Edgar Filing: CVB FINANCIAL CORP

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


California		95-3629339
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

701 North Haven Ave, Suite 350, Ontario, California		91764
(Address of Principal Executive Offices)		(Zip Code)

(909) 980-4030

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of common stock of the registrant: 105,239,634 outstanding as of October 31, 2013.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		3
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
	CRITICAL ACCOUNTING POLICIES	40
	OVERVIEW	40
	ANALYSIS OF THE RESULTS OF OPERATIONS	42
	RESULTS BY BUSINESS SEGMENTS	53
	ANALYSIS OF FINANCIAL CONDITION	54
	ASSET/LIABILITY AND MARKET RISK MANAGEMENT	69
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	71
ITEM 4.	CONTROLS AND PROCEDURES	71
PART II – OTHER INFORMATION		71
ITEM 1.	LEGAL PROCEEDINGS	71
ITEM 1A.	RISK FACTORS	72
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	72
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	72
ITEM 4.	MINE SAFETY DISCLOSURES	72
ITEM 5.	OTHER INFORMATION	72
ITEM 6.	EXHIBITS	73
SIGNATURES		74

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Forward Looking Statements

Certain statements in this Report on Form 10-Q, including, but not limited to, statements under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, including but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business prospects, strategic alternatives, business strategies, regulatory policies, competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for future operations, management hiring and retention and other similar forecasts and statements of expectations of assumptions underlying any of the foregoing. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will” and variations of these words and similar expressions are intended to identify these forward looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, local, regional, national and international economic conditions and events and the impact they may have on us and our customers; ability to attract and maintain deposits, borrowings and other sources of liquidity; supply of property inventory and renewed fluctuation or deterioration in values of real estate in California or other jurisdictions where we lend, whether involving residential or commercial property; a prolonged slowdown or decline in construction activity; changes in the financial performance and/or condition of our loan and deposit customers ; changes in the levels of performing and nonperforming assets and charge-offs; the cost or effect of acquisitions or divestitures we may make; the effect of changes in laws and regulations (including laws, regulations and judicial decisions concerning financial reform, taxes, bank or holding company capital levels, securities, employment, executive compensation, insurance, and information security) with which we and our subsidiaries must comply; changes in the applicability or costs of deposit insurance; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant legal, regulatory and accounting requirements; inflation, interest rate, securities market and monetary fluctuations; internal and external fraud and cyber-security threats, including theft or loss of Company or customer funds, loss of system functionality or access, or theft or loss of data; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services (including technology-based services and products) and the perceived overall value of these products and services by users; changes in consumer spending, borrowing and savings habits; the effects of technological changes, the expanding use of technology in banking (including the adoption of mobile banking applications) and product innovation; the ability to retain or increase market share, retain or grow customers and control expenses; changes in the risk or competitive environment among financial and bankentities, holding companies and other financial service providers; continued volatility in the credit and equity markets and its effects on the general economy or local business conditions; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other national or international accounting standard setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team; the costs and effects of legal and regulatory changes or developments; the favorable or unfavorable resolution of legal proceedings or regulatory or other governmental inquiries, including, but not limited to, the current investigation by the Securities and Exchange Commission and the related class-action lawsuits filed against us; and the results of regulatory examinations or reviews or other government actions. The Company cautions that the foregoing factors are not exclusive. For additional information concerning these factors and other factors which may cause actual results to differ from the results discussed in our forward-looking statements, see the periodic filings the Company makes with the Securities and Exchange Commission, and, in particular, the information set forth in Item 1A herein and in “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)


	September 30,			December 31,
	2013			2012
ASSETS
Cash and due from banks	$	127,728		$	87,274
Interest-earning balances due from Federal Reserve		3,714			11,157

Total cash and cash equivalents		131,442			98,431

Interest-earning balances due from depository institutions		70,000			70,000
Investment securities available-for-sale, at fair value (with amortized cost of $2,609,959 at September 30, 2013, and $2,374,816 at December 31, 2012)		2,617,307			2,449,387
Investment securities held-to-maturity		1,850			2,050
Investment in stock of Federal Home Loan Bank (FHLB)		39,420			56,651
Loans and lease finance receivables, excluding covered loans		3,281,352			3,252,313
Allowance for loan losses		(80,713	)		(92,441	)

Net loans and lease finance receivables		3,200,639			3,159,872

Covered loans and lease finance receivables, net		163,334			195,215
Premises and equipment, net		33,604			35,080
Bank owned life insurance		122,538			119,744
Accrued interest receivable		21,860			22,355
Intangibles		2,386			3,389
Goodwill		55,097			55,097
FDIC loss sharing asset		7,034			18,489
Non-covered other real estate owned		6,524			14,832
Covered other real estate owned		906			1,067
Income tax assets, net		59,226			16,978
Other assets		24,116			44,727

TOTAL ASSETS	$	6,557,283		$	6,363,364

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	2,538,461		$	2,420,993
Interest-bearing		2,357,025			2,352,994

Total deposits		4,895,486			4,773,987
Customer repurchase agreements		565,883			473,244
FHLB advances		199,138			198,934
Other borrowings		42,482			26,000
Accrued interest payable		1,106			1,493
Deferred compensation		9,316			8,781
Junior subordinated debentures		25,774			67,012
Other liabilities		49,876			50,943

TOTAL LIABILITIES		5,789,061			5,600,394

COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 105,209,875 at September 30, 2013, and 104,889,586 at December 31, 2012.		488,555			484,709
Retained earnings		275,405			235,010
Accumulated other comprehensive income, net of tax		4,262			43,251

Total stockholders’ equity		768,222			762,970

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,557,283		$	6,363,364

See accompanying notes to the condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Interest income:
Loans and leases, including fees	$	41,706		$	45,559		$	124,879		$	139,289
Accretion on acquired loans		2,947			7,045			10,796			19,258

Loans, including fees		44,653			52,604			135,675			158,547
Investment securities:
Taxable		7,102			7,246			19,280			25,202
Tax-advantaged		5,517			5,640			16,569			17,221

Total investment income		12,619			12,886			35,849			42,423
Dividends from FHLB stock		622			79			1,432			263
Federal funds sold		58			158			158			539
Interest-earning deposits with other institutions		122			118			366			317

Total interest income		58,074			65,845			173,480			202,089
Interest expense:
Deposits		1,228			1,398			3,627			4,605
Borrowings		2,768			4,086			8,184			13,933
Junior subordinated debentures		105			617			512			2,245

Total interest expense		4,101			6,101			12,323			20,783

Net interest income before provision for loan losses		53,973			59,744			161,157			181,306
Provision for loan losses		(3,750	)		—			(9,950	)		—

Net interest income after provision for loan losses		57,723			59,744			171,107			181,306

Noninterest income:
Service charges on deposit accounts		4,011			4,040			11,982			12,232
Trust and investment services		2,021			2,037			6,098			6,264
Bankcard services		920			962			2,697			2,888
BOLI income		497			781			1,867			2,271
Gain on sale of investment securities, net		—			—			2,094			—
Decrease in FDIC loss sharing asset, net		(3,248	)		(7,059	)		(10,715	)		(19,339	)
Gain on OREO, net		(3	)		524			3,129			1,458
Other		759			1,341			2,245			4,400

Total noninterest income		4,957			2,626			19,397			10,174

Noninterest expense:
Salaries and employee benefits		18,389			17,489			52,777			50,856
Occupancy and equipment		3,641			4,010			10,888			11,582
Professional services		1,316			1,570			4,299			5,666
Software licenses and maintenance		1,077			1,062			3,392			2,960
Promotion		1,105			1,176			3,503			3,741
Provision for unfunded commitments		500			—			500			—
Amortization of intangibles		127			449			1,002			1,717
Debt termination expense		—			20,379			—			20,379
OREO expense		21			405			384			1,458
Insurance reimbursements		(4,139	)		(48	)		(4,139	)		(451	)
Other		3,677			3,528			12,154			11,273

Total noninterest expense		25,714			50,020			84,760			109,181

Earnings before income taxes		36,966			12,350			105,744			82,299

Income taxes		12,727			3,093			35,424			27,155

Net earnings	$	24,239		$	9,257		$	70,320		$	55,144

Other comprehensive income/(loss):
Unrealized gain/(loss) on investment securities arising during the period	$	421		$	8,417		$	(65,129	)	$	12,064
Less: Reclassification adjustment for net gain on investment securities included in net income		—			—			(2,094	)		—

Other comprehensive income (loss), before tax		421			8,417			(67,223	)		12,064
Income tax (expense) benefit related to items of other comprehensive income (loss)		(176	)		(3,536	)		28,234			(5,068	)

Other comprehensive income (loss), net of tax		245			4,881			(38,989	)		6,996

Comprehensive income	$	24,484		$	14,138		$	31,331		$	62,140

Basic earnings per common share	$	0.23		$	0.09		$	0.67		$	0.53
Diluted earnings per common share	$	0.23		$	0.09		$	0.67		$	0.53
Cash dividends declared per common share	$	0.10		$	0.085		$	0.285		$	0.255

See accompanying notes to the condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2013 and 2012

(Dollars and shares in thousands)

(Unaudited)


										Accumulated
	Common									Other
	Shares			Common			Retained			Comprehensive
	Outstanding			Stock			Earnings			Income/(Loss)			Total
Balance January 1, 2012		104,482		$	479,973		$	193,372		$	41,469		$	714,814
Exercise of stock options		331			2,412									2,412
Tax benefit from exercise of stock options					179									179
Shares issued pursuant to stock-based compensation plan					1,387									1,387
Cash dividends declared Common ($0.255 per share)								(26,725	)					(26,725	)
Net earnings								55,144						55,144
Other comprehensive income											6,996			6,996

Balance September 30, 2012		104,813		$	483,951		$	221,791		$	48,465		$	754,207

Balance January 1, 2013		104,890		$	484,709		$	235,010		$	43,251		$	762,970
Repurchase of common stock		(36	)		(459	)								(459	)
Exercise of stock options		259			2,651									2,651
Tax benefit from exercise of stock options					215									215
Shares issued pursuant to stock-based compensation plan		97			1,439									1,439
Cash dividends declared Common ($0.285 per share)								(29,925	)					(29,925	)
Net earnings								70,320						70,320
Other comprehensive income											(38,989	)		(38,989	)

Balance September 30, 2013		105,210		$	488,555		$	275,405		$	4,262		$	768,222

See accompanying notes to the condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received	$	181,608		$	200,601
Service charges and other fees received		23,103			28,144
Interest paid		(12,506	)		(22,531	)
Net cash paid to vendors and employees		(69,441	)		(105,347	)
Income taxes paid		(50,200	)		(3,455	)
Proceeds from FDIC loss share agreement		239			17,842

Net cash provided by operating activities		72,803			115,254
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from redemption of FHLB stock		17,231			10,261
Proceeds from sale of investment securities		99,155			—
Proceeds from repayment of investment securities		344,660			401,229
Proceeds from maturity of investment securities		62,175			74,287
Purchases of investment securities		(759,609	)		(567,391	)
Net decrease in loan and lease finance receivables		13,375			61,475
Proceeds from sales of premises and equipment		9			26
Purchase of premises and equipment		(2,080	)		(3,382	)
Proceeds from sales of other real estate owned		12,922			17,274

Net cash used in investing activities		(212,162	)		(6,221	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction deposits		147,349			275,109
Net decrease in time deposits		(25,850	)		(98,541	)
Repayment of FHLB advances		—			(250,000	)
Repayment of junior subordinated debentures		(41,238	)		(48,043	)
Net increase in other borrowings		16,482			—
Net increase/(decrease) in customer repurchase agreements		92,639			(60,582	)
Cash dividends on common stock		(19,419	)		(26,725	)
Repurchase of common stock		(459	)		—
Proceeds from exercise of stock options		2,651			2,412
Tax benefit related to exercise of stock options		215			179

Net cash provided by/(used in) financing activities		172,370			(206,191	)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		33,011			(97,158	)
CASH AND CASH EQUIVALENTS, beginning of period		98,431			345,343

CASH AND CASH EQUIVALENTS, end of period	$	131,442		$	248,185

See accompanying notes to the condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2013			2012
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings	$	70,320		$	55,144
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of investment securities		(2,094	)		—
Loss/(gain) on sale of premises and equipment, net		2			(1	)
Gain on sale of other real estate owned		(3,048	)		(1,341	)
Amortization of capitalized prepayment penalty on borrowings		204			204
Increase in bank owned life insurance		(1,805	)		(2,252	)
Net amortization of premiums and discounts on investment securities		20,770			17,578
Accretion of SJB discount		(10,796	)		(19,258	)
Provision for loan losses		(9,950	)		—
Provision for unfunded commitments		500			—
Valuation adjustment on other real estate owned		87			490
Change in FDIC loss share asset		10,715			19,339
Proceeds from FDIC loss share agreement		239			17,842
Stock-based compensation		1,439			1,387
Depreciation and amortization, net		2,029			5,776
Change in accrued interest receivable		495			627
Change in accrued interest payable		(387	)		(1,952	)
Change in other assets and liabilities		(5,917	)		21,671

Total adjustments		2,483			60,110

Net cash provided by operating activities	$	72,803		$	115,254

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned	$	1,492		$	4,582

See accompanying notes to the condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2013, and 2012

(Unaudited)

1. BUSINESS

The condensed consolidated financial statements include the accounts of CVB Financial Corp. and its wholly owned subsidiaries (the “Company”) Citizens Business Bank (the “Bank”) after elimination of all intercompany transactions and balances. The Company also has three inactive subsidiaries; CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with ASC 810 Consolidation (previously Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities”), this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing to customers through its Citizens Financial Services Group and trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Los Angeles County, Orange County, San Diego County, Madera County, Fresno County, Tulare County, Kern County and San Joaquin County, California. The Bank operates 39 Business Financial Centers, six Commercial Banking Centers, and three trust office locations, with its headquarters located in the city of Ontario, California.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the full year. These unaudited financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification — Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investment Securities — The Company classifies as held-to-maturity those debt securities that the Company has the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized gains and losses being included in current earnings. Available-for-sale securities are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the expected terms of the securities. For mortgage-backed securities (“MBS”), the amortization or accretion is based on the estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The Company’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”) stock is carried at cost.

At each reporting date, securities are assessed to determine whether there is an other-than-temporary impairment (“OTTI”). Other-than-temporary impairment on investment securities is recognized in earnings when there are credit losses on a debt security for which management does not intend to sell and for which it is more-likely-than-not that the Company will not have to sell prior to recovery of the noncredit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost and its fair value would be included in other comprehensive income.

Loans and Lease Finance Receivables — Non-covered loans and lease finance receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, less deferred net loan origination fees. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. To the extent that such commitments are unfunded, the related unfunded amounts are not reflected in the accompanying unaudited condensed consolidated financial statements.

Interest on non-covered loans and lease finance receivables is credited to income based on the principal amounts of such loans or receivables outstanding. Non-covered loans are considered delinquent when principal or interest payments are past due 30 days or more and generally remain on accrual status between 30 and 89 days past due. Interest income is not recognized on non-covered loans and lease finance receivables when collection of interest is deemed by management to be doubtful. Non-covered loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. In general, the accrual of interest on non-covered loans is discontinued when the loan becomes 90 days past due, or when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining that the full collection of principal and interest is no longer probable include cash flow and liquidity of the borrower or property, the financial position of the guarantors and their willingness to support the loan as well as other factors, and this determination involves significant judgment. When an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against income. Subsequent collections of cash are applied as reductions to the principal balance unless the loan is returned to accrual status. Interest is not recognized using a cash-basis method. Nonaccrual loans may be restored to accrual status when principal and interest become current and when the borrower is able to demonstrate payment performance for a sustained period, typically for six months. A nonaccrual loan may return to accrual status sooner based on other significant events or mitigating circumstances. This policy is consistently applied to all classes of non-covered financing receivables.

The Company receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in dairy, livestock and agribusiness, and various personal property assets utilized in commercial and industrial business governed by the Uniform Commercial Code.

Nonrefundable fees and direct costs associated with the origination or purchase of non-covered loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income over the loan term using the effective-yield method.

Troubled Debt Restructurings — Loans are reported as a Troubled Debt Restructuring (“TDR”) if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Types of modifications that may be considered concessions, which in turn result in a TDR include, but are not limited to, (i) a reduction of the stated interest rate for the remaining original life of the debt, (ii) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, or (iv) a reduction of interest. In addition, the Company may provide a concession to the debtor where the debtor offers collateral and the value of such collateral is significant in proportion to the nature of the concession requested, and it substantially reduces the Company’s risk of loss. In such cases, these modifications may not be considered a TDR as, in substance, no concession was made as a result of the significant additional collateral obtained.

When determining whether or not a loan modification is a TDR under ASC 310-40, the Company evaluates loan modification requests from borrowers experiencing financial difficulties on a case-by-case basis. Any such modifications granted are unique to the borrower’s circumstances. Because of the Company’s focus on the commercial lending sector, each business customer has unique attributes, which in turn means that modifications of loans to those customers are not easily categorized by type, key features, or other terms, but are evaluated individually based on all relevant facts and circumstances pertaining to the modification request and the borrower’s/guarantor’s financial condition at the time of the request. The evaluation of whether or not a borrower is experiencing financial difficulties will include, among other relevant factors considered by the Company, a review of (i) whether the borrower is in default on any of its debt, (ii) whether the borrower is experiencing payment delinquency, (iii) whether the global cash flows of the borrower and the owner guarantor(s) of the borrower have diminished below what is necessary to service existing debt obligations, (iv) whether the borrowers’ forecasted cash flows will be insufficient to service the debt in future periods or in accordance with the contractual terms of the existing agreement with the Company (or agreements with other lenders) through maturity, (v) whether the borrower is unable to refinance the subject debt from other financing sources with similar terms, and (vi) whether the borrower is in jeopardy as a going-concern and/or considering bankruptcy. In any case, the debtor is presumed to be experiencing financial difficulties if the Company determines it is probable the debtor will default on the original loan if the modification is not granted.

The types of loans subject to modification vary greatly, but during the subject period are concentrated in commercial and industrial loans, dairy and agricultural loans, and term loans to commercial real estate investors. Some examples of key features include payment deferrals and delays, interest rate reductions, and extensions or renewals where the contract rate may or may not be below the market rate of interest for debt with similar characteristics as those of the modified debt. The typical length of the modified

terms ranges from three (3) to twelve (12) months but may in some cases apply for the remaining term of the loan; however, all actual modified terms will depend on the facts, circumstances and attributes of the specific borrower requesting a modification. In general, after a careful evaluation of all relevant facts and circumstances taken together, including the nature of any concession, certain modification requests will result in troubled debt restructurings while certain other modifications will not, pursuant to the criteria and judgments as discussed throughout this report. In certain cases, modification requests for delays or deferrals of principal were evaluated and determined to be exempt from TDR reporting because they constituted insignificant delays under ASC 310-40-15.

In situations where the Company has determined that the borrower is experiencing financial difficulties and is evaluating whether a concession is insignificant, and therefore does not result in a troubled debt restructuring, such analysis is based on an evaluation of both the amount and the timing of the restructured payments, including the following factors:

Whether the amount of the restructured payments subject to delay is insignificant relative to the unpaid principal balance or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due; and

The delay is insignificant relative to any of the following:

•

The frequency of payments due;

•

The debt’s original contractual maturity; or

•

The debt’s original expected duration.

Most modified loans not classified and accounted for as troubled debt restructurings were performing and paying as agreed under their original terms in the six-month period immediately preceding a request for modification. Subsequently, these modified loans have continued to perform under the modified terms and deferrals that amounted to insignificant delays, which in turn is supported by the facts and circumstances of each individual customer and loan as described above. Payment performance continues to be monitored once modifications are made. The Company’s favorable experience regarding “re-defaults” under modified terms, or upon return of the loan to its original terms, indicates that such relief may improve ultimate collection and reduces the Company’s risk of loss.

A loan is generally considered impaired, when based on current events and information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan, including a restructured loan, for which there is an insignificant delay relative to the frequency of payments due, and/or the original contractual maturity, is not considered an impaired loan. Generally, impaired loans include loans on nonaccrual status and TDRs.

The Company’s policy is to record a specific valuation allowance, which is included in the allowance for loan losses, or to charge off that portion of an impaired loan that represents the impairment or shortfall amount as determined utilizing one of the three methods described in ASC 310-10-35-22. Impairment on non-collateral dependent restructured loans is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. The impairment amount, if any, is generally charged off and recorded against the allowance for loan losses at the time impairment is measurable and a probable loss is determined. As a result, most of the TDRs have no specific allowance allocated because, consistent with the Company’s stated practice, any impairment is typically charged off in the period in which it is identified. Impairment on collateral dependent restructured loans is measured by determining the amount by which the impaired loan exceeds the fair value of the collateral less estimated selling costs. The fair value is generally determined by one or more appraisals of the collateral, performed by a Company approved third-party independent appraiser. The majority of impaired loans that are collateral dependent are charged off down to their estimated fair value of the collateral (less selling costs) at each reporting date based on current appraised value.

Appraisals of the collateral for impaired collateral dependent loans are typically ordered at the time the loan is identified as showing signs of inherent weakness. These appraisals are normally updated at least annually, or more frequently, if there are concerns or indications that the value of the collateral may have changed significantly since the previous appraisal. On an exception basis, a specific valuation allowance is recorded on collateral dependent impaired loans when a current appraisal is not yet available, a recent appraisal is still under review or on single-family mortgage loans if the loans are currently under review for a loan modification. Such valuation allowances are generally based on previous appraisals adjusted for current market conditions, based on preliminary appraisal values that are still being reviewed or for single-family loans under review for modification on an appraisal or indications of comparable home sales from external sources.

Charge-offs of unsecured consumer loans are recorded when the loan reaches 120 days past due or sooner as circumstances indicate. Except for the charge-offs of unsecured consumer loans, the charge-off policy is generally applied consistently across all portfolio segments.

The Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is a collateral-dependent loan. Impaired single-family mortgage loans that have been modified in accordance with the various government modification programs are also measured based on the present value of the expected cash flows discounted at the loan’s pre-modification interest rate. The Company recognizes the change in present value attributable to the passage of time as interest income on such performing single-family mortgage loans and the amount of interest income recognized to date has been insignificant.

Covered Loans —We refer to “covered loans” as those loans that we acquired in the San Joaquin Bank (“SJB”) acquisition for which we will be reimbursed for a substantial portion of any future losses under the terms of the Federal Deposit Insurance Corporation (“FDIC”) loss sharing agreement. We account for loans under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“acquired impaired loan accounting”) when (i) we acquire loans deemed to be impaired when there is evidence of credit deterioration since their origination and it is probable at the date of acquisition that we would be unable to collect all contractually required payments and (ii) as a general policy election for non-impaired loans that we acquire in a distressed bank acquisition. Acquired impaired loans are accounted for individually or in pools of loans based on common risk characteristics. The excess of the loan’s or pool’s scheduled contractual principal and interest payments over all cash flows expected at acquisition is the nonaccretable difference. The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the fair value is the accretable yield (accreted into interest income over the remaining life of the loan or pool).

Provision and Allowance for Loan Losses — The allowance for loan losses is management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. The determination of the balance in the allowance for loan losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is appropriate to provide for probable loan losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past loan loss experience, and such other factors that would deserve current recognition in estimating inherent loan losses.

There are different qualitative risks for the loans in each portfolio segment. The construction and real estate segments’ predominant risk characteristic is the collateral and the geographic location of the property collateralizing the loan as well as the operating cash flow for commercial real estate properties. The commercial and industrial segment’s predominant risk characteristics are the cash flows of the businesses we lend to, the global cash flows and liquidity of the guarantors of such losses, as well as economic and market conditions. The dairy & livestock segment’s predominant risk characteristics are milk and beef prices in the market as well as the cost of feed and cattle. The municipal lease segment’s predominant risk characteristics are the municipality’s general financial condition and tax revenues or if applicable the specific project related financial condition. The consumer, auto and other segment’s predominant risk characteristics are employment and income levels as they relate to consumers and cash flows of the businesses as they relate to equipment and vehicle leases to businesses. The Agribusiness segment’s predominant risk characteristics are the supply and demand conditions of the product, production seasonality, the scale of operations and ability to control costs, the availability and cost of water, and operator experience.

The Company’s methodology is consistently applied across all portfolio segments taking into account the applicable historical loss rates and the qualitative factors applicable to each pool of loans. A key factor in the Company’s methodology is the loan risk rating (Pass, Special Mention, Substandard, Doubtful and Loss). Loan risk ratings are updated as facts related to the loan or borrower become available. In addition, all term loans in excess of $1.0 million are subject to an annual internal credit review process where all factors underlying the loan, borrower and guarantors are subject to review which may result in changes to the loan’s risk rating. Periodically, we assess various attributes utilized in adjusting our historical loss factors to reflect our view of current economic conditions. The estimate is reviewed quarterly by the Board of Directors and management and periodically by various regulatory agencies and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

A provision for loan losses on the covered portfolio will be recorded if there is deterioration in the expected cash flows on covered loans as a result of deteriorated credit quality, compared to those previously estimated without regard to the reimbursement from the FDIC under the FDIC loss sharing agreement. The portion of the loss on covered loans reimbursable from the FDIC is recorded in noninterest income as an increase in the FDIC loss sharing asset. Decreases in expected cash flows on the acquired impaired loans as of the measurement date compared to previously estimated are recognized by recording a provision for loan losses on acquired impaired loans. Loans accounted for as part of a pool are measured based on the expected cash flows of the entire pool.

FDIC Loss Sharing Asset — On October 16, 2009, the Bank acquired substantially all of the assets and assumed substantially all of the liabilities of SJB from the FDIC in an FDIC-assisted transaction. The Bank entered into a loss sharing agreement with the FDIC, whereby the FDIC will cover a substantial portion of any future losses on certain acquired assets. The acquired assets subject to the loss sharing agreement are referred to collectively as “covered assets.” Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to $144.0 million with respect to covered assets, after a first loss amount of $26.7 million. The FDIC will reimburse the Bank for 95% of losses and share in 95% of loss recoveries in excess of $144.0 million with respect to covered assets. The loss sharing agreement is in effect for 5 years for commercial loans and 10 years for single-family residential loans from the October 16, 2009 acquisition date and the loss recovery provisions are in effect for 8 and 10 years, respectively, for commercial and single-family residential loans from the acquisition date.

The FDIC loss sharing asset was initially recorded at fair value which represents the present value of the estimated cash payments from the FDIC for future losses on covered loans. The ultimate collectability of this asset is dependent upon the performance of the underlying covered loans, the passage of time and claims paid by the FDIC. The loss estimates used in calculating the FDIC loss sharing asset are determined on the same basis as the loss estimates on the related covered loans and is the present value of the cash flows the Company expects to collect from the FDIC under the loss sharing agreement. The difference between the present value and the undiscounted cash flow the Company expects to collect from the FDIC is accreted (or amortized) into noninterest income over the life of the FDIC indemnification asset. The FDIC indemnification asset is adjusted for any changes in expected cash flows based on covered loan performance. Any increases in the cash flows of covered loans over those expected will reduce the FDIC indemnification asset and any decreases in the cash flows of covered loans over those expected will increase the FDIC indemnification asset, with the remaining balance amortized on the same basis as the discount, not to exceed its remaining contract life. These increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Goodwill and Intangible Assets — Goodwill resulting from business combinations prior to January 1, 2009, represents the excess of the purchase price over the fair value of the net assets of the businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Based on the Company’s annual impairment test, there was zero recorded impairment as of September 30, 2013.

Other intangible assets consist of core deposit intangible assets arising from business combinations and are amortized using an accelerated method over their estimated useful lives.

At September 30, 2013, goodwill was $55.1 million. As of September 30, 2013, intangible assets that continue to be subject to amortization include core deposit premiums of $2.4 million (net of $29.6 million of accumulated amortization). Amortization expense for such intangible assets was $127,000, and $1.0 million for the three and nine months ended September 30, 2013. Estimated amortization expense for the remainder of 2013 is expected to be $124,000. Estimated amortization expense for the succeeding years is $475,000 for 2014, $437,000 for 2015, $395,000 for 2016, $366,000 for 2017, and $589,000 for the period from 2018 to 2019. The weighted average remaining life of intangible assets is approximately 2.0 years.

Fair Value of Financial Instruments — We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale and interest-rate swaps are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a non-recurring basis, such as impaired loans and other real estate owned (“OREO”). These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Further, we include in Note 8 of the unaudited condensed consolidated financial statements information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value we disclose the estimate of their fair value.

Earnings per Common Share — The Company calculates earnings per common share (“EPS”) using the two-class method. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to common shareholders and any participating securities. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities. The Company grants restricted shares under the 2008 Equity Incentive Plan that qualify as participating securities. Restricted shares issued under this plan are entitled to dividends at the same rate as common stock. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per common share is included in Note 7 of these unaudited condensed consolidated financial statements.

Stock-Based Compensation — Consistent with the provisions of ASC 718, “Stock Compensation”, we recognize expense for the grant date fair value of stock options and restricted shares issued to employees, officers and non-employee directors over the their requisite service periods (generally the vesting period). The service periods may be subject to performance conditions.

At September 30, 2013, the Company had three stock-based employee compensation plans. The Company accounts for stock compensation using the “modified prospective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured at fair value as of the grant date with compensation costs recognized over the vesting period on a straight-lined basis. Also under this method, unvested stock awards as of January 1, 2006 are recognized over the remaining service period with no change in historical reported earnings.

The fair value of each stock option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions used at the time of grant impact the fair value of the option calculated under the Black-Scholes option-pricing model, and ultimately, the expense that will be recognized over the life of the option.

The grant date fair value of restricted stock awards is measured at the fair value of the Company’s common stock as if the restricted share was vested and issued on the date of grant.

Additional information is included in Note 19, “Stock Option Plan and Restricted Stock Awards”, of the Company’s Annual Report on Form 10-K.

Derivative Financial Instruments — All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the consolidated balance sheets at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes, and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates which may be subject to change include fair value determinations and disclosures, impairment of investments, goodwill, loans, determining the amount and realization of the FDIC loss sharing asset, and valuation of deferred tax assets, other intangibles and OREO.

Other Contingencies — In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves as appropriate, for estimates of the probable outcome of all cases brought against the Company. Except as discussed in Part II – Other Information, Item 1. “Legal Proceedings,” at September 30, 2013, the Company does not have any litigation reserves, and is not aware of any material pending legal action or complaints asserted against the Company.

Recent Accounting Pronouncements — In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This ASU requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than a liability when (1) the uncertain tax position would reduce the net operating loss or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. ASU No. 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

4. FEDERALLY ASSISTED ACQUISITION OF SAN JOAQUIN BANK

On October 16, 2009, the Bank acquired SJB and entered into a loss sharing agreement with the FDIC that is more fully discussed in the Significant Accounting Policies (Note 3) included herein.

At September 30, 2013, the remaining discount associated with the SJB loans approximated $14.5 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $9.0 million of the related discount is expected to accrete into interest income over the remaining average lives of the respective pools and individual loans, which approximates 4.4 years and 1.0 year, respectively. Due to the decrease in estimated losses to be incurred in the remaining portfolio, the expected reimbursement from the FDIC under the loss sharing agreement decreased. The FDIC loss sharing asset of $7.0 million at September 30, 2013 will continue to be reduced by reimbursements of loss claims submitted to the FDIC with the remaining balance amortized on the same basis as the discount on the related loans, not to exceed its remaining contract life of approximately 1.0 year.

5. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service based upon market quotes.


	September 30, 2013
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency	$	353,580	$	36	$	(20,603	)	$	333,013		12.72	%
Residential mortgage-backed securities		1,286,448		19,249		(16,073	)		1,289,624		49.28	%
CMO’s / REMIC’s—residential		383,268		7,002		(1,062	)		389,208		14.87	%
Municipal bonds		581,663		22,206		(3,145	)		600,724		22.95	%
Other securities		5,000		—		(262	)		4,738		0.18	%

Total investment securities	$	2,609,959	$	48,493	$	(41,145	)	$	2,617,307		100.00	%


	December 31, 2012
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency	$	357,960	$	1,588	$	(248	)	$	359,300		14.67	%
Residential mortgage-backed securities		862,196		25,529		(127	)		887,598		36.24	%
CMO’s / REMIC’s—residential		565,968		7,402		(1,410	)		571,960		23.35	%
Municipal bonds		583,692		41,920		(183	)		625,429		25.53	%
Other securities		5,000		100		—			5,100		0.21	%

Total investment securities	$	2,374,816	$	76,539	$	(1,968	)	$	2,449,387		100.00	%

Approximately 77% of the available-for-sale portfolio at September 30, 2013 represents securities issued by the U.S government or U.S. government-sponsored agencies and enterprises, with the implied guarantee of payment of principal and interest. The remaining CMO/REMICs are backed by agency-pooled collateral or whole loan collateral. All non-agency available-for-sale CMO/REMIC issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of September 30, 2013 and December 31, 2012. The Company had $679,000 and $1.2 million in CMO/REMIC’s backed by whole loans issued by private-label companies (non-government sponsored) as of September 30, 2013, and December 31, 2012, respectively.

During the first quarter of 2013, we identified 13 securities with a par value of $94.2 million that were experiencing accelerated prepayment speeds that were causing a deterioration in yield. We elected to sell these securities and recognized a net pre-tax gain on sale of $2.1 million. There were no gains or losses recognized during the second and third quarters of 2013. In the third quarter of 2013, we purchased $314.7 million of investment securities and utilized short-term borrowings to facilitate a portion of these purchases.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012. The Company has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.


	September 30, 2013
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency	$	312,948	$	20,603	$	—	$	—	$	312,948	$	20,603
Residential mortgage-backed securities		473,190		16,073		—		—		473,190		16,073
CMO / REMICs—residential		92,281		988		18,700		74		110,981		1,062
Municipal bonds		42,859		2,671		10,393		474		53,252		3,145
Other securities		4,738		262		—		—		4,738		262

Total	$	926,016	$	40,597	$	29,093	$	548	$	955,109	$	41,145


	December 31, 2012
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency	$	51,134	$	248	$	—	$	—	$	51,134	$	248
Residential mortgage-backed securities		55,118		127		—		—		55,118		127
CMO / REMICs—residential		74,784		572		69,042		838		143,826		1,410
Municipal bonds		13,110		162		975		21		14,085		183
Other securities		—		—		—		—		—		—

Total	$	194,146	$	1,109	$	70,017	$	859	$	264,163	$	1,968

The following summarizes our analysis of these securities and the unrealized losses. This assessment was based on the following factors: i) the length of the time and the extent to which the fair value has been less than amortized cost; ii) adverse condition specifically related to the security, an industry, or a geographic area and whether or not the Company expects to recover the entire amortized cost, iii) historical and implied volatility of the fair value of the security; iv) the payment structure of the security and the likelihood of the issuer being able to make payments in the future; v) failure of the issuer of the security to make scheduled interest or principal payments, vi) any changes to the rating of the security by a rating agency, and vii) recoveries or additional declines in fair value subsequent to the balance sheet date.

CMO Held-to-Maturity — We have one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO scores of 715 and an average LTV of 71% at origination. The security was a senior security in the securitization, was rated triple AAA at origination and was supported by subordinate securities. This security is classified as held-to-maturity as we have both the intent and ability to hold this debt security to maturity. We acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security first appeared in August 2008 at the time the financial crisis in the markets occurred and the market for securities collateralized by Alt-A mortgages diminished.

As of September 30, 2013, the unrealized loss on this security was zero and the current fair value on the security was 73% of the current par value. This Alt-A bond, with a book value of $1.8 million as of September 30, 2013, has had $1.9 million in net impairment losses to date. These losses have been recorded as a reduction to noninterest income. The security is rated non-investment grade. We evaluated the security for an other-than-temporary decline in fair value as of September 30, 2013. The key assumptions include default rates, loss severities and prepayment rates. There were no changes in credit related other-than temporary impairment recognized in earnings for the three and nine months ended September 30, 2013, and 2012.

Government Agency & Government-Sponsored Enterprise — The government agency bonds are backed by the full faith and credit of agencies of the U.S. Government. While the Government-Sponsored Enterprise bonds are not expressly guaranteed by the U.S. Government, they are currently being supported by the U.S. Government under a conservatorship arrangement. As of September 30, 2013, approximately $144.4 million in U.S. government agency bonds are callable. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Company will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security.

Mortgage-Backed Securities and CMO/REMICs — Almost all of the available-for-sale mortgage-backed and CMO/REMICs securities are issued by government agencies or government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All mortgage-backed securities are considered to be rated investment grade with a weighted average life of approximately 4.8 years. Of the total MBS/CMO, 99.96% have the implied guarantee of U.S. government-sponsored agencies and enterprises. The remaining 0.04% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds.

Municipal Bonds — The majority of our municipal bonds are insured by the largest bond insurance companies with maturities of approximately 8.9 years. The Company diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Company’s exposure to any single adverse event. Because we believe the decline in fair value is attributable to the changes in interest rates and not credit quality and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized costs, which may be at maturity, management does not consider these investments to be other than temporarily impaired at September 30, 2013.

We are continually monitoring the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. Many of the securities that would not be rated without insurance are pre-refunded and/or are general obligation bonds. We continue to monitor municipalities, which includes a review of the respective municipalities’ audited financial statements to determine whether there are any audit or performance issues. We use outside brokers to assist us in these analyses. Based on our monitoring of the municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial problems that would lead us to believe that there is an OTTI for any given security.

At September 30, 2013 and December 31, 2012, investment securities having a carrying value of approximately $2.61 billion and $2.24 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at September 30, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMO/REMICs are included in maturity categories based upon estimated prepayment speeds.


	September 30, 2013
					Weighted-
	Amortized		Fair		Average
	Cost		Value		Yield
	(Dollars in thousands)
Available-for-sale:
Due in one year or less	$	130,984	$	133,474		2.39	%
Due after one year through five years		1,895,032		1,919,812		2.22	%
Due after five years through ten years		527,503		508,724		2.37	%
Due after ten years		56,440		55,297		3.49	%

Total	$	2,609,959	$	2,617,307		2.28	%

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2013.

6. LOAN AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES

The following tables provide a summary of the components of loan and lease finance receivables:


	September 30, 2013
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and industrial	$	510,566		$	20,825		$	531,391
Real estate:
Commercial real estate		2,126,415			147,289			2,273,704
Construction		47,648			661			48,309
SFR mortgage		192,130			327			192,457
Dairy & livestock and agribusiness		261,638			3,659			265,297
Municipal lease finance receivables		99,188			—			99,188
Consumer and other loans		52,886			5,102			57,988

Gross loans		3,290,471			177,863			3,468,334
Less:
Purchase accounting discount		—			(14,529	)		(14,529	)
Deferred loan fees, net		(9,119	)		—			(9,119	)

Gross loans, net of deferred loan fees and discount		3,281,352			163,334			3,444,686
Less: Allowance for loan losses		(80,713	)		—			(80,713	)

Net loans	$	3,200,639		$	163,334		$	3,363,973


	December 31, 2012
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and industrial	$	547,422		$	26,149		$	573,571
Real estate:
Commercial real estate		1,990,107			179,428			2,169,535
Construction		59,721			1,579			61,300
SFR mortgage		159,288			1,415			160,703
Dairy & livestock and agribusiness		336,660			5,651			342,311
Municipal lease finance receivables		105,767			—			105,767
Consumer and other loans		60,273			6,337			66,610

Gross loans		3,259,238			220,559			3,479,797
Less:
Purchase accounting discount		—			(25,344	)		(25,344	)
Deferred loan fees, net		(6,925	)		—			(6,925	)

Gross loans, net of deferred loan fees and discount		3,252,313			195,215			3,447,528
Less: Allowance for loan losses		(92,441	)		—			(92,441	)

Net loans	$	3,159,872		$	195,215		$	3,355,087

As of September 30, 2013, 65.56% of the total gross loan portfolio consisted of commercial real estate loans and 1.39% of the total gross loan portfolio consisted of construction loans, respectively. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. At September 30, 2013, the Company held approximately $1.73 billion of fixed rate loans.

At September 30, 2013 and December 31, 2012, loans totaling $1.99 billion and $2.32 billion, respectively, were pledged to secure borrowings from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by Credit Management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Pass Watch List, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

Pass Watch List — Pass Watch list loans usually require more than normal management attention. Loans which qualify for the Pass Watch List may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category are currently protected but are weak. Although concerns exist, the Company is currently protected and loss is unlikely. Such loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

Substandard – Loans classified as substandard include poor liquidity, high leverage, and erratic earnings or losses. The primary source of repayment is no longer realistic, and asset or collateral liquidation may be the only source of repayment. Substandard loans are marginal and require continuing and close supervision by credit management. Substandard loans have the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added provision that the weaknesses make collection or the liquidation, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the assets, their classifications as losses are deferred until their more exact status may be determined.

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be achieved in the future.

The following table summarizes our internal risk grouping by loan class as of September 30, 2013 and December 31, 2012:

Credit Quality Indicators


	September 30, 2013
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	308,271	$	131,118	$	53,972	$	16,730	$	475	$	510,566
Real estate:
Commercial real estate
Owner occupied		441,739		128,887		89,475		65,455		—		725,556
Non-owner occupied		1,040,758		217,822		85,784		56,495		—		1,400,859
Construction
Speculative		7,568		—		1,538		18,020		—		27,126
Non-speculative		6,408		4,895		—		9,219		—		20,522
SFR mortgage		152,169		20,960		4,319		14,682		—		192,130
Dairy & livestock and agribusiness		44,735		39,360		102,464		72,879		2,200		261,638
Municipal lease finance receivables		51,935		19,540		21,283		6,430		—		99,188
Consumer and other loans		41,555		6,379		3,410		1,539		3		52,886

Total non-covered loans		2,095,138		568,961		362,245		261,449		2,678		3,290,471
Covered loans		35,125		67,347		23,477		51,914		—		177,863

Total gross loans	$	2,130,263	$	636,308	$	385,722	$	313,363	$	2,678	$	3,468,334


	December 31, 2012
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	347,275	$	131,186	$	44,466	$	22,901	$	1,594	$	547,422
Real estate:
Commercial real estate
Owner occupied		382,111		159,653		78,087		84,116		—		703,967
Non-owner occupied		888,777		214,901		105,121		77,341		—		1,286,140
Construction
Speculative		1,417		—		15,163		21,314		—		37,894
Non-speculative		9,841		2,767		—		9,219		—		21,827
SFR mortgage		129,730		10,215		3,107		16,236		—		159,288
Dairy & livestock and agribusiness		72,113		111,393		75,316		77,721		117		336,660
Municipal lease finance receivables		72,432		20,237		11,124		1,974		—		105,767
Consumer and other loans		49,321		6,763		2,714		1,421		54		60,273

Total non-covered loans		1,953,017		657,115		335,098		312,243		1,765		3,259,238
Covered loans		52,637		72,803		31,689		63,354		76		220,559

Total gross loans	$	2,005,654	$	729,918	$	366,787	$	375,597	$	1,841	$	3,479,797

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the allowance for loan losses (“ALLL”) methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. The Bank’s methodology consists of two major phases.

In the first phase, individual loans are reviewed to identify loans for impairment. A loan is generally considered impaired when principal and interest are deemed uncollectible in accordance with the contractual terms of the loan. A loan for which there is an insignificant delay or shortfall in the amount of payments due is not considered an impaired loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). If we determine that the value of the impaired loan is less than the recorded investment of the loan, we either recognize an impairment reserve as a Specific Allowance, or charge off the impaired balance for collateral dependent loans if it is determined that such amount represents a confirmed loss. Loans determined to be impaired are excluded from the formula allowance so as not to double count the loss exposure.

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics. In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other behavioral characteristics of the subject portfolios.

Included in this second phase is our considerations of qualitative factors, including, all known relevant internal and external factors that may affect the collectability of a loan. This includes our estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. These qualitative factors are used to adjust the historical loan loss rates for each pool of loans to determine the probable loan losses inherent in the portfolio.

The methodology is consistently applied across all the portfolio segments taking into account the applicable historical loss rates and the qualitative factors applicable to each pool of loans. Periodically, we assess various attributes utilized in adjusting our historical loss factors to reflect current economic conditions. As a result of improved credit quality and better economic conditions, the allowance for loan losses was reduced by $3.8 million and $10.0 million for the three and nine months ended September 30, 2013, respectively. This compares with zero provision for loan losses for the same periods of 2012.

Management believes that the ALLL was appropriate at September 30, 2013. No assurance can be given that economic conditions which adversely affect our service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

The following table presents the balance and activity in the allowance for loan losses; and the recorded investment in held-for-investment loans by portfolio segment and based upon our impairment method as of September 30, 2013, and 2012:

Allowance for Loan losses and Recorded Investment in Financing Receivables


	As of and For the Three and Nine Months Ended September 30, 2013
				Real Estate
	Commercial and Industrial			Commercial Real Estate			Construction			SFR Mortgage			Dairy & Livestock and Agribusiness			Municipal Lease Finance Receivables		Consumer and Other Loans			Covered Loans (1)		Unallocated			Total
	(Dollars in thousands)
Beginning balance, July 1, 2013	$	12,586		$	44,392		$	1,172		$	3,715		$	14,225		$	2,369	$	1,052		$	—	$	5,946		$	85,457
Charge-offs		(1,235	)		—			—			(110	)		—			—		(39	)		—		—			(1,384	)
Recoveries		315			34			15			—			14			—		12			—		—			390
Provision / reallocation of ALLL		(1,022	)		(1,007	)		412			(144	)		(2,152	)		69		25			—		69			(3,750	)

Ending balance, September 30, 2013	$	10,644		$	43,419		$	1,599		$	3,461		$	12,087		$	2,438	$	1,050		$	—	$	6,015		$	80,713

Beginning balance, January 1, 2013	$	11,652		$	47,457		$	2,291		$	3,448		$	18,696		$	1,588	$	1,170		$	—	$	6,139		$	92,441
Charge-offs		(2,339	)		—			—			(252	)		—			—		(108	)		—		—			(2,699	)
Recoveries		523			100			83			133			42			—		40			—		—			921
Provision / reallocation of ALLL		808			(4,138	)		(775	)		132			(6,651	)		850		(52	)		—		(124	)		(9,950	)

Ending balance, September 30, 2013	$	10,644		$	43,419		$	1,599		$	3,461		$	12,087		$	2,438	$	1,050		$	—	$	6,015		$	80,713

Allowance for loan losses:
Individually evaluated for impairment	$	387		$	1		$	144		$	290		$	2,658		$	—	$	5		$	—	$	—		$	3,485
Collectively evaluated for impairment	$	10,257		$	43,418		$	1,455		$	3,171		$	9,429		$	2,438	$	1,045		$	—	$	6,015		$	77,228
Loans and financing receivables (2):
Balance, September 30, 2013	$	510,566		$	2,126,415		$	47,648		$	192,130		$	261,638		$	99,188	$	52,886		$	163,334	$	—		$	3,453,805
Individually evaluated for impairment	$	4,983		$	38,999		$	27,239		$	12,805		$	24,494		$	—	$	159		$	—	$	—		$	108,679
Collectively evaluated for impairment	$	505,583		$	2,087,416		$	20,409		$	179,325		$	237,144		$	99,188	$	52,727		$	—	$	—		$	3,181,792
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	163,334	$	—		$	163,334

(1)	Represents the allowance and related loan balances in accordance with ASC 310-30.

(2)	Net of purchase accounting discount.


	As of and For the Three and Nine Months Ended September 30, 2012
				Real Estate
	Commercial and Industrial			Commercial Real Estate			Construction			SFR Mortgage			Dairy & Livestock and Agribusiness			Municipal Lease Finance Receivables			Consumer and Other Loans			Covered Loans (1)			Unallocated			Total
	(Dollars in thousands)
Beginning balance, July 1, 2012	$	12,332		$	45,319		$	3,029		$	3,039		$	16,976		$	1,656		$	1,401		$	—		$	8,140		$	91,892
Charge-offs		(294	)		(358	)		—			(168	)		—			—			(66	)		—			—			(886	)
Recoveries		106			134			77			4			9			—			3			728			—			1,061
Provision / reallocation of ALLL		(13	)		(280	)		265			366			2,861			(110	)		(52	)		(728	)		(2,309	)		—

Ending balance, September 30, 2012	$	12,131		$	44,815		$	3,371		$	3,241		$	19,846		$	1,546		$	1,286		$	—		$	5,831		$	92,067

Beginning balance, January 1, 2012	$	10,654		$	47,841		$	4,947		$	4,032		$	17,278		$	2,403		$	1,590		$	—		$	5,219		$	93,964
Charge-offs		(977	)		(1,840	)		—			(642	)		(1,150	)		—			(154	)		(81	)		—			(4,844	)
Recoveries		694			481			1,129			(108	)		11			—			12			728			—			2,947
Provision / reallocation of ALLL		1,760			(1,667	)		(2,705	)		(41	)		3,707			(857	)		(162	)		(647	)		612			—

Ending balance, September 30, 2012	$	12,131		$	44,815		$	3,371		$	3,241		$	19,846		$	1,546		$	1,286		$	—		$	5,831		$	92,067

Allowance for loan losses:
Individually evaluated for impairment	$	481		$	25		$	—		$	348		$	1,043		$	—		$	113		$	—		$	—		$	2,010
Collectively evaluated for impairment	$	11,650		$	44,790		$	3,371		$	2,893		$	18,803		$	1,546		$	1,173		$	—		$	5,831		$	90,057
Loans and financing receivables (2):
Balance, September 30, 2012	$	525,801		$	2,012,119		$	70,740		$	158,074		$	297,932		$	109,005		$	60,071		$	207,307		$	—		$	3,441,049
Individually evaluated for impairment	$	4,457		$	41,955		$	37,794		$	13,852		$	18,708		$	471		$	364		$	—		$	—		$	117,601
Collectively evaluated for impairment	$	521,344		$	1,970,164		$	32,946		$	144,222		$	279,224		$	108,534		$	59,707		$	—		$	—		$	3,116,141
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	207,307		$	—		$	207,307

(1)	Represents the allowance and related loan balances in accordance with ASC 310-30.

(2)	Net of purchase accounting discount.

Past Due and Nonperforming Loans

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

Loans are reported as a troubled debt restructuring when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

Generally, when loans are identified as impaired they are moved to our Special Assets Division. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals.

Speculative construction loans are generally for properties where there is no identified buyer or renter.

The following table presents the recorded investment in non-covered past due and nonaccrual loans and loans past due by class of loans as of September 30, 2013, and December 31, 2012:

Non-Covered Past Due and Nonaccrual Loans


	September 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	417	$	—	$	—	$	417	$	3,734	$	506,415	$	510,566
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		4,180		721,376		725,556
Non-owner occupied		772		243		—		1,015		13,649		1,386,195		1,400,859
Construction
Speculative		—		—		—		—		10,368		16,758		27,126
Non-speculative		—		—		—		—		—		20,522		20,522
SFR mortgage		—		—		—		—		10,421		181,709		192,130
Dairy & livestock and agribusiness		—		—		—		—		6,973		254,665		261,638
Municipal lease finance receivables		—		—		—		—		—		99,188		99,188
Consumer and other loans		4		251		—		255		159		52,472		52,886

Total non-covered gross loans	$	1,193	$	494	$	—	$	1,687	$	49,484	$	3,239,300	$	3,290,471

(1)	As of September 30, 2013, $23.7 million of nonaccruing loans were current, $487,000 were 30-59 days past due, and $25.3 million were 90+ days past due.


	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	233	$	457	$	—	$	690	$	3,136	$	543,596	$	547,422
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		5,415		698,552		703,967
Non-owner occupied		—		—		—		—		15,624		1,270,516		1,286,140
Construction
Speculative		—		—		—		—		10,663		27,231		37,894
Non-speculative		—		—		—		—		—		21,827		21,827
SFR mortgage		107		—		—		107		13,102		146,079		159,288
Dairy & livestock and agribusiness		—		—		—		—		9,842		326,818		336,660
Municipal lease finance receivables		—		—		—		—		—		105,767		105,767
Consumer and other loans		82		8		—		90		215		59,968		60,273

Total non-covered gross loans	$	422	$	465	$	—	$	887	$	57,997	$	3,200,354	$	3,259,238

(1)	As of December 31, 2012, $40.1 million of nonaccruing loans were current, $2.6 million were 30-59 days past due, and $15.3 million were 90+ days past due.

Non-Covered Impaired Loans

At September 30, 2013, the Company had non-covered impaired loans of $108.7 million. Of this amount, there was $10.4 million in nonaccrual commercial construction loans, $10.4 million of nonaccrual SFR mortgage loans, $17.8 million of nonaccrual commercial real estate loans, $3.7 million of nonaccrual commercial and industrial loans, $7.0 million of nonaccrual dairy & livestock loans and $159,000 of other loans. These non-covered impaired loans included $87.2 million of loans whose terms were modified in a troubled debt restructure, of which $28.0 million are classified as nonaccrual. The remaining balance of $59.2 million consists of 41 loans performing according to the restructured terms. The impaired loans had a specific allowance of $3.5 million at September 30, 2013. At December 31, 2012, the Company had classified as impaired, non-covered loans with a balance of $108.4 million with a related allowance of $2.3 million.

The following table presents held-for-investment, individually evaluated for impairment by class of loans, as of September 30, 2013 and December 31, 2012:

Non-Covered Impaired Loans


	September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	4,595	$	6,020	$	—	$	5,131	$	161
Real estate:
Commercial real estate
Owner occupied		13,361		14,412		—		13,635		494
Non-owner occupied		25,631		36,851		—		26,838		553
Construction
Speculative		10,369		10,956		—		10,522		—
Non-speculative		9,219		9,219		—		9,219		428
SFR mortgage		10,156		11,838		—		9,487		75
Dairy & livestock and agribusiness		17,553		18,515		—		19,308		445
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		142		214		—		149		—

Total		91,026		108,025		—		94,289		2,156
With a related allowance recorded:
Commercial and industrial		388		408		387		417		—
Real estate:
Commercial real estate
Owner occupied		7		9		1		11		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		7,651		7,651		144		7,651		232
Non-speculative		—		—		—		—		—
SFR mortgage		2,649		2,764		290		2,636		5
Dairy & livestock and agribusiness		6,941		7,654		2,658		7,571		—
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		17		19		5		19		—

Total		17,653		18,505		3,485		18,305		237

Total non-covered impaired loans	$	108,679	$	126,530	$	3,485	$	112,594	$	2,393


	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,385	$	4,215	$	—	$	3,766	$	43
Real estate:
Commercial real estate
Owner occupied		13,478		14,569		—		14,459		397
Non-owner occupied		28,639		38,633		—		29,801		670
Construction
Speculative		21,314		21,607		—		21,650		311
Non-speculative		9,219		9,219		—		9,219		574
SFR mortgage		11,079		14,342		—		11,292		54
Dairy & livestock and agribusiness		12,406		13,756		—		11,834		173
Municipal lease finance receivables		263		263		—		443		5
Consumer and other loans		142		196		—		145		—

Total		99,925		116,800		—		102,609		2,227
With a related allowance recorded:
Commercial and industrial		304		327		289		387		—
Real estate:
Commercial real estate
Owner occupied		19		19		2		28		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		—		—		—		—		—
Non-speculative		—		—		—		—		—
SFR mortgage		3,766		4,071		434		3,363		—
Dairy & livestock and agribusiness		4,303		4,340		1,596		4,017		73
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		73		74		11		75		—

Total		8,465		8,831		2,332		7,870		73

Total non-covered impaired loans	$	108,390	$	125,631	$	2,332	$	110,479	$	2,300

The Company recognizes the charge-off of impairment allowance on impaired loans in the period it arises for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of September 30, 2013 and December 31, 2012 have already been written down to their estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Impaired construction speculative loans increased in the third quarter of 2012 due to a participating interest in the Company’s only Shared National Credit loan that was transferred to nonaccrual status. The outstanding balance was $10.4 million as of September 30, 2013.

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. The Company recorded $500,000 and zero provision for unfunded commitments for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013 and December 31, 2012, the balance in this reserve was $9.1 million and was included in other liabilities.

Troubled Debt Restructurings (“TDR”)

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, Troubled Debt Restructurings, included herein.

As of September 30, 2013, we had loans of $87.2 million classified as TDR, of which $28.0 million are nonperforming and $59.2 million are performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At September 30, 2013, performing TDRs were comprised of 15 commercial real estate loans of $21.2 million, two construction loans of $16.9 million, nine dairy & livestock loans of $17.5 million, eight single-family residential loans of $2.4 million, and seven commercial and industrial loans of $1.2 million. There were no loans removed from TDR classification for the nine months ended September 30, 2013 and 2012.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated $2.9 million and $1.4 million of specific allowance to TDRs as of September 30, 2013 and December 31, 2012, respectively.

The following tables provide a summary of the activity related to TDRs for the three and nine months ended September 30, 2013, and 2012:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	61,566		$	45,243		$	50,392		$	38,554
New modifications		—			9,506			21,364			20,106
Payoffs and payments, net		(2,481	)		(480	)		(13,820	)		(2,384	)
TDRs returned to accrual status		110			—			1,259			517
TDRs placed on nonaccrual status		—			(2,656	)		—			(5,180	)

Ending balance	$	59,195		$	51,613		$	59,195		$	51,613


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Nonperforming TDRs:
Beginning balance	$	26,497		$	31,753		$	31,309		$	23,844
New modifications		3,676			1,612			3,804			14,563
Charge-offs		(68	)		—			(68	)		—
Payoffs and payments, net		(1,950	)		(2,922	)		(5,741	)		(9,971	)
TDRs returned to accrual status		(110	)		—			(1,259	)		(517	)
TDRs placed on nonaccrual status		—			2,656			—			5,180

Ending balance	$	28,045		$	33,099		$	28,045		$	33,099

The following tables summarize loans modified as troubled debt restructurings during the three and nine months ended September 30, 2013, and 2012.

Modifications (1)


	For the Three Months Ended September 30, 2013
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2013		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		1		34		34		34		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		3,642		3,642		3,556		—

Total non-covered loans		3		3,676		3,676		3,590		—

Covered loans		—		—		—		—		—

Total gross loans		3	$	3,676	$	3,676	$	3,590	$	—


	For the Nine Months Ended September 30, 2013
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2013		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		4		265		265		223		122
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		168		168		143		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		7		18,848		18,848		16,068		—

Total non-covered loans		12		19,281		19,281		16,434		122

Covered loans		—		—		—		—		—

Total gross loans		12	$	19,281	$	19,281	$	16,434	$	122

(1)	The tables exclude modified loans that were paid off prior to the end of the period.

(2)	Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.


	For the Three Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2012		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		2		268		135		121		102
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		853		853		853		—
Non-owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		2,631		2,631		2,588		—
Construction:
Speculative
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		4		5,060		5,560		6,797		—
Municipal lease finance receivables
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		519		519		472		—

Total non-covered loans		11		9,331		9,698		10,831		102

Covered loans		—		—		—		—		—

Total gross loans		11	$	9,331	$	9,698	$	10,831	$	102


	For the Nine Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2012		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		1	$	80	$	80	$	74	$	—
Change in amortization period or maturity		8		1,890		1,757		1,270		105
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		4		3,921		3,921		3,916		—
Non-owner occupied
Interest rate reduction		2		3,891		3,891		3,865		—
Change in amortization period or maturity		2		2,766		2,766		2,325		—
Construction:
Speculative
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		10,966		10,966		10,618		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		8		9,447		9,947		10,804		—
Municipal lease finance receivables
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		519		519		472		—

Total non-covered loans		28		33,480		33,847		33,344		105

Covered loans		—		—		—		—		—

Total gross loans		28	$	33,480	$	33,847	$	33,344	$	105

(1)	The tables exclude modified loans that were paid off prior to the end of the period.

(2)	Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

As of September 30, 2013, there was one commercial real estate loan with an outstanding balance of $2.2 million that was previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2013.

7. EARNINGS PER SHARE

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations.

The table below presents the reconciliation of earnings per share for the periods indicated:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Earnings per common share:
Net earnings	$	24,239	$	9,257	$	70,320	$	55,144
Less: Net earnings allocated to restricted stock		74		30		218		179

Net earnings allocated to common shareholders	$	24,165	$	9,227	$	70,102	$	54,965

Weighted average shares outstanding		104,766		104,456		104,657		104,380
Earnings per common share	$	0.23	$	0.09	$	0.67	$	0.53

Diluted earnings per common share:
Net income allocated to common shareholders	$	24,165	$	9,227	$	70,102	$	54,965

Weighted average shares outstanding		104,766		104,456		104,657		104,380
Incremental shares from assumed exercise of outstanding options		451		320		330		259

Diluted weighted average shares outstanding		105,217		104,776		104,987		104,639
Diluted earnings per common share	$	0.23	$	0.09	$	0.67	$	0.53

8. FAIR VALUE INFORMATION

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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.

The following disclosure provides the fair value information for financial assets and liabilities as of September 30, 2013. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).

•

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

•

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows and similar techniques.

There were no transfers in and out of Level 1 and Level 2 measurement during the nine months ended September 30, 2013 and 2012.

Determination of Fair Value

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value.

Cash and Cash Equivalents — The carrying amount of cash and cash equivalents is considered to approximate fair value due to the liquidity of these instruments.

Interest-Bearing Balances Due from Depository Institutions — The carrying value of due from depository institutions is considered to approximate fair value due to the short-term nature of these deposits.

FHLB Stock — The carrying amount of FHLB stock approximates fair value, as the stock may be sold back to the FHLB at carrying value.

Investment Securities Held–to- Maturity — Investment securities held-to-maturity are valued based upon quotes obtained from an independent third-party pricing service. The Company categorized its held-to-maturity investment as a level 3 valuation.

Investment Securities Available-for-Sale — Investment securities available-for-sale are generally valued based upon quotes obtained from an independent third-party pricing service. This service uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

Non-Covered Loans — The carrying amount of loans and lease finance receivables is their contractual amounts outstanding, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses.

The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for loan losses is considered to provide for such changes in estimating fair value. As a result, this fair value is not necessarily the value which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy.

Non-covered impaired loans and OREO are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell (approximately 8%). Appraised values may be adjusted based on factors such as the changes in market conditions from the time of valuation or discounted cash flows of the property. As such, these loans and OREO fall within Level 3 of the fair value hierarchy.

The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the following table because it is not material.

Covered Loans — Covered loans were measured at fair value on the date of acquisition. Thereafter, covered loans are not measured at fair value on a recurring basis. The above valuation discussion for non-covered loans is applicable to covered loans following their acquisition date.

Swaps — The fair value of the interest rate swap contracts are provided by our counterparty using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and 3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.

Deposits & Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and short-term borrowings are considered to approximate fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of long-term borrowings and junior subordinated debentures is estimated using the rates currently offered for borrowings of similar remaining maturities. Interest-bearing deposits and borrowings are included within Level 2 of the fair value hierarchy.

Accrued Interest Receivable/Payable — The amounts of accrued interest receivable on loans and lease finance receivables and investments and accrued interest payable on deposits and borrowings are considered to approximate fair value and are included within Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012.


	Carrying Value at September 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Description of assets
Investment securities—AFS:
Government agency	$	333,013	$	—	$	333,013	$	—
Residential mortgage-backed securities		1,289,624		—		1,289,624		—
CMO’s / REMIC’s—residential		389,208		—		389,208		—
Municipal bonds		600,724		—		600,724		—
Other securities		4,738		—		4,738		—

Total investment securities—AFS		2,617,307		—		2,617,307		—
Interest rate swaps		13,393		—		13,393		—

Total assets	$	2,630,700	$	—	$	2,630,700	$	—

Description of liability
Interest rate swaps	$	13,393	$	—	$	13,393	$	—

Total liabilities	$	13,393	$	—	$	13,393	$	—


	Carrying Value at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Description of assets
Investment securities—AFS:
Government agency	$	359,300	$	—	$	359,300	$	—
Residential mortgage-backed securities		887,598		—		887,598		—
CMO’s / REMIC’s—residential		571,960		—		571,960		—
Municipal bonds		625,429		—		625,429		—
Other securities		5,100		—		5,100		—

Total investment securities—AFS		2,449,387		—		2,449,387		—
Interest rate swaps		23,966		—		23,966		—

Total assets	$	2,473,353	$	—	$	2,473,353	$	—

Description of liability
Interest rate swaps	$	23,966	$	—	$	23,966	$	—

Total liabilities	$	23,966	$	—	$	23,966	$	—

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were still held on the balance sheet at September 30, 2013 and December 31, 2012, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets for investments that had losses during the period.


	Carrying Value at September 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses for the Nine Months Ended September 30, 2013
	(Dollars in thousands)
Description of assets
Impaired loans-non-covered	$	13,857	$	—	$	—	$	13,857	$	3,288
OREO-non-covered		—		—		—		—		—
OREO-covered		—		—		—		—		—

Total assets	$	13,857	$	—	$	—	$	13,857	$	3,288


	Carrying Value at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses for the Year Ended December 31, 2012
	(Dollars in thousands)
Description of assets
Impaired loans-non-covered	$	12,460	$	—	$	—	$	12,460	$	3,930
OREO-non-covered		3,008		—		—		3,008		336
OREO-covered		1,067		—		—		1,067		467

Total assets	$	16,535	$	—	$	—	$	16,535	$	4,733

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of September 30, 2013 and December 31, 2012, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.


	September 30, 2013
	Carrying Amount		Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	131,442	$	131,442	$	—	$	—	$	131,442
Interest-earning balances due from depository institutions		70,000		—		70,000		—		70,000
FHLB stock		39,420		—		39,420		—		39,420
Investment securities available-for-sale		2,617,307		—		2,617,307		—		2,617,307
Investment securities held-to-maturity		1,850		—		—		2,305		2,305
Total loans, net of allowance for loan losses		3,363,973		—		—		3,423,040		3,423,040
Accrued interest receivable		21,860		—		21,860		—		21,860
Swaps		13,393		—		13,393		—		13,393
Liabilities
Deposits:
Noninterest-bearing	$	2,538,461	$	2,538,461	$	—	$	—	$	2,538,461
Interest-bearing		2,357,025		—		2,358,090		—		2,358,090
Borrowings		807,503		—		829,776		—		829,776
Junior subordinated debentures		25,774		—		25,783		—		25,783
Accrued interest payable		1,106		—		1,106		—		1,106
Swaps		13,393		—		13,393		—		13,393


	December 31, 2012
	Carrying Amount		Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	98,431	$	98,431	$	—	$	—	$	98,431
Interest-earning balances due from depository institutions		70,000		—		70,000		—		70,000
FHLB stock		56,651		—		56,651		—		56,651
Investment securities available-for-sale		2,449,387		—		2,449,387		—		2,449,387
Investment securities held-to-maturity		2,050		—		—		2,515		2,515
Total loans, net of allowance for loan losses		3,355,087		—		—		3,503,332		3,503,332
Accrued interest receivable		22,355		—		22,355		—		22,355
Swaps		23,966		—		23,966		—		23,966
Liabilities
Deposits:
Noninterest-bearing	$	2,420,993	$	2,420,993	$	—	$	—	$	2,420,993
Interest-bearing		2,352,994		—		2,354,126		—		2,354,126
Borrowings		698,178		—		727,512		—		727,512
Junior subordinated debentures		67,012		—		67,415		—		67,415
Accrued interest payable		1,493		—		1,493		—		1,493
Swaps		23,966		—		23,966		—		23,966

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2013 and December 31, 2012. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

9. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and the Treasury Department. The Company’s subsidiary bank has 39 Business Financial Centers and six Commercial Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and to assess performance. Business Financial and Commercial Banking Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk. Information related to the Company’s remaining operating segments, which include construction lending, dairy & livestock lending, leasing, CitizensTrust, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following table represents the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 - Summary of Significant Accounting Policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the Centers category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

The following tables present the operating results and other key financial measures for the individual operating segments for the periods indicated:


	For the Three Months Ended September 30, 2013
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	36,024	$	13,443		$	8,607		$	—		$	58,074
Credit for funds provided (1)		6,782		—			2,617			(9,399	)		—

Total interest income		42,806		13,443			11,224			(9,399	)		58,074

Interest expense		1,551		2,435			115			—			4,101
Charge for funds used (1)		919		11,595			(3,115	)		(9,399	)		—

Total interest expense		2,470		14,030			(3,000	)		(9,399	)		4,101

Net interest income		40,336		(587	)		14,224			—			53,973

Provision for loan losses		—		—			(3,750	)		—			(3,750	)

Net interest income after provision for loan losses		40,336		(587	)		17,974			—			57,723

Noninterest income		5,306		—			(349	)		—			4,957
Noninterest expense		11,514		178			14,022			—			25,714

Segment pre-tax profit (loss)	$	34,128	$	(765	)	$	3,603		$	—		$	36,966

Segment assets as of September 30, 2013	$	5,305,357	$	2,855,964		$	732,999		$	(2,337,037	)	$	6,557,283

(1)	Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.


	For the Three Months Ended September 30, 2012
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	38,122	$	13,263		$	14,460		$	—		$	65,845
Credit for funds provided (1)		6,403		—			2,608			(9,011	)		—

Total interest income		44,525		13,263			17,068			(9,011	)		65,845

Interest expense		1,665		3,819			617			—			6,101
Charge for funds used (1)		992		10,309			(2,290	)		(9,011	)		—

Total interest expense		2,657		14,128			(1,673	)		(9,011	)		6,101

Net interest income		41,868		(865	)		18,741			—			59,744

Provision for loan losses		—		—			—			—			—

Net interest income after provision for loan losses		41,868		(865	)		18,741			—			59,744

Noninterest income		5,798		—			(3,172	)		—			2,626
Noninterest expense		10,874		176			18,591			—			29,641
Debt termination		—		20,379			—			—			20,379

Segment pre-tax profit (loss)	$	36,792	$	(21,420	)	$	(3,022	)	$	—		$	12,350

Segment assets as of September 30, 2012	$	5,084,218	$	2,604,648		$	739,153		$	(2,106,678	)	$	6,321,341

(1)	Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.


	For the Nine Months Ended September 30, 2013
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	106,660	$	37,872		$	28,948		$	—		$	173,480
Credit for funds provided (1)		19,603		—			7,485			(27,088	)		—

Total interest income		126,263		37,872			36,433			(27,088	)		173,480
Interest expense		4,495		7,270			558			—			12,323
Charge for funds used (1)		3,025		32,973			(8,910	)		(27,088	)		—

Total interest expense		7,520		40,243			(8,352	)		(27,088	)		12,323

Net interest income		118,743		(2,371	)		44,785			—			161,157

Provision for loan losses		—		—			(9,950	)		—			(9,950	)

Net interest income after provision for loan losses		118,743		(2,371	)		54,735			—			171,107

Noninterest income		15,889		2,094			1,414			—			19,397
Noninterest expense		34,410		539			49,811			—			84,760
Debt termination		—		—			—			—			—

Segment pre-tax profit (loss)	$	100,222	$	(816	)	$	6,338		$	—		$	105,744

Segment assets as of September 30, 2013	$	5,305,357	$	2,855,964		$	732,999		$	(2,337,037	)	$	6,557,283

(1)	Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.


	For the Nine Months Ended September 30, 2012
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	113,366	$	43,609		$	45,114		$	—		$	202,089
Credit for funds provided (1)		19,027		—			7,758			(26,785	)		—

Total interest income		132,393		43,609			52,872			(26,785	)		202,089

Interest expense		5,581		12,936			2,266			—			20,783
Charge for funds used (1)		3,133		30,435			(6,783	)		(26,785	)		—

Total interest expense		8,714		43,371			(4,517	)		(26,785	)		20,783

Net interest income		123,679		238			57,389			—			181,306

Provision for loan losses		—		—			—			—			—

Net interest income after provision for loan losses		123,679		238			57,389			—			181,306

Noninterest income		17,588		—			(7,414	)		—			10,174
Noninterest expense		34,069		557			54,176			—			88,802
Debt termination		—		20,379			—			—			20,379

Segment pre-tax profit (loss)	$	107,198	$	(20,698	)	$	(4,201	)	$	—		$	82,299

Segment assets as of September 30, 2012	$	5,084,218	$	2,604,648		$	739,153		$	(2,106,678	)	$	6,321,341

(1)	Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of September 30, 2013, the Bank has entered into 85 interest-rate swap agreements with customers and 85 with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of September 30, 2013, and December 31, 2012, the total notional amount of the Company’s swaps was $227.1 million, and $240.1 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below:

September 30, 2013

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

13,393

Other liabilities

13,393

Total derivatives

13,393

December 31, 2012

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

23,966

Other liabilities

23,966

Total derivatives

23,966

The Effect of Derivative Financial Instruments on the Consolidated Statements of Earnings

The following table summarizes the effect of derivative financial instruments on the consolidated statements of earnings for the three and nine months ended September 30, 2013, and 2012:


Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative Instruments	Amount of Gain Recognized in Income on Derivative Instruments
		For the Three Months Ended September 30,
		2013		2012
		(Dollars in thousands)
Interest rate swaps	Other income	$	—	$	360

Total		$	—	$	360


Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative Instruments	Amount of Gain Recognized in Income on Derivative Instruments
		For the Nine Months Ended September 30,
		2013		2012

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company