Edgar Filing: CVB FINANCIAL CORP

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

California

95-3629339

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)


701 North Haven Ave., Suite 350
Ontario, California		91764
(Address of principal executive offices)		(Zip Code)

(909) 980-4030

(Registrant’s telephone number, including area code)

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

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

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

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

Number of shares of common stock of the registrant: 106,340,143 outstanding as of July 30, 2015.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION (UNAUDITED)		3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37

	CRITICAL ACCOUNTING POLICIES	37

	OVERVIEW	37

	ANALYSIS OF THE RESULTS OF OPERATIONS	39

	RESULTS BY BUSINESS SEGMENTS	49

	ANALYSIS OF FINANCIAL CONDITION	51

	ASSET/LIABILITY AND MARKET RISK MANAGEMENT	68

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70

ITEM 4.	CONTROLS AND PROCEDURES	70

PART II – OTHER INFORMATION		70

ITEM 1.	LEGAL PROCEEDINGS	70

ITEM 1A.	RISK FACTORS	71

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	71

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	72

ITEM 4.	MINE SAFETY DISCLOSURES	72

ITEM 5.	OTHER INFORMATION	72

ITEM 6.	EXHIBITS	72

SIGNATURES		73

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 and results, financial position and liquidity, business prospects, strategic alternatives, business strategies, technology initiatives and cyber security, regulatory and compliance policies, competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for legacy and future operations, legal proceedings or investigations, board and management hiring and retention and other similar forecasts and statements of expectations or 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 and market conditions and events and the impact they may have on the Company, our customers and/or our assets and liabilities; our ability to attract and maintain deposits, borrowings and other sources of funding or liquidity, and the pricing and rates applicable thereto; supply and demand for real estate and renewed fluctuations or periodic deterioration in the market values of real estate in California or other jurisdictions where we lend, whether involving residential or commercial property; a prolonged slowdown or decline in real estate sales or construction activity; changes in the financial performance and/or condition of our loan and deposit customers or key vendors or counterparties; changes in the levels of performing and nonperforming bank assets and charge-offs; the cost or effect of acquisitions or divestitures we may make; the effect of changes in laws and regulations (including laws, regulations and judicial decisions concerning financial reform, taxes, bank or holding company capital levels, securities, employment, executive compensation, insurance, compliance, vendor management and information security) with which we and our subsidiaries must comply (or believe we must comply); changes in the applicability or costs of deposit insurance or other regulatory fees; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant legal, regulatory and accounting requirements; inflation, interest rate, securities market and monetary fluctuations; internal and external fraud and cyber-security threats, including theft or loss of Company or customer funds, loss of system functionality or access, or theft or loss of Company or customer information; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, droughts or pandemic diseases; the timely development and acceptance of new banking products and services (including technology-based services and products) and the perceived value of these products and services by customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of key internal or external systems and applications; changes in consumer spending, borrowing and savings preferences or habits; the effects of technological changes, the expanding use of technology in banking (including the adoption of mobile banking applications) and product innovation or contraction; 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, banks and other financial service providers; volatility in the credit and equity markets and its effects on the general economy or local or regional business conditions; market fluctuations in the prices of the Company’s common stock or other securities; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other national or international accounting standard setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and our board of directors; the costs and effects of legal, regulatory and compliance changes or developments; the initiation and the favorable or unfavorable resolution of legal proceedings or regulatory or other governmental inquiries involving the Company, including, but not limited to, any consumer or employment class action litigation, and the current investigation by the Securities and Exchange Commission and the related federal class-action and state law derivative action lawsuits filed against us; the results of regulatory examinations or reviews or other government actions; and our ongoing relationships with our various federal and state regulators, including the SEC, FDIC and California DBO.

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, 2014. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)


	June 30,			December 31,
	2015			2014
Assets
Cash and due from banks	$	125,431		$	95,030
Interest-earning balances due from Federal Reserve		321,015			10,738

Total cash and cash equivalents		446,446			105,768

Interest-earning balances due from depository institutions		24,378			27,118
Investment securities available-for-sale, at fair value (with amortized cost of $3,113,339 at June 30, 2015, and $3,083,582 at December 31, 2014)		3,154,217			3,137,158
Investment securities held-to-maturity		1,400			1,528
Investment in stock of Federal Home Loan Bank (FHLB)		17,588			25,338
Loans and lease finance receivables		3,784,219			3,817,067
Allowance for loan losses		(59,554	)		(59,825	)

Net loans and lease finance receivables		3,724,665			3,757,242

Premises and equipment, net		31,894			33,591
Bank owned life insurance		129,597			126,927
Accrued interest receivable		22,173			23,194
Intangibles		2,707			3,214
Goodwill		74,244			74,244
Other real estate owned		7,835			5,637
Income taxes		40,756			31,461
Other assets		19,458			25,500

Total assets	$	7,697,358		$	7,377,920

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	3,250,574		$	2,866,365
Interest-bearing		2,743,306			2,738,293

Total deposits		5,993,880			5,604,658
Customer repurchase agreements		662,326			563,627
FHLB advances		—			199,479
Other borrowings		—			46,000
Accrued interest payable		321			1,161
Deferred compensation		11,093			10,291
Junior subordinated debentures		25,774			25,774
Payable for securities purchased		59,693			—
Other liabilities		50,280			48,821

Total liabilities		6,803,367			6,499,811

Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,337,106 at June 30, 2015, and 105,893,216 at December 31, 2014		501,322			495,220
Retained earnings		368,960			351,814
Accumulated other comprehensive income, net of tax		23,709			31,075

Total stockholders’ equity		893,991			878,109

Total liabilities and stockholders’ equity	$	7,697,358		$	7,377,920

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Interest income:
Loans and leases, including fees	$	45,322		$	43,558		$	90,864		$	88,214
Investment securities:
Taxable		12,820			11,686			25,781			21,965
Tax-advantaged		4,719			5,186			9,730			10,464

Total investment income		17,539			16,872			35,511			32,429
Dividends from FHLB stock		1,414			526			1,883			1,130
Federal funds sold		187			127			329			251
Interest-earning deposits with other institutions		53			133			108			254

Total interest income		64,515			61,216			128,695			122,278

Interest expense:
Deposits		1,307			1,222			2,600			2,408
Borrowings		342			2,729			2,115			5,559
Junior subordinated debentures		108			106			213			210

Total interest expense		1,757			4,057			4,928			8,177

Net interest income before recapture of provision for loan losses		62,758			57,159			123,767			114,101
Recapture of provision for loan losses		(2,000	)		(7,600	)		(2,000	)		(15,100	)

Net interest income after recapture of provision for loan losses		64,758			64,759			125,767			129,201

Noninterest income:
Service charges on deposit accounts		3,952			3,905			7,913			7,733
Trust and investment services		2,181			2,133			4,332			4,058
Bankcard services		842			923			1,575			1,701
BOLI income		808			601			1,457			1,239
Gain on sale of loans held-for-sale		—			—			—			5,330
Decrease in FDIC loss sharing asset, net		(413	)		(1,467	)		(803	)		(3,174	)
Gain on OREO, net		132			130			256			135
Other		843			825			1,626			1,526

Total noninterest income		8,345			7,050			16,356			18,548

Noninterest expense:
Salaries and employee benefits		19,648			18,387			38,943			37,804
Occupancy and equipment		3,713			3,676			7,365			7,401
Professional services		1,527			1,646			2,680			3,010
Software licenses and maintenance		993			1,010			2,023			2,075
Promotion		1,201			1,341			2,528			2,607
Recapture of provision for unfunded loan commitments		—			—			(500	)		—
Amortization of intangible assets		239			193			507			315
Debt termination expense		—			—			13,870			—
OREO expense		251			113			335			138
Acquisition related expenses		—			865			—			1,292
Other		3,961			4,093			8,254			7,839

Total noninterest expense		31,533			31,324			76,005			62,481

Earnings before income taxes		41,570			40,485			66,118			85,268

Income taxes		14,757			15,001			23,472			31,123

Net earnings	$	26,813		$	25,484		$	42,646		$	54,145

Other comprehensive income:
Unrealized gain on securities arising during the period	$	(32,968	)	$	32,782		$	(12,698	)	$	57,563
Less: Reclassification adjustment for net gain on securities included in net income		—			—			—			—

Other comprehensive income, before tax		(32,968	)		32,782			(12,698	)		57,563
Less: Income tax expense related to items of other comprehensive income		13,846			(13,769	)		5,332			(24,176	)

Other comprehensive income, net of tax		(19,122	)		19,013			(7,366	)		33,387

Comprehensive income	$	7,691		$	44,497		$	35,280		$	87,532

Basic earnings per common share	$	0.25		$	0.24		$	0.40		$	0.51
Diluted earnings per common share	$	0.25		$	0.24		$	0.40		$	0.51
Cash dividends declared per common share	$	0.12		$	0.10		$	0.24		$	0.20

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended June 30, 2015 and 2014

(Dollars and shares in thousands)

(Unaudited)


										Accumulated
	Common									Other
	Shares			Common			Retained			Comprehensive
	Outstanding			Stock			Earnings			Income			Total
Balance January 1, 2014		105,370		$	491,068		$	290,149		$	(9,330	)	$	771,887
Repurchase of common stock		(346	)		(4,908	)								(4,908	)
Exercise of stock options		469			5,109									5,109
Tax benefit from exercise of stock options					796									796
Shares issued pursuant to stock-based compensation plan		306			1,531									1,531
Cash dividends declared on common stock ($0.20 per share)								(21,188	)					(21,188	)
Net earnings								54,145						54,145
Other comprehensive income											33,387			33,387

Balance June 30, 2014		105,799		$	493,596		$	323,106		$	24,057		$	840,759


Balance January 1, 2015		105,893		$	495,220		$	351,814		$	31,075		$	878,109
Repurchase of common stock		(33	)		(511	)								(511	)
Exercise of stock options		397			4,500									4,500
Tax benefit from exercise of stock options					742									742
Shares issued pursuant to stock-based compensation plan		80			1,371									1,371
Cash dividends declared on common stock ($0.24 per share)								(25,500	)					(25,500	)
Net earnings								42,646						42,646
Other comprehensive income											(7,366	)		(7,366	)

Balance June 30, 2015		106,337		$	501,322		$	368,960		$	23,709		$	893,991

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2015			2014
Cash Flows from Operating Activities
Interest and dividends received	$	137,747		$	125,583
Service charges and other fees received		13,840			15,036
Interest paid		(5,768	)		(7,984	)
Net cash paid to vendors, employees and others		(68,710	)		(63,504	)
Income taxes paid		(27,000	)		(35,500	)
Payments to FDIC, loss share agreement		(460	)		(1,372	)

Net cash provided by operating activities		49,649			32,259

Cash Flows from Investing Activities
Proceeds from redemption of FHLB stock		7,750			8,899
Proceeds from maturity of interest-earning balances from depository institutions		2,740			1,494
Proceeds from sale of investment securities		—			14,271
Proceeds from repayment of investment securities		202,162			143,151
Proceeds from maturity of investment securities		54,601			47,199
Purchases of investment securities		(236,451	)		(413,458	)
Net decrease in loan and lease finance receivables		35,862			184,031
Proceeds from sales of premises and equipment		—			663
Purchase of premises and equipment		(485	)		(964	)
Proceeds from sales of other real estate owned		1,538			2,254
Cash acquired on purchase of American Security Bank, net of cash paid		—			50,038

Net cash provided by investing activities		67,717			37,578

Cash Flows from Financing Activities
Net increase in transaction deposits		430,912			392,737
Net decrease in time deposits		(41,690	)		(32,172	)
Repayment of FHLB advances		(200,000	)		—
Net decrease in other borrowings		(46,000	)		(69,000	)
Net increase (decrease) in customer repurchase agreements		98,699			(31,792	)
Cash dividends on common stock		(23,340	)		(21,117	)
Repurchase of common stock		(511	)		(4,908	)
Proceeds from exercise of stock options		4,500			5,109
Tax benefit related to exercise of stock options		742			796

Net cash provided by financing activities		223,312			239,653

Net increase in cash and cash equivalents		340,678			309,490

Cash and cash equivalents, beginning of period		105,768			94,693

Cash and cash equivalents, end of period	$	446,446		$	404,183

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2015			2014
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings	$	42,646		$	54,145
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of loans held-for-sale		—			(5,330	)
Loss on sale of premises and equipment, net		52			71
Gain on sale of other real estate owned		(232	)		(117	)
Amortization of capitalized prepayment penalty on borrowings		521			136
Increase in bank owned life insurance		(2,670	)		(1,161	)
Net amortization of premiums and discounts on investment securities		9,749			10,044
Accretion of SJB discount		(2,012	)		(3,174	)
Recapture of provision for loan losses		(2,000	)		(15,100	)
Recapture of provision for unfunded loan commitments		(500	)		—
Valuation adjustment on other real estate owned		162			—
Change in FDIC loss share asset		299			3,174
Payments to FDIC, loss share agreement		(460	)		(1,372	)
Stock-based compensation		1,371			1,531
Depreciation and amortization, net		(229	)		858
Change in accrued interest receivable		1,021			331
Change in accrued interest payable		(840	)		12
Change in other assets and liabilities		2,771			(11,789	)

Total adjustments		7,003			(21,886	)

Net cash provided by operating activities	$	49,649		$	32,259


Supplemental Disclosure of Non-cash Investing Activities
Securities purchased and not settled	$	59,693		$	56,430
Transfer of loans to other real estate owned	$	3,666		$	478

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BUSINESS

The condensed consolidated financial statements include the accounts of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiaries: Citizens Business Bank (the “Bank” or “CBB”) after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with ASC 810 Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes 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 Equipment Financing Group and trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Los Angeles County, Orange County, Ventura County, San Diego County, Madera County, Fresno County, Tulare County, and Kern County, California. The Bank operates 40 Business Financial Centers, seven Commercial Banking Centers, and three trust offices. The Company is headquartered in the city of Ontario, California.

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated 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, 2014, filed with the SEC. 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’ condensed consolidated 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

Except as discussed below, our accounting policies are described in Note 3—Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC (“Form 10-K”).

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

Recent Accounting Pronouncements— In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The new guidance reduces the number of consolidation models from four to two as well as simplifies the FASB Accounting Standards Codification and improves GAAP by placing more of an emphasis on risk of loss when

determining a controlling financial interest, reducing the frequency of the application of related party guidance when determining a controlling financial interest in a variable interest entity (VIE) and changing the consolidation conclusions for public and private companies in several industries that typically make use of VIEs. ASU 2015-02 will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

4.	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.


	June 30, 2015
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency/GSEs	$	358,052	$	16	$	(6,785	)	$	351,283		11.14	%
Residential mortgage-backed securities		1,830,381		30,770		(4,661	)		1,856,490		58.86	%
CMOs/REMICs - residential		403,108		7,265		(626	)		409,747		12.99	%
Municipal bonds		516,798		16,488		(1,671	)		531,615		16.85	%
Other securities		5,000		82		—			5,082		0.16	%

Total	$	3,113,339	$	54,621	$	(13,743	)	$	3,154,217		100.00	%


	December 31, 2014
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency/GSEs	$	339,071	$	—	$	(8,228	)	$	330,843		10.55	%
Residential mortgage-backed securities		1,884,370		36,154		(3,028	)		1,917,496		61.12	%
CMOs/REMICs - residential		297,318		7,050		(277	)		304,091		9.69	%
Municipal bonds		557,823		22,463		(645	)		579,641		18.48	%
Other securities		5,000		87		—			5,087		0.16	%

Total	$	3,083,582	$	65,754	$	(12,178	)	$	3,137,158		100.00	%

Approximately 83% of the available-for-sale portfolio at June 30, 2015 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale collateralized mortgage obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of June 30, 2015 and December 31, 2014. The Bank had $234,000 in CMOs/REMICs backed by whole loans issued by private-label companies (nongovernment sponsored).

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.


	June 30, 2015
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency/GSEs	$	45,332	$	119	$	284,011	$	6,666	$	329,343	$	6,785
Residential mortgage-backed securities		212,143		1,128		122,027		3,533		334,170		4,661
CMOs/REMICs - residential		114,943		458		6,315		168		121,258		626
Municipal bonds		52,881		813		24,599		858		77,480		1,671
Other securities		—		—		—		—		—		—

Total	$	425,299	$	2,518	$	436,952	$	11,225	$	862,251	$	13,743


	December 31, 2014
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency/GSEs	$	22,224	$	28	$	307,873	$	8,200	$	330,097	$	8,228
Residential mortgage-backed securities		19,636		4		145,681		3,024		165,317		3,028
CMOs/REMICs - residential		—		—		31,143		277		31,143		277
Municipal bonds		1,953		23		24,812		622		26,765		645
Other securities		—		—		—		—		—		—

Total	$	43,813	$	55	$	509,509	$	12,123	$	553,322	$	12,178

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 — The Company has one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A (limited documentation) 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 subordinated securities. This security is classified as held-to-maturity as the Bank has both the intent and ability to hold this debt security to maturity. The Bank acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security became apparent in August 2008 at the time the crisis in the financial markets occurred and the market for securities collateralized by Alt-A mortgages declined.

This Alt-A bond, with a book value of $1.4 million as of June 30, 2015 and has $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 June 30, 2015. The key assumptions include default rates, loss severities and prepayment rates. There were no changes in credit related other-than-temporary impairment (“OTTI”) recognized in earnings for the three and six months ended June 30, 2015 and 2014.

Government Agency & Government-Sponsored Enterprise (“GSE”) — The government agency bonds are backed by the full faith and credit of agencies of the U.S. Government. While the Government-Sponsored Enterprise bonds are not expressly guaranteed by the U.S. Government, they are currently being supported by the U.S. Government under a conservatorship arrangement with the

Government-Sponsored Enterprises. As of June 30, 2015, approximately $240.1 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 due to be paid. The contractual terms of these investments provide 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. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the bonds.

Mortgage-Backed Securities and CMOs/REMICs—Almost all of the Company’s available-for-sale mortgage-backed and CMOs/REMICs securities are issued by Government Agencies or Government-Sponsored Enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All mortgage-backed securities are considered to be rated investment grade with a weighted average life of approximately 4.3 years. Of the total MBS/CMO, 99.99% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining 0.01% are issued by banks. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the bonds.

Municipal Bonds—The majority of the Company’s municipal bonds, with a weighted-average life of approximately 8.5 years, are insured by the largest bond insurance companies. 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. The decline in fair value is attributable to the changes in interest rates and not credit quality. Since 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, these investments are not considered other than temporarily impaired at June 30, 2015.

On an ongoing basis, we monitor 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 OTTI for any given security.

At June 30, 2015 and December 31, 2014, investment securities having a carrying value of approximately $2.92 billion and $3.11 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 June 30, 2015, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMOs/REMICs have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMOs/REMICs are included in maturity categories based upon estimated prepayment speeds.


	June 30, 2015
	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
Available-for-sale:
Due in one year or less	$	177,307	$	180,332
Due after one year through five years		2,063,160		2,104,524
Due after five years through ten years		659,129		652,414
Due after ten years		213,743		216,947

Total	$	3,113,339	$	3,154,217

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 June 30, 2015.

5.	ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3—Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans. The application of the purchase method of accounting resulted in an after-tax gain of $12.3 million which was included in 2009 earnings. The gain is the negative goodwill resulting from the acquired assets and liabilities recognized at fair value.

At June 30, 2015, the remaining discount associated with the PCI loans approximated $5.7 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $3.5 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 3.4 years and 1.3 years, respectively. The loss sharing agreement for commercial loans expired October 16, 2014. The following table provides a summary of PCI loans and lease finance receivables by type and their credit quality indicators for the periods indicated.


	June 30, 2015			December 31, 2014
	(Dollars in thousands)
Commercial and industrial	$	13,310		$	14,605
SBA		440			1,110
Real estate:
Commercial real estate		93,700			109,350
Construction		—			—
SFR mortgage		203			205
Dairy & livestock and agribusiness		276			4,890
Municipal lease finance receivables		—			—
Consumer and other loans		2,817			3,336

Gross PCI loans		110,746			133,496
Less: Purchase accounting discount		(5,680	)		(7,129	)

Gross PCI loans, net of discount		105,066			126,367
Less: Allowance for PCI loans losses		—			—

Net PCI loans	$	105,066		$	126,367

Credit Quality Indicators

The following table summarizes PCI loans by internal risk ratings for the periods indicated.


	June 30, 2015		December 31, 2014
	(Dollars in thousands)
Pass	$	21,863	$	26,706
Watch list		65,435		77,371
Special mention		6,909		8,203
Substandard		16,539		21,216
Doubtful & loss		—		—

Total PCI gross loans	$	110,746	$	133,496

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology for PCI loans. The ALLL for PCI loans is determined separately from total loans, and is based on expectations of future cash flows from the underlying pools of loans or individual loans in accordance with ASC 310-30, as more fully described in Note 3— Summary of Significant

Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. As of June 30, 2015 and December 31, 2014, there were no allowances for loan losses recorded for PCI loans.

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

The following table provides a summary of total loans and lease finance receivables, excluding PCI loans, by type.


	June 30, 2015			December 31, 2014
	(Dollars in thousands)
Commercial and industrial	$	406,423		$	390,011
SBA		120,566			134,265
Real estate:
Commercial real estate		2,569,411			2,487,803
Construction		46,927			55,173
SFR mortgage		214,503			205,124
Dairy & livestock and agribusiness		183,984			279,173
Municipal lease finance receivables		74,691			77,834
Consumer and other loans		71,176			69,884

Gross loans, excluding PCI loans		3,687,681			3,699,267
Less: Deferred loan fees, net		(8,528	)		(8,567	)

Gross loans, excluding PCI loans, net of deferred loan fees		3,679,153			3,690,700
Less: Allowance for loan losses		(59,554	)		(59,825	)

Net loans, excluding PCI loans		3,619,599			3,630,875

PCI Loans		110,746			133,496
Discount on PCI loans		(5,680	)		(7,129	)

PCI loans, net		105,066			126,367

Total loans and lease finance receivables	$	3,724,665		$	3,757,242

As of June 30, 2015, 69.68% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 1.27% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2015, $157.2 million, or 6.12%, of the total commercial real estate loans included loans secured by farmland, compared to $165.6 million, or 6.66%, at December 31, 2014. The loans secured by farmland included $130.0 million for loans secured by dairy & livestock land and $27.2 million for loans secured by agricultural land at June 30, 2015, compared to $144.1 million for loans secured by dairy & livestock land and $21.5 million for loans secured by agricultural land at December 31, 2014. As of June 30, 2015, $184.0 million, or 4.99%, of the total gross loan portfolio (excluding PCI loans) consisted of dairy & livestock and agribusiness commercial loans, compared to $279.2 million, or 7.55%, at December 31, 2014. This was comprised of $171.8 million for dairy & livestock loans and $12.2 million for agribusiness loans at June 30, 2015, compared to $268.1 million for dairy & livestock loans and $11.1 million for agribusiness loans at December 31, 2014. At June 30, 2015, the Company held approximately $1.84 billion of total fixed rate loans.

At June 30, 2015 and December 31, 2014, loans totaling $2.80 billion and $2.78 billion, respectively, were pledged to secure borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

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

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

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

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

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

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

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

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that 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 tables summarize each class of loans, excluding PCI loans, according to our internal risk ratings for the periods presented.


	June 30, 2015
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total

Commercial and industrial	$	259,171	$	97,969	$	37,649	$	11,578	$	56	$	406,423
SBA		74,716		22,448		14,202		7,698		1,502		120,566
Real estate:
Commercial real estate
Owner occupied		581,824		146,611		49,507		13,456		—		791,398
Non-owner occupied		1,445,175		250,818		28,789		53,231		—		1,778,013
Construction
Speculative		26,741		2,172		—		7,651		—		36,564
Non-speculative		9,710		653		—		—		—		10,363
SFR mortgage		185,302		21,230		4,261		3,710		—		214,503
Dairy & livestock and agribusiness		105,341		75,217		3,426		—		—		183,984
Municipal lease finance receivables		41,726		27,766		5,199		—		—		74,691
Consumer and other loans		55,776		10,497		2,032		2,774		97		71,176

Total gross loans, excluding PCI loans	$	2,785,482	$	655,381	$	145,065	$	100,098	$	1,655	$	3,687,681


	December 31, 2014
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total

Commercial and industrial	$	234,029	$	105,904	$	33,795	$	16,031	$	252	$	390,011
SBA		84,769		24,124		15,858		7,920		1,594		134,265
Real estate:
Commercial real estate
Owner occupied		552,072		159,908		46,248		32,139		—		790,367
Non-owner occupied		1,347,006		241,809		56,353		52,268		—		1,697,436
Construction
Speculative		28,310		613		—		7,651		—		36,574
Non-speculative		18,071		528		—		—		—		18,599
SFR mortgage		174,311		20,218		2,442		8,153		—		205,124
Dairy & livestock and agribusiness		174,783		85,660		8,612		10,015		103		279,173
Municipal lease finance receivables		35,463		22,349		20,022		—		—		77,834
Consumer and other loans		62,904		2,233		1,789		2,763		195		69,884

Total gross loans, excluding PCI loans	$	2,711,718	$	663,346	$	185,119	$	136,940	$	2,144	$	3,699,267

Allowance for Loan Losses

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

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2014 Annual Report on Form 10-K for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at June 30, 2015 and December 31, 2014. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

The following tables present the balance and activity related to the allowance for loan losses for held-for-investment loans, by portfolio segment for the periods presented.


	For the Three Months Ended June 30, 2015
	Ending Balance March 31, 2015		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,502	$	—		$	197	$	(514	)	$	7,185
SBA		2,196		—			3		(114	)		2,085
Real estate:
Commercial real estate		34,848		(107	)		783		(110	)		35,414
Construction		1,043		—			41		(338	)		746
SFR mortgage		2,425		(215	)		—		354			2,564
Dairy & livestock and agribusiness		3,746		—			111		117			3,974
Municipal lease finance receivables		1,030		—			—		(16	)		1,014
Consumer and other loans		825		(20	)		52		(23	)		834
Unallocated		7,094		—			—		(1,356	)		5,738

Total allowance for loan losses	$	60,709	$	(342	)	$	1,187	$	(2,000	)	$	59,554


	For the Three Months Ended June 30, 2014
	Ending Balance March 31, 2014		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2014
	(Dollars in thousands)
Commercial and industrial	$	6,368	$	(100	)	$	43	$	(274	)	$	6,037
SBA		2,468		—			63		(166	)		2,365
Real estate:
Commercial real estate		39,400		(352	)		70		(3,200	)		35,918
Construction		458		—			19		128			605
SFR mortgage		2,282		—			—		(68	)		2,214
Dairy & livestock and agribusiness		9,267		—			98		(3,937	)		5,428
Municipal lease finance receivables		1,519		—			—		(55	)		1,464
Consumer and other loans		950		(6	)		14		(28	)		930
Unallocated		6,013		—			—		—			6,013

Total allowance for loan losses	$	68,725	$	(458	)	$	307	$	(7,600	)	$	60,974


	For the Six Months Ended June 30, 2015
	Ending Balance December 31, 2014		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,074	$	(134	)	$	232	$	13		$	7,185
SBA		2,557		(33	)		37		(476	)		2,085
Real estate:
Commercial real estate		33,373		(107	)		1,640		508			35,414
Construction		988		—			50		(292	)		746
SFR mortgage		2,344		(215	)		185		250			2,564
Dairy & livestock and agribusiness		5,479		—			210		(1,715	)		3,974
Municipal lease finance receivables		1,412		—			—		(398	)		1,014
Consumer and other loans		1,262		(197	)		61		(292	)		834
Unallocated		5,336		—			—		402			5,738

Total allowance for loan losses	$	59,825	$	(686	)	$	2,415	$	(2,000	)	$	59,554


	For the Six Months Ended June 30, 2014
	Ending Balance December 31, 2013		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2014
	(Dollars in thousands)
Commercial and industrial	$	8,502	$	(554	)	$	498	$	(2,409	)	$	6,037
SBA		2,332		—			63		(30	)		2,365
Real estate:
Commercial real estate		39,402		(352	)		138		(3,270	)		35,918
Construction		1,305		—			797		(1,497	)		605
SFR mortgage		2,718		—			—		(504	)		2,214
Dairy & livestock and agribusiness		11,728		—			242		(6,542	)		5,428
Municipal lease finance receivables		2,335		—			—		(871	)		1,464
Consumer and other loans		960		(19	)		26		(37	)		930
Unallocated		5,953		—			—		60			6,013

Total allowance for loan losses	$	75,235	$	(925	)	$	1,764	$	(15,100	)	$	60,974

The following tables present the recorded investment in loans held-for-investment, excluding PCI loans, and the related allowance for loan losses by portfolio segment, based on the Company’s methodology for determining the allowance for loan losses for the periods presented.


	June 30, 2015
	Recorded Investment in Loans				Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial	$	1,562	$	404,861	$	435	$	6,750
SBA		3,146		117,420		12		2,073
Real estate:
Commercial real estate		39,981		2,529,430		—		35,414
Construction		7,651		39,276		24		722
SFR mortgage		7,044		207,459		77		2,487
Dairy & livestock and agribusiness		7,091		176,893		—		3,974
Municipal lease finance receivables		—		74,691		—		1,014
Consumer and other loans		915		70,261		2		832
Unallocated		—		—		—		5,738

Total	$	67,390	$	3,620,291	$	550	$	59,004


	June 30, 2014
	Recorded Investment in Loans				Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial	$	5,904	$	379,661	$	643	$	5,394
SBA		2,138		126,706		64		2,301
Real estate:
Commercial real estate		36,873		2,363,991		—		35,918
Construction		26,554		32,923		—		605
SFR mortgage		10,554		176,370		44		2,170
Dairy & livestock and agribusiness		23,355		156,696		1,366		4,062
Municipal lease finance receivables		—		78,934		—		1,464
Consumer and other loans		470		70,527		96		834
Unallocated		—		—		—		6,013

Total	$	105,848	$	3,385,808	$	2,213	$	58,761

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the 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 loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the appropriateness 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. Refer to Note 3 –Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014 for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

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

Generally, when loans are identified as impaired they are moved to our Special Assets Department. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.

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

The following tables present the recorded investment in the aging of, past due and nonaccrual loans, excluding PCI loans, by type of loans for the periods presented.


	June 30, 2015
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	246	$	—	$	246	$	903	$	405,274	$	406,423
SBA		—		—		—		2,456		118,110		120,566
Real estate:
Commercial real estate
Owner occupied		—		—		—		2,290		789,109		791,399
Non-owner occupied		945		388		1,333		12,677		1,764,002		1,778,012
Construction
Speculative		—		—		—		—		36,564		36,564
Non-speculative		—		—		—		—		10,363		10,363
SFR mortgage		—		355		355		3,400		210,748		214,503
Dairy & livestock and agribusiness		—		—		—		—		183,984		183,984
Municipal lease finance receivables		—		—		—		—		74,691		74,691
Consumer and other loans		—		2		2		498		70,676		71,176

Total gross loans, excluding PCI loans	$	1,191	$	745	$	1,936	$	22,224	$	3,663,521	$	3,687,681

(1)

As of June 30, 2015, $18.6 million of nonaccruing loans were current, $599,000 were 30-59 days past due, $668,000 were 60-89 days past due and $2.4 million were 90+ days past due.


	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	943	$	35	$	978	$	2,308	$	386,725	$	390,011
SBA		75		—		75		2,481		131,709		134,265
Real estate:
Commercial real estate
Owner occupied		36		86		122		4,072		786,173		790,367
Non-owner occupied		—		—		—		19,246		1,678,190		1,697,436
Construction
Speculative		—		—		—		—		36,574		36,574
Non-speculative		—		—		—		—		18,599		18,599
SFR mortgage		425		—		425		3,240		201,459		205,124
Dairy & livestock and agribusiness		—		—		—		103		279,070		279,173
Municipal lease finance receivables		—		—		—		—		77,834		77,834
Consumer and other loans		64		17		81		736		69,067		69,884

Total gross loans, excluding PCI loans	$	1,543	$	138	$	1,681	$	32,186	$	3,665,400	$	3,699,267

(1)

As of December 31, 2014, $20.1 million of nonaccruing loans were current, $3.7 million were 30-59 days past due, $8.5 million were 90+ days.

Impaired Loans

At June 30, 2015, the Company had impaired loans, excluding PCI loans, of $67.4 million. Of this amount, there were $15.0 million of nonaccrual commercial real estate loans, $3.4 million of nonaccrual SFR mortgage loans, $2.5 million of nonaccrual SBA loans, $903,000 of nonaccrual commercial and industrial loans and $498,000 of nonaccrual consumer and other loans. These impaired loans included $60.3 million of loans whose terms were modified in a troubled debt restructuring, of which $15.2 million were classified as nonaccrual. The remaining balance of $45.1 million consisted of 33 loans performing according to the restructured terms.

The impaired loans had a specific allowance of $550,000 at June 30, 2015. At December 31, 2014, the Company had classified as impaired loans, excluding PCI loans, with a balance of $85.8 million with a related allowance of $1.5 million.

The following tables present information for held-for-investment loans, excluding PCI loans, individually evaluated for impairment by class of loans, as of and for the periods indicated below.


	As of and For the Six Months Ended June 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,097	$	1,941	$	—	$	1,172	$	15
SBA		3,087		3,688		—		3,167		26
Real estate:
Commercial real estate
Owner occupied		5,987		7,080		—		5,865		127
Non-owner occupied		33,994		39,946		—		34,567		838
Construction
Speculative		—		—		—		—		—
Non-speculative		—		—		—		—		—
SFR mortgage		6,228		7,175		—		6,102		50
Dairy & livestock and agribusiness		7,091		7,559		—		7,269		167
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		906		1,426		—		940		8

Total		58,390		68,815		—		59,082		1,231

With a related allowance recorded:
Commercial and industrial		465		536		435		478		1
SBA		59		59		12		63		—
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		7,651		7,651		24		7,651		192
Non-speculative		—		—		—		—		—
SFR mortgage		816		824		77		826		3
Dairy & livestock and agribusiness		—		—		—		—		—
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		9		14		2		10		—

Total		9,000		9,084		550		9,028		196

Total impaired loans	$	67,390	$	77,899	$	550	$	68,110	$	1,427


	As of and For the Six Months Ended June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	4,376	$	5,437	$	—	$	4,396	$	30
SBA		2,074		2,516		—		2,112		—
Real estate:
Commercial real estate
Owner occupied		11,822		12,910		—		11,967		247
Non-owner occupied		25,051		31,676		—		25,390		430
Construction
Speculative		17,418		18,407		—		17,484		154
Non-speculative		9,136		9,136		—		9,158		308
SFR mortgage		10,078		11,719		—		10,156		52
Dairy & livestock and agribusiness		20,015		20,714		—		22,529		456
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		366		718		—		368		—

Total		100,336		113,233		—		103,560		1,677

With a related allowance recorded:
Commercial and industrial		1,528		1,852		643		1,531		—
SBA		64		72		64		67		—
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		—		—		—		—		—
Non-speculative		—		—		—		—		—
SFR mortgage		476		486		44		478		—
Dairy & livestock and agribusiness		3,340		3,340		1,366		3,408		25
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		104		165		96		105		—

Total		5,512		5,915		2,213		5,589		25

Total impaired loans	$	105,848	$	119,148	$	2,213	$	109,149	$	1,702


	As of December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	2,391	$	3,624	$	—
SBA		1,853		2,197		—
Real estate:
Commercial real estate
Owner occupied		16,961		18,166		—
Non-owner occupied		30,068		38,156		—
Construction
Speculative		7,651		7,651		—
Non-speculative		—		—		—
SFR mortgage		6,512		7,493		—
Dairy & livestock and agribusiness		15,796		17,587		—
Municipal lease finance receivables		—		—		—
Consumer and other loans		673		1,094		—

Total		81,905		95,968		—

With a related allowance recorded:
Commercial and industrial		629		698		615
SBA		1,327		1,591		296
Real estate:
Commercial real estate
Owner occupied		—		—		—
Non-owner occupied		982		1,278		154
Construction
Speculative		—		—		—
Non-speculative		—		—		—
SFR mortgage		467		484		35
Dairy & livestock and agribusiness		—		—		—
Municipal lease finance receivables		—		—		—
Consumer and other loans		482		508		449

Total		3,887		4,559		1,549

Total impaired loans	$	85,792	$	100,527	$	1,549

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2015 and December 31, 2014 have already been written down to the 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.

Reserve for Unfunded Loan Commitments

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 loan commitments for the three months ended June 30, 2015 and 2014. A $500,000 recapture of provision for unfunded loan commitments was recorded for the six months ended June 30, 2015, compared to no provision for unfunded commitments for the same period of 2014. At June 30, 2015 and December 31, 2014, the balance of the reserve was $7.2 million and $7.7 million, respectively, and was included in other liabilities.

Troubled Debt Restructurings (“TDRs”)

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, included in our Annual Report on Form 10-K for the year ended December 31, 2014 for a more detailed discussion regarding TDRs.

As of June 30, 2015, there were $60.3 million of loans classified as TDRs, of which $15.2 million were nonperforming and $45.1 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2015, performing TDRs were comprised of 10 commercial real estate loans of $25.0 million, one construction loan of $7.7 million, five dairy & livestock and agribusiness loans of $7.1 million, 11 SFR mortgage loans of $3.6 million, four commercial and industrial loans of $659,000, one SBA loan of $691,000 and one consumer loan of $417,000. There were no loans removed from TDR classification during the three and six months ended June 30, 2015 and 2014.

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 $432,000 and $726,000 of specific allowance to TDRs as of June 30, 2015 and December 31, 2014, respectively.

The following tables provide a summary of the activity related to TDRs for the periods presented.


	For the Three Months June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)						(Dollars in thousands)
Performing TDRs:
Beginning balance	$	45,376		$	66,394		$	53,589		$	66,955
New modifications (1)		30			—			30			41
Payoffs and payments, net		(240	)		(4,516	)		(8,969	)		(5,118	)
TDRs returned to accrual status		—			—			516			—
TDRs placed on nonaccrual status		—			—			—			—

Ending balance	$	45,166		$	61,878		$	45,166		$	61,878


	For the Three Months June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(Dollars in thousands)						(Dollars in thousands)
Nonperforming TDRs:
Beginning balance	$	16,774		$	23,968		$	20,285		$	25,119
New modifications (1)		330			4,187			330			4,187
Charge-offs		—			—			—			—
Transfer to OREO		(842	)		—			(842	)		—
Payoffs and payments, net		(1,095	)		(758	)		(4,090	)		(1,909	)
TDRs returned to accrual status		—			—			(516	)		—
TDRs placed on nonaccrual status		—			—			—			—

Ending balance	$	15,167		$	27,397		$	15,167		$	27,397

(1)

New modifications for the three and six months ended June 30, 2014 represent TDRs acquired from ASB.

The following tables summarize loans modified as troubled debt restructurings for the periods presented.

Modifications (1)


	For the Three Months Ended June 30, 2015
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2015		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		1		30		30		30		—
Other		—		—		—		—		—
SBA
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		330		330		330		12
Other		—		—		—		—		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Non-owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Consumer
Interest rate reduction		—		—		—		—		—

Total loans		2	$	360	$	360	$	360	$	12


	For the Three Months Ended June 30, 2014
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2014		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		—		—		—		—		—
SBA:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity (3)		1		47		47		45		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction (3)		2		389		389		376		—
Change in amortization period or maturity		—		—		—		—		—
Non-owner occupied
Interest rate reduction (3)		4		3,751		3,751		3,710		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Consumer
Interest rate reduction		—		—		—		—		—

Total loans		7	$	4,187	$	4,187	$	4,131	$	—


	For the Six Months Ended June 30, 2015
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2015		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		1		30		30		30		—
Other		—		—		—		—		—
SBA
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		330		330		330		12
Other		—		—		—		—		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Non-owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Consumer
Interest rate reduction		—		—		—		—		—

Total loans		2	$	360	$	360	$	360	$	12


	For the Six Months Ended June 30, 2014
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2014		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity (3)		1		41		41		39		—
Other		—		—		—		—		—
SBA
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity (3)		1		47		47		45		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction (3)		2		389		389		376		—
Change in amortization period or maturity		—		—		—		—		—
Non-owner occupied
Interest rate reduction (3)		4		3,751		3,751		3,710		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Consumer
Interest rate reduction		—		—		—		—		—

Total loans		8	$	4,228	$	4,228	$	4,170	$	—

(1)

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

(2)

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

(3)

New modifications for the three and six months ended June 30, 2014 represent TDRs acquired from ASB.

As of June 30, 2015, there were no loans that were previously modified as a TDRs within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2015.

7.	EARNINGS PER SHARE RECONCILIATION

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. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and six months ended June 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were, 254,000 and 228,000, respectively. For the three and six months ended June 30, 2014, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 222,000 and 186,000 shares, respectively.

The table below summarizes earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
	(In thousands, except per share amounts)
Earnings per common share:
Net earnings	$	26,813	$	25,484	$	42,646	$	54,145
Less: Net earnings allocated to restricted stock		143		145		223		274

Net earnings allocated to common shareholders	$	26,670	$	25,339	$	42,423	$	53,871

Weighted average shares outstanding		105,707		105,251		105,616		105,222
Basic earnings per common share	$	0.25	$	0.24	$	0.40	$	0.51


Diluted earnings per common share:
Net income allocated to common shareholders	$	26,670	$	25,339	$	42,423	$	53,871

Weighted average shares outstanding		105,707		105,251		105,616		105,222
Incremental shares from assumed exercise of outstanding options		451		504		445		552

Diluted weighted average shares outstanding		106,158		105,755		106,061		105,774
Diluted earnings per common share	$	0.25	$	0.24	$	0.40	$	0.51

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 June 30, 2015. 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 measurements during the six months ended June 30, 2015 and 2014.

Determination of Fair Value

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

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

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

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

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

Investment Securities Available-for-Sale — Investment securities available-for-sale are generally valued based upon quotes obtained from an independent third-party pricing service, which 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.

Loans Held-for-Sale — Loans held-for-sale are carried at the lower of cost or fair value. The fair value is derived from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral.

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

The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ specific credit risks since the origination or purchase of such loans. Rather, the allocable portion of the allowance for loan losses and the purchase price discounts are 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.

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. 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.

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.


	Carrying Value at June 30, 2015		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/GSEs	$	351,283	$	—	$	351,283	$	—
Residential mortgage-backed securities		1,856,490		—		1,856,490		—
CMO’s/REMIC’s - residential		409,747		—		409,747		—
Municipal bonds		531,615		—		531,615		—
Other securities		5,082		—		5,082		—

Total investment securities - AFS		3,154,217		—		3,154,217		—
Interest rate swaps		8,861		—		8,861		—

Total assets	$	3,163,078	$	—	$	3,163,078	$	—

Description of liability
Interest rate swaps	$	8,861	$	—	$	8,861	$	—

Total liabilities	$	8,861	$	—	$	8,861	$	—


	Carrying Value at December 31, 2014		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/GSEs	$	330,843	$	—	$	330,843	$	—
Residential mortgage-backed securities		1,917,496		—		1,917,496		—
CMO’s/REMIC’s - residential		304,091		—		304,091		—
Municipal bonds		579,641		—		579,641		—
Other securities		5,087		—		5,087		—

Total investment securities - AFS		3,137,158		—		3,137,158		—
Interest rate swaps		10,080		—		10,080		—

Total assets	$	3,147,238	$	—	$	3,147,238	$	—

Description of liability
Interest rate swaps	$	10,080	$	—	$	10,080	$	—

Total liabilities	$	10,080	$	—	$	10,080	$	—

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 fair value 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 June 30, 2015 and December 31, 2014, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets for investments that experienced losses during the period.


	Carrying Value at June 30, 2015		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 Six Months Ended June 30, 2015
	(Dollars in thousands)

Description of assets
Impaired loans, excluding PCI Loans:
Commercial and industrial	$	37	$	—	$	—	$	37	$	22
SBA		59		—		—		59		12
Real estate:
Commercial real estate		—		—		—		—		—
Construction		7,651		—		—		7,651		24
SFR mortgage		1,389		—		—		1,389		292
Dairy & livestock and agribusiness		—		—		—		—		—
Consumer and other loans		206		—		—		206		77
Other real estate owned		948		—		—		948		162

Total assets	$	10,290	$	—	$	—	$	10,290	$	589


	Carrying Value at December 31, 2014		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, 2014
	(Dollars in thousands)

Description of assets
Impaired loans, excluding PCI Loans:
Commercial and industrial	$	1,911	$	—	$	—	$	1,911	$	771
SBA		1,327		—		—		1,327		296
Real estate:
Commercial real estate		2,500		—		—		2,500		271
Construction		—		—		—		—		—
SFR mortgage		—		—		—		—		—
Dairy & livestock and agribusiness		103		—		—		103		1,061
Consumer and other loans		482		—		—		482		447
Other real estate owned		—		—		—		—		—

Total assets	$	6,323	$	—	$	—	$	6,323	$	2,846

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 may realize in a current market exchange as of June 30, 2015 and December 31, 2014, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.


	June 30, 2015
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	446,446	$	446,446	$	—	$	—	$	446,446
Interest-earning balances due from depository institutions		24,378		—		24,378		—		24,378
FHLB stock		17,588		—		17,588		—		17,588
Investment securities available-for-sale		3,154,217		—		3,154,217		—		3,154,217
Investment securities held-to-maturity		1,400		—		—		2,066		2,066
Loans held-for-sale		—		—		—		—		—
Total loans, net of allowance for loan losses		3,724,665		—		—		3,747,468		3,747,468
Swaps		8,861		—		8,861		—		8,861
Liabilities
Deposits:
Noninterest-bearing	$	3,250,574	$	3,250,574	$	—	$	—	$	3,250,574
Interest-bearing		2,743,306		—		2,743,129		—		2,743,129
Borrowings		662,326		—		662,254		—		662,254
Junior subordinated debentures		25,774		—		26,024		—		26,024
Swaps		8,861		—		8,861		—		8,861


	December 31, 2014
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	105,768	$	105,768	$	—	$	—	$	105,768
Interest-earning balances due from depository institutions		27,118		—		27,118		—		27,118
FHLB stock		25,338		—		25,338		—		25,338
Investment securities available-for-sale		3,137,158		—		3,137,158		—		3,137,158
Investment securities held-to-maturity		1,528		—		—		2,177		2,177
Loans held-for-sale		—		—		—		—		—
Total loans, net of allowance for loan losses		3,757,242		—		—		3,794,454		3,794,454
Swaps		10,080		—		10,080		—		10,080
Liabilities
Deposits:
Noninterest-bearing	$	2,866,365	$	2,866,365	$	—	$	—	$	2,866,365
Interest-bearing		2,738,293		—		2,739,221		—		2,739,221
Borrowings		809,106		—		822,607		—		822,607
Junior subordinated debentures		25,774		—		26,005		—		26,005
Swaps		10,080		—		10,080		—		10,080

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2015 and December 31, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

9.	BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and the Treasury Department. The Company’s subsidiary bank has 40 Business Financial Centers and seven Commercial Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and to assess performance. Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity and interest rate risk. Information related to the Company’s remaining operating segments, which include construction lending, dairy & livestock and agribusiness lending, leasing, CitizensTrust, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following table represents the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 — Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the Centers category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the condensed consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

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


	For the Three Months Ended June 30, 2015
	Centers		Treasury		Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	35,813	$	19,210	$	9,492		$	—		$	64,515
Credit for funds provided (1)		8,530		—		13,024			(21,554	)		—

Total interest income		44,343		19,210		22,516			(21,554	)		64,515

Interest expense		1,628		31		98			—			1,757
Charge for funds used (1)		1,052		15,441		5,061			(21,554	)		—

Total interest expense		2,680		15,472		5,159			(21,554	)		1,757

Net interest income		41,663		3,738		17,357			—			62,758
Recapture of provision for loan losses		—		—		(2,000	)		—			(2,000	)

Net interest income after recapture of provision for loan losses		41,663		3,738		19,357			—			64,758

Noninterest income		5,319		—		3,026			—			8,345
Noninterest expense		12,259		211		19,063			—			31,533
Debt termination expense		—		—		—			—			—

Segment pre-tax profit	$	34,723	$	3,527	$	3,320		$	—		$	41,570

Segment assets as of June 30, 2015	$	6,436,216	$	3,624,321	$	875,585		$	(3,238,764	)	$	7,697,358

(1)

Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.


	For the Three Months Ended June 30, 2014
	Centers		Treasury		Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	34,683	$	17,675	$	8,858		$	—		$	61,216
Credit for funds provided (1)		7,660		—		11,414			(19,074	)		—

Total interest income		42,343		17,675		20,272			(19,074	)		61,216

Interest expense		1,561		2,390		106			—			4,057
Charge for funds used (1)		953		13,436		4,685			(19,074	)		—

Total interest expense		2,514		15,826		4,791			(19,074	)		4,057

Net interest income		39,829		1,849		15,481			—			57,159
Recapture of provision for loan losses		—		—		(7,600	)		—			(7,600	)

Net interest income after recapture of provision for loan losses		39,829		1,849		23,081			—			64,759

Noninterest income		5,162		—		1,888			—			7,050
Noninterest expense		11,420		182		19,722			—			31,324
Debt termination expense		—		—		—			—			—

Segment pre-tax profit	$	33,571	$	1,667	$	5,247		$	—		$	40,485

Segment assets as of June 30, 2014	$	5,928,456	$	3,511,341	$	782,783		$	(2,798,587	)	$	7,423,993

(1)

Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.


	For the Six Months Ended June 30, 2015
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	71,181	$	37,865		$	19,649		$	—		$	128,695
Credit for funds provided (1)		16,741		—			25,665			(42,406	)		—

Total interest income		87,922		37,865			45,314			(42,406	)		128,695

Interest expense		3,291		1,462			175			—			4,928
Charge for funds used (1)		2,119		30,247			10,040			(42,406	)		—

Total interest expense		5,410		31,709			10,215			(42,406	)		4,928

Net interest income		82,512		6,156			35,099			—			123,767
Recapture of provision for loan losses		—		—			(2,000	)		—			(2,000	)

Net interest income after recapture of provision for loan losses		82,512		6,156			37,099			—			125,767

Noninterest income		10,386		—			5,970			—			16,356
Noninterest expense		24,108		424			37,603			—			62,135
Debt termination expense		—		13,870			—			—			13,870

Segment pre-tax profit (loss)	$	68,790	$	(8,138	)	$	5,466		$	—		$	66,118

Segment assets as of June 30, 2015	$	6,436,216	$	3,624,321		$	875,585		$	(3,238,764	)	$	7,697,358

(1)

Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.


	For the Six Months Ended June 30, 2014
	Centers		Treasury		Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	67,774	$	34,107	$	20,397		$	—		$	122,278
Credit for funds provided (1)		14,734		—		22,877			(37,611	)		—

Total interest income		82,508		34,107		43,274			(37,611	)		122,278

Interest expense		3,198		4,763		216			—			8,177
Charge for funds used (1)		1,917		26,233		9,461			(37,611	)		—

Total interest expense		5,115		30,996		9,677			(37,611	)		8,177

Net interest income		77,393		3,111		33,597			—			114,101
Recapture of provision for loan losses		—		—		(15,100	)		—			(15,100	)

Net interest income after recapture of provision for loan losses		77,393		3,111		48,697			—			129,201

Noninterest income		9,944		—		8,604			—			18,548
Noninterest expense		23,248		378		38,855			—			62,481
Debt termination expense		—		—		—			—			—

Segment pre-tax profit	$	64,089	$	2,733	$	18,446		$	—		$	85,268

Segment assets as of June 30, 2014	$	5,928,456	$	3,511,341	$	782,783		$	(2,798,587	)	$	7,423,993

(1)

Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.

10.

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of June 30, 2015, the Bank has entered into 75 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

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

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

Balance Sheet Classification of Derivative Financial Instruments

As of June 30, 2015 and December 31, 2014, the total notional amount of the Company’s swaps was $184.7 million, and $197.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below.

June 30, 2015

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

8,861

Other liabilities

8,861

Total derivatives

8,861

December 31, 2014

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

10,080

Other liabilities

10,080

Total derivatives

10,080

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

The following table summarizes the effect of derivative financial instruments on the consolidated statement of earnings for the periods presented.


Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative Instruments	Amount of Gain Recognized in Income on Derivative Instruments
		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2015		2014		2015		2014
		(Dollars in thousands)
Interest rate swaps	Other income	$	199	$	—	$	199	$	—

Total		$	199	$	—	$	199	$	—

11.

OTHER COMPREHENSIVE INCOME (LOSS)

The tables below provide a summary of the components of other comprehensive income (loss) (“OCI”) for the periods presented.


	For the Three Months Ended June 30,
	2015									2014
	Before-tax			Tax effect			After-tax			Before-tax		Tax effect		After-tax
	(Dollars in thousands)
Investment securities available-for-sale:
Net change in fair value recorded in accumulated OCI	$	(32,968	)	$	(13,846	)	$	(19,122	)	$	32,782	$	13,769	$	19,013

Net change	$	(32,968	)	$	(13,846	)	$	(19,122	)	$	32,782	$	13,769	$	19,013


	For the Six Months Ended June 30,
	2015									2014
	Before-tax			Tax effect			After-tax			Before-tax		Tax effect		After-tax
	(Dollars in thousands)
Investment securities available-for-sale:
Net change in fair value recorded in accumulated OCI	$	(12,698	)	$	(5,332	)	$	(7,366	)	$	57,563	$	24,176	$	33,387

Net change	$	(12,698	)	$	(5,332	)	$	(7,366	)	$	57,563	$	24,176	$	33,387

The following table provides a summary of the change in accumulated other comprehensive income for the periods presented.


	Investment Securities Available-for-Sale
	(Dollars in thousands)
Balance, January 1, 2015	$	31,075
Net change in fair value recorded in accumulated OCI		(7,366	)
Net realized gains reclassified into earnings		—

Balance, June 30, 2015	$	23,709


	Investment Securities Available-for-Sale
	(Dollars in thousands)
Balance, January 1, 2014	$	(9,330	)
Net change in fair value recorded in accumulated OCI		33,387
Net realized gains reclassified into earnings		—

Balance, June 30, 2014	$	24,057

12.

BALANCE SHEET OFFSETTING

Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to the counterparty bank continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the condensed consolidated balances.

Gross Amounts
Recognized in the
Condensed
Consolidated
Balance Sheets

Gross Amounts
offset in the
Condensed
Consolidated
Balance Sheets

Net Amounts of
Assets Presented
in the Condensed
Consolidated
Balance Sheets

Gross Amounts Not Offset in
the Condensed Consolidated
Balance Sheets

Net Amount

Financial
Instruments

Collateral
Pledged

(Dollars in thousands)

June 30, 2015

Financial assets:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company