XNAS:UMPQ Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 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

 

(I.R.S. Employer Identification Number)

of Incorporation or Organization)

 

 

 

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: 111,891,811 shares outstanding as of July 31, 2012

 

 

 

 

1

 

 

 


 

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

58

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

93

 

 

 

Item 4.

Controls and Procedures

93

 

 

 

Part II.  OTHER INFORMATION 

94

 

 

 

Item 1.

Legal Proceedings

94

 

 

 

Item 1A.

Risk Factors

94

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

94

 

 

 

Item 3.

Defaults Upon Senior Securities

95

 

 

 

Item 4.

Mine Safety Disclosures

95

 

 

 

Item 5.

Other Information

95

 

 

 

Item 6.

Exhibits

95

 

 

 

SIGNATURES 

96

 

 

 

EXHIBIT INDEX 

97

 

 

 

 

 

 

                        

2

 

 

 


 

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,

 

December 31,

 

2012

 

2011

ASSETS

 

 

 

 

 

 Cash and due from banks

$

159,694 

 

$

152,265 

 Interest bearing deposits

 

503,552 

 

 

445,954 

 Temporary investments

 

530 

 

 

547 

    Total cash and cash equivalents

 

663,776 

 

 

598,766 

 Investment securities

 

 

 

 

 

   Trading, at fair value

 

3,301 

 

 

2,309 

   Available for sale, at fair value

 

2,834,076 

 

 

3,168,578 

   Held to maturity, at amortized cost

 

4,506 

 

 

4,714 

 Loans held for sale

 

209,607 

 

 

98,691 

 Non-covered loans and leases

 

6,104,432 

 

 

5,888,098 

 Allowance for non-covered loan and lease losses

 

(83,618)

 

 

(92,968)

     Net non-covered loans and leases

 

6,020,814 

 

 

5,795,130 

 Covered loans and leases, net of allowance of $12,977 and $14,320

 

553,963 

 

 

622,451 

 Restricted equity securities

 

31,712 

 

 

32,581 

 Premises and equipment, net

 

154,956 

 

 

152,366 

 Goodwill and other intangible assets, net

 

674,794 

 

 

677,224 

 Mortgage servicing rights, at fair value

 

22,513 

 

 

18,184 

 Non-covered other real estate owned

 

26,884 

 

 

34,175 

 Covered other real estate owned

 

9,191 

 

 

19,491 

 FDIC indemnification asset

 

68,805 

 

 

91,089 

 Other assets

 

242,999 

 

 

247,606 

      Total assets

$

11,521,897 

 

$

11,563,355 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 Deposits

 

 

 

 

 

   Noninterest bearing

$

2,021,303 

 

$

1,913,121 

   Interest bearing

 

7,110,878 

 

 

7,323,569 

     Total deposits

 

9,132,181 

 

 

9,236,690 

 Securities sold under agreements to repurchase

 

149,341 

 

 

124,605 

 Term debt

 

254,641 

 

 

255,676 

 Junior subordinated debentures, at fair value

 

83,993 

 

 

82,905 

 Junior subordinated debentures, at amortized cost

 

102,382 

 

 

102,544 

 Other liabilities

 

102,523 

 

 

88,522 

      Total liabilities

 

9,825,061 

 

 

9,890,942 

COMMITMENTS AND CONTINGENCIES (NOTE 9)

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,891,283 in 2012 and 112,164,891 in 2011

 

1,511,633 

 

 

1,514,913 

Retained earnings

 

154,474 

 

 

123,726 

Accumulated other comprehensive income

 

30,729 

 

 

33,774 

     Total shareholders' equity

 

1,696,836 

 

 

1,672,413 

     Total liabilities and shareholders' equity

$

11,521,897 

 

$

11,563,355 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 


 

 

 

 

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED) 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on non-covered loans

$

77,637 

 

$

79,321 

 

$

155,296 

 

$

158,054 

Interest and fees on covered loans

 

16,935 

 

 

22,226 

 

 

34,278 

 

 

43,773 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 Taxable

 

16,535 

 

 

24,348 

 

 

34,655 

 

 

46,391 

 Exempt from federal income tax

 

2,291 

 

 

2,178 

 

 

4,568 

 

 

4,343 

 Dividends

 

28 

 

 

 

 

34 

 

 

Interest on temporary investments and interest bearing deposits

 

168 

 

 

340 

 

 

405 

 

 

741 

       Total interest income

 

113,594 

 

 

128,417 

 

 

229,236 

 

 

253,309 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

8,169 

 

 

14,698 

 

 

17,014 

 

 

30,364 

Interest on securities sold under agreement

 

 

 

 

 

 

 

 

 

 

 

   to repurchase and federal funds purchased

 

79 

 

 

131 

 

 

159 

 

 

253 

Interest on term debt

 

2,305 

 

 

2,301 

 

 

4,609 

 

 

4,590 

Interest on junior subordinated debentures

 

2,029 

 

 

1,926 

 

 

4,087 

 

 

3,839 

       Total interest expense

 

12,582 

 

 

19,056 

 

 

25,869 

 

 

39,046 

       Net interest income

 

101,012 

 

 

109,361 

 

 

203,367 

 

 

214,263 

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES 

 

6,638 

 

 

15,459 

 

 

9,805 

 

 

30,489 

PROVISION FOR COVERED LOAN AND LEASE LOSSES 

 

1,406 

 

 

3,755 

 

 

1,375 

 

 

11,023 

       Net interest income after provision for loan and lease losses

 

92,968 

 

 

90,147 

 

 

192,187 

 

 

172,751 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

7,190 

 

 

8,540 

 

 

13,856 

 

 

16,361 

Brokerage commissions and fees

 

3,532 

 

 

3,276 

 

 

6,476 

 

 

6,653 

Mortgage banking revenue, net

 

15,641 

 

 

4,807 

 

 

28,723 

 

 

10,082 

Gain on investment securities, net:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of investment securities, net

 

1,030 

 

 

5,678 

 

 

1,178 

 

 

5,678 

Total other-than-temporary impairment losses

 

 -

 

 

(110)

 

 

 -

 

 

(110)

Portion of other-than-temporary impairment losses

 

 

 

 

 

 

 

 

 

 

 

   transferred from other comprehensive income

 

 -

 

 

63 

 

 

 -

 

 

38 

Total gain on investment securities, net

 

1,030 

 

 

5,631 

 

 

1,178 

 

 

5,606 

Loss on junior subordinated debentures carried at fair value

 

(547)

 

 

(547)

 

 

(1,095)

 

 

(1,089)

Change in FDIC indemnification asset

 

(4,040)

 

 

(5,551)

 

 

(5,885)

 

 

(2,646)

Other income

 

6,120 

 

 

3,471 

 

 

12,910 

 

 

6,245 

       Total non-interest income

 

28,926 

 

 

19,627 

 

 

56,163 

 

 

41,212 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

49,979 

 

 

43,808 

 

 

97,072 

 

 

88,418 

Net occupancy and equipment

 

13,580 

 

 

12,547 

 

 

27,078 

 

 

25,064 

Communications

 

2,845 

 

 

2,796 

 

 

5,787 

 

 

5,606 

Marketing

 

1,761 

 

 

1,798 

 

 

2,751 

 

 

2,649 

Services

 

6,631 

 

 

6,026 

 

 

12,793 

 

 

11,908 

Supplies

 

644 

 

 

843 

 

 

1,309 

 

 

1,624 

FDIC assessments

 

1,886 

 

 

2,821 

 

 

3,854 

 

 

6,694 

Net loss on non-covered other real estate owned

 

889 

 

 

3,844 

 

 

4,076 

 

 

6,677 

Net loss on covered other real estate owned

 

169 

 

 

73 

 

 

2,623 

 

 

1,024 

Intangible amortization

 

1,211 

 

 

1,251 

 

 

2,423 

 

 

2,502 

Merger related expenses

 

153 

 

 

71 

 

 

253 

 

 

252 

Other expenses

 

7,188 

 

 

7,329 

 

 

14,613 

 

 

14,990 

      Total non-interest expense

 

86,936 

 

 

83,207 

 

 

174,632 

 

 

167,408 

Income before provision for income taxes

 

34,958 

 

 

26,567 

 

 

73,718 

 

 

46,555 

Provision for income taxes

 

11,681 

 

 

8,782 

 

 

24,938 

 

 

15,303 

       Net income

$

23,277 

 

$

17,785 

 

$

48,780 

 

$

31,252 

4

 

 

 


 

 

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(UNAUDITED) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Net income

$

23,277 

 

$

17,785 

 

$

48,780 

 

$

31,252 

Dividends and undistributed earnings

 

 

 

 

 

 

 

 

 

 

 

    allocated to participating securities

 

162 

 

 

86 

 

 

329 

 

 

148 

       Net earnings available to common shareholders

$

23,115 

 

$

17,699 

 

$

48,451 

 

$

31,104 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.21 

 

$

0.15 

 

$

0.43 

 

$

0.27 

Diluted

$

0.21 

 

$

0.15 

 

$

0.43 

 

$

0.27 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

111,897 

 

 

114,611 

 

 

111,943 

 

 

114,593 

Diluted

 

112,078 

 

 

114,785 

 

 

112,120 

 

 

114,796 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 


 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

23,277 

 

$

17,785 

 

$

48,780 

 

$

31,252 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

(6,050)

 

 

24,835 

 

 

(4,029)

 

 

25,649 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains realized in earnings (net of tax expense $412 and $2,271 for the three months ended June 30, 2012 and 2011, respectively, and net of tax expense of $471 and $2,271 for the six months ended June 30, 2012 and 2011, respectively)

 

(618)

 

 

(3,407)

 

 

(707)

 

 

(3,407)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense) related to unrealized gains

 

2,420 

 

 

(9,934)

 

 

1,612 

 

 

(10,259)

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains

 

(4,248)

 

 

11,494 

 

 

(3,124)

 

 

11,983 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses 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)

 

 -

 

 

(53)

 

 

 -

 

 

(45)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 -

 

 

15 

 

 

 -

 

 

30 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $25 and $10 for the three months ended June 30, 2012 and 2011, respectively, and net of tax benefit of $53 and $27 for the six months ended June 30, 2012 and 2011, respectively)

 

38 

 

 

15 

 

 

79 

 

 

41 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses related to factors other than credit

 

38 

 

 

(23)

 

 

79 

 

 

26 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

(4,210)

 

 

11,471 

 

 

(3,045)

 

 

12,009 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

19,067 

 

$

29,256 

 

$

45,735 

 

$

43,261 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 


 

 

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except shares)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

Common Stock

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Retained

 

Comprehensive

 

 

 

 

Shares

 

Amount

 

Earnings

 

Income (Loss)

 

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

 

 

 

 

 

 

48,780 

 

 

 

 

 

48,780 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

(3,045)

 

 

(3,045)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

$

45,735 

Stock-based compensation

 

 

 

1,942 

 

 

 

 

 

 

 

 

1,942 

Stock repurchased and retired

(413,750)

 

 

(5,234)

 

 

 

 

 

 

 

 

(5,234)

Issuances of common stock under stock plans and

 

 

 

 

 

 

 

 

 

 

 

 

 

related net tax deficiencies

140,142 

 

 

12 

 

 

 

 

 

 

 

 

12 

Cash dividends on common stock ($0.16 per share)

 

 

 

 

 

 

(18,032)

 

 

 

 

 

(18,032)

Balance at June 30, 2012

111,891,283 

 

$

1,511,633 

 

$

154,474 

 

$

30,729 

 

$

1,696,836 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 


 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

2012

 

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 Net income

$

48,780 

 

$

31,252 

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

 

 

 

 

 

   Amortization of investment premiums, net

 

21,778 

 

 

16,367 

   Gain on sale of investment securities, net

 

(1,178)

 

 

(5,678)

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

 

 -

 

 

72 

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

 

(643)

 

 

1,160 

   Gain on sale of covered other real estate owned

 

(723)

 

 

(898)

   Valuation adjustment on non-covered other real estate owned

 

4,719 

 

 

5,518 

   Valuation adjustment on covered other real estate owned

 

3,346 

 

 

1,921 

   Provision for non-covered loan and lease losses

 

9,805 

 

 

30,489 

   Provision for covered loan and lease losses

 

1,375 

 

 

11,023 

   Change in FDIC indemnification asset

 

5,885 

 

 

2,646 

   Depreciation, amortization and accretion

 

7,949 

 

 

6,218 

   Increase in mortgage servicing rights

 

(6,281)

 

 

(2,407)

   Change in mortgage servicing rights carried at fair value

 

1,952 

 

 

511 

   Change in junior subordinated debentures carried at fair value

 

1,007 

 

 

1,078 

   Stock-based compensation

 

1,942 

 

 

1,987 

   Net (increase) decrease in trading account assets

 

(992)

 

 

502 

   Gain on sale of loans

 

(14,571)

 

 

(1,819)

   Origination of loans held for sale

 

(786,697)

 

 

(290,058)

   Proceeds from sales of loans held for sale

 

690,352 

 

 

307,087 

   Excess tax benefits from the exercise of stock options

 

(49)

 

 

(4)

   Change in other assets and liabilities:

 

 

 

 

 

      Net decrease in other assets

 

1,807 

 

 

5,954 

      Net increase in other liabilities

 

11,199 

 

 

4,759 

          Net cash provided by operating activities

 

762 

 

 

127,680 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 Purchases of investment securities available for sale

 

(419,078)

 

 

(690,720)

 Purchases of investment securities held to maturity

 

 -

 

 

(1,573)

 Proceeds from investment securities available for sale

 

727,750 

 

 

441,721 

 Proceeds from investment securities held to maturity

 

363 

 

 

757 

 Redemption of restricted equity securities

 

869 

 

 

1,636 

 Net non-covered loan and lease originations

 

(239,262)

 

 

(136,582)

 Net covered loan and lease paydowns

 

56,468 

 

 

63,417 

 Proceeds from sales of loans

 

5,964 

 

 

6,777 

 Proceeds from disposals of furniture and equipment

 

1,508 

 

 

180 

 Purchases of premises and equipment

 

(12,197)

 

 

(16,877)

 Net proceeds from FDIC indemnification asset

 

21,418 

 

 

48,850 

 Proceeds from sales of non-covered other real estate owned

 

12,208 

 

 

17,026 

 Proceeds from sales of covered other real estate owned

 

8,733 

 

 

7,355 

          Net cash provided (used) by investing activities

 

164,744 

 

 

(258,033)

 

 

8

 

 

 


 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Six months ended

 

June 30,

 

2012

 

2011

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 Net decrease in deposit liabilities

 

(104,348)

 

 

(286,867)

 Net increase in securities sold under agreements to repurchase

 

24,736 

 

 

47,130 

 Repayment of term debt

 

 -

 

 

(5,000)

 Dividends paid on common stock

 

(15,777)

 

 

(11,506)

 Excess tax benefits from stock based compensation

 

49 

 

 

 Proceeds from stock options exercised

 

78 

 

 

309 

 Retirement of common stock

 

(5,234)

 

 

(1,960)

          Net cash used by financing activities

 

(100,496)

 

 

(257,890)

Net increase (decrease) in cash and cash equivalents

 

65,010 

 

 

(388,243)

Cash and cash equivalents, beginning of period

 

598,766 

 

 

1,004,125 

Cash and cash equivalents, end of period

$

663,776 

 

$

615,882 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 Cash paid during the period for:

 

 

 

 

 

   Interest

$

27,573 

 

$

41,302 

   Income taxes

$

13,800 

 

$

6,850 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

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

$

(3,124)

 

$

11,983 

 Change in unrealized losses on investment securities held to maturity

 

 

 

 

 

    related to factors other than credit, net of taxes

$

79 

 

$

26 

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

$

10,139 

 

$

5,754 

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

$

8,993 

 

$

25,322 

 Transfer of covered loans to covered other real estate owned

$

1,346 

 

$

8,668 

 Transfer of covered loans to non-covered loans

$

9,299 

 

$

4,114 

 Transfer from FDIC indemnification asset to due from FDIC and other

$

16,399 

 

$

26,839 

 Receivable from sales of covered other real estate owned

$

290 

 

$

 -

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 

  

 

 

9

 

 

 


 

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 June 30, 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 June 30, 2012 and December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 U.S. Treasury and agencies

$

45,533 

 

$

586 

 

$

(1)

 

$

46,118 

 Obligations of states and political subdivisions

 

247,272 

 

 

17,476 

 

 

(239)

 

 

264,509 

 Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

    collateralized mortgage obligations

 

2,487,588 

 

 

38,671 

 

 

(5,048)

 

 

2,521,211 

 Other debt securities

 

149 

 

 

 -

 

 

(5)

 

 

144 

 Investments in mutual funds and

 

 

 

 

 

 

 

 

 

 

 

    other equity securities

 

1,959 

 

 

135 

 

 

 -

 

 

2,094 

 

$

2,782,501 

 

$

56,868 

 

$

(5,293)

 

$

2,834,076 

 

 

 

 

 

 

 

 

 

 

 

 

HELD TO MATURITY:

 

 

 

 

 

 

 

 

 

 

 

 Obligations of states and political subdivisions

$

1,280 

 

$

 

$

 -

 

$

1,283 

 Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

    collateralized mortgage obligations

 

3,226 

 

 

 

 

(68)

 

 

3,163 

 

$

4,506 

 

$

 

$

(68)

 

$

4,446 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

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 

 

$

 

$

 -

 

$

1,337 

 Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

    collateralized mortgage obligations

 

3,379 

 

 

120 

 

 

(77)

 

 

3,422 

 

$

4,714 

 

$

122 

 

$

(77)

 

$

4,759 

10

 

 

 


 

 

Investment securities that were in an unrealized loss position as of June 30, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S. Treasury and agencies

$

 -

 

$

 -

 

$

72 

 

$

 

$

72 

 

$

 Obligations of states and political subdivisions

 

13,225 

 

 

239 

 

 

 -

 

 

 -

 

 

13,225 

 

 

239 

 Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    collateralized mortgage obligations

 

650,817 

 

 

4,364 

 

 

46,670 

 

 

684 

 

 

697,487 

 

 

5,048 

 Other debt securities

 

 -

 

 

 -

 

 

144 

 

 

 

 

144 

 

 

  Total temporarily impaired securities

$

664,042 

 

$

4,603 

 

$

46,886 

 

$

690 

 

$

710,928 

 

$

5,293 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELD TO MATURITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    collateralized mortgage obligations

$

 -

 

$

 -

 

$

1,531 

 

$

68 

 

$

1,531 

 

$

68 

  Total temporarily impaired securities

$

 -

 

$

 -

 

$

1,531 

 

$

68 

 

$

1,531 

 

$

68 

 

Unrealized losses on the impaired held to maturity collateralized mortgage obligations include the unrealized losses related to factors other than credit that are included in other comprehensive income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S. Treasury and agencies

$

 -

 

$

 -

 

$

85 

 

$

 

$

85 

 

$

 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 

 

11

 

 

 


 

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 June 30, 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 June 30, 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.

 

The following table presents the maturities of investment securities at June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

Held To Maturity

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Cost

 

Value

 

Cost

 

Value

AMOUNTS MATURING IN:

 

 

 

 

 

 

 

 

 

 

 

 Three months or less

$

41,701 

 

$

42,031 

 

$

 -

 

$

 -

 Over three months through twelve months

 

363,905 

 

 

367,679 

 

 

595 

 

 

597 

 After one year through five years

 

1,749,176 

 

 

1,784,023 

 

 

880 

 

 

854 

 After five years through ten years

 

565,350 

 

 

575,258 

 

 

807 

 

 

771 

 After ten years

 

60,410 

 

 

62,992 

 

 

2,224 

 

 

2,224 

 Other investment securities

 

1,959 

 

 

2,093 

 

 

 -

 

 

 -

 

$

2,782,501 

 

$

2,834,076 

 

$

4,506 

 

$

4,446 

 

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.

12

 

 

 


 

 

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, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

June 30, 2012

 

June 30, 2011

 

Gains

 

Losses

 

Gains

 

Losses

U.S. Treasury and agencies

$

 -

 

$

 -

 

$

 -

 

$

 -

Obligations of states and political subdivisions

 

 -

 

 

 -

 

 

 

 

 -

Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

  collateralized mortgage obligations

 

1,484 

 

 

454 

 

 

6,475 

 

 

804 

Other debt securities

 

 -

 

 

 -

 

 

 -

 

 

 -

 

$

1,484 

 

$

454 

 

$

6,482 

 

$

804 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Six months ended

 

June 30, 2012

 

June 30, 2011

 

Gains

 

Losses

 

Gains

 

Losses

U.S. Treasury and agencies

$

371 

 

$

 -

 

$

 -

 

$

 -

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 -

Residential mortgage-backed securities and

 

 

 

 

 

 

 

 

 

 

 

  collateralized mortgage obligations

 

1,484 

 

 

683 

 

 

6,475 

 

 

804 

Other debt securities

 

 

 

 -

 

 

 -

 

 

 -

 

$

1,862 

 

$

684 

 

$

6,482 

 

$

804 

 

The following table presents, as of June 30, 2012, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Amortized

 

Fair

 

Cost

 

Value

To Federal Home Loan Bank to secure borrowings

$

109,220 

 

$

112,430 

To state and local governments to secure public deposits

 

853,106 

 

 

873,849 

Other securities pledged principally to secure repurchase agreements

 

203,460 

 

 

205,253 

Total pledged securities

$

1,165,786 

 

$

1,191,532 

 

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 June 30, 2012 and December 31, 2011:

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

June 30,

 

December 31,

 

2012

 

2011

Commercial real estate

 

 

 

 

 

Term & multifamily

$

3,660,071 

 

$

3,558,295 

Construction & development

 

171,982 

 

 

165,066 

Residential development

 

70,066 

 

 

90,073 

Commercial

 

 

 

 

 

Term

 

707,784 

 

 

625,766 

LOC & other

 

835,148 

 

 

832,999 

Residential

 

 

 

 

 

Mortgage

 

375,302 

 

 

315,927 

Home equity loans & lines

 

263,941 

 

 

272,192 

Consumer & other

 

32,436 

 

 

38,860 

Total

 

6,116,730 

 

 

5,899,178 

Deferred loan fees, net

 

(12,298)

 

 

(11,080)

Total

$

6,104,432 

 

$

5,888,098 

13

 

 

 


 

 

As of June 30, 2012, loans totaling $5.3 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.

 

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.

 

14

 

 

 


 

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 June 30, 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 79% 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;

 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 and six months ended June 30, 2012 and 2011, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012

 

Commercial

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

Real Estate

 

Commercial

 

Residential

 

& Other

 

Unallocated

 

Total

Balance, beginning of period

$

58,026 

 

$

17,886 

 

$

6,106 

 

$

862 

 

$

3,790 

 

$

86,670 

Charge-offs

 

(7,342)

 

 

(3,115)

 

 

(925)

 

 

(220)

 

 

 -

 

 

(11,602)

Recoveries

 

352 

 

 

1,388 

 

 

72