Form 10-Q
Table of Contents

 

 

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 March 31, 2013

or

 

¨ 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):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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: 104,953,607 outstanding as of April 30, 2013.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION (UNAUDITED)     3   
ITEM 1.  

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    4   
 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    9   
ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    36   
 

CRITICAL ACCOUNTING POLICIES

    36   
 

OVERVIEW

    36   
 

ANALYSIS OF THE RESULTS OF OPERATIONS

    38   
 

RESULTS BY BUSINESS SEGMENTS

    44   
 

ANALYSIS OF FINANCIAL CONDITION

    46   
 

RISK MANAGEMENT

    58   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    61   
ITEM 4.  

CONTROLS AND PROCEDURES

    65   
PART II—OTHER INFORMATION     66   
ITEM 1.  

LEGAL PROCEEDINGS

    66   
ITEM 1A.  

RISK FACTORS

    67   
ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

    67   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

    67   
ITEM 4.  

MINE SAFETY DISCLOSURES

    67   
ITEM 5.  

OTHER INFORMATION

    67   
ITEM 6.  

EXHIBITS

    68   
SIGNATURES     69   

 

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Table of Contents

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 and competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for future operations 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 deposits 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 borrowers; changes in the level of nonperforming assets and charge-offs; the cost or effect of acquisitions we may make; the effect of changes in laws and regulations (including laws, regulations and judicial decisions concerning financial reform, taxes, banking, 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 bank or customer funds, loss of system functionality or theft or loss of data; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, or the effects of pandemic flu; the timely development and acceptance of new banking products and services and perceived overall value of these products and services by users; changes in consumer spending, borrowing and savings habits; the effects of technological change 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 bank holding companies and other financial service providers; continued volatility in the credit and equity markets and its effect on the general economy; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as 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 developments including the 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. 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.

 

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Table of Contents
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

 

     March 31,     December 31,  
     2013     2012  
ASSETS     

Cash and due from banks

   $ 79,669      $ 87,274   

Interest-earning balances due from Federal Reserve

     55,609        11,157   
  

 

 

   

 

 

 

Total cash and cash equivalents

     135,278        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 $2,329,892 at March 31, 2013, and $2,374,816 at December 31, 2012)

     2,390,673        2,449,387   

Investment securities held-to-maturity

     1,975        2,050   

Investment in stock of Federal Home Loan Bank (FHLB)

     50,981        56,651   

Loans and lease finance receivables, excluding covered loans

     3,189,514        3,252,313   

Allowance for loan losses

     (92,218     (92,441
  

 

 

   

 

 

 

Net loans and lease finance receivables

     3,097,296        3,159,872   

Covered loans and lease finance receivables, net

     178,694        195,215   

Premises and equipment, net

     34,886        35,080   

Bank owned life insurance

     120,476        119,744   

Accrued interest receivable

     22,985        22,355   

Intangibles

     2,950        3,389   

Goodwill

     55,097        55,097   

FDIC loss sharing asset

     14,230        18,489   

Non-covered other real estate owned

     13,341        14,832   

Covered other real estate owned

     857        1,067   

Income taxes

     35,077        16,978   

Other assets

     40,971        44,727   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 6,265,767      $ 6,363,364   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 2,366,719      $ 2,420,993   

Interest-bearing

     2,319,442        2,352,994   
  

 

 

   

 

 

 

Total deposits

     4,686,161        4,773,987   

Customer repurchase agreements

     500,115        473,244   

FHLB advances

     199,002        198,934   

Other borrowings

     —          26,000   

Accrued interest payable

     1,306        1,493   

Deferred compensation

     9,259        8,781   

Junior subordinated debentures

     46,393        67,012   

Other liabilities

     55,319        50,943   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     5,497,555        5,600,394   

COMMITMENTS AND CONTINGENCIES

    

Stockholders’ Equity:

    

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 104,903,107 at March 31, 2013, and 104,889,586 at December 31, 2012.

     485,246        484,709   

Retained earnings

     247,713        235,010   

Accumulated other comprehensive income, net of tax

     35,253        43,251   
  

 

 

   

 

 

 

Total stockholders’ equity

     768,212        762,970   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 6,265,767      $ 6,363,364   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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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
March 31,
 
     2013     2012  

Interest income:

    

Loans and leases, including fees

     41,654        46,032   

Accretion on acquired loans

     4,393        4,692   
  

 

 

   

 

 

 

Loans, including fees

     46,047        50,724   

Investment securities:

    

Taxable

     6,747        9,170   

Tax-advantaged

     5,541        5,796   
  

 

 

   

 

 

 

Total investment income

     12,288        14,966   

Dividends from FHLB stock

     343        90   

Federal funds sold

     14        185   

Interest-earning deposits with other institutions

     121        100   
  

 

 

   

 

 

 

Total interest income

     58,813        66,065   

Interest expense:

    

Deposits

     1,241        1,653   

Borrowings

     2,700        4,971   

Junior subordinated debentures

     283        839   
  

 

 

   

 

 

 

Total interest expense

     4,224        7,463   
  

 

 

   

 

 

 

Net interest income before provision for credit losses

     54,589        58,602   

Provision for credit losses

     —          —     
  

 

 

   

 

 

 

Net interest income after provision for credit losses

     54,589        58,602   

Noninterest income:

    

Service charges on deposit accounts

     3,826        4,124   

Trust and investment services

     2,005        2,185   

Bankcard services

     839        919   

BOLI income

     743        750   

Gain on sale of securities, net

     2,094        —     

Decrease in FDIC loss sharing asset, net

     (4,023     (2,944

Other

     1,261        222   
  

 

 

   

 

 

 

Total noninterest income

     6,745        5,256   

Noninterest expense:

    

Salaries and employee benefits

     17,300        16,721   

Occupancy and equipment

     3,682        3,948   

Professional services

     1,596        1,991   

Software licenses and maintenance

     1,152        909   

Promotion

     1,258        1,251   

Amortization of intangibles

     438        816   

OREO expense

     330        730   

Other

     5,042        3,846   
  

 

 

   

 

 

 

Total noninterest expense

     30,798        30,212   
  

 

 

   

 

 

 

Earnings before income taxes

     30,536        33,646   
  

 

 

   

 

 

 

Income taxes

     8,921        11,378   
  

 

 

   

 

 

 

Net earnings

   $ 21,615      $ 22,268   
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized loss on securities arising during the period

   $ (11,696   $ (73

Less: Reclassification adjustment for net gain on securities included in net income

     (2,094     —      
  

 

 

   

 

 

 

Other comprehensive loss, before tax

     (13,790     (73

Income tax benefit related to items of other comprehensive loss

     5,792        31   
  

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (7,998     (42
  

 

 

   

 

 

 

Comprehensive income

   $ 13,617      $ 22,226   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.21      $ 0.21   

Diluted earnings per common share

   $ 0.21      $ 0.21   

Cash dividends declared per common share

   $ 0.085      $ 0.085   

See accompanying notes to the condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2013 and 2012

(Dollars and shares in thousands)

(Unaudited)

 

     Common
Shares
Outstanding
    Common
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total  

Balance January 1, 2012

     104,482      $ 479,973      $ 193,372      $ 41,469      $ 714,814   

Exercise of stock options

     225        1,355            1,355   

Tax benefit from exercise of stock options

       110            110   

Shares issued pursuant to stock-based compensation plan

       405            405   

Cash dividends declared Common ($0.085 per share)

         (8,903       (8,903

Net earnings

         22,268          22,268   

Other comprehensive income

           (42     (42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

     104,707        481,843        206,737        41,427        730,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2013

     104,890        484,709        235,010        43,251        762,970   

Repurchase of common stock

     (2     (24         (24

Exercise of stock options

     10        95            95   

Tax benefit from exercise of stock options

       5            5   

Shares issued pursuant to stock-based compensation plan

     5        461            461   

Cash dividends declared Common ($0.085 per share)

         (8,912       (8,912

Net earnings

         21,615          21,615   

Other comprehensive income

           (7,998     (7,998
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

     104,903      $ 485,246      $ 247,713      $ 35,253      $ 768,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Interest and dividends received

   $ 59,834      $ 66,789   

Service charges and other fees received

     8,905        8,030   

Interest paid

     (4,343     (7,504

Cash paid to vendors and employees

     (34,057     (34,081

Income taxes paid

     (22,200     —     

Proceeds from FDIC loss share agreement

     187        1,316   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,326        34,550   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from redemption of FHLB stock

     5,670        3,467   

Proceeds from sale of investment securities

     99,155        —     

Proceeds from repayment of investment securities

     136,939        129,203   

Proceeds from maturity of investment securities

     6,533        36,397   

Purchases of investment securities

     (197,690     (360,846

Net decrease in loan and lease finance receivables

     83,023        52,869   

Proceeds from sales of premises and equipment

     5        25   

Purchase of premises and equipment

     (1,059     (711

Proceeds from sales of other real estate owned

     3,443        6,507   
  

 

 

   

 

 

 

Net cash provided by/(used in) investing activities

     136,019        (133,089

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net (decrease)/increase in transaction deposits

     (85,560     115,807   

Net decrease in time deposits

     (2,266     (40,248

Repayment of junior subordinated debentures

     (20,619     (6,805

Net decrease in other borrowings

     (26,000     —     

Net increase/(decrease) in customer repurchase agreements

     26,871        (31,802

Cash dividends on common stock

     —          (8,903

Repurchase of common stock

     (24     —     

Proceeds from exercise of stock options

     95        1,355   

Tax benefit related to exercise of stock options

     5        110   
  

 

 

   

 

 

 

Net cash (used in)/provided by financing activities

     (107,498     29,514   
  

 

 

   

 

 

 

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

     36,847        (69,025

CASH AND CASH EQUIVALENTS, beginning of period

     98,431        345,343   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 135,278      $ 276,318   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2013     2012  

RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES

    

Net earnings

   $ 21,615      $ 22,268   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Gain on sale of investment securities

     (2,094     —     

Loss on sale of premises and equipment, net

     6        —     

Gain on sale of other real estate owned

     (512     (151

Amortization of capitalized prepayment penalty on borrowings

     68        68   

Increase in bank owned life insurance

     (732     (750

Net amortization of premiums and discounts on investment securities

     6,786        5,448   

Accretion of SJB discount

     (4,393     (4,692

Provision for credit losses

     —          —     

Valuation adjustment on other real estate owned

     73        226   

Change in FDIC loss share asset

     4,023        2,944   

Proceeds from FDIC loss share agreement

     187        1,316   

Stock-based compensation

     461        405   

Depreciation, amortization, net

     831        2,158   

Change in accrued interest receivable

     (630     137   

Change in accrued interest payable

     (187     (109

Change in other assets and liabilities

     (17,176     5,282   
  

 

 

   

 

 

 

Total adjustments

     (13,289     12,282   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 8,326      $ 34,550   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

    

Securities purchased and not settled

   $ 4,630      $ 2,014   

Transfer of loans to other real estate owned

   $ 1,303      $ 808   

See accompanying notes to the condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 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 II, and CVB Statutory Trust III. CVB Statutory Trust II was created in December 2003 and 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”), these trusts do 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, Orange County, Los Angeles County, Madera County, Fresno County, Tulare County, Kern County and San Joaquin County, California. The Bank operates 40 Business Financial Centers, five 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 unaudited 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 months ended March 31, 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 unaudited 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 SecuritiesThe 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.

 

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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

 

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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:

 

  1. 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

 

  2. 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 credit 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 credit 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

 

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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 Credit Losses — The allowance for credit 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 credit 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 credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors that would deserve current recognition in estimating inherent credit 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 and 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 credit 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 credit 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.

 

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FDIC Loss Sharing Asset — On October 16, 2009, the Bank acquired substantially all of the assets and assumed substantially all of the liabilities of San Joaquin Bank (“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 March 31, 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 March 31, 2013, goodwill was $55.1 million. As of March 31, 2013, intangible assets that continue to be subject to amortization include core deposit premiums of $3.0 million (net of $29.0 million of accumulated amortization). Amortization expense for such intangible assets was $438,000 for the three months ended March 31, 2013. Estimated amortization expense for the remainder of 2013 is expected to be $689,000. 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 2.1 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

 

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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 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 March 31, 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 credit 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 March 31, 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 January 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210)”, which amends the scope of FASB ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”, to clarify that the disclosure requirements of ASU 2011-11 are limited to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in the statement of financial position or subject to an enforceable master netting arrangement or similar agreement. The ASU responds to implementation issues raised by stakeholders about the scope of ASU 2011-11. Consistent with the effective date of ASU 2011-11, an entity is required to apply the amendments retrospectively for annual periods beginning on or after January 1, 2013 (and interim periods within those annual periods). The adoption of this new guidance does not have a material impact on the Company’s consolidated financial statements.

In November 2006, we began a repurchase agreement product with our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the consolidated balance sheet.

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.

In February 2013, the FASB issued ASU 2013-02, “Other Comprehensive Income (Topic 220), Reporting of Amounts Reclassified out of Other Comprehensive Income. The provisions in the ASU supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income (“AOCI”) in ASUs 2011-05 and 2011-12. ASU 2013-02 requires entities to disclose additional information about reclassification adjustments, including (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company’s adoption of this new guidance does not have a material effect on its 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 (Note3) included herein.

Loans acquired from the SJB acquisition have performed better than originally expected. At March 31, 2013, the remaining discount associated with the SJB loans approximated $20.9 million. Based on the Company’s regular re-forecast of expected cash flows from these loans, approximately $13.2 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 4.9 years and 0.9 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 $14.2 million at March 31, 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 1.5 years.

 

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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.

 

     March 31, 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

   $ 391,336       $ 845       $ (1,543   $ 390,638         16.34

Residential mortgage-backed securities

     874,913         21,139         (3,415     892,637         37.34

CMO’s / REMIC’s - residential

     470,694         7,439         (556     477,577         19.98

Municipal bonds

     587,949         37,264         (414     624,799         26.13

Other securities

     5,000         22         —          5,022         0.21
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

   $ 2,329,892       $ 66,709       $ (5,928   $ 2,390,673         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 74% of the available-for-sale portfolio at March 31, 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 March 31, 2013 and December 31, 2012. The Company had $1.1 million and $1.2 million in CMO/REMIC’s backed by whole loans issued by private-label companies (non-government sponsored) as of March 31, 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 first quarter of 2012.

 

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     March 31, 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)  

Held-to-maturity:

                 

CMO

   $ —         $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale:

                 

Government agency

   $ 182,843       $ 1,543       $ —         $ —         $ 182,843       $ 1,543   

Residential mortgage-backed securities

     173,748         3,415         —           —           173,748         3,415   

CMO / REMICs - residential

     45,399         539         5,460         17         50,859         556   

Municipal bonds

     26,788         343         2,207         71         28,995         414   

Other securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 428,778       $ 5,840       $ 7,667       $ 88       $ 436,445       $ 5,928   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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)  

Held-to-maturity:

                 

CMO

   $ —         $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 tables above 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 March 31, 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.

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 March 31, 2013, the unrealized loss on this security was zero and the current fair value on the security was 72% of the current par value. This Alt-A bond, with a book value of $2.0 million as of March 31, 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 March 31, 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 months ended March 31, 2013, and 2012.

 

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Table of Contents

Government Agency & Government-Sponsored Enterprise — The government agency bonds are backed by the full faith and credit of Agencies of the U.S. Government. As of March 31, 2013, approximately $162.1 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 the 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 4.2 years. Of the total MBS/CMO, 99.92% have the implied guarantee of U.S. government-sponsored agencies and enterprises. The remaining 0.08% 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 9.3 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 March 31, 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 March 31, 2013 and December 31, 2012, investment securities having a carrying value of approximately $2.30 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 March 31, 2013, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2041, 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.

 

     March 31, 2013  
     Amortized
Cost
     Fair
Value
     Weighted-
Average
Yield
 
     (Dollars in thousands)  

Available-for-Sale:

        

Due in one year or less

   $ 226,351       $ 228,686         1.83

Due after one year through five years

     1,566,483         1,613,119         2.36

Due after five years through ten years

     492,241         501,892         2.54

Due after ten years

     44,817         46,976         3.45
  

 

 

    

 

 

    

Total

   $ 2,329,892       $ 2,390,673         2.36
  

 

 

    

 

 

    

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 March 31, 2013.

 

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Table of Contents

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

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

 

     March 31, 2013  
     Non-Covered
Loans
    Covered
Loans
    Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 532,941      $ 25,314      $ 558,255   

Real estate:

     —         

Construction

     55,703        1,061        56,764   

Commercial real estate

     1,996,198        160,069        2,156,267   

SFR mortgage

     162,022        1,321        163,343   

Consumer

     44,116        5,967        50,083   

Municipal lease finance receivables

     109,727        —          109,727   

Auto and equipment leases, net of unearned discount

     12,422        —          12,422   

Dairy and livestock

     278,502        —          278,502   

Agribusiness

     5,370        5,870        11,240   
  

 

 

   

 

 

   

 

 

 

Gross loans

     3,197,001        199,602        3,396,603   

Less:

      

Purchase accounting discount

     —          (20,908     (20,908

Deferred loan fees, net

     (7,487     —          (7,487
  

 

 

   

 

 

   

 

 

 

Gross loans, net of deferred loan fees and discount

     3,189,514        178,694        3,368,208   

Less: Allowance for credit losses

     (92,218     —          (92,218
  

 

 

   

 

 

   

 

 

 

Net loans

   $ 3,097,296      $ 178,694      $ 3,275,990   
  

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  
     Non-Covered
Loans
    Covered
Loans
    Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 547,422      $ 26,149      $ 573,571   

Real estate:

     —         

Construction

     59,721        1,579        61,300   

Commercial real estate

     1,990,107        179,428        2,169,535   

SFR mortgage

     159,288        1,415        160,703   

Consumer

     47,557        6,337        53,894   

Municipal lease finance receivables

     105,767        —          105,767   

Auto and equipment leases, net of unearned discount

     12,716        —          12,716   

Dairy and livestock

     327,579        —          327,579   

Agribusiness

     9,081        5,651        14,732   
  

 

 

   

 

 

   

 

 

 

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 credit losses

     (92,441     —          (92,441
  

 

 

   

 

 

   

 

 

 

Net loans

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

 

 

   

 

 

   

 

 

 

As of March 31, 2013, 63.48% of the total gross loan portfolio consisted of commercial real estate loans and 1.67% 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 March 31, 2013, the Company held approximately $1.56 billion of fixed rate loans.

At March 31, 2013 and December 31, 2012, loans totaling $2.31 billion and $2.32 billion, respectively, were pledged to secure borrowings from the FHLB and the Federal Reserve Bank.

 

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Table of Contents

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 possibly changed by Credit Management, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. 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

 

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Table of Contents

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 March 31, 2013 and December 31, 2012:

Credit Quality Indicators

 

     March 31, 2013  
     Pass      Watch
List
     Special
Mention
     Substandard      Doubtful &
Loss
     Total  
     (Dollars in thousands)  

Commercial & industrial

   $ 338,974       $ 119,560       $ 48,081       $ 24,931       $ 1,395       $ 532,941   

Construction - speculative

     3,756         —           13,599         18,272         —           35,627   

Construction - non-speculative

     6,540         4,317         —           9,219         —           20,076   

Commercial real estate - owner occupied

     374,300         142,436         88,461         85,950         —           691,147   

Commercial real estate - non-owner occupied

     926,150         215,660         94,016         69,225         —           1,305,051   

Residential real estate (SFR 1-4)

     131,708         11,158         4,273         14,883         —           162,022   

Dairy and livestock

     48,015         64,557         80,048         81,822         4,060         278,502   

Agribusiness

     3,630         1,050         690         —           —           5,370   

Municipal lease finance receivables

     65,673         21,249         14,535         8,270         —           109,727   

Consumer

     37,625         3,206         1,914         1,367         4         44,116   

Auto and equipment leases

     8,527         2,983         776         136         —           12,422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,944,898         586,176         346,393         314,075         5,459         3,197,001   

Covered loans

     47,139         69,482         22,465         60,516         —           199,602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 1,992,037       $ 655,658       $ 368,858       $ 374,591       $ 5,459       $ 3,396,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Pass      Watch
List
     Special
Mention
     Substandard      Doubtful &
Loss
     Total  
     (Dollars in thousands)  

Commercial & industrial

   $ 347,275       $ 131,186       $ 44,466       $ 22,901       $ 1,594       $ 547,422   

Construction - speculative

     1,417         —           15,163         21,314         —           37,894   

Construction - non-speculative

     9,841         2,767         —           9,219         —           21,827   

Commercial real estate - owner occupied

     382,111         159,653         78,087         84,116         —           703,967   

Commercial real estate - non-owner occupied

     888,777         214,901         105,121         77,341         —           1,286,140   

Residential real estate (SFR 1-4)

     129,730         10,215         3,107         16,236         —           159,288   

Dairy and livestock

     67,144         108,087         74,510         77,721         117         327,579   

Agribusiness

     4,969         3,306         806         —           —           9,081   

Municipal lease finance receivables

     72,432         20,237         11,124         1,974         —           105,767   

Consumer

     40,650         3,538         1,976         1,339         54         47,557   

Auto and equipment leases

     8,671         3,225         738         82         —           12,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

Allowance for Credit Losses

The Company’s Credit Management Division is responsible for regularly reviewing the allowance for credit 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 to be provided for in the allowance for credit losses or charge off the impaired balance 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 credit 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. Our dairy and livestock borrowers continue to experience a difficult operating environment. Milk prices are up, but high feed costs continue to put pressure on profit margins. As part of our qualitative analysis during the current period, we adjusted the attributes used in the allowance for credit losses to account for challenges evident in the current economic environment of the dairy and livestock industry.

Management believes that the ALLL was appropriate at March 31, 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 credit losses in the future.

 

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Table of Contents

The following table presents the balance and activity in the allowance for credit losses; and the recorded investment in held-for-investment loans by portfolio segment and based upon our impairment method as of March 31, 2013, and 2012:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

 

    As of and For the Three Months Ended March 31, 2013  
    Commercial
and Industrial
    Construction     Real Estate     Municipal
Lease
Finance
Receivables
    Dairy,
Livestock /
Agribusiness
    Consumer,
Auto &
Other
    Covered
Loans (1)
    Unallocated     Total  
    (Dollars in thousands)  

Allowance for loan losses:

                 

Beginning balance, January 1, 2013

  $ 11,652      $ 2,291      $ 50,905      $ 1,588      $ 18,696      $ 1,170      $ —        $ 6,139      $ 92,441   

Charge-offs

    (357     —          (142     —          —          (47     —          —          (546

Recoveries

    99        126        71        —          14        13        —          —          323   

Provision / reallocation of ALLL

    919        (293     (503     1,044        (2,139     (3     —          975        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2013

  $ 12,313      $ 2,124      $ 50,331      $ 2,632      $ 16,571      $ 1,133      $ —        $ 7,114      $ 92,218   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

  $ 1,055      $ —        $ 429      $ —        $ 2,560      $ 27      $ —        $ —        $ 4,071   

Collectively evaluated for impairment

  $ 11,258      $ 2,124      $ 49,902      $ 2,632      $ 14,011      $ 1,106      $ —        $ 7,114      $ 88,147   

Loans and financing receivables (2):

                 

Ending balance, March 31, 2013

  $ 532,941      $ 55,703      $ 2,158,220      $ 109,727      $ 283,872      $ 56,538      $ 178,694      $ —        $ 3,375,695   

Individually evaluated for impairment

  $ 4,579      $ 27,491      $ 55,098      $ —        $ 25,327      $ 226      $ —        $ —        $ 112,721   

Collectively evaluated for impairment

  $ 528,362      $ 28,212      $ 2,103,122      $ 109,727      $ 258,545      $ 56,312      $ —        $ —        $ 3,084,280   

Acquired loans with deteriorated credit quality, net of discount

  $ —        $ —        $ —        $ —        $ —        $ —        $ 178,694      $ —        $ 178,694   

 

    As of and For the Three Months Ended March 31, 2012  
    Commercial
and Industrial
    Construction     Real Estate     Municipal
Lease
Finance
Receivables
    Dairy,
Livestock /
Agribusiness
    Consumer,
Auto &
Other
    Covered
Loans (1)
    Unallocated     Total  
    (Dollars in thousands)  

Allowance for loan losses:

                 

Beginning balance, January 1, 2012

  $ 10,654      $ 4,947      $ 51,873      $ 2,403      $ 17,278      $ 1,590      $ —        $ 5,219      $ 93,964   

Charge-offs

    (560     —          (530     —          (1,150     (85     (31     —          (2,356

Recoveries

    62        27        221        —          —          4        —          —          314   

Provision / reallocation of ALLL

    1,751        (651     371        (383     (48     (20     31        (1,051     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2012

  $ 11,907      $ 4,323      $ 51,935      $ 2,020      $ 16,080      $ 1,489      $ —        $ 4,168      $ 91,922   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

  $ 421      $ —        $ 787      $ —        $ 221      $ 81      $ —        $ —        $ 1,510   

Collectively evaluated for impairment

  $ 11,486      $ 4,323      $ 51,148      $ 2,020      $ 15,859      $ 1,408      $ —        $ 4,168      $ 90,412   

Loans and financing receivables (2):

                 

Ending balance, March 31, 2012

  $ 497,625      $ 67,382      $ 2,153,345      $ 114,724      $ 290,578      $ 67,862      $ 241,943      $ —        $ 3,433,459   

Individually evaluated for impairment

  $ 7,820      $ 29,354      $ 51,153      $ —        $ 8,470      $ 389        —        $ —        $ 97,186   

Collectively evaluated for impairment

  $ 489,805      $ 38,028      $ 2,102,192      $ 114,724      $ 282,108      $ 67,473        —        $ —        $ 3,094,330   

Acquired loans with deteriorated credit quality, net of discount

  $ —        $ —        $ —        $ —        $ —        $ —        $ 241,943      $ —        $ 241,943   

 

(1) Represents the allowance and related loan balance in accordance with ASC 310-30.
(2) Net of purchase accounting discount.

 

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Table of Contents

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 credit 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 and credit 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.

The accrual of interest on loans is discontinued when the loan becomes 90 or more days past due based on the contractual term of the loan, or when the full collection of principal and interest is in doubt. 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. Nonaccrual loans may be restored to accrual status when principal and interest become current and full payment of principal and interest is expected.

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

 

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Table of Contents

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 March 31, 2013, and December 31, 2012:

Non-Covered Past Due and Nonaccrual Loans

 

     March 31, 2013  
     30-59
Days Past
Due
     60-89
Days Past
Due
     90+ Days
Past Due
and
Accruing
     Total Past
Due and
Accruing
     Nonaccrual      Current      Total Loans
and
Financing
Receivables
 
     (Dollars in thousands)  

Commercial and industrial

   $ 1,893       $ 133       $ —         $ 2,026       $ 3,387       $ 527,528       $ 532,941   

Construction - speculative

     —           —           —           —           10,620         25,007         35,627   

Construction - non-speculative

     —           —           —           —           —           20,076         20,076   

Commercial real estate - owner occupied

     945         —           —           945         1,658         688,544         691,147   

Commercial real estate - non-owner occupied

     875         —           —           875         18,306         1,285,870         1,305,051   

Residential real estate (SFR 1-4)

     824         —           —           824         11,561         149,637         162,022   

Dairy and livestock

     —           —           —           —           9,371         269,131         278,502   

Agribusiness

     —           —           —           —           —           5,370         5,370   

Municipal lease finance receivables

     —           —           —           —           —           109,727         109,727   

Consumer

     63         —           —           63         161         43,892         44,116   

Auto and equipment leases

     —           —           —           —           65         12,357         12,422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered gross loans

   $ 4,600       $ 133       $ —         $ 4,733       $ 55,129       $ 3,137,139       $ 3,197,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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      Current      Total Loans
and
Financing
Receivables
 
     (Dollars in thousands)  

Commercial and industrial

   $ 233       $ 457       $ —         $ 690       $ 3,136       $ 543,596       $ 547,422   

Construction - speculative

     —           —           —           —           10,663         27,231         37,894   

Construction - non-speculative

     —           —           —           —           —           21,827         21,827   

Commercial real estate - owner occupied

     —           —           —           —           5,415         698,552         703,967   

Commercial real estate - non-owner occupied

     —           —           —           —           15,624         1,270,516         1,286,140   

Residential real estate (SFR 1-4)

     107         —           —           107         13,102         146,079         159,288   

Dairy and livestock

     —           —           —           —           9,842         317,737         327,579   

Agribusiness

     —           —           —           —           —           9,081         9,081   

Municipal lease finance receivables

     —           —           —           —           —           105,767         105,767   

Consumer

     74         8         —           82         215         47,260         47,557   

Auto and equipment leases

     8         —           —           8         —           12,708         12,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered gross loans

   $    422       $ 465       $ —         $    887       $ 57,997       $ 3,200,354       $ 3,259,238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Covered Impaired Loans

At March 31, 2013, the Company had non-covered impaired loans of $112.7 million. Of this amount, there was $10.6 million in nonaccrual commercial construction loans, $11.5 million of nonaccrual single family mortgage loans, $20.0 million of nonaccrual commercial real estate loans, $3.4 million of nonaccrual commercial and industrial loans, $9.4 million of nonaccrual dairy and livestock loans and $226,000 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 $29.6 million are classified as nonaccrual. The remaining balance of $57.6 million consists of 44 loans performing according to the restructured terms. The impaired loans had a specific allowance of $4.1 million at March 31, 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.

 

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Table of Contents

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

Non-Covered Impaired Loans

 

     March 31, 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

   $ 2,873       $ 3,617       $ —         $ 2,899       $ 18   

Construction - speculative

     18,272         18,607         —           18,272         77   

Construction - non-speculative

     9,219         9,219         —           9,219         141   

Commercial real estate - owner occupied

     13,616         14,827         —           13,630         122   

Commercial real estate - non-owner occupied

     27,877         38,306         —           28,092         202   

Residential real estate (SFR 1-4)

     10,184         12,821         —           10,319         16   

Dairy and livestock

     20,843         21,874         —           19,170         98   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer

     141         196         —           141         —     

Auto and equipment leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     103,025         119,467         —           101,742         674   

With a related allowance recorded:

              

Commercial and industrial

     1,706         1,871         1,055         1,723         —     

Construction - speculative

     —           —           —           —           —     

Construction - non-speculative

     —           —           —           —           —     

Commercial real estate - owner occupied

     12         14         1         16         —     

Commercial real estate - non-owner occupied

     —           —           —           —           —     

Residential real estate (SFR 1-4)

     3,409         4,040         428         3,415         —     

Dairy and livestock

     4,484         4,944         2,560         4,603         —     

Municipal lease finance receivables

     —           —           —           —           —     

Consumer

     20         22         7         21         —     

Auto and equipment leases

     65         65         20         22         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,696         10,956         4,071         9,800         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered impaired loans

   $ 112,721       $ 130,423       $ 4,071       $ 111,542       $ 674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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   

Construction - speculative

     21,314         21,607         —           21,650         311   

Construction - non-speculative

     9,219         9,219         —           9,219         574   

Commercial real estate - owner occupied

     13,478         14,569         —           14,459         397   

Commercial real estate - non-owner occupied

     28,639         38,633         —           29,801         670   

Residential real estate (SFR 1-4)

     11,079         14,342         —           11,292         54   

Dairy and livestock

     12,406         13,756         —           11,834         173   

Municipal lease finance receivables

     263         263         —           443         5   

Consumer

     142         196         —           145         —     

Auto and equipment leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     99,925         116,800         —           102,609         2,227   

With a related allowance recorded:

              

Commercial and industrial

     304         327         289         387         —     

Construction - speculative

     —           —           —           —           —     

Construction - non-speculative

     —           —           —           —           —     

Commercial real estate - owner occupied

     19         19         2         28         —     

Commercial real estate - non-owner occupied

     —           —           —           —           —     

Residential real estate (SFR 1-4)

     3,766         4,071         434         3,363         —     

Dairy and livestock

     4,303         4,340         1,596         4,017         73   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer

     73         74         11         75         —     

Auto and equipment leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 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 loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Impaired construction speculative loans increased in the second 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 $10.6 million as of March 31, 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 zero provision for unfunded commitments for the three months ended March 31, 2013 and 2012. At March 31, 2013 and December 31, 2012, the balance in this reserve was $8.6 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 March 31, 2013, we had loans of $87.2 million classified as troubled debt restructured, of which $29.6 million are nonperforming and $57.6 million are performing. TDRs on accrual status are comprised of loans that were accruing at the time of

 

26


Table of Contents

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 March 31, 2013, performing TDRs were comprised of 14 commercial real estate loans of $21.5 million, two construction loans of $16.9 million, 13 dairy and livestock loans of $16.0 million, seven single-family residential loans of $2.0 million, and eight commercial and industrial loans of $1.2 million.

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 $1.8 million and $1.4 million specific allowance to TDRs as of March 31, 2013 and December 31, 2012.

The following are the loans modified as troubled debt restructuring during the three months ended March 31, 2013, and 2012:

Modifications

 

     For the Three Months Ended March 31, 2013  
     Number
of Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded

Investment
     Outstanding
Recorded
Investment at
March 31, 2013
 
     (Dollars in thousands)  

Commercial and industrial

     2       $ 204       $ 204       $ 193   

Construction - speculative

     —           —            —            —      

Construction - non-speculative

     —           —           —           —     

Commercial real estate - owner occupied

     1         168         168         168   

Commercial real estate - non-owner occupied

     —           —            —            —      

Residential real estate (SFR 1-4)

     —           —            —            —      

Dairy and livestock

     8         9,973         9,973         9,855   

Municipal lease finance receivables

     —           —            —            —      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     11         10,345         10,345         10,216   

Covered loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

     11       $ 10,345       $ 10,345       $ 10,216   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Three Months Ended March 31, 2012  
     Number
of Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded

Investment
     Outstanding
Recorded
Investment at
March 31, 2012
 
     (Dollars in thousands)  

Commercial and industrial

     2       $ 2,534       $ 2,534       $ 2,532   

Construction - speculative

     —           —           —           —     

Construction - non-speculative

     —           —           —           —     

Commercial real estate - owner occupied

     1         307         307         304   

Commercial real estate - non-owner occupied

     1         513         513         513   

Residential real estate (SFR 1-4)

     —           —           —           —     

Dairy and livestock

     —           —           —           —     

Municipal lease finance receivables

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     4         3,354         3,354         3,349   

Covered loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

     4       $ 3,354       $ 3,354       $ 3,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2013, there were no loans that were previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the three months ended March 31, 2013.

 

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Table of Contents
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. 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
March 31,
 
     2013      2012  
     (In thousands, except per
share amounts)
 

Earnings per common share:

     

Net earnings

   $ 21,615       $ 22,268   

Less: Net earnings allocated to restricted stock

     69         72   
  

 

 

    

 

 

 

Net earnings allocated to common shareholders (numerator)

   $ 21,546       $ 22,196   
  

 

 

    

 

 

 

Weighted average shares outstanding (denominator)

     104,564         104,303   

Earnings per common share

   $ 0.21       $ 0.21   
  

 

 

    

 

 

 

Diluted earnings per common share:

     

Net income allocated to common shareholders (numerator)

   $ 21,546       $ 22,196   
  

 

 

    

 

 

 

Weighted average shares outstanding

     104,564         104,303   

Incremental shares from assumed exercise of outstanding options

     246         197   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding (denominator)

     104,810         104,500   

Diluted earnings per common share

   $ 0.21       $ 0.21   
  

 

 

    

 

 

 

 

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 March 31, 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 three months ended March 31, 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.

 

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Table of Contents

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 credit 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 credit 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 credit 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.

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

 
     Carrying Value at
March 31, 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

   $ 390,638       $ —         $ 390,638       $ —     

Residential mortgage-backed securities

     892,637         —           892,637         —     

CMO’s / REMIC’s - residential

     477,577         —           477,577         —     

Municipal bonds

     624,799         —           624,799         —     

Other securities

     5,022            5,022      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities - AFS

     2,390,673         —           2,390,673         —     

Interest rate swaps

     21,358         —           21,358         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,412,031       $ —         $ 2,412,031       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Description of liability

           

Interest rate swaps

   $ 21,358       $ —         $ 21,358       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 21,358       $ —         $ 21,358       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 March 31, 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 with losses during the period.

 

     Carrying Value at
March 31, 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 Three
Months Ended
March 31,
2013
 
     (Dollars in thousands)  

Description of assets

              

Impaired loans-non-covered

   $ 4,169       $ —         $ —         $ 4,169       $ (2,164

OREO-non-covered

     828         —           —           828         (73

OREO-covered

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $   4,997       $ —         $ —         $   4,997       $ (2,237
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 March 31, 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.

 

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Table of Contents
     March 31, 2013  
            Estimated Fair Value  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets

              

Total cash and cash equivalents

   $ 135,278       $ 135,278       $ —         $ —         $ 135,278   

Interest-earning balances due from depository institutions

     70,000         —           70,000         —           70,000   

FHLB stock

     50,981         —           50,981         —           50,981   

Investment securities available-for-sale

     2,390,673         —           2,390,673         —           2,390,673   

Investment securities held-to-maturity

     1,975         —           —           2,425         2,425   

Total loans, net of allowance for credit losses

     3,275,990         —           —           3,394,235         3,394,235   

Accrued interest receivable

     22,985         —           22,985         —           22,985   

Swaps

     21,358         —           21,358         —           21,358   

Liabilities

              

Deposits:

              

Noninterest-bearing

   $ 2,366,719       $ 2,366,719       $ —         $ —         $ 2,366,719   

Interest-bearing

     2,319,442         —           2,320,514         —           2,320,514   

Borrowings

     699,117         —           727,065         —           727,065   

Junior subordinated debentures

     46,393         —           46,649         —           46,649   

Accrued interest payable

     1,306         —           1,306         —           1,306   

Swaps

     21,358         —           21,358         —           21,358   

 

     December 31, 2012  
            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 credit 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