SEC Company Response from CENTRAL PACIFIC FINANCIAL CORP (CPF) (CIK 0000701347) (CPF) — May 22, 2014
CENTRAL PACIFIC FINANCIAL CORP (CPF) (CIK 0000701347)
Date: May 22, 2014 · CIK: 0000701347 · Accession: 0000701347-14-000034
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-31567
Letter
VIA EDGAR AND EMAIL Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, DC 20549-4561 Re: Central Pacific Financial Corp. Form 10-K for Fiscal Period Ended December 31, 2013 (File No. 001-31567)
Dear Mr. Rodriguez,
On behalf of Central Pacific Financial Corp., a Hawaii corporation (the “Company”), we respectfully set forth below our responses to your letter, dated May 8, 2014 (the “Comment Letter”), relating to comments of the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) concerning the Company’s Form 10-K for the fiscal period ended December 31, 2013. Capitalized terms used herein and not otherwise defined herein have the meanings ascribed thereto in Form 10-K. For your convenience, we have included the Staff’s comments below in bold and have keyed our responses accordingly.
The Company acknowledges that:
·
the Company is responsible for the adequacy and accuracy of disclosures in our SEC filing.
·
Staff comments or changes to disclosure in response to SEC staff comments do not foreclose the Commission from taking any action with respect to the filing.
·
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Form 10-K for Fiscal Year Ended December 31, 2013
Critical Accounting Policies and Use of Estimates
Allowance for Loan and Lease Losses, page 34
1.
Please tell us and revise future filings to provide a detailed discussion of which loans you evaluate for impairment on an individual basis under ASC 310-10 and which loans you evaluate for impairment on a pool or homogeneous basis under ASC 450-20. Please be specific, addressing each major loan category. Include applicable quantitative thresholds, methodologies used (e.g., discounted cash flows, collateral values) and other criteria that you apply as well as a discussion of the surrounding uncertainties of each methodology.
Response:
The Company’s approach to evaluating impairment in our loan portfolio has three basic elements. These elements include a specific reserve for individually impaired loans, general allowance for loans other than those analyzed as individually impaired, and an unallocated reserve. These three methods are explained below:
Specific Reserve
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under ASC 310-10; Fair Value of Collateral, Observable Market Price, or Cash Flow. A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following characteristics: risk-rated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance for loan and lease losses (“Allowance”) or, alternatively, a specific reserve will be established and included in the overall Allowance balance. As of December 31, 2013 this specific reserve represented $0.3 million of the total allowance.
General Allowance
Loans not subject to the specific reserve approach include groups of homogeneous loans that are collectively evaluated for impairment such as consumer loans, small business credit-scored loans, and leases. These portfolios are collectively evaluated for impairment under ASC 450-20. They are divided into segments by FDIC classification (Commercial, industrial and agricultural, Construction, Commercial Mortgage, Residential mortgage, Consumer, and Leases), collateral type, geography (Hawaii and U.S. Mainland), and risk rating (criticized and non-criticized). The allowance for each segment is based upon that segment’s average historical loss experience over a rolling four or eight quarter period, with the latter being applied to commercial real estate-secured loans. Further consideration is made with adjustments for current conditions based on our analysis of specific environmental or qualitative loss factors affecting the collectability of our loan portfolio which may cause actual loss rates to differ from historical loss experience. As of December 31, 2013, this general allowance represented $77.5 million of the total Allowance.
Unallocated Reserve
In addition, recognizing the inherent imprecision in the estimation of these loss factors, we also incorporate an unallocated reserve that reflects management’s best estimate of probable losses not otherwise captured in our analysis or accounted for in our Allowance methodology. As of December 31, 2013 this unallocated reserve represented $6.0 million of the total Allowance.
Since we cannot predict with certainty the amount of loan and lease charge-offs that will be incurred and because the eventual level of loan and lease charge-offs are impacted by numerous conditions beyond our control, we use our historical loss experience adjusted for current conditions to determine both our Allowance and our Provision. The determination of our Allowance requires us to make estimates of losses that are highly uncertain and involves a high degree of judgment. Accordingly, actual results can differ from those estimates.
We will revise future filings to provide a more detailed discussion consistent with the disclosure set forth above.
Goodwill and other Intangibles Assets, page 36
2.
Please tell us and revise future filings to disclose how you validate the values assigned to loan servicing assets determined by a third party and clarify the sources of the market value assumptions used to value them at each reporting period (i.e., third party or internally obtained).
Response:
The fair value of our mortgage servicing rights is validated by first ensuring the completeness and accuracy of the loan data used in the valuation analysis. Reconciliation is performed by comparing the loan data from our loan system to a valuation report prepared by a third party. Additionally, the critical assumptions which come from the third party are reviewed by management. This review may include comparing actual assumptions to forecast or evaluating the reasonableness of market assumptions by reviewing them in relation to the values and trends of assumptions used by peer banks. The validation process also includes reviewing key metrics such as the fair value as a percentage of the total unpaid principal balance of the mortgages serviced, and the resulting percentage as a multiple of the net servicing fee. These key metrics are tracked to ensure the trends are reasonable, and are periodically compared to peer banks. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above.
Net Interest Margin, page 41
3.
Please tell us and revise future filings to discuss the factors contributing to the slowing of premium amortization on your mortgage backed securities, including quantification of it on your net interest margin in the periods presented.
Response:
Slowing of premium amortization in 2013 was attributed to reduced prepayment speeds on mortgage-backed securities. Reduced prepayment on mortgage backed securities were a result of an increase in intermediate-term yields of approximately 100 bps in 2013. As a result of slower premium amortization, the net interest margin was positively impacted by 5 bps in 2013. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above, as applicable.
Loan Portfolio, page 45
4.
Please tell us and revise in future filings to provide expanded discussions of your loan underwriting policies and procedures. For instance, discuss criteria in addition to loan to value ratios applied to your loans, such as FICO scores, etc.
Response:
In addition to the information provided in our Form 10-K, the general underwriting guidelines require analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of funds, loan term, minimum equity, loan-to-value standards, repayment terms, sources of repayment, covenants, pricing, collateral, insurance, and documentation standards. All loan requests considered by us should be for a clearly defined legitimate purpose with a determinable primary source, as well as alternate sources of repayment. All loans should be supported by appropriate documentation including, current financial statements, credit reports, collateral information, asset verification, tax returns, title reports, and appraisals (where appropriate).
We score consumer and small business loans using an underwriting matrix (“Scorecard”) developed based on the results of a third party analysis (Experian Information Solutions, Inc.) commissioned by our Bank. The Scorecard uses the attributes that were determined to most highly correlate with probability of repayment. Those attributes include (i) credit score, (ii) age of oldest account, (iii) credit limit amount, and (iv) debt-to-income (“DTI”) ratio. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above.
5.
Please tell us and revise future filings to discuss the nature of your loan products by loan category, to include fixed rate loans and variable rate loans. For variable rate loans, disclose whether borrowers are qualified at the fully indexed interest rate and, if not, how you evaluate the risks associated with these loans in the underwriting process.
Response:
We respectfully refer the Staff to the disclosure provided on pages 49 and 50 of our Form 10-K. which we believe is consistent with the requirements set forth in Securities Act Industry Guide 3 for Statistical Disclosure by Bank Holding Companies, item III. B. Loan Portfolio: Maturities and Sensitivities of Loans to Changes in Interest Rates. Notwithstanding the foregoing, we provide the additional disclosure and will revise future filings to provide disclosure consistent with the disclosure provided below.
At December 31, 2013 commercial, financial and agricultural loans were 22.8% fixed rate and 77.2% variable rate. Real estate construction loans were 23.8% fixed rate and 76.2% variable rate. Residential mortgage loans, which include home equity lines and loans, were 72.5% fixed rate and 27.5% variable rate. Commercial mortgage loans were 39.6% fixed rate and 60.4% variable rate. Consumer loans were 77.4% fixed rate and 22.6% variable rate.
Commercial loans and commercial mortgage loans with variable interest rates are underwritten at the current market rate of interest. For commercial loans and commercial real estate loans with a fixed rate period that are not fully amortizing, the loans are underwritten at the current market rate of interest. At the expiration of the fixed rate period and/or maturity, the projected loan balance at that time is underwritten at an interest rate based on the current interest rate plus two percent per annum (2.0%).
Qualifying payments for our variable rate residential mortgage loans with initial fixed rate periods of 5 years or less are calculated using the greater of the note rate plus 2% per annum or the fully indexed rate. Payments for our variable rate loans with a fixed-rate period of greater than 5 years are calculated using the greater of the note rate or the fully indexed rate. The qualifying payment for our HELOCs is based on the fully indexed rate plus the required principal payment due during repayment assuming the line was fully drawn. Our consumer lines of credit use a qualifying payment factor that exceeds the actual fully indexed interest rate.
Table 12. Maturity Distribution of Loans
Maturing
Over one
One year
through
Over five
or less
five years
years
Total
(Dollars in thousands)
Commercial, financial and agricultural
With fixed interest rates
$ 2,983
$ 53,906
$ 34,062
$ 90,951
With variable interest rates
33,378
172,163
102,224
307,765
36,361
226,069
136,286
398,716
Real estate:
Construction
With fixed interest rates
4,833
8,952
4,184
17,969
With variable interest rates
14,779
33,851
9,017
57,647
19,612
42,803
13,201
75,616
Mortgage - residential
With fixed interest rates
1,808
18,164
878,092
898,064
With variable interest rates
10,171
38,047
292,977
341,195
11,979
56,211
1,171,069
1,239,259
Mortgage - commercial
With fixed interest rates
23,171
85,873
128,552
237,596
With variable interest rates
33,919
84,243
244,323
362,485
57,090
170,116
372,875
600,081
Consumer
With fixed interest rates
1,107
128,808
110,490
240,405
With variable interest rates
14,070
31,367
24,846
70,283
15,177
160,175
135,336
310,688
Leases
With fixed interest rates
1,880
3,664
6,241
With variable interest rates
-
-
-
-
1,880
3,664
6,241
Total
$ 142,099
$ 659,038
$ 1,829,464
$ 2,630,601
6.
Please tell us and revise future filings to clarify whether or not your loan portfolio includes any non-conforming loans such as hybrid loans, interest only loans, etc. and, if applicable, how they are underwritten.
Response:
Adjustable rate mortgages or hybrid adjustable rate mortgages comprised 11% and 16% of the residential mortgage loan portfolio as of December 31, 2013 and 2012, respectively. Qualifying payments for our variable rate residential mortgage loans with initial fixed rate periods of 5 years or less are calculated using the greater of the note rate plus 2% per annum or the fully indexed rate. Payments for our variable rate loans with a fixed-rate period of greater than 5 years are calculated using the greater of the note rate or the fully indexed rate. The portfolio also included only one pay option ARM and one interest only loan with principal balances of $512 thousand and $1.1 million respectively at December 31, 2013. The pay option ARM loan was originated in 2005 and the interest only loan was originated in 2012. The pay option and interest only loan products are no longer being offered. Given the insignificant amounts of these loans, we do not intend to include further information in future filings about these loans unless they become material.
7.
Given the different credit characteristics of home equity lines of credit (HELOC) and home equity loans from first lien mortgages, please tell us and revise future filings to provide a separate discussion of the underwriting policies and procedures for them, including whether they are amortizing or balloon, the percentage of them for which you own the first lien and how you monitor credit risk on those for which the first lien is owned by others.
Response:
Home equity lines of credit (“HELOCs”) are underwritten according to a policy and guidelines reviewed and approved by the Board of Directors annually. All HELOCs originated since early 2011 have a 10 year draw period followed by a 20 year repayment period during which the principal balance will be fully amortized. As of December 31, 2013, 58% of the HELOCS in the portfolio are fully amortizing and the remaining 42% have a balloon payment due at maturity. All HELOCs today are underwritten using a qualifying payment which assumes the line is fully drawn and is amortizing as if was in the repayment period. Underwriting criteria include a minimum FICO score, maximum DTI ratio, and maximum combined loan-to-value (“CLTV”) ratio. During 2013, the weighted average FICO score for newly originated lines exceeded 760 and the weighted average CLTV ratio was less than
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filename1.htm
letter.htm
Central Pacific Plaza
PO Box 3590
Honolulu Hawaii 96811-3590
Telephone 808-544-0500
Fax Line 808-531-2875
VIA EDGAR AND EMAIL
May 22, 2014
Mr. Gus Rodriguez
Accounting Branch Chief
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549-4561
Re: Central Pacific Financial Corp.
Form 10-K for Fiscal Period Ended December 31, 2013 (File No. 001-31567)
Dear Mr. Rodriguez,
On behalf of Central Pacific Financial Corp., a Hawaii corporation (the “Company”), we respectfully set forth below our responses to your letter, dated May 8, 2014 (the “Comment Letter”), relating to comments of the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) concerning the Company’s Form 10-K for the fiscal period ended December 31, 2013. Capitalized terms used herein and not otherwise defined herein have the meanings ascribed thereto in Form 10-K. For your convenience, we have included the Staff’s comments below in bold and have keyed our responses accordingly.
The Company acknowledges that:
·
the Company is responsible for the adequacy and accuracy of disclosures in our SEC filing.
·
Staff comments or changes to disclosure in response to SEC staff comments do not foreclose the Commission from taking any action with respect to the filing.
·
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Form 10-K for Fiscal Year Ended December 31, 2013
Critical Accounting Policies and Use of Estimates
Allowance for Loan and Lease Losses, page 34
1.
Please tell us and revise future filings to provide a detailed discussion of which loans you evaluate for impairment on an individual basis under ASC 310-10 and which loans you evaluate for impairment on a pool or homogeneous basis under ASC 450-20. Please be specific, addressing each major loan category. Include applicable quantitative thresholds, methodologies used (e.g., discounted cash flows, collateral values) and other criteria that you apply as well as a discussion of the surrounding uncertainties of each methodology.
Response:
The Company’s approach to evaluating impairment in our loan portfolio has three basic elements. These elements include a specific reserve for individually impaired loans, general allowance for loans other than those analyzed as individually impaired, and an unallocated reserve. These three methods are explained below:
Specific Reserve
Individually impaired loans in all loan categories are evaluated using one of three valuation methods as prescribed under ASC 310-10; Fair Value of Collateral, Observable Market Price, or Cash Flow. A loan is generally evaluated for impairment on an individual basis if it meets one or more of the following characteristics: risk-rated as substandard, doubtful or loss, loans on nonaccrual status, troubled debt restructures, or any loan deemed prudent by management to so analyze. If the valuation of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the Allowance for loan and lease losses (“Allowance”) or, alternatively, a specific reserve will be established and included in the overall Allowance balance. As of December 31, 2013 this specific reserve represented $0.3 million of the total allowance.
General Allowance
Loans not subject to the specific reserve approach include groups of homogeneous loans that are collectively evaluated for impairment such as consumer loans, small business credit-scored loans, and leases. These portfolios are collectively evaluated for impairment under ASC 450-20. They are divided into segments by FDIC classification (Commercial, industrial and agricultural, Construction, Commercial Mortgage, Residential mortgage, Consumer, and Leases), collateral type, geography (Hawaii and U.S. Mainland), and risk rating (criticized and non-criticized). The allowance for each segment is based upon that segment’s average historical loss experience over a rolling four or eight quarter period, with the latter being applied to commercial real estate-secured loans. Further consideration is made with adjustments for current conditions based on our analysis of specific environmental or qualitative loss factors affecting the collectability of our loan portfolio which may cause actual loss rates to differ from historical loss experience. As of December 31, 2013, this general allowance represented $77.5 million of the total Allowance.
Unallocated Reserve
In addition, recognizing the inherent imprecision in the estimation of these loss factors, we also incorporate an unallocated reserve that reflects management’s best estimate of probable losses not otherwise captured in our analysis or accounted for in our Allowance methodology. As of December 31, 2013 this unallocated reserve represented $6.0 million of the total Allowance.
Since we cannot predict with certainty the amount of loan and lease charge-offs that will be incurred and because the eventual level of loan and lease charge-offs are impacted by numerous conditions beyond our control, we use our historical loss experience adjusted for current conditions to determine both our Allowance and our Provision. The determination of our Allowance requires us to make estimates of losses that are highly uncertain and involves a high degree of judgment. Accordingly, actual results can differ from those estimates.
We will revise future filings to provide a more detailed discussion consistent with the disclosure set forth above.
2
Goodwill and other Intangibles Assets, page 36
2.
Please tell us and revise future filings to disclose how you validate the values assigned to loan servicing assets determined by a third party and clarify the sources of the market value assumptions used to value them at each reporting period (i.e., third party or internally obtained).
Response:
The fair value of our mortgage servicing rights is validated by first ensuring the completeness and accuracy of the loan data used in the valuation analysis. Reconciliation is performed by comparing the loan data from our loan system to a valuation report prepared by a third party. Additionally, the critical assumptions which come from the third party are reviewed by management. This review may include comparing actual assumptions to forecast or evaluating the reasonableness of market assumptions by reviewing them in relation to the values and trends of assumptions used by peer banks. The validation process also includes reviewing key metrics such as the fair value as a percentage of the total unpaid principal balance of the mortgages serviced, and the resulting percentage as a multiple of the net servicing fee. These key metrics are tracked to ensure the trends are reasonable, and are periodically compared to peer banks. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above.
Net Interest Margin, page 41
3.
Please tell us and revise future filings to discuss the factors contributing to the slowing of premium amortization on your mortgage backed securities, including quantification of it on your net interest margin in the periods presented.
Response:
Slowing of premium amortization in 2013 was attributed to reduced prepayment speeds on mortgage-backed securities. Reduced prepayment on mortgage backed securities were a result of an increase in intermediate-term yields of approximately 100 bps in 2013. As a result of slower premium amortization, the net interest margin was positively impacted by 5 bps in 2013. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above, as applicable.
Loan Portfolio, page 45
4.
Please tell us and revise in future filings to provide expanded discussions of your loan underwriting policies and procedures. For instance, discuss criteria in addition to loan to value ratios applied to your loans, such as FICO scores, etc.
Response:
In addition to the information provided in our Form 10-K, the general underwriting guidelines require analysis and documentation to include among other things, overall credit worthiness of borrower, guarantor support, use of funds, loan term, minimum equity, loan-to-value standards, repayment terms, sources of repayment, covenants, pricing, collateral, insurance, and documentation standards. All loan requests considered by us should be for a clearly defined legitimate purpose with a determinable primary source, as well as alternate sources of repayment. All loans should be supported by appropriate documentation including, current financial statements, credit reports, collateral information, asset verification, tax returns, title reports, and appraisals (where appropriate).
3
We score consumer and small business loans using an underwriting matrix (“Scorecard”) developed based on the results of a third party analysis (Experian Information Solutions, Inc.) commissioned by our Bank. The Scorecard uses the attributes that were determined to most highly correlate with probability of repayment. Those attributes include (i) credit score, (ii) age of oldest account, (iii) credit limit amount, and (iv) debt-to-income (“DTI”) ratio. We will revise future filings to provide a comparable discussion consistent with the disclosure set forth above.
5.
Please tell us and revise future filings to discuss the nature of your loan products by loan category, to include fixed rate loans and variable rate loans. For variable rate loans, disclose whether borrowers are qualified at the fully indexed interest rate and, if not, how you evaluate the risks associated with these loans in the underwriting process.
Response:
We respectfully refer the Staff to the disclosure provided on pages 49 and 50 of our Form 10-K. which we believe is consistent with the requirements set forth in Securities Act Industry Guide 3 for Statistical Disclosure by Bank Holding Companies, item III. B. Loan Portfolio: Maturities and Sensitivities of Loans to Changes in Interest Rates. Notwithstanding the foregoing, we provide the additional disclosure and will revise future filings to provide disclosure consistent with the disclosure provided below.
At December 31, 2013 commercial, financial and agricultural loans were 22.8% fixed rate and 77.2% variable rate. Real estate construction loans were 23.8% fixed rate and 76.2% variable rate. Residential mortgage loans, which include home equity lines and loans, were 72.5% fixed rate and 27.5% variable rate. Commercial mortgage loans were 39.6% fixed rate and 60.4% variable rate. Consumer loans were 77.4% fixed rate and 22.6% variable rate.
Commercial loans and commercial mortgage loans with variable interest rates are underwritten at the current market rate of interest. For commercial loans and commercial real estate loans with a fixed rate period that are not fully amortizing, the loans are underwritten at the current market rate of interest. At the expiration of the fixed rate period and/or maturity, the projected loan balance at that time is underwritten at an interest rate based on the current interest rate plus two percent per annum (2.0%).
Qualifying payments for our variable rate residential mortgage loans with initial fixed rate periods of 5 years or less are calculated using the greater of the note rate plus 2% per annum or the fully indexed rate. Payments for our variable rate loans with a fixed-rate period of greater than 5 years are calculated using the greater of the note rate or the fully indexed rate. The qualifying payment for our HELOCs is based on the fully indexed rate plus the required principal payment due during repayment assuming the line was fully drawn. Our consumer lines of credit use a qualifying payment factor that exceeds the actual fully indexed interest rate.
4
Table 12. Maturity Distribution of Loans
Maturing
Over one
One year
through
Over five
or less
five years
years
Total
(Dollars in thousands)
Commercial, financial and agricultural
With fixed interest rates
$
2,983
$
53,906
$
34,062
$
90,951
With variable interest rates
33,378
172,163
102,224
307,765
36,361
226,069
136,286
398,716
Real estate:
Construction
With fixed interest rates
4,833
8,952
4,184
17,969
With variable interest rates
14,779
33,851
9,017
57,647
19,612
42,803
13,201
75,616
Mortgage - residential
With fixed interest rates
1,808
18,164
878,092
898,064
With variable interest rates
10,171
38,047
292,977
341,195
11,979
56,211
1,171,069
1,239,259
Mortgage - commercial
With fixed interest rates
23,171
85,873
128,552
237,596
With variable interest rates
33,919
84,243
244,323
362,485
57,090
170,116
372,875
600,081
Consumer
With fixed interest rates
1,107
128,808
110,490
240,405
With variable interest rates
14,070
31,367
24,846
70,283
15,177
160,175
135,336
310,688
Leases
With fixed interest rates
1,880
3,664
697
6,241
With variable interest rates
-
-
-
-
1,880
3,664
697
6,241
Total
$
142,099
$
659,038
$
1,829,464
$
2,630,601
6.
Please tell us and revise future filings to clarify whether or not your loan portfolio includes any non-conforming loans such as hybrid loans, interest only loans, etc. and, if applicable, how they are underwritten.
Response:
Adjustable rate mortgages or hybrid adjustable rate mortgages comprised 11% and 16% of the residential mortgage loan portfolio as of December 31, 2013 and 2012, respectively. Qualifying payments for our variable rate residential mortgage loans with initial fixed rate periods of 5 years or less are calculated using the greater of the note rate plus 2% per annum or the fully indexed rate. Payments for our variable rate loans with a fixed-rate period of greater than 5 years are calculated using the greater of the note rate or the fully indexed rate. The portfolio also included only one pay option ARM and one interest only loan with principal balances of $512 thousand and $1.1 million respectively at December 31, 2013. The pay option ARM loan was originated in 2005 and the interest only loan was originated in 2012. The pay option and interest only loan products are no longer being offered. Given the insignificant amounts of these loans, we do not intend to include further information in future filings about these loans unless they become material.
5
7.
Given the different credit characteristics of home equity lines of credit (HELOC) and home equity loans from first lien mortgages, please tell us and revise future filings to provide a separate discussion of the underwriting policies and procedures for them, including whether they are amortizing or balloon, the percentage of them for which you own the first lien and how you monitor credit risk on those for which the first lien is owned by others.
Response:
Home equity lines of credit (“HELOCs”) are underwritten according to a policy and guidelines reviewed and approved by the Board of Directors annually. All HELOCs originated since early 2011 have a 10 year draw period followed by a 20 year repayment period during which the principal balance will be fully amortized. As of December 31, 2013, 58% of the HELOCS in the portfolio are fully amortizing and the remaining 42% have a balloon payment due at maturity. All HELOCs today are underwritten using a qualifying payment which assumes the line is fully drawn and is amortizing as if was in the repayment period. Underwriting criteria include a minimum FICO score, maximum DTI ratio, and maximum combined loan-to-value (“CLTV”) ratio. During 2013, the weighted average FICO score for newly originated lines exceeded 760 and the weighted average CLTV ratio was less than