          121          206          -           4,871    

Provision

     18,438          11,868          2,036          747          (2,600)        30,489    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

     $ 61,982          $ 23,750          $ 5,154          $ 868          $ 6,041         $ 97,795    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended June 30, 2010  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Unallocated     Total  

Balance, beginning of period

     $ 67,281          $ 24,583          $ 5,811          $ 455          $ 9,527         $ 107,657    

Charge-offs

     (35,535)         (32,865)         (1,837)         (1,076)         -           (71,313)   

Recoveries

     4,596          649          170          282          -           5,697    

Provision

     31,873          27,480          5,629          1,187          5,704         71,873    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

     $ 68,215          $ 19,847          $ 9,773          $ 848          $ 15,231         $ 113,914    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 2011 and 2010, respectively:

 

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Table of Contents

(in thousands)

 

     June 30, 2011  
     Commercial
  Real Estate  
       Commercial        Residential      Consumer
& Other
     Unallocated      Total  

Allowance for non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 59,277          $ 20,812          $ 5,136          $ 868          $ 6,041          $ 92,134    

Individually evaluated for impairment

     2,705          2,938          18          -              -              5,661    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 61,982          $ 23,750          $ 5,154          $ 868          $ 6,041          $ 97,795    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 3,663,034          $ 1,330,749          $ 522,309          $ 34,584             $ 5,550,676    

Individually evaluated for impairment

     166,464          29,921          178          -                 196,563    
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

     $ 3,829,498          $ 1,360,670          $ 522,487          $ 34,584             $ 5,747,239    
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

     June 30, 2010  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Unallocated      Total  

Allowance for non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 61,127          $ 19,836          $ 9,548          $ 848          $ 15,231          $ 106,590    

Individually evaluated for impairment

     7,088          11          225          -                 7,324    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 68,215          $ 19,847          $ 9,773          $ 848          $ 15,231          $ 113,914    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans and leases:

                 

Collectively evaluated for impairment

     $ 3,783,102          $ 1,203,558          $ 465,633          $ 34,215             $ 5,486,508    

Individually evaluated for impairment

     194,373          52,295          4,502          -                 251,170    
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

     $ 3,977,475          $ 1,255,853          $ 470,135          $ 34,215             $ 5,737,678    
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

(1) The gross non-covered loan and lease balance excludes deferred loans fees of $11.7 million at June 30, 2011 and $11.0 million at June 30, 2010.

Summary of Reserve for Unfunded Commitments Activity

The following tables present a summary of activity in the reserve for unfunded commitments (“RUC”) and unfunded commitments for the three and six months ended June 30, 2011 and 2010, respectively:

 

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Table of Contents

(in thousands)

 

     Three Months Ended June 30, 2011  
     Commercial
    Real Estate    
       Commercial          Residential        Consumer
  & Other  
     Total  

Balance, beginning of period

     $ 76          $ 621          $ 162          $ 52          $ 911    

Net change to other expense

     (15)         84                          77    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 61          $ 705          $ 169          $ 53          $ 988    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended June 30, 2010  
     Commercial
    Real Estate    
       Commercial          Residential        Consumer
  & Other  
     Total  

Balance, beginning of period

     $ 47          $ 531          $ 140          $ 47          $ 765    

Net change to other expense

     (6)         (21)         (4)         -             (31)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 41          $ 510          $ 136          $ 47          $ 734    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30, 2011  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Balance, beginning of period

     $ 33          $ 575          $ 158          $ 52          $ 818    

Net change to other expense

     28          130          11                  170    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 61          $ 705          $ 169          $ 53          $ 988    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30, 2010  
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Balance, beginning of period

     $ 57          $ 484          $ 144          $ 46          $ 731    

Net change to other expense

     (16)         26          (8)                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

     $ 41          $ 510          $ 136          $ 47          $ 734    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial
Real Estate
     Commercial      Residential      Consumer
& Other
     Total  

Unfunded commitments:

              

June 30, 2011

     $ 61,478          $ 674,210          $ 226,790          $ 45,483          $ 1,007,961    

June 30, 2010

     41,354          501,667          209,643          39,938          792,602    

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 and six months ended June 30, 2011 and 2010, respectively:

(in thousands)

 

     Three months ended June 30      Six months ended June 30  
     2011      2010      2011      2010  

Commercial real estate

           

Term & multifamily

   $ 1,385        $ 969        $ 3,884        $ 10,728    

Construction & development

     -              -              -              1,175    

Residential development

     -              1,399                  5,434    

Commercial

           

Term

     -              3,210          151          3,210    

LOC & other

     -              -              2,740          462    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,385        $ 5,578        $ 6,777        $ 21,009    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 loans are identified as 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 nor 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. 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(s) 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 ASC 450, Contingencies. 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 June 30, 2011 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 June 30, 2011 and December 31, 2010:

 

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Table of Contents

(in thousands)

 

     June 30, 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

   $ 15,154       $ 16,940       $ 555       $ 32,649       $ 53,059       $ 3,446,426       $ 3,532,134   

Construction & development

     99         -             -             99         8,093         176,515         184,707   

Residential development

     2,573         -             -             2,573         25,858         84,226         112,657   

Commercial

                    

Term

     1,548         957         750         3,255         8,070         561,077         572,402   

LOC & other

     476         495         5,713         6,684         14,809         766,775         788,268   

Residential

                    

Mortgage

     1,357         908         4,467         6,732         -             238,302         245,034   

Home equity loans & lines

     1,800         1,277         1,123         4,200         -             273,253         277,453   

Consumer & other

     207         60         529         796         -             33,788         34,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,214       $ 20,637       $ 13,137       $ 56,988       $ 109,889       $ 5,580,362       $ 5,747,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan fees, net

                       (11,686
                    

 

 

 

Total

                     $ 5,735,553   
                    

 

 

 

 

     December 31, 2010  
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than

90 Days
and Accrui