Information required by this item is set
forth in the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes, and Selected Quarterly Income
Statements, which is incorporated by reference into this item.
The Management of HPCI is responsible for the financial information
and representations contained in the financial statements and other sections of this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the United States. In all material respects, they reflect
the substance of transactions that should be included based on informed judgments, estimates, and currently available information.
Management maintains a system of internal accounting controls, which includes the careful selection and training of qualified
personnel, appropriate segregation of responsibilities, communication of written policies and procedures, and a broad program
of internal audits. The costs of the controls are balanced against the expected benefits. During 2012, the audit committee of
the board of directors met regularly with Management, HPCI’s internal auditors, and the independent registered public accounting
firm, Deloitte & Touche LLP, to review the scope of the audits and to discuss the evaluation of internal accounting controls
and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access
to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, HPCI maintains a disclosure review
committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material
information relating to the financial and operating condition of HPCI is properly reported to its chief executive officer, chief
financial officer, internal auditors, and the audit committee of the board of directors in connection with the preparation and
filing of periodic reports and the certification of those reports by the chief executive officer and the chief financial officer.
Report of Management’s Assessment
of Internal Control Over Financial Reporting
Management is responsible for establishing
and maintaining adequate internal control over financial reporting for the Company, including accounting and other internal control
systems that, in the opinion of Management, provide reasonable assurance that (1) transactions are properly authorized, (2) the
assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the United States. HPCI’s management assessed
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control—Integrated Framework
. Based on that assessment, Management believes that, as of December 31, 2012, the Company’s
internal control over financial reporting is effective based on those criteria. The Company’s internal control over financial
reporting as of December 31, 2012 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm,
as stated in their report appearing on the next page.
(1) All of HPCI’s common stock is owned by HPCII and
Holdings and, therefore, net income per share is not presented.
Notes to the Financial Statements
Note 1 -
Significant Accounting Policies
Basis of Presentation
—
The financial statements of
HPCI
are presented in conformity with GAAP. The
financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of Management,
necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented.
Business
—
HPCI
was organized under Ohio law in 1992, and designated as a REIT in 1998. HPCI’s principal business objective is to acquire,
hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders.
Two related parties own HPCI’s common stock: HPCII and Holdings.
HPCII and Holdings are direct and indirect subsidiaries of
the Bank, a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The
Bank is a wholly-owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under
Maryland law and headquartered in Columbus, Ohio. At December 31, 2012, the Bank, on a consolidated basis with its subsidiaries,
accounted for over 99% of Huntington’s consolidated total assets and essentially all of the net income. Thus, for purposes
of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington
to be substantially the same.
The preparation of financial statements in conformity with
GAAP requires Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results
could differ from those estimates.
In preparing these financial statements, subsequent events
were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are
widely distributed to all shareholders and other financial statement users, or filed with the SEC. In conjunction with applicable
accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the
Notes to the Financial Statements.
Transactions with Related Parties
—
HPCI’s due from/to The Huntington National Bank primarily consists of the net settlement amounts due
to, or from, the Bank for the last month of the reporting period’s activity. Principal and interest payments on loan participations
remitted by customers are due from the Bank, while new loan participation interest purchases are due to the Bank. The amounts
are settled with the Bank within the first few days of the following month.
Loan Participation Interests
—
Loan participation interests are purchased from the Bank either directly or through Holdings by HPCI at the
Bank’s carrying value, which is the principal amount outstanding plus accrued interest, net of unearned income, if any,
less an allowance for loan losses. The purchase price paid approximates fair value on the date the loan participations are purchased.
Participation interests are categorized based on the collateral securing the underlying loan. HPCI does not purchase loan participation
interests in loans made to directors or executive officers of HPCI or Huntington.
Troubled Debt Restructurings
—
Troubled debt restructurings are loan participation
interests
for which the
original contractual terms have been modified to provide a concession to a borrower experiencing financial difficulties. Loan
participation
interest
modifications are considered TDRs when the concessions provided are not
available to the borrower through either normal channels or other sources. However, not all loan participation
interest
modifications are TDRs. Modifications resulting in troubled debt restructurings may include changes
to one or more terms of the loan participation
interest
, including but not limited to, a change
in interest rate, an extension of the amortization period, a reduction in payment amount and partial forgiveness or deferment
of principal or accrued interest.
Allowance for Credit Losses
—
The ACL is comprised of the ALPL and the AULPC, and reflects Management’s judgment regarding the appropriate
level necessary to absorb credit losses inherent in the loan participation interest portfolio. It is HPCI’s policy to utilize
the Bank’s analysis as of the end of each reporting date to estimate the required level of the ALPL and AULPC. The determination
of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loan participation
interests, consideration of economic conditions, and historical loss experience pertaining to pools of homogeneous loan participation
interests, all of which may be susceptible to change.
The appropriateness of the ACL is based on Management’s
current judgments about the credit quality of the loan participation interests portfolio. These judgments consider on-going evaluations
of the loan participation interests portfolio, including such factors as the differing economic risks associated with each loan
participation interests category, the financial condition of specific borrowers, the level of delinquent loan participation interests,
the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, Management
evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial
obligations when quantifying the exposure to credit losses and assessing the appropriateness of the ACL at each reporting date.
In addition to general economic conditions and the other factors described above, additional factors also considered include the
impact of declining residential real estate values and the diversification of commercial real estate loan participation interests.
Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks
to current performance.
ALPL is transferred to HPCI either directly or through Holdings
from the Bank on loan participation interests underlying the participation interests at the time the participation interests are
acquired. This transfer of ALPL is reflected as ALPL acquired rather than HPCI recording provision for credit losses. Based on
Management’s quarterly evaluation of the factors previously mentioned, the ALPL may either be increased through a provision
for credit losses, net of recoveries, charged to earnings or lowered through a reduction in allowance for credit losses, net of
recoveries, credited to earnings. Credit losses are charged against the ALPL when Management believes the loan participation interest
balance, or a portion thereof, is uncollectible.
The ALPL consists of two components: (1) the transaction reserve,
which includes an allocation per ASC 310-10, specific reserves related to loan participation interests considered to be impaired,
and loan participation interests involved in TDRs allocated per ASC 310-40, and (2) the general reserve. The transaction reserve
component includes both (1) an estimate of loss based on pools of commercial and consumer loan participation interests with similar
characteristics and (2) an estimate of loss based on an impairment review of each CRE loan participation interest greater than
$1.0 million. For the CRE portfolio, the estimate of loss based on pools of loan participation interests with similar characteristics
is made by applying a PD factor and a LGD factor to each individual loan based on a continuously updated loan grade, using a standardized
loan grading system. The PD and LGD factors are determined for each loan grade using statistical models based on historical performance
data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service
coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry
and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors
are developed based on credit migration models that track historical movements of loan participation interests between loan ratings
over time and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month
emergence period.
In the case of more homogeneous portfolios, such as the consumer
and residential real estate portfolio, the determination of the transaction reserve also incorporates PD and LGD factors, however,
the estimate of loss is based on pools of loan participation interests with similar characteristics. The PD factor considers current
credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis of
understanding the borrowers past and current payment performance, and this information is used to estimate expected losses over
the subsequent 12-month period. The performance of first-lien loans ahead of junior-lien loans is available to use as part of
the updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores,
models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent
behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies,
and adjustments to the allowance factors are made as required. Models utilized in the ALPL estimation process are subject to the
Bank’s model validation policies.
The general reserve consists of economic reserve and risk-profile
reserve components. The economic reserve component considers the potential impact of changing market and economic conditions on
portfolio performance. The risk-profile component considers items unique to our structure, policies, processes, and portfolio
composition, as well as qualitative measurements and assessments of the portfolios including, but not limited to, management quality,
concentrations, portfolio composition, industry comparisons, and internal review functions.
The estimate for the AULPC is determined using the same procedures
and methodologies as used for the ALPL. The loss factors used in the AULPC are the same as the loss factors used in the ALPL while
also considering a historical utilization of unused commitments.
Nonaccrual and Past Due Loan Participation
Interests
—
Loan participation interests are considered past due
when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due
date.
Any loan participation interest in either portfolio may be
placed on nonaccrual status prior to policies described below when collection of principal or interest is in doubt.
Loan participation interests in all classes within the CRE
portfolio are placed on nonaccrual status at 90-days past due. First-lien consumer and residential real estate loan participation
interests are placed on nonaccrual status at 150-days past due. Junior-lien consumer and residential real estate loan participation
interests are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified
as nonaccrual. Beginning in the 2012 third quarter, when a loan participation interest with discharged non-reaffirmed debt in
a Chapter 7 bankruptcy filing is identified, and the loan participation interest is determined to be collateral dependent, the
consumer and residential real estate loan participation interest is placed on nonaccrual status.
For all classes within all portfolios, when a loan participation
interest is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest
income, and prior year amounts charged-off as a credit loss.
For all classes within all portfolios, cash receipts received
on NPAs are applied entirely against principal until the loan has been collected in full, after which time any additional cash
receipts are recognized as interest income.
However, for secured non-reaffirmed debt in a Chapter 7
bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of
the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the
carrying value has been fully charged-off, payments are recorded as loan recoveries.
Regarding all classes within CRE portfolio, the determination
of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s
current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer
and residential real estate portfolio, the determination of a borrower’s ability to make the required principal and interest
payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s
financial condition. When, in Management’s judgment, the borrower’s ability to make required principal and interest
payments resumes and collectability is no longer in doubt, the loan participation interest is returned to accrual status. For
these loan participation interests that have been returned to accrual status, cash receipts are applied according to the contractual
terms of the loan.
Charge-off of Uncollectible Loan Participation
Interests
—
Any loan participation interest in any portfolio may be charged-off prior
to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to,
bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency
and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter
7 bankruptcy filings are charged-off to estimated collateral value, less anticipated selling costs.
CRE loan participation interests are either charged-off or
written down to net realizable value at 90-days past due. First-lien consumer and residential real estate loan participation interests
are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due. Junior-lien
consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral,
less anticipated selling costs, at 120-days past due.
Impaired Loan Participation Interest
—
For all classes within the CRE portfolio, all loan participation interests with an outstanding balance of greater
than $1.0 million are considered for individual impairment evaluation on a quarterly basis. Generally, consumer loan participation
interests within any class are not individually evaluated on a regular basis for impairment. Additionally, all TDRs, regardless
of the outstanding balance amount, are also considered impaired.
Once a loan participation interest has been identified for
an assessment of impairment, the loan participation interest is considered impaired when, based on current information and events,
it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination
requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.
When a loan participation interest in any class has been determined
to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the
loan participation interest’s effective interest rate or, as a practical expedient, the observable market price of the loan
participation interest, or the fair value of the collateral if the loan participation interest is collateral-dependent. When the
present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of
the loan participation interest adjusted for any premium or discount. When the contractual interest rate is variable, the effective
interest rate of the loan participation interest changes over time. A specific reserve is established as a component of the ALPL
when a loan participation interest has been determined to be impaired. Subsequent to the initial measurement of impairment, if
there is a significant change to the impaired loan participation interest's expected future cash flows, or if actual cash flows
are significantly different from the cash flows previously estimated, the impairment is recalculated and the specific reserve
is appropriately adjusted. Similarly, if impairment is measured based on the observable market price of an impaired loan participation
interest or the fair value of the collateral of an impaired collateral-dependent loan participation interest, the specific reserve
is adjusted.
When a loan participation interest within any class is impaired,
interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is
accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received
on nonaccrual impaired loan participation interests within any class are generally applied entirely against principal until the
loan participation interest has been collected in full, after which time any additional cash receipts are recognized as interest
income. Cash receipts received on accruing impaired loan participation interests within any class are applied in the same manner
as accruing loan participation interests that are not considered impaired.
Net Income per Share
—
HPCII and Holdings own all of HPCI’s common stock and, therefore, net income per common share information is
not presented.
Income Taxes
—
HPCI
has elected to be treated as a REIT for federal income tax purposes and intends to comply with the provisions of the IRC. Accordingly,
HPCI will not be subject to federal income tax to the extent it distributes its earnings, excluding capital gains, to stockholders
and as long as certain asset, income, and stock ownership tests are met in accordance with the IRC.
Statement of Cash Flows
—
Cash, cash equivalents, and interest-bearing deposits are defined as cash and cash equivalents.
Fair Value Measurements
— HPCI records
or discloses certain of its assets at fair value. Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. Fair value measurements are classified within one of
three levels in a valuation hierarchy based upon the transparency of inputs to the valuation of an asset or liability as of the
measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology
are unobservable and significant to the fair value measurement. A financial instrument’s categorization within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Note 2 - Accounting Standards Update
ASU 2011-04 — Fair Value Measurement (Topic 820),
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
The ASU amends Topic
820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing
principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement
of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the
unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of
financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional
disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued
for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively. The amendments
did not have a material impact on HPCI’s Financial Statements.
ASU 2011-05 — Other Comprehensive Income (Topic 220),
Presentation of Comprehensive Income.
The ASU amends Topic 220 to require an entity the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. An entity is also required to present on the face of the
financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income
in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments
do not change items that must be reported in other comprehensive income or when an item of other comprehensive income must be
reclassified to net income, only the format for presentation. Other than the deferral of the requirements related to reclassifications,
the updated guidance was effective for our quarterly and annual financial statements for 2012.
ASU 2013-02— Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires an entity to provide information
about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required
to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified
out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is
required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective
prospectively for reporting periods beginning after December 15, 2012. Management does not believe the amendments will have a
material impact on HPCI's Financial Statements.
Note 3 - Loan Participation Interests and Allowance For
Credit Losses
Loan Participation Interest Portfolio Composition
Loan participation interests are categorized
based on the collateral underlying the loan. At December 31, 2012 and 2011, loan participation interests were comprised of the
following:
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
2,875,870
|
|
|
$
|
3,149,330
|
|
Consumer and residential real estate
|
|
|
439,073
|
|
|
|
434,272
|
|
Total loan participation interests
|
|
|
3,314,943
|
|
|
|
3,583,602
|
|
Allowance for loan participation losses
|
|
|
(59,451
|
)
|
|
|
(83,772
|
)
|
Net loan participation interests
|
|
$
|
3,255,492
|
|
|
$
|
3,499,830
|
|
As shown in the table above, the Company’s
primary loan participation interest portfolios are: CRE and consumer and residential real estate. Classes are generally disaggregations
of a portfolio. The classes within the CRE portfolio are: retail properties, multi family, office, industrial and warehouse, and
other CRE. The classes within the consumer and residential real estate portfolio are: first-lien loan participation interests
and junior-lien loan participation interests.
Other than the credit risk concentration
related to loan participation interests secured by real estate as described above, there were no other underlying loans outstanding
that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying
loans were, however, generally collateralized by real estate. Loans made to borrowers in the five states of Ohio, Michigan, Indiana,
Pennsylvania, and Kentucky comprised 94% and 93% of the portfolio at December 31, 2012 and 2011, respectively.
Loan Participation Interest Purchases and Sales
The following table summarizes significant
portfolio purchase activity during the years ended December 31, 2012 and 2011:
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Total
|
|
Portfolio loan participation interests purchased during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
$
|
1,573,512
|
|
|
$
|
107,428
|
|
|
$
|
1,680,940
|
|
Year ended December 31, 2011
|
|
|
2,197,034
|
|
|
|
—
|
|
|
|
2,197,034
|
|
There were no significant portfolio loan
participation interest sales during either of the years ended December 31, 2012 and 2011.
NPAs and Past Due Loan Participation Interests
The following table presents NPAs by loan
class for the years ended December 31, 2012 and 2011:
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
1,652
|
|
|
$
|
15,346
|
|
Retail properties
|
|
|
4,771
|
|
|
|
8,107
|
|
Office
|
|
|
13,745
|
|
|
|
8,476
|
|
Multi family
|
|
|
1,109
|
|
|
|
1,248
|
|
Other commercial real estate
|
|
|
6,624
|
|
|
|
12,308
|
|
Total commercial real estate
|
|
$
|
27,901
|
|
|
$
|
45,485
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
7,190
|
|
|
$
|
5,387
|
|
Secured by junior-lien
|
|
|
780
|
|
|
|
710
|
|
Total consumer and residential real estate
|
|
$
|
7,970
|
|
|
$
|
6,097
|
|
Total nonperforming assets
|
|
$
|
35,871
|
|
|
$
|
51,582
|
|
The amount of interest that would have
been recorded under the original terms for participations in loans classified as nonaccrual was $3.9 million for 2012, $4.8 million
for 2011, and $6.1 million for 2010. Amounts actually collected and recorded as interest income for these loan participations
interests totaled $0.4 million, $0.6 million, and $0.4 million in the same respective years.
The following table presents an aging
analysis of loan participation interests, including past due loan participation interests, for the years ended December 31, 2012
and 2011 (1):
December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan
|
|
|
days
|
|
(dollar amounts in thousands)
|
|
Past Due
|
|
|
|
|
|
Participation
|
|
|
past due and
|
|
|
|
30-59
days
|
|
|
60-89
days
|
|
|
90
or more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
3,177
|
|
|
$
|
83
|
|
|
$
|
1,021
|
|
|
$
|
4,281
|
|
|
$
|
672,218
|
|
|
$
|
676,499
|
|
|
$
|
—
|
|
Retail properties
|
|
|
24
|
|
|
|
—
|
|
|
|
4,506
|
|
|
|
4,530
|
|
|
|
571,118
|
|
|
|
575,648
|
|
|
|
—
|
|
Office
|
|
|
52
|
|
|
|
367
|
|
|
|
13,634
|
|
|
|
14,053
|
|
|
|
457,323
|
|
|
|
471,376
|
|
|
|
—
|
|
Multi family
|
|
|
424
|
|
|
|
—
|
|
|
|
975
|
|
|
|
1,399
|
|
|
|
300,819
|
|
|
|
302,218
|
|
|
|
—
|
|
Other commercial
real estate
|
|
|
1,226
|
|
|
|
1,435
|
|
|
|
5,078
|
|
|
|
7,739
|
|
|
|
842,390
|
|
|
|
850,129
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
4,903
|
|
|
$
|
1,885
|
|
|
$
|
25,214
|
|
|
$
|
32,002
|
|
|
$
|
2,843,868
|
|
|
$
|
2,875,870
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
4,418
|
|
|
$
|
2,091
|
|
|
$
|
9,123
|
|
|
$
|
15,632
|
|
|
$
|
339,292
|
|
|
$
|
354,924
|
|
|
$
|
2,713
|
|
Secured by
junior-lien
|
|
|
2,037
|
|
|
|
1,040
|
|
|
|
1,314
|
|
|
|
4,391
|
|
|
|
79,758
|
|
|
|
84,149
|
|
|
|
509
|
|
Total consumer and residential real estate
|
|
$
|
6,455
|
|
|
$
|
3,131
|
|
|
$
|
10,437
|
|
|
$
|
20,023
|
|
|
$
|
419,050
|
|
|
$
|
439,073
|
|
|
$
|
3,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan participation interests
|
|
$
|
11,358
|
|
|
$
|
5,016
|
|
|
$
|
35,651
|
|
|
$
|
52,025
|
|
|
$
|
3,262,918
|
|
|
$
|
3,314,943
|
|
|
$
|
3,222
|
|
December
31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan
|
|
|
90 or more days
|
|
(dollar amounts in thousands)
|
|
Past
Due
|
|
|
|
|
|
Participation
|
|
|
past due and
|
|
|
|
30-59
days
|
|
|
60-89
days
|
|
|
90 or
more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
395
|
|
|
$
|
10
|
|
|
$
|
14,952
|
|
|
$
|
15,357
|
|
|
$
|
727,251
|
|
|
$
|
742,608
|
|
|
$
|
—
|
|
Retail properties
|
|
|
782
|
|
|
|
613
|
|
|
|
6,067
|
|
|
|
7,462
|
|
|
|
662,450
|
|
|
|
669,912
|
|
|
|
—
|
|
Office
|
|
|
296
|
|
|
|
196
|
|
|
|
7,922
|
|
|
|
8,414
|
|
|
|
515,784
|
|
|
|
524,198
|
|
|
|
—
|
|
Multi family
|
|
|
—
|
|
|
|
13
|
|
|
|
1,236
|
|
|
|
1,249
|
|
|
|
216,803
|
|
|
|
218,052
|
|
|
|
—
|
|
Other commercial
real estate
|
|
|
847
|
|
|
|
596
|
|
|
|
11,304
|
|
|
|
12,747
|
|
|
|
981,813
|
|
|
|
994,560
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
2,320
|
|
|
$
|
1,428
|
|
|
$
|
41,481
|
|
|
$
|
45,229
|
|
|
$
|
3,104,101
|
|
|
$
|
3,149,330
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
5,590
|
|
|
$
|
2,143
|
|
|
$
|
9,112
|
|
|
$
|
16,845
|
|
|
$
|
303,750
|
|
|
$
|
320,595
|
|
|
$
|
3,725
|
|
Secured by
junior-lien
|
|
|
2,831
|
|
|
|
1,212
|
|
|
|
1,192
|
|
|
|
5,235
|
|
|
|
108,442
|
|
|
|
113,677
|
|
|
|
483
|
|
Total consumer and residential real estate
|
|
$
|
8,421
|
|
|
$
|
3,355
|
|
|
$
|
10,304
|
|
|
$
|
22,080
|
|
|
$
|
412,192
|
|
|
$
|
434,272
|
|
|
$
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan participation interests
|
|
$
|
10,741
|
|
|
$
|
4,783
|
|
|
$
|
51,785
|
|
|
$
|
67,309
|
|
|
$
|
3,516,293
|
|
|
$
|
3,583,602
|
|
|
$
|
4,208
|
|
(1) NPAs are included in this aging analysis based on the
loan participation interest's past due status.
Allowance for Credit Losses
The ACL is increased through a provision
for credit losses that is charged to earnings, based on Management’s quarterly evaluation, and is reduced by NCOs. There
were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of
the current period’s ALPL and AULPC. The impact of Chapter 7 bankruptcy loans was primarily associated with NALs and NCOs,
with minimal impact to the ALPL.
The following table presents ACL activity
by portfolio segment for the years ended December 31, 2012, 2011, and 2010:
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential Real
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Estate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
Allowance related to loan participations acquired
|
|
|
19,802
|
|
|
|
792
|
|
|
|
20,594
|
|
Loan participation charge-offs
|
|
|
(15,866
|
)
|
|
|
(12,035
|
)
|
|
|
(27,901
|
)
|
Recoveries of loan participations previously charged-off
|
|
|
5,715
|
|
|
|
1,196
|
|
|
|
6,911
|
|
Provision for (reduction in) loan participation losses
|
|
|
(30,791
|
)
|
|
|
6,866
|
|
|
|
(23,925
|
)
|
ALPL balance, end of period
|
|
$
|
50,415
|
|
|
$
|
9,036
|
|
|
$
|
59,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
Provision for (reduction in) AULPC
|
|
|
22
|
|
|
|
—
|
|
|
|
22
|
|
AULPC balance, end of period
|
|
$
|
1,057
|
|
|
$
|
—
|
|
|
$
|
1,057
|
|
ACL balance, end of period
|
|
$
|
51,472
|
|
|
$
|
9,036
|
|
|
$
|
60,508
|
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential Real
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Estate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
Allowance related to loan participations acquired
|
|
|
46,205
|
|
|
|
—
|
|
|
|
46,205
|
|
Loan participation charge-offs
|
|
|
(29,697
|
)
|
|
|
(10,291
|
)
|
|
|
(39,988
|
)
|
Recoveries of loan participations previously charged-off
|
|
|
3,394
|
|
|
|
1,024
|
|
|
|
4,418
|
|
Provision for (reduction in) loan participation losses
|
|
|
(46,267
|
)
|
|
|
9,301
|
|
|
|
(36,966
|
)
|
ALPL balance, end of period
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,598
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
Provision for (reduction in) AULPC
|
|
|
(563
|
)
|
|
|
—
|
|
|
|
(563
|
)
|
AULPC balance, end of period
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
ACL balance, end of period
|
|
$
|
72,590
|
|
|
$
|
12,217
|
|
|
$
|
84,807
|
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential Real
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Estate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
147,893
|
|
|
$
|
8,538
|
|
|
$
|
156,431
|
|
Allowance related to loan participations acquired
|
|
|
57,040
|
|
|
|
—
|
|
|
|
57,040
|
|
Loan participation charge-offs
|
|
|
(52,474
|
)
|
|
|
(13,468
|
)
|
|
|
(65,942
|
)
|
Recoveries of loan participations previously charged-off
|
|
|
5,160
|
|
|
|
755
|
|
|
|
5,915
|
|
Provision for (reduction in) loan participation losses
|
|
|
(59,699
|
)
|
|
|
16,358
|
|
|
|
(43,341
|
)
|
ALPL balance, end of period
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,607
|
|
|
$
|
—
|
|
|
$
|
1,607
|
|
Provision for (reduction in) AULPC
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
AULPC balance, end of period
|
|
$
|
1,598
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
ACL balance, end of period
|
|
$
|
99,518
|
|
|
$
|
12,183
|
|
|
$
|
111,701
|
|
Credit Quality Indicators
To facilitate the monitoring of credit
quality for CRE loan participation interests, and for purposes of determining an appropriate ACL level for these loan participation
interests, the following categories of credit grades are utilized:
Pass = Higher quality loan participation interests
that do not fit any of the other categories described below.
OLEM = The credit risk may be relatively minor yet
represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may
weaken or inadequately protect the Company’s position in the future. For these reasons, the loan participation interests
are considered to be potential problem loan participation interests.
Substandard = Inadequately protected loan participation
interests by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan participation interest.
These loan participation interests have identified weaknesses that could hinder normal repayment or collection of the debt. It
is likely that the Company will sustain some loss if any identified weaknesses are not mitigated.
Doubtful = Loan participation interests that have
all of the weaknesses inherent in those loan participation interests classified as Substandard, with the added elements of the
full collection of the loan participation interest is improbable and that the possibility of loss is high.
The categories above, which are derived
from standard regulatory rating definitions, are assigned upon initial approval of the loan and subsequently updated as appropriate.
Commercial loan participation interests
categorized as OLEM, Substandard, or Doubtful are considered Criticized loan participation interests. Commercial loan participation
interests categorized as Substandard or Doubtful are also considered Classified loan participation interests.
For all classes within the consumer and
residential real estate portfolio, each loan participation interest is assigned a specific PD factor that is generally based on
the borrower’s most recent credit bureau score (FICO), which is updated quarterly. A FICO credit bureau score is a credit
score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The FICO credit bureau score is widely
accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher
the FICO credit bureau score, the higher likelihood of repayment and therefore, an indicator of higher credit quality.
The risk in the loan portfolio is assessed
by utilizing numerous risk characteristics. The classifications described above, and presented in the table below, represent one
of those characteristics that are closely monitored in the overall credit risk management process.
The following table presents each loan
participation class by credit quality indicator for the years ended December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
|
Credit Risk Profile by UCS classification
|
|
(dollar amounts in thousands)
|
|
Pass
|
|
|
OLEM
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
646,537
|
|
|
$
|
13,660
|
|
|
$
|
16,302
|
|
|
$
|
—
|
|
|
$
|
676,499
|
|
Retail properties
|
|
|
558,396
|
|
|
|
9,927
|
|
|
|
7,325
|
|
|
|
—
|
|
|
|
575,648
|
|
Office
|
|
|
450,862
|
|
|
|
4,872
|
|
|
|
15,642
|
|
|
|
—
|
|
|
|
471,376
|
|
Multi family
|
|
|
298,039
|
|
|
|
1,178
|
|
|
|
3,001
|
|
|
|
—
|
|
|
|
302,218
|
|
Other commercial real estate
|
|
|
826,403
|
|
|
|
7,133
|
|
|
|
16,593
|
|
|
|
—
|
|
|
|
850,129
|
|
Total commercial real estate
|
|
$
|
2,780,237
|
|
|
$
|
36,770
|
|
|
$
|
58,863
|
|
|
$
|
—
|
|
|
$
|
2,875,870
|
|
|
|
Credit Risk Profile by FICO score (1)
|
|
|
|
750+
|
|
|
650-749
|
|
|
<650
|
|
|
Total
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
175,314
|
|
|
$
|
120,661
|
|
|
$
|
58,949
|
|
|
$
|
354,924
|
|
Secured by junior-lien
|
|
|
28,488
|
|
|
|
31,805
|
|
|
|
23,856
|
|
|
|
84,149
|
|
Total consumer and residential real estate
|
|
$
|
203,802
|
|
|
$
|
152,466
|
|
|
$
|
82,805
|
|
|
$
|
439,073
|
|
|
|
December 31, 2011
|
|
|
|
Credit Risk Profile by UCS classification
|
|
(dollar amounts in thousands)
|
|
Pass
|
|
|
OLEM
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
703,043
|
|
|
$
|
11,698
|
|
|
$
|
27,867
|
|
|
$
|
—
|
|
|
$
|
742,608
|
|
Retail properties
|
|
|
606,479
|
|
|
|
46,779
|
|
|
|
16,654
|
|
|
|
—
|
|
|
|
669,912
|
|
Office
|
|
|
494,932
|
|
|
|
15,041
|
|
|
|
14,140
|
|
|
|
85
|
|
|
|
524,198
|
|
Multi family
|
|
|
204,221
|
|
|
|
2,943
|
|
|
|
10,888
|
|
|
|
—
|
|
|
|
218,052
|
|
Other commercial real estate
|
|
|
927,974
|
|
|
|
38,368
|
|
|
|
28,218
|
|
|
|
—
|
|
|
|
994,560
|
|
Total commercial real estate
|
|
$
|
2,936,649
|
|
|
$
|
114,829
|
|
|
$
|
97,767
|
|
|
$
|
85
|
|
|
$
|
3,149,330
|
|
|
|
Credit Risk Profile by FICO score (1)
|
|
|
|
750+
|
|
|
650-749
|
|
|
<650
|
|
|
Total
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
142,627
|
|
|
$
|
111,308
|
|
|
$
|
66,660
|
|
|
$
|
320,595
|
|
Secured by junior-lien
|
|
|
38,997
|
|
|
|
42,069
|
|
|
|
32,611
|
|
|
|
113,677
|
|
Total consumer and residential real estate
|
|
$
|
181,624
|
|
|
$
|
153,377
|
|
|
$
|
99,271
|
|
|
$
|
434,272
|
|
(1) Reflects currently updated customer credit scores.
Impaired Loans
A loan participation interest is considered
to be impaired when, based on current information and events, it is probable that not all amounts due according to the contractual
terms of the loan agreement will be collected. The following tables present the balance of the ALPL attributable to loans by portfolio
segment individually and collectively evaluated for impairment and the related loan participation interest balance for the years
ended December 31, 2012, 2011, and 2010 (1):
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ALPL balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation interests individually evaluated for impairment
|
|
$
|
1,195
|
|
|
$
|
640
|
|
|
$
|
1,835
|
|
Attributable to loan participation interests collectively evaluated for impairment
|
|
|
49,220
|
|
|
|
8,396
|
|
|
|
57,616
|
|
Total ALPL balance
|
|
$
|
50,415
|
|
|
$
|
9,036
|
|
|
$
|
59,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Participation Interests Ending Balance at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loan participation interest ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
18,086
|
|
|
$
|
30,275
|
|
|
$
|
48,361
|
|
Collectively evaluated for impairment
|
|
|
2,857,784
|
|
|
|
408,798
|
|
|
|
3,266,582
|
|
Total loan participation interests evaluated for impairment
|
|
$
|
2,875,870
|
|
|
$
|
439,073
|
|
|
$
|
3,314,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of individually evaluated for impairment ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance assigned loan participation interest balances
|
|
$
|
8,905
|
|
|
$
|
30,275
|
|
|
$
|
39,180
|
|
With no allowance assigned to the loan participation interest balances
|
|
|
9,181
|
|
|
|
—
|
|
|
|
9,181
|
|
Total loan participation interests individually evaluated for impairment
|
|
$
|
18,086
|
|
|
$
|
30,275
|
|
|
$
|
48,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of loan participation interests individually evaluated for impairment
|
|
$
|
14,928
|
|
|
$
|
23,431
|
|
|
$
|
38,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ALPL balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation interests individually evaluated for impairment
|
|
$
|
3,274
|
|
|
$
|
531
|
|
|
$
|
3,805
|
|
Attributable to loan participation interests collectively evaluated for impairment
|
|
|
68,281
|
|
|
|
11,686
|
|
|
|
79,967
|
|
Total ALPL balance
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Participation Interests Ending Balance at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loan participation interest ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
24,597
|
|
|
$
|
14,599
|
|
|
$
|
39,196
|
|
Collectively evaluated for impairment
|
|
|
3,124,733
|
|
|
|
419,673
|
|
|
|
3,544,406
|
|
Total loan participation interests evaluated for impairment
|
|
$
|
3,149,330
|
|
|
$
|
434,272
|
|
|
$
|
3,583,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of individually evaluated for impairment ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance assigned to the loan participation interest balances
|
|
$
|
24,597
|
|
|
$
|
14,599
|
|
|
$
|
39,196
|
|
With no allowance assigned to the loan participation interest balances
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loan participation interests individually evaluated for impairment
|
|
$
|
24,597
|
|
|
$
|
14,599
|
|
|
$
|
39,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of loan participation interests individually evaluated for impairment
|
|
$
|
26,722
|
|
|
$
|
12,266
|
|
|
$
|
38,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ALPL balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation interests individually evaluated for impairment
|
|
$
|
8,115
|
|
|
$
|
156
|
|
|
$
|
8,271
|
|
Attributable to loan participation interests collectively evaluated for impairment
|
|
|
89,805
|
|
|
|
12,027
|
|
|
|
101,832
|
|
Total ALPL balance
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Participation Interests Ending Balance at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loan participation interest ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
25,294
|
|
|
$
|
3,464
|
|
|
$
|
28,758
|
|
Collectively evaluated for impairment
|
|
|
2,924,417
|
|
|
|
559,943
|
|
|
|
3,484,360
|
|
Total loan participation interests evaluated for impairment
|
|
$
|
2,949,711
|
|
|
$
|
563,407
|
|
|
$
|
3,513,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of individually evaluated for impairment ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
With allowance assigned to the loan participation interest balances
|
|
$
|
19,104
|
|
|
$
|
3,464
|
|
|
$
|
22,568
|
|
With no allowance assigned to the loan participation interest balances
|
|
|
6,190
|
|
|
|
—
|
|
|
|
6,190
|
|
Total loan participation interests individually evaluated for impairment
|
|
$
|
25,294
|
|
|
$
|
3,464
|
|
|
$
|
28,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of loan participation interests individually evaluated for impairment
|
|
$
|
75,419
|
|
|
$
|
3,039
|
|
|
$
|
78,458
|
|
(1) During the years ended December 31, 2012, 2011, and 2010,
no loans with deteriorated credit quality were acquired.
The following tables present by class
the ending, unpaid principal balance, and the related ALPL, along with the average balance and interest income recognized only
for loan participation interests individually evaluated for impairment for the years ended December 31, 2012 and 2011 (1), (2):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2012
|
|
|
December 31, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Ending
|
|
|
Principal
|
|
|
Related
|
|
|
Average
|
|
|
Income
|
|
(dollar amounts in thousands)
|
|
Balance
|
|
|
Balance (4)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
337
|
|
|
$
|
9
|
|
Retail properties
|
|
|
3,334
|
|
|
|
4,139
|
|
|
|
—
|
|
|
|
278
|
|
|
|
—
|
|
Office
|
|
|
5,847
|
|
|
|
5,848
|
|
|
|
—
|
|
|
|
487
|
|
|
|
—
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
9,181
|
|
|
$
|
9,987
|
|
|
$
|
—
|
|
|
$
|
1,102
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Secured by junior-lien
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,592
|
|
|
$
|
39
|
|
Retail properties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,750
|
|
|
|
—
|
|
Office
|
|
|
5,266
|
|
|
|
8,332
|
|
|
|
480
|
|
|
|
3,815
|
|
|
|
—
|
|
Multi family
|
|
|
944
|
|
|
|
944
|
|
|
|
114
|
|
|
|
1,187
|
|
|
|
11
|
|
Other commercial real estate
|
|
|
2,695
|
|
|
|
5,108
|
|
|
|
601
|
|
|
|
1,482
|
|
|
|
17
|
|
Total commercial real estate
|
|
$
|
8,905
|
|
|
$
|
14,384
|
|
|
$
|
1,195
|
|
|
$
|
13,826
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
26,719
|
|
|
$
|
29,346
|
|
|
$
|
350
|
|
|
$
|
20,400
|
|
|
$
|
929
|
|
Secured by junior-lien
|
|
|
3,556
|
|
|
|
4,879
|
|
|
|
290
|
|
|
|
3,031
|
|
|
|
180
|
|
Total consumer and residential real estate
|
|
$
|
30,275
|
|
|
$
|
34,225
|
|
|
$
|
640
|
|
|
$
|
23,431
|
|
|
$
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Ending
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Average
|
|
|
Income
|
|
(dollar amounts in thousands)
|
|
Balance
|
|
|
Balance (4)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
539
|
|
|
$
|
15
|
|
Retail properties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,282
|
|
|
|
—
|
|
Office
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,891
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Secured by junior-lien
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
14,544
|
|
|
$
|
22,484
|
|
|
$
|
1,370
|
|
|
$
|
10,555
|
|
|
$
|
20
|
|
Retail properties
|
|
|
1,755
|
|
|
|
3,278
|
|
|
|
488
|
|
|
|
726
|
|
|
|
—
|
|
Office
|
|
|
5,100
|
|
|
|
11,822
|
|
|
|
645
|
|
|
|
3,836
|
|
|
|
—
|
|
Multi family
|
|
|
2,042
|
|
|
|
2,225
|
|
|
|
189
|
|
|
|
1,547
|
|
|
|
2
|
|
Other commercial real estate
|
|
|
1,156
|
|
|
|
2,345
|
|
|
|
582
|
|
|
|
6,167
|
|
|
|
15
|
|
Total commercial real estate
|
|
$
|
24,597
|
|
|
$
|
42,154
|
|
|
$
|
3,274
|
|
|
$
|
22,831
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
11,901
|
|
|
$
|
12,424
|
|
|
$
|
309
|
|
|
$
|
9,792
|
|
|
$
|
491
|
|
Secured by junior-lien
|
|
|
2,698
|
|
|
|
2,698
|
|
|
|
222
|
|
|
|
2,474
|
|
|
|
201
|
|
Total consumer and residential real estate
|
|
$
|
14,599
|
|
|
$
|
15,122
|
|
|
$
|
531
|
|
|
$
|
12,266
|
|
|
$
|
692
|
|
|
(1)
|
These tables do not include loans fully charged-off.
|
|
(2)
|
All consumer and residential real estate impaired loans are considered impaired due to their status
as a TDR.
|
|
(3)
|
At December 31, 2012, $167 thousand of the $8,905 thousand commercial real estate loan participation
interests with an allowance recorded were considered impaired due to their status as a TDR.
|
|
(4)
|
The differences between the ending balance and unpaid principal balance amounts represent partial
charge-offs.
|
TDR Loan Participation Interests
TDRs are modified loan participation interests
where a concession was provided to a borrower experiencing financial difficulties. Loan participation interest modifications are
considered TDRs when the concessions provided are not available to the borrower through either the Bank’s normal channels
or other sources. However, not all loan participation interest modifications are TDRs.
The amount of interest that would have
been recorded under the original terms for total accruing TDRs was $1.7 million for 2012, $1.1 million for 2011, and $0.8 million
for 2010. The total amount of interest recorded to interest income for these loan participation interests was $1.2 million for
2012, $0.7 million for 2011, and $0.5 million for 2010.
TDR Concession Types
The Bank’s standards relating to
loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations.
Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific
circumstances at a point in time. Commercial TDR are reviewed and approved by the Bank’s SAD. The types of concessions provided
to borrowers include:
|
·
|
Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the
debt.
|
|
·
|
Amortization or maturity date change beyond what the collateral supports, including any of the following:
|
|
(1)
|
Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly
payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
|
|
(2)
|
Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases
the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
|
|
(3)
|
Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans
without a balloon payment at the end of the term of the loan.
|
|
·
|
Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt is considered a concession when the borrower
does not reaffirm the discharged debt.
|
|
·
|
Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not
limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness
may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of
loans modified as TDRs during the years ended December 31, 2012, and 2011 was not significant.
|
TDRs by Loan Participation Interest Type
The following is a description of TDRs
by loan participation interest type:
Commercial real estate loan participation interest
TDRs
– CRE accruing TDRs often result from loan participation interests receiving a concession with terms that are
not considered a market transaction to the Bank. The TDR remains in accruing status as long as the customer is less than 90-days
past due on payments per the restructured loan participation interest terms and no loss is expected.
CRE nonaccrual TDRs result from
either: (1) an accruing CRE TDR being placed on nonaccrual status, or (2) a workout where an existing CRE NAL is restructured and
a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note
is underwritten based upon the Bank’s normal underwriting standards and is sized so projected cash flows are sufficient to
repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer
principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to
continue a project or weather a temporary economic downturn and allows the Bank to right-size a loan based upon the current expectations
for a borrower’s or project’s performance.
Our strategy involving TDR borrowers
includes working with these borrowers to allow them to refinance elsewhere as well as allow them time to improve their financial
position and remain our customer through refinancing their notes according to market terms and conditions in the future. A refinancing
or modification of a loan occurs when either the loan matures according to the terms of the TDR-modified agreement or the borrower
requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected
to the Bank’s normal underwriting standards and process for similar credit extensions, both new and existing.
In accordance with ASC 310-20-35,
the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is
considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation.
In order for the TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms
of the refinanced loan must not represent a concession.
Consumer and residential real estate loan participation
interest TDRs
– Consumer and residential real estate TDRs represent loan modifications associated with traditional
first-lien mortgage loans, as well as first-lien and junior-lien home equity loans, in which a concession has been provided to
the borrower. The primary concessions given to these borrowers are amortization or maturity date changes and interest rate reductions.
Consumer and residential real estate loans identified as TDRs include borrowers unable to refinance their mortgages through the
Bank’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be
delinquent at the time of modification.
TDR Impact on Credit Quality
The ALPL is largely driven by updated risk
ratings assigned to CRE loan participation interests, updated borrower credit scores on consumer and residential real estate, and
borrower delinquency history in both portfolios. These updated risk ratings and credit scores consider the default history of the
borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment
performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loan participation interests.
Nonaccrual TDRs are included in NPAs whereas accruing TDRs are excluded from NPAs as it is probable that all contractual principal
and interest due under the restructured terms will be collected.
TDRs may include multiple concessions and
the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of concessions
for the CRE portfolio are the extension of the maturity date coupled with an increase in the interest rate. In these instances,
the primary concession is the maturity date extension.
TDR concessions may also result in the
reduction of the ALPL within the CRE portfolio. This reduction is from payments and the resulting application of the reserve calculation
within the ALPL. The transaction reserve for non-TDR loans is calculated based upon several estimated probability factors,
such as PD and LGD, both of which were previously discussed above. Upon the occurrence of a TDR in the CRE portfolio, the
reserve is measured based on discounted expected cash flows or collateral value, less selling costs, of the modified loan in accordance
with ASC 310-10. The resulting TDR ALPL calculation often results in a lower ALPL amount because: (1) the discounted expected
cash flows or collateral value indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting
of cash flows or the collateral value, less selling costs, on the modified loan, using the pre-modification interest rate, exceeds
the carrying value of the loan, or (3) payments may occur as part of the modification. The ALPL for CRE loans may increase as a
result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.
TDR concessions on consumer and residential
real estate loans may increase the ALPL. The concessions made to these borrowers often include interest rate reductions and,
therefore, the TDR ALPL calculation results in a greater ALPL compared with the non-TDR calculation as the reserve is measured
based on the estimation of the discounted expected cash flows or collateral value, less selling costs, on the modified loan in
accordance with ASC 310-10. The resulting TDR ALPL calculation often results in a higher ALPL amount because (1) the discounted
expected cash flows or collateral value, less selling costs, indicate a higher estimated loss or, (2) due to the rate decrease,
the discounting of the cash flows on the modified loan participation interest, using the pre-modification interest rate, indicates
a reduction in the expected cash flows or collateral value, less selling costs. In certain instances, the ALPL may decrease as
a result of payments made in connection with the modification.
Commercial real estate loan participation
interest TDRs
– In instances where the Bank substantiates that it will collect the outstanding balance in full, the
note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time.
This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring,
any interest or principal payments received on that note are applied to first reduce the outstanding book balance and then to recoveries
of charged-off principal, unpaid interest, and/or fee expenses.
Consumer and residential real estate
loan participation interest TDRs
– Modified loans identified as TDRs are aggregated into pools for analysis. Cash
flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated
into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.
The following table presents by class and
by the reason for the modification the number of contracts, post-modification outstanding balance, and the financial effects of
the modification for the years ended December 31, 2012 and 2011:
|
|
New Troubled Debt Restructurings During The Year Ended
(1)
|
|
|
|
December 31, 2012
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Outstanding
|
|
|
Financial effects
|
|
|
Number of
|
|
|
Outstanding
|
|
|
Financial effects
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(2)
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Industrial
and warehouse:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
Amortization or maturity date change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Industrial and warehouse
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Retail properties:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
1
|
|
|
$
|
892
|
|
|
$
|
(2
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Retail properties
|
|
|
1
|
|
|
$
|
892
|
|
|
$
|
(2
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Office:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Office
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Multi family:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Multi family
|
|
|
1
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Other commercial
real estate:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
303
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Other commercial real estate
|
|
|
1
|
|
|
$
|
303
|
|
|
$
|
27
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential
real estate secured by first-lien:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
112
|
|
|
$
|
14,134
|
|
|
$
|
2,328
|
|
|
|
22
|
|
|
$
|
2,651
|
|
|
$
|
(157
|
)
|
Amortization or maturity date change
|
|
|
7
|
|
|
|
670
|
|
|
|
2
|
|
|
|
41
|
|
|
|
11,799
|
|
|
|
233
|
|
Chapter 7 bankruptcy
|
|
|
55
|
|
|
|
1,864
|
|
|
|
2,093
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
1,996
|
|
|
|
45
|
|
Total consumer and residential real estate secured
by first-lien
|
|
|
174
|
|
|
$
|
16,668
|
|
|
$
|
4,423
|
|
|
|
66
|
|
|
$
|
16,446
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential
real estate secured by junior-lien:
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
15
|
|
|
$
|
876
|
|
|
$
|
143
|
|
|
|
18
|
|
|
$
|
696
|
|
|
$
|
(114
|
)
|
Amortization or maturity date change
|
|
|
6
|
|
|
|
90
|
|
|
|
(3
|
)
|
|
|
15
|
|
|
|
135
|
|
|
|
(8
|
)
|
Chapter 7 bankruptcy
|
|
|
96
|
|
|
|
521
|
|
|
|
1,333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured
by junior-lien
|
|
|
117
|
|
|
$
|
1,487
|
|
|
$
|
1,473
|
|
|
|
33
|
|
|
$
|
831
|
|
|
$
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new troubled debt restructurings
|
|
|
294
|
|
|
$
|
19,392
|
|
|
$
|
5,921
|
|
|
|
100
|
|
|
$
|
19,442
|
|
|
$
|
(300
|
)
|
|
(1)
|
TDRs may include multiple concessions and the disclosure classifications are based on the primary
concession provided to the borrower.
|
|
(2)
|
Amounts represent the financial impact via provision for loan participation interest losses as a
result of the modification.
|
|
(3)
|
Post-modification balances approximate pre-modification balances. The aggregate amount
of charge-offs as a result of a restructuring are not significant.
|
|
(4)
|
Chapter 7 bankruptcy pre-modification balances were impacted by $2.1 million of charge-offs in 2012.
|
|
(5)
|
Chapter 7 bankruptcy pre-modification balances were impacted by $1.4 million of charge-offs in 2012.
|
Any loan participation interest within
any portfolio or class is considered as payment redefaulted at 90-days past due.
The following table presents TDRs that
have redefaulted within one year of modification during the years ended December 31, 2012 and 2011:
|
|
Troubled Debt Restructurings That Have Redefaulted
(1)
|
|
|
|
Within One Year of Modification During The Year Ended
|
|
|
|
December 31, 2012
(2)
|
|
|
December 31, 2011
(2)
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Ending
|
|
|
Number of
|
|
|
Ending
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
Contracts
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by first-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
1
|
|
|
$
|
30
|
|
|
|
1
|
|
|
$
|
555
|
|
Amortization or maturity date change
|
|
|
4
|
|
|
|
489
|
|
|
|
9
|
|
|
|
1,193
|
|
Chapter 7 bankruptcy
|
|
|
1
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
6
|
|
|
$
|
553
|
|
|
|
10
|
|
|
$
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by junior-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
14
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
20
|
|
|
|
4
|
|
|
|
247
|
|
Chapter 7 bankruptcy
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by junior-lien
|
|
|
1
|
|
|
$
|
20
|
|
|
|
5
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings with subsequent redefault
|
|
|
7
|
|
|
$
|
573
|
|
|
|
15
|
|
|
$
|
2,009
|
|
|
(1)
|
Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment
redefault is defined as 90-days past due for any loan in any portfolio or class. Any loan in any portfolio may be considered
to be in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.
|
|
(2)
|
For years ended December 31, 2012 and 2011, there were no troubled debt restructurings that redefaulted
within one year of modification for the following classes: CRE - Industrial and warehouse, CRE - Retail properties,
CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.
|
Note 4 – Dividends
Holders of Class A preferred securities,
a majority of which are held by Holdings and the remainder by current and past employees of the Bank, are entitled to receive,
if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of $80.00
per share per annum. Dividends on the Class A preferred securities, if declared, are payable annually in December to holders of
record on the record date fixed for such purpose by the board of directors in advance of payment.
The holder of the Class B preferred securities,
HPC Holdings-II, Inc., a direct nonbank subsidiary of Huntington, is entitled to receive, if, when, and as declared by the Board
of Directors of HPCI out of funds legally available, dividends at a variable rate equal to the three-month LIBOR published on the
first day of each calendar quarter times par value. Dividends on the Class B preferred securities, which are declared quarterly,
are payable annually in December and are noncumulative. No dividend, except payable in common shares, may be declared or paid on
Class B preferred securities unless dividend obligations are satisfied on the Class A, Class C, and Class E preferred securities.
Holders of Class C preferred securities
are entitled to receive, if, when, and as declared by the board of directors of HPCI out of funds legally available, dividends
at a fixed rate of 7.875% per annum, of the initial liquidation preference of $25.00 per share, payable quarterly. Dividends accrue
in each quarterly period from the first day of each period, whether or not dividends are paid with respect to the preceding period.
Dividends are not cumulative and if no dividend is paid on the Class C preferred securities for a quarterly dividend period, the
payment of dividends on HPCI’s common stock and other HPCI-issued securities ranking junior to the Class C preferred securities
(
i.e.
, Class B preferred securities) will be prohibited for that period and at least the following three quarterly dividend
periods.
The holder of Class E preferred securities,
Tower Hill Securities, Inc., is entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally
available, dividends at a variable rate established at the beginning of each calendar quarter equal to three-month LIBOR published
on the first day of each calendar quarter, plus 1.625% times par value, payable quarterly. Dividends accrue in each quarterly period
from the first day of each period, whether or not dividends are paid with respect to the preceding period. Dividends are not cumulative
and if no dividend is paid on the Class E preferred securities for a quarterly dividend period, the payment of dividends on HPCI’s
common stock and other HPCI-issued securities ranking junior to the Class E preferred securities (
i.e.
, Class B preferred
securities) will be prohibited for that period and at least the following three quarterly dividend periods.
A summary of dividends declared by each
class of preferred securities follows for the periods indicated:
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Class A preferred securities
|
|
$
|
80
|
|
|
$
|
80
|
|
|
$
|
80
|
|
Class B preferred securities
|
|
|
1,867
|
|
|
|
1,227
|
|
|
|
1,369
|
|
Class C preferred securities
|
|
|
3,938
|
|
|
|
3,938
|
|
|
|
3,938
|
|
Class D preferred securities
|
|
|
—
|
|
|
|
—
|
|
|
|
5,210
|
|
Class E preferred securities
|
|
|
7,320
|
|
|
|
6,761
|
|
|
|
1,676
|
|
Total preferred dividends declared
|
|
$
|
13,205
|
|
|
$
|
12,006
|
|
|
$
|
12,273
|
|
As of December 31, 2012 and 2011, all declared
dividends on preferred securities were paid to shareholders
.
Regulatory approval is required prior to
the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared
without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding
two years, less any required transfers to surplus or common stock. As a result of the deficit position of its undivided profits,
for the year ended December 31, 2012, the Bank could not have declared and paid any cash dividends to the parent company without
regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries
or outside shareholders without regulatory approval. The OCC has approved the payment of HPCI’s dividends on its Class A,
B, and C preferred securities throughout 2011, 2012 and through the 2013 first quarter. For the foreseeable future, Management
intends to request approval for any future dividend; however, there can be no assurance that the OCC will approve future dividends.
For HPCI to meet its statutory requirement
for a REIT to distribute 90% of its taxable income, excluding capital gains, to its shareholders, the holders of common shares
received dividends declared by the board of directors, subject to any preferential dividend rights of the outstanding preferred
securities. In 2012, 2011, and 2010 HPCI declared dividends to common shareholders of $307.4 million, none, and $149.9 million.
In addition, HPCI had return of capital distributions on common stock of $192.6 million, none, and $350.1 million, for the years
ended December 31, 2012, 2011, and 2010, respectively. Dividends and return of capital of $500.0 million accrued in 2012 were distributed
to shareholders through a distribution paid in January 2013. These dividends and distributions were either accrued or paid by the
last business day in each year. Dividends and return of capital were distributed to common shareholders through a distribution
paid in January 2013, which reduced HPCI’s cash balances by $500.0 million. This distribution met the 2012 REIT distribution
requirements.
HPCI’s policy is to reinvest the
proceeds of our assets in other interest-earning assets such that our FFO, which represents cash flows from operations, over any
period of four fiscal quarters will equal or exceed 150% of the amount required to pay annual dividends on the Class A, Class C,
Class D, and Class E preferred securities, except as may be necessary to maintain our status as a REIT. FFO is equal to net cash
provided by operating activities as reflected in our statements of cash flows. For the years ended December 31, 2012, 2011, and
2010, our FFO were $135.8 million, $142.5 million, and $149.7 million, respectively. These amounts exceeded the minimum requirement
of 150% of dividends on Class A, Class C, Class D, and Class E securities of $17.0 million, $16.2 million, and $16.4 million, for
the same periods, respectively. HPCI’s Articles of Incorporation provide that we cannot amend or change this policy with
respect to the reinvestment of proceeds without the consent or affirmative vote of the holders of at least two-thirds of the Class
C preferred securities and two-thirds of the Class E preferred securities, voting as separate classes.
Note 5 - Related Party Transactions
The Bank is required, under the Agreements,
to service HPCI’s loan participation interest portfolio in a manner substantially the same as for similar work for transactions
on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and
submits and pursues insurance claims. In addition, the Bank provides accounting and reporting services to HPCI. The Bank is required
to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the
performance of the Bank’s duties under the participation and subparticipation agreements. All of these participation interests
to date were acquired directly or indirectly from the Bank.
The Bank performs the servicing of the
commercial real estate, consumer, and residential real estate loans underlying the participations held by HPCI in accordance with
normal industry practice under the amended participation and subparticipation agreements. In its capacity as servicer, the Bank
collects and holds the loan payments received on behalf of HPCI until the end of each month. Servicing costs incurred by the Bank
totaled $6.2 million, $7.0 million, and $7.9 million for the respective years ended 2012, 2011, and 2010.
In 2012, 2011 and 2010, the annual servicing
rates the Bank charged with respect to outstanding principal balances were:
|
|
January 1, 2010
|
|
|
|
through
|
|
|
|
December 31, 2012
|
|
Commercial and commercial real estate
|
|
|
0.125
|
%
|
Consumer
|
|
|
0.650
|
|
Residential real estate
|
|
|
0.267
|
|
Pursuant to the Agreements, the amount
and terms of the loan servicing fee between the Bank and HPCI are determined by mutual agreement from time-to-time during the terms
of the Agreements. In lieu of paying higher servicing costs to the Bank with respect to CRE loans, HPCI has waived its right to
receive any origination fees associated with participation interests in CRE loans. The Bank and HPCI performed a review of loan
servicing fees in 2012, and have agreed to retain current servicing rates for all loan participation categories, including the
continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2013.
Huntington’s and the Bank’s
personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative
functions. On a monthly basis, HPCI pays the Bank and Huntington for the cost related to the time spent by employees for performing
these functions. These personnel costs totaled $0.4 million for each of the years ended December 31, 2012 and 2011 and 2010, respectively
and are recorded in other noninterest expense.
The following table represents the ownership
of HPCI’s outstanding common and preferred securities as of December 31, 2012:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Number of Preferred Securities
|
|
Shareholder:
|
|
Shares
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class E
|
|
Held by related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HPCII
|
|
|
11,130,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Holdings
|
|
|
2,870,000
|
|
|
|
895
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tower Hill Securities, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,400,000
|
|
HPC Holdings-II, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
Total held by related parties
|
|
|
14,000,000
|
|
|
|
895
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
1,400,000
|
|
Other shareholders
|
|
|
—
|
|
|
|
105
|
|
|
|
—
|
|
|
|
2,000,000
|
|
|
|
—
|
|
Total shares outstanding
|
|
|
14,000,000
|
|
|
|
1,000
|
|
|
|
400,000
|
|
|
|
2,000,000
|
|
|
|
1,400,000
|
|
As of December 31, 2012, 10.5% of the Class
A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.5% owned
by Holdings. The Class A preferred securities are non-voting. All of the Class B preferred securities are owned by HPC Holdings-II,
Inc., a non-bank subsidiary of Huntington and are non-voting. In 2001, the Class C preferred securities were obtained by Holdings,
who sold the securities to the public. Various board members and executive officers of HPCI have purchased a portion of the Class
C preferred securities. At December 31, 2012, HPCI board members and executive officers beneficially owned, in the aggregate, a
total of 6,965 shares, or less than 1%, of the HPCI Class C preferred securities. All of the Class E preferred securities are owned
by Tower Hill Securities, Inc. In the event HPCI redeems its Class C or Class E preferred securities, holders of such securities
will be entitled to receive $25.00 per share for Class C shares, $250.00 per share for Class E shares, plus any accrued and unpaid
dividends on such shares. The redemption amount may be significantly lower than the current market price of the Class C preferred
securities.
Both the Class C and Class E preferred
securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders. If the Bank becomes under-capitalized,
or is placed in conservatorship or receivership, the OCC may require the exchange of Class C and Class E Preferred securities for
preferred securities of the Bank with substantially equivalent terms. The Class E preferred securities are currently redeemable
and Class C preferred securities are redeemable at HPCI’s option on or after December 31, 2021, with prior consent of the
OCC.
In June 2012, federal banking agencies,
including the FRB, jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules
for banks. The proposed capital rules (Basel III NPR) are intended to implement the Basel III regulatory capital reforms, comply
with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our interpretation
of Basel III NPR as currently proposed, we believe the HPCI Class C preferred securities would no longer constitute Tier 1 capital
for Huntington or the Bank. It is possible that, upon considering comments received on the NPRs, the FRB may not adopt the Basel
III NPR as proposed, or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. However, in
the event the FRB’s applicable final rules regarding Tier 1 capital treatment are substantially similar to Basel III NPR
as proposed, or otherwise result in the Class C preferred securities no longer constituting Tier 1 capital for the Bank and we
receive an opinion of counsel to that effect, HPCI would be able to redeem the Class C preferred securities at the par value of
$25 per share due to a regulatory capital event. There can be no assurance as to if or when HPCI would redeem the Class C preferred
securities.
As only related parties hold HPCI’s
common stock, there is no established public trading market for this class of stock.
HPCI had a noninterest-bearing payable
due to the Bank of $62.9 million at December 31, 2012 and a noninterest-bearing receivable due from the Bank of $40.4 million at
December 31, 2011. The balances represent the net settlement amounts due to, or from, the Bank for the last month of the period’s
activity. Principal and interest payments on loan participations remitted by customers are due from the Bank, while new loan participation
purchases are due to the Bank. The amounts are settled with the Bank within the first few days of the following month.
HPCI has assets pledged in association
with the Bank’s advances from the FHLB. For further information regarding this, see Note 7.
HPCI maintains and transacts all of its
cash activity through the Bank. Typically, cash is invested with the Bank in an interest-bearing account. These interest-bearing
balances are invested overnight or may be invested in Eurodollar deposits with the Bank for a term of not more than 30 days at
market rates.
Note 6 - Fair Value of Financial Instruments
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements
are classified within one of three levels in a valuation hierarchy based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable
and significant to the fair value measurement.
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Certain assets and liabilities may be required
to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities
are not measured at fair value on an on-going basis; however, they are subject to fair value adjustments in certain circumstances,
such as when there is evidence of impairment.
Periodically, HPCI records nonrecurring
adjustments of collateral-dependent loan participation interests measured for impairment when establishing the ACL. Such amounts
are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support
the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction.
HPCI considers these fair values Level 3. In cases where the carrying value exceeds the fair value of the collateral less costs
to sell, an impairment charge is recognized.
For the year ended December 31, 2012, HPCI
identified the following loan participation interests where the carrying value exceeded the fair value of the underlying collateral
for the loan. The fair value impairment was recorded within the provision for credit losses.
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
Significant
|
|
|
Total
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Other
|
|
|
Gains/(Losses)
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
For the Twelve
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Months Ended
|
|
(dollar amounts in thousands)
|
|
December 31, 2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
December 31, 2012
|
|
Loan participation interests
|
|
$
|
16,471
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,471
|
|
|
$
|
(5,395
|
)
|
There were no changes in the valuation techniques or related
inputs used to measure similar assets in prior periods.
Fair Value of Financial Instruments
The following methods and assumptions were
used by HPCI to estimate the fair value of the classes of financial instruments:
Cash and interest-bearing deposits, and due from The Huntington
National Bank
- The carrying value approximates fair value based on its highly liquid nature. All amounts at December 31, 2012
and December 31, 2011 are classified as Level 1 in the valuation hierarchy.
Loan participation interests
– Underlying variable
rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with
similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating
costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan portfolio.
As of December 31, 2012, the net carrying amount of $3.3 billion corresponded to a fair value of $2.9
billion. As of December 31, 2011, the net carrying amount of $3.5 billion corresponded to a fair value of $3.2 billion. All amounts
at December 31, 2012 and December 31, 2011 are classified as Level 3 in the valuation hierarchy. At December 31, 2012, the valuation
of the loan portfolio reflected discounts that HPCI believed are consistent with transactions occurring in the
market place.
Note 7 - Commitments and Contingencies
Class C Preferred Securities
In June 2012, federal banking agencies,
including the FRB, jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules
for banks. The proposed capital rules (Basel III NPR) are intended to implement the Basel III regulatory capital reforms, comply
with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our interpretation
of Basel III NPR as currently proposed, we believe the HPCI Class C preferred securities would no longer constitute Tier 1 capital
for Huntington or the Bank. It is possible that, upon considering comments received on the NPRs, the FRB may not adopt the Basel
III NPR as proposed, or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. However, in
the event the FRB’s applicable final rules regarding Tier 1 capital treatment are substantially similar to Basel III NPR
as proposed, or otherwise result in the Class C preferred securities no longer constituting Tier 1 capital for the Bank and we
receive an opinion of counsel to that effect, HPCI would be able to redeem the Class C preferred securities at the par value of
$25 per share due to a regulatory capital event. There can be no assurance as to if or when HPCI would redeem the Class C preferred
securities.
Pledged Assets
The Bank is eligible to obtain collateralized
advances from various federal and government-sponsored agencies such as the FHLB. From time-to-time, HPCI may be asked to act as
guarantor of the Bank’s obligations under such advances and / or pledge all or a portion of its assets in connection with
those advances. Any such guarantee and / or pledge would rank senior to HPCI’s common and preferred securities upon liquidation.
Accordingly, any federal or government-sponsored agencies that make advances to the Bank where HPCI has acted as guarantor or has
pledged all or a portion of its assets as collateral will have a liquidation preference over the holders of HPCI’s securities.
Any such guarantee and / or pledge in connection with the Bank’s advances from the FHLB falls within the definition of Permitted
Indebtedness (as defined in HPCI’s Articles of Incorporation) and, therefore, HPCI is not required to obtain the consent
of the holders of its common or preferred securities for any such guarantee and / or pledge.
Currently, HPCI’s assets have been
used to collateralize only one such facility. The Bank has a line of credit from the FHLB with a maximum borrowing capacity of
$4.0 billion as of December 31, 2012, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had outstanding
borrowings of $1.0 billion under the facility.
HPCI has entered
into an Amended and Restated Agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s
borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate
dollar amount or aggregate percentage of such assets established from time-to-time by HPCI’s board of directors, including
a majority of HPCI’s independent directors.
The pledge limit was established by HPCI’s board at 25% of total
assets, or approximately $1.0 billion as of December 31, 2012, as reflected in HPCI’s month-end management report.
This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors.
The amount of HPCI’s participation interests pledged was $0.2 billion at December 31, 2012. In 2012, the loans pledged
consisted of the 1-4 family residential mortgage loans.
The agreement also provides that the Bank will
pay HPCI a monthly fee based upon the total loans pledged by HPCI.
The Bank paid HPCI a total of $1.2 million, $1.5 million,
and $2.0 million in the respective annual periods ended December 31, 2012, 2011, and 2010 as compensation for making such assets
available to the Bank.
Under the terms of the participation and
subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through
Holdings so that the Bank may extend credit to any borrowers, or pay letters-of-credit issued for the account of any borrowers,
to the extent provided in the loan agreements underlying HPCI’s participation interests. As of December 31, 2012 and 2011,
the unfunded loan commitments totaled $273.4 million and $233.4 million, respectively.
Dividends
Regulatory approval is required prior to
the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared
without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding
two years, less any required transfers to surplus or common stock. As a result of the deficit position of its undivided profits,
for the year ended December 31, 2012, the Bank could not have declared and paid any cash dividends to the parent company without
regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries
or outside shareholders without regulatory approval. The OCC has approved the payment of HPCI’s dividends on its Class A,
B, and C Preferred securities throughout 2011, 2012 and through the 2013 first quarter. For the foreseeable future, management
intends to request approval for any future dividend; however, there can be no assurance that the OCC will approve future dividends
.
Note 8 - Segment Reporting
HPCI’s operations consist of acquiring,
holding, and managing its participation interests. Accordingly, HPCI only operates in one segment. HPCI has no external customers
and transacts all of its business with the Bank and its affiliates.
Note 9 – Income Taxes
HPCI accounts for uncertainties in income
taxes in accordance with ASC 740, Income Taxes. As of December 31, 2012, there were no unrecognized tax benefits. HPCI does not
anticipate the total amount of unrecognized tax benefits to significantly change within the next twelve months.
HPCI is included in certain of Huntington’s
unitary and combined state income tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy
Statement on Intercorporate-State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary
and combined state income tax provision is allocated to each member of the unitary and combined filing group’s based upon
the filing group’s effective tax rate. Under the intercompany state tax allocation agreement with Huntington, we will provide
and remit state income taxes to or receive a state income tax benefit from the tax paying member. For the year ended December 31,
2012, provision for state income taxes was $39 thousand. There was no provision for state income taxes for the years ended December
31, 2011 and 2010.
HPCI has elected to be treated as a REIT
for federal income tax purposes and intends to maintain compliance with the provisions of the IRC and, therefore, is not subject
to federal income taxes. The federal tax returns for years ended 2009 and after are open for review by the IRS. Various state jurisdictions
remain open to review for tax years 2006 and after.
HPCI recognizes interest and penalties
on tax assessments or tax refunds in the financial statements as a component of its provision for income taxes. There were no amounts
recognized for interest and penalties for the years ended December 31, 2012, 2011, and 2010 and no amounts accrued at December
31, 2012 and 2011.
Note 10 - Quarterly Results of Operations (
Unaudited
)
The following is a summary of the unaudited
quarterly results of operations for the years ended December 31:
(dollar amounts in thousands)
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
32,574
|
|
|
$
|
33,731
|
|
|
$
|
34,515
|
|
|
$
|
35,627
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(1,637
|
)
|
|
|
5,117
|
|
|
|
(11,257
|
)
|
|
|
(16,126
|
)
|
Noninterest income
|
|
|
289
|
|
|
|
309
|
|
|
|
317
|
|
|
|
344
|
|
Noninterest expense
|
|
|
1,892
|
|
|
|
2,323
|
|
|
|
1,768
|
|
|
|
1,804
|
|
Income before provision (benefit) for income taxes
|
|
|
32,608
|
|
|
|
26,600
|
|
|
|
44,321
|
|
|
|
50,293
|
|
Provision (Benefit) for income taxes
|
|
|
(143
|
)
|
|
|
182
|
|
|
|
-
|
|
|
|
-
|
|
Dividends declared on preferred securities
|
|
|
3,071
|
|
|
|
3,272
|
|
|
|
3,284
|
|
|
|
3,578
|
|
Net income applicable to common shares
|
|
$
|
29,680
|
|
|
$
|
23,146
|
|
|
$
|
41,037
|
|
|
$
|
46,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
37,105
|
|
|
$
|
37,010
|
|
|
$
|
36,525
|
|
|
$
|
36,711
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(7,352
|
)
|
|
|
(23,067
|
)
|
|
|
9,255
|
|
|
|
(16,365
|
)
|
Noninterest income
|
|
|
370
|
|
|
|
389
|
|
|
|
415
|
|
|
|
438
|
|
Noninterest expense
|
|
|
1,870
|
|
|
|
1,907
|
|
|
|
1,936
|
|
|
|
1,951
|
|
Net income
|
|
|
42,957
|
|
|
|
58,559
|
|
|
|
25,749
|
|
|
|
51,563
|
|
Dividends declared on preferred securities
|
|
|
3,114
|
|
|
|
2,867
|
|
|
|
2,971
|
|
|
|
3,054
|
|
Net income applicable to common shares
|
|
$
|
39,843
|
|
|
$
|
55,692
|
|
|
$
|
22,778
|
|
|
$
|
48,509
|
|