UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2013
or
¨ | 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: 001-32550
WESTERN ALLIANCE BANCORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 88-0365922 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer I.D. No.) | |
One E. Washington Street, Phoenix, AZ | 85004 | |
(Address of principal executive offices) | (Zip Code) | |
(602) 389-3500 | ||
(Registrants 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. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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 ¨ No x
Common stock issued and outstanding: 87,082,783 shares as of July 31, 2013.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(unaudited) | ||||||||
(in thousands, except share amounts) | ||||||||
Assets: |
||||||||
Cash and due from banks |
$ | 126,932 | $ | 141,789 | ||||
Securities purchased under agreement to resell |
134,046 | | ||||||
Interest-bearing deposits in other financial institutions |
116,430 | 62,836 | ||||||
Federal funds sold |
5,545 | | ||||||
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Cash and cash equivalents |
382,953 | 204,625 | ||||||
Money market investments |
2,301 | 664 | ||||||
Investment securitiesmeasured at fair value |
3,987 | 5,061 | ||||||
Investment securitiesavailable-for-sale, at fair value; amortized cost of $1,001,926 at June 30, 2013 and $926,050 at December 31, 2012 |
985,837 | 939,590 | ||||||
Investment securitiesheld-to-maturity, at amortized cost; fair value of $284,370 at June 30, 2013 and $292,819 at December 31, 2012 |
289,850 | 291,333 | ||||||
Investments in restricted stock, at cost |
31,164 | 30,936 | ||||||
Loans: |
||||||||
Held for sale |
27,645 | 31,124 | ||||||
Held for investment, net of deferred fees |
6,383,874 | 5,678,194 | ||||||
Less: allowance for credit losses |
96,323 | 95,427 | ||||||
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Total loans |
6,287,551 | 5,582,767 | ||||||
Premises and equipment, net |
106,097 | 107,910 | ||||||
Other assets acquired through foreclosure, net |
76,499 | 77,247 | ||||||
Bank owned life insurance |
140,408 | 138,336 | ||||||
Goodwill |
23,224 | 23,224 | ||||||
Other intangible assets, net |
5,344 | 6,539 | ||||||
Deferred tax assets, net |
82,627 | 51,757 | ||||||
Prepaid expenses |
3,451 | 12,029 | ||||||
Other assets |
144,746 | 119,495 | ||||||
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Total assets |
$ | 8,593,684 | $ | 7,622,637 | ||||
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Liabilities: |
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Deposits: |
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Non-interest-bearing demand |
$ | 1,919,566 | $ | 1,933,169 | ||||
Interest-bearing |
5,081,720 | 4,522,008 | ||||||
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Total deposits |
7,001,286 | 6,455,177 | ||||||
Customer repurchase agreements |
51,866 | 79,034 | ||||||
Securities sold short |
129,499 | | ||||||
Other borrowings |
418,607 | 193,717 | ||||||
Junior subordinated debt, at fair value |
39,925 | 36,218 | ||||||
Other liabilities |
152,976 | 98,875 | ||||||
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Total liabilities |
7,794,159 | 6,863,021 | ||||||
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Commitments and contingencies (Note 7) |
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Stockholders equity: |
||||||||
Preferred stockpar value $0.0001 and liquidation value per share of $1,000; 20,000,000 authorized; 141,000 issued and outstanding at June 30, 2013 and December 31, 2012 |
141,000 | 141,000 | ||||||
Common stockpar value $0.0001; 200,000,000 authorized; 86,997,311 shares issued and outstanding at June 30, 2013 and 86,465,050 at December 31, 2012 |
9 | 9 | ||||||
Additional paid in capital |
789,462 | 784,852 | ||||||
Accumulated deficit |
(120,196 | ) | (174,471 | ) | ||||
Accumulated other comprehensive (loss) income |
(10,750 | ) | 8,226 | |||||
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|
|
|||||
Total stockholders equity |
799,525 | 759,616 | ||||||
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Total liabilities and stockholders equity |
$ | 8,593,684 | $ | 7,622,637 | ||||
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|
See accompanying Notes to the unaudited Consolidated Financial Statements.
3
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Interest income: |
||||||||||||||||
Loans, including fees |
$ | 81,093 | $ | 68,342 | $ | 155,818 | $ | 136,102 | ||||||||
Investment securitiestaxable |
3,616 | 5,815 | 7,448 | 12,227 | ||||||||||||
Investment securitiesnon-taxable |
3,227 | 2,528 | 6,356 | 4,768 | ||||||||||||
Dividendstaxable |
294 | 314 | 653 | 594 | ||||||||||||
Dividendsnon-taxable |
685 | 732 | 1,523 | 1,385 | ||||||||||||
Other |
370 | 115 | 595 | 207 | ||||||||||||
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|
|||||||||
Total interest income |
89,285 | 77,846 | 172,393 | 155,283 | ||||||||||||
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|
|||||||||
Interest expense: |
||||||||||||||||
Deposits |
3,929 | 4,168 | 7,661 | 8,930 | ||||||||||||
Customer repurchase agreements |
22 | 58 | 57 | 122 | ||||||||||||
Other borrowings |
2,727 | 2,328 | 5,399 | 4,398 | ||||||||||||
Junior subordinated debt |
455 | 487 | 921 | 971 | ||||||||||||
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|
|||||||||
Total interest expense |
7,133 | 7,041 | 14,038 | 14,421 | ||||||||||||
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Net interest income |
82,152 | 70,805 | 158,355 | 140,862 | ||||||||||||
Provision for credit losses |
3,481 | 13,330 | 8,920 | 26,411 | ||||||||||||
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Net interest income after provision for credit losses |
78,671 | 57,475 | 149,435 | 114,451 | ||||||||||||
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Non-interest income: |
||||||||||||||||
Service charges and fees |
2,449 | 2,317 | 4,983 | 4,602 | ||||||||||||
Income from bank owned life insurance |
1,036 | 1,120 | 2,072 | 2,243 | ||||||||||||
Amortization of affordable housing investments |
(900 | ) | (59 | ) | (1,800 | ) | (59 | ) | ||||||||
(Loss) Gain on sales of securities, net |
(5 | ) | 1,110 | 143 | 1,471 | |||||||||||
Mark to market (losses) gains, net |
(3,290 | ) | 564 | (3,761 | ) | 232 | ||||||||||
Other fee revenue |
| 870 | | 1,870 | ||||||||||||
Bargain purchase gain from acquisition |
10,044 | | 10,044 | | ||||||||||||
Other |
1,528 | 1,475 | 3,080 | 2,922 | ||||||||||||
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Total non-interest income |
10,862 | 7,397 | 14,761 | 13,281 | ||||||||||||
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Non-interest expense: |
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Salaries and employee benefits |
28,100 | 25,995 | 54,675 | 52,659 | ||||||||||||
Occupancy expense, net |
4,753 | 4,669 | 9,599 | 9,391 | ||||||||||||
Legal, professional and directors fees |
2,228 | 2,517 | 5,012 | 4,089 | ||||||||||||
Data processing |
2,175 | 1,293 | 4,040 | 2,288 | ||||||||||||
Insurance |
2,096 | 2,152 | 4,466 | 4,202 | ||||||||||||
Marketing |
1,607 | 1,459 | 3,372 | 2,830 | ||||||||||||
Loan and repossessed asset expenses |
721 | 1,653 | 2,317 | 3,337 | ||||||||||||
Customer service |
717 | 682 | 1,360 | 1,274 | ||||||||||||
Net (gain) loss on sales / valuations of repossessed assets and bank premises, net |
(1,124 | ) | 901 | (605 | ) | 3,552 | ||||||||||
Intangible amortization |
597 | 890 | 1,194 | 1,779 | ||||||||||||
Merger / restructure expenses |
2,620 | | 2,815 | | ||||||||||||
Other |
4,041 | 3,220 | 7,215 | 6,927 | ||||||||||||
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Total non-interest expense |
48,531 | 45,431 | 95,460 | 92,328 | ||||||||||||
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Income from continuing operations before provision for income taxes |
41,002 | 19,441 | 68,736 | 35,404 | ||||||||||||
Income tax expense |
6,817 | 5,259 | 13,625 | 9,700 | ||||||||||||
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Income from continuing operations |
34,185 | 14,182 | 55,111 | 25,704 | ||||||||||||
Loss from discontinued operations, net of tax benefit |
(169 | ) | (221 | ) | (131 | ) | (443 | ) | ||||||||
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Net income |
34,016 | 13,961 | 54,980 | 25,261 | ||||||||||||
Dividends on preferred stock |
353 | 1,325 | 705 | 3,088 | ||||||||||||
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Net income available to common shareholders |
$ | 33,663 | $ | 12,636 | $ | 54,275 | $ | 22,173 | ||||||||
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4
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (unaudited)
(continued)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Earnings per share from continuing operations: |
||||||||||||||||
Basic |
$ | 0.39 | $ | 0.16 | $ | 0.64 | $ | 0.28 | ||||||||
Diluted |
$ | 0.39 | $ | 0.16 | $ | 0.63 | $ | 0.28 | ||||||||
Loss per share from discontinued operations: |
||||||||||||||||
Basic |
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | ||||
Diluted |
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | ||||
Earnings per share applicable to common shareholders: |
||||||||||||||||
Basic |
$ | 0.39 | $ | 0.15 | $ | 0.63 | $ | 0.27 | ||||||||
Diluted |
$ | 0.39 | $ | 0.15 | $ | 0.63 | $ | 0.27 | ||||||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
85,659 | 81,590 | 85,493 | 81,475 | ||||||||||||
Diluted |
86,524 | 81,955 | 86,254 | 82,091 | ||||||||||||
Dividends declared per common share |
$ | | $ | | $ | | $ | |
See accompanying Notes to the unaudited Consolidated Financial Statements.
5
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income |
$ | 34,016 | $ | 13,961 | $ | 54,980 | $ | 25,261 | ||||||||
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Other comprehensive (loss) income, net: |
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Unrealized (loss) gain on securities available-for-sale (AFS), net (tax effect of $10,898, $(2,493), $11,439, $(6,249) for each respective period presented) |
(18,005 | ) | 4,119 | (18,900 | ) | 10,325 | ||||||||||
Unrealized gain on cash flow hedge, net (tax effect of $(28), $(4), $(8), $(4) for each respective period presented) |
47 | 8 | 13 | 8 | ||||||||||||
Realized gain on cash flow hedge, net (tax effect of $314 for the respective period presented) |
| | | (519 | ) | |||||||||||
Realized loss (gain) on sale of securities AFS included in income, net (tax effect of $(2), $405, $54, $541 for each respective period presented) |
3 | (705 | ) | (89 | ) | (930 | ) | |||||||||
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Net other comprehensive (loss) income |
(17,955 | ) | 3,422 | (18,976 | ) | 8,884 | ||||||||||
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Comprehensive income |
$ | 16,061 | $ | 17,383 | $ | 36,004 | $ | 34,145 | ||||||||
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See accompanying Notes to the unaudited Consolidated Financial Statements.
6
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (unaudited)
Preferred Stock | Common Stock | Additional Paid In |
Accumulated Other Comprehensive |
Accumulated | Total Stockholders |
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Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Equity | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2012: |
141 | $ | 141,000 | 86,465 | $ | 9 | $ | 784,852 | $ | 8,226 | $ | (174,471 | ) | $ | 759,616 | |||||||||||||||||
Net income |
| | | | | | 54,980 | 54,980 | ||||||||||||||||||||||||
Exercise of stock options |
| | 231 | | 1,819 | | | 1,819 | ||||||||||||||||||||||||
Stock-based compensation |
| | 93 | | 1,289 | | | 1,289 | ||||||||||||||||||||||||
Restricted stock grants, net |
| | 208 | | 1,502 | | | 1,502 | ||||||||||||||||||||||||
Dividends on preferred stock |
| | | | | | (705 | ) | (705 | ) | ||||||||||||||||||||||
Other comprehensive loss, net |
| | | | | (18,976 | ) | | (18,976 | ) | ||||||||||||||||||||||
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Balance, June 30, 2013 |
141 | $ | 141,000 | 86,997 | $ | 9 | $ | 789,462 | $ | (10,750 | ) | $ | (120,196 | ) | $ | 799,525 | ||||||||||||||||
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See accompanying Notes to the unaudited Consolidated Financial Statements.
7
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
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Net income |
$ | 54,980 | $ | 25,261 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Provision for credit losses |
8,920 | 26,411 | ||||||
Depreciation and amortization |
4,429 | 4,936 | ||||||
Stock-based compensation |
2,791 | 3,827 | ||||||
Deferred income taxes and income taxes receivable |
(20,690 | ) | 8,781 | |||||
Net amortization of discounts and premiums for investment securities |
5,174 | 5,371 | ||||||
Accretion and amortization of fair market value adjustments due to acquisitions |
(6,818 | ) | | |||||
(Gains) / Losses on: |
||||||||
Sales of securities, AFS |
(143 | ) | (1,471 | ) | ||||
Acquisition of Centennial Bank |
(10,044 | ) | | |||||
Derivatives |
(9 | ) | 99 | |||||
Other assets acquired through foreclosure, net |
(2,096 | ) | 294 | |||||
Valuation adjustments of other repossessed assets, net |
1,582 | 3,279 | ||||||
Sale of premises and equipment, net |
(91 | ) | (21 | ) | ||||
Changes in, net of acquisitions: |
||||||||
Other assets |
21,853 | 8,097 | ||||||
Other liabilities |
22,918 | (898 | ) | |||||
Fair value of assets and liabilities measured at fair value |
3,761 | (232 | ) | |||||
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Net cash provided by operating activities |
86,517 | 83,734 | ||||||
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Cash flows from investing activities: |
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Securities measured at fair value |
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Principal pay downs and maturities |
1,006 | 557 | ||||||
Securities available-for-sale |
||||||||
Proceeds from sales |
14,054 | 120,922 | ||||||
Principal pay downs and maturities |
113,056 | 225,833 | ||||||
Purchases |
(180,292 | ) | (251,072 | ) | ||||
Securities held-to-maturity |
||||||||
Proceeds from maturities of securities |
| 3 | ||||||
Purchases of securities |
| (3 | ) | |||||
Purchase of investment tax credits |
(11,742 | ) | (3,883 | ) | ||||
Investment in money market |
(1,637 | ) | 3,713 | |||||
Liquidation of restricted stock |
(228 | ) | (705 | ) | ||||
Loan fundings and principal collections, net |
(336,717 | ) | (425,024 | ) | ||||
Proceeds from loan sales |
| 3,445 | ||||||
Sale and purchase of premises and equipment, net |
(1,128 | ) | (4,485 | ) | ||||
Proceeds from sale of other real estate owned and repossessed assets, net |
18,156 | 17,253 | ||||||
Cash and cash equivalents acquired in acquisition, net |
21,204 | | ||||||
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Net cash used in investing activities |
(364,268 | ) | (313,446 | ) | ||||
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8
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(continued)
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
207,632 | 342,936 | ||||||
Net decrease in customer repurchases |
(27,168 | ) | | |||||
Proceeds from repurchase securities |
129,499 | | ||||||
Net increase / (decrease) in borrowings |
145,000 | (86,762 | ) | |||||
Proceeds from exercise of common stock options |
1,819 | 552 | ||||||
Cash dividends paid on preferred stock |
(705 | ) | (3,088 | ) | ||||
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Net cash provided by financing activities |
456,077 | 253,638 | ||||||
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Net increase in cash and cash equivalents |
178,326 | 23,926 | ||||||
Cash and cash equivalents at beginning of year |
204,625 | 154,995 | ||||||
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Cash and cash equivalents at end of period |
$ | 382,951 | $ | 178,921 | ||||
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Supplemental disclosure: |
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Cash paid during the period for: |
||||||||
Interest |
$ | 9,497 | $ | 14,801 | ||||
Income taxes |
11,575 | 1,290 | ||||||
Non-cash investing and financing activity: |
||||||||
Transfers to other assets acquired through foreclosure, net |
11,273 | 8,715 | ||||||
Unfunded commitments to purchase investment tax credits |
12,448 | 28,617 | ||||||
Non-cash assets acquired in Centennial merger transaction |
410,827 | | ||||||
Liabilities assumed in Centennial merger transaction |
421,987 | | ||||||
Change in unrealized holding (loss) / gain on AFS securities, net of tax |
(18,990 | ) | 9,395 | |||||
Change in unrealized holding gain on cash flow hedge, net of tax |
13 | (511 | ) |
See accompanying Notes to the unaudited Consolidated Financial Statements.
9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Western Alliance Bancorporation (WAL or the Company), incorporated under the laws of the state of Nevada, is a bank holding company providing full service banking and related services to locally owned businesses, professional firms, real estate developers and investors, local non-profit organizations, high net worth individuals and other consumers through its three wholly owned subsidiary banks: Bank of Nevada (BON), operating in Southern Nevada; Western Alliance Bank (WAB), operating in Arizona and Northern Nevada; and Torrey Pines Bank (TPB), operating in California. In addition, there are two non-bank subsidiaries, Western Alliance Equipment Finance (WAEF), which offers equipment finance services nationwide, and Las Vegas Sunset Properties (LVSP), which holds certain non-performing assets. These entities are collectively referred to herein as the Company.
Basis of presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (GAAP) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses; fair value determinations related to acquisitions, including loans acquired with deteriorated credit quality; fair value of other real estate owned; determination of the valuation allowance related to deferred tax assets; impairment of goodwill and other intangible assets and other than temporary impairment on securities. Although the Companys management (Management) believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the Consolidated Financial Statements.
Principles of consolidation
WAL has eleven wholly owned subsidiaries: BON, WAB, TPB, which are all banking subsidiaries; WAEF, which provides equipment finance services; LVSP, which holds certain non-performing assets; and six unconsolidated subsidiaries used as business trusts in connection with the issuance of trust-preferred securities. In addition, until October 31, 2012, WAL maintained an 80% interest in Shine Investment Advisory Services Inc. (Shine), a registered investment advisor. WAL divested its formerly owned 80% interest in Shine as of October 31, 2012. On April 30, 2013, the Company completed its acquisition of Centennial Bank (Centennial) and merged Centennial into WAB effective as of the acquisition date. The assets and liabilities of Centennial are included in the Companys financials as of April 30, 2013. See Note 2, Acquisitions and Dispositions for further discussion.
BON has three wholly owned subsidiaries: BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of BONs real estate loans and related securities; BON Investments, Inc., which holds certain investment securities, municipal loans and commercial leases; and BW Nevada Holdings, LLC, which owns the Companys 2700 West Sahara Avenue, Las Vegas, Nevada location.
WAB has one wholly owned subsidiary, WAB Investments, Inc., which holds certain investment securities, municipal loans and commercial leases, and TPB has one wholly owned subsidiary, TPB Investments, Inc., which holds certain investment securities and commercial leases.
The Company does not have any other significant entities that should be considered for consolidation. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the Consolidated Financial Statements as of December 31, 2012 and for the three and six months ended June 30, 2013 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders equity as previously reported.
10
Interim financial information
The accompanying unaudited Consolidated Financial Statements as of June 30, 2013 and 2012 have been prepared in condensed format and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to the Companys Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of Management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Companys audited Consolidated Financial Statements.
Business Combinations
Acquisitions are accounted for in accordance with FASB ASC 805, Business Combinations (ASC 805), which requires that all identified assets acquired and liabilities assumed are recorded at their estimated fair value as of the acquisition date. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.
Fair values are determined in accordance with FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820). In many cases, the determination of these fair values required Management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Determining the fair value of the assets and liabilities, especially the loan portfolio and other real estate owned (OREO), is a complex process involving significant judgment regarding the methods and assumptions used to calculate estimated fair values. The fair value of loans acquired is estimated based on discounted cash flows, which take into consideration current portfolio interest rates and repricing characteristics as well as assumptions related to prepayment speeds. Loans acquired with credit deterioration are considered to be impaired and are accounted for in accordance with GAAP (see the policy note, Loans Acquired with Deteriorated Credit Quality, on page 12 for further discussion).
Investment securities
Investment securities may be classified as held-to-maturity (HTM), available-for-sale (AFS) or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as HTM are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (OCI), except for impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are both equity and debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Companys assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.
In estimating whether there are any other than temporary impairment (OTTI) losses, Management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates, and (4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.
Declines in the fair value of individual debt securities classified as AFS that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to (1) credit loss is recognized in earnings, and (2) market or other factors is recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost.
For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
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Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers. Like other financial institutions, the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when Management believes that the contractual principal or interest will not be collected. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to absorb probable losses on existing loans that may become uncollectable, based on evaluation of the collectability of loans and prior credit loss experience, together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
The Companys allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include the Companys historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of the Companys operating markets and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of the Companys loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in Nevada, Arizona and California, which have declined substantially from their peak. While Management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the Federal Deposit Insurance Corporation (FDIC) and state bank regulatory agencies, as an integral part of their examination processes, periodically review the Companys subsidiary banks allowances for credit losses, and may require us to make additions to the allowance based on their judgment about information available to them at the time of their examinations. Management regularly reviews the assumptions and formulas used in determining the allowance and makes adjustments if required to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components. The specific allowance relates to impaired loans. In general, impaired loans include those where interest recognition has been suspended, loans that are more than 90 days delinquent but because of adequate collateral coverage, income continues to be recognized, and other criticized and classified loans not paying substantially according to the original contract terms. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310, Receivables (ASC 310). Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate. The amount to which the present value falls short of the current loan obligation will be set up as a reserve for that account or charged-off.
The Company uses an appraised value method to determine the need for a reserve on impaired, collateral dependent loans and further discounts the appraisal for disposition costs. Generally, the Company obtains independent collateral valuation analysis for each loan every six to twelve months.
The general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative and quantitative factors listed above. The change in the allowance from one reporting period to the next may not directly correlate to the rate of change of the nonperforming loans for the following reasons:
1. A loan moving from impaired performing to impaired nonperforming does not mandate an increased reserve. The individual account is evaluated for a specific reserve requirement when the loan moves to impaired status, not when it moves to nonperforming status, and is reevaluated at each subsequent reporting period. Because the Companys nonperforming loans are predominately collateral dependent, reserves are primarily based on collateral value, which is not affected by borrower performance, but rather by market conditions.
2. Not all impaired accounts require a specific reserve. The payment performance of the borrower may require an impaired classification, but the collateral evaluation may support adequate collateral coverage. For a number of impaired accounts in which borrower performance has ceased, the collateral coverage is now sufficient because a partial charge off of the account has been taken. However, in those instances, although the specific reserve calculation results in no allowance, the Company may record a reserve due to qualitative considerations.
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Loans Acquired with Deteriorated Credit Quality
FASB ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (ASC 310-30), applies to a loan with evidence of deterioration of credit quality since its origination, and for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. For these loans, accounted for under ASC 310-30, Management determines the value of the loan portfolio based, in part, on work provided by an appraiser. Factors considered in the valuation are projected cash flows for the loans, type of loan and related collateral, classification status and current discount rates. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. Loans are first evaluated individually to determine if there has been credit deterioration since origination. Once acquired loans are determined to have deteriorated credit quality, the Company evaluates such loans for common risk characteristics and aggregation into one or more pools. Common risk characteristics for pooling acquired loans include similar credit risk or risk ratings; similar risk characteristics, including collateral, loan purpose or type of borrower; and similar anticipated risk of default and loss given default. Management also estimates the amount of credit losses that are expected to be realized for the loan portfolio by estimating the probability of default and the loss given default, which is based on the liquidation value of collateral securing loans. These estimates are highly subjective. The accretion of the fair value adjustments attributable to interest rates on loans acquired with deteriorated credit quality is recorded in interest income in the Consolidated Income Statements. The fair value adjustment attributable to credit losses on these loans is non-accretable. When a loan is sold, paid off or transferred to OREO and liquidated, any remaining non-accretable yield is recorded in interest income.
Adjustments to these loan values in future periods may occur based on Managements expectation of future cash flows to be collected over the lives of the loans. Estimating cash flows is performed at a pool level and incorporates analysis of historical cash flows, delinquencies, and charge-offs as well as assumptions about future cash flows. Performance can vary from period to period, causing changes in estimates of the expected cash flows. If based on the review of a pool of loans, it is probable that a significant increase or improvement in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, any valuation allowance established for the pool of loans is first reduced for the increase in the present value of cash flows expected to be collected and any remaining increase in estimated cash flows increases the accretable yield and is recognized over the remaining estimated life of the loan pool. If based on the review of a pool of loans, it is probable that a decrease or impairment in cash flows previously expected to be collected or if actual cash flows are less than cash flows previously expected, the allowance for credit losses is increased for the decrease in the present value of the cash flows expected to be collected.
Other assets acquired through foreclosure
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly leased) are classified as other real estate owned and other repossessed property and are initially reported at fair value of the asset less estimated selling costs. Subsequent adjustments are based on the lower of carrying value or fair value, less estimated costs to sell the property. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to non-interest expense. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances.
Derivative financial instruments
Derivatives are recognized on the balance sheet at their fair value, with changes in fair value reported in current-period earnings. These instruments consist primarily of interest rate swaps.
Certain derivative transactions that meet specified criteria qualify for hedge accounting. The Company occasionally purchases a financial instrument or originates a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current earnings, or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at fair value and is not designated as a hedging instrument.
Commitments and Letters of Credit
In the ordinary course of business, the Company enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the Consolidated Financial Statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses.
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Income taxes
The Company and its subsidiaries, other than BW Real Estate, Inc., file a consolidated federal tax return. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent temporary differences. Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of Management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market. |
| Level 3 Valuation is generated from model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Companys own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models and similar techniques. |
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
FASB ASC 825, Financial Instruments (ASC 825) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Companys financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2013 or December 31, 2012. The estimated fair value amounts for June 30, 2013 and December 31, 2012 have been measured as of period-end, and have not been reevaluated or updated for purposes of these Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.
The information beginning on page 37 in Note 11, Fair Value Accounting, should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Companys assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Companys disclosures and those of other companies or banks may not be meaningful.
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The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks approximate their fair value.
Money market and certificates of deposit investments
The carrying amounts reported in the Consolidated Balance Sheets for money market investments approximate their fair value.
Investment securities
The fair values of U.S. Treasuries, corporate bonds, mutual funds, and exchange-listed preferred stock are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.
The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.
The Company owns certain collateralized debt obligations (CDOs) for which quoted prices are not available. Quoted prices for similar assets are also not available for these investment securities. In order to determine the fair value of these securities, the Company has estimated the future cash flows and discount rate using observable market inputs adjusted based on assumptions regarding the adjustments a market participant would assume necessary for each specific security. As a result, the resulting fair values have been categorized as Level 3 in the fair value hierarchy.
Restricted stock
The Companys subsidiary banks are members of the Federal Home Loan Bank (FHLB) system and maintain an investment in capital stock of the FHLB. The Companys subsidiary banks also maintain an investment in their primary correspondent bank. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.
Loans
Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation. As a result, the fair value for loans disclosed in Note 11, Fair Value Accounting, is categorized as Level 2 in the fair value hierarchy.
Accrued interest receivable and payable
The carrying amounts reported in the Consolidated Balance Sheets for accrued interest receivable and payable approximate their fair value. Accrued interest receivable and payable fair value measurements are classified as Level 3 in the fair value hierarchy.
Derivative financial instruments
All derivatives are recognized in the Consolidated Balance Sheet at their fair value. The fair value for derivatives is determined based on market prices, broker-dealer quotations on similar products or other related input parameters. As a result, the fair values have been categorized as Level 2 in the fair value hierarchy.
Deposit liabilities
The fair value disclosed for demand and savings deposits is by definition equal to the amount payable on demand at their reporting date (that is, their carrying amount), which the Company believes a market participant would consider in determining fair value. The carrying amount for variable-rate deposit accounts approximates their fair value. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on these deposits. The fair value measurement of the deposit liabilities disclosed in Note 11, Fair Value Accounting, is categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank advances and other borrowings
The fair values of the Companys borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The other borrowings have been categorized as Level 3 in the fair value hierarchy. The FHLB advances have been categorized as Level 2 in the fair value hierarchy due to their short durations.
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Junior subordinated debt
Junior subordinated debt and subordinated debt are valued by comparing interest rates and spreads to benchmark indices offered to institutions with similar credit profiles to the Company and discounting the contractual cash flows on the Companys debt using these market rates. The junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.
Off-balance sheet instruments
Fair values for the Companys off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
Recent accounting pronouncements
In January 2013, the Financial Accounting Standards Board (FASB) issued guidance within ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse agreements, and securities borrowing and securities lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Companys Consolidated Income Statement, its Consolidated Balance Sheet, or its Consolidated Cash Flows.
In February 2013, the FASB issued guidance within ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in ASU 2013-02 to Topic 220, Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance did not have a material impact on the Companys Consolidated Income Statement, its Consolidated Balance Sheet, or its Consolidated Cash Flows and only impacted the presentation of other comprehensive income in the Consolidated Financial Statements.
In February 2013, the FASB issued guidance within ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the Update is fixed at the reporting date, except for obligations addressed with existing GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Companys Consolidated Income Statement, its Consolidated Balance Sheet, or its Consolidated Cash Flows.
In July 2013, the FASB issued guidance within ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, provides guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on the Companys Consolidated Financial Statements.
2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
On April 30, 2013, the Company completed its acquisition of Centennial Bank (Centennial). Under the terms of the merger, the Company paid $57.5 million in cash for all equity interests in Centennial. The Company merged Centennial into WAB effective April 30, 2013, reporting combined assets for the resulting bank of $3.16 billion and deposits of $2.76 billion. The merger was undertaken, in part, because the purchase price of Centennial was at a discount to its tangible book value and was accretive to capital at close of the transaction.
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Centennials results of operations are included in the Companys results beginning April 30, 2013. Merger/restructure expenses related to the Centennial acquisition of $2.5 million for the three and six months ended June 30, 2013 have been included in non-interest expense, of which, $1.2 million are acquisition related costs per ASC 805. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. Assets purchased and liabilities assumed were all recorded at their respective acquisition date fair values. A bargain purchase gain of $10.0 million resulted from the acquisition and is included as a component of non-interest income in the Consolidated Income Statement. The amount of gain is equal to the amount by which the fair value of net assets purchased exceeded the consideration paid. Pursuant to the terms of the transaction, $12.7 million in loans receivable were not acquired by the Company.
The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:
(in thousands) | ||||
Assets: |
||||
Cash and cash equivalents (1) |
$ | 70,349 | ||
Federal funds sold (1) |
8,355 | |||
Investment securities |
26,014 | |||
Loans |
351,474 | |||
Deferred tax assets |
21,666 | |||
Premises and equipment |
44 | |||
Other real estate owned |
5,622 | |||
Other assets |
6,007 | |||
|
|
|||
Total assets acquired |
489,531 | |||
|
|
|||
Liabilities: |
||||
Deposits |
338,811 | |||
FHLB advances |
79,943 | |||
Other liabilities |
3,233 | |||
Total liabilities assumed |
$ | 421,987 | ||
|
|
|||
Net assets acquired |
67,544 | |||
|
|
|||
Consideration paid (1) |
57,500 | |||
|
|
|||
Bargain purchase gain |
$ | 10,044 | ||
|
|
(1) | Cash acquired, net of cash consideration paid of $57.5 million represents the net cash and cash equivalents acquired of $21.2 million as part of the acquisition |
The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. Accordingly, the estimated fair value of certain net assets are preliminary and subject to measurement period adjustments. Assets that are particularly susceptible to adjustment include certain loans and other real estate owned. However, these adjustments are not expected to be significant. The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to acquired loans which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans with a fair value and gross contractual amounts receivable of $242.6 million and $370.2 million, respectively, on the date of acquisition. Receivables acquired that have shown evidence of credit deterioration since origination include impaired loans with a fair value and gross contractual amounts receivable of $108.9 million and $253.4 million, respectively, on the date of acquisition and are discussed in Note 4, Loans, Leases and Allowance for Credit Losses.
On October 17, 2012, the Company acquired Western Liberty Bancorp (Western Liberty), which included two wholly owned subsidiaries, Service 1st Bank of Nevada and Las Vegas Sunset Properties. Service 1st Bank of Nevada was merged into the Companys wholly owned subsidiary, Bank of Nevada, effective October 19, 2012.
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The following table presents pro forma information as if the Centennial and Western Liberty acquisitions had occurred as of January 1, 2012. The pro forma information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net Interest income (1) |
$ | 78,012 | $ | 77,688 | $ | 157,337 | $ | 154,963 | ||||||||
Non Interest income (2) |
849 | 7,747 | 4,843 | 14,009 | ||||||||||||
Net income (3) |
22,033 | 12,333 | 43,615 | 22,463 | ||||||||||||
Earnings per sharebasic |
$ | 0.26 | $ | 0.15 | $ | 0.51 | $ | 0.28 | ||||||||
Earnings per sharediluted |
$ | 0.25 | $ | 0.15 | $ | 0.51 | $ | 0.27 |
(1) | Excludes accretion (or amortization) of fair market value adjustments for loans, deposits and FHLB advances of $5,599 for the three months ended June 30, 2013 and $6,818 for the six months ended June 30, 2013 |
(2) | Excludes bargain purchase gain of $10,044 related to Centennial |
(3) | Excludes merger / restructure related costs incurred by the Company($2,479) and Centennial ($1,000), items 1 & 2 noted above as well as related tax effects |
Discontinued Operations
The Company has discontinued its affinity credit card business, PartnersFirst, and has presented these activities as discontinued operations. At June 30, 2013 and December 31, 2012, the outstanding credit card loans held for sale were $27.6 million and $31.1 million, respectively.
The following table summarizes the operating results of the discontinued operations for the periods indicated:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands) | ||||||||||||||||
Affinity card revenue |
$ | 1,132 | $ | 336 | $ | 2,271 | $ | 631 | ||||||||
Non-interest expenses |
(1,424 | ) | (717 | ) | (2,498 | ) | (1,395 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(292 | ) | (381 | ) | (227 | ) | (764 | ) | ||||||||
Income tax benefit |
(123 | ) | (160 | ) | (96 | ) | (321 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (169 | ) | $ | (221 | ) | $ | (131 | ) | $ | (443 | ) | ||||
|
|
|
|
|
|
|
|
3. INVESTMENT SECURITIES
Carrying amounts and fair values of investment securities at June 30, 2013 and December 31, 2012 are summarized as follows:
June 30, 2013 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Securities held-to-maturity |
||||||||||||||||
Collateralized debt obligations |
$ | 50 | $ | 570 | $ | | $ | 620 | ||||||||
Corporate bonds (2) |
97,779 | 539 | (5,725 | ) | 92,593 | |||||||||||
Municipal obligations (1) |
190,421 | 1,330 | (2,194 | ) | 189,557 | |||||||||||
Other |
1,600 | | | 1,600 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 289,850 | $ | 2,439 | $ | (7,919 | ) | $ | 284,370 | ||||||||
|
|
|
|
|
|
|
|
18
Amortized Cost |
OTTI Recognized in Other Comprehensive Income |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Securities available-for-sale |
||||||||||||||||||||
U.S. government sponsored agency securities |
$ | 28,694 | $ | | $ | | $ | (952 | ) | $ | 27,742 | |||||||||
Municipal obligations (1) |
86,853 | | 3 | (5,240 | ) | 81,616 | ||||||||||||||
Adjustable-rate preferred stock |
66,125 | | 1,433 | (1,324 | ) | 66,234 | ||||||||||||||
Mutual funds (2) |
32,422 | | 135 | (213 | ) | 32,344 | ||||||||||||||
Direct U.S. obligations and GSE residential mortgage-backed securities (3) |
697,705 | | 5,526 | (6,105 | ) | 697,126 | ||||||||||||||
Private label residential mortgage-backed securities |
29,201 | | | (1,541 | ) | 27,660 | ||||||||||||||
Private label commercial mortgage-backed securities |
5,316 | | 185 | | 5,501 | |||||||||||||||
Trust preferred securities |
32,000 | | | (7,911 | ) | 24,089 | ||||||||||||||
CRA investments |
23,610 | | 13 | (98 | ) | 23,525 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,001,926 | $ | | $ | 7,295 | $ | (23,384 | ) | $ | 985,837 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Securities measured at fair value |
||||||||||||||||||||
Direct U.S. obligations and GSE residential mortgage-backed securities (3) |
$ | 3,987 | ||||||||||||||||||
|
|
(1) | These consist of revenue obligations. |
(2) | These are investment grade corporate bonds. |
(3) | These are primarily agency collateralized mortgage obligations. |
December 31, 2012 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Securities held-to-maturity |
||||||||||||||||
Collateralized debt obligations |
$ | 50 | $ | 1,401 | $ | | $ | 1,451 | ||||||||
Corporate bonds (2) |
97,781 | 984 | (6,684 | ) | 92,081 | |||||||||||
Municipal obligations (1) |
191,902 | 5,887 | (102 | ) | 197,687 | |||||||||||
CRA investments |
1,600 | | | 1,600 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 291,333 | $ | 8,272 | $ | (6,786 | ) | $ | 292,819 | ||||||||
|
|
|
|
|
|
|
|
Amortized Cost |
OTTI Recognized in Other Comprehensive Income |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Securities available-for-sale |
||||||||||||||||||||
Municipal obligations (1) |
$ | 71,777 | $ | | $ | 1,578 | $ | (184 | ) | $ | 73,171 | |||||||||
Adjustable-rate preferred stock |
72,717 | | 3,591 | (753 | ) | 75,555 | ||||||||||||||
Mutual funds (2) |
36,314 | | 1,647 | | 37,961 | |||||||||||||||
Corporate bonds (2) |
| | | | | |||||||||||||||
Direct U.S. obligations and GSE residential mortgage-backed securities (3) |
648,641 | | 14,573 | (10 | ) | 663,204 | ||||||||||||||
Private label residential mortgage-backed securities |
35,868 | (1,811 | ) | 2,067 | (517 | ) | 35,607 | |||||||||||||
Private label commercial mortgage-backed securities |
5,365 | | 376 | | 5,741 | |||||||||||||||
Trust preferred securities |
32,000 | | | (7,865 | ) | 24,135 | ||||||||||||||
CRA investments |
23,368 | | 848 | | 24,216 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 926,050 | $ | (1,811 | ) | $ | 24,680 | $ | (9,329 | ) | $ | 939,590 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Securities measured at fair value |
||||||||||||||||||||
Direct U.S. obligations and GSE residential mortgage-backed securities (3) |
$ | 5,061 | ||||||||||||||||||
|
|
(1) | These consist of revenue obligations. |
(2) | These are investment grade corporate bonds. |
(3) | These are primarily agency collateralized mortgage obligations. |
19
During the second quarter 2013, the private label mortgage-backed security with a $1.8 million balance of OTTI recognized in other comprehensive income was sold. Accordingly, there is no OTTI balance recognized in other comprehensive income as of June 30, 2013. For additional information on the fair value changes of the securities measured at fair value, see the trading securities table in Note 11, Fair Value Accounting.
The Company conducts an OTTI analysis on a quarterly basis. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. Another potential indication of OTTI is a downgrade below investment grade. In determining whether an impairment is OTTI, the Company considers the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the Companys ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. For marketable equity securities, the Company also considers the issuers financial condition, capital strength, and near-term prospects.
For debt securities and adjustable-rate preferred stock (ARPS) that are treated as debt securities for the purpose of OTTI analysis, the Company also considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuers financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuers ability to service debt, and any change in agencies ratings at evaluation date from acquisition date and any likely imminent action. For ARPS with a fair value below cost that is not attributable to the credit deterioration of the issuer, such as a decline in cash flows from the security or a downgrade in the securitys rating below investment grade, the Company does not recognize an OTTI charge where it is able to assert that it has the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Gross unrealized losses at June 30, 2013 and December 31, 2012 are primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has reviewed securities on which there is an unrealized loss in accordance with its accounting policy for OTTI described above and determined there were no securities impairment charges needed for the three and six months ended June 30, 2013 and 2012.
The Company does not consider any other securities to be other-than-temporarily impaired as of June 30, 2013 and December 31, 2012. No assurance can be made that additional OTTI will not occur in future periods.
Information pertaining to securities with gross unrealized losses at June 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
June 30, 2013 | ||||||||||||||||||||||||
Less Than Twelve Months | More Than Twelve Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
Losses | Value | Losses | Value | Losses | Value | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Securities held-to-maturity |
||||||||||||||||||||||||
Corporate bonds |
$ | | $ | | $ | 5,725 | $ | 79,275 | $ | 5,725 | $ | 79,275 | ||||||||||||
Municipal obligations |
2,194 | 88,397 | | | 2,194 | 88,397 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 2,194 | $ | 88,397 | $ | 5,725 | $ | 79,275 | $ | 7,919 | $ | 167,672 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Securities available-for-sale |
||||||||||||||||||||||||
U.S. Government-sponsored agency securities |
$ | 952 | $ | 17,742 | $ | | $ | | $ | 952 | $ | 17,742 | ||||||||||||
Adjustable-rate preferred stock |
1,324 | 36,362 | | | 1,324 | 36,362 | ||||||||||||||||||
Mutual funds |
213 | 25,871 | | | 213 | 25,871 | ||||||||||||||||||
Direct U.S obligations and GSE residential mortgage-backed securities |
6,095 | 287,665 | 10 | 1,663 | 6,105 | 289,328 | ||||||||||||||||||
Municipal obligations |
5,240 | 81,094 | | | 5,240 | 81,094 | ||||||||||||||||||
Private label residential mortgage-backed securities |
1,497 | 23,836 | 44 | 3,824 | 1,541 | 27,660 | ||||||||||||||||||
Trust preferred securities |
| | 7,911 | 24,089 | 7,911 | 24,089 | ||||||||||||||||||
Other |
98 | 6,168 | | | 98 | 6,168 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 15,419 | $ | 478,738 | $ | 7,965 | $ | 29,576 | $ | 23,384 | $ | 508,314 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
December 31, 2012 | ||||||||||||||||||||||||
Less Than Twelve Months | More Than Twelve Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
Losses | Value | Losses | Value | Losses | Value | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Securities held-to-maturity |
||||||||||||||||||||||||
Corporate bonds |
$ | 206 | $ | 14,794 | $ | 6,478 | $ | 63,522 | $ | 6,684 | $ | 78,316 | ||||||||||||
Municipal obligations |
102 | 10,908 | | | 102 | 10,908 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 308 | $ | 25,702 | $ | 6,478 | $ | 63,522 | $ | 6,786 | $ | 89,224 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Securities available-for-sale |
||||||||||||||||||||||||
Adjustable-rate preferred stock |
$ | 110 | $ | 7,811 | $ | 643 | $ | 8,723 | $ | 753 | $ | 16,534 | ||||||||||||
Direct U.S obligations and GSE residential mortgage-backed securities |
2 | 557 | 8 | 1,938 | 10 | 2,495 | ||||||||||||||||||
Municipal obligations |
184 | 15,713 | | | 184 | 15,713 | ||||||||||||||||||
Private label residential mortgage-backed securities |
120 | 16,901 | 397 | 6,986 | 517 | 23,887 | ||||||||||||||||||
Trust preferred securities |
| | 7,865 | 24,135 | 7,865 | 24,135 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 416 | $ | 40,982 | $ | 8,913 | $ | 41,782 | $ | 9,329 | $ | 82,764 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The total number of securities in an unrealized loss position at June 30, 2013 was 199 compared to 66 at December 31, 2012. In analyzing an issuers financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysis reports. Since material downgrades have not occurred and Management does not intend to sell the debt securities for the foreseeable future, none of the securities described in the above table or in this paragraph were deemed to be other than temporarily impaired.
At June 30, 2013 and December 31, 2012, the net unrealized loss on trust preferred securities classified as AFS was $7.9 million. The Company actively monitors its debt and other structured securities portfolios classified as AFS for declines in fair value. At June 30, 2013, the gross unrealized loss on the corporate bond portfolio classified as HTM was $5.7 million compared to $6.7 million at December 31, 2012. During the prior year, the Federal Reserve announced its intention to keep interest rates at historically low levels into 2015. The yields of most of the bonds in the portfolio are tied to LIBOR, thus, negatively affecting their anticipated returns. Additionally, Moodys had downgraded certain bonds held in the portfolio during the prior year. However, all of the bonds remain investment grade.
The amortized cost and fair value of securities as of June 30, 2013 and December 31, 2012, by contractual maturities, are shown below. The actual maturities of the mortgage-backed securities may differ from their contractual maturities because the loans underlying the securities may be repaid without any penalties due to borrowers that have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are listed separately in the maturity summary.
June 30, 2013 | December 31, 2012 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Securities held-to-maturity |
||||||||||||||||
Due in one year or less |
$ | 2,522 | $ | 2,543 | $ | 1,600 | $ | 1,600 | ||||||||
After one year through five years |
12,670 | 12,791 | 13,596 | 13,934 | ||||||||||||
After five years through ten years |
120,911 | 115,652 | 121,238 | 116,020 | ||||||||||||
After ten years |
153,747 | 153,384 | 154,899 | 161,265 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 289,850 | $ | 284,370 | $ | 291,333 | $ | 292,819 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities available-for-sale |
||||||||||||||||
Due in one year or less |
$ | 56,033 | $ | 55,869 | $ | 65,190 | $ | 67,794 | ||||||||
After one year through five years |
23,323 | 24,446 | 24,261 | 25,906 | ||||||||||||
After five years through ten years |
35,095 | 34,064 | 8,165 | 8,000 | ||||||||||||
After ten years |
189,772 | 174,332 | 179,793 | 174,686 | ||||||||||||
Mortgage backed securities |
697,703 | 697,126 | 648,641 | 663,204 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,001,926 | $ | 985,837 | $ | 926,050 | $ | 939,590 | |||||||||
|
|
|
|
|
|
|
|
21
The following table summarizes the Companys investment ratings position as of June 30, 2013:
As of June 30, 2013 | ||||||||||||||||||||||||||||
Split-rated | ||||||||||||||||||||||||||||
AAA | AAA/AA+ | AA+ to AA- | A+ to A- | BBB+ to BBB- | BB+ and below | Totals | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Municipal obligations |
$ | 8,043 | $ | | $ | 130,718 | $ | 118,181 | $ | 14,824 | $ | 271 | $ | 272,037 | ||||||||||||||
Direct U.S. obligations & GSE residential mortgage-backed securities |
| 701,113 | | | | | 701,113 | |||||||||||||||||||||
Private label residential mortgage- backed securities |
12,963 | | 192 | 5,960 | 4,412 | 4,133 | 27,660 | |||||||||||||||||||||
Private label commercial mortgage- backed securities |
5,501 | | | | | | 5,501 | |||||||||||||||||||||
Mutual funds (3) |
| | | | 32,344 | | 32,344 | |||||||||||||||||||||
U.S. Government-sponsored agency securities |
| 27,742 | | | | | 27,742 | |||||||||||||||||||||
Adjustable-rate preferred stock |
| | | | 49,448 | 14,761 | 64,209 | |||||||||||||||||||||
Trust preferred securities |
| | | | 24,089 | | 24,089 | |||||||||||||||||||||
Collateralized debt obligations |
| | | | | 50 | 50 | |||||||||||||||||||||
Corporate bonds |
| | 2,697 | 40,109 | 54,973 | | 97,779 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total (1) (2) |
$ | 26,507 | $ | 728,855 | $ | 133,607 | $ | 164,250 | $ | 180,090 | $ | 19,215 | $ | 1,252,524 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The Company used the average credit rating of the combination of S&P, Moodys and Fitch in the above table where ratings differed. |
(2) | Securities values are shown at carrying value as of June 30, 2013. Unrated securities consist of CRA investments with a carrying value of $23.5 million, ARPS with a carrying value of $2.0 million and an other investment of $1.6 million. |
(3) | At least 80% of mutual funds are investment grade corporate bonds. |
The following table summarizes the Companys investment ratings position as of December 31, 2012:
As of December 31, 2012 | ||||||||||||||||||||||||||||
Split-rated | ||||||||||||||||||||||||||||
AAA | AAA/AA+ | AA+ to AA- | A+ to A- | BBB+ to BBB- | BB+ and below | Totals | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Municipal obligations |
$ | 8,120 | $ | | $ | 149,352 | $ | 92,401 | $ | 14,922 | $ | 278 | $ | 265,073 | ||||||||||||||
Direct U.S. obligations & GSE residential mortgage-backed securities |
| 668,265 | | | | | 668,265 | |||||||||||||||||||||
Private label residential mortgage- backed securities |
15,219 | | 1,649 | 6,069 | 5,249 | 7,421 | 35,607 | |||||||||||||||||||||
Private label commercial mortgage- backed securities |
5,741 | | | | | | 5,741 | |||||||||||||||||||||
Mutual funds (3) |
| | | | 37,961 | | 37,961 | |||||||||||||||||||||
Adjustable-rate preferred stock |
| | 826 | | 60,807 | 10,838 | 72,471 | |||||||||||||||||||||
Trust preferred securities |
| | | | 24,135 | | 24,135 | |||||||||||||||||||||
Collateralized debt obligations |
| | | | | 50 | 50 | |||||||||||||||||||||
Corporate bonds |
| | 2,696 | 40,116 | 54,969 | | 97,781 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total (1) (2) |
$ | 29,080 | $ | 668,265 | $ | 154,523 | $ | 138,586 | $ | 198,043 | $ | 18,587 | $ | 1,207,084 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The Company used the average credit rating of the combination of S&P, Moodys and Fitch in the above table where ratings differed. |
(2) | Securities values are shown at carrying value as of December 31, 2012. Unrated securities consist of CRA investments with a carrying value of $24.2 million, one ARPS security with a carrying value of $3.1 million and an other investment of $1.6 million. |
(3) | At least 80% of mutual funds are investment grade corporate bonds. |
22
Securities with carrying amounts of approximately $646.6 million and $711.7 million at June 30, 2013 and December 31, 2012, respectively, were pledged for various purposes as required or permitted by law.
The following table presents gross gains and (losses) on sales of investment securities:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands) | ||||||||||||||||
Gross gains |
$ | 68 | $ | 1,157 | $ | 268 | $ | 1,713 | ||||||||
Gross (losses) |
(73 | ) | (47 | ) | (125 | ) | (242 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | (5 | ) | $ | 1,110 | $ | 143 | $ | 1,471 | ||||||||
|
|
|
|
|
|
|
|
4. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Companys loans held for investment portfolio is as follows:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Commercial and industrial |
$ | 1,906,293 | $ | 1,659,003 | ||||
Commercial real estatenon-owner occupied |
1,839,687 | 1,505,600 | ||||||
Commercial real estateowner occupied |
1,549,983 | 1,396,797 | ||||||
Construction and land development |
416,745 | 394,319 | ||||||
Residential real estate |
381,687 | 407,937 | ||||||
Commercial leases |
267,770 | 288,747 | ||||||
Consumer |
28,539 | 31,836 | ||||||
Deferred fees and unearned income, net |
(6,830 | ) | (6,045 | ) | ||||
|
|
|
|
|||||
6,383,874 | 5,678,194 | |||||||
Allowance for credit losses |
(96,323 | ) | (95,427 | ) | ||||
|
|
|
|
|||||
Total |
$ | 6,287,551 | $ | 5,582,767 | ||||
|
|
|
|
The following table presents the contractual aging of the recorded investment in past due loans by class of loans including loans held for sale and excluding deferred fees:
June 30, 2013 | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | Over 90 days | Total | |||||||||||||||||||||
Current | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
$ | 1,534,437 | $ | 3,156 | $ | 1,432 | $ | 10,958 | $ | 15,546 | $ | 1,549,983 | ||||||||||||
Non-owner occupied |
1,629,489 | 2,152 | | 2,371 | 4,523 | 1,634,012 | ||||||||||||||||||
Multi-family |
205,675 | | | | | 205,675 | ||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||
Commercial |
1,903,746 | 294 | 208 | 2,045 | 2,547 | 1,906,293 | ||||||||||||||||||
Leases |
267,351 | | | 419 | 419 | 267,770 | ||||||||||||||||||
Construction and land development |
||||||||||||||||||||||||
Construction |
230,816 | | | | | 230,816 | ||||||||||||||||||
Land |
184,223 | 84 | 1,345 | 277 | 1,706 | 185,929 | ||||||||||||||||||
Residential real estate |
363,919 | 836 | 2,704 | 14,228 | 17,768 | 381,687 | ||||||||||||||||||
Consumer |
55,023 | 406 | 205 | 550 | 1,161 | 56,184 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 6,374,679 | $ | 6,928 | $ | 5,894 | $ | 30,848 | $ | 43,670 | $ | 6,418,349 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
23
December 31, 2012 | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | Over 90 days | Total | |||||||||||||||||||||
Current | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
$ | 1,372,550 | $ | 13,153 | $ | 1,757 | $ | 9,337 | $ | 24,247 | $ | 1,396,797 | ||||||||||||
Non-owner occupied |
1,327,481 | 917 | 4,416 | 8,573 | 13,906 | 1,341,387 | ||||||||||||||||||
Multi-family |
164,213 | | | | | 164,213 | ||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||
Commercial |
1,654,787 | 3,109 | 121 | 986 | 4,216 | 1,659,003 | ||||||||||||||||||
Leases |
287,768 | 515 | | 464 | 979 | 288,747 | ||||||||||||||||||
Construction and land development |
||||||||||||||||||||||||
Construction |
215,597 | | | | | 215,597 | ||||||||||||||||||
Land |
171,919 | 826 | 571 | 5,406 | 6,803 | 178,722 | ||||||||||||||||||
Residential real estate |
387,641 | 3,525 | 1,837 | 14,934 | 20,296 | 407,937 | ||||||||||||||||||
Consumer |
62,271 | 524 | | 165 | 689 | 62,960 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 5,644,227 | $ | 22,569 | $ | 8,702 | $ | 39,865 | $ | 71,136 | $ | 5,715,363 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing interest by class of loans:
June 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Loans past | Loans past | |||||||||||||||||||||||||||||||
Non-accrual loans | due 90 days | Non-accrual loans | due 90 days | |||||||||||||||||||||||||||||
Past Due/ | Total | or more and | Past Due/ | Total | or more and | |||||||||||||||||||||||||||
Current | Delinquent | Non-accrual | still accruing | Current | Delinquent | Non-accrual | still accruing | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||||||
Owner occupied |
$ | 10,109 | $ | 14,435 | $ | 24,544 | $ | 152 | $ | 14,392 | $ | 18,394 | $ | 32,786 | $ | 1,272 | ||||||||||||||||
Non-owner occupied |
22,515 | 2,280 | 24,795 | 91 | 18,299 | 8,572 | 26,871 | | ||||||||||||||||||||||||
Multi-family |
| | | | 318 | | 318 | | ||||||||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||||||||||
Commercial |
2,874 | 2,045 | 4,919 | | 2,549 | 3,194 | 5,743 | 15 | ||||||||||||||||||||||||
Leases |
284 | 419 | 703 | | | 979 | 979 | | ||||||||||||||||||||||||
Construction and land development |
||||||||||||||||||||||||||||||||
Construction |
| | | | | | | | ||||||||||||||||||||||||
Land |
5,532 | 1,705 | 7,237 | | 4,375 | 6,718 | 11,093 | | ||||||||||||||||||||||||
Residential real estate |
6,020 | 14,652 | 20,672 | | 11,561 | 15,161 | 26,722 | 101 | ||||||||||||||||||||||||
Consumer |
29 | | 29 | 550 | 39 | 165 | 204 | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 47,363 | $ | 35,536 | $ | 82,899 | $ | 793 | $ | 51,533 | $ | 53,183 | $ | 104,716 | $ | 1,388 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in interest income associated with loans on nonaccrual status was approximately $1.2 million and $2.5 million for the three and six months ended June 30, 2013, respectively, and $1.5 million and $2.9 million for the three and six months ended June 30, 2012.
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Companys risk rating system, the Company classifies problem and potential problem loans as Special Mention, Substandard, Doubtful, and Loss. Substandard loans include those characterized by well-defined weaknesses and carry the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The final rating of Loss covers loans considered uncollectible and having such little recoverable value that it is not practical to defer writing off the asset. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve Managements close attention, are deemed to be Special Mention. Risk ratings are updated, at a minimum, quarterly. The following tables present the recorded investment and delinquency status by class of loans including loans held for sale and excluding deferred fees by risk rating:
24
June 30, 2013 | ||||||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
$ | 1,436,646 | $ | 53,153 | $ | 59,187 | $ | 997 | $ | | $ | 1,549,983 | ||||||||||||
Non-owner occupied |
1,481,623 | 70,665 | 81,724 | | | 1,634,012 | ||||||||||||||||||
Multi-family |
200,860 | 3,273 | 1,542 | | | 205,675 | ||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||
Commercial |
1,876,899 | 11,627 | 16,236 | 1,531 | | 1,906,293 | ||||||||||||||||||
Leases |
262,229 | 4,838 | 703 | | | 267,770 | ||||||||||||||||||
Construction and land development |
||||||||||||||||||||||||
Construction |
224,900 | 5,916 | | | | 230,816 | ||||||||||||||||||
Land |
155,046 | 6,274 | 24,609 | | | 185,929 | ||||||||||||||||||
Residential real estate |
341,297 | 5,966 | 34,424 | | | 381,687 | ||||||||||||||||||
Consumer |
54,300 | 771 | 1,113 | | | 56,184 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,033,800 | $ | 162,483 | $ | 219,538 | $ | 2,528 | $ | | $ | 6,418,349 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013 | ||||||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Current (up to 29 days past due) |
$ | 6,032,000 | $ | 161,858 | $ | 180,111 | $ | 710 | $ | | $ | 6,374,679 | ||||||||||||
Past due 30 59 days |
1,082 | 420 | 5,426 | | | 6,928 | ||||||||||||||||||
Past due 60 89 days |
610 | 205 | 5,079 | | | 5,894 | ||||||||||||||||||
Past due 90 days or more |
108 | | 28,922 | 1,818 | | 30,848 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,033,800 | $ | 162,483 | $ | 219,538 | $ | 2,528 | $ | | $ | 6,418,349 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
$ | 1,280,337 | $ | 50,552 | $ | 65,908 | $ | | $ | | $ | 1,396,797 | ||||||||||||
Non-owner occupied |
1,257,011 | 21,065 | 63,311 | | | 1,341,387 | ||||||||||||||||||
Multi-family |
163,895 | | 318 | | | 164,213 | ||||||||||||||||||
Commercial and industrial |
||||||||||||||||||||||||
Commercial |
1,630,166 | 12,370 | 15,499 | 968 | | 1,659,003 | ||||||||||||||||||
Leases |
282,075 | 5,693 | 979 | | | 288,747 | ||||||||||||||||||
Construction and land development |
||||||||||||||||||||||||
Construction |
215,395 | 202 | | | | 215,597 | ||||||||||||||||||
Land |
141,436 | 5,641 | 31,645 | | | 178,722 | ||||||||||||||||||
Residential real estate |
365,042 | 7,559 | 32,446 | 2,890 | | 407,937 | ||||||||||||||||||
Consumer |
61,469 | 469 | 1,022 | | | 62,960 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,396,826 | $ | 103,551 | $ | 211,128 | $ | 3,858 | $ | | $ | 5,715,363 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
December 31, 2012 | ||||||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Current (up to 29 days past due) |
$ | 5,387,543 | $ | 100,549 | $ | 152,827 | $ | 3,308 | $ | | $ | 5,644,227 | ||||||||||||
Past due 30 59 days |
4,410 | 1,310 | 16,849 | | | 22,569 | ||||||||||||||||||
Past due 60 89 days |
4,450 | 1,692 | 2,560 | | | 8,702 | ||||||||||||||||||
Past due 90 days or more |
423 | | 38,892 | 550 | | 39,865 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,396,826 | $ | 103,551 | $ | 211,128 | $ | 3,858 | $ | | $ | 5,715,363 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The table below reflects recorded investment in loans classified as impaired:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Impaired loans with a specific valuation allowance under ASC 310 |
$ | 22,755 | $ | 51,538 | ||||
Impaired loans without a specific valuation allowance under ASC 310 |
157,966 | 146,617 | ||||||
|
|
|
|
|||||
Total impaired loans |
$ | 180,721 | $ | 198,155 | ||||
|
|
|
|
|||||
Valuation allowance related to impaired loans |
$ | (6,786 | ) | $ | (12,866 | ) | ||
|
|
|
|
The following table presents the impaired loans by class:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Commercial real estate |
||||||||
Owner occupied |
$ | 46,661 | $ | 58,074 | ||||
Non-owner occupied |
54,982 | 52,146 | ||||||
Multi-family |
| 318 | ||||||
Commercial and industrial |
||||||||
Commercial |
13,647 | 15,531 | ||||||
Leases |
703 | 979 | ||||||
Construction and land development |
||||||||
Construction |
| | ||||||
Land |
28,147 | 32,492 | ||||||
Residential real estate |
35,975 | 37,851 | ||||||
Consumer |
606 | 764 | ||||||
|
|
|
|
|||||
Total |
$ | 180,721 | $ | 198,155 | ||||
|
|
|
|
A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and, are included, when applicable in the table above as Impaired loans without specific valuation allowance under ASC 310. The valuation allowance disclosed above is included in the allowance for credit losses reported in the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012.
26
The following table presents average investment in impaired loans by loan class:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands) | ||||||||||||||||
Commercial real estate |
||||||||||||||||
Owner occupied |
$ | 49,916 | $ | 57,466 | $ | 54,990 | $ | 53,210 | ||||||||
Non-owner occupied |
56,462 | 55,401 | 54,724 | 56,046 | ||||||||||||
Multi-family |
125 | 1,125 | 177 | 1,034 | ||||||||||||
Commercial and industrial |
||||||||||||||||
Commercial |
14,801 | 27,298 | 14,945 | 26,337 | ||||||||||||
Leases |
859 | 892 | 944 | 744 | ||||||||||||
Construction and land development |
||||||||||||||||
Construction |
| | | 1,972 | ||||||||||||
Land |
28,024 | 37,813 | 28,693 | 38,553 | ||||||||||||
Residential real estate |
33,260 | 34,614 | 35,150 | 32,943 | ||||||||||||
Consumer |
619 | 1,044 | 662 | 1,487 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 184,066 | $ | 215,653 | $ | 190,285 | $ | 212,326 | ||||||||
|
|
|
|
|
|
|
|
The following table presents interest income on impaired loans by class:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Commercial real estate |
||||||||||||||||
Owner occupied |
$ | 336 | $ | 441 | $ | 756 | $ | 855 | ||||||||
Non-owner occupied |
421 | 553 | 825 | 1,012 | ||||||||||||
Multi-family |
| | | | ||||||||||||
Commercial and industrial |
||||||||||||||||
Commercial |
119 | 259 | 269 | 514 | ||||||||||||
Leases |
| | | | ||||||||||||
Construction and land development |
||||||||||||||||
Construction |
| | | | ||||||||||||
Land |
287 | 344 | 546 | 696 | ||||||||||||
Residential real estate |
20 | 63 | 25 | 121 | ||||||||||||
Consumer |
8 | 7 | 16 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,191 | $ | 1,667 | $ | 2,437 | $ | 3,216 | ||||||||
|
|
|
|
|
|
|
|
The Company is not committed to lend significant additional funds on these impaired loans.
The following table summarizes nonperforming assets:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Nonaccrual loans |
$ | 82,899 | $ | 104,716 | ||||
Loans past due 90 days or more on accrual status |
793 | 1,388 | ||||||
Troubled debt restructured loans |
90,900 | 84,609 | ||||||
|
|
|
|
|||||
Total nonperforming loans |
174,592 | 190,713 | ||||||
Other assets acquired through foreclosure, net |
76,499 | 77,247 | ||||||
|
|
|
|
|||||
Total nonperforming assets |
$ | 251,091 | $ | 267,960 | ||||
|
|
|
|
27
Loans Acquired with Deteriorated Credit Quality
The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the Centennial acquisition, as of April 30, 2013, the closing date of the transaction:
April 30, 2013 | ||||||||||||
Commercial | Residential | |||||||||||
Real Estate | Real Estate | Total | ||||||||||
(in thousands) | ||||||||||||
Contractually required payments : |
||||||||||||
Loans with credit deterioration since origination |
$ | 253,419 | $ | | $ | 253,419 | ||||||
Purchased non-credit impaired loans |
368,040 | 2,136 | 370,176 | |||||||||
|
|
|
|
|
|
|||||||
Total loans acquired |
$ | 621,459 | $ | 2,136 | $ | 623,595 | ||||||
|
|
|
|
|
|
|||||||
Cash flows expected to be collected: |
||||||||||||
Loans with credit deterioration since origination |
$ | 145,346 | $ | | $ | 145,346 | ||||||
Purchased non-credit impaired loans |
304,818 | 1,352 | 306,170 | |||||||||
|
|
|
|
|
|
|||||||
Total loans acquired |
$ | 450,164 | $ | 1,352 | $ | 451,516 | ||||||
|
|
|
|
|
|
|||||||
Fair value of loans acquired: |
||||||||||||
Loans with credit deterioration since origination |
$ | 108,863 | $ | | $ | 108,863 | ||||||
Purchased non-credit impaired loans |
241,541 | 1,070 | 242,611 | |||||||||
|
|
|
|
|
|
|||||||
Total loans acquired |
$ | 350,404 | $ | 1,070 | $ | 351,474 | ||||||
|
|
|
|
|
|
Changes in the accretable yield for loans acquired with deteriorated credit quality are as follows:
June 30, 2013 | ||||||||
Three Months Ended |
Six Months Ended |
|||||||
(in thousands) | ||||||||
Balance, at beginning of period |
$ | 4,993 | $ | 7,072 | ||||
Addition due to acquisition |
22,318 | 22,318 | ||||||
Reclassification from nonaccretable difference |
1,047 | 1,047 | ||||||
Accretion to interest income |
(2,285 | ) | (4,364 | ) | ||||
|
|
|
|
|||||
Balance, at end of period |
$ | 26,073 | $ | 26,073 | ||||
|
|
|
|
The primary drivers of reclassification to accretable yield from nonaccretable difference resulted from changes in estimated cash flows. The additions reflected in the above table relate to the acquisition of Centennial.
28
Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses by portfolio type:
For the Three Months Ended June 30, | ||||||||||||||||||||||||
Construction and | Commercial | Residential | Commercial | |||||||||||||||||||||
Land Development | Real Estate | Real Estate | and Industrial | Consumer | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
2013 |
||||||||||||||||||||||||
Beginning Balance |
$ | 11,039 | $ | 34,901 | $ | 14,595 | $ | 34,185 | $ | 774 | $ | 95,494 | ||||||||||||
Charge-offs |
(238 | ) | (2,391 | ) | (2,010 | ) | (1,065 | ) | (18 | ) | (5,722 | ) | ||||||||||||
Recoveries |
120 | 633 | 549 | 1,757 | 11 | 3,070 | ||||||||||||||||||
Provision |
(1,307 | ) | 1,440 | 713 | 2,506 | 129 | 3,481 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 9,614 | $ | 34,583 | $ | 13,847 | $ | 37,383 | $ | 896 | $ | 96,323 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
2012 |
||||||||||||||||||||||||
Beginning Balance |
$ | 12,753 | $ | 35,118 | $ | 18,732 | $ | 26,901 | $ | 4,618 | $ | 98,122 | ||||||||||||
Charge-offs |
(3,185 | ) | (5,641 | ) | (2,094 | ) | (4,933 | ) | (770 | ) | (16,623 | ) | ||||||||||||
Recoveries |
217 | 561 | 274 | 1,417 | 214 | 2,683 | ||||||||||||||||||
Provision |
3,593 | 6,695 | 45 | 2,747 | 250 | 13,330 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 13,378 | $ | 36,733 | $ | 16,957 |