CVB FINANCIAL CORP - Quarter Report: 2009 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from                      to                     

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)		95-3629339 (I.R.S. Employer Identification No.)
701 North Haven Ave, Suite 350, Ontario, California (Address of Principal Executive Offices)		91764 (Zip Code)

(Registrant’s telephone number, including area code) (909) 980-4030

     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 þ     No o

     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 o     No o

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

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

Yes o     No þ

     Number of shares of common stock of the registrant: 105,981,511 outstanding as of August 4, 2009.

 

 

CVB FINANCIAL CORP.
2009 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION (UNAUDITED)			3
ITEM 1. FINANCIAL STATEMENTS			3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES			8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
GENERAL			25
OVERVIEW			25
CRITICAL ACCOUNTING POLICIES			27
ANALYSIS OF THE RESULTS OF OPERATIONS			28
RESULTS BY BUSINESS SEGMENTS			37
ANALYSIS OF FINANCIAL CONDITION			39
RISK MANAGEMENT			49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			53
ITEM 4. CONTROLS AND PROCEDURES			57
PART II — OTHER INFORMATION			58
ITEM 1. LEGAL PROCEEDINGS			58
ITEM 1A. RISK FACTORS			58
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			58
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			58
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			58
ITEM 5. OTHER INFORMATION			59
ITEM 6. EXHIBITS			60
SIGNATURES			61
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
Dollar amounts in thousands

		June 30,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	221,242			$	95,297
Investment securities available-for-sale			2,271,393				2,493,476
Investment securities held-to-maturity			6,347				6,867
Interest-bearing balances due from depository institutions			1,785				285
Investment in stock of Federal Home Loan Bank (FHLB)			93,240				93,240
Loans and lease finance receivables			3,614,756				3,736,838
Allowance for credit losses			(74,755	)			(53,960	)
Net Loans and lease finance receivables			3,540,001				3,682,878
Total earning assets			5,912,766				6,276,746
Premises and equipment, net			42,838				44,420
Bank owned life insurance			108,045				106,366
Accrued interest receivable			26,320				28,519
Intangibles			9,497				11,020
Goodwill			55,097				55,097
Other assets			39,092				32,186
TOTAL ASSETS		$	6,414,897			$	6,649,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,420,535			$	1,334,248
Interest-bearing			2,562,685				2,173,908
Total deposits			3,983,220				3,508,156
Demand Note to U.S. Treasury			8,995				5,373
Repurchase agreements			676,111				607,813
Borrowings .			955,000				1,737,660
Accrued interest payable			8,559				9,741
Deferred compensation			9,156				8,985
Junior subordinated debentures			115,055				115,055
Other liabilities			35,425				41,976
TOTAL LIABILITIES			5,791,521				6,034,759
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Preferred stock, authorized, 20,000,000 shares without par; issued and outstanding 130,000 (2008)			122,219				121,508
Common stock, authorized, 122,070,312 shares without par; issued and outstanding 83,326,511 (2009) and 83,270,263 (2008)			365,594				364,469
Retained earnings			111,089				100,184
Accumulated other comprehensive income, net of tax			24,474				28,731
Total stockholders’ equity			623,376				614,892
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	6,414,897			$	6,649,651

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Dollar amounts in thousands, except per share

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
Interest income:
Loans, including fees		$	49,771			$	52,211			$	99,296			$	106,257
Investment securities:
Taxable			19,134				22,430				41,570				43,306
Tax-preferred			6,815				7,111				13,811				14,299
Total investment income			25,949				29,541				55,381				57,605
Dividends from FHLB stock			—				1,205				—				2,299
Federal funds sold and Interest bearing deposits with other institutions			55				12				59				27
Total interest income			75,775				82,969				154,736				166,188
Interest expense:
Deposits			6,439				8,537				13,029				20,816
Borrowings			14,212				24,235				30,102				49,187
Junior subordinated debentures			1,029				1,714				2,219				3,573
Total interest expense			21,680				34,486				45,350				73,576
Net interest income before provision for credit losses			54,095				48,483				109,386				92,612
Provision for credit losses			20,000				3,000				42,000				4,700
Net interest income after provision for credit losses			34,095				45,483				67,386				87,912
Other operating income:
Service charges on deposit accounts			3,643				3,807				7,360				7,552
Trust and Investment Services			1,604				1,975				3,265				3,888
Bankcard services			586				618				1,120				1,199
BOLI income			659				1,146				1,396				2,218
Other			598				1,156				1,377				1,986
Gain on sale of securities, net			12,619				—				21,548				—
Total other operating income			19,709				8,702				36,066				16,843
Other operating expenses:
Salaries and employee benefits			15,376				15,501				31,196				31,044
Occupancy and Equipment			4,421				5,099				8,870				9,619
Professional services			1,658				1,874				3,352				3,415
Amortization of intangibles			734				898				1,523				1,796
Other			10,790				7,006				19,435				12,903
Total other operating expenses			32,979				30,378				64,376				58,777
Earnings before income taxes			20,825				23,807				39,076				45,978
Income taxes			4,964				6,655				10,048				12,642
Net earnings		$	15,861			$	17,152			$	29,028			$	33,336
Preferred stock dividend and other reductions			2,000				23				3,993				44
Net earnings allocated to common shareholders		$	13,861			$	17,129			$	25,035			$	33,292
Comprehensive income		$	5,329			$	(11,338	)		$	24,771			$	23,488
Basic earnings per common share		$	0.17			$	0.21			$	0.30			$	0.40
Diluted earnings per common share		$	0.17			$	0.21			$	0.30			$	0.40
Cash dividends per common share		$	0.085			$	0.085			$	0.17			$	0.17

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Amounts and shares in thousands

																		Accumulated
		Common																Other
		Shares				Preferred				Common				Retained				Comprehensive				Comprehensive
		Outstanding				Stock				Stock				Earnings				Income				Income				Total
Balance January 1, 2009			83,270			$	121,508			$	364,469			$	100,184			$	28,731							$	614,892
Issuance of common stock			56								280																280
Tax benefit from exercise of stock options											62																62
Stock-based Compensation Expense											783																783
Cash dividends declared
Common ($0.17 per share)															(14,162	)											(14,162	)
Preferred															(3,250	)											(3,250	)
Amortization of preferred stock discount							711								(711	)											—
Comprehensive income:
Net earnings															29,028							$	29,028				29,028
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net																			(4,257	)			(4,257	)			(4,257	)
Comprehensive income																						$	24,771
Balance June 30, 2009			83,326				122,219			$	365,594			$	111,089			$	24,474							$	623,376

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive				Comprehensive
		Outstanding				Stock				Earnings				Loss				Income				Total
Balance January 1, 2008			83,165			$	354,249			$	66,569			$	4,130							$	424,948
Issuance of common stock			127				328																328
Repurchase of common stock			(71	)			(650	)															(650	)
Tax benefit from exercise of stock options							101																101
Stock-based Compensation Expense							701																701
Adoption of EITF 06-4 Split Dollar Life Insurance											(571	)											(571	)
Cash dividends ($0.17 per share)											(14,151	)											(14,151	)
Comprehensive income:
Net earnings											33,336							$	33,336				33,336
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net															(9,848	)			(9,848	)			(9,848	)
Comprehensive income																		$	23,488
Balance June 30, 2008			83,221			$	354,729			$	85,183			$	(5,718	)						$	434,194

		At June 30,
		2009				2008
Disclosure of reclassification amount
Unrealized loss on securities arising during the period		$	(7,339	)		$	(16,980	)
Tax benefit			3,082				7,132
Net unrealized loss on securities		$	(4,257	)		$	(9,848	)

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Dollar amounts in thousands

		For the Six Months
		Ended June 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received		$	155,769			$	165,547
Service charges and other fees received			14,494				16,834
Interest paid			(46,533	)			(74,990	)
Cash paid to vendors and employees			(59,257	)			(59,221	)
Income taxes paid			(23,386	)			(8,846	)
Net cash provided by operating activities			41,087				39,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities			440,343				—
Proceeds from repayment of investment securities			210,361				182,420
Proceeds from maturity of investment securities			46,417				21,320
Purchases of investment securities			(462,387	)			(328,114	)
Purchases of FHLB stock			—				(11,944	)
Net decrease/(increase) in loans and lease finance receivables			95,787				(19,196	)
Proceeds from sales of premises and equipment			216				67
Proceeds from sales of other real estate owned			9,413				—
Purchase of premises and equipment			(2,172	)			(2,165	)
Other, net			(375	)			(28	)
Net cash provided by/(used in) investing activities			337,603				(157,640	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in transaction deposits			276,273				(83,903	)
Net increase/(decrease) in time deposits			198,791				(66,813	)
Advances from Federal Home Loan Bank			—				300,000
Repayment of advances from Federal Home Loan Bank			(600,000	)			(50,000	)
Net decrease in other borrowings			(179,037	)			(9,113	)
Net increase in repurchase agreements			68,298				63,997
Cash dividends on preferred stock			(3,250	)			—
Cash dividends on common stock			(14,162	)			(14,151	)
Repurchase of common stock			—				(650	)
Proceeds from exercise of stock options			280				328
Tax benefit related to exercise of stock options			62				101
Net cash (used in)/provided by financing activities			(252,745	)			139,796
NET INCREASE IN CASH AND CASH EQUIVALENTS			125,945				21,480
CASH AND CASH EQUIVALENTS, beginning of period			95,297				89,486
CASH AND CASH EQUIVALENTS, end of period		$	221,242			$	110,966

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands

		For the Six Months
		Ended June 30,
		2009				2008
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings		$	29,028			$	33,336
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of investment securities			(21,548	)			—
Loss on sale of premises and equipment			57				46
Income from bank owned life insurance			(1,396	)			(2,218	)
Net amortization of premiums on investment securities			579				845
Provisions for credit losses			42,000				4,700
Stock-based compensation			783				701
Depreciation and amortization			5,002				5,568
Change in accrued interest receivable			2,199				1,084
Change in accrued interest payable			(1,182	)			(1,415	)
Change in other assets and liabilities			(14,435	)			(3,323	)
Total adjustments			12,059				5,988
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	41,087			$	39,324
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer from loans to Other Real Estate Owned (OREO)		$	7,644			$	1,137

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the six months ended June 30, 2009 and 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission 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 for interim financial reporting. The results of operations for the six months ended June 30, 2009 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

     Principles of Consolidation — The consolidated financial statements include the accounts of CVB Financial Corp. (the “Company”) and its wholly owned subsidiary: Citizens Business Bank (the “Bank”) after elimination of all intercompany transactions and balances. The Company also has three inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp; and Orange National Bancorp. The Company is also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II, CVB Statutory Trust III and FCB Trust II. CVB Statutory Trusts I and II were created in December 2003 and CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. The Company acquired FCB Trust II through the acquisition of First Coastal Bancshares (“FCB”). In accordance with Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”), these trusts do not meet the criteria for consolidation.

     Nature of Operations — The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing to customers through its Citizens Financial Services Division and trust services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Orange County, Los Angeles County, Madera County, Fresno County, Tulare County, Kern County and San Joaquin County. The Bank operates 41 Business Financial Centers and 5 Commercial Banking Centers with its headquarters located in the city of Ontario.

     The Company’s operating business units have been combined into two main segments: (i) Business Financial and Commercial Banking Centers and (ii) Treasury. Business Financial and Commercial Banking Centers (branches) are comprised of loans, deposits, and products and services the Bank offers to the majority of its customers. The other segment is Treasury, which manages the investment portfolio of the Company. The Company’s remaining centralized functions and eliminations of inter-segment amounts have been aggregated and included in “Other.”

     The internal reporting of the Company considers all business units. Funds are allocated to each business unit based on its need to fund assets (use of funds) or its need to invest funds (source of funds). Net income is determined based on the actual net income of the business unit plus the allocated income or

expense based on the sources and uses of funds for each business unit. Non-interest income and non-interest expense are those items directly attributable to a business unit.

     Cash and due from banks — Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks.

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

     At each reporting date, securities are assessed to determine whether there is an other-than-temporary impairment. Effective April 1, 2009, the Company adopted FSP FAS 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which amended SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” by changing the amount of an other-than-temporary impairment that is recognized in earnings when there are credit losses on a debt security for which management does not intend to sell and for which it is more-likely-than-not that the Company will not have to sell prior to recovery of the noncredit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost and its fair value would be included in other comprehensive income.

     Loans and Lease Finance Receivables — Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of June 30, 2009, the Company had entered into commitments with certain customers amounting to $583.5 million compared to $642.7 million at December 31, 2008. Letters of credit at June 30, 2009, and December 31, 2008, were $63.2 million and $63.1 million, respectively.

     The Bank receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in agribusiness.

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

     Provision and Allowance for Credit Losses — The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is adequate to provide for probable

credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors that would deserve current recognition in estimating inherent credit losses. The estimate is reviewed quarterly by the Board of Directors and management and periodically by various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. During the first six months of 2009, we recorded a provision for credit losses of $42.0 million. The allowance for credit losses was $74.8 million as of June 30, 2009.

     In addition to the allowance for credit losses, the Company also has a reserve for undisbursed commitments for loans and letters of credit. This reserve is carried in the liabilities section of the balance sheet in other liabilities. Provisions to this reserve are included in other expense. For the first six months of 2009, the Company recorded an increase of $1.4 million in the reserve for undisbursed commitments. As of June 30, 2009, the balance in this reserve was $5.5 million.

     A loan for which collection of principal and interest according to its original terms is not probable is considered to be impaired. The Company’s policy is to record a specific valuation allowance, which is included in the allowance for credit losses, or charge off that portion of an impaired loan that exceeds its fair value. Fair value is usually based on the value of underlying collateral.

     At June 30, 2009, the Company had impaired loans of $53.8 million. Of this amount, $17.4 million consisted of non-accrual residential construction and land loans, $21.3 million in non-accrual commercial construction loans, $4.6 million of non-accrual single family mortgage loans, $7.0 million of non-accrual commercial real estate loans, $859,000 of non-accrual commercial and industrial loans, $115,000 of non-accrual consumer loans and one loan of $2.5 million whose terms were modified in a troubled debt restructure. The impaired loans of $53.8 million, net of $21.9 million in charge-offs, are supported by collateral with a fair value less selling costs, net of prior liens, of $52.7 million. The amount of specific reserve for these loans was $1.0 million at June 30, 2009. At December 31, 2008, the Bank had classified as impaired, loans with a balance of $20.2 million.

     Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of estimated economic lives of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and improvements. Long-lived assets are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The existence of impairment is based on undiscounted cash flows. To the extent impairment exists, the impairment is calculated as the difference in fair value of assets and their carrying value. The impairment loss, if any, would be recorded in noninterest expense.

     Other Real Estate Owned — Other real estate owned (“OREO”) represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations.

     Business Combinations and Intangible Assets — The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment.

The Company completed its annual impairment test as of July 1, 2009; there was no impairment of goodwill.

     At June 30, 2009 goodwill was $55.1 million. As of June 30, 2009, intangible assets that continue to be subject to amortization include core deposit premiums of $9.5 million (net of $17.6 million of accumulated amortization). Amortization expense for such intangible assets was $1.5 million for the six months ended June 30, 2009. Estimated amortization expense, for the remainder of 2009 is expected to be $1.5 million. Estimated amortization expense, for the succeeding five fiscal years is $2.9 million for year one, $2.8 million for year two, $1.6 million for year three, $627,000 for year four and $26,000 for year five. The weighted average remaining life of intangible assets is approximately 2.6 years.

     Bank Owned Life Insurance — The Bank invests in Bank-Owned Life Insurance (BOLI). BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.

     As of January 1, 2008, the Company adopted EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires that for a split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion — 1967.” The adoption did not have a material effect on the Company’s consolidated financial position or results of operations. The cumulative effect of the adoption was recorded in equity.

     Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available strategies, the Company considers the future realization of these deferred tax assets more likely than not.

     The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

     Earnings per Common Share — The Company calculates earnings per common share (“EPS”) using the two-class method in accordance with FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”), effective January 1, 2009 with retrospective application to all prior-period earnings per share data presented. There was no impact to prior period earnings per share. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to common shareholders and any participating securities, regardless of whether any actual dividends or distributions are made. Under FSP 03-6-1, all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities. The Company grants restricted shares under the 2008 Equity Incentive Plan that qualify as participating securities. Restricted shares issued under this plan are entitled to dividends at the same rate as common stock.

     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. Share and per share amounts have been retroactively restated to give effect to all stock dividends and splits. The number of shares outstanding at June 30, 2009 was 83,326,511. The tables below presents the reconciliation of earnings per share for the periods indicated.

Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)

		For the six months								For the three months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Earnings per common share
Net earnings		$	29,028			$	33,336			$	15,861			$	17,152
Less: Dividends on preferred stock and discount amortization			3,961				—				1,983				—
Net earnings available to common shareholders		$	25,067			$	33,336			$	13,878			$	17,152
Less: Net earnings allocated to restricted stock			32				44				17				23
Net earnings allocated to common shareholders (numerator)		$	25,035			$	33,292			$	13,861			$	17,129
Weighted Average Shares Outstanding (denominator)			83,199				83,128				83,222				83,105
Earnings per common share (1)		$	0.30			$	0.40			$	0.17			$	0.21
Diluted earnings per common share
Net income allocated to common shareholders (numerator)		$	25,035			$	33,292			$	13,861			$	17,129
Weighted Average Shares Outstanding			83,199				83,128				83,222				83,105
Incremental shares from assumed exercise of outstanding options			100				328				69				373
Diluted Weighted Average Shares Outstanding (denominator)			83,299				83,456				83,291				83,478
Diluted earnings per common share (1)		$	0.30			$	0.40			$	0.17			$	0.21

     Stock-Based Compensation — At June 30, 2009, the Company has three stock-based employee compensation plans, which are described more fully in Note 15 in the Company’s Annual Report on Form 10-K.

     Derivative Financial Instruments — The Company accounts for derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, and SFAS 161, Disclosures about Derivative Instruments and Hedging Activities. Pursuant to the requirements of SFAS No. 133, all derivative instruments, including certain derivative instruments embedded in other contracts, are to be recognized on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

     Statement of Cash Flows — Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks. Cash flows from loans and deposits are reported net.

     CitizensTrust — This division provides trust, investment and brokerage related services, as well as financial, estate and business succession planning services. The Company maintains funds in trust for customers. CitizensTrust has approximately $1.6 billion in assets under administration, including $750.4

million in assets under management. The amount of these funds and the related liability have not been recorded in the accompanying consolidated balance sheets because they are not assets or liabilities of the Bank or Company, with the exception of any funds held on deposit with the Bank.

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

     Recent Accounting Pronouncements — On July 1, 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which will become the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statement. The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in Statement 162. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 will be effective for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material effect on the Company’s consolidated financial position or results of operations.

     On May 28, 2009, the FASB issued Statement No. 165, “Subsequent Events,” which requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued. Companies are required to disclose the date through which subsequent events have been evaluated. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material effect on the Company’s consolidated financial position or results of operations.

     Shareholder Rights Plan — The Company has a shareholder rights plan designed to maximize long-term value and to protect shareholders from improper takeover tactics and takeover bids which are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right to purchase one one-thousandth of a share of the Company’s Series A Participating Preferred Stock at an initial exercise price of $50.00 (subject to adjustment as described in the terms of the plan) upon the occurrence of certain triggering events. For additional information concerning this plan, see Note 11 to Consolidated Financial Statements, “Commitments and Contingencies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     Other Contingencies — In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them. At June 30, 2009, the Company does not have any litigation reserves and is not aware of any material pending legal action or complaints asserted against the Company.

2. INVESTMENTS

     The amortized cost and estimated fair value of investment securities are shown 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.

Table 3 — Composition of Investment Securities

		June 30, 2009
						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding								Total
		Cost				Gain				Loss				Fair Value				Percent
		(Amounts in thousands)
Investment Securities Available-for-Sale:
Government agency & government-sponsored enterprises			21,199				336				(31	)			21,504				0.95	%
Mortgage-backed securities			836,029				20,987				(1,310	)			855,706				37.67	%
CMO’s / REMIC’s			721,100				17,451				(1,828	)			736,723				32.43	%
Municipal bonds			650,868				13,228				(6,636	)			657,460				28.95	%
Total Investment Securities		$	2,229,196			$	52,002			$	(9,805	)		$	2,271,393				100.00	%

		December 31, 2008
						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding								Total
		Cost				Gain				Loss				Fair Value				Percent
		(Amounts in thousands)
Investment Securities Available-for-Sale:
Government agency & government-sponsored enterprises			27,105				673				—				27,778				1.11	%
Mortgage-backed securities			1,150,650				33,836				(1	)			1,184,485				47.50	%
CMO’s / REMIC’s			591,531				9,855				(4,595	)			596,791				23.94	%
Municipal bonds			674,655				16,704				(6,937	)			684,422				27.45	%
Total Investment Securities		$	2,443,941			$	61,068			$	(11,533	)		$	2,493,476				100.00	%

     Approximately 69% of the available-for-sale portfolio represents securities issued by the U.S government or U.S. government-sponsored enterprises, which guarantee payment of principal and interest.

     The remaining CMO/REMICs are backed by agency-pooled collateral or whole loan collateral. All non-agency available-for-sale CMO/REMIC issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of June 30, 2009 and December 31, 2008.

     Gross realized gains were $21.5 million and $12.6 million for the six and three months ended June 30, 2009, respectively. There were no realized gains or losses during the same periods ended June 30, 2008.

Composition of the Fair Value and Gross Unrealized Losses of Securities:

		June 30, 2009
		Less than 12 months								12 months or longer								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
						Holding								Holding								Holding
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(amounts in thousands)
Held-To-Maturity
CMO		$	—			$	—			$	4,365			$	1,982			$	4,365			$	1,982
Available-for-Sale
Government agency		$	9,069			$	31			$	—			$	—			$	9,069			$	31
Mortgage-backed securities			109,252				1,310				—				—				109,252				1,310
CMO/REMICs			162,816				1,211				42,209				617				205,025				1,828
Municipal bonds			179,486				3,921				44,689				2,715				224,175				6,636
		$	460,623			$	6,473			$	86,898			$	3,332			$	547,521			$	9,805

		December 31, 2008
		Less than 12 months								12 months or longer								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
						Holding								Holding								Holding
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(amounts in thousands)
Held-To-Maturity
CMO		$	4,770			$	2,097			$	—			$	—			$	4,770			$	2,097
Available-for-Sale
Mortgage-backed securities		$	265			$	—			$	13,903			$	1			$	14,168			$	1
CMO/REMICs			163,036				4,542				1,853				53				164,889				4,595
Municipal bonds			159,370				5,341				37,994				1,596				197,364				6,937
		$	322,671			$	9,883			$	53,750			$	1,650			$	376,421			$	11,533

     The tables above show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009 and December 31, 2008. The Company has reviewed individual securities to determine whether a decline in fair value below the amortized cost is other-than-temporary.

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

     CMO Held-to-Maturity — We have one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO scores of 715 and an average LTV of 71% at origination. The security was a senior security in the securitization, was rated triple AAA at origination and was supported by subordinate securities. This security is classified as held-to-maturity as we have both the intent and ability to hold this debt security to maturity as the amount of the security, $6.3 million, is not significant to our liquidity needs. We acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security first appeared in August

2008 as the current financial crisis in the markets occurred and the market for securities collateralized by Alt-A mortgages diminished.

     As of June 30, 2009, the unrealized loss on this security was $2.0 million and the fair value quoted on the security was 68% of the current par value. The security is rated non-investment grade. We evaluated the security for an other than temporary decline in fair value as of June 30, 2009 under the requirements of FSP 115-2 and FSP 124-2. We believe the decline in fair value below cost on the security is not other than temporary based on a detailed model of the securitization performed by an outside third party which indicates we will receive all of our book value on the security based on what we believe are the probable assumptions related to the housing market, the losses expected on the underlying mortgages, and the credit support available to the security, as well as, all other information available on the security and underlying collateral. Because the Company does not intend to sell this investment and it is more likely than not that the Company will not be required to sell this investment before recovery of it’s amortized cost, which may be at maturity, management does not consider these investments to be other than temporarily impaired at June 30, 2009.

     Government Agency — The government agency bonds are backed by the full faith and credit of Agencies of the U.S. Government. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Bank 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. There was no loss greater than 12 months on these securities at June 30, 2009.

     Mortgaged-Backed Securities and CMO/REMICs — Almost all of the mortgage-backed and CMO/REMICs securities are issued by the government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All mortgage-backed securities are rated investment grade with average life of approximately 3.3 years. The contractual cash flows of 97.5% of these investments are guaranteed by U.S. government-sponsored agencies. The remaining 2.5% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds. The unrealized loss greater than 12 months on these securities at June 30, 2009 is $617,000. This loss is comprised of bonds issued by non-government sponsored enterprises such as financial institutions with a loss of $528,000 and two FHLMC securities with a loss of $89,000. Because we believe the decline in fair value is attributable to the changes in interest rates and not credit quality and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized costs, which may be at maturity, management does not consider these investments to be other than temporarily impaired at June 30, 2009.

     Municipal Bonds — Ninety-six percent of our $657.5 million municipal bond portfolio contains securities which have an underlying rating of investment grade. The majority of our municipal bonds are insured by the largest bond insurance companies with maturities of approximately 6.9 years. The unrealized loss greater than 12 months on these securities at June 30, 2009 is $2.7 million. As with the other securities in the portfolio, we believe this loss is due to the interest rate environment and not the credit risk of these securities. The Bank diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Bank’s exposure to any single adverse event. Because the decline in fair value is attributable to the changes in interest rates and not credit quality, and because the Company does not intend to sell these securities and it is more likely than not that the Bank will not be required to sell the securities before recovery of their amortized costs, which may be at maturity, management does not consider these investments to be other than temporarily impaired at June 30, 2009.

     We are continually monitoring the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. While most of our securities are insured by these companies, we feel that there is minimal risk of loss due to the problems these insurers

are having. Many of the securities that would not be rated without insurance are pre-refunded and/or are general obligation bonds. 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 there is a loss in any given security.

     Although we determined that these securities are not other-than-temporarily impaired, we will continue to monitor the portfolio in the light of economic, credit and market factors. In addition, we will look at the potential for improving the overall performance of the portfolio and the income of the Company. Accordingly, subsequent changes in some of these factors may indicate that we should sell some of these securities even though we have disclosed that we currently intend to hold these securities to maturity.

     At June 30, 2009 and December 31, 2008, investment securities having an amortized cost of approximately $2.10 billion and $2.32 billion respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

     The amortized cost and fair value of debt securities at June 30, 2009, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2038, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMO/REMICs are included in maturity categories based upon estimated prepayment speeds.

		Available-for-sale
										Weighted-
		Amortized				Fair				Average
		Cost				Value				Yield
		(amounts in thousands)
Due in one year or less		$	95,665			$	97,337				5.02	%
Due after one year through five years			1,238,886				1,272,939				4.55	%
Due after five years through ten years			716,430				728,180				4.41	%
Due after ten years			178,215				172,937				4.00	%
		$	2,229,196			$	2,271,393				4.48	%

          The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2009.

3. FAIR VALUE INFORMATION

     Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (FAS 157) for financial assets and liabilities. FAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This statement applies whenever other accounting pronouncements require or permit fair value measurements.

     The fair value hierarchy under SFAS No. 157 prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).

	•		Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
	•		Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•

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

     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 (FAS 107 disclosures).

     Cash — The carrying amount of cash and cash equivalents is considered to be a reasonable estimate of fair value.

     Investment securities available-for-sale - Investment securities available-for-sale are valued based upon quotes obtained from a reputable third-party pricing service. The service uses evaluated pricing applications and model processes. 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. Accordingly, the Company categorized its investment portfolio as a Level 2 valuation.

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

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

     The fair value of loans on non-accrual status has not been specifically estimated because it is not practicable to reasonably assess the credit risk adjustment that would be applied in the marketplace for such loans. As such, the estimated fair value of total loans at June 30, 2009 includes the carrying amount of non-accrual loans at each respective date, net of allowance for credit losses.

     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. These loans fall within Level 2 of the fair value hierarchy. Appraised values may be adjusted based on factors such as the changes in market conditions from the time of valuation. These loans fall within Level 3 of the fair value hierarchy.

     The fair value of commitments to extend credit and standby letters of credit were not significant at June 30, 2009 as these instruments predominantly have adjustable terms and are of a short-term nature.

     Swaps — The fair value of the interest rate swap contracts are provided by our counterparty using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and 3-year

through 30-year swap rates. The yield curve determines the valuations of the interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.

     Deposits & Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and the demand note to the U.S. Treasury, and short-term borrowings are considered to be stated at 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.

     Accrued Interest Receivable/Payable - The amounts of accrued interest receivable on loans and lease finance receivables and investments and accrued interest payable on deposits and borrowings are considered to be stated at fair value.

     The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

Assets & Liabilities Measured at Fair Value on a Recurring Basis

						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Carrying Value at				Assets				Inputs				Inputs
(in thousands)		June 30, 2009				(Level 1)				(Level 2)				(Level 3)
Description of Assets
Investment Securities-AFS		$	2,271,393			$	—			$	2,271,393			$	—
Interest Rate Swaps			4,438				—				4,438				—
Total Assets		$	2,275,831			$	—			$	2,275,831			$	—
Description of Liability
Interest Rate Swaps		$	4,438			$	—			$	4,438			$	—

     We may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end.

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

						Quoted Prices in				Significant
						Active Markets				Other				Significant				For the six
						for Identical				Observable				Unobservable				months ended
		Carrying Value at				Assets				Inputs				Inputs				June 30, 2009
(in thousands)		June 30, 2009				(Level 1)				(Level 2)				(Level 3)				Total Losses
Description of Assets
Impaired Loans		$	52,717			$	—			$	34,005			$	18,712			$	(15,481	)
OREO		$	4,035			$	—			$	2,645			$	1,390			$	(1,656	)

     The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FSP No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments.” The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not

necessarily indicative of the amounts the Company could have realized in a current market exchange as of June 30, 2009. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

FAIR VALUE INFORMATION

		June 30, 2009
		Carrying				Estimated
		Amount				Fair Value
		(amounts in thousands)
Assets
Cash and cash equivalents		$	221,242			$	221,242
Federal funds sold and Interest-bearing balances due from depository institutions			1,785				1,785
FHLB Stock			93,240				93,240
Investment securities available-for-sale			2,271,393				2,271,393
Investment securities held-to-maturity			6,347				4,365
Loans and lease finance receivables, net			3,540,001				3,542,047
Accrued interest receivable			26,320				26,320
Liabilities
Deposits:
Noninterest-bearing		$	1,420,535			$	1,420,535
Interest-bearing			2,562,685				2,566,105
Demand note to U.S. Treasury			8,995				8,995
Borrowings			1,631,111				1,687,698
Junior subordinated debentures			115,055				115,540
Accrued interest payable			8,559				8,559

     The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2009. 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.

4. BUSINESS SEGMENTS

     The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers and the Treasury Department. The Company’s subsidiary bank has 41 Business Financial Centers and 5 Commercial Banking Centers (branches), organized in 6 geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The Chief Operating Decision Maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and assessing performance. The Bank’s Business Financial and Commercial Banking Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk. Information related to the Company’s remaining operating segments which include construction lending, dairy and livestock lending, SBA lending, leasing, 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. Accounting principles generally accepted in the United States of America do 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 identified in the footnote on the summary of significant accounting policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees, included in the “Business Financial and Commercial Banking Centers” category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

     The following tables present the operating results and other key financial measures for the individual reportable segments for the three and six months ended June 30, 2009 and 2008:

		Three Months Ended June 30, 2009
		Business
		Financial
		Centers				Treasury				Other				Eliminations				Total
Interest income, including loan fees		$	38,556			$	26,030			$	11,189			$	—			$	75,775
Credit for funds provided (1)			12,717				—				5,233				(17,950	)			—
Total interest income			51,273				26,030				16,422				(17,950	)			75,775
Interest expense			7,300				13,188				1,192				—				21,680
Charge for funds used (1)			3,236				6,993				7,721				(17,950	)			—
Total interest expense			10,536				20,181				8,913				(17,950	)			21,680
Net interest income			40,737				5,849				7,509				—				54,095
Provision for credit losses			—				—				20,000				—				20,000
Net interest income after provision for credit losses		$	40,737			$	5,849				($12,491	)		$	—			$	34,095
Non-interest income			4,800				12,619				2,290				—				19,709
Non-interest expense			12,363				377				20,239				—				32,979
Segment pretax profit (loss)		$	33,174			$	18,091				($30,440	)		$	—			$	20,825