| Covered Assets and Indemnification Asset |
Covered Assets and Indemnification Asset Covered Loans, Net Loans acquired in an Federal Deposit Insurance Corporation ("FDIC")-assisted acquisition that are subject to a loss-share agreement are referred to as covered loans and reported separately in our statements of financial condition. Covered loans are reported exclusive of the cash flow reimbursements expected from the FDIC. The following table presents the major types of covered loans as of June 30, 2014 and December 31, 2013: | | | | | | | | | (in thousands) | June 30, 2014 | | December 31, 2013 | Commercial real estate | | | | Non-owner occupied term, net | $ | 169,299 |
| | $ | 206,902 |
| Owner occupied term, net | 48,191 |
| | 49,817 |
| Multifamily, net | 23,869 |
| | 37,671 |
| Construction & development, net | 2,383 |
| | 3,455 |
| Residential development, net | 3,167 |
| | 7,286 |
| Commercial | | | | Term, net | 10,109 |
| | 15,719 |
| LOC & other, net | 8,604 |
| | 6,698 |
| Residential | | | | Mortgage, net | 18,337 |
| | 22,316 |
| Home equity loans & lines, net | 18,220 |
| | 19,637 |
| Consumer & other, net | 3,931 |
| | 4,262 |
| Total, net of deferred fees and costs | $ | 306,110 |
| | $ | 373,763 |
| Allowance for covered loans | (8,500 | ) | | (9,771 | ) | Total | $ | 297,610 |
| | $ | 363,992 |
|
The outstanding contractual unpaid principal balance, excluding purchase accounting adjustments, at June 30, 2014 was $366.4 million as compared to $462.4 million at December 31, 2013. In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the "accretable yield." The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The following table presents the changes in the accretable yield for the three and six months ended June 30, 2014 and 2013 for the covered loan portfolio: | | | | | | | | | | | | | | | | | (in thousands) | | | | | | | | | Three Months Ended | | Six Months Ended | | June 30, | | June 30, | | 2014 | | 2013 | | 2014 | | 2013 | Balance, beginning of period | $ | 115,574 |
| | $ | 169,620 |
| | $ | 126,484 |
| | $ | 183,388 |
| Accretion to interest income | (15,601 | ) | | (14,387 | ) | | (27,983 | ) | | (28,584 | ) | Disposals | (13,397 | ) | | (4,523 | ) | | (17,254 | ) | | (7,453 | ) | Reclassifications from nonaccretable difference | 8,446 |
| | 4,093 |
| | 13,775 |
| | 7,452 |
| Balance, end of period | $ | 95,022 |
| | $ | 154,803 |
| | $ | 95,022 |
| | $ | 154,803 |
|
Allowance for Covered Loan Losses The following table summarizes activity related to the allowance for covered loan losses by covered loan portfolio segment for the three and six months ended June 30, 2014 and 2013: | | | | | | | | | | | | | | | | | | | | | (in thousands) | Three Months Ended June 30, 2014 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Balance, beginning of period | $ | 6,071 |
| | $ | 3,469 |
| | $ | 632 |
| | $ | 148 |
| | $ | 10,320 |
| Charge-offs | (700 | ) | | (745 | ) | | (46 | ) | | (27 | ) | | (1,518 | ) | Recoveries | 238 |
| | 125 |
| | 20 |
| | 18 |
| | 401 |
| (Recapture) provision | (647 | ) | | (10 | ) | | (56 | ) | | 10 |
| | (703 | ) | Balance, end of period | $ | 4,962 |
| | $ | 2,839 |
| | $ | 550 |
| | $ | 149 |
| | $ | 8,500 |
| | | | | | | | | | | | Three Months Ended June 30, 2013 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Balance, beginning of period | $ | 12,374 |
| | $ | 4,867 |
| | $ | 685 |
| | $ | 295 |
| | $ | 18,221 |
| Charge-offs | (507 | ) | | (484 | ) | | (58 | ) | | (154 | ) | | (1,203 | ) | Recoveries | 191 |
| | 108 |
| | 89 |
| | 33 |
| | 421 |
| (Recapture) provision | (3,187 | ) | | 21 |
| | 92 |
| | 2 |
| | (3,072 | ) | Balance, end of period | $ | 8,871 |
| | $ | 4,512 |
| | $ | 808 |
| | $ | 176 |
| | $ | 14,367 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | Six Months Ended June 30, 2014 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Balance, beginning of period | $ | 6,105 |
| | $ | 2,837 |
| | $ | 660 |
| | $ | 169 |
| | $ | 9,771 |
| Charge-offs | (1,046 | ) | | (914 | ) | | (164 | ) | | (63 | ) | | (2,187 | ) | Recoveries | 629 |
| | 246 |
| | 135 |
| | 38 |
| | 1,048 |
| (Recapture) provision | (726 | ) | | 670 |
| | (81 | ) | | 5 |
| | (132 | ) | Balance, end of period | $ | 4,962 |
| | $ | 2,839 |
| | $ | 550 |
| | $ | 149 |
| | $ | 8,500 |
| | | | | | | | | | | | Six Months Ended June 30, 2013 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Balance, beginning of period | $ | 12,129 |
| | $ | 4,980 |
| | $ | 804 |
| | $ | 362 |
| | $ | 18,275 |
| Charge-offs | (768 | ) | | (813 | ) | | (108 | ) | | (332 | ) | | (2,021 | ) | Recoveries | 487 |
| | 272 |
| | 126 |
| | 68 |
| | 953 |
| (Recapture) provision | (2,977 | ) | | 73 |
| | (14 | ) | | 78 |
| | (2,840 | ) | Balance, end of period | $ | 8,871 |
| | $ | 4,512 |
| | $ | 808 |
| | $ | 176 |
| | $ | 14,367 |
|
The following table presents the allowance and recorded investment in covered loans by portfolio segment as of June 30, 2014 and 2013: | | | | | | | | | | | | | | | | | | | | | (in thousands) | June 30, 2014 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Allowance for covered loans: | | | | | | | | | | Loans acquired with deteriorated credit quality (1) | $ | 4,880 |
| | $ | 2,618 |
| | $ | 497 |
| | $ | 98 |
| | $ | 8,093 |
| Collectively evaluated for impairment (2) | 82 |
| | 221 |
| | 53 |
| | 51 |
| | 407 |
| Total | $ | 4,962 |
| | $ | 2,839 |
| | $ | 550 |
| | $ | 149 |
| | $ | 8,500 |
| Covered loans: | | | | | | | | | | Loans acquired with deteriorated credit quality (1) | $ | 246,377 |
| | $ | 9,551 |
| | $ | 31,436 |
| | $ | 1,454 |
| | $ | 288,818 |
| Collectively evaluated for impairment (2) | 532 |
| | 9,162 |
| | 5,121 |
| | 2,477 |
| | 17,292 |
| Total | $ | 246,909 |
| | $ | 18,713 |
| | $ | 36,557 |
| | $ | 3,931 |
| | $ | 306,110 |
|
| | | | | | | | | | | | | | | | | | | | | (in thousands) | June 30, 2013 | | Commercial | | | | | | Consumer | | | | Real Estate | | Commercial | | Residential | | & Other | | Total | Allowance for covered loans: | | | | | | | | | | Loans acquired with deteriorated credit quality (1) | $ | 8,497 |
| | $ | 4,124 |
| | $ | 758 |
| | $ | 130 |
| | $ | 13,509 |
| Collectively evaluated for impairment (2) | 374 |
| | 388 |
| | 50 |
| | 46 |
| | 858 |
| Total | $ | 8,871 |
| | $ | 4,512 |
| | $ | 808 |
| | $ | 176 |
| | $ | 14,367 |
| Covered loans: | | | | | | | | | | Loans acquired with deteriorated credit quality (1) | $ | 348,013 |
| | $ | 21,935 |
| | $ | 41,416 |
| | $ | 2,192 |
| | $ | 413,556 |
| Collectively evaluated for impairment (2) | 2,876 |
| | 9,475 |
| | 5,040 |
| | 2,479 |
| | 19,870 |
| Total | $ | 350,889 |
| | $ | 31,410 |
| | $ | 46,456 |
| | $ | 4,671 |
| | $ | 433,426 |
|
(1) The valuation allowance is netted against the carrying value of the covered loan balance. (2) The allowance on covered loan losses includes an allowance on covered loan advances on acquired loans subsequent to acquisition. The valuation allowance on covered loans was reduced by recaptured provision of $873,000 and $1.3 million for the three and six months ended June 30, 2014, respectively, and $4.1 million and $5.7 million for the three and six months ended June 30, 2013, respectively. Covered Credit Quality Indicators Covered loans are risk rated in a manner consistent with non-covered loans. 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 10 risk rating groupings are described fully in Note 5. The following table includes loans acquired with deteriorated credit quality and advances made subsequent to acquisition on covered loans. The following table summarizes our internal risk rating grouping by covered loans, net as of June 30, 2014 and December 31, 2013: | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | June 30, 2014 | | | | Special | | | | | | | | | | Pass/Watch | | Mention | | Substandard | | Doubtful | | Loss | | Total | Commercial real estate | | | | | | | | | | | | Non-owner occupied term, net | $ | 105,875 |
| | $ | 21,468 |
| | $ | 39,625 |
| | $ | — |
| | $ | — |
| | $ | 166,968 |
| Owner occupied term, net | 30,342 |
| | 4,865 |
| | 11,827 |
| | — |
| | — |
| | 47,034 |
| Multifamily, net | 13,358 |
| | 1,158 |
| | 8,893 |
| | — |
| | — |
| | 23,409 |
| Construction & development, net | 1,148 |
| | — |
| | 824 |
| | — |
| | — |
| | 1,972 |
| Residential development, net | — |
| | 225 |
| | 2,273 |
| | 64 |
| | — |
| | 2,562 |
| Commercial | | | | | | | | | | | | Term, net | 3,639 |
| | 505 |
| | 3,372 |
| | — |
| | — |
| | 7,516 |
| LOC & other, net | 7,618 |
| | 10 |
| | 730 |
| | — |
| | — |
| | 8,358 |
| Residential | | | | | | | | | | | | Mortgage, net | 18,272 |
| | — |
| | — |
| | — |
| | — |
| | 18,272 |
| Home equity loans & lines, net | 17,655 |
| | — |
| | 81 |
| | — |
| | — |
| | 17,736 |
| Consumer & other, net | 3,783 |
| | — |
| | — |
| | — |
| | — |
| | 3,783 |
| Total, net of deferred fees and costs and allowance for loan losses | $ | 201,690 |
| | $ | 28,231 |
| | $ | 67,625 |
| | $ | 64 |
| | $ | — |
| | $ | 297,610 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | December 31, 2013 | | | | Special | | | | | | | | | | Pass/Watch | | Mention | | Substandard | | Doubtful | | Loss | | Total | Commercial real estate | | | | | | | | | | | | Non-owner occupied term, net | $ | 133,452 |
| | $ | 26,321 |
| | $ | 44,279 |
| | $ | — |
| | $ | — |
| | $ | 204,052 |
| Owner occupied term, net | 30,119 |
| | 3,370 |
| | 14,971 |
| | 213 |
| | — |
| | 48,673 |
| Multifamily, net | 24,213 |
| | 2,563 |
| | 10,409 |
| | — |
| | — |
| | 37,185 |
| Construction & development, net | 1,117 |
| | — |
| | 1,686 |
| | — |
| | — |
| | 2,803 |
| Residential development, net | 492 |
| | 224 |
| | 5,541 |
| | 54 |
| | — |
| | 6,311 |
| Commercial | | | | | | | | | | | | Term, net | 3,753 |
| | 3,141 |
| | 6,128 |
| | 258 |
| | — |
| | 13,280 |
| LOC & other, net | 4,630 |
| | 991 |
| | 681 |
| | — |
| | — |
| | 6,302 |
| Residential | | | | | | | | | | | | Mortgage, net | 22,175 |
| | — |
| | — |
| | — |
| | — |
| | 22,175 |
| Home equity loans & lines, net | 19,043 |
| | — |
| | 76 |
| | — |
| | — |
| | 19,119 |
| Consumer & other, net | 4,092 |
| | — |
| | — |
| | — |
| | — |
| | 4,092 |
| Total, net of deferred fees and costs and allowance for loan losses | $ | 243,086 |
| | $ | 36,610 |
| | $ | 83,771 |
| | $ | 525 |
| | $ | — |
| | $ | 363,992 |
|
FDIC Indemnification Asset The Company has elected to account for amounts receivable under the loss-share agreements as an indemnification asset. The FDIC indemnification asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreement. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into non-interest income over the life of the FDIC indemnification asset. Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered assets. These adjustments are measured on the same basis as the related covered loans and covered OREO. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to non-interest income. The resulting carrying value of the indemnification asset represents the amounts recoverable from the FDIC for future expected losses, and the amounts due from the FDIC for claims related to covered losses the Company has incurred less amounts due back to the FDIC relating to shared recoveries. The following table summarizes the activity related to the FDIC indemnification asset for the three and six months ended June 30, 2014 and 2013:
| | | | | | | | | | | | | | | | | (in thousands) | Three Months ended | | Six Months Ended | | June 30, | | June 30, | | 2014 | | 2013 | | 2014 | | 2013 | Balance, beginning of period | $ | 18,362 |
| | $ | 46,046 |
| | $ | 23,174 |
| | $ | 52,798 |
| Change in FDIC indemnification asset | (5,601 | ) | | (8,294 | ) | | (10,441 | ) | | (13,367 | ) | Transfers to due from FDIC and other | (1,468 | ) | | (1,489 | ) | | (1,440 | ) | | (3,168 | ) | Balance, end of period | $ | 11,293 |
| | $ | 36,263 |
| | $ | 11,293 |
| | $ | 36,263 |
|
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