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NATIONAL BANK HOLDINGS CORP - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

August 8, 2014

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2014, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2013, 2012, and 2011. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements" located elsewhere in this quarterly report and in Item 1A"Risk Factors" in the annual report on Form 10-K, referenced above, and should be read herewith. Readers are cautioned that meaningful comparability of current period financial information to prior periods may be limited. Following our Hillcrest Bank acquisition on October 22, 2010, we completed three additional acquisitions: Bank Midwest on December 10, 2010, Bank of Choice on July 22, 2011 and Community Banks of Colorado on October 21, 2011. As a result, our operating results are limited to the periods since these acquisitions, and the comparability of periods is compromised due to the timing of these acquisitions. Additionally, in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, the assets acquired and liabilities assumed were recorded at fair value at their respective dates of acquisition. The comparability of data is also compromised by the FDIC loss sharing agreements in place that cover a portion of losses incurred on certain assets acquired in the Hillcrest Bank and the Community Banks of Colorado acquisitions. Overview National Bank Holdings Corporation is a bank holding company formed in 2009. Through our subsidiary, NBH Bank, N.A., we provide a variety of banking products to both commercial and consumer clients through a network of 97 banking centers, located in Colorado, the greater Kansas City area and Texas, and through on-line and mobile banking products. We operate under the following brand names: Community Banks of Colorado in Colorado, Bank Midwest in Kansas and Missouri, and Hillcrest Bank in Texas. In just over three years, we have completed the acquisition and integration of four problem or failed banks, three of which were FDIC-assisted. We have transformed these four banks into one collective banking operation with steadily increasing organic growth, prudent underwriting, and meaningful market share with continued opportunity for expansion. Our long-term business model utilizes our organic development infrastructure, low-risk balance sheet, continuous operational development and a disciplined acquisition strategy to create value and provide opportunities for growth. As of June 30, 2014, we had $4.9 billion in assets, $2.1 billion in loans, $3.9 billion in deposits and $0.9 billion in equity. We believe that our established presence positions us well for growth opportunities in our current and complementary markets. Our focus is on building strong banking relationships with small to mid-sized businesses and consumers, while maintaining a low risk profile designed to generate reliable income streams and attractive returns. Through our acquisitions, we have established a solid financial services franchise with a sizable presence for deposit gathering and client relationship building necessary for growth. Operating Highlights and Key Challenges Our operations resulted in the following highlights as of and for the six months ended June 30, 2014 (except as noted): Loan portfolio Organic loan originations totaled $483.7 million for the six months ended June 30, 2014, representing a 73.9% increase from the same period of 2013.



As of June 30, 2014, we have $1.8 billion of loans outstanding that are

associated with a "strategic" client relationship - a 39.6% annualized

growth for the six months ended June 30, 2014. Successfully exited $61.6 million, or 35.5% annualized, of the non-strategic loan portfolio. Credit quality Non 310-30 loans



Strong loss-share coverage on 40.5% of non-performing assets.

Net charge-offs on average non 310-30 loans remained low at 0.04% annualized.

ASC 310-30 loans Added a net $17.7 million to accretable yield for the acquired loans accounted for under ASC 310-30. 41

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The $14.8 million covered commercial and industrial loan pool that had previously been on non-accrual status was returned to accrual status during the first quarter of 2014 due to improved performance and predictability of cash flows within that pool.



Client deposit funded balance sheet Average transaction deposits and client repurchase agreements increased

$53.3 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, or 2.2%. Transaction account balances improved to 63.0% of total deposits as of June 30, 2014 from 61.0% at December 31, 2013.



As of June 30, 2014, total deposits and client repurchase agreements

made up 98.1% of our total liabilities.

We did not have any brokered deposits as of June 30, 2014.

Revenues and expenses The average annual yield on our loan portfolio was 6.85% for the six months ended June 30, 2014 compared to 8.05% for the six months ended



June 30, 2013, driven by the increasing originated loan balances coupled

with declining balances of higher-yielding purchased loans.

Cost of deposits improved six basis points to 0.37% for the six months

ended June 30, 2014 from 0.43% for the six months ended June 30, 2013

due to a $227.5 million decrease in average interest bearing deposits

and a $31.9 million increase in average demand deposits. Net interest margin widened to 3.89% during the six months ended June 30, 2014, compared to 3.82% during the six months ended June 30,



2013, driven by a seven basis points decrease in the cost of average

interest bearing liabilities. Operating costs before problem loan/OREO workout expenses and the



benefit of the change in the warrant liability declined $7.4 million, or

8.9%, during the six months ended June 30, 2014, compared to the same

period in 2013. The decrease in operating costs is attributable to

branch reorganizations and implementation of effective cost controls. Problem loan/OREO workout expenses totaled $4.8 million for the six months ended June 30, 2014, decreasing $5.6 million from the same period in 2013. Strong capital position As of June 30, 2014, our consolidated tier 1 leverage ratio was 16.2% and our consolidated tier 1 risk-based capital ratio was 33.2%.



The after-tax accretable yield on ASC 310-30 loans plus the after-tax

yield on the FDIC indemnification asset, net, in excess of 4.5%, an approximate yield on new loan originations, and discounted at 5%, adds $0.75 per share to our tangible book value per share as of June 30, 2014.



Tangible common book value per share was $18.53 before consideration of

the excess accretable yield value of $0.75 per share. During the six months ended June 30, 2014, we repurchased 2.3 million shares, or 5.1% of outstanding shares, at a weighted average price of $19.47 per share. Since late 2012 and through August 7, 2014, we have repurchased 10.2 million shares, or 19.5% of outstanding shares, at an attractive weighted average price of $19.70 per share.



On July 17, 2014, the Board of Directors approved a new authorization to

repurchase up to $50.0 million of the Company's common stock.

Key Challenges There are a number of significant challenges confronting us and our industry. We face a variety of challenges in implementing our business strategy, including being a new entity, the challenges of acquiring distressed franchises and rebuilding them, deploying our remaining capital on quality acquisition targets, low interest rates and low demand from borrowers and intense competition for loans. General economic conditions have been modestly improving in recent quarters. However, continued uncertainty about the strength of the recovery remains and has hindered the pace and advancement of an economic recovery, both nationally and in our markets. Residential real estate values have largely recovered from their lows, and we continue to consider this with guarded optimism. Commercial real estate values have been recovering slightly slower than residential real estate, and it is difficult to determine how strong this recovery is and how long it will last. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio. Our total loan balances increased $233.7 million during the six months ended June 30, 2014, or 25.4% annualized on the strength of $483.7 million of loan originations. While we have reached our loan growth inflection point, whereby total 42 -------------------------------------------------------------------------------- originations are now outpacing problem loan resolution, interest rates remain low and intense loan competition has been limiting the yields we have been able to obtain on interest earning assets. For example, our acquired loans generally have produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield. As a result, we expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and any growth in our interest income will be dependent on our ability to generate sufficient volumes of high-quality originated loans. Increased regulation, such as the rules and regulations promulgated under the Dodd-Frank Act and potential higher required capital ratios, is adding costs and uncertainty to all U.S. banks and could reduce our competitiveness as compared to other financial service providers or lead to industry-wide decreases in profitability. While certain external factors are out of our control and may provide obstacles during the implementation of our business strategy, we believe we are prepared to deal with these challenges. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes. Performance Overview As a financial institution, we routinely evaluate and review our consolidated statements of financial condition and results of operations. We evaluate the levels, trends and mix of the statements of financial condition and statements of operations line items and compare those levels to our budgeted expectations, our peers, industry averages and trends. Within our statements of financial condition, we specifically evaluate and manage the following: Loan balances - We monitor our loan portfolio to evaluate loan originations, payoffs, and profitability. We forecast loan originations and payoffs within the overall loan portfolio, and we work to resolve problem loans and OREO in an expeditious manner. We track the runoff of our covered assets as well as the loan relationships that we have identified as "non-strategic" and put particular emphasis on the buildup of "strategic" relationships. Asset quality - We monitor the asset quality of our loans and OREO through a variety of metrics, and we work to resolve problem assets in an efficient manner. Specifically, we monitor the resolution of problem loans through payoffs, pay downs and foreclosure activity. We marked all of our acquired assets to fair value at the date of their respective acquisitions, taking into account our estimation of credit quality. Many of the loans that we acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado acquisitions had deteriorated credit quality at the respective dates of acquisition. These loans are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. This guidance is described more fully below under "-Application of Critical Accounting Policies" and in note 2 in our consolidated financial statements in our 2013 Annual Report on Form 10-K. Our evaluation of traditional credit quality metrics and the allowance for loan losses ("ALL") levels, especially when compared to industry averages or to other financial institutions, takes into account that any credit quality deterioration that existed at the date of acquisition was considered in the original valuation of those assets on our balance sheet. Additionally, many of these assets are covered by loss sharing agreements. All of these factors limit the comparability of our credit quality and ALL levels to peers or other financial institutions. Deposit balances - We monitor our deposit levels by type, market and rate. Our loans are funded through our deposit base, and we seek to optimize our deposit mix in order to provide reliable, low-cost funding sources. Liquidity - We monitor liquidity based on policy limits and through projections of sources and uses of cash. In order to test the adequacy of our liquidity, we routinely perform various liquidity stress test scenarios that incorporate wholesale funding maturities, if any, certain deposit run-off rates and access to borrowings. We manage our liquidity primarily through our balance sheet mix, including our cash and our investment security portfolio, and the interest rates that we offer on our loan and deposit products, coupled with contingency funding plans as necessary. Capital - We monitor our capital levels, including evaluating the effects of share repurchases and potential acquisitions, to ensure continued compliance with regulatory requirements and with the OCC Operating Agreement that we entered into in connection with our Bank Midwest acquisition, which is described under "Supervision and Regulation"in our 2013 Annual Report on Form 10-K. We review our tier 1 leverage capital ratios, our tier 1 risk-based capital ratios and our total risk-based capital ratios on a regular basis. Within our consolidated results of operations, we specifically evaluate the following: Net interest income - Net interest income represents the amount by which interest income on interest earning assets exceeds interest expense incurred on interest bearing liabilities. We generate interest income through interest and dividends on loans, investment securities and interest bearing bank deposits. Our acquired loans have generally produced higher yields than our originated loans due to the recognition of accretion of fair value adjustments and accretable yield and, as a result, we have historically had downward pressure on our interest income. Solid loan origination growth is stabilizing interest income by 43 -------------------------------------------------------------------------------- offsetting the decrease in interest income, from the higher yielding purchased loans, with the interest income earned on new loan originations . We incur interest expense on our interest bearing deposits and repurchase agreements and would also incur interest expense on any future borrowings, including any debt assumed in acquisitions. We strive to maximize our interest income by acquiring and originating loans and investing excess cash in investment securities. Furthermore, we seek to minimize our interest expense through low-cost funding sources, thereby maximizing our net interest income. Provision for loan losses - The provision for loan losses includes the amount of expense that is required to maintain the ALL at an adequate level to absorb probable losses inherent in the non 310-30 loan portfolio at the balance sheet date. Additionally, we incur a provision for loan losses on loans accounted for under ASC 310-30 as a result of a decrease in the net present value of the expected future cash flows during the periodic remeasurement of the cash flows associated with these pools of loans. The determination of the amount of the provision for loan losses and the related ALL is complex and involves a high degree of judgment and subjectivity to maintain a level of ALL that is considered by management to be appropriate under GAAP. Non-interest income - Non-interest income consists of service charges, bank card fees, gains on sales of mortgages, gains on sales of investment securities, gains on previously charged-off acquired loans, OREO related write-ups and other income and other non-interest income. Also included in non-interest income is FDIC indemnification asset amortization and other FDIC loss sharing income, which consists of reimbursement of costs related to the resolution of covered assets, and amortization of our clawback liability. For additional information, see "-Application of Critical Accounting Policies-Acquisition Accounting Application and the Valuation of Assets Acquired and Liabilities Assumed" and note 2 in our consolidated financial statements in our 2013 Annual Report on Form 10-K. Due to fluctuations in the amortization rates on the FDIC indemnification asset and the amortization of the clawback liability and due to varying levels of expenses and income related to the resolution of covered assets, the FDIC loss sharing income is not consistent on a period-to-period basis and, is expected to decline over time as covered assets are resolved and as the FDIC loss-sharing agreements expire over the next few years. Non-interest expense - The primary components of our non-interest expense are salaries and benefits, occupancy and equipment, telecommunications and data processing and intangible asset amortization. Any expenses related to the resolution of covered assets are also included in non-interest expense. These expenses are dependent on individual resolution circumstances and, as a result, are not consistent from period to period. We seek to manage our non-interest expense in order to maximize efficiencies. Net income - We utilize traditional industry return ratios such as return on average assets, return on average tangible assets, return on average equity, return on average tangible equity and return on risk-weighted assets to measure and assess our returns in relation to our balance sheet profile. In evaluating the financial statement line items described above, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated: 44 -------------------------------------------------------------------------------- As of and for the three months ended



As of and for the six months ended

June 30, 2014 December 31, 2013 June 30, 2013 June 30, 2014 June 30, 2013 Key Ratios(1) Return on average assets 0.17 % 0.08 % 0.22 % 0.15 % 0.19 % Return on average tangible assets(2) 0.25 % 0.15 % 0.29 % 0.22 % 0.26 % Return on average equity 0.96 % 0.42 % 1.08 % 0.80 % 0.93 % Return on average tangible common equity(2) 1.46 % 0.82 % 1.49 % 1.28 % 1.33 % Return on risk weighted assets 0.36 % 0.19 % 0.61 % 0.31 % 0.53 % Interest-earning assets to interest-bearing liabilities (end of period)(3) 138.53 % 137.05 % 137.95 % 138.53 % 137.95 % Loans to deposits ratio (end of period) 54.25 % 48.46 % 43.37 % 54.25 % 43.37 % Average equity to average assets 18.14 % 19.02 % 20.72 % 18.24 % 20.63 % Non-interest bearing deposits to total deposits (end of period) 18.65 % 17.59 % 16.75 % 18.65 % 16.75 % Net interest margin 3.81 % 3.78 % 3.77 % 3.87 % 3.82 % Net interest margin (fully taxable equivalent)(2)(4) 3.83 % 3.78 % 3.77 % 3.89 % 3.82 % Interest rate spread(5) 3.72 % 3.66 % 3.64 % 3.77 % 3.69 % Yield on earning assets 4.14 % 4.11 % 4.13 % 4.19 % 4.20 % Yield on earning assets (fully taxable equivalent)(2)(3) 4.16 % 4.11 % 4.13 % 4.21 % 4.20 % Cost of interest bearing liabilities(3) 0.44 % 0.45 % 0.49 % 0.44 % 0.51 % Cost of deposits 0.37 % 0.38 % 0.42 % 0.37 % 0.43 % Non-interest expense to average assets 3.27 % 3.50 % 3.49 % 3.25 % 3.58 % Efficiency ratio(6) 86.40 % 93.36 % 85.05 % 87.01 % 86.69 % Dividend payout ratio 100.00 % 250.00 % 83.33 % 125.00 % 100.00 % Asset Quality Data(7)(8)(9) Non-performing loans to total loans 2.12 % 1.95 % 2.77 % 2.12 % 2.77 % Covered non-performing loans to total non-performing loans 22.40 % 62.64 % 59.65 % 22.40 % 59.65 % Non-performing assets to total assets 2.07 % 2.18 % 2.46 % 2.07 % 2.46 % Covered non-performing assets to total non-performing assets 40.51 % 57.53 % 58.12 % 40.51 % 58.12 % Allowance for loan losses to total loans 0.75 % 0.68 % 0.69 % 0.75 % 0.69 % Allowance for loan losses to total non-covered loans 0.85 % 0.81 % 0.93 % 0.85 % 0.93 % Allowance for loan losses to non-performing loans 35.11 % 34.71 % 24.81 % 35.11 % 24.81 % Net charge-offs (recoveries) to average loans 0.01 % (0.07 %) 0.63 % 0.04 % 0.76 % (1) Ratios are annualized.



(2) Ratio represents non-GAAP financial measure. See non-GAAP reconciliation on

page 48.

(3) Interest earning assets include assets that earn interest/accretion or

dividends, except for the FDIC indemnification asset, which is not part of

interest earning assets. Any market value adjustments on investment securities are excluded from interest-earning assets. Interest bearing liabilities include liabilities that must be paid interest.



(4) Net interest margin represents net interest income, including accretion

income on interest earning assets, as a percentage of average interest earning assets. 45

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(5) Interest rate spread represents the difference between the weighted average

yield on interest earning assets and the weighted average cost of interest

bearing liabilities.

(6) The efficiency ratio represents non-interest expense, less intangible asset

amortization, as a percentage of net interest income plus non-interest

income.

(7) Non-performing loans consist of non-accruing loans, loans 90 days or more

past due and still accruing interest and restructured loans, but exclude any

loans accounted for under ASC 310-30 in which the pool is still performing.

These ratios may, therefore, not be comparable to similar ratios of our

peers.

(8) Non-performing assets include non-performing loans, other real estate owned

and other repossessed assets.

(9) Total loans are net of unearned discounts and fees.

About Non-GAAP Financial Measures Certain of the financial measures and ratios we present, including "tangible assets," "return on average tangible assets," "return on average tangible common equity," "tangible common book value," "tangible common book value per share," "tangible common equity," "tangible common equity to tangible assets," and "fully taxable equivalent" metrics are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as "non-GAAP financial measures." We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods. These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. In particular, the items that we exclude in our adjustments are not necessarily consistent with the items that our peers may exclude from their results of operations and key financial measures and therefore may limit the comparability of similarly named financial measures and ratios. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance. A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is as follows (in thousands, except share and per share information). 46 --------------------------------------------------------------------------------

As of and for the three months ended June 30, 2014 December 31, 2013 June 30, 2013 Total shareholders' equity $ 863,933$ 897,792$ 1,044,243 Less: goodwill (59,630 ) (59,630 ) (59,630 ) Add: deferred tax liability related to goodwill 5,447 4,671 3,896 Less: intangible assets, net (19,556 ) (22,229 ) (24,902 )



Tangible common equity (non-GAAP) $ 790,194$ 820,604

$ 963,607 Total assets $ 4,880,186$ 4,914,115$ 5,220,688 Less: goodwill (59,630 ) (59,630 ) (59,630 ) Add: deferred tax liability related to goodwill 5,447 4,671 3,896 Less: intangible assets, net (19,556 ) (22,229 ) (24,902 ) Tangible assets (non-GAAP) $ 4,806,447$ 4,836,927



$ 5,140,052

Total shareholders' equity to total assets 17.70 % 18.27 % 20.00 % Less: impact of goodwill and intangible assets, net (1.26 )% (1.30 )% (1.25 )% Tangible common equity to tangible assets (non-GAAP) 16.44 % 16.97 % 18.75 % Common book value per share calculations: Total shareholders' equity $ 863,933$ 897,792$ 1,044,243 Divided by: ending shares outstanding 42,637,687 44,918,336



51,377,198

Common book value per share $ 20.26 $ 19.99



$ 20.33

Tangible common book value per share calculations: Tangible common equity $ 790,194$ 820,604$ 963,607 Divided by: ending shares outstanding 42,637,687 44,918,336



51,377,198

Tangible common book value per share (non-GAAP) $ 18.53 $ 18.27



$ 18.76

Tangible common book value per share, excluding accumulated other comprehensive income (loss) calculations: Tangible common equity (non-GAAP) $ 790,194$ 820,604$ 963,607 Less: accumulated other comprehensive income (loss) (5,076 ) 6,756 (9,250 ) Tangible common book value, excluding accumulated other comprehensive income (loss), net of tax 785,118 827,360 954,357 Divided by: ending shares outstanding 42,637,687 44,918,336



51,377,198

Tangible common book value per share, excluding accumulated other comprehensive income (loss), net of tax (non-GAAP) $ 18.41 $ 18.42 $ 18.58 47

-------------------------------------------------------------------------------- As of and for the three months ended



As of and for the six months ended

June 30, 2014 December 31, 2013 June 30, 2013 June 30, 2014 June 30, 2013 Return on average assets 0.17 % 0.08 % 0.22 % 0.15 % 0.19 % Add: impact of goodwill and intangible assets, after tax, net 0.01 % 0.00 % 0.00 % 0.00 % 0.00 % Add: impact of core deposit intangible amortization expense, after tax 0.07 % 0.07 % 0.07 % 0.07 % 0.07 % Return on average tangible assets (non-GAAP) 0.25 % 0.15 % 0.29 % 0.22 % 0.26 % Return on average equity 0.96 % 0.42 % 1.08 % 0.80 % 0.93 % Add: impact of goodwill and intangible assets, after tax, net 0.09 % 0.07 % 0.08 % 0.08 % 0.08 % Add: impact of core deposit intangible amortization expense, after tax 0.41 % 0.33 % 0.33 % 0.40 % 0.32 % Return on average tangible common equity (non-GAAP) 1.46 % 0.82 % 1.49 % 1.28 % 1.33 % Yield on earning assets 4.14 % 4.11 % 4.13 % 4.19 % 4.20 % Add: impact of taxable equivalent adjustment 0.02 % 0.00 % 0.00 % 0.02 % 0.00 % Yield on earning assets (fully taxable equivalent) (non-GAAP) 4.16 % 4.11 % 4.13 % 4.21 % 4.20 % Net interest margin 3.81 % 3.78 % 3.77 % 3.87 % 3.82 % Add: impact of taxable equivalent adjustment 0.02 % 0.00 % 0.00 % 0.02 % 0.00 % Net interest margin (fully taxable equivalent) (non-GAAP) 3.83 % 3.78 % 3.77 % 3.89 % 3.82 % 48

-------------------------------------------------------------------------------- Application of Critical Accounting Policies We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the fair value determination of assets acquired and liabilities assumed in business combinations and the application of acquisition accounting, the accounting for acquired loans and the related FDIC indemnification asset, the determination of the ALL, and the valuation of stock-based compensation. These critical accounting policies and estimates are summarized in the sections captioned "Application of Critical Accounting Policies" in Management's Discussion and Analysis in our 2013 Annual Report on Form 10-K, and are further analyzed with other significant accounting policies in note 2, "Summary of Significant Accounting Policies" in the notes to our consolidated financial statements for the year ended December 31, 2013. There have been no significant changes to the application of critical accounting policies since December 31, 2013. Financial Condition Total assets were $4.9 billion at both June 30, 2014 and December 31, 2013. We originated $483.7 million loans during the six months ended June 30, 2014, which grew the balances in our strategic portfolio at an annualized rate of 39.6%. Total non-strategic loan balances decreased $61.6 million, or 35.5% annualized, which was a reflection of our successful workout progress on acquired problem loans (many of which were covered). As a result, total loans were $2.1 billion at June 30, 2014, and grew $233.7 million, or 25.4% annualized, from December 31, 2013. Our FDIC indemnification asset decreased $13.0 million during the six months ended June 30, 2014, primarily as a result of amortization that resulted from an overall increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. These increases in cash flows also contributed to a net reclassification of $17.7 million of non-accretable difference to accretable yield during the period, which is being accreted to income over the remaining life of the loans. Total deposits increased $18.0 million from December 31, 2013 to June 30, 2014, which included an increase of $85.7 million in lower cost demand, savings, and money market ("transaction") deposits, partially offset by a $67.6 million decrease in time deposits as we sought to retain only those depositors who were interested in time deposits at market rate and developing a banking relationship and continued our focus on migrating toward a client-based deposit mix with higher concentrations of transaction deposits. Investment Securities Available-for-sale Total investment securities available-for-sale were $1.6 billion at June 30, 2014, compared to $1.8 billion at December 31, 2013, a decrease of $138.3 million, or 7.7%. During the six months ended June 30, 2014, maturities and pay downs of available-for-sale securities totaled $157.9 million. There were no purchases of available-for-sale securities during the six months ended June 30, 2014. Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated (in thousands): June 30, 2014 December 31, 2013 Weighted Weighted Amortized Fair Percent of average Amortized Fair Percent of average cost value portfolio yield cost value portfolio yield Asset-backed securities $ 1,148$ 1,149 0.07 % 0.64 % $ 4,534$ 4,537 0.26 % 0.61 % Mortgage-backed securities ("MBS"): Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises 443,794 453,992 27.56 % 2.27 % 490,321 494,990 27.72 % 2.22 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises 1,210,767 1,191,636 72.34 % 1.82 % 1,320,998 1,285,582 72.00 % 1.83 % Other securities 419 419 0.03 % 0.00 % 419 419 0.02 % 0.00 % Total investment securities available-for-sale $ 1,656,128$ 1,647,196 100.00 %



1.94 % $ 1,816,272$ 1,785,528 100.00 % 1.94 %

As of June 30, 2014, approximately 99.9% of the available-for-sale investment portfolio was backed by mortgages as compared to 99.7% at December 31, 2013. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA") securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities. 49 -------------------------------------------------------------------------------- At June 30, 2014 and December 31, 2013, adjustable rate securities comprised 7.6% and 7.8%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.2% per annum, at June 30, 2014 and December 31, 2013. The available-for-sale investment portfolio included $8.9 million and $30.7 million of net unrealized losses, at June 30, 2014 and December 31, 2013, respectively, inclusive of $21.0 million and $18.4 million of unrealized gains, respectively. In addition to the U.S. Government agency or sponsored enterprise backings of our MBS portfolio, we believe any unrecognized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were other-than-temporarily-impaired. The estimated weighted average life of the available-for-sale MBS portfolio as of June 30, 2014 and December 31, 2013 was 3.6 years and 3.9 years, respectively, the decrease of which is primarily due to an adjustment in expected prepayment speeds. This estimate is based on various assumptions, including repayment characteristics, and actual results may differ. As of June 30, 2014, the duration of the total available-for-sale investment portfolio was 3.4 years. As of December 31, 2013, the duration of the total available-for-sale investment portfolio was 3.6 years.



Held-to-maturity

At June 30, 2014, we held $588.4 million of held-to-maturity investment securities, compared to $641.9 million at December 31, 2013, a decrease of $53.5 million, or 8.3%. During the six months ended June 30, 2014 we did not purchase any held-to-maturity securities. Held-to-maturity investment securities are summarized as follows as of the date indicated (in thousands): June 30, 2014 Amortized Fair Percent of Weighted cost value portfolio average yield Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises $ 469,381$ 475,909 79.77 % 3.30 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises 119,001 116,339 20.23 % 1.71 % Total investment securities held-to-maturity $ 588,382$ 592,248 100.00 % 2.97 % December 31, 2013 Amortized Fair Percent of Weighted cost value portfolio average yield Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises $ 513,090$ 511,489 79.93 % 3.31 % Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises 128,817 124,916 20.07 % 1.70 % Total investment securities held-to-maturity $ 641,907$ 636,405 100.00 % 2.99 % The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities. The fair value of the held-to-maturity investment portfolio was $592.2 million and $636.4 million, at June 30, 2014 and December 31, 2013, respectively, and included $3.9 million of net unrealized gains and $5.5 million of net unrealized losses for the respective periods. The estimated weighted average life of the held-to-maturity investment portfolio was 3.5 years as of June 30, 2014 and 3.8 years as of December 31, 2013. As of June 30, 2014, the duration of the total held-to-maturity investment portfolio was 3.3 years and the duration of the entire investment securities portfolio was 3.4 years. As of December 31, 2013, the duration of the total held-to-maturity investment portfolio was 3.5 years and the duration of the entire investment securities portfolio was 3.6 years. Loans Overview At June 30, 2014 our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our four acquisitions to date. The majority of the loans acquired in the Hillcrest Bank and Community Banks of Colorado transaction are covered by loss sharing agreements with the FDIC. 50 -------------------------------------------------------------------------------- As discussed in note 4 to our audited consolidated financial statements, in accordance with applicable accounting guidance, all acquired loans are recorded at fair value at the date of acquisition, and an allowance for loan losses is not carried over with the loans but, rather, the fair value of the loans encompasses both credit quality and contractual interest rate considerations. Loans that exhibit signs of credit deterioration at the date of acquisition are accounted for in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Management accounted for all loans acquired in the Hillcrest Bank, Bank of Choice and Community Banks of Colorado acquisitions under ASC 310-30, with the exception of loans with revolving privileges which were outside the scope of ASC 310-30. In our Bank Midwest transaction, we did not acquire all of the loans of the former Bank Midwest but, rather, selected certain loans based upon specific criteria of performance, adequacy of collateral, and loan type that were performing at the time of acquisition. As a result, none of the loans acquired in the Bank Midwest transaction are accounted for under ASC 310-30. Consistent with differences in the accounting, the loan portfolio is presented in two categories: (i) ASC 310-30 loans and (ii) non 310-30 loans. The portfolio is further stratified based on (i) loans covered by FDIC loss sharing agreements, or "covered loans," and (ii) loans that are not covered by FDIC loss sharing agreements, or "non-covered loans." Additionally, inherent in the nature of acquiring problem banks, only certain of our acquired clients conform to our long-term business model of in-market, relationship-oriented banking clients. We have developed a management tool to evaluate the progress of working out the problem loans acquired in our FDIC-assisted acquisitions and the progress of organic loan growth, whereby we have designated loans as "strategic" or "non-strategic." Strategic loans include all originated loans in addition to those acquired loans inside our operating markets that meet our credit risk profile. Identification as strategic for acquired loans was made at the time of acquisition. Criteria utilized in the designation of a loan as "strategic" include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with our current underwriting standards. At June 30, 2014, strategic loans totaled $1.8 billion and had strong credit quality as represented by a non-accrual loans ratio of 0.9%. We believe this presentation of our loan portfolio provides a meaningful basis to understand the underlying drivers of changes in our loan portfolio balances. Due to the unique structure and accounting treatment in our loan portfolio, we utilize four primary presentations to analyze our loan portfolio, depending on the purpose of the analysis. Those are: To analyze: We look at: Loan growth and production efforts Strategic balances and loan originations Workout efforts of our purchased non-strategic portfolio Non-strategic balances and accretable yield Risk mitigants of our non-performing FDIC loss-share coverage and fair value loans marks Interest income ASC 310-30 and non 310-30 yields and accretable yield For information regarding the loan portfolio composition and the breakdown of the portfolio between ASC 310-30 loans, non 310-30 loans, along with the amounts that are covered and non-covered, see note 4. Strategic loans comprised 86.2% of the total loan portfolio at June 30, 2014, compared to 81.1% at December 31, 2013. The table below shows the loan portfolio composition categorized between strategic and non-strategic at the respective dates (in thousands): June 30, 2014 December 31, 2013 Strategic Non-strategic Total Strategic Non-strategic Total Commercial $ 627,588$ 59,390$ 686,978$ 411,589$ 71,906$ 483,495 Agriculture 156,760 3,380 160,140 154,811 5,141 159,952 Owner-occupied commercial real estate 139,892 24,530 164,422 123,386 30,306 153,692 Commercial real estate 252,298 174,117 426,415 210,265 210,263 420,528 Residential real estate 592,239 24,798 617,037 570,455 29,469 599,924 Consumer 30,676 2,163 32,839 33,599 2,904 36,503 Total $ 1,799,453$ 288,378$ 2,087,831$ 1,504,105$ 349,989$ 1,854,094 Total loans increased $233.7 million from December 31, 2013, ending at $2.1 billion at June 30, 2014. The 12.6% increase in total loans was primarily driven by a $295.3 million increase in our strategic loan portfolio, partially offset by a $61.6 million decrease in our non-strategic loan portfolio. The increase in strategic loans of $295.3 million, or 39.6% annualized, at June 30, 2014 compared to December 31, 2013, was driven by strong loan originations. We successfully increased our balances in our strategic commercial, agriculture, owner-occupied commercial real estate, commercial real estate and residential real estate portfolios as we continued to generate new relationships with individuals and small to mid-sized businesses. We have experienced particularly strong loan growth in our commercial portfolio, which at June 30, 2014, was comprised of energy/oil/ 51 -------------------------------------------------------------------------------- gas-related loans of $144.0 million, finance and insurance-related loans of $66.3 million, manufacturing related loans of $90.0 million, property management related loans of $72.9 million, and a variety of smaller subcategories of commercial and industrial loans. Our enterprise-level, dedicated special asset resolution team has had continued success working out non-strategic loans acquired in our FDIC-assisted transactions, which complimented the repayment of non-strategic loans that do not conform to our business model of in-market, relationship-oriented loans with credit metrics commensurate with our current underwriting standards. New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. New loan originations of $483.7 million during the six months ended June 30, 2014, were up $205.6 million, or 73.9% from the same period of the prior year as a result of market penetration and the deployment of specialized commercial lending groups during 2013. The following table represents new loan originations for the last five quarters (in thousands): Second quarter First quarter Fourth quarter Third quarter Second quarter 2014 2014 2013 2013 2013 Commercial $ 133,671$ 130,096$ 159,931$ 80,833 $ 24,982 Agriculture 10,288 4,959 23,610 5,689 22,901 Owner-occupied commercial real estate 28,803 21,002 6,380 21,226 7,577 Commercial real estate 45,903 29,633 14,579 28,855 23,976 Residential real estate 44,539 27,812 36,113 51,749 86,161 Consumer 3,556 3,461 3,594 3,326 3,157 Total $ 266,760$ 216,963$ 244,207$ 191,678$ 168,754 52

-------------------------------------------------------------------------------- The tables below show the contractual maturities of our loans for the dates indicated (in thousands): June 30, 2014 Due within Due after 1 but Due after 1 Year within 5 Years 5 Years Total Commercial $ 122,993 $ 428,830 $ 135,155$ 686,978 Agriculture 32,433 74,605 53,102 160,140 Owner-occupied commercial real estate 32,345 61,942 70,134 164,421 Commercial real estate 137,026 200,258 89,131 426,415 Residential real estate 27,094 42,053 547,891 617,038 Consumer 12,925 14,054 5,860 32,839 Total loans $ 364,816 $ 821,742 $ 901,273$ 2,087,831 Covered $ 170,699 $ 49,665 $ 42,493$ 262,857 Non-covered 194,117 772,077 858,780 1,824,974 Total loans $ 364,816 $ 821,742



$ 901,273$ 2,087,831

December 31, 2013 Due within Due after 1 but Due after 1 Year within 5 Years 5 Years Total Commercial $ 128,368 $ 297,120 $ 58,007$ 483,495 Agriculture 32,258 80,681 47,013 159,952 Owner-occupied commercial real estate 20,382 72,839 60,472 153,693 Commercial real estate 135,673 205,046 79,808 420,527 Residential real estate 36,085 52,079 511,760 599,924 Consumer 14,284 15,281 6,938 36,503 Total loans $ 367,050 $ 723,046 $ 763,998$ 1,854,094 Covered $ 175,452 $ 96,216 $ 37,729$ 309,397 Non-covered 191,598 626,830 726,269 1,544,697 Total loans $ 367,050 $ 723,046 $ 763,998$ 1,854,094 53

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The stated interest rate sensitivity (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of non 310-30 loans with maturities over one year is as follows at the dates indicated (in thousands):

June 30, 2014 Fixed Variable Total Weighted Weighted Weighted Balance average rate Balance average rate Balance average rate Commercial $ 158,575 3.95 % $ 387,584 3.48 % $ 546,159 3.62 % Agriculture 73,366 4.98 % 34,888 4.72 % 108,254 4.90 % Owner-occupied commercial real estate 70,460 4.43 % 30,775 4.29 % 101,235 4.39 % Commercial real estate 106,084 4.70 % 107,244 3.44 % 213,328 4.06 % Residential real estate 327,438 3.49 % 228,843 3.61 % 556,281 3.54 % Consumer 10,298 6.11 % 4,616 4.09 % 14,914 5.48 % Total loans with > 1 year maturity $ 746,221 4.03 % $ 793,950 3.60 % $ 1,540,171 3.81 % Covered $ 5,179 3.52 % $ 10,509 2.85 % $ 15,688 3.11 % Non-covered 741,042 4.03 % 783,441 3.61 % 1,524,483 3.82 % Total loans with > 1 year maturity $ 746,221 4.03 % $ 793,950 3.60 % $ 1,540,171 3.81 % December 31, 2013 Fixed Variable Total Weighted Weighted Weighted Balance average rate Balance average rate Balance average rate Commercial $ 76,521 4.36 % $ 248,795 3.79 % $ 325,316 3.93 % Agriculture 68,701 5.02 % 35,898 4.47 % 104,599 4.83 % Owner-occupied commercial real estate 59,939 4.61 % 31,492 4.19 % 91,431 4.46 % Commercial real estate 92,418 4.62 % 83,678 3.81 % 176,096 4.29 % Residential real estate 316,083 3.49 % 208,361 3.64 % 524,444 3.55 % Consumer 10,683 6.24 % 4,617 4.20 % 15,300 5.63 % Total loans with > 1 year maturity $ 624,345 4.11 % $ 612,841 3.80 % $ 1,237,186 3.96 % Covered $ 11,044 3.74 % $ 7,057 5.97 % $ 18,101 4.54 % Non-covered 613,301 4.11 % 605,784 3.78 % 1,219,085 3.95 % Total loans with > 1 year maturity $ 624,345 4.11 % $ 612,841 3.80 % $ 1,237,186 3.96 % Accretable Yield At June 30, 2014, the accretable yield balance was $116.1 million compared to $130.6 million at December 31, 2013. We re-measure the expected cash flows of all 28 remaining loan pools accounted for under ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. During the six months ended June 30, 2014 and 2013, we reclassified a net $17.7 million and $35.0 million, respectively, from non-accretable difference to accretable yield, as a result of these remeasurements. In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. Total remaining accretable yield and fair value mark was as follows for the dates indicated (in thousands): June 30, 2014



December 31, 2013 Remaining accretable yield on loans accounted for under ASC 310-30

$ 116,095 $ 130,624 Remaining accretable fair value mark on loans not accounted for under ASC 310-30 9,001 10,755



Total remaining accretable yield and fair value mark $ 125,096 $

141,379 Loss-Share Coverage We have two loss sharing agreements with the FDIC for the assets related to the Hillcrest Bank acquisition and a separate loss sharing agreement that covers certain assets related to the Community Banks of Colorado acquisition, whereby the FDIC will 54 -------------------------------------------------------------------------------- reimburse us for a portion of the losses and expenses incurred as a result of the resolution and disposition of the covered assets of these banks. The details of these agreements are more fully described in Management's Discussion and Analysis in our 2013 Annual Report on Form 10-K. The categories, and the respective loss thresholds and coverage amounts related to the Hillcrest Bank loss sharing agreement are as follows (in thousands): Commercial Single family Loss-Coverage Loss-Coverage Tranche Loss Threshold Percentage Tranche Loss Threshold Percentage 1 Up to $295,592 60% 1 Up to $4,618 60% 2 $295,593-405,293 0% 2 $4,618-8,191 30% 3 >$405,293 80% 3 >$8,191 80% The categories, and the respective loss thresholds and coverage amounts related to the Community Banks of Colorado loss sharing agreement are as follows (in thousands): Tranche Loss Threshold Loss-Coverage Percentage 1 Up to $204,194 80% 2 $204,195-308,020 30% 3 >$308,020 80% Under the Hillcrest Bank and Community Banks of Colorado loss sharing agreements, the reimbursable losses from the FDIC are based on the book value of the related covered assets as determined by the FDIC at the date of acquisition, and the FDIC's book value does not necessarily correlate with our book value of the same assets. This difference is primarily because we recorded the assets at fair value at the date of acquisition in accordance with applicable accounting guidance. As of June 30, 2014, we had incurred $203.3 million of estimated losses on our Hillcrest Bank covered assets since the beginning of the loss sharing agreement as measured by the FDIC's book value, substantially all of which was related to the commercial assets. Additionally, as of June 30, 2014, we had incurred approximately $137.8 million of estimated losses related to our Community Banks of Colorado loss sharing agreement. The claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. Asset Quality All of the assets acquired in our acquisitions were marked to fair value at the date of acquisition, and the fair value adjustments to loans included a credit quality component. We utilize traditional credit quality metrics to evaluate the overall credit quality of our loan portfolio; however, our credit quality ratios are limited in their comparability to industry averages or to other financial institutions because: 1. Any asset quality deterioration that existed at the date of acquisition was considered in the original fair value adjustments; and 2. 40.5% of our non-performing assets (by dollar amount) at June 30, 2014 were covered by loss sharing agreements with the FDIC. Asset quality is fundamental to our success. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate. Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution to the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $250,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below. 55 -------------------------------------------------------------------------------- Our internal risk rating system uses a series of grades which reflect our assessment of the credit quality of covered and non-covered loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements. Loans that are perceived to have acceptable risk are categorized as "Pass" loans. "Special mention" loans represent loans that have potential credit weaknesses that deserve close attention. Special mention loans include borrowers that have potential weaknesses or unwarranted risks that, unless corrected, may threaten the borrower's ability to meet debt service requirements. However, these borrowers are still believed to have the ability to respond to and resolve the financial issues that threaten their financial situation. Loans classified as "Substandard" have a well-defined credit weakness and are inadequately protected by the current paying capacity of the obligor or of the collateral pledged, if any. Although these loans are identified as potential problem loans, they may never become non-performing. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. "Doubtful" loans are loans that management believes that collection of payments in accordance with the terms of the loan agreement are highly questionable and improbable. Doubtful loans are deemed impaired and put on non-accrual status. In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered "troubled debt restructurings" in accordance with ASC 310-40 Troubled Debt Restructurings by Creditors. Under this guidance, modifications to loans that fall within the scope of ASC 310-30 are not considered troubled debt restructurings, regardless of otherwise meeting the definition of a troubled debt restructuring. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the lower of the related loan balance or the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in carrying value charged to impairments on OREO. Non-performing Assets Non-performing assets consist of covered and non-covered non-accrual loans, accruing loans 90 days or more past due, troubled debt restructurings, OREO and other repossessed assets. However, loans and troubled debt restructurings accounted for under ASC 310-30, as described below, may be excluded from our non-performing assets to the extent that the cash flows of the loan pools are still estimable. Our non-performing assets included $9.9 million and $22.6 million of covered loans at June 30, 2014 and December 31, 2013, respectively, and $30.8 million and $38.8 million of covered OREO at June 30, 2014 and December 31, 2013, respectively. In addition to being covered by loss sharing agreements, these assets were marked to fair value at the time of acquisition, mitigating much of our loss potential on these non-performing assets. As a result, the levels of our non-performing assets are not fully comparable to those of our peers or to industry benchmarks. Loans accounted for under ASC 310-30 were recorded at fair value based on cash flow projections that considered the deteriorated credit quality and expected losses. These loans are accounted for on a pool basis and any non-payment of contractual principal or interest is considered in our periodic re-estimation of the expected future cash flows. To the extent that we decrease our cash flow projections, we record an immediate impairment expense through the provision for loan losses. We recognize any increases to our cash flow projections on a prospective basis through an increase to the pool's yield over its remaining life once any previously recorded impairment expense has been recouped. As a result of this accounting treatment, these pools may be considered to be performing, even though some or all of the individual loans within the pools may be contractually past due. During 2013, the Company identified one covered commercial and industrial loan pool accounted for under ASC 310-30, that had a balance of $14.8 million at December 31, 2013, for which the cash flows were no longer reasonably estimable. In accordance with the guidance in ASC 310-30, this pool was put on non-accrual status. During the six months ended June 30, 2014, this loan pool was returned to accrual status due to improved performance and predictability of cash flows within that pool. All other loans accounted for under ASC 310-30 were classified as performing assets at December 31, 2013. All loans accounted for under ASC 310-30 were classified as performing assets at June 30, 2014, as the carrying values of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the loans in the pool and the pool's expected future cash flows, is being recognized on all acquired loans accounted for under ASC 310-30. 56 --------------------------------------------------------------------------------



The following table sets forth the non-performing assets as of the dates presented (in thousands):

June 30, 2014



December 31, 2013

Non-covered Covered Total Non-covered Covered Total Non-accrual loans: Commercial $ 12,765$ 289$ 13,054$ 1,009$ 15,098$ 16,107 Agriculture 319 201 520 153 - 153 Owner-occupied commercial real estate 752 112 864 565 127 692 Commercial real estate 163 153 316 1,131 169 1,300 Residential real estate 4,041 1,326 5,367 4,468 1,377 5,845 Consumer 211 - 211 247 - 247 Total non-accrual loans 18,251 2,081 20,332 7,573 16,771 24,344 Loans past due 90 days or more and still accruing interest: Commercial 282 - 282 - 115 115 Agriculture - - - - - - Owner-occupied commercial real estate 28 - 28 - - - Commercial real estate - - - - - - Residential real estate - - - - - - Consumer 7 - 7 14 - 14 Total accruing loans 90 days past due 317 - 317 14 115 129 Accruing restructured loans(1) 15,847 7,855 23,702 5,891 5,714 11,605 Total non-performing loans $ 34,415$ 9,936$ 44,351$ 13,478$ 22,600$ 36,078 OREO 24,690 30,753 55,443 31,300 38,825 70,125 Other repossessed assets 884 160 1,044 784 302 1,086 Total non-performing assets $ 59,989$ 40,849$ 100,838$ 45,562$ 61,727$ 107,289 Allowance for loan losses $ 15,572$ 12,521 Total non-performing loans to total non-covered, total covered, and total loans, respectively 1.89 % 3.78 % 2.12 % 0.87 % 7.30 % 1.95 % Total non-performing assets to total assets 2.07 % 2.18 % Allowance for loan losses to non-performing loans 35.11 % 34.71 %



(1) Includes restructured loans less than 90 days past due and still accruing.

During the six months ended June 30, 2014, total non-accrual loans decreased $4.0 million. Non-covered non-accrual loans increased $10.7 million from December 31, 2013 to June 30, 2014, primarily due to one non 310-30 loan relationship in the commercial segment, totaling $12.2 million, that was placed on non-accrual status during the six months ended June 30, 2014. The loans in this relationship were fully secured and current as to principal and interest payments at June 30, 2014. This increase in non-covered non-accrual loans was more than offset by a $14.7 million decrease in covered non-accrual loans as a result of the previously mentioned 310-30 loan pool that was returned to accrual status during the six months ended June 30, 2014. During the six months ended June 30, 2014 accruing TDR's increased $12.1 million. The increase was primarily attributable to three loans in the commercial segment with a recorded balance of $9.3 million and four loans in the agriculture segment with a recorded balance of $8.6 million, all of which have been granted an extension of maturity. The $55.4 million of OREO at June 30, 2014 excludes $10.6 million of minority interest in participated OREO in connection with the repossession of collateral on loans for which we were not the lead bank and we do not have a controlling interest. These properties have been repossessed by the lead banks and we have recorded our receivable due from the lead banks in other assets as minority interest in participated OREO. 57 -------------------------------------------------------------------------------- During the six months ended June 30, 2014, $1.5 million of OREO was foreclosed on or otherwise repossessed and $16.3 million of OREO was sold. The OREO sales resulted in $0.1 million of net non-covered losses and $1.1 million of net covered gains that are subject to reimbursement to the FDIC at the applicable loss-share coverage percentage. OREO write-downs of $0.9 million were recorded during the six months ended June 30, 2014, of which $0.6 million, or 65.0%, were covered by FDIC loss sharing agreements. Past Due Loans Past due status is monitored as an indicator of credit deterioration. Covered and non-covered loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due and not accounted for under ASC 310-30 are put on non-accrual status unless the loan is well secured and in the process of collection. Pooled loans accounted for under ASC 310-30 that are 90 days or more past due and still accreting are included in loans 90 days or more past due and still accruing interest and are generally considered to be performing as is further described above under "Non-Performing Assets." One covered loan pool accounted for under ASC 310-30 that was put on non-accrual during 2013 was included in non-accrual loans at December 31, 2013, but was excluded from non-accrual loans during the six months ended June 30, 2014 as the pool was again considered performing. The table below shows the past due status of loans accounted for under ASC 310-30 and loans not accounted for under ASC 310-30, based on contractual terms of the loans as of June 30, 2014 and December 31, 2013 (in thousands): June 30, 2014 December 31, 2013 ASC 310-30 Non ASC Total ASC 310-30 Non ASC Total loans 310-30 loans loans loans 310-30 loans loans Loans 30-89 days past due and still accruing interest $ 5,402$ 4,267$ 9,669$ 11,245$ 2,854$ 14,099 Loans 90 days past due and still accruing interest 44,450 317 44,767 55,864 129 55,993 Non-accrual loans - 20,332 20,332 14,827 9,517 24,344 Total past due and non-accrual loans $ 49,852$ 24,916$ 74,768$ 81,936$ 12,500$ 94,436 Total past due covered loans $ 37,646$ 2,151$ 39,797$ 63,603$ 2,284$ 65,887 Total past due and non-accrual loans to total ASC 310-30 loans, total non 310-30 loans and total loans, respectively 13.91 % 1.44 % 3.58 % 18.17 % 0.89 % 5.09 % Total non-accrual loans to total ASC 310-30 loans, total non 310-30 loans, and total loans, respectively 0.00 % 1.18 % 0.97 % 3.29 % 0.68 % 1.31 % % of total past due and non-accrual loans that carry fair value adjustments 100.00 % 27.44 % 75.82 % 100.00 % 52.23 % 93.68 % % of total past due and non-accrual loans that are covered by FDIC loss sharing agreements 75.52 % 8.63 % 53.23 % 77.63 % 18.27 % 69.77 % Loans 30-89 days past due and still accruing interest decreased by $4.4 million from December 31, 2013 to June 30, 2014, and loans 90 days or more past due and still accruing interest decreased $11.2 million at June 30, 2014 compared to December 31, 2013, for a collective decrease in total past due loans of $15.7 million. Non-accrual loans decreased $4.0 million from December 31, 2013 to June 30, 2014. The decrease in non-accrual loans was primarily because of the covered commercial and industrial loan pool accounted for under ASC 310-30 that was on non-accrual status at December 31, 2013, with a balance $14.8 million, was returned to accrual status during the six months ended June 30, 2014. This decrease was partially offset by the addition to non-accrual status of one non 310-30 loan relationship in the commercial segment totaling $12.2 million as of June 30, 2014, which is fully secured and current as to principal and interest payments. 58 -------------------------------------------------------------------------------- Allowance for Loan Losses The ALL represents the amount that we believe is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. Determination of the ALL is based on an evaluation of the collectability of loans, the realizable value of underlying collateral and, to the extent applicable, prior loss experience. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations. In accordance with the applicable guidance for business combinations, acquired loans were recorded at their acquisition date fair values, which were based on expected future cash flows and included an estimate for future loan losses, therefore no ALL was recorded as of the acquisition date. Any estimated losses on acquired loans that arise after the acquisition date are reflected in a charge to the provision for loan losses. Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss sharing agreements with the FDIC. Accordingly, any provision for loan losses relating to covered loans is partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income. Loans accounted for under the accounting guidance provided in ASC 310-30 have been grouped into pools based on the predominant risk characteristics of purpose and/or type of loan. The timing and receipt of expected principal, interest and any other cash flows of these loans are periodically re-estimated and the expected future cash flows of the collective pools are compared to the carrying value of the pools. To the extent that the expected future cash flows of each pool is less than the book value of the pool, an allowance for loan losses will be established through a charge to the provision for loan losses and, for loans covered by loss sharing agreements with the FDIC, a related adjustment to the FDIC indemnification asset for the portion of the loss that is covered by the loss sharing agreements. If the re-estimated expected future cash flows are greater than the book value of the pools, then the improvement in the expected future cash flows is accreted into interest income over the remaining expected life of the loan pool. During the six months ended June 30, 2014 and 2013, these re-estimations resulted in overall increases in expected cash flows in certain loan pools, which, absent previous valuation allowances within the same pool, are reflected in increased accretion as well as an increased amount of accretable yield and are recognized over the expected remaining lives of the underlying loans as an adjustment to yield. For all loans not accounted for under ASC 310-30, the determination of the ALL follows a process to determine the appropriate level of ALL that is designed to account for changes in credit quality. This process provides an ALL consisting of a specific allowance component based on certain individually evaluated loans and a general allowance component based on estimates of reserves needed for all other loans, segmented based on similar risk characteristics. Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over $250,000 are subject to individual evaluation on a regular basis to determine the need, if any, to allocate a specific reserve to the impaired loan. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing: the borrower's resources, ability, and willingness to repay in



accordance with the terms of the loan agreement;

the likelihood of receiving financial support from any guarantors;

the adequacy and present value of future cash flows, less disposal

costs, of any collateral;

the impact current economic conditions may have on the borrower's

financial condition and liquidity or the value of the collateral.

In evaluating the loan portfolio for an appropriate ALL level, unimpaired loans are grouped into segments based on broad characteristics such as primary use and underlying collateral. We have identified five primary loan segments that are further stratified into ten loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific factors affecting each loan class. Following are the loan classes within each of the five primary loan segments:



Residential

Commercial Commercial real estate Agriculture real estate Consumer Total commercial Construction

Total agriculture Senior lien Total consumer Acquisition and development Junior lien Multi-family Owner-occupied Non-owner occupied 59

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Appropriate ALL levels are determined by segment and class utilizing risk ratings, loss history, peer loss history and qualitative adjustments. The qualitative adjustments consider the following risk factors: economic/external conditions;

loan administration, loan structure and procedures;

risk tolerance/experience;

loan growth; trends; concentrations; and other. Historical loss data is categorized by segment and class and a loss rate is applied to loan balances. The loss rates are based on loan segment and class and utilize a credit risk rating migration analysis. Due to our relatively short historical loss history, we incorporate not only our own historical loss rates since the beginning of 2012, but we also utilize peer historical loss data based on a 20-quarter historical average net charge-off ratio on each loan type, relying on the Uniform Bank Performance Reports compiled by the Federal Financial Institutions Examinations Council ("FFIEC"). While we use our own loss history and peer loss history for both purchased and originated loans, we assign a higher portion of our own loss history to our purchased loans, because those loans are more seasoned and more of the actual losses in the portfolio have historically been in the purchased portfolio. For originated loans, we assign a higher portion of the peer loss history, as we believe that this is likely more indicative of losses inherent in the portfolio. The collective resulting ALL for loans not accounted for under ASC 310-30 is calculated as the sum of the specific reserves and the general reserves. While these amounts are calculated by individual loan or segment and class, the entire ALL is available for any loan that, in our judgment, should be charged-off. Non 310-30 ALL During the three and six months ended June 30, 2014, we recorded $1.8 million and $3.6 million, respectively, of provision for loan losses for loans not accounted for under ASC 310-30, which primarily reflects reserves to support recent loan growth. Net charge-offs for non ASC 310-30 loans during the three and six months ended June 30, 2014 totaled $24 thousand and $340 thousand, respectively, and were primarily from the commercial and consumer loans segments, partially offset by net recoveries from the residential real estate segment. At June 30, 2014, there were 11 impaired loans that carried specific reserves totaling $0.7 million compared to eight impaired loans that carried specific reserves totaling $0.9 million at December 31, 2013. During the three and six months ended June 30, 2013, we recorded $0.7 million and $1.8 million of provision for loan losses for loans not accounted for under ASC 310-30, respectively, as we provided for 1.8 million and $2.9 million of net loan charge-offs and credit risks inherent in the non ASC 310-30 loan balances. During the three and six months ended June 30, 2013, $1.2 million and $0.8 million of net charge-offs were from the commercial and commercial real estate segments, respectively. At June 30, 2013, there were nine loans that carried specific reserves totaling $0.9 million compared to ten loans at December 31, 2012. 310-30 ALL During the three and six months ended June 30, 2014, several loan pools accounted for under ASC 310-30 had previous valuation allowances of $223 thousand and $312 thousand, respectively, that were reversed as a result of an increase in expected cash flows. The remaining pools had net impairments of $133 thousand and $168 thousand during the three and six months ended June 30, 2014, respectively, as a result of decreases in expected cash flows. The result of this activity resulted in net provision reversals of $90 thousand and $144 thousand during the three and six months ended June 30, 2014, respectively. During the three and six months ended June 30, 2013, two loans pools accounted for under ASC 310-30 had previous valuation allowances of $193 thousand and $1.3 million, respectively, that were reversed as a result of an increase in expected cash flows. Two loan pools have net impairments as a result of decreases in expected cash flows, resulting in a net provision of $1.0 million and $1.3 million for the three and six months ended June 30, 2013, respectively, for loans accounted for under ASC 310-10. After considering the above mentioned factors, we believe that the ALL of $15.6 million and $12.5 million was adequate to cover probable losses inherent in the loan portfolio at June 30, 2014 and December 31, 2013, respectively. However, it is likely that future adjustments to the ALL will be necessary and any changes to the assumptions, circumstances or estimates used in determining the ALL could adversely affect the Company's results of operations, liquidity or financial condition. 60 --------------------------------------------------------------------------------



The following schedule presents, by class stratification, the changes in the ALL during the three months ended June 30, 2014 and 2013 (in thousands):

For the three months ended June 30, 2014 June 30, 2013 ASC 310-30 ASC 310-30 Loans Non 310-30 Loans Total Loans Non 310-30 Loans Total

Beginning allowance for loan losses $ 1,224 $ 12,748 $ 13,972$ 2,149 $ 10,740 $ 12,889 Charge-offs: Commercial - (26 ) (26 ) (407 ) (624 ) (1,031 ) Agriculture - - - - - - Commercial real estate - - - 16 (684 ) (668 ) Residential real estate - (49 ) (49 ) (566 ) (549 ) (1,115 ) Consumer (36 ) (184 ) (220 ) - (208 ) (208 ) Total charge-offs (36 ) (259 ) (295 ) (957 ) (2,065 ) (3,022 ) Recoveries - 235 235 - 310 310 Net charge-offs (36 ) (24 ) (60 ) (957 ) (1,755 ) (2,712 ) Provision (recoupment) for loan loss (90 ) 1,750 1,660 1,003 667 1,670 Ending allowance for loan losses $ 1,098 $ 14,474 $ 15,572$ 2,195 $ 9,652 $ 11,847 Ratio of annualized net charge-offs to average total loans during the period, respectively 0.04 % 0.01 % 0.01 % 0.57 % 0.67 % 0.63 % Average total loans outstanding during the period $ 387,817$ 1,629,773$ 2,017,590 $

671,546 $ 1,048,772$ 1,720,318 61

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The following schedule presents, by class stratification, the changes in the ALL during the six months ended June 30, 2014 and 2013 (in thousands):

For the six months ended June 30, 2014 June 30, 2013 ASC 310-30 ASC 310-30 loans Non 310-30 loans Total loans Non 310-30 loans Total

Beginning allowance for loan losses $ 1,280 $ 11,241 $ 12,521$ 4,652 $ 10,728 $ 15,380 Charge-offs: Commercial (2 ) (412 ) (414 ) (407 ) (1,253 ) (1,660 ) Agriculture - - - - - - Commercial real estate - - - (2,796 ) (943 ) (3,739 ) Residential real estate - (69 ) (69 ) (566 ) (624 ) (1,190 ) Consumer (36 ) (355 ) (391 ) - (441 ) (441 ) Total charge-offs (38 ) (836 ) (874 ) (3,769 ) (3,261 ) (7,030 ) Recoveries - 496 496 - 410 410 Net charge-offs (38 ) (340 ) (378 ) (3,769 ) (2,851 ) (6,620 ) Provision (recoupment) for loan loss (144 ) 3,573 3,429 1,312 1,775 3,087 Ending allowance for loan losses $ 1,098 $ 14,474 $ 15,572$ 2,195 $ 9,652 $ 11,847 Ratio of annualized net charge-offs to average total loans during the period, respectively 0.02 % 0.04 % 0.04 % 1.04 % 0.56 % 0.76 % Ratio of allowance for loan losses to total loans outstanding at period end, respectively 0.31 % 0.84 % 0.75 % 0.36 % 0.87 % 0.69 % Ratio of allowance for loan losses to total non-covered loans outstanding at period end, respectively 0.77 % 0.86 % 0.85 % 0.96 % 0.93 % 0.93 % Ratio of allowance for loan losses to total non-performing loans at period end, respectively 0.00 % 32.64 % 35.11 % 11.76 % 33.17 % 24.81 % Ratio of allowance for loan losses to total non-performing, non-covered loans at period end, respectively 0.00 % 42.06 % 45.25 % 0.00 % 50.09 % 61.48 % Total loans $ 358,277$ 1,729,554$ 2,087,831$ 617,465$ 1,105,822$ 1,723,287 Average total loans outstanding during the period $ 405,975$ 1,554,472$ 1,960,447$ 728,011$ 1,030,058$ 1,758,069 Total non-covered loans $ 141,718$ 1,683,256$ 1,824,974$ 227,981$ 1,041,501$ 1,269,482 Total non-performing loans $ - $ 44,351 $ 44,351$ 18,661 $ 29,099 $ 47,760 Total non-performing, covered loans $ - $ 9,936 $ 9,936$ 18,661 $ 9,829 $ 28,490 62

-------------------------------------------------------------------------------- The following table presents the allocation of the ALL and the percentage of the total amount of loans in each loan category listed as of the dates presented (in thousands): June 30, 2014 % of total Related Total loans loans ALL % of ALL Commercial $ 686,978 32.9 % $ 6,421 41.2 % Agriculture 160,140 7.7 % 1,407 9.0 % Commercial real estate 590,837 28.3 % 2,969 19.1 % Residential real estate 617,037 29.5 % 4,310 27.7 % Consumer and overdrafts 32,839 1.6 % 465 3.0 % Total $ 2,087,831 100.0 % $ 15,572 100.0 % December 31, 2013 % of total Related Total loans loans ALL % of ALL Commercial $ 483,495 26.1 % $ 4,258 34.0 % Agriculture 159,952 8.6 % 1,237 9.9 % Commercial real estate 574,220 31.0 % 2,276 18.2 % Residential real estate 599,924 32.3 % 4,259 34.0 % Consumer and overdrafts 36,503 2.0 % 491 3.9 % Total $ 1,854,094 100.0 % $ 12,521 100.0 % The ALL allocated to commercial loans increased to 41.2% at June 30, 2014 from 34.0% at December 31, 2013 largely due to provisions of $3.6 million added during the period for loan growth in the non 310-30 portfolio. FDIC Indemnification Asset and Clawback Liability At June 30, 2014, the FDIC indemnification asset was $51.4 million, compared to $64.4 million at December 31, 2013. The $51.4 millionFDIC indemnification asset at June 30, 2014 was comprised of $36.2 million in projected future FDIC loss-share billing and $15.2 million representing increased client cash flows. In the three and six months ended June 30, 2014, we recognized $6.0 million and $13.6 million, respectively, of amortization on the FDIC indemnification asset as the performance of our covered assets improved. The amortization resulted from an increase in actual and expected cash flows on the underlying covered assets, resulting in lower expected reimbursements from the FDIC. The increase in expected cash flows from these underlying assets is primarily reflected in the increased accretable yield on loans accounted for under ASC 310-30, as most of the FDIC covered assets are accounted for under this guidance. The carrying value of the FDIC indemnification asset was increased by $987 thousand during the six months ended June 30, 2014 as a result FDIC loss share submissions. During the six months ended June 30, 2014, we remitted $987 thousand in net loss-share payments to the FDIC for the aforementioned submissions. The loss claims filed are subject to review and approval, including extensive audits, by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreements. During the three and six months ended June 30, 2013, we recognized $3.0 million and $7.6 million, respectively, of amortization related to the FDIC indemnification asset as a result of improved performance of our covered assets. We also reduced the carrying value of the FDIC indemnification asset by $21.0 million as a result of claims filed with the FDIC during the six months ended June 30, 2013. During the six months ended June 30, 2013, we received $67.6 million from the FDIC. Within 45 days of the end of each of the loss sharing agreements with the FDIC, we may be required to reimburse the FDIC in the event that our losses on covered assets do not reach the second tranche in each related loss sharing agreement, based on the initial discount received less cumulative servicing amounts for the covered assets acquired. At June 30, 2014 and December 31, 2013, this clawback liability was carried at $34.2 million and $32.5 million, respectively, and is included in Due to FDIC in our consolidated statements of financial condition. 63 --------------------------------------------------------------------------------



Other Assets Significant components of other assets were as follows as of the periods indicated (in thousands):

June 30, 2014 December 31, 2013 Accrued income taxes receivable and deferred tax assets $ 44,476 $ 54,032



Minority interest in participated other real estate owned

10,627 10,627 Accrued interest on loans 6,572 6,134 Accrued interest on interest bearing bank deposits and investment securities 4,749 5,221 Other assets 11,036 10,533 Total other assets $ 77,460 $ 86,547 Other assets decreased $9.1 million, or 10.5%, during the six months ended June 30, 2014. The decrease was largely attributable to a $9.6 million decline in accrued income taxes receivable and the deferred tax assets during the six months ended June 30, 2014 primarily from the tax effect of unrealized gains on available-for-sale securities and, to a lesser degree, from tax liabilities generated during the six months ended June 30, 2014 and refunds of prior year tax overpayments received during the period. Other Liabilities Significant components of other liabilities were as follows as of the dates indicated (in thousands): June 30, 2014 December 31, 2013 Pending loan purchase settlement $ 16,019 $ 5,063 Accrued expenses 11,116 15,425 Warrant liability 4,803 6,281 Accrued interest payable 3,424 3,058 Participant interest in other real estate owned 434 4,243 Other liabilities 4,509 2,515 Total other liabilities $ 40,305 $ 36,585 Other liabilities increased $3.7 million during the six months ended June 30, 2014. Pending loan purchase settlements increased $11.0 million from December 31, 2013 to June 30, 2014 primarily due to loan purchases during the second quarter of 2014 that are expected to settle during the third quarter of 2014. Accrued expenses for the six months ended June 30, 2014 decreased $4.3 million, or 27.9%, from December 31, 2013, primarily due to the payment of accrued annual bonuses and incentive compensation. Participant interest in other real estate owned decreased $3.8 million due to the sale of an OREO property during the six months ended June 30, 2014, in which we had a controlling interest and had recorded a corresponding payable in other liabilities. We have outstanding warrants to purchase 830,750 shares of our common stock, which are classified as a liability and included in other liabilities in our consolidated statements of financial condition. We revalue the warrants at the end of each reporting period using a Black-Scholes model and any change in fair value is reported in the statements of operations as "loss (gain) from change in fair value of warrant liability" in non-interest expense in the period in which the change occurred. The warrant liability decreased $1.5 million during the six months ended June 30, 2014 to $4.8 million. The value of the warrant liability, and the expense that results from an increase to this liability, is correlated to our stock price. Accordingly, an increase in our stock price results in an increase in the warrant liability and the associated expense. More information on the accounting and measurement of the warrant liability can be found in note 11 in this quarterly report or in notes 2 and 18 in our audited consolidated financial statements in our 2013 Annual Report on Form 10-K. 64 --------------------------------------------------------------------------------



Deposits

Deposits from banking clients serve as a primary funding source for our banking operations and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at June 30, 2014 and December 31, 2013 (in thousands): June 30, 2014 December 31, 2013 Non-interest bearing demand deposits $ 719,248 18.7 % $ 674,989 17.6 % Interest bearing demand deposits 384,160 10.0 % 386,762 10.1 % Savings accounts 252,307 6.5 % 198,444 5.1 % Money market accounts 1,072,573 27.8 % 1,082,427 28.2 % Total transaction deposits 2,428,288 63.0 % 2,342,622 61.0 % Time deposits < $100,000 906,998 23.5 % 971,431 25.3 % Time deposits > $100,000 521,047 13.5 % 524,256 13.7 % Total time deposits 1,428,045 37.0 % 1,495,687 39.0 % Total deposits $ 3,856,333 100.0 % $ 3,838,309 100.0 % During the six months ended June 30, 2014, our total deposits increased $18.0 million, or 0.47%. Time deposits decreased $67.6 million, or 4.5%, during the six months ended June 30, 2014 and the mix of transaction deposits to total deposits improved to 63.0% at June 30, 2014, from 61.0% at December 31, 2013. At June 30, 2014 and December 31, 2013, we had $0.9 billion and $1.0 billion, respectively, of time deposits that were scheduled to mature within 12 months. Of the $0.9 billion in time deposits scheduled to mature within 12 months, $0.3 billion were in denominations of $100,000 or more, and $0.6 billion were in denominations less than $100,000. Results of Operations Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income and FDIC loss sharing income. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, and data processing expense. Overview of Results of Operations We recorded net income of $2.1 million and $3.6 million, or $0.05 and $0.08 per diluted share, during the three and six months ended June 30, 2014, respectively, compared to net income of $2.9 million and $5.0 million, or $0.06 and $0.10 per diluted share, during the three and six months ended June 30, 2013, respectively. Net interest income totaled $42.4 million and $85.8 million during the three and six months ended June 30, 2014, respectively, and decreased $1.9 million and $4.1 million from the three and six months ended June 30, 2013, respectively. Average interest earning assets decreased $249.9 million and $267.8 million from the three and six months ended June 30, 2013, respectively, with such decreases being partially offset by a six basis point and seven basis point widening of the net interest margin (fully taxable equivalent) from the three and six months ended June 30, 2013 to the three and six months ended June 30, 2014, respectively. Strong growth in the strategic loan portfolio of 46.7% was somewhat offset by the continued resolution of the acquired non-strategic loan portfolio, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, as well as a $298.8 million decrease in average short-term investments attributable to stock repurchases and a reduction in time deposits, for the aforementioned period. The net interest margin benefited from the relatively stable yield on interest earning assets, which was complemented by a five basis point and seven basis point decrease in the cost of interest bearing liabilities for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively. Provision for loan loss expense was $1.7 million and $3.4 million during the three and six months ended June 30, 2014, respectively, compared to $1.7 million and $3.1 million during the three and six months ended June 30, 2013, respectively. The increase in provision during the six months ended June 30, 2014 was primarily due to loan growth as credit quality improved and net charge-offs were lower by nearly $6.2 million compared to the six months ended June 30, 2013. Non-interest income totaled $2.2 million and $1.8 million during the three and six months ended June 30, 2014, respectively, compared to income of $7.3 million and $14.5 million during the three and six months ended June 30, 2013, respectively. The decrease of $5.2 million and $12.7 million during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013 was primarily due to $3.0 million and $5.9 million of additional FDIC 65 -------------------------------------------------------------------------------- indemnification asset amortization during the three and six months ended June 30, 2014, respectively, due to better performance of the underlying covered assets. In addition, other FDIC loss-sharing income from the three and six months ended June 30, 2013 to the three and six months ended June 30, 2014, decreased $1.8 million and $6.1 million, respectively, due to lower problem loan and OREO expenses on covered assets. Non-interest expense totaled $39.9 million and $78.9 million during the three and six months ended June 30, 2014, respectively, compared to $45.2 million and $93.1 million during the three and six months ended June 30, 2013, respectively, a decrease of $5.4 million and $14.2 million for the aforementioned periods, respectively. OREO and problem loan expenses declined $0.9 million and $5.6 million during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013 as the volume of problem assets has steadily declined as a result of successful workout efforts on the acquired problem loan portfolio. Operating expenses of $38.0 million and $75.5 million during the three and six months ended June 30, 2014, respectively, decreased $3.6 million and $7.4 million from the three and six months ended June 30, 2013, respectively. The decrease in operating expenses was primarily due to a decrease of $3.3 million and $5.5 million in salaries and employee benefits from the three and six months ended June 30, 2013 to the three and six months ended June 30, 2014, respectively. Net Interest Income We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods. The following tables present the components of net interest income for the periods indicated. The tables include: (i) the average daily balances of interest earning assets and interest bearing liabilities; (ii) the average daily balances of non-interest earning assets and non-interest bearing liabilities; (iii) the total amount of interest income earned on interest earning assets; (iv) the total amount of interest expense incurred on interest bearing liabilities; (v) the resultant average yields and rates; (vi) net interest spread; and (vii) net interest margin, which represents the difference between interest income and interest expense, expressed as a percentage of interest earning assets. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale. Non-accrual and restructured loan balances are included in the average loan balances; however, the forgone interest on non-accrual and restructured loans is not included in the dollar amounts of interest earned. All amounts presented are on a pre-tax basis. The table below presents the components of net interest income on a fully taxable equivalent basis for the three months ended June 30, 2014 and 2013 (in thousands): 66

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For the three months ended June 30, 2014 For the three months ended June 30, 2013 Average Average Average Average Balance Interest Rate Balance Interest Rate Interest earning assets: ASC 310-30 loans $ 387,817 $ 15,378 15.86 %



$ 671,546 $ 18,710 11.14 % Non 310-30 loans (1)(2)(3)(4)

1,632,234 17,896 4.40 % 1,057,144 15,610 5.92 % Investment securities available-for-sale 1,702,665 8,274 1.94 % 2,110,138 9,252 1.75 % Investment securities held-to-maturity 604,827 4,332 2.86 % 532,552 4,344 3.26 % Other securities 23,214 270 4.65 % 32,110 388 4.83 % Interest earning deposits and securities purchased under agreements to resell 111,141 75 0.27 % 308,280 174 0.23 % Total interest earning assets(4) $ 4,461,898$ 46,225 4.16 %



$ 4,711,770$ 48,478 4.13 % Cash and due from banks

58,054 59,726 Other assets 376,477 439,328 Allowance for loan losses (14,783 ) (12,855 ) Total assets $ 4,881,646$ 5,197,969 Interest bearing liabilities: Interest bearing demand, savings and money market deposits $ 1,722,111$ 1,099 0.26 %



$ 1,727,760$ 1,061 0.25 % Time deposits

1,435,155 2,457 0.69 % 1,628,332 3,110 0.77 % Securities sold under agreements to repurchase 83,514 26 0.12 % 60,924 20 0.13 % Total interest bearing liabilities $ 3,240,780$ 3,582 0.44 % $ 3,417,016$ 4,191 0.49 % Demand deposits 691,851 649,323 Other liabilities 63,588 54,480 Total liabilities 3,996,219 4,120,819 Stockholders' equity 885,427



1,077,150

Total liabilities and stockholders' equity $ 4,881,646$ 5,197,969 Net interest income $ 42,643$ 44,287 Interest rate spread 3.72 % 3.64 % Net interest earning assets $ 1,221,118$ 1,294,754 Net interest margin(4) 3.83 % 3.77 % Ratio of average interest earning assets to average interest bearing liabilities 137.68 % 137.89 % (1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.



(2) Includes originated loans with average balances of $1.3 billion and $636.9

million, interest income of $13.5 million and $7.6 million, and yields of

4.02% and 4.79% for the three months ended June 30, 2014 and 2013,

respectively.

(3) Non 310-30 loans include loans held-for-sale. Average balances during the

three months ended June 30, 2014 and 2013 were $2.5 million and $8.4

million, and interest income was $57 thousand and $118 thousand for the same

periods respectively.

(4) Presented on a fully taxable equivalent basis using the statutory tax rate

of 35%. The taxable equivalent adjustments included above are $220 thousand

and $0 for the three months ended June 30, 2014 and 2013, respectively.

Net interest income totaled $42.4 million and $44.3 million for the three months ended June 30, 2014 and 2013, respectively. Net interest income on a tax equivalent basis totaled $42.6 million for the three months ended June 30, 2014 and declined $1.6 million from $44.3 million during the same period in 2013. Average interest earning assets decreased $249.9 million, or 5.30%, from the same period last year, and was partially offset by a six basis point widening of the net interest margin to 3.83% and the interest rate spread widening eight basis points to 3.72%. Strong loan originations and growth in the strategic loan portfolio have been somewhat offset by the continued successful resolution of the acquired non-strategic loan portfolio, as well as a decrease in average short-term investments attributable to stock repurchases and a reduction in time deposits. Average loans comprised $2.0 billion, or 45.3%, of total average interest earning assets during the three months ended June 30, 2014, compared to $1.7 billion, or 36.7%, of total average interest earning assets during the three months ended June 30, 2013. The increase in average loan balances is reflective of our loan originations outpacing the exit of the acquired non-strategic loans. The yield on the ASC 310-30 loan portfolio was 15.86% during the three months ended June 30, 2014, compared to 11.14% during the same period the prior year. This increase was attributable to the effects of the favorable life-to-date transfers of non-accretable difference to accretable yield that are being accreted to interest income over the remaining lives of these loans. 67 -------------------------------------------------------------------------------- Average investment securities comprised 51.7% of total interest earning assets during the three months ended June 30, 2014 compared to 56.1% during the three months ended June 30, 2013. We have been steadily re-mixing the earning assets, utilizing the steady run-off of the mortgage-backed securities to provide the cash flow for the strong loan originations. The lower average balances of investment securities were partially offset by a 13 basis point increase in yields earned on the total investment portfolio during the three months ended June 30, 2014 compared to the same period of the prior year. Average balances of interest earning liabilities declined $176.2 million during the three months ended June 30, 2014 compared to the three months ended June 30, 2013, driven by a $193.2 million decline in average time deposits, partially offset by a $22.6 million increase in securities sold under agreements to repurchase. The net interest margin benefited from a 5 basis point decrease in the cost of interest bearing liabilities as we continued our strategy of transitioning high-priced time deposits to lower-cost transaction accounts. During the three months ended June 30, 2014, total interest expense related to interest bearing liabilities was $3.6 million compared to $4.2 million during the three months ended June 30, 2013, or an average cost of 0.44% and 0.49% during the respective periods. 68 --------------------------------------------------------------------------------



The table below presents the components of net interest income on a fully taxable equivalent basis for the six months ended June 30, 2014 and 2013 (in thousands):

For the six months ended June 30, 2014 For the six months ended June 30, 2013 Average Average Average Average balance Interest rate balance Interest rate Interest earning assets: ASC 310-30 loans $ 405,975 $ 32,278



15.90 % $ 728,011 $ 40,012 10.99 % Non 310-30 loans (1)(2)(3)(4)

1,556,872 34,402 4.46 % 1,036,318 30,443 5.92 % Investment securities available-for-sale 1,740,989 16,921 1.94 % 1,978,492 17,723 1.79 % Investment securities held-to-maturity 617,777 8,853 2.87 % 542,636 9,121 3.36 % Other securities 27,412 659 4.81 % 32,550 782 4.80 % Interest earning deposits and securities purchased under agreements to resell 120,695 156 0.26 % 419,494 495 0.24 % Total interest earning assets(4) $ 4,469,720$ 93,269



4.21 % $ 4,737,501$ 98,576 4.20 % Cash and due from banks

58,938 61,163 Other assets 386,388 460,135 Allowance for loan losses (13,138 ) (13,572 ) Total assets $ 4,901,908$ 5,245,227 Interest bearing liabilities: Interest bearing demand, savings and money market deposits $ 1,719,389$ 2,156



0.25 % $ 1,733,055$ 2,155 0.25 % Time deposits

1,449,557 4,906 0.68 % 1,663,372 6,527 0.79 % Securities sold under agreements to repurchase 88,948 58 0.13 % 53,893 38 0.14 % Total interest bearing liabilities $ 3,257,894$ 7,120 0.44 % $ 3,450,320$ 8,720 0.51 % Demand deposits 679,498 647,623 Other liabilities 65,350 64,969 Total liabilities 4,002,742 4,162,912 Shareholders' equity 892,913 1,082,315 Total liabilities and shareholders' equity $ 4,895,655$ 5,245,227 Net interest income $ 86,149$ 89,856 Interest rate spread 3.77 % 3.69 % Net interest earning assets $ 1,211,826$ 1,287,181 Net interest margin(4) 3.89 % 3.82 % Ratio of average interest earning assets to average interest bearing liabilities 137.20 % 137.31 % (1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.



(2) Includes originated loans with average balances of $1.3 billion and $594.8

million, interest income of $25.6 million and $14.0 million, and yields of

4.08% and 4.73% for the six months ended June 30, 2014 and 2013, respectively. (3) Non 310-30 loans include loans held-for-sale. Average balances during the



six months ended June 30, 2014 and 2013 were $2.4 million and $6.3 million,

and interest income was $102 thousand and $161 thousand for the same

periods, respectively.

(4) Presented on a fully taxable equivalent basis using the statutory tax rate

of 35%. The taxable equivalent adjustments included above are $379 thousand

and $0 for the six months ended June 30, 2014 and 2013, respectively.

Net interest income totaled $85.8 million and $89.9 million for the six months ended June 30, 2014 and 2013, respectively. On a fully tax equivalent basis, net interest income totaled $86.1 million and $89.9 million for the six months ended June 30, 2014 and 2013, respectively. The net interest margin (fully tax equivalent) expanded seven basis points to 3.89% from 3.82% during the same period in the prior year, and the interest rate spread (fully tax equivalent) expanded eight basis points to 3.77%. The year-over-year widening of the net interest margin was primarily driven by a seven basis point decrease in the cost of average interest bearing liabilities, which was largely attributable to an 11 basis point decrease in the cost of average time deposits. Average loans comprised $2.0 billion, or 43.9%, of total average interest earning assets during the six months ended June 30, 2014, compared to $1.8 billion, or 37.2% of total average interest earning assets, during the six months ended June 30, 2013. The increase in average balances is reflective of our loan originations outpacing the exit of the non-strategic loans. The yield on the ASC 310-30 loan portfolio was 15.90% during the six months ended June 30, 2014, compared to 10.99% during the same period of the prior year. This increase in yield was attributable to the effects of the favorable life-to-date transfers of non-accretable difference to accretable yield that are being accreted to interest income over the remaining life of these loans. 69 -------------------------------------------------------------------------------- Average investment securities comprised 52.8% of total interest earning assets during the six months ended June 30, 2014, compared to 53.2% during the six months ended June 30, 2013. The lower average balances were somewhat offset by a six basis point widening of the yields earned on the total investment portfolio. Short-term investments, depicted by the interest earning deposits and securities purchased under agreements to resell, also decreased substantially to 2.70% of interest earning assets compared to 8.85% during the prior period. The decreases in the investment portfolio and short-term investments reflect the re-mixing of the interest-earning assets as we have utilized the runoff of the investment portfolio to fund loan originations and have reduced our short-term investments to fund significant share repurchases. Average balances of interest bearing liabilities during the six months ended June 30, 2014 declined $192.4 million to $3.3 billion from $3.5 billion during the six months ended June 30, 2013, driven by a $213.8 million decrease in average time deposits and partially offset by a $35.1 million increase in securities sold under agreements to repurchase. During the six months ended June 30, 2014, total interest expense related to interest bearing liabilities was $7.1 million, compared to $8.7 million during the six months ended June 30, 2013. The resulting $1.6 million decrease in interest expense was attributable to a combination of lower average balances of time deposits and lower rates paid on time deposits as we continued our strategy of transitioning high-priced time deposits to lower-cost transaction accounts coupled with our exit of the four California and 32 retirement center banking locations on December 31, 2013. As a result of this successful strategy, we have increased our average transaction deposits (defined as total deposits less time deposits) and client repurchase agreements as a percentage of average total deposits and client repurchase agreements to 63.2% during the six months ended June 30, 2014 from 59.4% during the six months ended June 30, 2013. This strategy benefited the average cost of interest bearing liabilities through a seven basis point decrease to 0.44% during the six months ended June 30, 2014 from 0.51% during the six months ended June 30, 2013. The following table summarizes the changes in net interest income by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 (in thousands): Three months ended June 30, 2014 Six months ended June 30, 2014 compared to compared to Three months ended June 30, 2013 Six months ended June 30, 2013 Increase (decrease) due to Increase (decrease) due to Volume Rate Net Volume Rate Net Interest income: ASC 310-30 loans $ (11,251 )$ 7,919$ (3,332 )$ (25,604 )$ 17,870$ (7,734 ) Non 310-30 loans(1)(2)(3) 6,305 (4,019 ) 2,286 11,503 (7,544 ) 3,959 Investment securities available-for-sale (1,980 ) 1,002 (978 ) (2,308 ) 1,506 (802 ) Investment securities held-to-maturity 518 (530 ) (12 ) 1,077 (1,345 ) (268 ) Other securities (103 ) (15 ) (118 ) (124 ) 1 (123 ) Interest earning deposits and securities purchased under agreements to resell (133 ) 34 (99 ) (386 ) 47 (339 ) Total interest income $ (6,644 )$ 4,391$ (2,253 )$ (15,842 )$ 10,535$ (5,307 ) Interest expense: Interest bearing demand, savings and money market deposits $ (4 ) $ 42$ 38$ (17 )$ 18$ 1 Time deposits (331 ) (322 ) (653 ) (724 ) (897 ) (1,621 ) Securities sold under agreements to repurchase 7 (1 ) 6 23 (3 ) 20 Total interest expense (328 ) (281 ) (609 ) (718 ) (882 ) (1,600 ) Net change in net interest income $ (6,316 )$ 4,672$ (1,644 )$ (15,124 )$ 11,417$ (3,707 )



(1) Originated loans are net of deferred loan fees, less costs, which are

included in interest income over the life of the loan.

(2) Non 310-30 loans include loans held-for-sale. Average balances during the

three months ended June 30, 2014 and 2013 were $2.5 million and $8.4 million,

and interest income was $57 thousand and $118 thousand for the same periods,

respectively. Average balances during the six months ended June 30, 2014 and

2013 were $2.4 million and $6.3 million, and interest income was $102

thousand and $161 thousand for the same periods, respectively.

(3) Presented on a fully taxable equivalent basis using the statutory tax rate of

35%. The taxable equivalent adjustments included above are $220 thousand and

$0 for the three months ended June 30, 2014 and 2013, respectively, and $379

thousand and $0 for the six months ended June 30, 2014 and 2013, respectively. 70

-------------------------------------------------------------------------------- Our acquired banks had deposit rates, particularly time deposit rates, higher than market at the time we acquired them. We have been steadily lowering deposit rates as we shift towards a more consumer-based banking strategy and focusing on lower cost transaction accounts. We have done this through a particular emphasis on lowering the cost of time deposits. Below is a breakdown of deposits and the average rates paid during the periods indicated (in thousands):



For the three months ended

June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013 June 30, 2013 Average Average Average Average Average Average rate Average rate Average rate Average rate Average rate balance paid balance paid balance paid balance paid balance paid Non-interest bearing demand $ 691,851 0.00 % $ 667,009 0.00 % $ 676,959 0.00 % $ 668,400 0.00 % $ 649,323 0.00 % Interest bearing demand 389,187 0.08 % 394,452 0.09 % 379,052 0.09 % 460,971 0.14 % 478,922 0.15 % Money market accounts 1,078,682 0.32 % 1,098,041 0.32 % 1,097,009 0.32 % 1,088,084 0.32 % 1,052,590 0.32 % Savings accounts 254,242 0.24 % 224,145 0.18 % 191,592 0.12 % 195,650 0.11 % 196,248 0.11 % Time deposits 1,435,155 0.69 % 1,464,120 0.68 % 1,544,223 0.70 % 1,561,552 0.73 % 1,628,332 0.77 % Total average deposits $ 3,849,117 0.37 % $ 3,847,767 0.37 % $ 3,888,835 0.38 % $ 3,974,657 0.40 % $ 4,005,415 0.42 % Provision for Loan Losses The provision for loan losses represents the amount of expense that is necessary to bring the ALL to a level that we deem appropriate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The ALL is in addition to the remaining purchase accounting marks of $9.0 million on purchased non 310-30 loans that were established at the time of acquisition. The determination of the ALL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions. Losses incurred on covered loans are reimbursable at the applicable loss share percentages in accordance with the loss sharing agreements with the FDIC. Accordingly, any provisions made that relate to covered loans are partially offset by a corresponding increase to the FDIC indemnification asset and FDIC loss sharing income in non-interest income. Below is a summary of the provision for loan losses for the periods indicated (in thousands): For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Provision for (recoupment of) impairment on loans accounted for under ASC 310-30 $ (90 ) $ 1,003$ (144 )$ 1,312 Provision for loan losses 1,750 667 3,573 1,775



Total provision for loan losses $ 1,660$ 1,670

$ 3,429$ 3,087

Through the re-measurement, we recouped $90 thousand and $144 thousand of provision for loan loss for loans accounted for under ASC 310-30 during the three and six months ended June 30, 2014, respectively. During the three and six months ended June 30, 2013 we recorded $1.0 million and $1.3 million, respectively, of provision for loans accounted for under ASC 310-30. The net recoupments on loans accounted for under ASC 310-30 reflect $223 thousand and $312 thousand in recoupments during the three and six months ended June 30, 2014, respectively, across several loan pools. These provision recoupments, when coupled with decreased expected future cash flows, primarily in our agriculture pool, resulted in the net recoupments for the three and six months ended June 30, 2014. The decreases in expected future cash flows are reflected immediately in our financial statements. Increases in expected future cash flows are reflected through an increase in accretable yield that is accreted to income in future periods. 71 -------------------------------------------------------------------------------- Non-Interest Income The table below details the components of non-interest income during the three and six months ended June 30, 2014 and 2013, respectively (in thousands): For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 FDIC indemnification asset amortization $ (5,959 )$ (2,966 )$ (13,567 )$ (7,635 ) FDIC loss sharing income (expense) (649 ) 1,193 (1,606 ) 4,469 Service charges 3,870 3,923 7,410 7,610 Bank card fees 2,559 2,558 4,933 5,027 Gain on sale of mortgages, net 202 474 410 780 Gain on previously charged-off acquired loans 232 451 528 894 OREO related write-ups and other income 1,010 1,012 1,978 1,986 Other non-interest income 896 679 1,721 1,344 Total non-interest income $ 2,161$ 7,324



$ 1,807$ 14,475

Non-interest income for the three and six months ended June 30, 2014 was $2.2 million and $1.8 million, respectively, compared to $7.3 million and $14.5 million during the three and six months ended June 30, 2013, respectively. We recognized amortization of $6.0 million and $13.6 million during the three and six months ended June 30, 2014, respectively, related to the FDIC indemnification asset. The amortization resulted from improved performance of the covered assets that resulted in lower expected reimbursements from the FDIC. Most of the FDIC covered assets are accounted for in the ASC 310-30 loan pools and the benefit of the increased client cash flows is primarily captured in the corresponding increased accretion rates on ASC 310-30 loans. FDIC loss sharing income (expense) represents the income recognized in connection with the actual reimbursement of costs/recoveries of resolution of covered assets from the FDIC. FDIC loss sharing income (expense) activity during the three and six months ended June 30, 2014 and 2013, respectively, was as follows (in thousands): For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013



Clawback liability amortization $ (336 )$ (310 ) $

(664 ) $ (623 ) Clawback liability remeasurement (538 ) 76 (1,054 ) 649 Reimbursement to FDIC for gain on sale of and income from covered OREO (782 ) (1,241 ) (1,700 ) (2,101 ) Reimbursement to FDIC for recoveries (33 ) (7 ) (118 ) (22 ) FDIC reimbursement of covered asset resolution costs 1,040 2,675 1,930 6,566 Other FDIC loss sharing income (expense) $ (649 )$ 1,193 $



(1,606 ) $ 4,469

Other FDIC loss sharing income (expense) in our statement of operations was primarily comprised of FDIC reimbursements of costs of resolution of covered assets of $1.0 million and $1.9 million during the three and six months ended June 30, 2014, respectively, offset with reimbursements to the FDIC for gains on sales of and income from covered OREO of $0.8 million and $1.7 million, respectively. The activity in the FDIC loss sharing income line fluctuates based on specific loan and OREO workout circumstances and may not be consistent from period to period. Banking-related non-interest income (excludes FDIC-related non-interest income, gain on previously charged-off acquired loans and OREO related income) totaled $7.5 million and $14.5 million, during the three and six months ended June 30, 2014, respectively, and decreased $0.1 million and $0.3 million, from the three and six months ended June 30, 2013, respectively. Service charges, which represent various fees charged to clients for banking services, including fees such as non-sufficient funds ("NSF") charges and service charges on deposit accounts, decreased $0.1 million and $0.2 million, or 1.4% and 2.6%, during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively. The decrease was largely due to declines in NSF/overdraft charges. Bank card fees are comprised primarily of interchange fees on the debit cards that we have issued to our clients. Bank card fees totaled $2.6 million and $4.9 million during the three and six months ended June 30, 2014, and $2.6 million and $5.0 million during the three and six months ended June 30, 2013, respectively. 72 -------------------------------------------------------------------------------- Gain on previously charged-off acquired loans represents recoveries on loans that were previously charged-off by the predecessor bank prior to takeover by the FDIC. During the three and six months ended June 30, 2014, these gains were $0.2 million and $0.5 million, respectively, compared to $0.5 million and $0.9 million during the same periods in the prior year. OREO related write-ups and other income include rental income and insurance proceeds received on OREO properties and write-ups to the fair-value of collateral that exceed the loan balance at the time of foreclosure. During the three and six months ended June 30, 2014, these gains totaled $1.0 million and $2.0 million, respectively. Non-Interest Expense Our operating strategy is to capture the efficiencies available by consolidating the operations of our acquisitions and several of our key operating objectives affect our non-interest expense. The table below details non-interest expense for the periods presented (in thousands): For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Salaries and benefits $ 20,428$ 23,768$ 41,202$ 46,724 Occupancy and equipment 6,209 5,870 12,683 11,835 Telecommunications and data processing 2,982 3,286 6,130 6,755 Marketing and business development 1,762 732 2,785 2,111 FDIC deposit insurance 1,035 1,006 2,080 2,053 ATM/debit card expenses 762 1,107 1,513 2,112 Professional fees 688 858 1,326 2,254 Other non-interest expense 2,749 3,549 5,158 6,457 (Gain) loss from change in fair value of warrant liability (580 ) 324 (1,478 ) (303 ) Intangible asset amortization 1,336 1,337 2,672 2,673 Other real estate owned expenses 1,402 2,497 3,035 7,216 Problem loan expenses 1,082 896 1,767 3,227 Total non-interest expense $ 39,855$ 45,230



$ 78,873$ 93,114

Non-interest expense totaled $39.9 million and $78.9 million for the three and six months ended June 30, 2014, respectively, compared to $45.2 million and $93.1 million for the three and six months ended June 30, 2013, respectively. Operating expenses, which exclude OREO expenses, problem loan expenses and the impact from the change in the warrant liability, decreased $3.6 million and $7.4 million, or 8.6% and 8.9%, from the three and six months ended June 30, 2013, respectively. The year-over-year decrease in operating expenses was attributable to efficiency initiatives implemented during the latter half of 2013, which provided decreases in most non-interest expense categories. Salaries and benefits is our largest component of non-interest expense and totaled $20.4 million and $41.2 million for the three and six months ended June 30, 2014, respectively, compared to $23.8 million and $46.7 million for the three and six months ended June 30, 2013, respectively. The 14.1% and 11.8% decreases in salaries and benefits during the three and six months ended June 30, 2014, respectively, was attributable to a decrease in salaries as a result of efficiency initiatives, coupled with the exits of the California banking centers and limited-service retirement centers at December 31, 2013. Occupancy and equipment expense totaled $6.2 million and $12.7 million for the three and six months ended June 30, 2014, respectively, an increase of $0.3 million and $0.8 million over the three and six months ended June 30, 2013, respectively. The increase was primarily due to the addition of software. Marketing and business development expense totaled $1.8 million and $2.8 million for the three and six months ended June 30, 2014, respectively, compared to $0.7 million and $2.1 million during the three and six months ended June 30, 2013, respectively. The increases of $1.0 million and $0.7 million for the three and six months ended June 30, 2014, respectively, was due to an increase in marketing and business development expenses related to the timing of marketing campaigns. Significant components of our non-interest expense are problem loan expenses and OREO related expenses. We incur these expenses in connection with the resolution process of our acquired problem loan portfolios. During the three and six months ended June 30, 2014, we incurred $2.5 million and $4.8 million of OREO and problem loan expenses, a $0.9 million and $5.6 million decrease from the three and six months ended June 30, 2013, respectively, as the volume of problem assets has steadily declined as a result of persistent workout efforts on the acquired problem loan portfolio. Of the $2.5 million and $4.8 million 73 -------------------------------------------------------------------------------- in collective OREO and problem loan expenses incurred during the three and six months ended June 30, 2014, $1.3 million and $2.8 million, respectively, were covered by loss sharing agreements with the FDIC. Income taxes Income tax expense totaled $0.9 million for three months ended June 30, 2014, as compared with $1.8 million for the three months ended June 30, 2013. These amounts equate to effective tax expense rates of 30.6% and 38.5% for the respective periods. Income tax expense for the six months ended June 30, 2014 and 2013 totaled $1.7 million and $3.2 million, respectively, equating to effective tax rates of 32.5% and 38.7% for the respective periods. The decrease in the effective tax rate for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, was attributable to an increase in tax-exempt lending through the specialized commercial lending groups formed in 2013 and the quarterly revaluation of the warrant liability, which is not taxable. Additional information regarding income taxes can be found in note 21 of our audited consolidated financial statements in our 2013 Annual Report on Form 10-K. Liquidity and Capital Resources Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. On-balance sheet liquidity is represented by our cash and cash equivalents and unencumbered investment securities, and is detailed in the table below as of June 30, 2014 and December 31, 2013 (in thousands): June 30, 2014 December 31, 2013 Cash and due from banks $ 67,120 $ 67,420 Due from Federal Reserve Bank of Kansas City 91,767 107,894 Interest bearing bank deposits 14,172 14,146 Unencumbered investment securities, at fair value 1,983,269 2,177,239 Total $ 2,156,328 $ 2,366,699 Total on-balance sheet liquidity decreased $210.4 million from December 31, 2013 to June 30, 2014. The decrease was largely due to a reduction in available-for-sale and held-to-maturity securities balances. Aside from the deployment of our capital and cash received from acquisitions, our primary sources of funds are deposits from clients, prepayments and maturities of loans and investment securities, the sale of investment securities, reimbursement of covered asset losses from the FDIC and the funds provided from operations. During 2013, we entered into a master repurchase agreement with a large financial institution and we anticipate that, through this agreement, we would have access to a significant amount of liquidity. Additionally, we anticipate having access to other third party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12 month period. Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses and debt payments, particularly subsequent to acquisitions and share repurchases. For additional information regarding our operating, investing, and financing cash flows, see our consolidated statements of cash flows in the accompanying unaudited consolidated interim financial statements. Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and pay downs of loans and purchases and sales of investment securities. At June 30, 2014, pledgeable investment securities represented our largest source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $2.2 billion at June 30, 2014, inclusive of pre-tax net unrealized losses of $8.9 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $3.9 million of unrealized gains at June 30, 2014. The gross unrealized gains and losses are detailed in note 3 of our unaudited consolidated interim financial statements for the six months ended June 30, 2014. As of June 30, 2014, our investment securities portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base. At present, financing activities primarily consist of changes in repurchase agreements and deposits, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of 74 -------------------------------------------------------------------------------- June 30, 2014, $0.9 billion of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy focusing on both lower cost transaction accounts and term deposits, we expect to replace a significant portion of those maturing time deposits with transaction deposits and market-rate time deposits. In July 2011, we joined the FHLB of Des Moines and since hold $6.0 million of FHLB stock as is required by the membership agreement. Through this relationship, we have pledged qualifying loans and can obtain additional liquidity through FHLB advances. NBH Bank is subject to specific dividend restrictions pursuant to the Operating Agreement with the OCC, which are further discussed in our Annual Report on Form 10-K under "Supervision and Regulation." At June 30, 2014, the holding company sources of funds were comprised of cash and cash equivalents on hand, which totaled $201.8 million. The holding company may seek to borrow funds and raise capital in the future, the success and terms of which will be subject to market conditions and other factors. On January 23, 2014, the Board of Directors authorized a program to repurchase up to $50.0 million of our common stock. This authorization replaced any remaining repurchase authorization under previous plans. Additionally, on July 17, 2014, our Board of Directors approved a new program to repurchase $50 million shares of the Company's common stock from time to time either in open market or in privately negotiated transactions. These programs authorized the purchase of shares from time to time either in the open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. During the six months ended June 30, 2014, we repurchased 2.3 million shares of our common stock at a weighted average price of $19.47, and all such shares are held as treasury shares. Subsequent to June 30, 2014 and through August 7, 2014, we repurchased an additional 487,073 shares. These repurchases have brought our cumulative repurchases to 19.53% of shares outstanding since we started repurchasing our shares in late 2012, at a weighted average price of $19.70 per share. We believe that our repurchases could serve to offset any future share issuances for future acquisitions. Asset/Liability Management and Interest Rate Risk Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows. The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income. 75 -------------------------------------------------------------------------------- Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at June 30, 2014. During the six months ended June 30, 2014, we increased our asset sensitivity as a result of the balance sheet mix towards more variable rate assets. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 50 basis point decrease in interest rates on net interest income based on the interest rate risk model at June 30, 2014 and December 31, 2013:



Hypothetical

shift in interest % change in projected net interest income

rates (in bps) June 30, 2014December 31, 2013

200 7.05% 4.09% 100 3.72% 2.32% -50 -1.60% -1.11% Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates. The federal funds rate is the basis for overnight funding and the market expectations for changes in the federal funds rate influence the yield curve. The federal funds rate is currently at 0.25% and has been since December 2008. Should interest rates decline further, net interest margin and net interest income would be compressed given the current mix of rate sensitive assets and liabilities. As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. The strategy with respect to liabilities has been to emphasize transaction accounts, particularly non-interest or low interest bearing non-maturing deposit accounts which are less sensitive to changes in interest rates. In response to this strategy, non-maturing deposit accounts have been steadily increasing and totaled 63.0% of total deposits at June 30, 2014 compared to 61.0% at December 31, 2013. We currently have no brokered time deposits and intend to continue to focus on our strategy of increasing non-interest or low-cost interest bearing non-maturing deposit accounts and accordingly, we have no current plans to use brokered deposits in the near future. Off-Balance Sheet Activities In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of June 30, 2014 and December 31, 2013, we had loan commitments totaling $438.7 million and $383.9 million, respectively, and standby letters of credit that totaled $8.1 million and $5.9 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. We do not anticipate any material losses arising from commitments or contingent liabilities and we do not believe that there are any material commitments to extend credit that represent risks of an unusual nature. 76



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