Allowance for Non-Covered Loan and Lease 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 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 or lease through the credit review process. The Bank'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 and leases. 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 and lease risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans and leases.

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 and leases; regulatory exam results; changes in the level of adversely classified loans and leases (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 represents the allocated allowance for loan and lease losses.

Unallocated Allowance

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% 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 and leases;

• 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 leases, and the volume and severity of adversely classified or graded loans;

• Changes in the quality of the institution’s loan and lease 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; and

• 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 Officer, Senior Credit 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 December 31, 2013. There is, however, no assurance that future loan and lease 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 74% of our loan and lease 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 recent U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our loan and lease portfolio. A continued deterioration in our markets may adversely affect our loan and lease 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 and lease portfolio;

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

• Current economic conditions;

• Loan and lease concentrations;

• Loan and lease 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; and

• 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 and lease portfolio segment for the years ended December 31, 2013 and 2012, respectively:

(in thousands)



	December 31, 2013
	Commercial									Consumer
	Real Estate			Commercial			Residential			& Other			Unallocated			Total
Balance, beginning of period	$	54,909		$	22,925		$	6,925		$	632		$	—		$	85,391
Charge-offs	(7,445		)	(19,266		)	(3,458		)	(826		)	—			(30,995		)
Recoveries	3,322			9,914			351			502			—			14,089
Provision	2,647			10,618			3,009			555			—			16,829
Balance, end of period	$	53,433		$	24,191		$	6,827		$	863		$	—		$	85,314

	December 31, 2012
	Commercial									Consumer
	Real Estate			Commercial			Residential			& Other			Unallocated			Total
Balance, beginning of period	$	59,574		$	20,485		$	7,625		$	867		$	4,417		$	92,968
Charge-offs	(22,349		)	(12,209		)	(5,282		)	(1,499		)	—			(41,339		)
Recoveries	5,409			5,356			762			439			—			11,966
Provision	12,275			9,293			3,820			825			(4,417		)	21,796
Balance, end of period	$	54,909		$	22,925		$	6,925		$	632		$	—		$	85,391

The following table presents the allowance and recorded investment in non-covered loans and leases by portfolio segment and balances individually or collectively evaluated for impairment as of December 31, 2013 and 2012, respectively:

(in thousands)



	December 31, 2013
	Commercial						Consumer
	Real Estate		Commercial		Residential		& Other		Unallocated		Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment	$	51,648	$	24,179	$	6,827	$	863	$	—	$	83,517
Individually evaluated for impairment	1,785		12		—		—		—		1,797
Total	$	53,433	$	24,191	$	6,827	$	863	$	—	$	85,314
Non-covered loans and leases:
Collectively evaluated for impairment	$	4,235,744	$	2,108,293	$	861,470	$	48,113			$	7,253,620
Individually evaluated for impairment	89,280		11,503		—		—				100,783
Total	$	4,325,024	$	2,119,796	$	861,470	$	48,113			$	7,354,403

(in thousands)



	December 31, 2012
	Commercial						Consumer
	Real Estate		Commercial		Residential		& Other		Unallocated		Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment	$	53,513	$	22,925	$	6,920	$	632	$	—	$	83,990
Individually evaluated for impairment	1,396		—		5		—		—		1,401
Total	$	54,909	$	22,925	$	6,925	$	632	$	—	$	85,391
Non-covered loans and leases:
Collectively evaluated for impairment	$	4,059,419	$	1,700,761	$	740,925	$	37,566			$	6,538,671
Individually evaluated for impairment	123,835		18,378		175		21				142,409
Total	$	4,183,254	$	1,719,139	$	741,100	$	37,587			$	6,681,080

The non-covered loan and lease balance are net of deferred loans fees of $495,000 at December 31, 2013 and $12.1 million at December 31, 2012.

Summary of Reserve for Unfunded Commitments Activity

The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”) and unfunded commitments for the years ended December 31, 2013 and 2012, respectively:

(in thousands)



	December 31, 2013
	Commercial							Consumer
	Real Estate		Commercial		Residential			& Other		Total
Balance, beginning of period	$	172	$	807	$	173		$	71	$	1,223
Net change to other expense	48		93		59			13		213
Balance, end of period	$	220	$	900	$	232		$	84	$	1,436

	December 31, 2012
	Commercial							Consumer
	Real Estate		Commercial		Residential			& Other		Total
Balance, beginning of period	$	59	$	633	$	185		$	63	$	940
Net change to other expense	113		174		(12		)	8		283
Balance, end of period	$	172	$	807	$	173		$	71	$	1,223

(in thousands)



	Commercial						Consumer
	Real Estate		Commercial		Residential		& Other		Total
Unfunded loan and lease commitments:
December 31, 2013	$	237,042	$	1,012,257	$	336,559	$	52,588	$	1,638,446
December 31, 2012	$	196,292	$	925,642	$	257,508	$	52,170	$	1,431,612

Non-covered loans and leases sold

In the course of managing the loan and lease portfolio, at certain times, management may decide to sell loans and leases. The following table summarizes loans and leases sold by loan portfolio during the years ended December 31, 2013 and 2012, respectively:

(In thousands)



	2013		2012
Commercial real estate
Non-owner occupied term	$	4,039	$	10,623
Owner occupied term	3,738		1,473
Multifamily	—		—
Construction & development	3,515		—
Residential development	363		12
Commercial
Term	47,635		—
LOC & other	—		1,942
Leases and equipment finance	—		—
Residential
Mortgage	1,008		192
Home equity loans & lines	—		—
Consumer & other	—		—
Total	$	60,298	$	14,242

Asset Quality and Non-Performing Loans and Leases

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

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when non-covered loans are identified as impaired, they are moved to the Special Assets Division. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we will use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every 12 months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (a) currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of current real estate market conditions and financing trends, (e) is reputable, and (f) is not on Freddie Mac’s or the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by our Real Estate Valuation Services Group to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by senior credit quality officers and the Bank's ALLL Committee. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Appraisals or other alternative sources of value received subsequent to the reporting period, but prior to our filing of periodic reports, are considered and evaluated to ensure our periodic filings are materially correct and not misleading. Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.

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

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

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

The Bank has written down impaired, non-accrual loans as of December 31, 2013 to their estimated net realizable value, and expects resolution with no additional material loss, absent further decline in market prices.

Non-Covered Non-Accrual Loans and Leases and Loans and Leases Past Due

The following table summarizes our non-covered non-accrual loans and leases and loans and leases past due by loan and lease class as of December 31, 2013 and December 31, 2012:

(in thousands)



	December 31, 2013
	30-59		60-89		Greater Than								Total Non-
	Days		Days		90 Days and		Total		Non-		Current &		covered Loans
	Past Due		Past Due		Accruing		Past Due		accrual		Other (1)		and Leases
Commercial real estate
Non-owner occupied term, net	$	3,618	$	352	$	—	$	3,970	$	9,193	$	2,315,097	$	2,328,260
Owner occupied term, net	1,320		340		610		2,270		6,204		1,251,109		1,259,583
Multifamily, net	—		—		—		—		935		402,602		403,537
Construction & development, net	—		—		—		—		—		245,231		245,231
Residential development, net	—		—		—		—		2,801		85,612		88,413
Commercial
Term, net	901		1,436		—		2,337		8,723		759,785		770,845
LOC & other, net	619		224		—		843		1,222		985,295		987,360
Leases and equipment finance, net	2,202		1,706		517		4,425		2,813		354,353		361,591
Residential
Mortgage, net	1,050		342		2,070		3,462		—		593,739		597,201
Home equity loans & lines, net	473		563		160		1,196		—		263,073		264,269
Consumer & other, net	69		75		73		217		—		47,896		48,113
Total, net of deferred fees and costs	$	10,252	$	5,038	$	3,430	$	18,720	$	31,891	$	7,303,792	$	7,354,403

(1) Other includes non-covered loans accounted for under ASC 310-30.

(in thousands)



	December 31, 2012
	30-59		60-89		Greater Than								Total Non-
	Days		Days		90 Days and		Total		Non-		Current &		covered Loans
	Past Due		Past Due		Accruing		Past Due		accrual		Other (1)		and Leases
Commercial real estate
Non-owner occupied term, net	$	5,132	$	1,097	$	—	$	6,229	$	33,797	$	2,276,883	$	2,316,909
Owner occupied term, net	2,615		1,687		—		4,302		8,448		1,264,090		1,276,840
Multifamily, net	—		—		—		—		1,045		330,690		331,735
Construction & development, net	283		—		—		283		4,177		196,171		200,631
Residential development, net	479		—		—		479		5,132		51,528		57,139
Commercial
Term, net	3,009		746		81		3,836		7,040		786,185		797,061
LOC & other, net	1,647		1,503		—		3,150		7,027		880,631		890,808
Leases and equipment finance, net	—		—		—		—		—		31,270		31,270
Residential
Mortgage, net	2,906		602		3,303		6,811		—		471,652		478,463
Home equity loans & lines, net	1,398		214		758		2,370		49		260,218		262,637
Consumer & other, net	282		191		90		563		21		37,003		37,587
Total, net of deferred fees and costs	$	17,751	$	6,040	$	4,232	$	28,023	$	66,736	$	6,586,321	$	6,681,080

(1) Other includes non-covered loans accounted for under ASC 310-30.

Non-Covered Impaired Loans

Loans with no related allowance reported generally represent non-accrual loans. The Bank recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans. Therefore, the non-accrual loans as of December 31, 2013 have already been written-down to their estimated net realizable value, based on net realizable value, and are expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value.

At December 31, 2013 and December 31, 2012, impaired loans of $68.8 million and $70.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, by providing for modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest at each respective date. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Bank had no obligation to lend additional funds on the restructured loans as of December 31, 2013.

The following table summarizes our non-covered impaired loans, including average recorded investment and interest income recognized on impaired non-covered loans, by loan class for the years ended December 31, 2013 and 2012:

(in thousands)



	December 31, 2013
	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate
Non-owner occupied term, net	$	19,350	$	18,285	$	—	$	31,024	$	—
Owner occupied term, net	6,674		6,204		—		3,014		—
Multifamily, net	1,416		935		—		765		—
Construction & development, net	9,518		8,498		—		12,021		—
Residential development, net	12,347		5,776		—		7,592		—
Commercial
Term, net	22,750		8,723		—		10,981		—
LOC & other, net	5,886		1,222		—		2,836		—
Residential
Mortgage, net	—		—		—		—		—
Home equity loans & lines, net	—		—		—		70		—
Consumer & other, net	—		—		—		1		—
With an allowance recorded:
Commercial real estate
Non-owner occupied term, net	31,252		31,362		928		32,250		1,512
Owner occupied term, net	5,202		5,202		198		4,448		205
Multifamily, net	—		—		—		—		—
Construction & development, net	1,091		1,091		11		1,898		484
Residential development, net	10,166		11,927		648		14,759		644
Commercial
Term, net	—		300		8		974		17
LOC & other, net	1,258		1,258		4		1,172		51
Residential
Mortgage, net	—		—		—		153		—
Home equity loans & lines, net	—		—		—		25		—
Consumer & other, net	—		—		—		—		—
Total:
Commercial real estate, net	97,016		89,280		1,785		107,771		2,845
Commercial, net	29,894		11,503		12		15,963		68
Residential, net	—		—		—		248		—
Consumer & other, net	—		—		—		1		—
Total, net of deferred fees and costs	$	126,910	$	100,783	$	1,797	$	123,983	$	2,913

(in thousands)



	December 31, 2012
	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate
Non-owner occupied term, net	$	38,654	$	33,912	$	—	$	36,167	$	—
Owner occupied term, net	10,085		8,449		—		7,998
Multifamily, net	1,214		1,045		—		886
Construction & development, net	18,526		15,638		—		17,899		—
Residential development, net	9,293		6,091		—		15,518		—
Commercial
Term, net	13,729		10,532		—		11,966		—
LOC & other, net	10,778		7,846		—		7,949		—
Residential
Mortgage, net	—		—		—		—		—
Home equity loans & lines, net	50		49		—		301		—
Consumer & other, net	21		21		—		4		—
With an allowance recorded:
Commercial real estate
Non-owner occupied term, net	35,732		35,732		762		25,608		1,076
Owner occupied term, net	5,284		5,284		436		3,328		37
Multifamily, net	—		—		—		—		—
Construction & development, net	1,091		1,091		14		2,400		672
Residential development, net	16,593		16,593		184		18,417		747
Commercial
Term, net	—		—		—		443		182
LOC & other, net	—		—		—		795		9
Residential
Mortgage, net	—		—		—		—		—
Home equity loans & lines, net	126		126		5		127		6
Consumer & other, net	—		—		—		—		—
Total:
Commercial real estate, net	136,472		123,835		1,396		128,221		2,532
Commercial, net	24,507		18,378		—		21,153		191
Residential, net	176		175		5		428		6
Consumer & other, net	21		21		—		4		—
Total, net of deferred fees and costs	$	161,176	$	142,409	$	1,401	$	149,806	$	2,729

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

Non-Covered Credit Quality Indicators

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

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

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

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

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

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

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


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


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


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


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


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


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

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


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


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


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


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


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

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

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

• The borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.

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

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

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

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

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

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

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

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

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

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

Substandard—A homogeneous substandard loan or lease, risk rated 8, is 60-89 days past due from the required payment date at month-end.

Doubtful—A homogeneous doubtful loan or lease, risk rated 9, is 90-179 days past due from the required payment date at month-end.

Loss—A homogeneous loss loan or lease, risk rated 10, is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses.

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

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

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

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

The following table summarizes our internal risk rating by loan and lease class for the non-covered loan and lease portfolio as of December 31, 2013 and December 31, 2012:

(in thousands)



	December 31, 2013
	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Impaired		Total
Commercial real estate
Non-owner occupied term, net	$	2,073,366	$	108,263	$	96,984	$	—	$	—	$	49,647	$	2,328,260
Owner occupied term, net	1,182,865		27,615		37,524		173		—		11,406		1,259,583
Multifamily, net	385,335		5,574		11,693		—		—		935		403,537
Construction & development, net	230,262		2,054		3,326		—		—		9,589		245,231
Residential development, net	67,019		1,836		1,855		—		—		17,703		88,413
Commercial
Term, net	718,778		23,393		19,651		—		—		9,023		770,845
LOC & other, net	951,109		24,197		9,574		—		—		2,480		987,360
Leases and equipment finance, net	351,971		4,585		1,706		2,996		333		—		361,591
Residential
Mortgage, net	593,723		1,405		743		—		1,330		—		597,201
Home equity loans & lines, net	263,070		1,038		25		—		136		—		264,269
Consumer & other, net	47,895		144		33		—		41		—		48,113
Total, net of deferred fees and costs	$	6,865,393	$	200,104	$	183,114	$	3,169	$	1,840	$	100,783	$	7,354,403

(in thousands)



	December 31, 2012
	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Impaired		Total
Commercial real estate
Non-owner occupied term, net	$	1,993,369	$	174,892	$	79,004	$	—	$	—	$	69,644	$	2,316,909
Owner occupied term, net	1,185,721		26,475		50,911		—		—		13,733		1,276,840
Multifamily, net	324,315		1,950		4,425		—		—		1,045		331,735
Construction & development, net	165,185		12,654		6,063		—		—		16,729		200,631
Residential development, net	25,018		4,373		5,064		—		—		22,684		57,139
Commercial
Term, net	717,546		22,256		46,727		—		—		10,532		797,061
LOC & other, net	847,883		19,510		15,569		—		—		7,846		890,808
Leases and equipment finance, net	31,270		—		—		—		—		—		31,270
Residential
Mortgage, net	471,206		3,510		1,120		—		2,627		—		478,463
Home equity loans & lines, net	260,086		1,616		—		—		760		175		262,637
Consumer & other, net	37,056		419		57		—		34		21		37,587
Total, net of deferred fees and costs	$	6,058,655	$	267,655	$	208,940	$	—	$	3,421	$	142,409	$	6,681,080

The percentage of non-covered impaired loans classified as watch, special mention, and substandard was 6.4%, 3.7%, and 89.9%, respectively, as of December 31, 2013. The percentage of non-covered impaired loans classified as watch, special mention, and substandard was 9.0%, 1.7%, and 89.3%, respectively, as of December 31, 2012.

Troubled Debt Restructurings

At December 31, 2013 and December 31, 2012, impaired loans of $68.8 million and $70.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance and the allowance on impaired restructured loans is calculated consistently across the portfolios.

There were no available commitments for troubled debt restructurings outstanding as of December 31, 2013 and none as of December 31, 2012.

The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of December 31, 2013 and December 31, 2012:

(in thousands)



	December 31, 2013
	Accrual		Non-Accrual		Total
	Status		Status		Modifications
Commercial real estate
Non-owner occupied term, net	$	37,366	$	—	$	37,366
Owner occupied term, net	5,202		—		5,202
Multifamily, net	—		—		—
Construction & development, net	9,590		—		9,590
Residential development, net	14,902		2,196		17,098
Commercial
Term, net	—		2,603		2,603
LOC & other, net	1,258		—		1,258
Leases and equipment finance, net	—		—		—
Residential
Mortgage, net	473		—		473
Home equity loans & lines, net	—		—		—
Consumer & other, net	—		—		—
Total, net of deferred fees and costs	$	68,791	$	4,799	$	73,590

(in thousands)



	December 31, 2012
	Accrual		Non-Accrual		Total
	Status		Status		Modifications
Commercial real estate
Non-owner occupied term, net	$	34,329	$	16,200	$	50,529
Owner occupied term, net	5,284		405		5,689
Multifamily, net	—		—		—
Construction & development, net	12,552		3,516		16,068
Residential development, net	17,141		4,921		22,062
Commercial
Term, net	350		4,641		4,991
LOC & other, net	820		1,493		2,313
Leases and equipment finance, net	—		—		—
Residential
Mortgage, net	—		—		—
Home equity loans & lines, net	126		—		126
Consumer & other, net	—		—		—
Total, net of deferred fees and costs	$	70,602	$	31,176	$	101,778

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

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

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

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

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

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

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

The following tables present newly non-covered restructured loans that occurred during the years ended December 31, 2013 and 2012, respectively:

(in thousands)



	December 31, 2013
	Rate		Term		Interest Only		Payment		Combination
	Modifications		Modifications		Modifications		Modifications		Modifications		Total
Commercial real estate
Non-owner occupied term, net	$	—	$	—	$	4,291	$	—	$	—	$	4,291
Owner occupied term, net	—		—		—		—		—		—
Multifamily, net	—		—		—		—		—		—
Construction & development, net	—		—		—		—		—		—
Residential development, net	—		—		—		—		—		—
Commercial
Term, net	—		—		—		—		3,588		3,588
LOC & other, net	—		—		—		—		452		452
Leases and equipment finance, net	—		—		—		—		—		—
Residential
Mortgage, net	—		—		—		—		478		478
Home equity loans & lines, net	—		—		—		—		—		—
Consumer & other, net	—		—		—		—		—		—
Total, net of deferred fees and costs	$	—	$	—	$	4,291	$	—	$	4,518	$	8,809

	December 31, 2012
	Rate		Term		Interest Only		Payment		Combination
	Modifications		Modifications		Modifications		Modifications		Modifications		Total
Commercial real estate
Non-owner occupied term, net	$	14,333	$	—	$	—	$	—	$	2,595	$	16,928
Owner occupied term, net	587		—		—		—		4,722		5,309
Multifamily, net	—		—		—		—		—		—
Construction & development, net	—		—		—		—		—		—
Residential development, net	—		—		—		—		—		—
Commercial
Term, net	—		—		—		—		—		—
LOC & other, net	—		—		—		820		—		820
Leases and equipment finance, net	—		—		—		—		—		—
Residential
Mortgage, net	—		—		—		—		—		—
Home equity loans & lines, net	—		—		—		—		—		—
Consumer & other, net	—		—		—		—		—		—
Total, net of deferred fees and costs	$	14,920	$	—	$	—	$	820	$	7,317	$	23,057

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

The following tables represent financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the years ended December 31, 2013 and 2012, respectively:

(in thousands)



	2013		2012
Commercial real estate
Non-owner occupied term, net	$	—	$	—
Owner occupied term, net	—		217
Multifamily, net	—		—
Construction & development, net	—		—
Residential development, net	—		633
Commercial
Term, net	1,786		—
LOC & other, net	—		26
Leases and equipment finance, net	—		—
Residential
Mortgage, net	—		—
Home equity loans & lines, net	—		—
Consumer & other, net	—		—
Total, net of deferred fees and costs	$	1,786	$	876