Edgar Filing: CVB FINANCIAL CORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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):


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Number of shares of common stock of the registrant:106,364,548 outstanding as of October 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	40

	CRITICAL ACCOUNTING POLICIES	40

	OVERVIEW	40

	ANALYSIS OF THE RESULTS OF OPERATIONS	42

	RESULTS BY BUSINESS SEGMENTS	53

	ANALYSIS OF FINANCIAL CONDITION	55

	ASSET/LIABILITY AND MARKET RISK MANAGEMENT	73

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	75

ITEM 4.	CONTROLS AND PROCEDURES	75

PART II - OTHER INFORMATION		75

ITEM 1.	LEGAL PROCEEDINGS	75

ITEM 1A.	RISK FACTORS	76

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	77

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	77

ITEM 4.	MINE SAFETY DISCLOSURES	77

ITEM 5.	OTHER INFORMATION	77

ITEM 6.	EXHIBITS	77

SIGNATURES		78

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Forward Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities; our ability to attract deposits and other sources of funding or liquidity; supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate; a prolonged slowdown or decline in real estate construction or sales activity; changes in the financial performance and/or condition of our borrowers or key vendors or counterparties; changes in the levels of nonperforming assets, allowance for loan losses and charge-offs; the costs or effects of acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits associated with any such acquisitions or dispositions; the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, banking capital levels, securities and securities trading and hedging, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk; inflation, interest rate, securities market and monetary fluctuations; changes in government interest rates or monetary policies; changes in the amount and availability of deposit insurance; cyber-security threats, including loss of system functionality or theft or loss of Company or customer data or money; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, drought, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services and the perceived overall 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 certain of the Company’s key internal and external systems and applications; changes in consumer spending, borrowing and savings preferences or habits; technological changes and the expanding use of technology in banking (including the adoption of mobile banking applications); the ability to retain and increase market share, retain and grow customers and control expenses; changes in the competitive environment among financial and bank holding companies, banks and other financial service providers; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; continued volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions; fluctuations in the price of the Company’s common stock or other securities; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and/or our board of directors; the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as consumer or employee class action litigation), regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; our ongoing relations with our various federal and state regulators, including the SEC, FDIC and California DBO; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2014, and particularly the discussion of risk factors within that document. 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. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)


	September 30, 2015			December 31, 2014
Assets
Cash and due from banks	$	100,334		$	95,030
Interest-earning balances due from Federal Reserve		207,893			10,738

Total cash and cash equivalents		308,227			105,768

Interest-earning balances due from depository institutions		33,189			27,118
Investment securities available-for-sale, at fair value (with amortized cost of $2,259,505 at September 30, 2015, and $3,083,582 at December 31, 2014)		2,312,721			3,137,158
Investment securities held-to-maturity (with fair value of $876,383 at September 30, 2015, and $2,177 at December 31, 2014)		869,650			1,528
Investment in stock of Federal Home Loan Bank (FHLB)		17,588			25,338
Loans and lease finance receivables		3,822,171			3,817,067
Allowance for loan losses		(59,149	)		(59,825	)

Net loans and lease finance receivables		3,763,022			3,757,242

Premises and equipment, net		31,797			33,591
Bank owned life insurance		130,076			126,927
Accrued interest receivable		22,769			23,194
Intangibles		2,487			3,214
Goodwill		74,244			74,244
Other real estate owned		7,003			5,637
Income taxes		30,402			31,461
Other assets		23,287			25,500

Total assets	$	7,626,462		$	7,377,920

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	3,304,967		$	2,866,365
Interest-bearing		2,654,505			2,738,293

Total deposits		5,959,472			5,604,658
Customer repurchase agreements		610,174			563,627
FHLB advances		-			199,479
Other borrowings		-			46,000
Accrued interest payable		273			1,161
Deferred compensation		11,100			10,291
Junior subordinated debentures		25,774			25,774
Payable for securities purchased		42,317			-
Other liabilities		56,625			48,821

Total liabilities		6,705,735			6,499,811

Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,355,098 at September 30, 2015, and 105,893,216 at December 31, 2014		502,102			495,220
Retained earnings		384,072			351,814
Accumulated other comprehensive income, net of tax		34,553			31,075

Total stockholders’ equity		920,727			878,109

Total liabilities and stockholders’ equity	$	7,626,462		$	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						For the Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Interest income:
Loans and leases, including fees	$	48,822		$	46,923		$	139,686		$	135,137
Investment securities:
Investment securities available-for-sale		14,734			17,647			50,171			49,991
Investment securities held-to-maturity		3,436			40			3,510			125

Total investment income		18,170			17,687			53,681			50,116

Dividends from FHLB stock		509			518			2,392			1,648
Federal funds sold		167			112			496			363
Interest-earning deposits with other institutions		63			55			171			309

Total interest income		67,731			65,295			196,426			187,573

Interest expense:
Deposits		1,333			1,228			3,933			3,636
Borrowings		371			2,724			2,486			8,283
Junior subordinated debentures		110			105			323			315

Total interest expense		1,814			4,057			6,742			12,234

Net interest income before recapture of provision for loan losses		65,917			61,238			189,684			175,339
Recapture of provision for loan losses		(2,500	)		(1,000	)		(4,500	)		(16,100	)

Net interest income after recapture of provision for loan losses		68,417			62,238			194,184			191,439

Noninterest income:
Service charges on deposit accounts		3,930			4,065			11,843			11,798
Trust and investment services		2,275			2,045			6,607			6,103
Bankcard services		805			868			2,380			2,569
BOLI income		491			613			1,948			1,852
Gain on sale of loans held-for-sale		-			-			-			5,330
Decrease in FDIC loss sharing asset, net		-			(479	)		(803	)		(3,653	)
Gain on OREO, net		158			127			414			262
Other		754			770			2,380			2,296

Total noninterest income		8,413			8,009			24,769			26,557

Noninterest expense:
Salaries and employee benefits		20,395			19,366			59,338			57,170
Occupancy and equipment		3,853			4,147			11,218			11,548
Professional services		1,937			2,080			4,617			5,090
Software licenses and maintenance		901			1,324			2,924			3,399
Promotion		1,297			1,349			3,825			3,956
Recapture of provision for unfunded loan commitments		-			(1,250	)		(500	)		(1,250	)
Amortization of intangible assets		220			466			727			781
Debt termination expense		-			-			13,870			-
OREO expense		28			102			363			240
Acquisition related expenses		75			640			75			1,932
Other		4,036			4,257			12,290			12,096

Total noninterest expense		32,742			32,481			108,747			94,962

Earnings before income taxes		44,088			37,766			110,206			123,034

Income taxes		16,202			13,471			39,674			44,594

Net earnings	$	27,886		$	24,295		$	70,532		$	78,440

Other comprehensive income:
Unrealized gain/(loss) on securities arising during the period	$	18,674		$	(10,291	)	$	5,974		$	47,272
Less: Reclassification adjustment for net loss on securities included in net income		22			-			22			-

Other comprehensive income (loss), before tax		18,696			(10,291	)		5,996			47,272
Less: Income tax benefit (expense) related to items of other comprehensive income (loss)		(7,852	)		4,322			(2,518	)		(19,854	)

Other comprehensive income (loss), net of tax		10,844			(5,969	)		3,478			27,418

Comprehensive income	$	38,730		$	18,326		$	74,010		$	105,858

Basic earnings per common share	$	0.26		$	0.23		$	0.66		$	0.74
Diluted earnings per common share	$	0.26		$	0.23		$	0.66		$	0.74
Cash dividends declared per common share	$	0.12		$	0.10		$	0.36		$	0.30

See accompanying notes to the unaudited condensed consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2015 and 2014

(Dollars and shares in thousands)

(Unaudited)


	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance January 1, 2014		105,370		$	491,068		$	290,149		$	(9,330	)	$	771,887
Repurchase of common stock		(377	)		(5,383	)		-			-			(5,383	)
Exercise of stock options		498			5,378			-			-			5,378
Tax benefit from exercise of stock options		-			983			-			-			983
Shares issued pursuant to stock-based compensation plan		306			2,277			-			-			2,277
Cash dividends declared on common stock ($0.30 per share)		-			-			(31,769	)		-			(31,769	)
Net earnings		-			-			78,440			-			78,440
Other comprehensive income		-			-			-			27,418			27,418

Balance September 30, 2014		105,797		$	494,323		$	336,820		$	18,088		$	849,231


Balance January 1, 2015		105,893		$	495,220		$	351,814		$	31,075		$	878,109
Repurchase of common stock		(41	)		(606	)		-			-			(606	)
Exercise of stock options		411			4,672			-			-			4,672
Tax benefit from exercise of stock options		-			772			-			-			772
Shares issued pursuant to stock-based compensation plan		92			2,044			-			-			2,044
Cash dividends declared on common stock ($0.36 per share)		-			-			(38,274	)		-			(38,274	)
Net earnings		-			-			70,532			-			70,532
Other comprehensive income		-			-			-			3,478			3,478

Balance September 30, 2015		106,355		$	502,102		$	384,072		$	34,553		$	920,727

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 Nine Months Ended
	September 30,
	2015			2014
Cash Flows from Operating Activities
Interest and dividends received	$	208,549		$	193,605
Service charges and other fees received		21,604			22,653
Interest paid		(7,631	)		(12,120	)
Net cash paid to vendors, employees and others		(98,692	)		(92,766	)
Income taxes paid		(38,000	)		(44,000	)
Payments to FDIC, loss share agreement		(460	)		(1,186	)

Net cash provided by operating activities		85,370			66,186

Cash Flows from Investing Activities
Proceeds from redemption of FHLB stock		7,750			10,413
Net change in interest-earning balances from depository institutions		(6,071	)		62,491
Proceeds from sale of investment securities available-for-sale		975			14,271
Proceeds from repayment of investment securities available-for-sale		300,959			238,495
Proceeds from maturity of investment securities available-for-sale		83,322			63,216
Purchases of investment securities available-for-sale		(431,650	)		(738,882	)
Proceeds from repayment of investment securities held-to-maturity		13,177			-
Proceeds from maturity of investment securities held-to-maturity		20,550			-
Net decrease in loan and lease finance receivables		2,647			101,432
Proceeds from sales of premises and equipment		-			663
Purchase of premises and equipment		(1,249	)		(1,668	)
Proceeds from sales of other real estate owned		2,579			2,588
Cash acquired on purchase of American Security Bank, net of cash paid		-			50,038

Net cash used in investing activities		(7,011	)		(196,943	)

Cash Flows from Financing Activities
Net increase in other deposits		416,830			492,720
Net decrease in time deposits		(62,016	)		(2,433	)
Repayment of FHLB advances		(200,000	)		-
Net decrease in other borrowings		(46,000	)		(69,000	)
Net increase (decrease) in customer repurchase agreements		46,547			(114,427	)
Cash dividends on common stock		(36,099	)		(31,718	)
Repurchase of common stock		(606	)		(5,383	)
Proceeds from exercise of stock options		4,672			5,378
Tax benefit related to exercise of stock options		772			983

Net cash provided by financing activities		124,100			276,120

Net increase in cash and cash equivalents		202,459			145,363

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

Cash and cash equivalents, end of period	$	308,227		$	240,056

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 Nine Months Ended
	September 30,
	2015			2014
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings	$	70,532		$	78,440

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 investment securities		22			-
Loss on sale of premises and equipment, net		154			68
Gain on sale of other real estate owned		(386	)		(222	)
Amortization of capitalized prepayment penalty on borrowings		521			204
Increase in bank owned life insurance		(3,149	)		(1,757	)
Net amortization of premiums and discounts on investment securities		14,605			15,515
Accretion of SJB discount		(3,010	)		(4,546	)
Recapture of provision for loan losses		(4,500	)		(16,100	)
Recapture of provision for unfunded loan commitments		(500	)		(1,250	)
Valuation adjustment on other real estate owned		162			65
Change in FDIC loss share asset		299			3,653
Payments to FDIC, loss share agreement		(460	)		(1,186	)
Stock-based compensation		2,044			2,277
Depreciation and amortization, net		(701	)		488
Change in accrued interest receivable		425			(684	)
Change in accrued interest payable		(888	)		(36	)
Change in other assets and liabilities		10,200			(3,413	)

Total adjustments		14,838			(12,254	)

Net cash provided by operating activities	$	85,370		$	66,186

Supplemental Disclosure of Non-cash Investing Activities
Securities purchased and not settled	$	42,317		$	643
Transfer of loans to other real estate owned	$	3,721		$	640
Transfer of AFS securities to HTM securities	$	898,598		$	-

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 subsidiary: 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 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 intends to open a new Commercial Banking Center in Santa Barbara in the fourth quarter of 2015. The Company is headquartered in the city of Ontario, California.

On October 14, 2015, we announced that we have entered into a merger agreement with County Commerce Bank, pursuant to which County Commerce Bank will merge into Citizens Business Bank when the transaction closes. County Commerce Bank is headquartered in Ventura County with four branch locations in Ventura and Santa Barbara Counties and total assets of approximately $250 million. This acquisition would extend our geographic footprint northward into the central coast of California. We expect to close this announced acquisition in the first quarter of 2016, subject to regulatory and County Commerce Bank shareholders’ approvals.

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 nine months ended September 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’ unaudited 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 other real estate owned (“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 No. 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.

In September 2015, the FASB issued ASU 2015-16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statement for measurement-period adjustments that occur in periods after a business combination is consummated. ASU 2015-16 will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. 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.


	September 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	$	20,753	$	16	$	(1	)	$	20,768		0.90	%
Residential mortgage-backed securities		1,670,643		40,902		-			1,711,545		74.00	%
CMOs/REMICs - residential		380,260		8,237		-			388,497		16.80	%
Municipal bonds		182,849		4,049		-			186,898		8.08	%
Other securities		5,000		13		-			5,013		0.22	%

Total available-for-sale securities	$	2,259,505	$	53,217	$	(1	)	$	2,312,721		100.00	%

Investment securities held-to-maturity (1):
Government agency/GSEs	$	297,204	$	3,321	$	-		$	300,525		34.18	%
Residential mortgage-backed securities		238,993		1,384		-			240,377		27.48	%
CMO		1,348		589		-			1,937		0.15	%
Municipal bonds		332,105		1,635		(196	)		333,544		38.19	%

Total held-to-maturity securities	$	869,650	$	6,929	$	(196	)	$	876,383		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 available-for-sale securities	$	3,083,582	$	65,754	$	(12,178	)	$	3,137,158		100.00%

Investment securities held-to-maturity (1):
CMO	$	1,528	$	649	$	-		$	2,177		100.00%

Total held-to-maturity securities	$	1,528	$	649	$	-		$	2,177		100.00%

(1) Securities held-to-maturity are presented in the condensed consolidated balance sheets at amortized cost.

During the quarter ended September 30, 2015, investment securities were transferred from the available-for-sale security portfolio to the held-to-maturity security portfolio. Transfers of securities into the held-to-maturity category from the available-for-sale category are transferred at fair value at the date of transfer. The fair value of these securities at the date of transfer was $898.6 million. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income (“AOCI”) and in the carrying value of the held-to-maturity securities. The net unrealized holding gain at the date of transfer was $3.9 million after-tax and will continue to be reported in AOCI and amortized over the remaining life of the securities as a yield adjustment.

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Investment securities available-for-sale:
Taxable	$	11,840	$	12,420	$	37,548	$	34,300
Tax-advantaged		2,894		5,227		12,623		15,691
Investment securities held-to-maturity:
Taxable		1,688		40		1,762		125
Tax-advantaged		1,748		-		1,748		-

Total interest income from investment securities	$	18,170	$	17,687	$	53,681	$	50,116

Approximately 84% of the total investment securities portfolio at September 30, 2015 represent 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 September 30, 2015 and December 31, 2014. The Bank had $1.5 million in CMOs 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 September 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.


	September 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)
Investment securities available-for-sale:
Government agency/GSEs	$	9,000	$	1	$	-	$	-	$	9,000	$	1
Residential mortgage-backed securities		-		-		-		-		-		-
CMOs/REMICs - residential		-		-		-		-		-		-
Municipal bonds		-		-		-		-		-		-
Other securities		-		-		-		-		-		-

Total available-for-sale securities	$	9,000	$	1	$	-	$	-	$	9,000	$	1

Investment securities held-to-maturity:
Government agency/GSEs	$	-	$	-	$	-	$	-	$	-	$	-
Residential mortgage-backed securities		-		-		-		-		-		-
CMO		-		-		-		-		-		-
Municipal bonds		81,956		196		-		-		81,956		196
Other securities		-		-		-		-		-		-

Total held-to-maturity securities	$	81,956	$	196	$	-	$	-	$	81,956	$	196


	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)
Investment securities 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 available-for-sale securities	$	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.

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 September 30, 2015, approximately $221.2 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(“MBS”) and CMOs/REMICs— Most of the Company’s 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 4.1 years. Of the total MBS/CMO, 99.93% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining 0.07% 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. There were no credit-related other-than-temporary impairment (“OTTI”) recognized in earnings for the three and nine months ended September 30, 2015 and 2014.

Municipal Bonds—The majority of the Company’s municipal bonds, with a weighted-average life of approximately 8.3 years, are insured by the largest U.S. 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 September 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 September 30, 2015 and December 31, 2014, investment securities having a carrying value of approximately $2.81 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 September 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.


	September 30, 2015
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	91,512	$	92,781	$	124,536	$	125,460
Due after one year through five years		1,894,584		1,939,712		139,716		141,134
Due after five years through ten years		118,633		121,282		554,537		558,832
Due after ten years		154,776		158,946		50,861		50,957

Total investment securities	$	2,259,505	$	2,312,721	$	869,650	$	876,383

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 for the nine months ended September 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 September 30, 2015, the remaining discount associated with the PCI loans approximated $4.8 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $2.8 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 3.2 years and 0.9 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.


	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Commercial and industrial	$	8,062		$	14,605
SBA		414			1,110
Real estate:
Commercial real estate		87,522			109,350
Construction		-			-
SFR mortgage		198			205
Dairy & livestock and agribusiness		523			4,890
Municipal lease finance receivables		-			-
Consumer and other loans		2,466			3,336

Gross PCI loans		99,185			133,496
Less: Purchase accounting discount		(4,754	)		(7,129	)

Gross PCI loans, net of discount		94,431			126,367
Less: Allowance for PCI loans losses		-			-

Net PCI loans	$	94,431		$	126,367

Credit Quality Indicators

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


	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Pass	$	22,108	$	26,706
Watch list		57,308		77,371
Special mention		13,379		8,203
Substandard		6,390		21,216
Doubtful & loss		-		-

Total PCI gross loans	$	99,185	$	133,496

Allowance for Loan Losses (“ALLL”)

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 September 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.


	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Commercial and industrial	$	413,709		$	390,011
SBA		116,126			134,265
Real estate:
Commercial real estate		2,569,128			2,487,803
Construction		57,578			55,173
SFR mortgage		221,696			205,124
Dairy & livestock and agribusiness		212,670			279,173
Municipal lease finance receivables		75,839			77,834
Consumer and other loans		69,630			69,884

Gross loans, excluding PCI loans		3,736,376			3,699,267
Less: Deferred loan fees, net		(8,636	)		(8,567	)

Gross loans, excluding PCI loans, net of deferred loan fees		3,727,740			3,690,700
Less: Allowance for loan losses		(59,149	)		(59,825	)

Net loans, excluding PCI loans		3,668,591			3,630,875

PCI Loans		99,185			133,496
Discount on PCI loans		(4,754	)		(7,129	)

PCI loans, net		94,431			126,367

Total loans and lease finance receivables	$	3,763,022		$	3,757,242

As of September 30, 2015, 68.76% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 1.54% 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 September 30, 2015, $171.0 million, or 6.66% 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 $132.8 million for loans secured by dairy & livestock land and $38.2 million for loans secured by agricultural land at September 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 September 30, 2015, dairy & livestock and agribusiness loans of $212.7 million was comprised of $197.9 million for dairy & livestock loans and $14.8 million for agribusiness loans, compared to $268.1 million for dairy & livestock loans and $11.1 million for agribusiness loans at December 31, 2014. At September 30, 2015, the Company held approximately $1.84 billion of total fixed rate loans.

At September 30, 2015 and December 31, 2014, loans totaling $2.89 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 each loan 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.


	September 30, 2015

	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	278,042	$	95,419	$	36,338	$	3,668	$	242	$	413,709
SBA		72,280		22,218		13,648		6,531		1,449		116,126
Real estate:
Commercial real estate
Owner occupied		613,734		145,354		50,171		13,560		-		822,819
Non-owner occupied		1,462,203		216,513		27,413		40,180		-		1,746,309
Construction
Speculative		28,962		6,302		-		7,651		-		42,915
Non-speculative		14,663		-		-		-		-		14,663
SFR mortgage		194,265		20,104		4,241		3,086		-		221,696
Dairy & livestock and agribusiness		88,147		112,419		12,104		-		-		212,670
Municipal lease finance receivables		46,084		24,787		4,968		-		-		75,839
Consumer and other loans		53,327		11,797		1,667		2,748		91		69,630

Total gross loans, excluding PCI loans	$	2,851,707	$	654,913	$	150,550	$	77,424	$	1,782	$	3,736,376


	December 31, 2014
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
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 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 September 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 September 30, 2015
	Ending Balance June 30, 2015		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance September 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,185	$	(82	)	$	50	$	(620	)	$	6,533
SBA		2,085		-			2		(122	)		1,965
Real estate:
Commercial real estate		35,414		(10	)		2,018		(2,811	)		34,611
Construction		746		-			8		119			873
SFR mortgage		2,564		-			-		75			2,639
Dairy & livestock and agribusiness		3,974		-			98		796			4,868
Municipal lease finance receivables		1,014		-			-		17			1,031
Consumer and other loans		834		-			11		(16	)		829
Unallocated		5,738		-			-		62			5,800

Total allowance for loan losses	$	59,554	$	(92	)	$	2,187	$	(2,500	)	$	59,149


	For the Three Months Ended September 30, 2014
	Ending Balance June 30, 2014		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance September 30, 2014
	(Dollars in thousands)
Commercial and industrial	$	6,037	$	(2	)	$	187	$	1,254		$	7,476
SBA		2,365		-			-		(1,157	)		1,208
Real estate:
Commercial real estate		35,918		-			2		(286	)		35,634
Construction		605		-			37		148			790
SFR mortgage		2,214		-			188		(97	)		2,305
Dairy & livestock and agribusiness		5,428		(1,061	)		151		(241	)		4,277
Municipal lease finance receivables		1,464		-			-		4			1,468
Consumer and other loans		930		(7	)		113		(169	)		867
Unallocated		6,013		-			-		(456	)		5,557

Total allowance for loan losses	$	60,974	$	(1,070	)	$	678	$	(1,000	)	$	59,582


	For the Nine Months Ended September 30, 2015
	Ending Balance December 31, 2014		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance September 30, 2015
	(Dollars in thousands)
Commercial and industrial	$	7,074	$	(216	)	$	282	$	(607	)	$	6,533
SBA		2,557		(33	)		39		(598	)		1,965
Real estate:
Commercial real estate		33,373		(117	)		3,658		(2,303	)		34,611
Construction		988		-			58		(173	)		873
SFR mortgage		2,344		(215	)		185		325			2,639
Dairy & livestock and agribusiness		5,479		-			308		(919	)		4,868
Municipal lease finance receivables		1,412		-			-		(381	)		1,031
Consumer and other loans		1,262		(197	)		72		(308	)		829
Unallocated		5,336		-			-		464			5,800

Total allowance for loan losses	$	59,825	$	(778	)	$	4,602	$	(4,500	)	$	59,149


	For the Nine Months Ended September 30, 2014
	Ending Balance December 31, 2013		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance September 30, 2014
	(Dollars in thousands)
Commercial and industrial	$	8,502	$	(556	)	$	685	$	(1,155	)	$	7,476
SBA		2,332		-			63		(1,187	)		1,208
Real estate:
Commercial real estate		39,402		(352	)		140		(3,556	)		35,634
Construction		1,305		-			834		(1,349	)		790
SFR mortgage		2,718		-			188		(601	)		2,305
Dairy & livestock and agribusiness		11,728		(1,061	)		393		(6,783	)		4,277
Municipal lease finance receivables		2,335		-			-		(867	)		1,468
Consumer and other loans		960		(26	)		139		(206	)		867
Unallocated		5,953		-			-		(396	)		5,557

Total allowance for loan losses	$	75,235	$	(1,995	)	$	2,442	$	(16,100	)	$	59,582

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.


	September 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	$	1,687	$	412,022	$	607	$	5,926
SBA		3,319		112,807		4		1,961
Real estate:
Commercial real estate		43,647		2,525,481		-		34,611
Construction		7,651		49,927		23		850
SFR mortgage		6,389		215,307		22		2,617
Dairy & livestock and agribusiness		5,262		207,408		-		4,868
Municipal lease finance receivables		-		75,839		-		1,031
Consumer and other loans		906		68,724		6		823
Unallocated		-		-		-		5,800

Total	$	68,861	$	3,667,515	$	662	$	58,487


	September 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	$	4,467	$	376,009	$	652	$	6,824
SBA		3,242		129,926		59		1,149
Real estate:
Commercial real estate		31,375		2,434,540		-		35,634
Construction		26,419		40,810		-		790
SFR mortgage		7,755		185,450		39		2,266
Dairy & livestock and agribusiness		18,939		173,991		-		4,277
Municipal lease finance receivables		-		80,013		-		1,468
Consumer and other loans		461		69,350		4		863
Unallocated		-		-		-		5,557

Total	$	92,658	$	3,490,089	$	754	$	58,828

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.

A loan is reported as a troubled debt restructuring (“TDR”) 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.

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.


	September 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	$	-	$	-	$	-	$	1,051	$	412,658	$	413,709
SBA		-		-		-		2,634		113,492		116,126
Real estate:
Commercial real estate
Owner occupied		-		-		-		4,279		818,540		822,819
Non-owner occupied		266		-		266		12,417		1,733,626		1,746,309
Construction				-
Speculative (2)		-		-		-		-		42,915		42,915
Non-speculative		-		-		-		-		14,663		14,663
SFR mortgage		-		-		-		2,778		218,918		221,696
Dairy & livestock and agribusiness		-		-		-		-		212,670		212,670
Municipal lease finance receivables		-		-		-		-		75,839		75,839
Consumer and other loans		52		-		52		489		69,089		69,630

Total gross loans, excluding PCI Loans	$	318	$	-	$	318	$	23,648	$	3,712,410	$	3,736,376

(1)

As of September 30, 2015, $19.1 million of nonaccruing loans were current, $371,000 were 30-59 days past due, $2.3 million were 60-89 days past due and $1.9 million were 90+ days past due.

(2)

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


	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 past due.

Impaired Loans

At September 30, 2015, the Company had impaired loans, excluding PCI loans, of $68.9 million. Of this amount, there were $16.7 million of nonaccrual commercial real estate loans, $2.8 million of nonaccrual SFR mortgage loans, $2.6 million of nonaccrual SBA loans, $1.1 million of nonaccrual commercial and industrial loans and $489,000 of nonaccrual consumer and other loans. These impaired loans included $60.4 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 $45.2 million consisted of 32 loans performing according to the restructured terms. The impaired loans had a specific allowance of $662,000 at September 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 Nine Months Ended September 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	$	1,067	$	1,926	$	-	$	1,166	$	23
SBA		3,273		3,911		-		3,385		39
Real estate:
Commercial real estate
Owner occupied		7,665		8,806		-		7,935		178
Non-owner occupied		35,982		40,591		-		36,490		1,338
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		5,788		6,739		-		6,392		82
Dairy & livestock and agribusiness		5,262		5,650		-		5,569		180
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		852		1,379		-		881		12

Total		59,889		69,002		-		61,818		1,852

With a related allowance recorded:
Commercial and industrial		620		694		607		637		-
SBA		46		47		4		58		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		7,651		7,651		23		7,651		290
Non-speculative		-		-		-		-		-
SFR mortgage		601		653		22		612		9
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		54		59		6		56		-

Total		8,972		9,104		662		9,014		299

Total impaired loans	$	68,861	$	78,106	$	662	$	70,832	$	2,151


	As of and For the Nine Months Ended September 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	$	2,913	$	3,954	$	-	$	2,912	$	44
SBA		3,183		3,907		-		2,937		-
Real estate:
Commercial real estate
Owner occupied		8,742		9,896		-		9,025		238
Non-owner occupied		22,633		29,545		-		23,252		541
Construction
Speculative		17,318		18,407		-		17,440		232
Non-speculative		9,101		9,101		-		9,145		463
SFR mortgage		7,285		9,685		-		7,934		82
Dairy & livestock and agribusiness		18,939		20,698		-		21,205		819
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		450		876		-		455		-

Total		90,564		106,069		-		94,305		2,419

With a related allowance recorded:
Commercial and industrial		1,554		1,882		652		1,560		-
SBA		59		69		59		66		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		470		484		39		476		-
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		11		15		4		12		-

Total		2,094		2,450		754		2,114		-

Total impaired loans	$	92,658	$	108,519	$	754	$	96,419	$	2,419


	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 September 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 September 30, 2015, compared to a $1.3 million recapture of provision for unfunded commitments for the same period in 2014. A $500,000 recapture of provision for unfunded loan commitments was recorded for the nine months ended September 30, 2015, compared to a $1.3 million recapture of provision for unfunded commitments for the same

period of 2014. At September 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 September 30, 2015, there were $60.4 million of loans classified as TDRs, of which $15.2 million were nonperforming and $45.2 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 September 30, 2015, performing TDRs were comprised of 11 commercial real estate loans of $27.0 million, one construction loan of $7.6 million, three dairy & livestock and agribusiness loans of $5.3 million, 11 SFR mortgage loans of $3.6 million, four commercial and industrial loans of $636,000, one SBA loan of $685,000 and one consumer loan of $417,000. There were no loans removed from TDR classification during the three and nine months ended September 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 $419,000 and $726,000 of specific allowance to TDRs as of September 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 September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	45,166		$	61,878		$	53,589		$	66,955
New modifications (1)		2,353			-			2,383			41
Payoffs and payments, net		(2,306	)		(6,270	)		(11,275	)		(11,388	)
TDRs returned to accrual status		-			-			516			-
TDRs placed on nonaccrual status		-			-			-			-

Ending balance	$	45,213		$	55,608		$	45,213		$	55,608

Nonperforming TDRs:
Beginning balance	$	15,167		$	27,397		$	20,285		$	25,119
New modifications (1)		330			-			661			4,187
Charge-offs		-			(1,061	)		-			(1,061	)
Transfer to OREO		-			-			(842	)		-
Payoffs and payments, net		(349	)		(3,730	)		(4,440	)		(5,639	)
TDRs returned to accrual status		-			-			(516	)		-
TDRs placed on nonaccrual status		-			-			-			-

Ending balance	$	15,148		$	22,606		$	15,148		$	22,606

Total TDRs	$	60,361		$	78,214		$	60,361		$	78,214

(1) New modifications for the three and nine months ended September 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 September 30, 2015
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2015		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Non-owner occupied
Interest rate reduction		1		2,376		2,376		2,353		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
SFR mortgage:
Interest rate reduction		1		322		322		330		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-

Total loans		2	$	2,698	$	2,698	$	2,683	$	-


	For the Three Months Ended September 30, 2014
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2014		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
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		-	$	-	$	-	$	-	$	-


	For the Nine Months Ended September 30, 2015

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 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		15		12
Other		-		-		-		-		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		330		330		325		-
Other		-		-		-		-		-
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Non-owner occupied
Interest rate reduction		1		2,376		2,376		2,353		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
SFR mortgage:
Interest rate reduction		1		322		322		330		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Dairy & livestock and agribusiness:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-

Total loans		4	$	3,058	$	3,058	$	3,023	$	12


	For the Nine Months Ended September 30, 2014
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2014		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction (3)		2	$	368	$	368	$	337	$	-
Change in amortization period or maturity		-		-		-		-		-
SBA:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Other		-		-		-		-		-
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction (3)		1		199		199		187		-
Change in amortization period or maturity		-		-		-		-		-
Non-owner occupied
Interest rate reduction (3)		3		3,573		3,573		3,469		-
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		6	$	4,140	$	4,140	$	3,993	$	-

(1) The tables above 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 nine months ended September 30, 2014 represent TDRs acquired from ASB.

As of September 30, 2015, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and nine months ended September 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 nine months ended September 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 251,000 and 234,000, respectively. For the three and nine months ended September 30, 2014, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 222,000 and 199,000 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 September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
	(In thousands, except per share amounts)
Earnings per common share:
Net earnings	$	27,886	$	24,295	$	70,532	$	78,440
Less: Net earnings allocated to restricted stock		149		134		371		409

Net earnings allocated to common shareholders	$	27,737	$	24,161	$	70,161	$	78,031

Weighted average shares outstanding		105,783		104,875		105,672		105,218
Basic earnings per common share	$	0.26	$	0.23	$	0.66	$	0.74


Diluted earnings per common share:
Net income allocated to common shareholders	$	27,737	$	24,161	$	70,161	$	78,031

Weighted average shares outstanding		105,783		104,875		105,672		105,218
Incremental shares from assumed exercise of outstanding options		498		531		467		542

Diluted weighted average shares outstanding		106,281		105,406		106,139		105,760
Diluted earnings per common share	$	0.26	$	0.23	$	0.66	$	0.74

8.	FAIR VALUE INFORMATION

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The following disclosure provides the fair value information for financial assets and liabilities as of September 30, 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- includes assets and liabilities that have an active market that provides an objective quoted value for each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most objective measurement of fair value. Level 2 is less objective and Level 3 is the least objective (most subjective) in estimating fair value.

•

Level 2- assets and liabilities are ones where there is no active market in the same assets, but where there are parallel markets or alternative means to estimate fair value using observable information inputs such as the value placed on similar assets or liability that were recently traded.

•

Level 3 -fair values are based on information from the entity that reports these values in their financial statements. Such data are referred to as unobservable, in that the valuations are not based on data available to parties outside the entity.

Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy. Inputs here refer explicitly to the types of information used to obtain the fair value of the asset or liability.

Observable inputs include data sources and market prices available and visible outside of the entity. While there will continue to be judgments required when an active market price is not available, these inputs are external to the entity and observable outside the entity; they are consequently considered more objective than internal unobservable inputs used for Level 3 fair value.

Unobservable inputs are data and analyses that are developed within the entity to assess the fair value, such as management estimates of future benefits from use of assets.

There were no transfers in and out of Level 1 and Level 2 measurements during the nine months ended September 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 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.

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

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, each 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 September 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	$	20,768	$	-	$	20,768	$	-
Residential mortgage-backed securities		1,711,545		-		1,711,545		-
CMO’s/REMIC’s - residential		388,497		-		388,497		-
Municipal bonds		186,898		-		186,898		-
Other securities		5,013		-		5,013		-

Total investment securities - AFS		2,312,721		-		2,312,721		-
Interest rate swaps		11,694		-		11,694		-

Total assets	$	2,324,415	$	-	$	2,324,415	$	-

Description of liability
Interest rate swaps	$	11,694	$	-	$	11,694	$	-

Total liabilities	$	11,694	$	-	$	11,694	$	-


	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 September 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 September 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 Nine Months Ended September 30, 2015
	(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI Loans:
Commercial and industrial	$	202	$	-	$	-	$	202	$	202
SBA		46		-		-		46		4
Real estate:
Commercial real estate		-		-		-		-		-
Construction		7,651		-		-		7,651		23
SFR mortgage		610		-		-		610		237
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		249		-		-		249		81
Other real estate owned		948		-		-		948		162

Total assets	$	9,706	$	-	$	-	$	9,706	$	709


	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 our 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 September 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.


	September 30, 2015
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	308,227	$	308,227	$	-	$	-	$	308,227
Interest-earning balances due from depository institutions		33,189		-		33,189		-		33,189
FHLB stock		17,588		-		17,588		-		17,588
Investment securities available-for-sale		2,312,721		-		2,312,721		-		2,312,721
Investment securities held-to-maturity		869,650		-		874,446		1,937		876,383
Total loans, net of allowance for loan losses		3,763,022		-		-		3,809,324		3,809,324
Swaps		11,694		-		11,694		-		11,694
Liabilities
Deposits:
Noninterest-bearing	$	3,304,967	$	3,304,967	$	-	$	-	$	3,304,967
Interest-bearing		2,654,505		-		2,654,501		-		2,654,501
Borrowings		610,174		-		610,103		-		610,103
Junior subordinated debentures		25,774		-		26,031		-		26,031
Swaps		11,694		-		11,694		-		11,694


	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
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 September 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 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, and the Bank will have four additional Business Financial Centers if, as expected, the acquisition of County Commerce Bank is consummated. 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 September 30, 2015
	Centers		Treasury			Other			Eliminations			Total
	(Dollars in thousands)
Interest income, including loan fees	$	36,998	$	18,927		$	11,806		$	-		$	67,731
Credit for funds provided (1)		8,977		-			13,249			(22,226	)		-

Total interest income		45,975		18,927			25,055			(22,226	)		67,731

Interest expense		1,654		58			102			-			1,814
Charge for funds used (1)		1,088		15,983			5,155			(22,226	)		-

Total interest expense		2,742		16,041			5,257			(22,226	)		1,814

Net interest income		43,233		2,886			19,798			-			65,917
Recapture of provision for loan losses		-		-			(2,500	)		-			(2,500	)

Net interest income after recapture of provision for loan losses		43,233		2,886			22,298			-			68,417

Noninterest income		5,276		(22	)		3,159			-			8,413
Noninterest expense		12,496		219			20,027			-			32,742
Debt termination expense		-		-			-			-			-

Segment pre-tax profit	$	36,013	$	2,645		$	5,430		$	-		$	44,088

Segment assets as of September 30, 2015	$	6,419,264	$	3,505,392		$	809,514		$	(3,107,708	)	$	7,626,462

(1)

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


	For the Three Months Ended September 30, 2014
	Centers		Treasury		Other			Eliminations			Total
			(Dollars in thousands)
Interest income, including loan fees	$	35,384	$	18,397	$	11,514		$	-		$	65,295
Credit for funds provided (1)		8,190		-		12,037			(20,227	)		-

Total interest income		43,574		18,397		23,551			(20,227	)		65,295

Interest expense		1,637		2,415		5			-			4,057
Charge for funds used (1)		1,061		14,374		4,792			(20,227	)		-

Total interest expense		2,698		16,789		4,797			(20,227	)		4,057

Net interest income		40,876		1,608		18,754			-			61,238
Recapture of provision for loan losses		-		-		(1,000	)		-			(1,000	)

Net interest income after recapture of provision for loan losses		40,876		1,608		19,754			-			62,238

Noninterest income		5,288		-		2,721			-			8,009
Noninterest expense		12,221		186		20,074			-			32,481
Debt termination expense		-		-		-			-			-

Segment pre-tax profit	$	33,943	$	1,422	$	2,401		$	-		$	37,766

Segment assets as of September 30, 2014	$	6,086,641	$	3,431,467	$	792,404		$	(2,887,663	)	$	7,422,849

(1)

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


	For the Nine Months Ended September 30, 2015
	Centers		Treasury			Other			Eliminations			Total
			(Dollars in thousands)
Interest income, including loan fees	$	108,179	$	56,792		$	31,455		$	-		$	196,426
Credit for funds provided (1)		25,718		-			38,914			(64,632	)		-

Total interest income		133,897		56,792			70,369			(64,632	)		196,426

Interest expense		4,945		1,520			277			-			6,742
Charge for funds used (1)		3,207		46,230			15,195			(64,632	)		-

Total interest expense		8,152		47,750			15,472			(64,632	)		6,742

Net interest income		125,745		9,042			54,897			-			189,684
Recapture of provision for loan losses		-		-			(4,500	)		-			(4,500	)

Net interest income after recapture of provision for loan losses		125,745		9,042			59,397			-			194,184

Noninterest income		15,662		(22	)		9,129			-			24,769
Noninterest expense		36,604		643			57,630			-			94,877
Debt termination expense		-		13,870			-			-			13,870

Segment pre-tax profit (loss)	$	104,803	$	(5,493	)	$	10,896		$	-		$	110,206

Segment assets as of September 30, 2015	$	6,419,264	$	3,505,392		$	809,514		$	(3,107,708	)	$	7,626,462

(1)

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


	For the Nine Months Ended September 30, 2014
	Centers		Treasury		Other			Eliminations			Total
			(Dollars in thousands)
Interest income, including loan fees	$	103,158	$	52,504	$	31,911		$	-		$	187,573
Credit for funds provided (1)		22,924		-		34,914			(57,838	)		-

Total interest income		126,082		52,504		66,825			(57,838	)		187,573

Interest expense		4,835		7,178		221			-			12,234
Charge for funds used (1)		2,978		40,607		14,253			(57,838	)		-

Total interest expense		7,813		47,785		14,474			(57,838	)		12,234

Net interest income		118,269		4,719		52,351			-			175,339
Recapture of provision for loan losses		-		-		(16,100	)		-			(16,100	)

Net interest income after recapture of provision for loan losses		118,269		4,719		68,451			-			191,439

Noninterest income		15,232		-		11,325			-			26,557
Noninterest expense		35,469		564		58,929			-			94,962
Debt termination expense		-		-		-			-			-

Segment pre-tax profit	$	98,032	$	4,155	$	20,847		$	-		$	123,034

Segment assets as of September 30, 2014	$	6,086,641	$	3,431,467	$	792,404		$	(2,887,663	)	$	7,422,849

(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 September 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 September 30, 2015 and December 31, 2014, the total notional amount of the Company’s swaps was $185.0 million, and $197.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below.

September 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

11,694

Other liabilities

11,694

Total derivatives

11,694

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 September 30,				For the Nine Months Ended September 30,
		2015		2014		2015		2014
		(Dollars in thousands)
Interest rate swaps	Other income	$	-	$	-	$	199	$	-

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