Edgar Filing: UMPQUA HOLDINGS CORP

1589fd90061e441

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q



[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the quarterly period ended: June 30, 2012



[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the transition period from to .

Commission File Number: 001-34624

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)



OREGON		93-1261319
(State or Other Jurisdiction		(I.R.S. Employer Identification Number)
of Incorporation or Organization)

One SW Columbia Street, Suite 1200

Portland, Oregon 97258

(Address of Principal Executive Offices)(Zip Code)

(503) 727-4100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [ ] No

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

[X] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company

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

[ ] Yes [X] No

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

Common stock, no par value: 111,891,811 shares outstanding as of July 31, 2012

Table Of Contents

UMPQUA HOLDINGS CORPORATION

FORM 10-Q

Table of Contents




PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	93

Item 4.	Controls and Procedures	93

Part II. OTHER INFORMATION		94

Item 1.	Legal Proceedings	94

Item 1A.	Risk Factors	94

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	94

Item 3.	Defaults Upon Senior Securities	95

Item 4.	Mine Safety Disclosures	95

Item 5.	Other Information	95

Item 6.	Exhibits	95

SIGNATURES		96

EXHIBIT INDEX		97

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(in thousands, except shares)
	June 30,		December 31,
	2012		2011
ASSETS
Cash and due from banks	$	159,694	$	152,265
Interest bearing deposits		503,552		445,954
Temporary investments		530		547
Total cash and cash equivalents		663,776		598,766
Investment securities
Trading, at fair value		3,301		2,309
Available for sale, at fair value		2,834,076		3,168,578
Held to maturity, at amortized cost		4,506		4,714
Loans held for sale		209,607		98,691
Non-covered loans and leases		6,104,432		5,888,098
Allowance for non-covered loan and lease losses		(83,618)		(92,968)
Net non-covered loans and leases		6,020,814		5,795,130
Covered loans and leases, net of allowance of $12,977 and $14,320		553,963		622,451
Restricted equity securities		31,712		32,581
Premises and equipment, net		154,956		152,366
Goodwill and other intangible assets, net		674,794		677,224
Mortgage servicing rights, at fair value		22,513		18,184
Non-covered other real estate owned		26,884		34,175
Covered other real estate owned		9,191		19,491
FDIC indemnification asset		68,805		91,089
Other assets		242,999		247,606
Total assets	$	11,521,897	$	11,563,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing	$	2,021,303	$	1,913,121
Interest bearing		7,110,878		7,323,569
Total deposits		9,132,181		9,236,690
Securities sold under agreements to repurchase		149,341		124,605
Term debt		254,641		255,676
Junior subordinated debentures, at fair value		83,993		82,905
Junior subordinated debentures, at amortized cost		102,382		102,544
Other liabilities		102,523		88,522
Total liabilities		9,825,061		9,890,942
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,891,283 in 2012 and 112,164,891 in 2011		1,511,633		1,514,913
Retained earnings		154,474		123,726
Accumulated other comprehensive income		30,729		33,774
Total shareholders' equity		1,696,836		1,672,413
Total liabilities and shareholders' equity	$	11,521,897	$	11,563,355

See notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


(in thousands, except per share amounts)
	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
INTEREST INCOME
Interest and fees on non-covered loans	$	77,637	$	79,321	$	155,296	$	158,054
Interest and fees on covered loans		16,935		22,226		34,278		43,773
Interest and dividends on investment securities:
Taxable		16,535		24,348		34,655		46,391
Exempt from federal income tax		2,291		2,178		4,568		4,343
Dividends		28		4		34		7
Interest on temporary investments and interest bearing deposits		168		340		405		741
Total interest income		113,594		128,417		229,236		253,309
INTEREST EXPENSE
Interest on deposits		8,169		14,698		17,014		30,364
Interest on securities sold under agreement
to repurchase and federal funds purchased		79		131		159		253
Interest on term debt		2,305		2,301		4,609		4,590
Interest on junior subordinated debentures		2,029		1,926		4,087		3,839
Total interest expense		12,582		19,056		25,869		39,046
Net interest income		101,012		109,361		203,367		214,263
PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES		6,638		15,459		9,805		30,489
PROVISION FOR COVERED LOAN AND LEASE LOSSES		1,406		3,755		1,375		11,023
Net interest income after provision for loan and lease losses		92,968		90,147		192,187		172,751
NON-INTEREST INCOME
Service charges on deposit accounts		7,190		8,540		13,856		16,361
Brokerage commissions and fees		3,532		3,276		6,476		6,653
Mortgage banking revenue, net		15,641		4,807		28,723		10,082
Gain on investment securities, net:
Gain on sale of investment securities, net		1,030		5,678		1,178		5,678
Total other-than-temporary impairment losses		-		(110)		-		(110)
Portion of other-than-temporary impairment losses
transferred from other comprehensive income		-		63		-		38
Total gain on investment securities, net		1,030		5,631		1,178		5,606
Loss on junior subordinated debentures carried at fair value		(547)		(547)		(1,095)		(1,089)
Change in FDIC indemnification asset		(4,040)		(5,551)		(5,885)		(2,646)
Other income		6,120		3,471		12,910		6,245
Total non-interest income		28,926		19,627		56,163		41,212
NON-INTEREST EXPENSE
Salaries and employee benefits		49,979		43,808		97,072		88,418
Net occupancy and equipment		13,580		12,547		27,078		25,064
Communications		2,845		2,796		5,787		5,606
Marketing		1,761		1,798		2,751		2,649
Services		6,631		6,026		12,793		11,908
Supplies		644		843		1,309		1,624
FDIC assessments		1,886		2,821		3,854		6,694
Net loss on non-covered other real estate owned		889		3,844		4,076		6,677
Net loss on covered other real estate owned		169		73		2,623		1,024
Intangible amortization		1,211		1,251		2,423		2,502
Merger related expenses		153		71		253		252
Other expenses		7,188		7,329		14,613		14,990
Total non-interest expense		86,936		83,207		174,632		167,408
Income before provision for income taxes		34,958		26,567		73,718		46,555
Provision for income taxes		11,681		8,782		24,938		15,303
Net income	$	23,277	$	17,785	$	48,780	$	31,252

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(UNAUDITED)


(in thousands, except per share amounts)
	Three months ended				Six months ended
	June 30,				June 30,
		2012		2011		2012		2011
Net income	$	23,277	$	17,785	$	48,780	$	31,252
Dividends and undistributed earnings
allocated to participating securities		162		86		329		148
Net earnings available to common shareholders	$	23,115	$	17,699	$	48,451	$	31,104
Earnings per common share:
Basic	$	0.21	$	0.15	$	0.43	$	0.27
Diluted	$	0.21	$	0.15	$	0.43	$	0.27
Weighted average number of common shares outstanding:
Basic		111,897		114,611		111,943		114,593
Diluted		112,078		114,785		112,120		114,796

See notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


(in thousands)
	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011

Net income	$	23,277	$	17,785	$	48,780	$	31,252
Available for sale securities:
Unrealized (losses) gains arising during the period		(6,050)		24,835		(4,029)		25,649

Reclassification adjustment for net gains realized in earnings (net of tax expense $412 and $2,271 for the three months ended June 30, 2012 and 2011, respectively, and net of tax expense of $471 and $2,271 for the six months ended June 30, 2012 and 2011, respectively)		(618)		(3,407)		(707)		(3,407)

Income tax benefit (expense) related to unrealized gains		2,420		(9,934)		1,612		(10,259)

Net change in unrealized gains		(4,248)		11,494		(3,124)		11,983

Held to maturity securities:
Unrealized losses related to factors other than credit (net of tax benefit of $35 and $30 for the three and six months ended June 30, 2011, respectively)		-		(53)		-		(45)

Reclassification adjustment for impairments realized in net income (net of tax benefit of $10 and $20 for the three and six months ended June 30, 2011, respectively)		-		15		-		30

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $25 and $10 for the three months ended June 30, 2012 and 2011, respectively, and net of tax benefit of $53 and $27 for the six months ended June 30, 2012 and 2011, respectively)		38		15		79		41

Net change in unrealized losses related to factors other than credit		38		(23)		79		26

Other comprehensive (loss) income, net of tax		(4,210)		11,471		(3,045)		12,009

Comprehensive income	$	19,067	$	29,256	$	45,735	$	43,261

See notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except shares)						Accumulated
	Common Stock					Other
				Retained		Comprehensive
	Shares	Amount		Earnings		Income (Loss)		Total
BALANCE AT JANUARY 1, 2011	114,536,814	$	1,540,928	$	76,701	$	24,945	$	1,642,574
Net income					74,496				74,496
Other comprehensive income, net of tax							8,829		8,829
Comprehensive income								$	83,325
Stock-based compensation			3,785						3,785
Stock repurchased and retired	(2,557,056)		(29,754)						(29,754)
Issuances of common stock under stock plans and
related net tax deficiencies	185,133		(46)						(46)
Cash dividends on common stock ($0.24 per share)					(27,471)				(27,471)
Balance at December 31, 2011	112,164,891	$	1,514,913	$	123,726	$	33,774	$	1,672,413

BALANCE AT JANUARY 1, 2012	112,164,891	$	1,514,913	$	123,726	$	33,774	$	1,672,413
Net income					48,780				48,780
Other comprehensive loss, net of tax							(3,045)		(3,045)
Comprehensive income								$	45,735
Stock-based compensation			1,942						1,942
Stock repurchased and retired	(413,750)		(5,234)						(5,234)
Issuances of common stock under stock plans and
related net tax deficiencies	140,142		12						12
Cash dividends on common stock ($0.16 per share)					(18,032)				(18,032)
Balance at June 30, 2012	111,891,283	$	1,511,633	$	154,474	$	30,729	$	1,696,836

See notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


(in thousands)
		Six months ended
		June 30,
	2012		2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	48,780	$	31,252
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premiums, net		21,778		16,367
Gain on sale of investment securities, net		(1,178)		(5,678)
Other-than-temporary impairment on investment securities held to maturity		-		72
(Gain) loss on sale of non-covered other real estate owned		(643)		1,160
Gain on sale of covered other real estate owned		(723)		(898)
Valuation adjustment on non-covered other real estate owned		4,719		5,518
Valuation adjustment on covered other real estate owned		3,346		1,921
Provision for non-covered loan and lease losses		9,805		30,489
Provision for covered loan and lease losses		1,375		11,023
Change in FDIC indemnification asset		5,885		2,646
Depreciation, amortization and accretion		7,949		6,218
Increase in mortgage servicing rights		(6,281)		(2,407)
Change in mortgage servicing rights carried at fair value		1,952		511
Change in junior subordinated debentures carried at fair value		1,007		1,078
Stock-based compensation		1,942		1,987
Net (increase) decrease in trading account assets		(992)		502
Gain on sale of loans		(14,571)		(1,819)
Origination of loans held for sale		(786,697)		(290,058)
Proceeds from sales of loans held for sale		690,352		307,087
Excess tax benefits from the exercise of stock options		(49)		(4)
Change in other assets and liabilities:
Net decrease in other assets		1,807		5,954
Net increase in other liabilities		11,199		4,759
Net cash provided by operating activities		762		127,680

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale		(419,078)		(690,720)
Purchases of investment securities held to maturity		-		(1,573)
Proceeds from investment securities available for sale		727,750		441,721
Proceeds from investment securities held to maturity		363		757
Redemption of restricted equity securities		869		1,636
Net non-covered loan and lease originations		(239,262)		(136,582)
Net covered loan and lease paydowns		56,468		63,417
Proceeds from sales of loans		5,964		6,777
Proceeds from disposals of furniture and equipment		1,508		180
Purchases of premises and equipment		(12,197)		(16,877)
Net proceeds from FDIC indemnification asset		21,418		48,850
Proceeds from sales of non-covered other real estate owned		12,208		17,026
Proceeds from sales of covered other real estate owned		8,733		7,355
Net cash provided (used) by investing activities		164,744		(258,033)

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)


(in thousands)
	Six months ended
	June 30,
	2012		2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit liabilities		(104,348)		(286,867)
Net increase in securities sold under agreements to repurchase		24,736		47,130
Repayment of term debt		-		(5,000)
Dividends paid on common stock		(15,777)		(11,506)
Excess tax benefits from stock based compensation		49		4
Proceeds from stock options exercised		78		309
Retirement of common stock		(5,234)		(1,960)
Net cash used by financing activities		(100,496)		(257,890)
Net increase (decrease) in cash and cash equivalents		65,010		(388,243)
Cash and cash equivalents, beginning of period		598,766		1,004,125
Cash and cash equivalents, end of period	$	663,776	$	615,882

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	27,573	$	41,302
Income taxes	$	13,800	$	6,850

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains on investment securities available for sale, net of taxes	$	(3,124)	$	11,983
Change in unrealized losses on investment securities held to maturity
related to factors other than credit, net of taxes	$	79	$	26
Cash dividend declared on common stock and payable after period-end	$	10,139	$	5,754
Transfer of non-covered loans to non-covered other real estate owned	$	8,993	$	25,322
Transfer of covered loans to covered other real estate owned	$	1,346	$	8,668
Transfer of covered loans to non-covered loans	$	9,299	$	4,114
Transfer from FDIC indemnification asset to due from FDIC and other	$	16,399	$	26,839
Receivable from sales of covered other real estate owned	$	290	$	-

See notes to condensed consolidated financial statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

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

In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2012 for potential recognition or disclosure. In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period. Certain reclassifications of prior period amounts have been made to conform to current classifications.

Note 2 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at June 30, 2012 and December 31, 2011:


June 30, 2012
(in thousands)
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	45,533	$	586	$	(1)	$	46,118
Obligations of states and political subdivisions		247,272		17,476		(239)		264,509
Residential mortgage-backed securities and
collateralized mortgage obligations		2,487,588		38,671		(5,048)		2,521,211
Other debt securities		149		-		(5)		144
Investments in mutual funds and
other equity securities		1,959		135		-		2,094
	$	2,782,501	$	56,868	$	(5,293)	$	2,834,076

HELD TO MATURITY:
Obligations of states and political subdivisions	$	1,280	$	3	$	-	$	1,283
Residential mortgage-backed securities and
collateralized mortgage obligations		3,226		5		(68)		3,163
	$	4,506	$	8	$	(68)	$	4,446


December 31, 2011
(in thousands)
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	117,232	$	1,234	$	(1)	$	118,465
Obligations of states and political subdivisions		237,302		16,264		(13)		253,553
Residential mortgage-backed securities and
collateralized mortgage obligations		2,755,153		43,152		(3,950)		2,794,355
Other debt securities		151		-		(17)		134
Investments in mutual funds and
other equity securities		1,959		112		-		2,071
	$	3,111,797	$	60,762	$	(3,981)	$	3,168,578

HELD TO MATURITY:
Obligations of states and political subdivisions	$	1,335	$	2	$	-	$	1,337
Residential mortgage-backed securities and
collateralized mortgage obligations		3,379		120		(77)		3,422
	$	4,714	$	122	$	(77)	$	4,759

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Investment securities that were in an unrealized loss position as of June 30, 2012 and December 31, 2011 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.


June 30, 2012
(in thousands)
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	-	$	-	$	72	$	1	$	72	$	1
Obligations of states and political subdivisions		13,225		239		-		-		13,225		239
Residential mortgage-backed securities and
collateralized mortgage obligations		650,817		4,364		46,670		684		697,487		5,048
Other debt securities		-		-		144		5		144		5
Total temporarily impaired securities	$	664,042	$	4,603	$	46,886	$	690	$	710,928	$	5,293

HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations	$	-	$	-	$	1,531	$	68	$	1,531	$	68
Total temporarily impaired securities	$	-	$	-	$	1,531	$	68	$	1,531	$	68

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


December 31, 2011
(in thousands)
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	-	$	-	$	85	$	1	$	85	$	1
Obligations of states and political subdivisions		516		13		-		-		516		13
Residential mortgage-backed securities and
collateralized mortgage obligations		489,475		3,160		52,222		790		541,697		3,950
Other debt securities		-		-		134		17		134		17
Total temporarily impaired securities	$	489,991	$	3,173	$	52,441	$	808	$	542,432	$	3,981

HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations	$	-	$	-	$	602	$	77	$	602	$	77
Total temporarily impaired securities	$	-	$	-	$	602	$	77	$	602	$	77

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

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of June 30, 2012. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 2012 are issued or guaranteed by governmental agencies. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

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

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


(in thousands)
	Available For Sale				Held To Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
AMOUNTS MATURING IN:
Three months or less	$	41,701	$	42,031	$	-	$	-
Over three months through twelve months		363,905		367,679		595		597
After one year through five years		1,749,176		1,784,023		880		854
After five years through ten years		565,350		575,258		807		771
After ten years		60,410		62,992		2,224		2,224
Other investment securities		1,959		2,093		-		-
	$	2,782,501	$	2,834,076	$	4,506	$	4,446

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

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The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three and six months ended June 30, 2012 and 2011:


(in thousands)
	Three months ended				Three months ended
	June 30, 2012				June 30, 2011
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	-	$	-	$	-	$	-
Obligations of states and political subdivisions		-		-		7		-
Residential mortgage-backed securities and
collateralized mortgage obligations		1,484		454		6,475		804
Other debt securities		-		-		-		-
	$	1,484	$	454	$	6,482	$	804


(in thousands)
	Six months ended				Six months ended
	June 30, 2012				June 30, 2011
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	371	$	-	$	-	$	-
Obligations of states and political subdivisions		2		1		7		-
Residential mortgage-backed securities and
collateralized mortgage obligations		1,484		683		6,475		804
Other debt securities		5		-		-		-
	$	1,862	$	684	$	6,482	$	804

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


(in thousands)
	Amortized		Fair
	Cost		Value
To Federal Home Loan Bank to secure borrowings	$	109,220	$	112,430
To state and local governments to secure public deposits		853,106		873,849
Other securities pledged principally to secure repurchase agreements		203,460		205,253
Total pledged securities	$	1,165,786	$	1,191,532

Note 3 – Non-Covered Loans and Leases

The following table presents the major types of non-covered loans recorded in the balance sheets as of June 30, 2012 and December 31, 2011:


(in thousands)
	June 30,		December 31,
	2012		2011
Commercial real estate
Term & multifamily	$	3,660,071	$	3,558,295
Construction & development		171,982		165,066
Residential development		70,066		90,073
Commercial
Term		707,784		625,766
LOC & other		835,148		832,999
Residential
Mortgage		375,302		315,927
Home equity loans & lines		263,941		272,192
Consumer & other		32,436		38,860
Total		6,116,730		5,899,178
Deferred loan fees, net		(12,298)		(11,080)
Total	$	6,104,432	$	5,888,098

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As of June 30, 2012, loans totaling $5.3 billion were pledged to secure borrowings and available lines of credit.

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

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

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

Formula Allowance

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

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

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

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

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

Specific Allowance

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

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

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Unallocated Allowance

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

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

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

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

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

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

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

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

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

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

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

Management believes that the ALLL was adequate as of June 30, 2012. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 79% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our loan portfolio. A continued deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

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

• The quality of the current loan portfolio;

• The trend in the loan portfolio's risk ratings;

• Current economic conditions;

• Loan concentrations;

• Loan growth rates;

• Past-due and non-performing trends;

• Evaluation of specific loss estimates for all significant problem loans;

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

• Recovery experience;

• Peer comparison loss rates.

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

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

The following table summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan portfolio segment for the three and six months ended June 30, 2012 and 2011, respectively:


(in thousands)
	Three Months Ended June 30, 2012
	Commercial						Consumer
	Real Estate		Commercial		Residential		& Other		Unallocated		Total
Balance, beginning of period	$	58,026	$	17,886	$	6,106	$	862	$	3,790	$	86,670
Charge-offs		(7,342)		(3,115)		(925)		(220)		-		(11,602)
Recoveries		352		1,388		72		100		-		1,912
Provision		5,305		3,428		1,399		296		(3,790)		6,638
Balance, end of period	$	56,341	$	19,587	$	6,652	$	1,038	$	-	$	83,618

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(in thousands)
	Three Months Ended June 30, 2011
	Commercial						Consumer
	Real Estate		Commercial		Residential		& Other		Unallocated	Total
Balance, beginning of period	$	63,528	$	20,798	$	5,626	$	856	$