0000354647 cvbf:DairyLivestockAndAgribusinessMember 2018-06-30
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20192020
or
☐
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  _____ to _____
Commission File Number:
000-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California
 
95-3629339
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
701 North Haven Ave., Suite 350
Ontario, California
 
91764
(Address of principal executive offices)
 
(Zip Code)
(909)
980-4030
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, No Par Value
  
CVBF
  
The Nasdaq Stock Market, LLC
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
☒
    No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒
    No
☐
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,
non-accelerated
filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
Large accelerated filer
 
☒
  Accelerated filer 
Accelerated☐
  Non-accelerated filer 
☐
Non-accelerated
filer
  
☐
Smaller reporting company    
 
☐
Emerging growth company    
 
☐
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  
☐��
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Yes
☐
No
☒​​​​​​​
Number of shares of common stock of the registrant: 140,106,948135,505,605 outstanding as of October 31, 2019.
30, 2020.
 
Table of Contents
TABLE OF CONTENTS
PART I –
FINANCIAL INFORMATION (UNAUDITED)
3
   
ITEM 1.
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
   
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10
   
ITEM 2.
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
41
37
   
 
CRITICAL ACCOUNTING POLICIES
38
   
 
CRITICAL ACCOUNTING POLICIES
OVERVIEW
41
40
   
 
OVERVIEW
41
ANALYSIS OF THE RESULTS OF OPERATIONS
43
42
   
 
ANALYSIS OF FINANCIAL CONDITION
53
52
   
 
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
69
66
   
ITEM 3.
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
71
69
   
ITEM 4.
4.
CONTROLS AND PROCEDURES
71
69
   
PART II –
OTHER INFORMATION
72
70
   
ITEM 1.
1.
LEGAL PROCEEDINGS
72
70
   
ITEM 1A.
1A.
RISK FACTORS
72
71
   
ITEM 2.
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
73
72
   
ITEM 3.
3.
DEFAULTS UPON SENIOR SECURITIES
73
72
   
ITEM 4.
4.
MINE SAFETY DISCLOSURES
73
   
ITEM 5.
5.
OTHER INFORMATION
73
   
ITEM 6.
6.
EXHIBITS
73
  
SIGNATURES
74
 
2
Table of Contents
PART I – FINANCIAL INFORMATION (UNAUDITED)
GENERAL
Cautionary Note Regarding Forward-Looking Statements
Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:
local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;
our ability to attract deposits and other sources of funding or liquidity;
supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;
a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;
changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;
changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs;
the costs or effects of mergers, acquisitions or dispositions we may make, including the 2018 merger of Community Bank with and into Citizens Business Bank, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits or cost savings associated with any such mergers, acquisitions or dispositions;
the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for loan losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;
the effects of additional legal and regulatory requirements to which we have or will become subject as a result of our total assets exceeding $10 billion, which first occurred in the third quarter of 2018 due to the closing of our merger transaction with Community Bank;following:
changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;
the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments or currently expected credit losses or delinquencies;
the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for loan losses;
•
local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;
•
our ability to attract deposits and other sources of funding or liquidity;
•
supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;
•
a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;
•
changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;
•
changes in our levels of delinquent loans, nonperforming assets, allowance for credit losses and charge-offs;
•
the costs or effects of mergers, acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits or cost savings associated with any such mergers, acquisitions or dispositions;
•
the effects of new laws, regulations and/or government programs, including those laws, regulations and programs enacted by federal, state or local governments in the geographic jurisdictions in which we do business in response to the recent national emergency declared in connection with the
COVID-19
pandemic;
•
the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;
•
the effects of the Company’s participation in one or more of the new lending programs recently established by the Federal Reserve, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility, and the impact of any related actions or decisions by the Federal Reserve Bank of Boston and its special purpose vehicle established pursuant to such lending programs;
•
the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for credit losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;
•
changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;
•
the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments or currently expected credit losses or delinquencies;
•
the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for credit losses;
•
inflation, changes in market interest rates, securities market and monetary fluctuations;
•
changes in government-established interest rates, reference rates or monetary policies, including the possible imposition of negative interest rates on bank reserves;
•
the impact of the anticipated
phase-out
of the London Interbank Offered Rate (LIBOR) on interest rate indexes specified in certain of our customer loan agreements and our interest rate swap arrangements, including any economic and compliance effects related to the expected change from LIBOR to an alternative reference rate;
•
changes in the amount, cost and availability of deposit insurance;
changes in government-established interest rates, reference rates (including the anticipated phase-out of LIBOR) or monetary policies;3
changes in the amount, cost and availability of deposit insurance;
disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communication facilities; cyber incidents or theft or loss of Company or customer data or money; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes, extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;
our timely development and implementation of new banking products and services and the perceived overall value of these products and services by customers and potential customers;
the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;
3
Table of Contents
 
•
disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communication facilities;
•
cyber incidents, attacks, infiltrations, exfiltrations, or theft or loss of Company or customer or employee data or money;
•
political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes or extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;
•
our timely development and implementation of new banking products and services and the perceived overall value of these products and services by customers and potential customers;
•
the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;
•
changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
•
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);
•
our ability to retain and increase market share, retain and grow customers and control expenses;
•
changes in the competitive environment among banks and other financial services and technology providers;
•
competition and innovation with respect to financial products and services by banks, financial institutions and
non-traditional
providers including retail businesses and technology companies;
•
volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s assets, liabilities, or customers;
•
changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);
our ability to retain and increase market share, retain and grow customers and control expenses;
changes in the competitive environment among banks and other financial services and technology providers;
competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies;
volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s assets, liabilities, or customers;
fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;
•
the effect of changes in accounting policies and practices, as may be adopted from
time-to-time
by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
•
changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team, key executive positions and/or our board of directors;
•
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
•
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, lender liability, bank operations, financial product or service, data privacy, consumer or employee class action litigation);
•
regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
•
our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DFPI;
•
our success at managing the risks involved in the foregoing items; and
•
all other factors set forth in the Company’s public reports, including its Annual Report on Form
10-K
for the year ended December 31, 2019, and particularly the discussion of risk factors within that document.
Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the Company’s business prospects. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact on the Company’s abilityeconomy, our customers and our business partners, and actions taken by governmental authorities in response to raise capital or make acquisitions;the pandemic.
the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or our board of directors;
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, bank operations, consumer or employee class action litigation);
regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;
our success at managing the risks involved in the foregoing items; and
all other factors set forth in the Company’s public reports, including its Annual Report on Form 10-K for the year ended December 31, 2018, and particularly the discussion of risk factors within that document.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.
 
4
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ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
  
   September 30,  
2019
 
 
  December 31,  
2018
 
Assets
      
Cash and due from banks
   $
222,248
    $
144,008
 
Interest-earning balances due from Federal Reserve
  
215,300
   
19,940
 
Total cash and cash equivalents
  
437,548
   
163,948
 
Interest-earning balances due from depository institutions
  
5,673
   
7,670
 
Investment securities
available-for-sale,
at fair value (with amortized cost of $1,549,406 at September
 
30,
2019, and $1,757,666 at December 31, 2018)
  
1,570,406
   
1,734,085
 
Investment securities
held-to-maturity
(with fair value of $711,891
at September 30, 2019, and
$721,537 at December 31, 2018)
  
703,953
   
744,440
 
Total investment securities
  
2,274,359
   
2,478,525
 
Investment in stock of Federal Home Loan Bank (FHLB)
  
17,688
   
17,688
 
Loans and lease finance receivables
  
7,494,451
   
7,764,611
 
Allowance for loan losses
  
(68,672
)  
(63,613
)
Net loans and lease finance receivables
  
7,425,779
   
7,700,998
 
Premises and equipment, net
  
53,256
   
58,193
 
Bank owned life insurance (BOLI)
  
224,841
   
220,758
 
Accrued interest receivable
  
27,244
   
30,649
 
Intangibles
  
45,446
   
53,784
 
Goodwill
  
663,707
   
666,539
 
Other real estate owned (OREO)
  
9,450
   
420
 
Income taxes
  
44,630
   
62,174
 
Other assets
  
103,141
   
67,807
 
Total assets
   $
11,332,762
    $
11,529,153
 
         
Liabilities and Stockholders’ Equity
      
Liabilities:
      
Deposits:
      
Noninterest-bearing
   $
5,385,104
    $
5,204,787
 
Interest-bearing
  
3,409,226
   
3,622,703
 
Total deposits
  
8,794,330
   
8,827,490
 
Customer repurchase agreements
  
407,850
   
442,255
 
Other borrowings
  
4,914
   
280,000
 
Deferred compensation
  
22,334
   
20,033
 
Junior subordinated debentures
  
25,774
   
25,774
 
Other liabilities
  
110,667
   
82,411
 
Total liabilities
  
9,365,869
   
9,677,963
 
         
Commitments and Contingencies
       
Stockholders’ Equity
      
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,157,063 at September 30, 2019, and 140,000,017 at December 31, 2018
  
1,298,138
   
1,293,669
 
Retained earnings
  
656,659
   
575,805
 
Accumulated other comprehensive income (loss), net of tax
  
12,096
   
(18,284
)
Total stockholders’ equity
  
1,966,893
   
1,851,190
 
Total liabilities and stockholders’ equity
   $
11,332,762
    $
11,529,153
 
 
   
  September 30,  
 
  December 31,  
   
2020
 
2019
Assets
   
Cash and due from banks
    $145,455    $158,310 
Interest-earning balances due from Federal Reserve
   1,339,498   27,208 
  
 
 
 
 
 
 
 
Total cash and cash equivalents
   1,484,953   185,518 
  
 
 
 
 
 
 
 
Interest-earning balances due from depository institutions
   44,367   2,931 
Investment securities
available-for-sale,
at fair value (with amortized cost of $2,150,364 at September 30, 2020, and $1,718,357 at December 31, 2019)
   2,205,646   1,740,257 
Investment securities
held-to-maturity
(with fair value of $603,522 at September 30, 2020, and $678,948 at December 31, 2019)
   577,694   674,452 
  
 
 
 
 
 
 
 
Total investment securities
   2,783,340   2,414,709 
  
 
 
 
 
 
 
 
Investment in stock of Federal Home Loan Bank (FHLB)
   17,688   17,688 
Loans and lease finance receivables
   8,407,872   7,564,577 
Allowance for credit losses
   (93,869)   (68,660) 
  
 
 
 
 
 
 
 
Net loans and lease finance receivables
   8,314,003   7,495,917 
  
 
 
 
 
 
 
 
Premises and equipment, net
   51,477   53,978 
Bank owned life insurance (BOLI)
   228,132   226,281 
Accrued interest receivable
   30,004   28,122 
Intangibles
   35,804   42,986 
Goodwill
   663,707   663,707 
Other real estate owned (OREO)
   4,189   4,889 
Income taxes
   21,412   35,587 
Other assets
   139,635   110,137 
  
 
 
 
 
 
 
 
Total assets
    $13,818,711    $11,282,450 
  
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
   
Liabilities:
   
Deposits:
   
Noninterest-bearing
    $6,919,423    $5,245,517 
Interest-bearing
   4,249,411   3,459,411 
  
 
 
 
 
 
 
 
Total deposits
   11,168,834   8,704,928 
Customer repurchase agreements
   483,420   428,659 
Other borrowings
   10,000   - 
Deferred compensation
   21,259   22,666 
Junior subordinated debentures
   25,774   25,774 
Other liabilities
   127,467   106,325 
  
 
 
 
 
 
 
 
Total liabilities
   11,836,754   9,288,352 
  
 
 
 
 
 
 
 
Commitments and Contingencies
   
Stockholders’ Equity
   
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 135,509,143 at September 30, 2020, and 140,102,480 at December 31, 2019
   1,210,646   1,298,792 
Retained earnings
   735,218   682,692 
Accumulated other comprehensive income, net of tax
   36,093   12,614 
  
 
 
 
 
 
 
 
Total stockholders’ equity
   1,981,957   1,994,098 
  
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
    $13,818,711    $11,282,450 
  
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
5
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    For the Three Months Ended    
September 30,
 
    For the Nine Months Ended    
September 30,
  
    Three Months Ended    
September 30,
 
    Nine Months Ended    
September 30,
 
2019
 
2018
 
2019
 
2018
   
2020
 
2019
 
2020
 
2019
Interest income:
                 
Loans and leases, including fees
   $
98,796
    $
79,818
    $
300,326
    $
192,382
     $94,200    $98,796    $ 281,669    $ 300,326 
Investment securities:
                 
Investment securities
available-for-sale
  
9,222
   
11,521
   
29,985
   
35,086
    8,447  9,222  26,945  29,985 
Investment securities
held-to-maturity
  
4,298
   
4,666
   
13,249
   
14,238
    3,375  4,298  11,033  13,249 
              
 
 
 
 
 
 
 
Total investment income
  
13,520
   
16,187
   
43,234
   
49,324
    11,822  13,520  37,978  43,234 
              
 
 
 
 
 
 
 
Dividends from FHLB stock
  
301
   
329
   
931
   
959
    215  301  761  931 
Interest-earning deposits with other institutions
  
946
   
304
   
1,140
   
1,475
    389  946  1,285  1,140 
              
 
 
 
 
 
 
 
Total interest income
  
113,563
   
96,638
   
345,631
   
244,140
    106,626  113,563  321,693  345,631 
              
 
 
 
 
 
 
 
Interest expense:
                 
Deposits
  
4,589
   
2,967
   
12,553
   
6,041
    2,958  4,589  10,077  12,553 
Borrowings and customer repurchase agreements
  
568
   
606
   
3,555
   
1,396
    232  568  972  3,555 
Junior subordinated debentures
  
247
   
245
   
771
   
674
    111  247  444  771 
              
 
 
 
 
 
 
 
Total interest expense
  
5,404
   
3,818
   
16,879
   
8,111
    3,301  5,404  11,493  16,879 
              
 
 
 
 
 
 
 
Net interest income before provision for (recapture of) loan losses
  
108,159
   
92,820
   
328,752
   
236,029
 
Provision for (recapture of) loan losses
  
1,500
   
500
   
5,000
   
(1,500
)
Net interest income before provision for credit losses
   103,325  108,159  310,200  328,752 
Provision for credit losses
   -  1,500  23,500  5,000 
              
 
 
 
 
 
 
 
Net interest income after provision for (recapture of) loan losses
  
106,659
   
92,320
   
323,752
   
237,529
 
Net interest income after provision for credit losses
   103,325  106,659  286,700  323,752 
              
 
 
 
 
 
 
 
Noninterest income:
                 
Service charges on deposit accounts
  
4,833
   
4,295
   
15,039
   
12,431
    3,970  4,833  12,555  15,039 
Trust and investment services
  
2,330
   
2,182
   
6,964
   
6,738
    2,405  2,330  7,302  6,964 
Bankcard services
  
637
   
875
   
2,614
   
2,637
    456  637  1,438  2,614 
BOLI income
  
1,797
   
936
   
4,482
   
2,984
    1,469  1,797  5,211  4,482 
Gain on OREO, net
  
-
   
-
   
129
   
3,540
    13   -  23  129 
Gain on sale of building, net
  
-
   
-
   
4,545
   
-
    1,680   -  1,680  4,545 
Gain on eminent domain condemnation, net
  
-
   
-
   
5,685
   
-
    -   -   -  5,685 
Other
  
2,297
   
1,824
   
6,944
   
4,393
    3,160  2,297  8,736  6,944 
              
 
 
 
 
 
 
 
Total noninterest income
  
11,894
   
10,112
   
46,402
   
32,723
    13,153  11,894  36,945  46,402 
              
 
 
 
 
 
 
 
Noninterest expense:
                 
Salaries and employee benefits
  
30,122
   
26,319
   
88,286
   
69,684
    31,034  30,122  90,617  88,286 
Occupancy and equipment
  
5,092
   
5,324
   
16,348
   
13,834
    5,275  4,879  15,143  15,730 
Professional services
  
1,688
   
1,154
   
5,653
   
4,374
    2,019  1,688  6,643  5,653 
Software licenses and maintenance
  
2,450
   
2,317
   
7,414
   
5,836
 
Computer software expense
   2,837  2,663  8,407  8,032 
Marketing and promotion
  
1,517
   
1,134
   
4,149
   
3,638
    728  1,517  3,538  4,149 
Amortization of intangible assets
  
2,648
   
1,736
   
8,338
   
2,395
    2,292  2,648  7,182  8,338 
Acquisition related expenses
  
244
   
6,645
   
6,005
   
7,942
    -  244   -  6,005 
Other
  
3,774
   
4,251
   
13,474
   
11,377
    5,403  3,774  13,097  13,474 
              
 
 
 
 
 
 
 
Total noninterest expense
  
47,535
   
48,880
   
149,667
   
119,080
    49,588  47,535  144,627  149,667 
              
 
 
 
 
 
 
 
Earnings before income taxes
  
71,018
   
53,552
   
220,487
   
151,172
    66,890  71,018  179,018  220,487 
Income taxes
  
20,595
   
14,994
   
63,941
   
42,328
    19,398  20,595  51,915  63,941 
              
 
 
 
 
 
 
 
Net earnings
   $
50,423
    $
38,558
    $
156,546
    $
108,844
     $47,492    $50,423    $127,103    $156,546 
              
 
 
 
 
 
 
 
        
Other comprehensive income (loss):
            
Unrealized gain (loss) on securities arising during the period, before tax
   $
5,423
    $
(10,387
)   $
43,136
    $
(49,155
)
Other comprehensive income:
     
Unrealized (loss) gain on securities arising during the period, before tax
    $(2,004)    $5,423    $33,334    $43,136 
Less: Reclassification adjustment for net gain on securities included in net income
 
 
(5
)
 
 
-
 
 
 
(5
)
 
 
-
 
   -  (5)   -  (5) 
Other comprehensive income (loss), before tax
 
 
5,418
 
 
 
(10,387
)
 
 
43,131
 
 
 
(49,155
)
Less: Income tax (expense) benefit related to items of other comprehensive income
  
(1,602
)  
3,070
   
(12,751
)  
14,532
 
              
 
 
 
 
 
 
 
Other comprehensive income (loss),
net
of
tax
  
3,816
   
(7,317
)  
30,380
   
(34,623
)
Other comprehensive (loss) income, before tax
   (2,004)  5,418  33,334  43,131 
Less: Income tax benefit (expense) related to items of other comprehensive income
   593  (1,602)  (9,855)  (12,751) 
  
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
   (1,411)  3,816  23,479  30,380 
              
 
 
 
 
 
 
 
Comprehensive income
   $
54,239
    $
31,241
    $
186,926
    $
74,221
     $46,081    $54,239    $150,582    $186,926 
              
 
 
 
 
 
 
 
        
Basic earnings per common share
   $
0.36
    $
0.30
    $
1.12
    $
0.94
     $0.35    $0.36    $0.93    $1.12 
Diluted earnings per common share
   $
0.36
    $
0.30
    $
1.12
    $
0.94
     $0.35    $0.36    $0.93    $1.12 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
6
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
(Unaudited)
For the Three Months Ended September 30, 2020 and 2019
 
        
Accumulated
  
  
Common
     
Other
  
  
Shares
 
Common
 
Retained
 
Comprehensive
  
  
Outstanding
 
Stock
 
Earnings
 
Income (Loss)
 
Total
Balance, July 1, 2020
  135,516    $ 1,209,449    $ 712,145    $ 37,504    $ 1,959,098 
Repurchase of common stock
  (15)   (257)   -   -   (257) 
Exercise of stock options
  4   47   -   -   47 
Shares issued pursuant to stock-based compensation plan
  4   1,407   -   -   1,407 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (24,419)   -   (24,419) 
Net earnings
  -   -   47,492   -   47,492 
Other comprehensive loss
  -   -   -   (1,411)   (1,411) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2020
  135,509    $ 1,210,646    $ 735,218    $ 36,093    $ 1,981,957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2019
  140,142  $1,296,885  $631,512  $8,280  $1,936,677 
Repurchase of common stock
  (34)   (723)   -   -   (723) 
Exercise of stock options
  15   155   -   -   155 
Shares issued pursuant to stock-based compensation plan
  34   1,821   -   -   1,821 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (25,276)   -   (25,276) 
Net earnings
  -   -   50,423   -   50,423 
Other comprehensive income
  -   -   -   3,816   3,816 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
  140,157    $1,298,138    $656,659    $12,096    $1,966,893 
 
 
 
 
 
 
 
 
��
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2020 and 2019
                     
 
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 (Loss)
 
Total
 
Balance, July 1, 2018
   
110,302
    $
575,502
    $
533,413
    $
(25,498
)   $
1,083,417
 
Repurchase of common stock
  
(6
)  
(151
)  
-
   
-
   
(151
)
Issuance of common stock for acquisition of Community
 
Bank
  
29,842
   
722,767
   
-
   
-
   
722,767
 
Exercise of stock options
  
7
   
87
   
-
   
-
   
87
 
Shares issued pursuant to stock-based compensation plan
  
190
   
847
   
-
   
-
   
847
 
Cash dividends declared on common stock ($0.14 per
 
share)
  
-
   
-
   
(19,628
)  
-
   
(19,628
)
Net earnings
  
-
   
-
   
38,558
   
-
   
38,558
 
Other comprehensive
loss
  
-
   
-
   
-
   
(7,317
)  
(7,317
)
                     
Balance, September 30, 2018
  
140,335
    $
1,299,052
    $
 
552,343
    $
(32,815
)   $
1,818,580
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2019
  
140,142
    $
1,296,885
    $
631,512
    $
8,280
    $
1,936,677
 
Repurchase of common stock
  
(34
)  
(723
)  
-
   
-
   
(723
)
Exercise of stock options
  
15
   
155
   
-
   
-
   
155
 
Shares issued pursuant to stock-based compensation plan
  
34
   
1,821
   
-
   
-
   
1,821
 
Cash dividends declared on common stock ($0.18 per
 
share)
  
-
   
-
   
(25,276
)  
-
   
(25,276
)
Net earnings
  
-
   
-
   
50,423
   
-
   
50,423
 
Other comprehensive 
income
  
-
   
-
   
-
   
3,816
   
3,816
 
                     
Balance, September 30, 2019
         
140,157
    $
     
1,298,138
    $
   
 
 
  
656,659
    $
         
12,096
    $
  
 
  
1,966,893
 
 
        
Accumulated
  
  
Common
     
Other
  
  
Shares
 
Common
 
Retained
 
Comprehensive
  
  
Outstanding
 
Stock
 
Earnings
 
Income (Loss)
 
Total
Balance, January 1, 2020
  140,102    $1,298,792    $682,692    $12,614    $1,994,098 
Cumulative adjustment upon adoption of ASU
2016-13
  -   -   (1,325)   -   (1,325) 
Repurchase of common stock
  (5,004)   (92,687)   -   -   (92,687) 
Exercise of stock options
  14   168   -   -   168 
Shares issued pursuant to stock-based compensation plan
  397   4,373   -   -   4,373 
Cash dividends declared on common stock ($0.54 per share)
  -   -   (73,252)   -   (73,252) 
Net earnings
  -   -   127,103   -   127,103 
Other comprehensive income
  -   -   -   23,479   23,479 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2020
  135,509    $ 1,210,646    $ 735,218    $ 36,093    $ 1,981,957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
  140,000  $ 1,293,669  $ 575,805  $ (18,284)  $ 1,851,190 
Repurchase of common stock
  (70)   (1,535)   -   -   (1,535) 
Exercise of stock options
  160   2,212   -   -   2,212 
Shares issued pursuant to stock-based compensation plan
  67   3,792   -   -   3,792 
Cash dividends declared on common stock ($0.54 per share)
  -   -   (75,692)   -   (75,692) 
Net earnings
  -   -   156,546   -   156,546 
Other comprehensive income
  -   -   -   30,380   30,380 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
  140,157    $1,298,138    $656,659    $12,096    $1,966,893 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                     
For the Nine Months Ended September 30, 2019
 
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 (Loss)
 
Total
 
Balance, January 1, 2018
   
110,185
    $
573,453
    $
494,361
    $
1,452
    $
1,069,266
 
Cumulative adjustment upon adoption of ASU
2018-02
  
-
   
-
   
(356
)  
356
   
-
 
Repurchase of common stock
  
(42
)  
(988
)  
-
   
-
   
(988
)
Issuance of common stock for acquisition of Community Bank
  
29,842
   
722,767
   
-
   
-
   
722,767
 
Exercise of stock options
  
145
   
1,504
   
-
   
-
   
1,504
 
Shares issued pursuant to stock-based compensation plan
  
205
   
2,316
   
-
   
-
   
2,316
 
Cash dividends declared on common stock ($0.42 per
 
share)
  
-
   
-
   
(50,506
)  
-
   
(50,506
)
Net earnings
  
-
   
-
   
108,844
   
-
   
108,844
 
Other comprehensive
lo
s
s
  
-
   
-
   
-
   
(34,623
)  
(34,623
)
                     
Balance, September 30, 2018
  
140,335
    $
1,299,052
    $
 
552,343
    $
(32,815
)   $
1,818,580
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
  
140,000
    $
1,293,669
    $
575,805
    $
(18,284
)   $
1,851,190
 
Repurchase of common stock
  
(70
)  
(1,535
)  
-
   
-
   
(1,535
)
Exercise of stock options
  
160
   
2,212
   
-
   
-
   
2,212
 
Shares issued pursuant to stock-based compensation plan
  
67
   
3,792
   
-
   
-
   
3,792
 
Cash dividends declared on common stock ($0.54 per
 
share)
  
-
   
-
   
(75,692
)  
-
   
(75,692
)
Net earnings
  
-
   
-
   
156,546
   
-
   
156,546
 
Other comprehensive income
  
-
   
-
   
-
   
30,380
   
30,380
 
                     
Balance, September 30, 2019
         
140,157
    $
     
1,298,138
    $   
 
 
  
656,659
    $
         
12,096
    $  
 
  
1,966,893
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
7
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
         
 
For the Nine Months Ended
September 30,
 
2019
 
2018
 
Cash Flows from Operating Activities
  
 
 
 
 
 
 
 
 
 
 
 
 
     
Interest and dividends received
   $
331,953
  
 
 
$
245,842
 
Service charges and other fees received
  
31,441
   
26,107
 
Interest paid
  
(16,155
)  
(8,642
)
Net cash paid to vendors, employees and others
  
(140,482
)  
(110,799
)
Income taxes
  
(59,347
)  
(35,879
)
Payments to FDIC, loss share agreement
  
-
   
(65
)
         
Net cash provided by operating activities
  
147,410
   
116,564
 
         
Cash Flows from Investing Activities
      
Proceeds from redemption of FHLB stock
  
-
   
17,250
 
Net change in interest-earning balances from depository institutions
  
1,997
   
11,934
 
Proceeds from sale of investment securities held-for-sale
  
152,644
   
716,996
 
Proceeds from repayment of investment securities available-for-sale
  
268,766
   
296,922
 
Proceeds from maturity of investment securities available-for-sale
  
6,059
   
20,260
 
Purchases of investment securities available-for-sale
  
(225,416
)  
(98,709
)
Proceeds from repayment and maturity of investment securities held-to-maturity
  
81,001
   
67,861
 
Purchases of investment securities held-to-maturity
  
(42,917
)  
-
 
Net increase in equity investments
  
(3,511
)  
(24,054
)
Net decrease (increase) in loan and lease finance receivables
  
289,490
   
(6,806
)
Proceeds on eminent domain condemnation, net
  
5,685
   
-
 
Proceeds from sale of building, net
  
5,487
   
-
 
Purchase of premises and equipment
  
(3,061
)  
(3,483
)
Proceeds from BOLI death benefit
  
1,509
   
882
 
Proceeds from sales of other real estate owned
  
523
   
8,067
 
Cash acquired from acquisition, net of cash paid
  
-
   
(132,918
)
         
Net cash provided by investing activities
  
538,256
   
874,202
 
         
Cash Flows from Financing Activities
      
Net increase (decrease) in other deposits
  
37,061
   
(241,934
)
Net decrease in time deposits
  
(70,221
)  
(65,079
)
Repayment of FHLB advances
  
-
   
(297,571
)
Net decrease in other borrowings
  
(275,086
)  
(136,000
)
Net decrease in customer repurchase agreements
  
(34,405
)  
(154,296
)
Cash dividends on common stock
  
(70,092
)  
(46,304
)
Repurchase of common stock
  
(1,535
)  
(988
)
Proceeds from exercise of stock options
  
2,212
   
1,504
 
         
Net cash used in financing activities
  
(412,066
)  
(940,668
)
         
Net increase in cash and cash equivalents
   
273,600
    
50,098
 
         
Cash and cash equivalents, beginning of period
  
163,948
   
144,377
 
         
Cash and cash equivalents, end of period
   $
 
 
 
 
 
 
437,548
    $
 
 
 
 
 
194,475
 
         
 
   
    Nine Months Ended    
   
September 30,
   
2020
 
2019
Cash Flows from Operating Activities
   
Interest and dividends received
    $301,634    $331,953 
Service charges and other fees received
   29,918   31,441 
Interest paid
   (10,975)   (16,155) 
Net cash paid to vendors, employees and others
   (136,948)   (140,482) 
Income taxes
   (45,610)   (59,347) 
  
 
 
 
 
 
 
 
Net cash provided by operating activities
   138,019   147,410 
  
 
 
 
 
 
 
 
Cash Flows from Investing Activities
   
Net change in interest-earning balances from depository institutions
   (41,436)   1,997 
Proceeds from sale of investment securities
held-for-sale
   0   152,644 
Proceeds from repayment of investment securities
available-for-sale
   426,684   268,766 
Proceeds from maturity of investment securities
available-for-sale
   3,506   6,059 
Purchases of investment securities
available-for-sale
   (870,934)   (225,416) 
Proceeds from repayment and maturity of investment securities
held-to-maturity
   106,491   81,001 
Purchases of investment securities
held-to-maturity
   (11,210)   (42,917) 
Net increase in equity investments
   (2,890)   (3,511) 
Net (increase) decrease in loan and lease finance receivables
   (815,151)   289,490 
Proceeds on eminent domain condemnation, net
   0   5,685 
Proceeds from sale of building, net of selling costs
   2,131   5,487 
Purchase of premises and equipment
   (2,444)   (3,061) 
Proceeds from BOLI death benefit
   4,589   1,509 
Proceeds from sales of other real estate owned
   0   523 
  
 
 
 
 
 
 
 
Net cash (used in) provided by investing activities
   (1,200,664)   538,256 
  
 
 
 
 
 
 
 
Cash Flows from Financing Activities
   
Net increase in other deposits
   2,465,066   37,061 
Net decrease in time deposits
   (1,160)   (70,221) 
Net increase (decrease) in other borrowings
   10,000   (275,086) 
Net increase (decrease) in customer repurchase agreements
   54,761   (34,405) 
Cash dividends on common stock
   (74,068)   (70,092) 
Repurchase of common stock
   (92,687)   (1,535) 
Proceeds from exercise of stock options
   168   2,212 
  
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
   2,362,080   (412,066) 
  
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
   1,299,435   273,600 
Cash and cash equivalents, beginning of period
   185,518   163,948 
  
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
    $1,484,953    $437,548 
  
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
8
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
   
        Nine Months Ended        
   
September 30,
   
2020
 
2019
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
   
   Net earnings
    $127,103    $156,546 
   Adjustments to reconcile net earnings to net cash provided by operating activities:
   
  Gain on sale of investment securities, net
   0   (5) 
  Gain on eminent domain condemnation, net
   0   (5,685) 
  Gain on sale of building, net
   (1,680)   (4,545) 
  Gain on sale of other real estate owned
   0   (105) 
  Increase in BOLI
   (4,028)   (5,592) 
  Net amortization of premiums and discounts on investment securities
   10,181   7,593 
  Accretion of discount for acquired loans, net
   (13,106)   (22,369) 
  Provision for credit losses
   23,500   5,000 
  Valuation allowance on other real estate owned
   700   0 
  Stock-based compensation
   4,373   3,792 
  Depreciation and amortization, net
   2,173   16,993 
  Change in other assets and liabilities
   (11,197)   (4,213) 
  
 
 
 
 
 
 
 
     Total adjustments
   10,916   (9,136) 
  
 
 
 
 
 
 
 
    Net cash provided by operating activities
    $138,019    $147,410 
  
 
 
 
 
 
 
 
Supplemental Disclosure of
Non-cash
Investing Activities
   
   Transfer of loans to other real estate owned
    $0    $9,450 
         
 
For the Nine Months Ended

September 30,
 
2019
  
2018
 
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
        
   Net earnings
 
 
 
 
$
 
 
156,546
  
 
  $
108,844
  
         
   Adjustments to reconcile net earnings to net cash provided by operating activities:
      
         
  Gain on sale of investment securities, net
 
 
(5
)
 
 
-
 
  Gain on eminent domain condemnation, net
  
(5,685
)  
-
 
  Gain on sale of building, net
  
(4,545
)  
-
 
  Gain on sale of other real estate owned
  
(105
)  
(3,540
)
  Increase in BOLI
  
(5,592
)  
(3,053
)
  Net amortization of premiums and discounts on investment securities
  
7,593
   
10,661
 
  Accretion of discount for acquired loans, net
  
(22,369
)  
(6,889
)
  Provision for (recapture of) loan losses
  
5,000
   
(1,500
)
  Payments to FDIC, loss share agreement
  
-
   
(65
)
  Stock-based compensation
  
3,792
   
2,316
 
  Depreciation and amortization, net
  
16,993
   
4,146
 
  Change in other assets and liabilities
  
(4,213
)  
5,644
 
         
     Total adjustments
  
(9,136
)  
7,720
 
         
    Net cash provided by operating activities
  $
147,410
   
 
$
116,564
 
         
         
Supplemental Disclosure of
Non-cash
Investing Activities
      
   Transfer of loans to other real estate owned
   $
9,450
    $
420
 
   Issuance of common stock for acquisition
   $
-
    $
722,767
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
9
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BUSINESS
The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has 1 inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.
The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust.its CitizensTrust Division. The Bank’s customers consist primarily of small to
mid-sized
businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 5857 banking centers, 1 loan production office in Modesto, California and 3 trust office locations. The Company is headquartered in the city of Ontario, California.
On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 –
Business Combinations
, included herein.
2.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form
10-Q
and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and nine months ended September 30, 20192020 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2018,2019, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Reclassification
— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as discussed below, our accounting policies are described in Note 3 —–
Summary of Significant Accounting Policies
, of our audited consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 20182019 as filed with the SEC (“
(“Form
10
-K” 10-K”).
Use of Estimates in the Preparation of Financial Statements
— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loancredit losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.
 
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Adoption of New Accounting Standards
— In August 2017, the FASB issued ASU No.
 2017-12,
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU
2017-12
changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both
non-financial
and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No.
 2017-12
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No.
 2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Accounting.” The intention of ASU
2018-07
is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be
re-measured
through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU
2018-07
is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU No.
 2016-02,
“Leases (Topic 842)
.
” ASU
2016-02
establishes a
right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU
2018-10,
“Codification Improvements to Topic 842, Leases
,
” which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU
2018-10
are the same as the effective date and transition requirements of
2016-02.
In July 2018, the FASB issued ASU No.
 2018-11,
“Leases (Topic 842): Targeted Improvements
,
” which creates a new optional transition method for implementing the new standard on leases, ASU No.
 2016-02,
and provides lessors with a practical expedient for separating lease and
non-lease
components. Specifically, under the amendments in ASU
2018-11:
(1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and
non-lease
components when certain conditions are met. The amendments have the same effective date as ASU
2016-02.
Practical Expedients
to Topic 842, Leases
— The Company elected several practical expedients made available by the FASB. The Company elected not to restate comparative financial statements upon adoption of the new accounting standard. In addition, the Company elected the package of practical expedients whereby the Company did not reassess (i) whether existing contracts are, or contain, leases. and (ii) lease classification for existing leases. Lastly, the Company elected not to separate lease and
non-lease
components in determining the consideration in the lease agreement.
The Company’s leasing portfolio consists of real estate leases, which are used primarily for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The adoption of this ASU during the first quarter of 2019 did not have a material impact on the Company’s consolidated financial statements. At adoption, the Company recognized a lease liability and a corresponding ROU asset of approximately $20 million on the consolidated balance sheet related to its future lease payments as a lessee under operating leases. See Note 13
—
Leases
for more information.
Operating lease ROU assets and lease liabilities are included in
other assets
and
other liabilities
, respectively, on the
Company’s
consolidated balance sheet. The Company uses its incremental borrowing rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset, at adoption of this ASU, was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.
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Recent
Adoption of New Accounting PronouncementsStandard
Provision and Allowance for Credit Losses
— In June 2016,On January 1, 2020, the FASB issuedCompany adopted ASU
No.
 2016-13,
“Financial Instruments –— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”Instruments”. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replaceThis ASU replaces the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will applyapplies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain
off-balance
off balance sheet credit exposures. This includes, but is not limited to, loans, leases,
held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to AFS
available-for-sale
(“AFS”) debt securities. For AFS debt securities with unrealized losses, entitieswe will measure credit impairment in a manner similar to what they do today,the approach used prior to the adoption of CECL, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entitieswe will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today.required prior to the adoption of CECL. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet. If accrued interest is not received, it is reversed against interest income, which was zero for the third quarter of 2020.
The Company adopted this ASU No.
 2016-13
is effectiveusing the modified retrospective method for interimall financial assets measured at amortized cost and annual
off-balance
sheet credit exposures. Results for reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.
We have determined a
methodology 
and
portfolio segmentation,
based on
data quality and availability. The Company continues to update
and validate its
assumptions and models, as appropriate.
In January 2017, the FASB issued ASU No.
 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU
2017-04
eliminates the second step in the goodwill impairment test
that
requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with early adoption permitted for goodwill impairment tests performed afterpreviously applicable GAAP. The Company recorded a net decrease to beginning retained earnings of $1.3 million, net of tax as of January 1, 2017.2020 for the cumulative adjustment upon adoption of ASC 326. The Company does not expect this ASUtransition adjustment of $1.8 million was added to have a materialthe beginning balance of the allowance for credit losses (“ACL”) for loans and $41,000 was added to the beginning balance of reserve for unfunded loan commitments. Upon adoption of CECL there was no impact on the Company’s consolidated financial statements.accounting for AFS or HTM investment securities.
The Company developed an allowance model that calculates reserves over the life of the loan and is largely driven by portfolio characteristics, risk grading, macroeconomic variables and the associated economic outlook, as well as other key methodology assumptions. The allowance is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. In August 2018,addition to determining the FASB issuedquantitative life of loan loss rate to be applied against the portfolio segments, the ASU No.indicates management has the opportunity to layer on current conditions and forecast adjustments to ensure that the life of loan loss rate reflects both the current state of the portfolio, and expectations for macroeconomic changes in the near future. We utilized a single economic forecast that is based on probability weighted scenarios to incorporate macroeconomic uncertainty over a 2 or
 2018-13,3-year
“Fair Value Measurement (Topic 820): Disclosure Frameworkforecast horizon. After the initial 2 to 3 year forecast horizon, we use an input reversion methodology in the model structure to complete a reasonable and supportable forecast period for the life of the loan.
 - 
Changes
Beginning in the second half of March 2020, the broader economy experienced a significant deterioration in the economic environment driven by the COVID-19 pandemic resulting in adverse changes to the Disclosure Requirements for Fair Value Measurement.”forecasted macroeconomic variables utilized in our modeling processes. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Amongeconomic deterioration, coupled with the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2implementation of the fair value hierarchy, but will be requiredexpected loss methodology for determining our provision for credit losses, have contributed to disclosean increased provision for credit losses of
$23.5 
million in the range and weighted average usedfirst half of 2020. We continue to develop significant unobservable inputs for Level 3 fair value measurements. ASU No.
 2018-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption ofmonitor the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidatedeconomy from COVID-19 closely, as well as any effects that may result from the CARES Act. The extent to which the COVID-19 pandemic will impact our operations and financial statements.results during the final quarter of 2020 is uncertain, but we may experience increased provision for credit losses if the COVID-19 pandemic results in additional economic stress on our borrowers and loan portfolios.
 
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2
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4.BUSINESS COMBINATIONS
Community Bank Acquisition
On August 10, 2018, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas. The systems integration of CB and CBB was completed in November 2018. The consolidation of banking centers was completed during the second quarter of 2019, in which 4
additional banking centers that were in close proximity were consolidated. For the first six months of 2019, a total of 10 banking centers were consolidated, including 9 former CB centers.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 10, 2018 acquisition date.
The purchase price allocation was finalized in the second quarter of 2019.
The change in goodwill resulted from finalizing the fair value of impaired loans. The application of the acquisition method of accounting resulted in the recognition of goodwill of $547.1 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.
The table below summarizes the amounts recognized for the estimated fair value of assets acquired and the liabilities assumed as of the acquisition date.
August 10, 2018
4.
(Dollars in thousands)INVESTMENT SECURITIES
Merger Consideration
  Cash paid
  $
180,719
  CVBF common stock issued
722,767
  Total merger consideration
  $
903,486
Identifiable net assets acquired, at fair value
  Assets Acquired
  Cash and cash equivalents
47,802
  Investment securities
716,996
  FHLB stock
17,250
  Loans
2,738,100
  Accrued interest receivable
7,916
  Premises and equipment
14,632
  BOLI
70,904
  Core deposit intangible
52,200
  Other assets
53,291
  Total assets acquired
3,719,091
  Liabilities assumed
  Deposits
2,869,986
  FHLB advances
297,571
  Other borrowings
166,000
  Other liabilities
29,192
  Total liabilities assumed
3,362,749
  Total fair value of identifiable net assets, at fair value
356,342
Goodwill
  $
547,144
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3
Table of Contents
At the date of acquisition, the gross contractual loan amounts receivable, inclusive of all principal and interest, was approximately $3 billion. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected at the date of acquisition was approximately $4.5 million.
We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.
The Company incurred merger related expenses associated with the CB acquisition of $244,000 and $6.0 million for the three and nine months ended September 30, 2019, respectively, and $6.6 million and $7.9 million for the three and nine months ended September 30, 2018, respectively.
For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and nine months ended September 30, 2018. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, 
cost savings, or business synergies.
As a result, actual amounts would have differed from the unaudited pro forma information presented.
 
Unaudited Pro Forma
 
 
  Three Months Ended
 
 
Nine Months Ended  
 
 
September 30, 2018
 
 
(Dollars in thousands, except per share amounts)
 
         
Total revenues (net interest income plus noninterest income)
   $
 120,467
    $
 364,846
 
Net income
   $
44,623
    $
 138,274
 
Earnings per share - basic
   $
0.32
    $
0.99
 
Earnings per share - diluted
   $
0.32
    $
0.99
 
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Table of Contents
5.INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are
available-for-sale
securities with fair value based on quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. Estimated fair values were obtained from an independent pricing service based upon market quotes.
 
September 30, 2019
 
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
  Total Percent  
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
               
Residential mortgage-backed securities
   $
1,127,395
    $
20,105
    $
(1,341
)   $
1,146,159
   
72.99
%
CMO/REMIC - residential
  
381,615
   
1,649
   
(336
)  
382,928
   
24.38
%
Municipal bonds
  
39,564
   
924
   
(1
)  
40,487
   
2.58
%
Other securities
  
832
   
-
   
-
   
832
   
0.05
%
                     
Total
available-for-sale
securities
   $
1,549,406
    $
22,678
    $
(1,678
) 
 
 
 
  $
1,570,406
   
100.00
%
                     
Investment securities
held-to-maturity:
               
Government agency/GSE
   $
123,917
    $
3,238
    $
(170
)   $
126,985
   
17.60
%
Residential mortgage-backed securities
  
172,919
   
2,624
   
(3
)  
175,540
   
24.56
%
CMO
  
204,263
   
76
   
(1,467
)  
202,872
   
29.02
%
Municipal bonds
  
202,854
   
4,198
   
(558
)  
206,494
   
28.82
%
                     
Total
held-to-maturity
securities
   $
703,953
    $
10,136
    $
(2,198
)   $
711,891
   
100.00
%
                     
   
 
December 31, 2018
 
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
T
otal Percent
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
               
Residential mortgage-backed securities
   $
1,494,106
    $
1,348
    $
(20,946
)   $
1,474,508
   
85.03
%
CMO/REMIC - residential
  
217,223
   
353
   
(3,525
)  
214,051
   
12.34
%
Municipal bonds
  
45,621
   
332
   
(1,143
)  
44,810
   
2.59
%
Other securities
  
716
   
-
   
-
   
716
   
0.04
%
                     
Total
available-for-sale
securities
   $
1,757,666
    $
2,033
    $
(25,614
)   $
1,734,085
   
100.00
%
                     
Investment securities
held-to-maturity:
               
Government agency/GSE
   $
138,274
    $
572
    $
(2,622
)   $
136,224
   
18.57
%
Residential mortgage-backed securities
  
153,874
   
-
   
(3,140
)  
150,734
   
20.67
%
CMO
  
215,336
   
-
   
(12,081
)  
203,255
   
28.93
%
Municipal bonds
  
236,956
   
556
   
(6,188
)  
231,324
   
31.83
%
                     
Total
held-to-maturity
securities
   $
744,440
    $
1,128
    $
(24,031
)   $
721,537
   
100.00
%
 
  
September 30, 2020
  
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
  
(Dollars in thousands)
Investment securities
available-for-sale:
     
Mortgage-backed securities
   $1,710,160    $46,713    $(2)    $1,756,871   79.65% 
CMO/REMIC
  404,380   7,326   (212)   411,494   18.66% 
Municipal bonds
  35,011   1,457   -   36,468   1.65% 
Other securities
  813   -   -   813   0.04% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $2,150,364    $55,496    $(214)    $2,205,646   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
     
Government agency/GSE
   $103,317    $6,627    $-    $109,944   17.88% 
Mortgage-backed securities
  152,285   7,837   -   160,122   26.36% 
CMO/REMIC
  159,676   5,315   -   164,991   27.64% 
Municipal bonds
  162,416   6,387   (338)   168,465   28.12% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $577,694    $26,166    $(338)    $603,522   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
5
  
December 31, 2019
  
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
  
(Dollars in thousands)
Investment securities
available-for-sale:
     
Mortgage-backed securities
   $1,185,757    $21,306    $(750)    $1,206,313   69.32% 
CMO/REMIC
  493,214   1,392   (896)   493,710   28.37% 
Municipal bonds
  38,506   850   (2)   39,354   2.26% 
Other securities
  880   -   -   880   0.05% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $1,718,357    $23,548    $(1,648)    $1,740,257   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
     
Government agency/GSE
   $117,366    $2,280    $(657)    $118,989   17.40% 
Mortgage-backed securities
  168,479   2,083   (54)   170,508   24.98% 
CMO/REMIC
  192,548   -   (2,458)   190,090   28.55% 
Municipal bonds
  196,059   3,867   (565)   199,361   29.07% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $674,452    $8,230    $(3,734)    $678,948   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Table of Contents
The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.
  
    For the Three Months Ended    
September 30,
 
    For the Nine Months Ended    
September 30,
 
         2019         
 
         2018         
 
         2019         
 
         2018         
 
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
            
Taxable
   $
8,949
    $
 11,126
    $
 29,079
    $
 33,861
 
Tax-advantaged
  
273
   
395
   
906
   
1,225
 
                 
Total interest income from
available-for-sale
securities
  
9,222
   
11,521
   
29,985
   
35,086
 
                 
Investment securities
held-to-maturity:
            
Taxable
  
2,883
   
2,961
   
8,725
   
8,887
 
Tax-advantaged
  
1,415
   
1,705
   
4,524
   
5,351
 
                 
Total interest income from
held-to-maturity
securities
  
4,298
   
4,666
   
13,249
   
14,238
 
                 
Total interest income from investment securities
   $
 13,520
    $
 16,187
    $
 43,234
    $
 49,324
 
                 
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
     2020     
  
     2019     
  
     2020     
  
     2019     
   
(Dollars in thousands)
Investment securities
available-for-sale:
        
Taxable
    $8,244     $8,949     $26,313     $29,079 
Tax-advantaged
   203    273    632    906 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from
available-for-sale
securities
   8,447    9,222    26,945    29,985 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
        
Taxable
   2,265    2,883    7,410    8,725 
Tax-advantaged
   1,110    1,415    3,623    4,524 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from
held-to-maturity
securities
   3,375    4,298    11,033    13,249 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from investment securities
    $11,822     $13,520     $37,978     $43,234 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Approximately
89
%The adoption of CECL did not have a material impact on the accounting for investment securities, as approximately 93% of the total investment securities portfolio at September 30, 20192020 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. The remaining securities are predominately
AA-
or better general-obligation municipal bonds. The allowance for credit losses for
held-to-maturity
investment securities under the new CECL model was zero at September 30, 2020.
We adopted ASU
2016-13
on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
and
held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the third quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.
The following table presents the Company’s
available-for-sale
investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2020.
  
September 30, 2020
  
    Less Than 12 Months    
 
    12 Months or Longer    
 
    Total    
  
Fair Value
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
  
 
(Dollars in thousands)
Investment securities
available-for-sale:
      
Mortgage-backed securities
   $30,851    $(2)    $-    $-    $30,851    $(2) 
CMO/REMIC
  71,781   (212)   -   -   71,781   (212) 
Municipal bonds
  -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $102,632    $(214)    $-    $-    $102,632    $(214) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The tablestable below showpresents the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018. 2019, prior to adoption of ASU
2016-13.
Management haspreviously reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market
interest
rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-
i
mpaired (“OTTI”). 
 
September 30, 2019
 
    Less Than 12 Months    
 
    12 Months or Longer    
 
    Total    
 
Fair Value
 
Gross
Unrealized
Holding
 
Losses
 
Fair Value
 
 
Gross
Unrealized
Holding
 
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
                  
Residential mortgage-backed securities
   $
  2
    $
  -
    $
  127,904
    $
 
 
  (1,341
)   $
  127,906
    $
  (1,341
)
CMO/REMIC - residential
  
122,595
   
(156
)  
39,498
   
(180
)  
162,093
   
(336
)
Municipal bonds
  
-
   
-
   
564
   
(1
)  
564
   
(1
)
                         
Total
available-for-sale
securities
   $
122,597
    $
(156
)   $
167,966
    $
(1,522
)   $
290,563
    $
(1,678
)
Investment securities
held-to-maturity:
                  
Government agency/GSE
   $
-
    $
-
    $
19,923
    $
(170
)   $
19,923
    $
(170
)
Residential mortgage-backed securities
  
5,021
   
(3
)  
-
   
-
   
5,021
   
(3
)
CMO
  
-
   
-
   
178,297
   
(1,467
)  
178,297
   
(1,467
)
Municipal bonds
  
3,037
   
(5
)  
32,217
   
(553
)  
35,254
   
(558
)
                         
Total
held-to-maturity
securities
   $
8,058
    $
(8
)   $
230,437
    $
(2,190
)   $
     
238,495
    $
     
(2,198
)
other-than-temporarily-impaired.
 
13
1
6
Table of Contents
                        
 
 
December 31, 2018
 
 
    Less Than 12 Months    
 
 
    12 Months or Longer    
 
 
    Total    
 
 
Fair Value
  
 
Gross
Unrealized
Holding
Losses
  
 
Fair Value
  
 
Gross
Unrealized
Holding
Losses
  
 
Fair Value
  
Gross
Unrealized
Holding
Losses
 
 
 
(Dollars in thousands)
 
Investment securities
available-for-sale:
   
 
  
 
  
 
  
 
    
Residential mortgage-backed securities
 
  $
 
692,311
 
 
  $
(4,864
)
 
  $
593,367
 
 
  $
(16,082
)
  
 
  $
 
1,285,678
 
  
  $
(20,946
)
  
CMO/REMIC - residential
  
36,582
 
 
 
(365
)
 
 
135,062
 
 
 
(3,160
)
 
 
171,644
  
(3,525
)
Municipal bonds
  
9,568
 
 
 
(188
)
 
 
14,181
 
 
 
(955
)
 
 
23,749
  
(1,143
)
     
 
   
 
   
 
   
 
      
Total
available-for-sale
securities
  
   $
738,461
 
 
  $
(5,417
)
 
  $
742,610
 
 
  $
(20,197
)
 
  $
1,481,071
   $
(25,614
)
     
 
   
 
   
 
   
 
      
Investment securities
held-to-maturity:
   
 
  
 
  
 
  
 
    
Government agency/GSE
   $
7,479
 
 
  $
(15
)
 
  $
54,944
 
 
  $
(2,607
)
 
  $
62,423
   $
(2,622
)
Residential mortgage-backed securities
  
59,871
 
 
 
(484
)
 
 
90,863
 
 
 
(2,656
)
 
 
150,734
  
(3,140
)
CMO
  
-
 
 
 
-
 
 
 
203,254
 
 
 
(12,081
)
 
 
203,254
  
(12,081
)
Municipal bonds
  
70,989
 
 
 
(778
)
 
 
77,723
 
 
 
(5,410
)
 
 
148,712
  
(6,188
)
     
 
   
 
   
 
   
 
      
Total
held-to-maturity
securities
   $
138,339
 
 
  $
(1,277
)
 
  $
426,784
 
 
  $
(22,754
)
 
  $
565,123
   $
     (24,031
)
     
 
   
 
   
 
   
 
      
  
December 31, 2019
  
    Less Than 12 Months    
 
    12 Months or Longer    
 
    Total    
  
Fair Value
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
  
 
(Dollars in thousands)
Investment securities
available-for-sale:
      
Mortgage-backed securities
   $20,289    $(6)    $97,964    $(744)    $118,253    $(750) 
CMO/REMIC
  177,517   (705)   34,565   (191)   212,082   (896) 
Municipal bonds
  -   -   563   (2)   563   (2) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $197,806    $(711)    $133,092    $(937)    $330,898    $(1,648) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
      
Government agency/GSE
   $28,359    $(252)    $19,405    $(405)    $47,764    $(657) 
Mortgage-backed securities
  10,411   (54)   -   -    10,411   (54) 
CMO/REMIC
  23,897   (104)   166,193   (2,354)   190,090   (2,458) 
Municipal bonds
  7,583   (32)   29,981   (533)   37,564   (565) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $70,250    $(442)    $215,579    $(3,292)    $285,829    $(3,734) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 20192020 and December 31, 2018,2019, investment securities having a carrying value of approximately $1.46$1.86 billion and $1.66$1.64 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at September 30, 2019,2020, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have weighted average remaining contractual maturities through 205
8
,of approximately 17 years, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. penalty
.
Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives, which incorporate estimated prepayment speeds.
                 
 
September 30, 2019
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair Value
 
 
 
 
Amortized
 
 

Cost
 
 
 
Fair Value
 
 
 
 
(Dollars in thousands)
Due in one year or less
   $
 
12,278
    $
 
12,426
    $
 
500
    $
500
 
Due after one year through five years
  
1,345,036
   
1,364,026
   
327,802
   
328,561
 
Due after five years through ten years
  
171,657
   
173,033
   
161,463
   
163,676
 
Due after ten years
  
20,435
   
20,921
   
214,188
   
219,154
 
                 
Total investment securities
   $
 
1,549,406
    $
 
1,570,406
    $
 
  703,953
    $
  711,891
 
 
  
September 30, 2020
  
Available-for-sale
 
Held-to-maturity
  
  Amortized  
Cost
 
  Fair Value  
 
 
  Amortized  
Cost
 
  Fair Value  
  
 
(Dollars in thousands)
Due in one year or less
   $27,816    $27,968    $2,730    $2,764 
Due after one year through five years
  1,960,912   2,012,028   327,785   341,060 
Due after five years through ten years
  119,315   121,652   81,246   84,329 
Due after ten years
  42,321   43,998   165,933   175,369 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment securities
   $2,150,364    $2,205,646    $577,694    $603,522 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition.
NaN
impairment losses have been recorded throughas of September 30, 2019.2020.
 
1
7
14
Table of Contents
6.
5.
LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOANCREDIT LOSSES
Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans
(“Non-PCI
loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018. At September 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at September 30, 2019 and December 31, 2018.
Beginning with June
 30, 2019, PCI loans were accounted for and combined with
Non-PCI
loans and were reflected in total loans and lease finance receivables.
The following table provides a summary of the Company’s total loans and lease finance receivables by type.
 
                                                    
  
September 30, 2020
 
December 31, 2019
  
(Dollars in thousands)
Commercial and industrial
   $817,056    $935,127 
SBA
  304,987   305,008 
SBA - Paycheck Protection Program (PPP)
  1,101,142   - 
Real estate:
  
Commercial real estate
  5,428,223   5,374,617 
Construction
  101,903   116,925 
SFR mortgage
  274,731   283,468 
Dairy & livestock and agribusiness
  252,802   383,709 
Municipal lease finance receivables
  38,040   53,146 
Consumer and other loans
  88,988   116,319 
 
 
 
 
 
 
 
 
Total loans
  8,407,872   7,568,319 
Less: Deferred loan fees, net (1)
  -   (3,742) 
 
 
 
 
 
 
 
 
Total loans, net of deferred loan fees
  8,407,872   7,564,577 
Less: Allowance for credit losses
  (93,869)   (68,660) 
 
 
 
 
 
 
 
 
Total loans and lease finance receivables, net
   $8,314,003    $7,495,917 
 
 
 
 
 
 
 
 
 
                 
 
September 30, 2019
  
December 31, 2018
 
 Total Loans
and Leases
  
Non-PCI
 Loans
and Leases
  
PCI Loans
  
Total Loans
and Leases
 
(Dollars in thousands)
 
Commercial and industrial
 $
921,678
    $
1,002,209
    $
519
  
 
$
 
1,002,728
 
SBA
  
319,571
   
350,043
   
1,258
   
351,301
 
Real estate:
  
 
       
Commercial real estate
  
5,375,668
   
5,394,229
   
14,407
   
5,408,636
 
Construction
  
119,931
   
122,782
   
-
   
122,782
 
SFR mortgage
  
278,644
   
296,504
   
145
   
296,649
 
Dairy & livestock and agribusiness
  
311,229
   
393,843
   
700
   
394,543
 
Municipal lease finance receivables
  
54,468
   
64,186
   
-
   
64,186
 
Consumer and other loans
  
117,128
   
128,429
   
185
   
128,614
 
                 
Gross loans
  
7,498,317
   
7,752,225
   
17,214
   
7,769,439
 
Less: Deferred loan fees, net
  
(3,866
)
  
(4,828
)
 
  
-
   
(4,828
)
                 
Gross loans, net of deferred loan fees
  
7,494,451
   
7,747,397
   
17,214
   
7,764,611
 
Less: Allowance for loan losses
  
(68,672
)  
(63,409
)
 
  
(204
)
 
  
(63,613
)
                 
Total loans and lease finance receivables
 $
7,425,779
    $
7,683,988
    $
17,010
   $
 
7,700,998
 
                 
(1)
Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables.
As of September 30, 2019, 77.01%2020, 69.04% of the Company’s total gross loan portfolio consisted of real estate loans,
with commercial real estate loans representing
71.69% 64.56% of
total loans
.loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of September 30, 2019, $245.62020, $271.2 million, or 4.57%5.00% of the total commercial real estate loans included loans secured by farmland, compared to $231.0$241.8 million, or 4.27%4.50%, at December 31, 2018.2019. The loans secured by farmland included $130.4$121.1 million for loans secured by dairy & livestock land and $115.1$150.2 million for loans secured by agricultural land at September 30, 2019,2020, compared to $126.9$125.9 million for loans secured by dairy & livestock land and $104.1$115.9 million for loans secured by agricultural land at December 31, 2018.2019. As of September 30, 2019,2020, dairy & livestock and agribusiness loans of $311.2$252.8 million were comprised of $251.3$210.4 million for dairy & livestock loans and $60.0$42.4 million for agribusiness loans, compared to $340.5$323.5 million for dairy & livestock loans and $54.0$60.2 million for agribusiness loans at December 31, 2018.2019.
At September 30, 2019, the Company held approximately $3.83 billion of total fixed rate loans.
At September 30, 20192020 and December 31, 2018,2019, loans totaling $5.91$6.00 billion and $5.71$6.03 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were 0 outstanding loans
held-for-sale
as of September 30, 20192020 and December 31, 2018.
2019.
 
1
8
15
Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. CreditsLoans are monitored by line and credit management personnel on an ongoing basis for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
16
Table of Contents
The following table summarizes loans by type and origination year, according to our internal risk ratings as of the date presented.
                
                
                
                
                
                
                
                
                
   
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted
to term
loans
   
September 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Commercial and
industrial loans:
                  
Risk Rating:
                  
Pass
    $81,480     $170,738     $72,345     $62,918     $41,860     $80,669     $255,407     $8,153     $773,570 
Special Mention
   0    1,235    3,087    814    241    5,015    15,970    1,022    27,384 
Substandard
   4,545    111    1,500    1,815    448    8    6,472    1,203    16,102 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial and
industrial loans:
    $86,025     $172,084     $76,932     $65,547     $42,549     $85,692     $277,849     $10,378     $817,056 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA loans:
                  
Risk Rating:
                  
Pass
    $37,389     $13,394     $46,193     $72,665     $26,687     $88,255     $0     $2,873     $287,456 
Special Mention
   0    0    0    1,113    1,352    6,910    0    0    9,375 
Substandard
   0    0    955    1,998    1,546    3,657    0    0    8,156 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA loans:
    $37,389     $13,394     $47,148     $75,776     $29,585     $98,822     $0     $2,873     $304,987 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA - PPP loans:
                  
Risk Rating:
                  
Pass
    $1,101,142     $0     $0     $0     $0     $0     $0     $0     $1,101,142 
Special Mention
   0    0    0    0    0    0    0    0    0 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA - PPP loans:
    $1,101,142     $0     $0     $0     $0     $0     $0     $0     $1,101,142 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Commercial real estate loans:
                  
Risk Rating:
                  
Pass
    $617,068     $701,648     $680,997     $684,519     $589,553     $1,776,989     $201,021     $26,329     $5,278,124 
Special Mention
   4,619    11,125    18,168    21,767    13,865    48,591    5,447    297    123,879 
Substandard
   0    793    3,815    5,497    1,281    14,597    237    0    26,220 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial real estate loans:
    $621,687     $713,566     $702,980     $711,783     $604,699     $1,840,177     $206,705     $26,626     $5,428,223 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Construction loans:
                  
Risk Rating:
                  
Pass
    $11,160     $8,614     $14,399     $15,667     $10,592     $4     $41,467     $0     $101,903 
Special Mention
   0    0    0    0    0    0    0    0    0 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Construction loans:
    $11,160     $8,614     $14,399     $15,667     $10,592     $4     $41,467     $0     $101,903 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SFR mortgage loans:
                  
Risk Rating:
                  
Pass
    $52,050     $62,087     $33,614     $25,069     $28,344     $69,215     $0     $0     $270,379 
Special Mention
   15    0    0    0    0    456    0    0    471 
Substandard
   0    238    0    0    229    2,974    0    440    3,881 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SFR mortgage loans:
    $52,065     $62,325     $33,614     $25,069     $28,573     $72,645     $0     $440     $274,731 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
17
Table of Contents
                
                
                
                
                
                
                
                
                
   
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted
to term
loans
   
September 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Dairy & livestock and agribusiness loans:
                  
Risk Rating:
                  
Pass
    $742     $2,201     $1,675     $5,709     $152     $341     $210,610     $494     $221,924 
Special Mention
   13    0    0    0    0    0    11,596    1,631    13,240 
Substandard
   0    0    849    703    2,985    0    824    12,277    17,638 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Dairy & livestock and agribusiness loans:
    $755     $2,201     $2,524     $6,412     $3,137     $341     $223,030     $14,402     $252,802 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Municipal lease finance receivables loans:
                  
Risk Rating:
                  
Pass
    $123     $0     $2,556     $10,436     $3,587     $20,926     $0     $0     $37,628 
Special Mention
   0    0    0    0    0    412    0    0    412 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Municipal lease finance receivables loans:
    $123     $0     $2,556     $10,436     $3,587     $21,338     $0     $0     $38,040 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Consumer and other
loans:
                  
Risk Rating:
                  
Pass
    $5,483     $2,334     $971     $1,068     $1,714     $1,380     $72,501     $1,994     $87,445 
Special Mention
   0    0    0    0    0    91    737    0    828 
Substandard
   0    0    0    0    0    174    0    541    715 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Consumer and other loans:
    $5,483     $2,334     $971     $1,068     $1,714     $1,645     $73,238     $2,535     $88,988 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Gross loans:
                  
Risk Rating:
                  
Pass
    $1,906,637     $961,016     $852,750     $878,051     $702,489     $2,037,779     $781,006     $39,843     $8,159,571 
Special Mention
   4,647    12,360    21,255    23,694    15,458    61,475    33,750    2,950    175,589 
Substandard
   4,545    1,142    7,119    10,013    6,489    21,410    7,533    14,461    72,712 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Gross loans:
    $1,915,829     $974,518     $881,124     $911,758     $724,436     $2,120,664     $822,289     $57,254     $8,407,872 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
18
Table of Contents
The following table summarizes loans by type, according to our internal risk ratings
as of
the
dates
date presented.
                                                                                                                                                       
 
September 30, 2019
 
Pass
 
Special
Mention
 
Substandard (1)
 
Doubtful &
 
Loss
 
Total
 
 
(Dollars in thousands)
Commercial and industrial
   $
892,865
    $
24,456
    $
4,357
    $
-
    $
921,678
 
SBA
  
296,127
   
13,764
   
9,680
   
-
   
319,571
 
Real estate:
               
Commercial real estate
               
Owner occupied
  
1,987,168
   
83,305
   
22,618
   
-
   
2,093,091
 
Non-owner
occupied
  
3,269,174
   
12,663
   
740
   
-
   
3,282,577
 
Construction
               
Speculative
  
105,636
   
-
   
-
   
-
   
105,636
 
Non-speculative
  
14,295
   
-
   
-
   
-
   
14,295
 
SFR mortgage
  
275,069
   
2,053
   
1,522
   
-
   
278,644
 
Dairy & livestock and agribusiness
  
247,554
   
43,585
   
20,090
   
-
   
311,229
 
Municipal lease finance receivables
  
53,998
   
470
   
-
   
-
   
54,468
 
Consumer and other loans
  
115,242
   
845
   
1,041
   
-
   
117,128
 
                     
Total gross loans
   $
7,257,128
    $
181,141
    $
60,048
    $
-
    $
7,498,317
 
                     
(1)Includes $18.0 million of classified loans acquired from CB in the third quarter of 2018.
1
9
 
Table of Contents
 
December 31, 2018 (1)
 
Pass
 
Special
Mention
 
Substandard (2)
 
Doubtful &
Loss
 
Total
 
 
(Dollars in thousands)
Commercial and industrial
   $
961,909
  
 
 
$
 
 
29,358
  
 
 
$
  10,942
  $
 
 
 
 
-
 
 
 
$
 
 
1,002,209
 
SBA
  
336,033
   
7,375
   
6,635
   
-
  
350,043
 
Real estate:
              
Commercial real estate
              
Owner occupied
  
2,008,169
   
95,841
   
13,980
   
-
  
2,117,990
 
Non-owner
occupied
  
3,260,822
   
9,938
   
5,479
   
-
  
3,276,239
 
Construction
              
Speculative
  
118,233
   
-
   
-
   
-
  
118,233
 
Non-speculative
  
4,549
   
-
   
-
   
-
  
4,549
 
SFR mortgage
  
289,607
   
3,310
   
3,587
   
-
  
296,504
 
Dairy & livestock and agribusiness
  
350,044
   
34,586
   
9,213
   
-
  
393,843
 
Municipal lease finance receivables
  
63,650
   
536
   
-
   
-
  
64,186
 
Consumer and other loans
  
126,085
   
1,263
   
1,081
   
-
  
128,429
 
Total gross loans
   $
7,519,101
    $
182,207
  
 
 
$
50,917
  $
-
 $
7,752,225
 
(1)Excludes PCI loans of $17.2 million as of December 31, 2018, of which $15.8 million were rated pass, $1.2 million were rated special mention, $224,000 were rated substandard, and 0 were rated doubtful & loss.
(2)Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018.
                                                                                          
  
December 31, 2019
  
Pass
 
Special
Mention
 
Substandard
 
Doubtful &
Loss
 
Total
  
(Dollars in thousands)
Commercial and industrial
   $895,234    $35,473    $4,420    $0    $935,127 
SBA
  283,430   11,032   10,546   0   305,008 
Real estate:
     
Commercial real estate
     
Owner occupied
  1,977,007   78,208   28,435   0   2,083,650 
Non-owner
occupied
  3,280,580   10,005   382   0   3,290,967 
Construction
     
Speculative
  106,895   0   0   0   106,895 
Non-speculative
  10,030   0   0   0   10,030 
SFR mortgage
  280,010   1,957   1,501   0   283,468 
Dairy & livestock and agribusiness
  320,670   35,920   27,119   0   383,709 
Municipal lease finance receivables
  52,676   470   0   0   53,146 
Consumer and other loans
  114,870   421   1,028   0   116,319 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gross loans
   $7,321,402    $173,486    $73,431    $0    $7,568,319 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for LoanCredit Losses (“ALLL”)
The Bank’s Auditallowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Director Loan Committees provide Board oversight of the ALL
L
processIndustrial, Commercial Real Estate, and approve the ALLL methodology on a quarterly basis.
Consumer Retail. Our methodology for assessing the appropriateness of the allowance is conductedreviewed on a regular basis and considers overall risks in the Bank’s overall loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
of the 2018 Annual Report on Form
10-K
for the year ended December 31, 2018contained herein for a more detailed discussion concerning the allowance for loancredit losses.
Our allowance for credit losses decreased in the third quarter by $114,000, as a result of net charge-offs of $114,000. There was 0 provision for credit losses in the third quarter of 2020. Our allowance for credit losses at September 30, 2020 was $93.9 million or 1.12% of total loans. For the nine months ended September 30, 2020, the ACL increased by $25.2 million, including a $1.8 million increase from the adoption of CECL on January 1, 2020. The increase in the ACL was primarily due to $23.5 million in provision for credit losses recorded in the first half of 2020 resulting from the forecasted changes in macroeconomic variables related to the
COVID
-19
pandemic. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. Moody’s baseline forecast continues to represent more than a 50% weighting in our multi-weighted forecast scenario. This U.S. baseline forecast assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5% in 2021 and 5% in 2022. The unemployment rate
 in this baseline forec
as
t
 is forecasted to be 8.9% in the third quarter of 2021, stay at an elevated level over 8% through 2021, before declining to 6.4% percent in 2022. With California slowly
re-opening
its
 economy and
currently
having an unemployment rate greater than 11% percent, our forecast includes a partial weighting o
f
 downside economic forecast scenarios from Moody’s.    
Management believes that the ALLLACL was appropriate at September 30, 20192020 and December 31, 2018. No2019. There is a high degree of uncertainty around the epidemiological assumptions and impact of government responses to the pandemic that impact our economic forecast, so no assurance can be given that economic conditions whichthat adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loancredit losses in the future.
19
Table of Contents
The following tables present the balance and activity related to the allowance for loancredit losses for
held-for-investment
loans by type for the periods presented.
                                                                                          
 
For the Three Months Ended September 30, 2019
 
 
Three Months Ended September 30, 2020
 
 Ending Balance 
June 30,
2019
 
Charge-offs
 
Recoveries
 
Provision for

(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
 
2019
 
 
 Ending Balance 
June 30, 2020
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Credit Losses
 
 Ending Balance 
September 30,
2020
 
(Dollars in thousands)
  
(Dollars in thousands)
Commercial and industrial
   $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7,857
     $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  -
    
    $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  94
    $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  287
  
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  8,238
     $7,991    $(161)    $2    $761    $8,593 
SBA
  
1,119
   
(65
)  
-
    
   
412
   
1,466
    3,651   (47)   69   (169)   3,504 
SBA - PPP
  0   0   0   0   0 
Real estate:
                     
Commercial real estate
  
48,287
   
-
    
   
-
    
   
624
   
48,911
    74,928   0   0   (473)   74,455 
Construction
  
871
   
-
    
   
3
   
55
   
929
    2,290   0   3   (355)   1,938 
SFR mortgage
  
2,323
   
-
    
   
8
   
44
   
2,375
    222   0   0   15   237 
Dairy & livestock and agribusiness
  
5,341
   
-
    
   
-
    
   
88
   
5,429
    3,379   0   0   330   3,709 
Municipal lease finance receivables
  
726
   
-
    
   
-
    
   
(64
)  
662
    302   0   0   (153)   149 
Consumer and other loans
  
608
   
(3
)  
3
   
54
   
662
    1,220   (23)   43   44   1,284 
                 
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
   $
67,132
    $
(68
)   $
108
    $
1,500
    $
68,672
  
Total allowance for credit losses
   $93,983    $(231)    $117    $0    $93,869 
 
 
 
 
 
 
 
 
 
 
                                                                                          
  
Three Months Ended September 30, 2019
  
 Ending Balance 
June 30, 2019
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
2019
  
(Dollars in thousands)
Commercial and industrial
   $7,857    $0    $94    $287    $8,238 
SBA
  1,119   (65)   0   412   1,466 
Real estate:
     
Commercial real estate
  48,287   0   0   624   48,911 
Construction
  871   0   3   55   929 
SFR mortgage
  2,323   0   8   44   2,375 
Dairy & livestock and agribusiness
  5,341   0   0   88   5,429 
Municipal lease finance receivables
  726   0   0   (64)   662 
Consumer and other loans
  608   (3)   3   54   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
   $67,132    $(68)    $108    $1,500    $68,672 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                            
  
Nine Months Ended September 30, 2020
  
Ending Balance,
prior to adoption
of ASU
2016-13

December 31,
2019
 
Impact of
Adoption of
ASU 2016-13
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Credit Losses
 
 Ending Balance 
September 30,
2020
  
(Dollars in thousands)
Commercial and industrial
   $8,880    $(2,442)    $(172)    $7    $2,320    $8,593 
SBA
  1,453   1,818   (203)   72   364   3,504 
SBA - PPP
  0   0   0   0   0   0 
Real estate:
      
Commercial real estate
  48,629   3,547   0   0   22,279   74,455 
Construction
  858   655   0   9   416   1,938 
SFR mortgage
  2,339   (2,043)   0   206   (265)   237 
Dairy & livestock and agribusiness
  5,255   (186)   0   0   (1,360)   3,709 
Municipal lease finance receivables
  623   (416)   0   0   (58)   149 
Consumer and other loans
  623   907   (109)   59   (196)   1,284 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for credit losses
   $68,660    $1,840    $(484)    $353    $23,500    $93,869 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20
Table of Contents
  
For the Three Months Ended September 30, 2018
  
Ending Balance

June 30,
2018
  
Charge-offs
  
Recoveries
  
Provision for

(Recapture of)
Loan Losses
  
Ending Balance

September 30,
2018
 
 
(Dollars in thousands)
 
Commercial and industrial
 
 
 
$
6,970
    $
-    
    $
44
    $
477
    $
7,491
 
SBA
  
841
   
(257
)  
5
   
369
   
958
 
Real estate:
               
Commercial real estate
  
42,597
   
-    
   
-    
   
(1,056
)  
41,541
 
Construction
  
1,003
   
-    
   
15
   
115
   
1,133
 
SFR mortgage
  
2,155
   
-    
   
-    
   
(30
)  
2,125
 
Dairy & livestock and
 
agribusiness
  
4,351
   
-    
   
-​​​​​​​    
   
673
   
5,024
 
Municipal lease finance
 
receivables
  
808
   
-    
   
-    
   
7
   
815
 
Consumer and other loans
  
642
   
(1
)  
118
   
(44
)  
715
 
PCI loans
  
216
   
-    
   
-    
   
(11
)  
205
 
Total allowance for loan
 
losses
   $
 
59,583
    $
(258
)   $
182
    $
500
    $
60,007
 
 
 
 
 
 
   
  
For the Nine Months Ended September 30, 2019
  
Ending Balance
December 31,
2018
 
  
Charge-offs
  
Recoveries
  
Provision for

(Recapture of)

Loan Losses
  
Ending Balance
September 30,
 
2019
 
 
(Dollars in thousands)
 
Commercial and industrial
   $
 
7,528
    $
(48
)   $
253
    $
 
505
    $
 
8,238 
 
SBA
  
1,078
   
(295
)  
9
   
674
   
1,466 
 
Real estate:
               
Commercial real estate
  
45,097
   
-
    
   
-    
   
3,814
   
48,911 
 
Construction
  
981
   
-    
   
9
   
(61
)
  
929 
 
SFR mortgage
  
2,197
   
-    
   
191
   
(13
)
  
2,375 
 
Dairy & livestock and
 
agribusiness
  
5,225
   
(78
)  
19
   
263
   
5,429 
 
Municipal lease finance receivables
  
775
   
-    
   
-    
   
(113
)  
662
 
Consumer and other loans
  
732
   
(7
)  
6
 
   
(69
)  
662 
 
Total allowance for loan
 
losses
   $
63,613
    $
(428
)   $
487 
    $
5,000
    $
68,672 
 
   
 
For the Nine Months Ended September 30, 2018
 
Ending Balance
December 31,
2017
 
Charge-offs
 
Recoveries
  
(Recapture of)
Provision for
Loan Losses
  
Ending Balance
September 30,
 
2018
 
(Dollars in thousands)
Commercial and industrial
   $
7,280
    $
-    
    $
81
    $
130
    $
7,491
 
SBA
  
869
   
(257
)  
15
   
331
   
958
 
Real estate:
               
Commercial real estate
  
41,722
   
-    
   
-    
   
(181
)
 
  
41,541
 
Construction
  
984
   
-    
   
1,945
   
(1,796
)
  
1,133
 
SFR mortgage
  
2,112
   
-    
   
-    
   
13
   
2,125
 
Dairy & livestock and
 
agribusiness
  
4,647
   
-    
   
19
   
358
   
5,024
 
Municipal lease finance receivables
  
851
   
-    
   
-    
   
(36
)  
815
 
Consumer and other loans
  
753
   
(10
)  
129
   
(157
)
  
715
 
PCI loans
  
367
   
-    
   
-    
   
(162
)
  
205
 
Total allowance for loan losses
   $
59,585
    $
(267
)   $
2,189
    $
(1,500
)
   $
60,007
 
2
1
Table of Contents
  
Nine Months Ended September 30, 2019
  
 Ending Balance 
December 31,
2018
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
2019
  
(Dollars in thousands)
Commercial and industrial
   $7,528    $(48)    $253    $505    $8,238 
SBA
  1,078   (295)   9   674   1,466 
Real estate:
     
Commercial real estate
  45,097   0   0   3,814   48,911 
Construction
  981   0   9   (61)   929 
SFR mortgage
  2,197   0   191   (13)   2,375 
Dairy & livestock and agribusiness
  5,225   (78)   19   263   5,429 
Municipal lease finance receivables
  775   0   0   (113)   662 
Consumer and other loans
  732   (7)   6   (69)   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
   $63,613    $(428)    $487    $5,000    $68,672 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following tables presenttable presents the recorded investment in loans
held-for-investment
and the related allowance for loan lossesACL by loan type, based on the Company’s methodology for determining the allowance​​​​​​​ for loan lossesACL for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.
                                                                                                                                     
 
September 30, 2019
 
 
Recorded Investment in Loans
  
Allowance for Loan Losses
 
 
Individually
 Evaluated for 
Impairment
 
 
Collectively
 Evaluated for 
Impairment
 
 
Individually
  Evaluated for  
Impairment
 
 
Collectively
  Evaluated for  
Impairment
 
 
(Dollars in thousands)
 
Commercial and industrial
   $
1,638
    $
920,040
    $
254
    $
7,984
 
SBA
  
3,248
   
316,323
   
286
   
1,180
 
Real estate:
            
  Commercial real estate
  
1,500
   
5,374,168
   
-
   
48,911
 
  Construction
  
-
   
119,931
   
-
   
929
 
  SFR mortgage
  
3,009
   
275,635
   
-
   
2,375
 
Dairy & livestock and agribusiness
  
-
   
311,229
   
-
   
5,429
 
Municipal lease finance receivables
  
-
   
54,468
   
-
   
662
 
Consumer and other loans
  
385
   
116,743
   
-
   
662
 
                 
  Total
   $
9,780
    $
7,488,537
    $
540
    $
68,132
 
                 
 
September 30, 2018
 
Recorded Investment in Loans
 
Allowance for Loan Losses
 
Individually
 Evaluated for 
Impairment
 
Collectively
 Evaluated for 
Impairment
 
Acquired with
Deterioriated
 Credit Quality 
 
Individually
  Evaluated for  
Impairment
 
Collectively
  Evaluated for  
Impairment
 
Acquired with
Deterioriated
 Credit Quality 
 
 
(Dollars in thousands)
Commercial and industrial
   $
3,168
    $
1,018,738
    $
-
    $
 -
    $
7,491
    $
-
 
SBA
  
3,593
   
353,459
   
-
   
-
   
958
   
-
 
Real estate:
                  
  Commercial real estate
  
6,348
   
5,262,392
   
-
   
-
   
41,541
   
-
 
  Construction
  
-
   
123,274
   
-
   
-
   
1,133
   
-
 
  SFR mortgage
  
5,492
   
287,024
   
-
   
13
   
2,112
   
-
 
Dairy & livestock and agribusiness
  
775
   
303,823
   
-
   
-
   
5,024
   
-
 
Municipal lease finance receivables
  
-
   
67,581
   
-
   
-
   
815
   
-
 
Consumer and other loans
  
807
   
133,989
   
-
   
70
   
645
   
-
 
PCI loans
  
-
   
-
   
17,260
   
-
   
-
   
205
 
                         
  Total
   $
20,183
    $
7,550,280
    $
17,260
    $
83
    $
59,719
    $
205
 
                         
 
22
Table of Contents
  
September 30, 2019
  
Recorded Investment in Loans
 
Allowance for Loan Losses
  
Individually
 Evaluated for 
Impairment
 
Collectively
 Evaluated for 
Impairment
 
 Individually
 Evaluated for 
Impairment
 
Collectively
 Evaluated for 
Impairment
  
(Dollars in thousands)
Commercial and industrial
   $1,638    $920,040    $254    $7,984 
SBA
  3,248   316,323   286   1,180 
Real estate:
    
  Commercial real estate
  1,500   5,374,168   0   48,911 
  Construction
  0   119,931   0   929 
  SFR mortgage
  3,009   275,635   0   2,375 
Dairy & livestock and agribusiness
  0   311,229   0   5,429 
Municipal lease finance receivables
  0   54,468   0   662 
Consumer and other loans
  385   116,743   0   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   $9,780    $7,488,537    $540    $68,132 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk ​​​​​​​through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance,ACL, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018,2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
A loan is reported as a TDR when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples
21
Table of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of one or more of these concessions, restructured loans are classified as impaired. Impairment reserves on
non-collateral
dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the carrying value of the loan. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.Contents
When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.
The following tables presenttable presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as of the date presented.
   
September 30, 2020
   
30-59 Days

Past Due
  
60-89 Days

Past Due
  
Greater than
89 Days

Past Due
  
Total

Past Due
  
Loans Not
Past Due
  
Total Loans
  and Financing  
Receivables
   
(Dollars in thousands)
Commercial and industrial
    $3,582     $1,209     $560     $5,351     $811,705     $817,056 
SBA
   468    270    777    1,515    303,472    304,987 
SBA - PPP
   0    0    0    0    1,101,142    1,101,142 
Real estate:
            
 Commercial real estate
            
  Owner occupied
   0    0    3,770    3,770    2,121,430    2,125,200 
  Non-owner
occupied
   0    0    1,715    1,715    3,301,308    3,303,023 
 Construction
            
  Speculative (1)
   0    0    0    0    94,232    94,232 
  Non-speculative
   0    0    0    0    7,671    7,671 
 SFR mortgage
   0    0    467    467    274,264    274,731 
Dairy & livestock and agribusiness
   0    849    0    849    251,953    252,802 
Municipal lease finance receivables
   0    0    0    0    38,040    38,040 
Consumer and other loans
   68    0    34    102    88,886    88,988 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total gross loans
    $        4,118     $        2,328     $        7,323     $      13,769     $    8,394,103     $8,407,872 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance, are presented as of September 30, 2020 by type of loan.
   
September 30, 2020
   
Nonaccrual
with No
Allowance for
Credit Losses
  
Total
Nonaccrual
(1) (3)
  
Loans Past
Due Over

89 Days Still
Accruing
   
(Dollars in thousands)
Commercial and industrial
    $1,421     $1,822     $0 
SBA
   850    1,724    0 
SBA - PPP
   0    0    0 
Real estate:
      
 Commercial real estate
      
  Owner occupied
   4,766    4,766    0 
  Non-owner
occupied
   0    1,715    0 
 Construction
      
  Speculative (2)
   0    0    0 
  Non-speculative
   0    0    0 
 SFR mortgage
   675    675    0 
Dairy & livestock and agribusiness
   849    849    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   224    224    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total gross loans
    $        8,785     $        11,775     $0 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
As of September 30, 2020, $1.8 million of nonaccruing loans were current, $571,000 were
30-59
days past due, $2.1 million were
60-89
days past due, and $7.3 million were 90+ days past due.
(2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
(3)
Excludes $51,000 of guaranteed portion of nonaccrual SBA loans that are in process of collection.
22
Table of Contents
The following table presents the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans
as of
the
date
s presented.
 
September 30, 2019
 
30-59
 Days
Past Due
 
60-89
 Days
Past Due
 
 
Total Past Due
 

and Accruing
 
Nonaccrual
(1) (3)
 (4)
 
Current
 
Total Loans
  and Financing  
Receivables
 
 
(Dollars in thousands)
Commercial and industrial
   $
 
  756
    $
 
 
 
  -
    $
  756
    $
 
 
   1,550
    $
 
  919,372
    $
 
 
 
  921,678
 
SBA
  
-
   
303
   
303
   
2,706
   
316,562
   
319,571
 
Real estate:
                  
 Commercial real estate
                  
  Owner occupied
  
-
   
-
   
-
   
494
   
2,092,597
   
2,093,091
 
  
Non-owner
occupied
  
368
   
-
   
368
   
589
   
3,281,620
   
3,282,577
 
 Construction
                  
  Speculative (2)
  
-
   
-
   
-
   
-
   
105,636
   
105,636
 
  
Non-speculative
  
-
   
-
   
-
   
-
   
14,295
   
14,295
 
 
SFR mortgage
  
-
   
-
   
-
   
888
   
277,756
   
278,644
 
Dairy & livestock and
 
agribusiness
  
-
   
-
   
-
   
-
   
311,229
   
311,229
 
Municipal lease finance
 
receivables
  
-
   
-
   
-
   
-
   
54,468
   
54,468
 
Consumer and other loans
  
-
   
-
   
-
   
385
   
116,743
   
117,128
 
                         
 Total gross loans
   $
         
1,124
    $
         303
    $
         1,427
    $
         6,612
    $
     
7,490,278
    $
   7,498,317
 
   
December 31, 2019
   
30-59 Days

Past Due
  
60-89 Days

Past Due
  
 Total Past Due 
and Accruing
  
Nonaccrual

(1) (3)
  
Current
  
Total Loans
  and Financing  
Receivables
   
(Dollars in thousands)
Commercial and industrial
    $2     $0     $2     $1,266     $933,859     $935,127 
SBA
   870    532    1,402    2,032    301,574    305,008 
Real estate:
            
 Commercial real estate
            
  Owner occupied
   0    0    0    479    2,083,171    2,083,650 
  Non-owner
occupied
   0    0    0    245    3,290,722    3,290,967 
 Construction
            
  Speculative (2)
   0    0    0    0    106,895    106,895 
  Non-speculative
   0    0    0    0    10,030    10,030 
 SFR mortgage
   6    243    249    878    282,341    283,468 
Dairy & livestock and agribusiness
   0    0    0    0    383,709    383,709 
Municipal lease finance receivables
   0    0    0    0    53,146    53,146 
Consumer and other loans
   0    0    0    377    115,942    116,319 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 Total gross loans
    $        878     $        775     $        1,653     $        5,277     $    7,561,389     $    7,568,319 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 (1)
As of
September
 30, December 31, 2019, $1.0$1.2 million of nonaccruing loans were current, $661,000$59,000 were
30-59
days past due, $1.7$1.1 million were
60-89
days past due
,
and $3.3$2.9 million were 90+ days past due.
 (2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
 (3)Includes $4.5 million of nonaccrual loans acquired from CB in the third quarter of 2018.
(4)Excludes $1.6$2.0 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
 
2
3
23
Table of Contents
 
December 31, 2018 (1)
 
 
30-59
 Days
Past Due
 
60-89
 Days
Past Due
 
 Total Past Due 
and Accruing
 
Nonaccrual
(2) (4)
 
Current
 
Total Loans
  and Financing  
Receivables
 
 
(Dollars in thousands)
Commercial and industrial
   $
820
    $
89
    $
909
    $
7,490
    $
993,810
    $
1,002,209
 
SBA
  
1,172
   
135
   
1,307
   
2,892
   
345,844
   
350,043
 
Real estate:
                  
 Commercial real estate
                  
  Owner occupied
  
2,439
   
350
   
2,789
   
589
   
2,114,612
   
2,117,990
 
  
Non-owner
occupied
  
-
   
-
   
-
   
5,479
   
3,270,760
   
3,276,239
 
 Construction
                  
  Speculative (3)
  
-
   
-
   
-
   
-
   
118,233
   
118,233
 
  
Non-speculative
  
-
   
-
   
-
   
-
   
4,549
   
4,549
 
 SFR mortgage
  
-
   
285
   
285
   
2,937
   
293,282
   
296,504
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
78
   
393,765
   
393,843
 
Municipal lease finance receivables
  
-
   
-
   
-
   
-
   
64,186
   
64,186
 
Consumer and other loans
  
-
   
-
   
-
   
486
   
127,943
   
128,429
 
                         
 
 Total gross loans
   $
         4,431
    $
         859
    $
 5,290
    $
       19,951
    $
 
    7,726,984
    $
 7,752,225
 
(1)Excludes PCI loans.
(2)As of December 31, 2018, $2.3 million of nonaccruing loans were current, $33,000 were
30-59
days past due, $57,000 were
60-89
days past due and $17.6 million were 90+ days past due.
(3)Speculative construction loans are generally for properties where there is no identified buyer or renter.
(4)Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018.
Impaired Loans
At September 30, 2019, the Company had impaired loans of $9.8 million. Impaired loans included $2.7 million of nonaccrual Small Business Administration (“SBA”) loans, $1.6 million of nonaccrual commercial and industrial loans, $1.1 million of nonaccrual commercial real estate loans, 
$888,000 of nonaccrual single-family residential (“SFR”) mortgage loans,
and $385,000 of nonaccrual consumer and other loans. These impaired loans included $3.4 million of loans whose terms were modified in a troubled debt restructuring, of which $249,000 were classified as nonaccrual. The remaining balance of $3.2 million consisted of 12 loans performing according to the restructured terms. The impaired loans had a specific allowance of $540,000 at September 30, 2019. At December 31, 2018, the Company had classified as impaired, loans with a balance of $23.5 million with a related allowance of $561,000.
2
4
The
Impaired Loans (prior to adoption of CECL)
Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. As a result of the change, the following tables present information ​​​​​​​for
held-for-investment
about our impaired loans and lease finance receivables, individually ​​​​​​​evaluated for impairment by type of loans, as of September 30, 2019 and forDecember 31, 2019, prior to the periods presented.date of adoption of the amendments to the credit loss standard.
                                                                                                                                        
 
As of and For the Nine Months Ended
September 30, 2019
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
   $
1,382
    $
1,537
    $
 -
    
    $
1,560
    $
4
 
SBA
  
2,447
   
3,554
   
-    
   
2,606
   
31
 
Real estate:
        
    
       
Commercial real estate
        
    
       
Owner occupied
  
494
   
614
   
-    
   
508
   
-    
 
Non-owner
occupied
  
1,006
   
1,190
   
-    
   
1,052
   
21
 
Construction
        
    
      
    
 
Speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
SFR mortgage
  
3,009
   
3,338
   
-    
   
3,059
   
62
 
Dairy & livestock and agribusiness
  
-    
   
-    
   
-    
   
-    
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
   
-    
   
-    
 
Consumer and other loans
  
385
   
516
   
-    
   
401
   
-    
 
                     
Total
  
8,723
   
10,749
   
-    
   
9,186
   
118
 
                     
With a related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
Commercial and industrial
  
256
   
345
   
254
   
829
   
-    
 
SBA
  
801
   
816
   
286
   
816
   
-    
 
Real estate:
           
    
   
    
 
Commercial real estate
  
    
         
    
   
    
 
Owner occupied
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-owner
occupied
  
-    
   
-    
   
-    
   
-    
   
-    
 
Construction
  
    
   
    
   
    
      
    
 
Speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
SFR mortgage
  
-    
   
-    
   
-    
   
-    
   
-    
 
Dairy & livestock and agribusiness
  
-    
   
-    
   
-    
   
-    
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
   
-    
   
-    
 
Consumer and other loans
  
-    
   
-    
   
-    
   
-    
   
-    
 
                     
Total
  
1,057
   
1,161
   
540
   
1,645
   
-    
 
                     
Total impaired loans
   $
9,780
    $
11,910
    $
540
    $
10,831
    $
118
 
                     
 
   
As of and For the Nine Months Ended
September 30, 2019
   
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
   
(Dollars in thousands)
With no related allowance recorded:
          
Commercial and industrial
    $1,382     $1,537     $0     $1,560     $4 
SBA
   2,447    3,554    0    2,606    31 
Real estate:
          
Commercial real estate
          
Owner occupied
   494    614    0    508    0 
Non-owner occupied
   1,006    1,190    0    1,052    21 
Construction
          
Speculative
   0    0    0    0    0 
Non-speculative
   0    0    0    0    0 
SFR mortgage
   3,009    3,338    0    3,059    62 
Dairy & livestock and agribusiness
   0    0    0    0    0 
Municipal lease finance receivables
   0    0    0    0    0 
Consumer and other loans
   385    516    0    401    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   8,723    10,749    0    9,186    118 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
With a related allowance recorded:
          
Commercial and industrial
   256    345    254    829    0 
SBA
   801    816    286    816    0 
Real estate:
          
Commercial real estate
          
Owner occupied
   0    0    0    0    0 
Non-owner occupied
   0    0    0    0    0 
Construction
          
Speculative
   0    0    0    0    0 
Non-speculative
   0    0    0    0    0 
SFR mortgage
   0    0    0    0    0 
Dairy & livestock and agribusiness
   0    0    0    0    0 
Municipal lease finance receivables
   0    0    0    0    0 
Consumer and other loans
   0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   1,057    1,161    540    1,645    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 Total impaired loans
  $9,780   $11,910   $540   $10,831   $118 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
25
24
Table of Contents
   
December 31, 2019
   
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
   
(Dollars in thousands)
With no related allowance recorded:
      
Commercial and industrial
    $1,091     $1,261     $0 
SBA
   2,243    2,734    0 
Real estate:
      
Commercial real estate
      
Owner occupied
   479    613    0 
Non-owner
occupied
   642    643    0 
Construction
      
Speculative
   0    0    0 
Non-speculative
   0    0    0 
SFR mortgage
   2,979    3,310    0 
Dairy & livestock and agribusiness
   0    0    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   377    514    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   7,811    9,075    0 
  
 
 
 
  
 
 
 
  
 
 
 
With a related allowance recorded:
      
Commercial and industrial
   253    347    251 
SBA
   325    324    257 
Real estate:
      
Commercial real estate
      
Owner occupied
   0    0    0 
Non-owner
occupied
   0    0    0 
Construction
      
Speculative
   0    0    0 
Non-speculative
   0    0    0 
SFR mortgage
   0    0    0 
Dairy & livestock and agribusiness
   0    0    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   578    671    508 
  
 
 
 
  
 
 
 
  
 
 
 
 Total impaired loans
    $8,389     $9,746     $508 
  
 
 
 
  
 
 
 
  
 
 
 
                     
 
As of and For the Nine Months Ended
September 
30, 2018 (1)
 
Recorded

Investment
 
 
Unpaid
Principal

Balance
 
Related

Allowance
 
 
Average
Recorded

Investment
 
 
Interest
Income

Recognized
 
 
(Dollars in thousands)
With no related allowance recorded:
               
Commercial and industrial
 
  $
3,168
  
  $
3,829
  
  $
 -
    
  
  $
3,439
  
  $
6
 
SBA
  
3,593
   
5,779
   
-    
   
4,457
   
34
 
Real estate:
               
Commercial real estate
               
Owner occupied
  
615
   
726
   
-    
   
644
   
-    
 
Non-owner
occupied
  
5,733
   
6,385
   
-    
   
5,904
   
24
 
Construction
               
Speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
SFR mortgage
  
5,479
   
6,449
   
-    
   
5,679
   
59
 
Dairy & livestock and agribusiness
  
775
   
1,091
   
-    
   
808
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
   
-    
   
-    
 
Consumer and other loans
  
737
   
1,025
   
-    
   
867
   
-    
 
                     
Total
  
20,100
   
25,284
   
-    
   
21,798
   
123
 
                     
With a related allowance recorded:
               
Commercial and industrial
  
-    
   
-    
   
-    
   
-    
   
-    
 
SBA
  
-    
   
-    
   
-    
   
-    
   
-    
 
Real estate:
               
Commercial real estate
               
Owner occupied
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-owner
occupied
  
-    
   
-    
   
-    
   
-    
   
-    
 
Construction
               
Speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
SFR mortgage
  
13
   
13
   
13
   
13
   
-    
 
Dairy & livestock and agribusiness
  
-    
   
-    
   
-    
   
-    
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
   
-    
   
-    
 
Consumer and other loans
  
70
   
101
   
70
   
85
   
-    
 
                     
Total
  
83
   
114
   
83
   
98
   
-    
 
                     
Total impaired loans
 
  $
20,183
  
  $
25,398
  
  $
83
  
  $
21,896
  
  $
123
 
                     
(1)Excludes PCI loans.
 
2
625
Table of Contents
Collateral Dependent Loans
             
 
As of December 31, 2018 (1)
 
Recorded
Investment
  
Unpaid
Principal
Balance
 
Related
Allowance
 
 
(Dollars in thousands)
With no related allowance recorded:
         
Commercial and industrial
   $
           
 
     
7,436
    $
         
 
       
11,457
    $
        
 
    
 
 
 
 
 
 
    
 -
    
 
SBA
  
3,467
   
5,746
   
-    
 
Real estate:
         
Commercial real estate
         
Owner occupied
  
589
   
705
   
-    
 
Non-owner
occupied
  
2,808
   
4,324
   
-    
 
Construction
         
Speculative
  
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
 
SFR mortgage
  
5,349
   
6,270
   
-    
 
Dairy & livestock and agribusiness
  
-    
   
-    
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
 
Consumer and other loans
  
418
   
526
   
-    
 
             
Total
  
20,067
   
29,028
   
-    
 
             
With a related allowance recorded:
         
Commercial and industrial
  
189
   
191
   
3
 
SBA
  
-    
   
-    
   
-    
 
Real estate:
         
Commercial real estate
         
Owner occupied
  
-    
   
-    
   
-    
 
Non-owner
occupied
  
3,143
   
3,144
   
478
 
Construction
         
Speculative
  
-    
   
-    
   
-    
 
Non-speculative
  
-    
   
-    
   
-    
 
SFR mortgage
  
-    
   
-    
   
-    
 
Dairy & livestock and agribusiness
  
78
   
78
   
12
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
 
Consumer and other loans
  
68
   
100
   
68
 
             
Total
  
3,478
   
3,513
   
561
 
             
Total impaired loans
   $
23,545
    $
32,541
    $
561
 
             
(1)Excludes PCI loans.
The Company recognizesA loan is considered collateral-dependent when the
charge-off
borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the impairment allowance on impairedcollateral. The following table presents the recorded investment in collateral-dependent loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majorityby type of the nonaccrual loans as of September 30, 2019, December 31, 2018 and September 30, 2018 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a
charge-offdate presented.
is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance
non-collateral
dependent loans.
   
September 30, 2020
   
Number of
Loans
Dependent on
Collateral
 
   
Real Estate
   
Business Assets
   
Other
 
   
(Dollars in thousands)
     
Commercial and industrial
    $145     $4,703     $62    14 
SBA
   1,015    497    7    11 
SBA - PPP
   0    0    0    0 
Real estate:
        
Commercial real estate
   6,836    0    0    7 
Construction
   0    0    0    0 
SFR mortgage
   675    0    0    3 
Dairy & livestock and agribusiness
   0    849    0    1 
Municipal lease finance receivables
   0    0    0    0 
Consumer and other loans
   203    0    20    4 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total collateral-dependent loans
    $8,874     $6,049     $89    40 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reserve for Unfunded Loan Commitments
The allowance for
off-balance
sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the
off-balance
sheet loan commitments at the same time
as i
tit evaluates credit risk associated with the loan and lease portfolio. As a result of the adoption of ASU
2016-13,
the reserve for unfunded loan commitments included a transition adjustment of $41,000 as of January 1, 2020. There was no0 provision or recapture of provision for unfunded loan commitments for the three and nine months ended September 30, 2019, and 2018.2020. As of September 30, 20192020 and December 31, 2018,2019, the balance in this reserve was $9.0 million and was included in other liabilities.
2
7
Table of Contents
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered impairednonperforming and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –
Summary of Significant Accounting Policies,
, included in our Annual Report on Form
10-K
for the year ended December 31, 20182019 for a more detailed discussion regarding TDRs.
As of September 30, 2019,2020, there were $3.4$2.2 million of loans classified as a TDR, all of
which $3.2 million
were performing and $249,000 were nonperforming.performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At September 30, 2019,2020, performing TDRs were comprised of 8seven SFR mortgage loans of $2.1$1.8 million, 1 SBA loan of $542,000, 1one commercial real estate loan of $417,000,$354,000, and 2one commercial and industrial loansloan of $88,000.$47,000.
The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated 0 and $490,000 of specificallocated allowance to TDRs as of September 30, 20192020 and December 31, 2018, respectively.2019.
26
Table of Contents
The following table provides a summary of the activity related to TDRs for the periods presented
.presented.
                 
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018 (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
2018 (1)
 
 
 
 
  
(Dollars in thousands)
 
(Dollars in thousands)
Performing TDRs:
            
Beginning balance
   $
3,219
    $
 4,530
    $
3,594
  
  $
 
 
4,809
 
New modifications
  
-
   
-
   
-
   
311
 
Payoffs/payments, net and other
  
(51
)  
(777
)  
(426
)  
(1,367
)
TDRs returned to accrual status
  
-
   
-
   
-
   
-
 
TDRs placed on nonaccrual status
  
-
   
-
   
-
   
-
 
                 
Ending balance
   $
3,168
    $
3,753
    $
3,168
    $
3,753
 
                 
Nonperforming TDRs:
            
Beginning balance
   $
263
    $
3,892
    $
3,509
    $
4,200
 
New modifications
  
-
   
278
   
-
   
316
 
Charge-offs
  
-
   
-
   
(78
)  
-
 
Transfer to OREO
  
-
   
-
   
(2,275
)  
-
 
Payoffs/payments, net and other
  
(14
)  
(650
)  
(907
)  
(996
)
TDRs returned to accrual status
  
-
   
-
   
-
   
-
 
TDRs placed on nonaccrual status
  
-
   
-
   
-
   
-
 
                 
Ending balance
   $
 
 
249
    $
3,520
    $
 
 
249
    $
3,520
 
                 
Total TDRs
   $
3,417
  
  $
 
 
7,273
  
  $
 
 
3,417
  
  $
 
 
7,273
 
(1)Excludes PCI loans.
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
2020
  
2019
  
2020
  
2019
   
(Dollars in thousands)
Performing TDRs:
        
Beginning balance
    $2,771     $3,219     $3,112     $3,594 
New modifications
   0    0    0    0 
Payoffs/payments, net and other
   (554)    (51)    (895)    (426) 
TDRs returned to accrual status
   0    0    0    0 
TDRs placed on nonaccrual status
   0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Ending balance
  $2,217   $3,168   $2,217   $3,168 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Nonperforming TDRs:
        
Beginning balance
    $0     $263     $244     $3,509 
New modifications
   0    0    0    0 
Charge-offs
   0    0    0    (78) 
Transfer to OREO
   0    0    0    (2,275) 
Payoffs/payments, net and other
   0    (14)    (244)    (907) 
TDRs returned to accrual status
   0    0    0    0 
TDRs placed on nonaccrual status
   0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Ending balance
    $0     $249     $0     $249 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total TDRs
    $2,217     $3,417     $2,217     $3,417 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
2
8
TableAs of Contents
ThereSeptember 30, 2020 and 2019, there were no loans that were modified as TDRs
for
during the three and nine months ended September 30, 2019.2020 and 2019, respectively.
The following tables summarize loans modified as TDRs for the periods presented.
Modifications (1)
 
For the Three Months Ended September 30, 201
8
 (2)
 
 
 
Number of
 

Loans
 
 
 
Pre-Modification

Outstanding
Recorded
Investment
 
 
 
Post-Modification
Outstanding
Recorded
Investment
 
Outstanding
Recorded
Investment at
September 30,
2018  
 
Financial Effect
Resulting From
Modifications (3)
 
 
(Dollars in thousands)
 
Commercial and industrial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
 
 
-
 
 
   $
-
 
 
 
 
$
-
 
 
 
 
$
-
 
 
 
 
$
-
 
 
Change in amortization period
 
or maturity
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Change in amortization period
 
or maturity
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Non-owner
occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Change in amortization period
 
or maturity
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
SFR mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Change in amortization period
 
or maturity
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
 
 
        -
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
        -
 
 
Change in amortization period
 
or maturity
 
 
1
 
 
 
278
 
 
 
278
 
 
 
272
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
 
1
 
 
  $
278
 
 
  $
278
 
 
  $
  272
 
 
  $
-
 
 
2
9
Table of Contents
 
For the Nine Months Ended September 30, 2018 (2)
 
 
 Number of 
Loans
 
 
  
Pre-Modification
  
Outstanding
Recorded
Investment
 
 
  
Post-Modification
  
Outstanding
Recorded
Investment
 
 
Outstanding
Recorded
Investment at
September 30,
2018
 
 
Financial Effect
Resulting From
  Modifications (3)  
 
 
(Dollars in thousands)
 
Commercial and industrial:
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
   Interest rate reduction
  
-  
    $
-  
    $
-  
    $
-  
    $
-  
 
   Change in amortization period or maturity
  
1  
   
38  
   
38  
   
27  
   
-  
 
Real estate:
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
Commercial real estate:
     
  
   
  
   
  
   
  
 
 Owner occupied
  
  
   
  
   
  
   
  
   
  
 
   Interest rate reduction
  
-  
   
-  
   
-  
   
-  
   
-  
 
   Change in amortization period or maturity
  
-  
   
-  
   
-  
   
-
   
-  
 
 
Non-owner
occupied
  
  
   
  
   
  
   
  
   
  
 
   Interest rate reduction
  
-  
   
-  
   
-  
   
-  
   
-  
 
   Change in amortization period or maturity
  
-  
   
-  
   
-  
   
-  
   
-  
 
SFR mortgage:
  
  
   
  
   
  
      
  
 
   Interest rate reduction
  
-  
   
-  
   
-  
   
-  
   
-  
 
   Change in amortization period or maturity
  
1  
   
311  
   
311  
   
304  
   
-  
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
   Interest rate reduction
  
-  
   
-  
   
-  
   
-  
   
-  
 
   Change in amortization period or maturity
  
1  
   
278  
   
278  
   
272  
   
-  
 
                     
  Total loans
  
3  
    $
627  
    $
627  
    $
603  
    $
-  
 
                     
(1)The tables above exclude modified loans that were paid off prior to the end of the period.
(2)Excludes PCI loans.
(3)Financial effects resulting from modifications represent charge-offs and ​​​​​​​specific allowance recorded at modification date.
There were
0
loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and nine months ended September 30, 2020 and 2019.
In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and 2018.enter into short-term loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. As of October 9, 2020, we have loans with temporary payment deferments of interest or of principal and interest for 90 days in the amount of $68.6 million, or less than 1% of our total loan portfolio, at September 30, 2020.
 
30
27
Table of Contents
7.
6.
EARNINGS PER SHARE RECONCILIATION
Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and nine months ended September 30, 2020, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 517,000 and 361,000, respectively. For the three and nine months ended September 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 240,000 and 184,000, respectively. For the three and nine months ended September 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 56,000 and 50,000, respectively.
The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.
 
 
  For the Three Months  
Ended
 
S
eptember
 30,
 
 
  For the 
Nine
 Months  
Ended
 
September
 30,
 
 
   
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
   
 
  
 
2019
 
 
 
 
 
 
 
 
 
 
 
   
 
  
 
2018
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except per share amounts)
Earnings per common share:
            
Net earnings
   $
 
 
 
50,423
    $
 
 
38,558
    $
 
 
 
 
 
 
 
 
156,546
    $
 
 
 
 
 
 
 
 
108,844
 
Less: Net earnings allocated to restricted stock
  
116
   
96
   
390
   
298
 
                 
Net earnings allocated to common shareholders
   $
50,307
    $
38,462
    $
156,156
    $
108,546
 
                 
Weighted average shares outstanding
  
139,824
   
126,574
   
139,730
   
115,533
 
Basic earnings per common share
   $
0.36
    $
0.30
    $
1.12
    $
0.94
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
            
Net income allocated to common shareholders
  
50,307
   
38,462
   
156,156
   
108,546
 
                 
Weighted average shares outstanding
  
139,824
   
126,574
   
139,730
   
115,533
 
Incremental shares from assumed exercise of outstanding options
  
151
   
363
   
217
   
397
 
                 
Diluted weighted average shares outstanding
  
139,975
   
126,937
   
139,947
   
115,930
 
Diluted earnings per common share
   $
0.36
    $
0.30
    $
1.12
    $
0.94
 
                 
 
3
1
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
2020
  
2019
  
2020
  
2019
   
(In thousands, except per share amounts)
Earnings per common share:
        
Net earnings
    $47,492     $50,423     $127,103     $156,546 
  Less: Net earnings allocated to restricted stock
   175    116    407    390 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net earnings allocated to common shareholders
    $47,317     $50,307     $126,696     $156,156 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Weighted average shares outstanding
   135,017    139,824    136,369    139,730 
Basic earnings per common share
    $0.35     $0.36     $0.93     $1.12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Diluted earnings per common share:
        
Net income allocated to common shareholders
    $47,317     $50,307     $126,696     $156,156 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  Weighted average shares outstanding
   135,017    139,824    136,369    139,730 
  Incremental shares from assumed exercise of outstanding options
   167    151    167    217 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Diluted weighted average shares outstanding
   135,184    139,975    136,536    139,947 
Diluted earnings per common share
    $0.35     $0.36     $0.93     $1.12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
Table of Contents
8.
7.
FAIR VALUE INFORMATION
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The following disclosure provides the fair value information for financial assets and liabilities as of September 30, 2019.2020. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).
Level 1
– Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.
·
Level 2
– Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model
-
derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3
– Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.
There were 0 transfers in and out of Level 1 and Level 2 during the nine months ended September 30, 2019 and 2018.
 1
— Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.
 
·
Level
 2
— Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model-derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.
·
Level
3
— Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.
2
28
Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis
as of
the
dates
presented.
 
  Carrying Value at  
 
 
September 30, 2019
 
 
 
Quoted Prices in
  Active Markets for  
Identical Assets
(Level 1)
  
Significant Other
 
 
Observable Inputs
 
 
(Level 2)
  
Significant
 
 
Unobservable Inputs
 
 

(Level 3)
 
 
(Dollars in thousands)
Description of assets
            
Investment securities - AFS:
            
Residential mortgage-backed securities
   $
 1,146,159
 
    $
 -
 
    $
 1,146,159
 
    $
 -
 
 
CMO/REMIC - residential
  
382,928 
   
- 
   
382,928 
   
- 
 
Municipal bonds
  
40,487 
   
- 
   
40,487 
   
- 
 
Other securities
  
832 
   
- 
   
832 
   
- 
 
 
 Total investment securities - AFS
  
1,570,406 
   
- 
   
1,570,406 
   
- 
 
Interest rate swaps
  
16,180 
   
- 
   
16,180 
   
- 
 
Total assets
   $
 1,586,586
 
    $
 
 -
 
    $
 
 
1,586,586
 
    $
 
 -
 
 
Description of liability
            
Interest rate swaps
   $
 16,180
 
    $
- 
    $
16,180 
    $
- 
 
Total liabilities
   $
 
 
16,180
 
    $
- 
    $
16,180 
    $
- 
 
           
 
Carrying Value at
December 31, 2018
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
 
(Dollars in thousands)
Description of assets
            
Investment securities - AFS:
            
Residential mortgage-backed securities
   $
  1,474,508
    $
- 
    $
  1,474,508
    $
- 
 
CMO/REMIC - residential
  
214,051
   
- 
   
214,051
   
- 
 
Municipal bonds
  
44,810
   
- 
   
44,810
   
- 
 
Other securities
  
716
   
- 
   
716
   
- 
 
  Total investment securities - AFS
  
1,734,085
   
- 
   
1,734,085
   
- 
 
Interest rate swaps
  
1,938
   
- 
   
1,938
   
- 
 
Total assets
   $
1,736,023
    $
- 
    $
1,736,023
    $
- 
 
Description of liability
            
Interest rate swaps
   $
1,938
    $
- 
    $
1,938
    $
- 
 
Total liabilities
   $
1,938
    $
- 
    $
1,938
    $
- 
 
 
  
  Carrying Value at  
September 30, 2020
 
Quoted Prices in

  Active Markets for  
Identical Assets
(Level 1)
  
Significant Other
  Observable Inputs  
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
  
(Dollars in thousands)
Description of assets
    
Investment securities - AFS:
    
Mortgage-backed securities
   $1,756,871    $0     $1,756,871    $0  
CMO/REMIC
  411,494   0    411,494   0  
Municipal bonds
  36,468   0    36,468   0  
Other securities
  813   0    813   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  2,205,646   0    2,205,646   0  
Interest rate swaps
  37,255   0    37,255   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total assets
   $2,242,901    $0     $2,242,901    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $37,255    $0     $37,255    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $37,255    $0     $37,255    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
Carrying Value at
December 31, 2019
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
  
(Dollars in thousands)
Description of assets
    
Investment securities - AFS:
    
Mortgage-backed securities
   $1,206,313    $0     $1,206,313    $0  
CMO/REMIC
  493,710   0    493,710   0  
Municipal bonds
  39,354   0    39,354   0  
Other securities
  880   0    880   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  1,740,257   0    1,740,257   0  
Interest rate swaps
  11,502   0    11,502   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total assets
   $1,751,759    $0     $1,751,759    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $11,502    $0     $11,502    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $11,502    $0     $11,502    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
3
3
29
Table of Contents
Assets and Liabilities Measured at Fair Value on a
Non-Recurring
Basis
We may be required to measure certain assets at fair value on a
non-recurring
basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or impairment write-downs of individual assets.
For assets measured at fair value on a
non-recurring
basis that were held on the balance sheet at September 30, 20192020 and December 31, 2018,2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment ​​​​​​​and the carrying value of the related assets that had losses during the period.
 
Carrying Value at
September 30, 2019
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
 
Significant Other
 
Observable Inputs
 

(Level 2)
 
 
Significant
Unobservable Inputs
(Level 3)
 
 
Total Losses
For the Nine
 

Months Ended
September 30, 2019
 
 
(Dollars in thousands)
 
Description of assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans, excluding
 
PCI
loans:
               
Commercial and industrial
   $
256
    $
- 
    $
- 
    $
256
    $
254
 
SBA
  
938
   
- 
   
- 
   
938
   
516
 
Real estate:
               
Commercial real estate
  
- 
   
- 
   
- 
   
- 
   
- 
 
Construction
  
- 
   
- 
   
- 
   
- 
   
- 
 
SFR mortgage
  
- 
   
- 
   
- 
   
- 
   
- 
 
Dairy & livestock and agribusiness
  
- 
   
- 
   
- 
   
- 
   
- 
 
Consumer and other loans
  
- 
   
- 
   
- 
   
- 
   
- 
 
Other real estate owned
  
444
   
- 
   
- 
   
444
   
64
 
Asset
held-for-sale
  
- 
   
- 
   
- 
   
- 
   
-
 
                     
  Total assets
   $
1,638
    $
- 
    $
- 
    $
1,638
    $
834
 
                     
                
 
Carrying Value at
December 31, 2018
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
Significant
Unobservable Inputs
(Level 3)
 
 
Total Losses For
the Year Ended
December 31, 2018
 
 
(Dollars in thousands)
 
Description of assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans, excluding
 
PCI
loans:
               
Commercial and industrial
   $
189
  
 
 
 
$
-
    $
-
    $
189
    $
3
 
SBA
  
-
   
-
   
-
   
-
   
-
 
Real estate:
               
Commercial real estate
  
3,143
   
-
   
-
   
3,143
   
478
 
Construction
  
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
-
   
-
   
-
   
-
   
-
 
Dairy & livestock and agribusiness
  
78 
   
- 
   
- 
   
78 
   
12 
 
Consumer and other loans
  
68
   
-
   
-
   
68
   
68
 
Other real estate owned
  
-
   
-
   
-
   
-
   
-
 
Asset
held-for-sale
  
-
   
-
   
-
   
-
   
-
 
                     
  Total assets
   $
3,478
    $
-
    $
-
    $
3,478
    $
561
 
 
  
Carrying Value at
September 30, 2020
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Losses

For the Nine

Months Ended
September 30, 2020
  
(Dollars in thousands)
Description of assets
     
Loans:
     
Commercial and industrial
   $3,273    $0     $0     $3,273    $2,034 
SBA
  712   0    0    712   203 
Real estate:
     
Commercial real estate
  1,715   0    0    1,715   1,295 
Construction
  0    0    0    0    0  
SFR mortgage
  0    0    0    0    0  
Dairy & livestock and agribusiness
  0    0    0    0    0  
Consumer and other loans
  0    0    0    0    0  
Other real estate owned
  2,275   0    0    2,275   700 
Asset
held-for-sale
  0    0    0    0    0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $7,975    $0     $0     $7,975    $4,232 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value at
December 31, 2019
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Losses
For the Year
Ended
December 31, 2019
  
(Dollars in thousands)
Description of assets
     
Impaired loans:
     
Commercial and industrial
   $253    $0     $0     $253    $251 
SBA
  359   0    0    359   513 
Real estate:
     
Commercial real estate
  0    0    0    0    0  
Construction
  0    0    0    0    0  
SFR mortgage
  0    0    0    0    0  
Dairy & livestock and agribusiness
  0    0    0    0    0  
Consumer and other loans
  0    0    0    0    0  
Other real estate owned
  444   0    0    444   64 
Asset
held-for-sale
  0    0    0    0    0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $1,056    $0     $0     $1,056    $828 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
4
30
Table of ContentsContents
Fair Value of Financial Instruments
The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation​​​​​​​valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of September 30, 20192020 and December 31, 2018,2019, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
 
September 30, 2019
 
 
 
 
Estimated Fair Value
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars in thousands)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
  $
437,548
 
 
  $
437,548
 
 
  $
-
 
 
  $
-
 
 
  $
437,548
 
 
Interest-earning balances due from depository institutions
 
 
5,673
 
 
 
-
 
 
 
5,793
 
 
 
-
 
 
 
5,793
 
 
Investment securities
available-for-sale
 
 
1,570,406
 
 
 
-
 
 
 
1,570,406
 
 
 
-
 
 
 
1,570,406
 
 
Investment securities
held-to-maturity
 
 
703,953
 
 
 
-
 
 
 
711,891
 
 
 
-
 
 
 
711,891
 
 
Total loans, net of allowance for loan losses
 
 
7,425,779
 
 
 
-
 
 
 
-
 
 
 
7,385,760
 
 
 
7,385,760
 
 
Swaps
 
 
16,180
 
 
 
-
 
 
 
16,180
 
 
 
-
 
 
 
16,180
 
 
Liabilities
 
��
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing
 
  $
3,409,226
 
 
  $
-
 
 
  $
3,407,573
 
 
  $
-
 
 
  $
3,407,573
 
 
Borrowings
 
 
412,764
 
 
 
-
 
 
 
412,372
 
 
 
-
 
 
 
412,372
 
 
Junior subordinated debentures
 
 
25,774
 
 
 
-
 
 
 
-
 
 
 
20,266
 
 
 
20,266
 
 
Swaps
 
 
16,180
 
 
 
-
 
 
 
16,180
 
 
 
-
 
 
 
16,180
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
Estimated Fair Value
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars in thousands)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
  $
163,948
 
 
  $
163,948
 
 
  $
-
 
 
  $
-
 
 
  $
163,948
 
 
Interest-earning balances due from depository institutions
 
 
7,670
 
 
 
-
 
 
 
7,339
 
 
 
-
 
 
 
7,339
 
 
Investment securities
available-for-sale
 
 
1,734,085
 
 
 
-
 
 
 
1,734,085
 
 
 
-
 
 
 
1,734,085
 
 
Investment securities
held-to-maturity
 
 
744,440
 
 
 
-
 
 
 
721,537
 
 
 
-
 
 
 
721,537
 
 
Total loans, net of allowance for loan losses
 
 
7,700,998
 
 
 
-
 
 
 
-
 
 
 
7,514,964
 
 
 
7,514,964
 
 
Swaps
 
 
1,938
 
 
 
-
 
 
 
1,938
 
 
 
-
 
 
 
1,938
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing
 
  $
3,622,703
 
 
  $
-
 
 
  $
3,614,682
 
 
  $
-
 
 
  $
3,614,682
 
 
Borrowings
 
 
722,255
 
 
 
-
 
 
 
721,601
 
 
 
-
 
 
 
721,601
 
 
Junior subordinated debentures
 
 
25,774
 
 
 
-
 
 
 
-
 
 
 
21,176
 
 
 
21,176
 
 
Swaps
 
 
1,938
 
 
 
-
 
 
 
1,938
 
 
 
-
 
 
 
1,938
 
 
 
                                                                                          
  
September 30, 2020
  
Carrying
Amount
 
Estimated Fair Value
  
Level 1
 
Level 2
 
Level 3
 
Total
  
(Dollars in thousands)
Assets
     
Total cash and cash equivalents
   $1,484,953    $1,484,953    $0    $0    $1,484,953 
Interest-earning balances due from depository
institutions
  44,367   0   44,414   0   44,414 
Investment securities
available-for-sale
  2,205,646   0   2,205,646   0   2,205,646 
Investment securities
held-to-maturity
  577,694   0   603,522   0   603,522 
Total loans, net of allowance for credit losses
  8,314,003   0   0   8,326,796   8,326,796 
Swaps
  37,255   0   37,255   0   37,255 
Liabilities
     
Deposits:
     
Interest-bearing
   $4,249,411    $0    $4,250,728    $0    $4,250,728 
Borrowings
  493,420   0   493,344   0   493,344 
Junior subordinated debentures
  25,774   0   0   18,917   18,917 
Swaps
  37,255   0   37,255   0   37,255 
                                                                                          
  
December 31, 2019
  
Carrying
Amount
 
Estimated Fair Value
  
Level 1
 
Level 2
 
Level 3
 
Total
  
(Dollars in thousands)
Assets
     
Total cash and cash equivalents
   $185,518    $185,518    $0    $0    $185,518 
Interest-earning balances due from depository
institutions
  2,931   0   2,938   0   2,938 
Investment securities
available-for-sale
  1,740,257   0   1,740,257   0   1,740,257 
Investment securities
held-to-maturity
  674,452   0   678,948   0   678,948 
Total loans, net of allowance for loan losses
  7,495,917   0   0   7,343,167   7,343,167 
Swaps
  11,502   0   11,502   0   11,502 
Liabilities
     
Deposits:
     
Interest-bearing
   $3,459,411    $0    $3,457,922    $0    $3,457,922 
Borrowings
  428,659   0   428,330   0   428,330 
Junior subordinated debentures
  25,774   0   0   20,669   20,669 
Swaps
  11,502   0   11,502   0   11,502 
The fair value estimates presented herein are based on ​​​​​​​pertinent information available to management as of September 30, 20192020 and December 31, 2018.2019. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
3
5
 
31
Table of Contents
9.
8.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of September 30, 2019,2020, the Bank has entered into 82133 interest-rate swap agreements with customers.customers with a notional amount totaling $455.2 million. The Bank then entered into identical offsetting swaps with a counterparty. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.
The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. As a result of the Bank exceeding $10 billion in assets, federal regulations requirerequired the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. NaNNaNne of our derivative assets and liabilities are offset in the
Company’s condensed consolidated balance sheet.
We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.
Balance Sheet Classification of Derivative Financial Instruments
As of September 30, 20192020 and December 31, 2018,2019, the total notional amount of the Company’s swaps was $227.2$455.2 million, and $195.4$260.0 million, respectively. The location of the asset and liability, and their respective fair values,
,
are summarized in the tables below.
                 
 
September 30, 2019
 
 
Asset Derivatives
  
Liability Derivatives
 
 
    Balance Sheet    
Location
  
Fair
    Value    
  
    Balance Sheet    
Location
  
Fair
    Value    
 
 
(Dollars in thousands)
 
Derivatives not designated as hedging instruments:
            
Interest rate swaps
  
Other assets
    $
16,180 
 
   
Other liabilities
    $
16,180 
 
 
                 
Total derivatives
      $
16,180 
 
       $
16,180 
 
 
                 
    
 
December 31, 2018
 
 
Asset Derivatives
  
Liability Derivatives
 
 
Balance Sheet
Location
  
Fair
Value
  
Balance Sheet
Location
  
Fair
Value
 
 
(Dollars in thousands)
 
Derivatives not designated as hedging instruments:
            
Interest rate swaps
  
Other assets
    $
 1,938
 
 
   
Other liabilities
    $
 1,938
 
 
 
                 
Total derivatives
      $
1,938 
 
       $
1,938 
 
 
                 
 
                                                                        
  
September 30, 2020
  
Asset Derivatives
 
Liability Derivatives
  
 Balance Sheet 
Location
 
Fair
  Value  
 
 Balance Sheet 
Location
 
Fair
  Value  
  
(Dollars in thousands)
Derivatives not designated as hedging instruments:
    
Interest rate swaps
  Other assets    $37,255   Other liabilities    $37,255 
  
 
 
 
  
 
 
 
Total derivatives
    $37,255     $37,255 
  
 
 
 
  
 
 
 
                                                                        
  
December 31, 2019
  
Asset Derivatives
 
Liability Derivatives
  
 Balance Sheet 
Location
 
Fair
  Value  
 
 Balance Sheet 
Location
 
Fair
  Value  
  
(Dollars in thousands)
Derivatives not designated as hedging instruments:
    
Interest rate swaps
  Other assets    $11,502   Other liabilities    $11,502 
  
 
 
 
  
 
 
 
Total derivatives
    $11,502     $11,502 
  
 
 
 
  
 
 
 
36
32
Table of Contents
The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings
The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.
                     
Derivatives Not 
Designated as
Hedging 
Instruments
 
  Location of Gain Recognized
 
in
 
 
Income on Derivative 
Instruments
 
 
  
Amount of Gain Recognized in Income on
Derivative Instruments
 
   
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
   
2019
  
2018
  
2019
  
2018
 
   
(Dollars in thousands)
 
Interest rate swaps
  
Other income
     $
 
 
 
378
 
    $
 
  73 
    $
 
 
 
1,135
 
    $
  340 
  
                     
Total
      $
378 
    $
73 
    $
1,135 
    $
340 
 
                     
 
Derivatives Not Designated
as Hedging Instruments
  
Location of Gain Recognized in
  Income on Derivative Instruments  
   
Amount of Gain Recognized in Income
on Derivative Instruments
       
    Three Months Ended    
September 30,
  
    Nine Months Ended    
September 30,
       
2020
  
2019
  
2020
  
2019
       
(Dollars in thousands)
Interest rate swaps
   Other income     $1,591     $378     $4,149     $1,135 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
      $1,591     $378     $4,149     $1,135 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
10.
9.
OTHER COMPREHENSIVE INCOME
The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.
                         
 
For the Three Months Ended September 30,
 
2019
 
2018
 
Before-tax
 
Tax effect
 
After-tax
 
Before-tax
 
Tax effect
 
After-tax
 
 
(Dollars in thousands)
Investment securities:
                  
Net change in fair value recorded in
accumulated OCI
 $
 
 
 
 5,672
 
  $
 
 (1,677
)  $
 
 3,995
  $
  (10,235
) $
3,025 
  $
(7,210
)
Net realized gain reclassified into earnings (1)
  
(5)
   
1
   
(4
)
  
-
   
-
 
   
-
 
Amortization of unrealized losses on securities
transferred from
 
available-for-sale
to
held-to-maturity
  
(249
)  
74
   
(175
)  
(152)
   
45 
   
(107
)
                         
Net change
   $
 
 
 
 
5,418
    $
 
 
 
(1,602
)   $
 
 
 
 
3,816
    $
 
 
 
(10,387)
    $
 
 
3,070 
    $
 
 
(7,317
)
   
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
Before-tax
 
Tax effect
 
After-tax
 
Before-tax
 
Tax effect
 
After-tax
 
 
(Dollars in thousands)
Investment securities:
                  
Net change in fair value recorded in
accumulated OCI
   $
 
 
44,586
    $
(13,181
)   $
31,405
    $
(47,346
)   $
  13,997
    $
 
 
 
  (33,349
)
Net realized gain reclassified into earnings (1)
  
(5
)  
1
   
(4
)  
-
   
-
   
-
 
Amortization of unrealized losses on securities
transferred from
 
available-for-sale
to
held-to-maturity
  
(1,450
)  
429
   
(1,021
)  
(1,809
)  
535
   
(1,274
)
                         
Net change
   $
 
 
43,131
    $
 
(12,751
)   $
 
 
 
30,380
    $
 
 
 
(49,155
)   $
14,532
    $
(34,623
)
 
                                                                                                                        
   
Three Months Ended September 30,
   
2020
 
2019
   
Before-tax
 
Tax effect
  
After-tax
 
Before-tax
 
Tax effect
 
After-tax
   
(Dollars in thousands)
Investment securities:
        
Net change in fair value recorded in accumulated OCI
    $(1,974)    $584     $(1,390)    $5,672    $(1,677)    $3,995 
Amortization of net unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity
   (30)   9    (21)   (249)   74   (175) 
Net realized gain reclassified into earnings (1)
   0   0    0   (5)   1   (4) 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change
    $(2,004)    $593     $(1,411)    $5,418    $(1,602)    $3,816 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                        
   
Nine Months Ended September 30,
   
2020
 
2019
   
Before-tax
 
Tax effect
 
After-tax
 
Before-tax
 
Tax effect
 
After-tax
   
(Dollars in thousands)
Investment securities:
       
Net change in fair value recorded in accumulated OCI
    $33,382    $(9,869)    $23,513    $44,586    $(13,181)    $31,405 
Amortization of net unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity
   (48)   14   (34)   (1,450)   429   (1,021) 
Net realized gain reclassified into earnings (1)
   0   0   0   (5)   1   (4) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change
    $33,334    $(9,855)    $23,479    $43,131    $(12,751)    $30,380 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Included in other noninterest income.
 
37
33
Table of Contents
11.10.
BALANCE SHEET OFFSETTING
Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject t
o
to master netting arrangements. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to counterparties continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in
the
Company’s condensed consolidated balances.
                                                                                                
   
Gross Amounts
Recognized in
the Condensed
Consolidated
Balance Sheets
  
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net Amounts
Presented in the
Condensed
Consolidated
Balance Sheets
  
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
 
    Net Amount    
   
Financial
Instruments
  
Collateral
Pledged
   
(Dollars in thousands)
September 30, 2020
          
Financial assets:
          
Derivatives not designated as
hedging instruments
    $37,255     $-    $-     $37,255     $-    $37,255 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $37,255     $-    $-     $37,255     $-    $37,255 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
Financial liabilities:
          
Derivatives not designated as
hedging instruments
    $37,255     $-    $37,255     $-     $(66,946)    $(29,691) 
Repurchase agreements
   483,420    -   483,420    -    (498,535)   (15,115) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $520,675     $-    $520,675     $-     $(565,481)    $(44,806) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
December 31, 2019
          
Financial assets:
          
Derivatives not designated as
hedging instruments
    $11,502     $-    $-     $11,502     $-    $11,502 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $11,502     $-    $-     $11,502     $-    $11,502 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
Financial liabilities:
          
Derivatives not designated as
hedging instruments
    $11,619     $(117)    $11,502     $117     $(23,312)    $(11,693) 
Repurchase agreements
   428,659    -   428,659    -    (510,138)   (81,479) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $440,278     $(117)    $440,161     $117     $(533,450)    $(93,172) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
34
                         
 
Gross Amounts
Recognized in
the Condensed
Consolidated
Balance Sheets
 
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net Amounts
Presented
in the
 
Condensed
Consolidated
Balance Sheets
 
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
 
Net Amount
 
Financial
 
 
Instruments
 
 
 
Collateral
Pledged
 
 
(Dollars in thousands)
September 30,
 
2019
                  
Financial assets:
                  
Derivatives not designated as
hedging instruments
   $
16,180
    $
-
    $
-
    $
 
 
 
 
 
 
 
 
16,180
   $
-
    $
16,180
 
                         
Total
   $
16,180
    $
-
    $
-
    $
16,180
   $
-
    $
16,180
 
                         
                   
Financial liabilities:
                  
Derivatives not designated as
hedging instruments
   $
16,182
    $
(2
)   $
16,180
    $
2
   $
(22,335
)   $
(6,153
)
Repurchase agreements
  
407,850
   
-
   
407,850
   
-
   
(419,465
)  
(11,615
)
                         
Total
   $
424,032
    $
(2
)   $
424,030
    $
2
   $
(441,800
)   $
 
 
 
 
 
 
 
(17,768
)
                         
                   
December 31, 2018
                  
Financial assets:
                  
Derivatives not designated as
hedging instruments
   $
1,938
    $
-
    $
-
    $
1,938
   $
-
    $
1,938
 
                         
Total
   $
1,938
    $
-
    $
-
    $
  1,938
   $
-
    $
1,938
 
                         
                   
Financial liabilities:
                  
Derivatives not designated as
hedging instruments
   $
4,203
    $
  (2,265
)   $
1,938
    $
2,265
  $
-
    $
4,203
 
Repurchase agreements
  
442,255
   
-
   
442,255
   
-
   
(487,607
)  
(45,352
)
                         
Total
   $
  446,458
    $
  (2,265
)   $
 
 
 
 
 
 
 
  444,193
    $
 
 
 
2,265
  $
  
 
 
 
 
 
(487,607
)   $
  (41,149
)
                         
38
Table of Contents
12.11.
LEASES
The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings.
Right-of-use
(“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s condensed consolidated balance sheet.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The following presentstables below present the components of lease costs and supplemental information related to leases as of September 30, 2019 and for the three and nine months ended September 30, 2019.periods presented.
                                                    
  
September 30,
2020
 
December 31,
2019
  
(Dollars in thousands)
Lease Assets and Liabilities
  
ROU assets
   $19,771    $18,522 
Total lease liabilities
  21,939   21,392 
                                                                        
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2020
 
2019
 
2020
 
2019
  
(Dollars in thousands)
Lease Cost
 
    
Operating lease expense (1)
   $1,654    $1,628    $4,900    $5,634 
Sublease income
  0   0   -   0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total lease expense
   $1,654    $1,628    $4,900    $5,634 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)   Includes short-term leases and variable lease costs, which are immaterial.
 
    
Other Information
    
Cash paid for amounts included in the measurement of lease liabilities:
    
Operating cash outflows from operating leases, net
   $1,826    $1,640    $5,630    $6,499 
                                                    
Lease Term and Discount Rate
 
September 30,
2020
 
December 31,
2019
Weighted average remaining lease term (years)
  4.29   4.18 
Weighted average discount rate
  2.86%   3.34% 
35
As of September 30, 2019
(Dollars in thousands)
Lease Assets and Liabilities
ROU assets
  $
 17,340  
Total lease liabilities
20,558  
         
 
For the 
  Three Months Ended  
 
 
For the 
  Nine Months Ended   
 
 
September 30, 2019
 
 
(Dollars in thousands)
 
Lease Cost
 
 
 
 
 
 
         
Operating lease expense (1)
   $
 1,628  
    $
 5,634  
 
         
Total lease expense
   $
 1,628  
    $
 5,634  
 
         
  
(1)
Includes short-term leases and variable lease costs, which are immaterial.
 
         
Other Information
 
 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
      
Operating cash outflows from operating leases, net
   $
 1,640  
    $
 6,499  
 
         
Lease Term and Discount Rate
 
 
 
 
 
 
       
 
 
 
 As of September 30, 2019 
 
         
Weighted average remaining lease term (years)
     
4.26  
 
         
Weighted average discount rate
     
3.46%
 
Table of Contents
The Company’s lease arrangements that have not yet commenced as of September 30, 20192020 and the Company’s short-term lease costs and variable lease costs, for the three and nine months ended September 30, 20192020 are not material to the consolidated financial statements.
The future lease payments required for leases that have initial or remaining
non-cancelable
lease terms in excess of one year as of September 30, 2019,2020, excluding property taxes and insurance, are as follows:
     
 
As of September 30, 2019
 
 
(Dollars in thousands)
 
Year:
 
 
 
2019 (excluding the
nine
 months ended
September
 30, 2019)
 
  $
 
 
 
 
 
 
 
 
1,973
 
 
2020
  
6,941
 
2021
  
5,178
 
2022
  
4,005
 
2023
  
2,336
 
Thereafter
  
3,100
 
     
Total future lease payments
  
23,533
 
Less: Imputed interest
  
(2,975
)
     
Present value of lease liabilities
   $
 20,558
 
     
 
   
      September 30, 2020      
 
   
(Dollars in thousands)
 
Year:
  
2020 (excluding the nine months ended September 30, 2020)
    $1,781 
2021
                           6,656 
2022
   5,475 
2023
   3,615 
2024
   2,428 
Thereafter
   3,461 
  
 
 
 
Total future lease payments
   23,416 
Less: Imputed interest
   (1,477) 
  
 
 
 
Present value of lease liabilities
    $21,939 
  
 
 
 
39
 
Table of Contents
13.12.
REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU
No.
 2014-09
“Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –
Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition
of the 2018
our
 2019 Annual Report on Form
10-K
for the year ended December 31, 20182019 for a more detailed discussion about noninterest revenue streams that are
in-scope
of Topic 606.
The following presents noninterest income, segregated by revenue streams
in-scope
and
out-of-scope
of Topic 606, for the periods indicated.
                                                                        
  
Three Months Ended
 
Nine Months Ended
  
September 30,
 
September 30,
  
2020
 
2019
 
2020
 
2019
  
(Dollars in thousands)
Noninterest income:
    
In-scope
of Topic 606:
    
Service charges on deposit accounts
   $3,970    $4,833    $12,555    $15,039 
Trust and investment services
  2,405   2,330   7,302   6,964 
Bankcard services
  456   637   1,438   2,614 
Gain on OREO, net
  13   0   23   129 
Other
  3,160   2,292   8,736   6,939 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest Income
(in-scope
of Topic 606)
  10,004   10,092   30,054   31,685 
Noninterest Income
(out-of-scope
of Topic 606)
  3,149   1,802   6,891   14,717 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest income
   $13,153    $11,894    $36,945    $46,402 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36
                 
 
For the Three Months Ended
September 30,
  
For the Nine Months Months Ended
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
(Dollars in thousands)
 
Noninterest income:
 
 
          
In-scope
of Topic 606:
            
Service charges on deposit accounts
   $
4,833
    $
4,295
    $
15,039
    $
12,431
 
 
 
 
Trust and investment services
  
2,330
   
2,182
   
6,964
   
6,738
 
Bankcard services
  
637
   
875
   
2,614
   
2,637
 
Gain on OREO, net
  
-
   
-
   
129
   
3,540
 
Other
  
2,292
   
1,824
   
6,939
   
4,393
 
Noninterest Income
(in-scope
of Topic 606)
  
10,092
   
9,176
   
31,685
   
29,739
 
Noninterest Income
(out-of-scope
of Topic 606)
  
1,802
   
936
   
14,717
   
2,984
 
Total noninterest income
   $
11,894
    $
10,112
    $
46,402
    $
32,723
 
40

Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2018,2019, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
IMPACT OF
COVID-19
The spread of
COVID-19
has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (“FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the
COVID-19
pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and
medium-sized
businesses through 100% SBA guaranteed loans distributed through banks. These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. The SBA exhausted the initial funding for this program on April 15, 2020, but legislation passed on April 24, 2020 to provide additional PPP funds of $310 billion. We originated and funded about 4,100 loans, totaling approximately $1.10 billion, as of September 30, 2020. In response to the
COVID-19
pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of October 9, 2020, we have remaining temporary payment deferments of principal, interest or of principal and interest in response to the CARES Act for 33 loans totaling $68.6 million. These deferments were primarily for 90 days, with 89% of these loans being pass rated. Of these loans, 27 have received a second deferment and the remaining six loans are first deferments.
The third quarter of 2020 did not include a provision for credit losses, as the economic outlook is generally consistent with the forecast from the prior quarter end. In comparison, the Company recorded a provision for credit losses of $23.5 million in the first half of 2020, including $11.5 million in the second quarter. We continue to monitor the impact of
COVID-19
closely, as well as any effects that may result from the CARES Act. The extent to which the
COVID-19
pandemic will impact our operations and financial results during the fourth quarter of 2020 is highly uncertain, but we may experience increased provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.
37
Table of Contents
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
Allowance for Loan Losses (“ALLL”)
 
·
Allowance for Credit Losses (“ACL”)
 
·
Business Combinations
 
·
Valuation and Recoverability of Goodwill
 
·
Valuation and Recoverability of Goodwill
Income Taxes
Our significant accounting policies are described in greater detail in our 20182019 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 —–
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018,2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Adoption of Allowance for Credit Losses
We adopted ASU
2016-13,
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU
2016-13,
resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements.
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Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020
Standard
Description
Adoption Timing
Impact on Financial Statements
ASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Issued March 2020
The FASB issued ASU
2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a
one-time
election for the sale or transfer of debt securities classified as
held-to-maturity.
This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.
1st Quarter 2020 through the 4th Quarter 2022
Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s consolidated financial statements.
ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
Issued January 2020
The FASB issued ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.
1st Quarter 2021
The adoption of this ASU will not have an impact on our consolidated financial statements.
ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
Issued August 2020
The FASB issued ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.
1st Quarter 2022
The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
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Table of Contents
OVERVIEW
For the third quarter of 2019,2020, we reported net earnings of $50.4$47.5 million, compared with $54.5$41.6 million for the second quarter of 20192020 and $38.6$50.4 million for the third quarter of 2018.2019. Diluted earnings per share were $0.36$0.35 for the third quarter, compared to $0.39$0.31 for the prior quarter and $0.30$0.36 for the same period last year.
No provision for credit losses was recorded for the third quarter of 2020. The Company’s economic forecast of macro-economic variables was generally consistent with the forecast at the end of the second quarter. A $23.5 million provision for credit losses was recorded in the first half of 2020, due to the economic disruption and forecasted impact resulting from
COVID-19.
In comparison to the prior year, a $1.5 million loan loss provision was incurred for the third quarter of 2019. During the third quarter of 2020, we experienced minimal credit charge-offs of $231,000 and total recoveries of $117,000, resulting in net charge-offs of $114,000. During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at September 30, 2020. Interest and fee income from PPP loans increased from approximately $8.5 million in the second quarter of 2020, to $9.5 million in the third quarter of 2020.
At September 30, 2019,2020, total assets of $11.33$13.82 billion decreased $196.4 million,increased $2.54 billion, or 1.70%22.48%, from total assets of $11.53$11.28 billion at December 31, 2018.2019. Interest-earning assets of $10.01$12.59 billion at September 30, 2019 decreased $281.0 million,2020 increased $2.57 billion, or 2.73%25.59%, when compared with $10.29$10.03 billion at December 31, 2018.2019. The decreaseincrease in interest-earning assets was primarily due to a $270.2 million decrease in total loans and a $204.2 million decrease in investment securities, partially offset by a $195.4 million$1.31 billion increase in interest-earning balances due from the Federal Reserve. Our tax equivalent yield on interest-earnings assets was 4.55% for the quarter ended September 30, 2019, compared to 4.72% for the second quarter of 2019Reserve, an $843.3 million increase in total loans, and 4.23% for the third quarter of 2018.a $368.6 million increase in investment securities. Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.
Total investment securities were $2.27$2.78 billion at September 30, 2019, a decrease2020, an increase of $204.2$368.6 million, or 8.24%15.27%, from $2.48$2.41 billion at December 31, 2018.2019. At September 30, 2019,2020, investment securities
held-to-maturity
(“HTM”) totaled $704.0$577.7 million. At September 30, 2019,2020, investment securities
available-for-sale
(“AFS”) totaled $1.57$2.21 billion, inclusive of a net
pre-tax
unrealized gain of $21.0 million.$55.3 million, an increase of $33.4 million from December 31, 2019. HTM securities declined by $40.5$96.8 million, or 5.44%14.35%, and AFS securities declinedincreased by $163.7$465.4 million, or 9.44%26.74%, from December 31, 2018.2019. Our tax equivalent yield on investments was 2.47%1.99% for the quarter ended September 30, 2019,2020, compared to 2.53%2.22% for the second quarter of 20192020 and 2.49%2.47% for the third quarter of 2018.2019.
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Table of Contents
Total loans and leases, net of deferred fees and discounts, of $7.49$8.41 billion at September 30, 2019 decreased2020 increased by $270.2$843.3 million, or 3.48%11.15%, from December 31, 2018.2019. The decreaseincrease in total loans included an $89.2$1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $181.9$126.9 million, or 2.45%1.77%. The $126.9 million decrease in total loans included declinesdecreases of $81.1$118.1 million in commercial and industrial loans, $33.0$27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines was an increase in commercial real estate loans $31.7 million in SBA loans, $18.0 million in SFR mortgage loans, and $11.5 million in consumer and other loans.of $53.6 million. Our yield on loans was 5.23%4.47% for the quarter ended September 30, 2019,2020, compared to 5.40%4.77% for the second quarter of 20192020 and 4.99%5.23% for the third quarter of 2018.2019. This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.3$4.2 million for the quarter ended September 30, 2019,2020, compared to $9.4$4.1 million for the second quarter of 20192020 and $4.9$7.2 million for the third quarter of 2018.2019.
Noninterest-bearing deposits were $5.39$6.92 billion at September 30, 2019,2020, an increase of $180.3 million,$1.67 billion, or 3.46%31.91%, when compared to December 31, 2018.2019. The significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. At September 30, 2019,2020, noninterest-bearing deposits were 61.23%61.95% of total deposits, compared to 58.96%60.26% at December 31, 2018.2019. Our average cost of total deposits was 0.21%0.11% for the quarter ended September 30, 2019,2020, compared to 0.19%0.12% for the second quarter of 20192020 and 0.15%0.21% for the third quarter of 2018.2019.
Customer repurchase agreements totaled $407.9$483.4 million at September 30, 2019,2020, compared to $442.3$428.7 million at December 31, 2018.2019. Our average cost of total deposits including customer repurchase agreements was 0.22%0.11% for the quarter ended September 30, 2019, 0.20%2020, compared to 0.12% for the second quarter of 2019,2020 and 0.15%0.22% for the third quarter of 2018.2019.
At September 30, 2019,2020, we had $4.9$10.0 million in othershort-term borrowings with 0% cost, compared to $280.0 millionno borrowings at December 31, 2018.2019 and September 30, 2019. At September 30, 2019,2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2018. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.2019. Our average cost of funds was 0.23%0.11% for the quarter ended September 30, 2019, 0.25%2020, 0.13% for the second quarter of 2019,2020, and 0.18%0.23% for the third quarter of 2018.2019.
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Table of Contents
The allowance for loancredit losses totaled $68.7$93.9 million at September 30, 2019,2020, compared to $63.6$68.7 million at December 31, 2018. The2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for loancredit losses forin the first nine months of 2019 was increased by $5.0 million in provision for loan losses and $59,000 in net recoveries. The allowance for loan losses was 0.92% and 0.82%2020 due to the severe economic disruption forecasted to result from the
COVID-19
pandemic. At September 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% at September 30, 2019 and December 31, 2018, respectively.2019. As of September 30, 2019, credit related2020, total discounts on acquired loans were $37.0$35.2 million.
The Company’s total equity was $1.98 billion at September 30, 2020. This represented a decrease of $12.1 million, or 0.61%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our
10b5-1
stock repurchase program, and $73.3 million in cash dividends, offset by net earnings of $127.1 million and a $23.5 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our
available-for-sale
investment securities portfolio. Our tangible common equity ratio was 9.8% at September 30, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards.requirements. As of September 30, 2019,2020, the Company’s Tier 1 leverage capital ratio totaled 12.23%9.88%, our common equity Tier 1 ratio totaled 14.64%14.60%, our Tier 1 risk-based capital ratio totaled 14.93%14.89%, and our total risk-based capital ratio totaled 15.83%16.08%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our
Analysis of Financial Condition – Capital Resources
.
Recent Acquisition
On August 10, 2018, we completed the acquisition of CB with approximately $4.09 billion in total assets and 16 banking centers. The total assets acquired from CB included $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $547.1 million of goodwill and $52.2 million in core deposit premium. At the close of the merger, the entire CB security portfolio was liquidated at fair market value, as was $297.6 million of FHLB term advances and $166.0 million of overnight borrowings assumed from CB. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019. The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers were consolidated into CBB banking centers.
We have included the financial results of the business combination in the consolidated statement of earnings and comprehensive income beginning on the acquisition date.
42
41
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
                 
 
For the Three Months Ended
 
Variance
 
September 30,
2019
 
June 30,
2019
 
$
 
%
 
 
(Dollars in thousands, except per share amounts)
                 
Net interest income
   $
     108,159
    $
111,057
    $
 (2,898) 
   
-2.61%
 
Provision for loan losses
  
(1,500
)  
(2,000
)  
500  
   
25.00%
 
Noninterest income
  
11,894
   
18,205
   
(6,311) 
   
-34.67%
 
Noninterest expense
  
(47,535
)  
(50,528
)  
2,993  
   
5.92%
 
Income taxes
  
(20,595
)  
(22,253
)  
1,658  
   
7.45%
 
                 
Net earnings
   $
50,423
    $
54,481
    $
 (4,058) 
   
-7.45%
 
                 
Earnings per common share:
            
Basic
   $
0.36
    $
0.39
    $
 (0.03) 
    
Diluted
   $
0.36
    $
0.39
    $
 (0.03) 
    
Return on average assets
  
1.78%
   
1.95%
   
-0.17%  
    
Return on average shareholders’ equity
  
10.18%
   
11.38%
   
-1.20%  
    
Efficiency ratio
  
39.60%
   
39.09%
   
0.51%  
    
Noninterest expense to average assets
  
1.68%
   
1.81%
   
-0.13%  
    
 
                                 
 
For the Three Months Ended
      
For the Nine Months Ended
     
 
September 30,
  
Variance
  
September 30,
  
Variance
 
 
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
 
(Dollars in thousands, except per share amounts)
 
                                 
Net interest income
   $
108,159 
    $
92,820 
    $
 15,339 
   
16.53%
    $
328,752 
    $
236,029 
    $
92,723  
   
39.28%
 
(Provision for) recapture of provision for loan losses
  
(1,500)
   
(500)
   
(1,000)
   
-200.00%
   
(5,000)
   
1,500 
   
(6,500) 
   
-433.33%
 
Noninterest income
  
11,894 
   
10,112 
   
1,782 
   
17.62%
   
46,402 
   
32,723 
   
13,679  
   
41.80%
 
Noninterest expense
  
(47,535)
   
(48,880)
   
1,345 
   
2.75%
   
(149,667)
   
(119,080)
   
(30,587) 
   
-25.69%
 
Income taxes
  
(20,595)
   
(14,994)
   
(5,601)
   
-37.35%
   
(63,941)
   
(42,328)
   
(21,613) 
   
-51.06%
 
                                 
Net earnings
   $
50,423 
    $
38,558 
    $
 11,865 
   
30.77%
    $
156,546 
    $
108,844 
    $
 47,702  
   
43.83%
 
                                 
Earnings per common share:
                        
Basic
   $
0.36 
    $
0.30 
    $
0.06
       $
1.12 
    $
0.94 
    $
0.18 
    
Diluted
   $
0.36 
    $
0.30 
    $
0.06
       $
1.12 
    $
0.94 
    $
0.18 
    
Return on average assets
  
1.78%
   
1.52%
   
0.26%
      
1.86%
   
1.65%
   
0.21%  
    
Return on average shareholders’ equity
  
10.18%
   
10.17%
   
0.01%
      
10.89%
   
11.86%
   
-0.97%  
    
Efficiency ratio
  
39.60%
   
47.49%
   
-7.89%
      
39.89%
   
44.31%
   
-4.42%  
    
Noninterest expense to average assets
  
1.68%
   
1.93%
   
-0.25%
      
1.77%
   
1.80%
   
-0.03%  
    
   
Three Months Ended
 
Variance
 
   
September 30,
 
June 30,
   
   
2020
 
2020
 
$
   
%
   
(Dollars in thousands, except per share amounts)
Net interest income
    $    103,325    $104,569    $(1,244)     -1.19% 
Provision for credit losses
   -         (11,500)   11,500      100.00% 
Noninterest income
   13,153   12,152   1,001      8.24% 
Noninterest expense
   (49,588)   (46,398)   (3,190)     -6.88% 
Income taxes
   (19,398)   (17,192)   (2,206)     -12.83% 
  
 
 
 
 
 
 
 
 
 
 
   
Net earnings
    $47,492    $41,631    $5,861      14.08% 
  
 
 
 
 
 
 
 
 
 
 
   
Earnings per common share:
      
Basic
    $0.35    $0.31    $0.04     
Diluted
    $0.35    $0.31    $0.04     
Return on average assets
   1.38%   1.33%   0.05%     
Return on average shareholders’ equity
   9.51%   8.51%   1.00%     
Efficiency ratio
   42.57%   39.75%   2.82%     
Noninterest expense to average assets
   1.44%   1.48%   -0.04%     
 
  
Three Months Ended
     
Nine Months Ended
   
  
September 30,
  
Variance
  
September 30,
  
Variance
  
2020
 
2019
  
$
 
%
  
2020
  
2019
  
$
 
%
  
(Dollars in thousands, except per share amounts)
Net interest income
   $103,325    $108,159       $(4,834)    -4.47%       $310,200       $328,752       $(18,552)    -5.64% 
Provision for credit losses
  -         (1,500)     1,500     100.00%      (23,500)     (5,000)     (18,500)    -370.00% 
Noninterest income
  13,153   11,894      1,259     10.59%      36,945      46,402      (9,457)    -20.38% 
Noninterest expense
  (49,588)   (47,535)     (2,053)    -4.32%      (144,627)     (149,667)     5,040     3.37% 
Income taxes
  (19,398)   (20,595)     1,197     5.81%      (51,915)     (63,941)     12,026     18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Net earnings
   $47,492    $50,423       $(2,931)    -5.81%       $127,103       $156,546       $(29,443)    -18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Earnings per common share:
               
Basic
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Diluted
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Return on average assets
  1.38%   1.78%      -0.40%       1.35%      1.86%      -0.51%    
Return on average shareholders’ equity
  9.51%   10.18%      -0.67%       8.55%      10.89%      -2.34%    
Efficiency ratio
  42.57%   39.60%      2.97%       41.66%      39.89%      1.77%    
Noninterest expense to average assets
  1.44%   1.68%      -0.24%       1.54%      1.77%      -0.23%    
43
42
Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
                 
 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Net Income
   $
50,423  
    $
38,558  
    $
156,546  
    $
108,844  
 
Add: Amortization of intangible assets
  
2,648  
   
1,736  
   
8,338  
   
2,395  
 
Less: Tax effect of amortization of intangible assets (1)
  
(783) 
   
(513) 
   
(2,465) 
   
(708) 
 
                 
Tangible net income
   $
52,288  
    $
39,781  
    $
162,419  
    $
110,531  
 
                 
                 
Average stockholders’ equity
   $
 1,965,427  
    $
1,503,643  
    $
 1,921,981  
    $
1,226,848  
 
Less: Average goodwill
  
(663,707) 
   
(419,418) 
   
(665,470) 
   
(218,625) 
 
Less: Average intangible assets
  
(46,720) 
   
(34,811) 
   
(49,682) 
   
(16,078) 
 
                 
Average tangible common equity
   $
 1,255,000  
    $
1,049,414  
    $
 1,206,829  
    $
992,145  
 
                 
                 
Return on average equity, annualized
  
10.18
%  
10.17
%  
10.89
%  
11.86
%
Return on average tangible common equity, annualized
  
16.53
%  
15.04
%  
17.99
%  
14.89
%
 
   
Three Months Ended
  
Nine Months Ended
 
   
September 30,
  
June 30,
  
September 30,
  
September 30,
  
September 30,
 
   
2020
  
2020
  
2019
  
2020
  
2019
 
   
(Dollars in thousands)
 
Net Income
    $47,492      $41,631      $50,423      $127,103      $156,546   
Add: Amortization of intangible assets
   2,292     2,445     2,648     7,182     8,338   
Less: Tax effect of amortization of intangible assets (1)
   (678)    (723)    (783)    (2,123)    (2,465)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Tangible net income
    $49,106      $43,353      $52,288      $132,162      $162,419   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average stockholders’ equity
    $1,985,842    $1,966,600      $1,965,427      $1,986,300      $1,921,981   
Less: Average goodwill
   (663,707)    (663,707)    (663,707)    (663,707)    (665,470)  
Less: Average intangible assets
   (37,133)    (39,287)    (46,720)    (39,376)    (49,682)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average tangible common equity
    $1,285,002      $1,263,606      $1,255,000      $1,283,217      $1,206,829   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Return on average equity, annualized
   9.51%   8.51%   10.18%   8.55%   10.89% 
Return on average tangible common equity, annualized
   15.20%   13.80%   16.53%   13.76%   17.99% 
 
 (1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended September 30, 20192020 and 2018.2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
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The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
                         
 
For the Three Months Ended September 30,
 
2019
 
2018
 
Average
Balance
 
Interest
 
Yield/
Rate
  
Average
Balance
 
Interest
 
Yield/
Rate
 
 
(Dollars in thousands)
INTEREST-EARNING ASSETS
                  
Investment securities (1)
                  
Available-for-sale
securities:
                  
Taxable
   $
1,505,087
    $
8,949
   
2.38%
    $
1,863,399
    $
11,126
   
2.39%
 
Tax-advantaged
  
40,189
   
273
   
3.75%
   
55,020
   
395
   
3.86%
 
Held-to-maturity
securities:
                  
Taxable
  
506,203
   
2,883
   
2.28%
   
527,688
   
2,961
   
2.24%
 
Tax-advantaged
  
205,996
   
1,415
   
3.32%
   
237,933
   
1,705
   
3.47%
 
Investment in FHLB stock
  
17,688
   
301
   
6.75%
   
24,645
   
329
   
5.30%
 
Interest-earning deposits with other institutions
  
174,119
   
946
   
2.16%
   
63,572
   
304
   
1.90%
 
Loans (2)
  
7,495,289
   
98,796
   
5.23%
   
6,350,240
   
79,818
   
4.99%
 
                         
Total interest-earning assets
  
9,944,571
   
113,563
   
4.55%
   
9,122,497
   
96,638
   
4.23%
 
Total noninterest-earning assets
  
1,269,845
         
935,028
       
                         
Total assets
   $
 11,214,416
          $
10,057,525
       
                         
                         
INTEREST-BEARING LIABILITIES
                  
Savings deposits (3)
   $
2,991,330
   
3,501
   
0.46%
    $
2,850,169
   
2,101
   
0.29%
 
Time deposits
  
473,347
   
1,088
   
0.91%
   
503,649
   
866
   
0.68%
 
                         
Total interest-bearing deposits
  
3,464,677
   
4,589
   
0.53%
   
3,353,818
   
2,967
   
0.35%
 
FHLB advances, other borrowings, and customer repurchase agreements
  
446,087
   
815
   
0.72%
   
478,538
   
851
   
0.70%
 
                         
Interest-bearing liabilities
  
3,910,764
   
5,404
   
0.55%
   
3,832,356
   
3,818
   
0.39%
 
                         
Noninterest-bearing deposits
  
5,227,595
         
4,651,127
       
Other liabilities
  
110,630
         
70,399
       
Stockholders’ equity
  
1,965,427
         
1,503,643
       
                         
Total liabilities and stockholders’ equity
   $
   11,214,416
          $
   10,057,525
       
                         
                         
Net interest income
      $
     108,159
          $
92,820
    
                         
                         
Net interest spread - tax equivalent
        
4.00%
         
3.84%
 
Net interest margin
        
4.32%
         
4.04%
 
Net interest margin - tax equivalent
        
4.34%
         
4.06%
 
 
   
Three Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,970,636     $8,244    1.82%     $1,505,087     $8,949    2.38% 
Tax-advantaged
   36,193    203    3.26%    40,189    273    3.75% 
Held-to-maturity
securities:
            
Taxable
   429,897    2,265    2.11%    506,203    2,883    2.28% 
Tax-advantaged
   164,854    1,110    3.26%    205,996    1,415    3.32% 
Investment in FHLB stock
   17,688    215    4.84%    17,688    301    6.75% 
Interest-earning deposits with other institutions
   1,494,149    389    0.10%    174,119    946    2.16% 
Loans (2)
   8,382,257    94,200    4.47%    7,495,289    98,796    5.23% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   12,495,674    106,626    3.45%    9,944,571    113,563    4.55% 
Total noninterest-earning assets
   1,231,502        1,269,845     
  
 
 
       
 
 
     
Total assets
    $13,727,176         $11,214,416     
  
 
 
       
 
 
     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
    $3,735,204    2,010    0.21%     $2,991,330    3,501    0.46% 
Time deposits
   449,484    948    0.84%    473,347    1,088    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   4,184,688    2,958    0.28%    3,464,677    4,589    0.53% 
FHLB advances, other borrowings, and customer repurchase agreements
   539,833    343    0.25%    446,087    815    0.72% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,724,521    3,301    0.28%    3,910,764    5,404    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,731,711        5,227,595     
Other liabilities
   285,102        110,630     
Stockholders’ equity
   1,985,842        1,965,427     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  13,727,176         $  11,214,416     
  
 
 
       
 
 
     
Net interest income
      $    103,325         $108,159   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.17%        4.00% 
Net interest margin
       3.33%        4.32% 
Net interest margin - tax equivalent
       3.34%        4.34% 
 (1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 20192020 and 2018.2019. The non TE rates were 2.40%1.93% and 2.41%2.40% for the three months ended September 30, 2020 and 2019, and 2018, respectively.
 (2)
Includes loan fees of $782,000$7.4 million and $865,000$782,000 for the three months ended September 30, 20192020 and 2018,2019, respectively. Prepayment penalty fees of $1.0$1.8 million and $674,000$1.0 million are included in interest income for the three months ended September 30, 2020 and 2019, and 2018, respectively.
 (3)
Includes interest-bearing demand and money market accounts.
 
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Nine Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,737,723     $26,313    2.08%     $1,582,902     $29,079    2.45% 
Tax-advantaged
   36,897    632    3.30%    42,746    906    3.87% 
Held-to-maturity
securities:
            
Taxable
   449,230    7,410    2.20%    509,247    8,725    2.29% 
Tax-advantaged
   177,364    3,623    3.29%    216,343    4,524    3.37% 
Investment in FHLB stock
   17,688    761    5.75%    17,688    931    7.04% 
Interest-earning deposits with other institutions
   947,211    1,285    0.18%    70,848    1,140    2.15% 
Loans (2)
   7,972,208    281,669    4.72%    7,571,502    300,326    5.30% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   11,338,321    321,693    3.82%    10,011,276    345,631    4.63% 
            
Total noninterest-earning assets
   1,237,241        1,269,160     
  
 
 
       
 
 
     
Total assets
    $12,575,562         $11,280,436     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
  $3,396,259    7,131    0.28%   $3,047,444    9,159    0.40% 
Time deposits
   448,615    2,946    0.88%    497,370    3,394    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   3,844,874    10,077    0.35%    3,544,814    12,553    0.47% 
FHLB advances, other borrowings, and customer repurchase agreements
   505,710    1,416    0.37%    573,633    4,326    1.00% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,350,584    11,493    0.35%    4,118,447    16,879    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,063,469        5,136,233     
Other liabilities
   175,209        103,775     
Stockholders’ equity
   1,986,300        1,921,981     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  12,575,562         $  11,280,436     
  
 
 
       
 
 
     
Net interest income
      $    310,200         $328,752   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.47%        4.08% 
Net interest margin
       3.67%        4.39% 
Net interest margin - tax equivalent
       3.68%        4.41% 
 
                         
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
Average
Balance
 
Interest
 
Yield/
Rate
 
Average
Balance
 
Interest
 
Yield/
Rate
 
 
(Dollars in thousands)
INTEREST-EARNING ASSETS
                  
Investment securities (1)
                  
Available-for-sale
securities:
                  
Taxable
   $
1,582,902
    $
29,079
   
2.45%
    $
1,920,942
    $
33,861
   
2.36%
 
Tax-advantaged
  
42,746
   
906
   
3.87%
   
54,517
   
1,225
   
3.99%
 
Held-to-maturity
securities:
                  
Taxable
  
509,247
   
8,725
   
2.29%
   
540,952
   
8,887
   
2.19%
 
Tax-advantaged
  
216,343
   
4,524
   
3.37%
   
246,270
   
5,351
   
3.50%
 
Investment in FHLB stock
  
17,688
   
931
   
7.04%
   
20,032
   
959
   
6.40%
 
Interest-earning deposits with other institutions
  
70,848
   
1,140
   
2.15%
   
115,200
   
1,475
   
1.71%
 
Loans (2)
  
7,571,502
   
300,326
   
5.30%
   
5,312,557
   
192,382
   
4.84%
 
                         
Total interest-earning assets
  
10,011,276
   
345,631
   
4.63%
   
8,210,470
   
244,140
   
4.00%
 
Total noninterest-earning assets
  
1,269,160
         
626,966
       
                         
Total assets
   $
 11,280,436
          $
8,837,436
       
                         
                         
INTEREST-BEARING LIABILITIES
                  
Savings deposits (3)
   $
3,047,444
   
9,159
   
0.40%
    $
2,460,390
   
4,667
   
0.25%
 
Time deposits
  
497,370
   
3,394
   
0.91%
   
416,754
   
1,374
   
0.44%
 
                         
Total interest-bearing deposits
  
3,544,814
   
12,553
   
0.47%
   
2,877,144
   
6,041
   
0.28%
 
FHLB advances, other borrowings, and customer repurchase agreements
  
573,633
   
4,326
   
1.00%
   
507,755
   
2,070
   
0.54%
 
                         
Interest-bearing liabilities
  
4,118,447
   
16,879
   
0.55%
   
3,384,899
   
8,111
   
0.32%
 
                         
Noninterest-bearing deposits
  
5,136,233
         
4,158,365
       
Other liabilities
  
103,775
         
67,324
       
Stockholders’ equity
  
1,921,981
         
1,226,848
       
                         
Total liabilities and stockholders’ equity
   $
   11,280,436
          $
   8,837,436
       
                         
                         
Net interest income
      $
     328,752
          $
236,029
    
                         
Net interest spread - tax equivalent
        
4.08%
         
3.68%
 
Net interest margin
        
4.39%
         
3.84%
 
Net interest margin - tax equivalent
        
4.41%
         
3.87%
 
 (1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 20192020 and 2018.2019. The non TE rates were 2.45%2.16% and 2.38%2.45% for the nine months ended September 30, 2020 and 2019, and 2018, respectively.
 (2)
Includes loan fees of $2.3$15.3 million and $2.6$2.3 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Prepayment penalty fees of $3.4$5.4 million and $2.1$3.4 million are included in interest income for the nine months ended September 30, 2020 and 2019, and 2018, respectively.
 (3)
Includes interest-bearing demand and money market accounts.
 
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The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
                                                                                                                                     
 
Comparision of Three Months Ended September 30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
 
    Volume    
 
Rate
 
Rate/
    Volume    
 
    Total    
 
  
(Dollars in thousands)
  
Interest income:
            
Available-for-sale
securities:
            
Taxable investment securities
   $
(2,122
)   $
(46
)   $
(9
)   $
(2,177
)
Tax-advantaged
investment securities
  
(98
)  
(19
)  
(5
)  
(122
)
Held-to-maturity
securities:
            
Taxable investment securities
  
(120
)  
44
   
(2
)  
(78
)
Tax-advantaged
investment securities
  
(215
)  
(66
)  
(9
)  
(290
)
Investment in FHLB stock
  
(93
)  
91
   
(26
)  
(28
)
Interest-earning deposits with other institutions
  
529
   
41
   
72
   
642
 
Loans
  
14,389
   
3,888
   
701
   
18,978
 
                 
Total interest income
  
12,270
   
3,933
   
722
   
16,925
 
                 
                 
Interest expense:
            
Savings deposits
  
104
   
1,235
   
61
   
1,400
 
Time deposits
  
(52
)  
292
   
(18
)  
222
 
FHLB advances, other borrowings, and customer repurchase agreements
  
(56
)  
21
   
(1
)  
(36
)
                 
Total interest expense
  
(4
)  
1,548
   
42
   
1,586
 
                 
Net interest income
   $
12,274
    $
2,385
    $
680
    $
15,339
 
                 
   
 
Comparision of Nine Months Ended September��30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
 
    Volume    
 
    Rate    
 
Rate/
    Volume    
 
    Total    
 
  
(Dollars in thousands)
  
Interest income:
            
Available-for-sale
securities:
            
Taxable investment securities
   $
(5,894
)   $
1,346
    $
(234
)   $
(4,782
)
Tax-advantaged
investment securities
  
(264
)  
(70
)  
15
   
(319
)
Held-to-maturity
securities:
            
Taxable investment securities
  
(583
)  
447
   
(26
)  
(162
)
Tax-advantaged
investment securities
  
(651
)  
(201
)  
25
   
(827
)
Investment in FHLB stock
  
(114
)  
97
   
(11
)  
(28
)
Interest-earning deposits with other institutions
  
(567
)  
378
   
(146
)  
(335
)
Loans
  
81,793
   
18,349
   
7,802
   
107,944
 
                 
Total interest income
  
73,720
   
20,346
   
7,425
   
101,491
 
                 
                 
Interest expense:
            
Savings deposits
  
1,113
   
2,728
   
651
   
4,492
 
Time deposits
  
266
   
1,470
   
284
   
2,020
 
FHLB advances, other borrowings, and customer repurchase agreements
  
271
   
1,757
   
228
   
2,256
 
                 
Total interest expense
  
1,650
   
5,955
   
1,163
   
8,768
 
                 
Net interest income
   $
72,070
    $
14,391
    $
6,262
    $
92,723
 
                 
 
   
Comparison of Three Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,835    $(2,108)    $(432)    $(705) 
Tax-advantaged
investment securities
   (24)   (42)   (4)   (70) 
Held-to-maturity
securities:
     
Taxable investment securities
   (395)   (194)   (29)   (618) 
Tax-advantaged
investment securities
   (273)   (27)   (5)   (305) 
Investment in FHLB stock
   -   (86)   -   (86) 
Interest-earning deposits with other institutions
   7,184   (902)   (6,839)   (557) 
Loans
   12,369   (15,170)   (1,795)   (4,596) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   20,696   (18,529)   (9,104)   (6,937) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   874   (1,894)   (471)   (1,491) 
Time deposits
   (53)   (83)   (4)   (140) 
FHLB advances, other borrowings, and customer repurchase agreements
   172   (532)   (112)   (472) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   993   (2,509)   (587)   (2,103) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $19,703    $(16,020)    $(8,517)    $(4,834) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Comparision of Nine Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,861    $(4,349)    $(278)    $(2,766) 
Tax-advantaged
investment securities
   (124)   (174)   24   (274) 
Held-to-maturity
securities:
     
Taxable investment securities
   (1,015)   (339)   39   (1,315) 
Tax-advantaged
investment securities
   (815)   (105)   19   (901) 
Investment in FHLB stock
   -   (170)   -   (170) 
Interest-earning deposits with other institutions
   14,238   (1,054)   (13,039)   145 
Loans
   15,682   (32,613)   (1,726)   (18,657) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   29,827   (38,804)   (14,961)   (23,938) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   1,045   (2,758)   (315)   (2,028) 
Time deposits
   (331)   (130)   13   (448) 
FHLB advances, other borrowings, and customer repurchase agreements
   (513)   (2,719)   322   (2,910) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   201   (5,607)   20   (5,386) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $29,626    $(33,197)    $(14,981)    $(18,552) 
  
 
 
  
 
 
  
 
 
  
 
 
 
47
46
Third Quarter of 20192020 Compared to the Third Quarter of 20182019
Net interest income, before provision for loancredit losses, of $103.3 million for the third quarter of 2020 decreased $4.8 million, or 4.47%, compared to $108.2 million for the third quarter of 2019 increased $15.3 million, or 16.53%, compared to $92.8 million for the third quarter of 2018.2019. Interest-earning assets increased on average by $822.1 million,$2.55 billion, or 9%25.65%, from $9.12 billion for the third quarter of 2018 to $9.94 billion for the third quarter of 2019. The growth in interest-earning assets was primarily2019 to $12.50 billion for the resultthird quarter of loan growth from the acquisition of CB.2020. Our net interest margin (TE) was 3.34% for the third quarter of 2020, compared to 4.34% for the third quarter of 2019, compared to 4.06% for the third quarter of 2018. The increase in our net interest margin was primarily due to a 32 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 24 basis point increase in our loan yield and an increase in loans as a percentage of our average earning assets. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.3 million for the third quarter of 2019, compared to $4.9 million for the third quarter of 2018.2019.
Interest income for the third quarter of 20192020 was $113.6$106.6 million, which represented a $16.9$6.9 million, or 17.51%6.11%, increasedecrease when compared to the same period of 2018.2019. Average interest-earning assets increased by $822.1 millionto $12.50 billion and the average interest-earning asset yield of 4.55%3.45%, compared to 4.23%4.55% for the third quarter of 2018.2019. The 32110 basis point increasedecrease in the interest-earning asset yield over the third quarter of 2018 resulted from the2019 was primarily due to a combination of a 2476 basis point increasedecrease in loan yields, a 48 basis point decrease in investment yields and thea change in mix of earning assets represented by an increase inwith average loans as a percentagebalances at the Federal Reserve growing to 11.62% of earning assets from 69.6% infor the third quarter of 20182020, compared to 75.4% in1.69% for the third quarter of 2019. Conversely,The increase in balances at the Federal Reserve resulted from $2.22 billion in average investment securities declined as a percentage of earning assets from 29.4% in the prior year to 22.7% indeposit growth during the third quarter of 2019.2020.
Interest income and fees on loans for the third quarter of 20192020 of $98.8$94.2 million increased $19.0decreased $4.6 million, or 23.78%4.65%, when compared to the third quarter of 2018 primarily due to loans acquired from CB.2019. Average loans increased $1.15 billion$887.0 million for the third quarter of 20192020 when compared with the same period of 2018. As a result2019, primarily due to $1.10 billion in average PPP loans originated in the second quarter of higher levels2020. The PPP loans we originated resulted in the recognition of discountapproximately $9.5 million in loan interest and fee income in the third quarter of 2020. Discount accretion on acquired CB loans and nonaccrual interest paid, third quarter interest income increaseddecreased by $2.5$2.9 million in comparisoncompared to the third quarter of 2018. Also contributing to the 24 basis point increase in loan yield were increases in the rate on loans indexed to variable2019. The Federal Reserve lowered short-term interest rates such as the Bank’s prime rate, which increased by 0.25%175 basis points when compared to the end of the third quarter of 2018.2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 44 basis points from the third quarter of 2019.
Interest income from investment securities was $11.8 million for the third quarter of 2020, a $1.7 million, or 12.56%, decrease from $13.5 million for the third quarter of 2019, a $2.7 million, or 16.48%, decrease from $16.2 million for the third quarter of 2018.2019. This decrease was primarily the result of a $426.647 basis point decline in the non
tax-equivalent
yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities. Partially offsetting the decline from lower rates was a $344.1 million declineincrease in average investment securities for the third quarter of 2019,2020, compared to the same period of 2018. The yield on investments decreased by two basis points compared to the third quarter of 2018.
2019.
Interest expense of $5.4$3.3 million for the third quarter of 2019, increased $1.62020, decreased $2.1 million, or 41.54%38.92%, compared to the third quarter of 2018, as our2019. The average rate paid on interest-bearing liabilities increased by $110.9 million and our cost of interest-bearing deposits increased 17 basis points. Our total cost of fundsdeclined to 0.28% for the third quarter of 2019 was 0.23%, compared to 0.18%2020 from 0.55% for the third quarter of 2018. The overall cost of funds increased by only five basis points due to the continued strength and growth of2019. On average, noninterest-bearing deposits during a period of higher short-term interest rates. Average interest-bearing deposits and customer repurchase agreements increased by $130.7 million, as we assumed $1.61 billion interest-bearing deposits from CB during the third quarter of 2018. Average noninterest-bearing deposits represented 60.14%were 61.67% of our total deposits for the third quarter of 2019,2020, compared to 58.10%60.14% for the third quarter of 2018.2019. In comparison to the third quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.50 billion. Average interest-bearing deposits increased by $720.0 million compared to the third quarter of 2019, while the cost of interest-bearing deposits decreased by 25 basis points.    
Nine Months of 20192020 Compared to the Nine Months of 20182019
Net interest income, before recapture of provision for (recapture of) loancredit losses, was $328.8$310.2 million for the nine months ended September 30, 2019, an increase2020, a decrease of $92.7$18.6 million, or 39.28%5.64%, compared to $236.0$328.8 million for the same period of 2018.2019. Interest-earning assets increased on average by $1.80$1.33 billion, or 21.93%13.26%, from $8.21$10.01 billion for the nine months ended September 30, 20182019 to $10.01$11.34 billion for the current year. Our net interest margin (TE) was 4.41%3.68% during the first nine months of 2019,2020, compared to 3.87%4.41% for the same period of 2018.2019.
Interest income for the nine months ended September 30, 20192020 was $345.6$321.7 million, which represented a $101.5$23.9 million, or 41.57%6.93%, increasedecrease when compared to the same period of 2018.2019. Compared to the first nine months of 2018,2019, average interest-earning assets increased by $1.80$1.33 billion primarily due to PPP loans, acquired from CB, and the yield on interest-earning assets increaseddecreased by 6381 basis points. The 6381 basis points increasepoint decrease in the earning asset yield over the first nine months of 2019,2020, resulted from a 4658 basis point increasedecrease in loan yields from 5.30% for first nine months of 2019 to 4.72% for the same period of 2020, and a 31 basis point decline in investment yields, as well as a change in the mix of earning assets.assets resulting from an $852.6 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets grewdeclined from 64.7%75.63% for the first nine months of 20182019 to 75.6%70.31% for the first nine months of 2019.2020. Conversely, average investment securities declinedbalances at the Federal Reserve grew as a percentage of earning assets from 33.7%0.64% in the prior year to 23.5%8.09% for the first nine months of 2019.2020.
 
48
47
Table of Contents
Interest income and fees on loans for the first nine months of 20192020 of $300.3$281.7 million increased $107.9decreased $18.7 million, or 56.11%6.21%, when compared to the same period of 2018.2019. Average loans increased $2.26 billion$400.7 million for the first nine months of 20192020 when compared with the same period of 2018,2019, primarily due to $591.4 million in average PPP loans. The PPP loans acquired from CB.we originated resulted in approximately $13.5 million in fee income and $4.5 million in loan interest during the first nine months of 2020. The first nine months of 20192020 reflected a $15.5$9.3 million increasedecrease in discount accretion on acquired loans and nonaccrual interest paidincome when compared to the same period of 2018. In addition, loan2019. Loan yields increaseddecreased by 2358 basis points from the prior nine month period,period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 33 basis points lower than the first nine months of 2019. This decline in loan yields was primarily due to higherlower rates on loans indexed to variable interest rates such as the Bank’s prime rate.
Interest income from investment securities was $43.2$38.0 million for the nine months ended September 30, 2019,2020, a $6.1$5.3 million decrease from $49.3$43.2 million for the first nine months of 2018.2019. This decrease was the net result of a $411.429 basis point decline in the non
tax-equivalent
yield on securities, compared to the first nine months of 2019, partially offset by a $50.0 million decreaseincrease in the average investment securities for the first nine months of 2019, compared to the same period of 2018, partially offset by a seven basis points increase in the non
tax-equivalent
yield on securities.2020.
Interest expense of $16.9$11.5 million for the nine months ended September 30, 2019, increased2020, decreased by $8.8$5.4 million from the same period of 2018.2019. The average rate paid on interest-bearing liabilities increaseddecreased by 2320 basis points, to 0.55%0.35% for the first nine months of 2019,2020, from 0.32%0.55% for the same period of 2018.2019. The rate on interest-bearing deposits for the first nine months of 2019 increased2020 decreased by 1912 basis points from the same period in 2018, as a result of higher rates on deposits acquired from CB and competition from higher interest rates offered by our competitors.2019. Average interest-bearing liabilities were $733.5$232.1 million higher duringfor the first nine months of 20192020 when compared with the same period of 2018, primarily due to deposits assumed from CB.2019. Average interest-bearing deposit growthdeposits grew by $300.1 million when compared to the first nine months of $667.7 million was partially offset by an $8.0 million decline in customer repurchase agreements.2019. Average noninterest-bearing deposits represented 59.17%61.20% of our total deposits for the nine months ended September 30, 2019,2020, compared to 59.11%59.17% for the same period of 2018.2019. Total cost of funds for the first nine months of 20192020 was 0.24%0.15%, compared with 0.14%0.24% for the same period of 2018.2019.
Provision for LoanCredit Losses
The allowance for loan losses is increased by the provision for loan losses and recoveries of prior losses, and is decreased by recapture of provisions and by charge-offs taken when management believes the uncollectability of any loan is confirmed. The provision for loancredit losses is determined by management as the amounta charge to be addedearnings to (subtracted from)maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan losses after net charge-offs have been deductedportfolio at the balance sheet date. On January 1, 2020, we adopted ASU
2016-13,
commonly referred to bringas CECL, which replaces the allowance to“incurred loss” approach with an appropriate level which, in management’s best estimate, is necessary to absorb probable loan losses within“expected loss” model over the existing loan portfolio.
life of the loan.
The allowance for loancredit losses on loans totaled $68.7$93.9 million at September 30, 2019,2020, compared to $63.6$68.7 million at December 31, 20182019 and $60.0$68.7 million as of September 30, 2018. The2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, for loan losseswith no impact on the consolidated statement of earnings, and was increased by $5.0$23.5 million in loan loss provision and $59,000for credit losses in net recoveries forthe first nine months of 2020 due to the severe economic disruption forecasted as a result of the
COVID-19
pandemic. For the nine months ended September 30, 2019.2020, we experienced minimal credit charge-offs of $484,000 and total recoveries of $353,000, resulting in net charge-offs of $131,000. This compares to a $1.5$5.0 million loan loss provision recapture and net recoveries of $1.9 million$59,000 for the same period of 2018. The increase in provision for loan losses was primarily due to lower levels of net recoveries and additional provision due to loan growth during the period experienced within the commercial and industrial and commercial real estate segments of the
non-acquired
loan portfolio. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. In addition to the growth in the
non-acquired
loan portfolio, the provision was the result of the net effect of modest increases in certain qualitative loss factors and reduced reserve requirements for moderate reductions in historical loss rates across the portfolio. We believe the allowance is appropriate at September 30, 2019. The ratio of the allowance for loancredit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2019,2020, was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% and 0.92%, as of December 31, 20182019 and September 2018 was 0.92%, 0.82% and 0.79%,30, 2019, respectively. As of September 30, 2019,2020, remaining credit related discounts on acquired loans were $37.0$35.2 million. Refer to the discussion of “Allowance for LoanCredit Losses” in Item 2 —–
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for loancredit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the
COVID-19
pandemic. See “Allowance for LoanCredit Losses” under
Analysis of Financial Condition
herein.
49
48
Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
                                 
 
For the Three Months Ended
September 30,
  
Variance
  
For the Nine Months Ended
September 30,
  
Variance
 
 
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
 
(Dollars in thousands)
 
Noninterest income:
                        
Service charges on deposit accounts
 $
4,833
  $
4,295
  $
 538
   
12.53
% $
15,039
  $
 12,431
  $
 2,608
   
20.98
%
Trust and investment services
  
2,330
   
2,182
   
148
   
6.78
%  
6,964
   
6,738
   
226
   
3.35
%
Bankcard services
  
637
   
875
   
(238
)  
-27.20
%  
2,614
   
2,637
   
(23
)  
-0.87
%
BOLI income
  
1,797
   
936
   
861
   
91.99
%  
4,482
   
2,984
   
1,498
   
50.20
%
Gain on OREO, net
  
-
   
-
   
-
   
-
   
129
   
3,540
   
(3,411
)  
-96.36
%
Gain on sale of building, net
  
-
      
-
   
-
   
4,545
   
-
   
4,545
   
-
 
Gain on eminent domain condemnation, net
  
-
      
-
   
-
   
5,685
   
-
   
5,685
   
-
 
Other
  
2,297
   
1,824
   
473
   
25.93%
   
6,944
   
4,393
   
2,551
   
58.07%
 
                                 
Total noninterest income
 $
   11,894
  $
   10,112
  $
   1,782
   
17.62
% $
   46,402
  $
   32,723
  $
   13,679
   
41.80
%
                                 
 
  
Three Months Ended
September 30,
  
Variance
  
Nine Months Ended
September 30,
  
Variance
 
  
2020
  
2019
  
$
  
%
  
2020
  
2019
  
$
  
%
 
           
(Dollars in thousands)
          
Noninterest income:
        
Service charges on deposit accounts
   $3,970    $4,833    $(863)   -17.86%    $12,555    $15,039    $(2,484)   -16.52% 
Trust and investment services
  2,405   2,330   75   3.22%   7,302   6,964   338   4.85% 
Bankcard services
  456   637   (181)   -28.41%   1,438   2,614   (1,176)   -44.99% 
BOLI income
  1,469   1,797   (328)   -18.25%   5,211   4,482   729   16.27% 
Swap fee income
  1,591   378   1,213   320.90%   4,149   1,135   3,014   265.55% 
Gain on OREO, net
  13   -   13   -   23   129   (106)   -82.17% 
Gain on sale of building, net
  1,680   -   1,680   -   1,680   4,545   (2,865)   -63.04% 
Gain on eminent domain condemnation, net
  -   -   -   -   -   5,685   (5,685)   -100.00% 
Other
  1,569   1,919   (350)   -18.24%   4,587   5,809   (1,222)   -21.04% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total noninterest income
   $13,153    $11,894    $1,259         10.59%    $36,945    $46,402    $(9,457)         -20.38% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Third Quarter of 20192020 Compared to the Third Quarter of 20182019
The $1.8$1.3 million growthincrease in noninterest income was primarily due to a $1.7 million net gain on the sale of one of our bank owned buildings, related to a banking center that was closed in September in the third quarter of 2020.
The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 –
Derivative Financial Instruments
of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The third quarter of 2020 included an increasehigher swap fee income of $861,000 in BOLI income. The $538,000 increase in service$1.2 million compared to the third quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020, compared to $19.0 million for the third quarter of 2019.
Service charges on deposit accounts decreased by $863,000 from the third quarter of 20182019. This decrease was primarily due to growththe increase in service charges onnoninterest-bearing deposits assumed inheld at the acquisition of CB.Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At September 30, 2019,2020, CitizensTrust had approximately $2.83$2.91 billion in assets under management and administration, including $1.96$2.08 billion in assets under management compared with $1.79 billion in assets under management at September 30, 2018.management. CitizensTrust generated fees of $2.4 million for the third quarter of 2020, compared to $2.3 million for the third quarter of 2019, an increase of $148,000 compared to the third quarter of 2018, due to the growth in assets under management.2019.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selectedselect group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $468,000 were included in ourIncome from BOLI policies for the third quarter of 2019. The $473,000 increase in other income included a $305,000 increase in swap fee income and a $272,000 increase in international banking fee income. For the third quarter of 2019, the Durbin Amendment’s cap on interchange fees became effective for the Company, which reduced our fee income for bankcard servicesdeclined by approximately $400,000 when$328,000 compared to the third quarter of 2018.2019.
49
Table of Contents
Nine Months of 20192020 Compared to the Nine Months of 20182019
The $13.7$9.5 million increasedecrease in noninterest income for the nine months ended September 30, 2019,2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield andduring the first nine month of 2019. In addition, there was a $4.5$2.9 million decrease in net gaingains on the sale of one of our bank owned buildings compared with a $3.5 million net gain on the sale of one OREO duringbetween the first nine months of 2018.2020 and the first nine months of 2019. Service charges on deposit accounts increaseddecreased by $2.6$2.5 million from the first nine months of 2018,2019. This decrease was primarily due to the acquisitionhigher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately $1.2 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. Swap fee income increased $3.0 million compared to the third quarter of CB.2019, due to higher volume of swap transactions. The $1.5 million$729,000 increase in BOLI income included $1.2 million in income from $70.9 million in BOLI policies acquired from CB in the third quarter of 2018 and $468,000 of death benefits included in our BOLI policies for the first nine months of 2019.2020. The $2.6$1.2 million increasedecrease in other income in the first nine months of 2020 included increases of approximately $800,000decreases in both international banking fees and swap fee income. In addition, SBA servicing income and dividend income from various equity investments, increased fromother banking fee income and SBA servicing income when compared to the prior nine month period.
50
Noninterest ExpenseIncome Taxes
Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Adoption of Allowance for Credit Losses
We adopted ASU
2016-13,
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU
2016-13,
resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements.
38
Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020
Standard
Description
Adoption Timing
Impact on Financial Statements
ASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Issued March 2020
The FASB issued ASU
2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a
one-time
election for the sale or transfer of debt securities classified as
held-to-maturity.
This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.
1st Quarter 2020 through the 4th Quarter 2022
Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s consolidated financial statements.
ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
Issued January 2020
The FASB issued ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.
1st Quarter 2021
The following table summarizes the various componentsadoption of noninterest expensethis ASU will not have an impact on our consolidated financial statements.
ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for the periods presented.Convertible Instruments and Contracts in an Entity’s Own Equity
                                 
 
  For the Three Months Ended  
September 30,
  
Variance
  
  For the Nine Months Ended  
September 30,
  
Variance
 
 
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
       
(Dollars in thousands)
       
Noninterest expense:
                        
Salaries and employee benefits
 $
30,122
  $
 26,319
  $
 3,803
   
14.45%
  $
88,286
  $
 69,684
  $
 18,602
   
26.69%
 
Occupancy
  
3,976
   
4,168
   
(192
)  
-4.61%
   
12,771
   
10,924
   
1,847
   
16.91%
 
Equipment
  
1,116
   
1,156
   
(40
)  
-3.46%
   
3,577
   
2,910
   
667
   
22.92%
 
Professional services
  
1,688
   
1,154
   
534
   
46.27%
   
5,653
   
4,374
   
1,279
   
29.24%
 
Software licenses and maintenance
  
2,450
   
2,317
   
133
   
5.74%
   
7,414
   
5,836
   
1,578
   
27.04%
 
Marketing and promotion
  
1,517
   
1,134
   
383
   
33.77%
   
4,149
   
3,638
   
511
   
14.05%
 
Amortization of intangible assets
  
2,648
   
1,736
   
912
   
52.53%
   
8,338
   
2,395
   
5,943
   
248.14%
 
Telecommunications expense
  
656
   
622
   
34
   
5.47%
   
2,126
   
1,711
   
415
   
24.25%
 
Regulatory assessments
  
147
   
896
   
(749
)  
-83.59%
   
1,805
   
2,276
   
(471
)  
-20.69%
 
Insurance
  
430
   
432
   
(2
)  
-0.46%
   
1,368
   
1,278
   
90
   
7.04%
 
Loan expense
  
308
   
274
   
34
   
12.41%
   
1,115
   
678
   
437
   
64.45%
 
Directors’ expenses
  
314
   
275
   
39
   
14.18%
   
921
   
785
   
136
   
17.32%
 
Stationery and supplies
  
259
   
251
   
8
   
3.19%
   
867
   
795
   
72
   
9.06%
 
Acquisition related expenses
  
244
   
6,645
   
(6,401
)  
-96.33%
   
6,005
   
7,942
   
(1,937
)  
-24.39%
 
Other
  
1,660
   
1,501
   
159
   
10.59%
   
5,272
   
3,854
   
1,418
   
36.79%
 
                                 
Total noninterest expense
 $
   47,535
  $
   48,880
  $
 (1,345
)  
-2.75%
  $
   149,667
  $
   119,080
  $
   30,587
   
25.69%
 
                                 
                                 
Noninterest expense to average assets
  
1.68%
   
1.93%
         
1.77%
   
1.80%
       
                                 
Efficiency ratio (1)
  
39.60%
   
47.49%
         
39.89%
   
44.31%
       
 
(1)Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.
Third QuarterIssued August 2020
The FASB issued ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of 2019 Comparedaccounting models for convertible instruments and allows more contracts to the Third Quarter of 2018qualify for equity classification.
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.68% for the third quarter of 2019, compared to 1.93% for the third quarter of 2018. The decrease is primarily the result of lower acquisition expense of $6.4 million.1st Quarter 2022
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for loan losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.60% for the third quarter of 2019, compared to 47.49% for the third quarter of 2018.
The $1.3adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
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Table of Contents
OVERVIEW
For the third quarter of 2020, we reported net earnings of $47.5 million, compared with $41.6 million for the second quarter of 2020 and $50.4 million for the third quarter of 2019. Diluted earnings per share were $0.35 for the third quarter, compared to $0.31 for the prior quarter and $0.36 for the same period last year.
No provision for credit losses was recorded for the third quarter of 2020. The Company’s economic forecast of macro-economic variables was generally consistent with the forecast at the end of the second quarter. A $23.5 million provision for credit losses was recorded in the first half of 2020, due to the economic disruption and forecasted impact resulting from
COVID-19.
In comparison to the prior year, a $1.5 million loan loss provision was incurred for the third quarter of 2019. During the third quarter of 2020, we experienced minimal credit charge-offs of $231,000 and total recoveries of $117,000, resulting in net charge-offs of $114,000. During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at September 30, 2020. Interest and fee income from PPP loans increased from approximately $8.5 million in the second quarter of 2020, to $9.5 million in the third quarter of 2020.
At September 30, 2020, total assets of $13.82 billion increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $12.59 billion at September 30, 2020 increased $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.31 billion increase in interest-earning balances due from the Federal Reserve, an $843.3 million increase in total loans, and a $368.6 million increase in investment securities. Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.
Total investment securities were $2.78 billion at September 30, 2020, an increase of $368.6 million, or 15.27%, from $2.41 billion at December 31, 2019. At September 30, 2020, investment securities
held-to-maturity
(“HTM”) totaled $577.7 million. At September 30, 2020, investment securities
available-for-sale
(“AFS”) totaled $2.21 billion, inclusive of a net
pre-tax
unrealized gain of $55.3 million, an increase of $33.4 million from December 31, 2019. HTM securities declined by $96.8 million, or 14.35%, and AFS securities increased by $465.4 million, or 26.74%, from December 31, 2019. Our tax equivalent yield on investments was 1.99% for the quarter ended September 30, 2020, compared to 2.22% for the second quarter of 2020 and 2.47% for the third quarter of 2019.
Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%. The $126.9 million or 2.75%, decrease in loans included decreases of $118.1 million in commercial and industrial loans, $27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million. Our yield on loans was 4.47% for the quarter ended September 30, 2020, compared to 4.77% for the second quarter of 2020 and 5.23% for the third quarter of 2019. This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans. Interest income for yield adjustments related to discount accretion on acquired loans was $4.2 million for the quarter ended September 30, 2020, compared to $4.1 million for the second quarter of 2020 and $7.2 million for the third quarter of 2019.
Noninterest-bearing deposits were $6.92 billion at September 30, 2020, an increase of $1.67 billion, or 31.91%, when compared to December 31, 2019. The significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. At September 30, 2020, noninterest-bearing deposits were 61.95% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.21% for the third quarter of 2019.
Customer repurchase agreements totaled $483.4 million at September 30, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.22% for the third quarter of 2019.
At September 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and September 30, 2019. At September 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.11% for the quarter ended September 30, 2020, 0.13% for the second quarter of 2020, and 0.23% for the third quarter of 2019.
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Table of Contents
The allowance for credit losses totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted to result from the
COVID-19
pandemic. At September 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of September 30, 2020, total discounts on acquired loans were $35.2 million.
The Company’s total equity was $1.98 billion at September 30, 2020. This represented a decrease of $12.1 million, or 0.61%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our
10b5-1
stock repurchase program, and $73.3 million in cash dividends, offset by net earnings of $127.1 million and a $23.5 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our
available-for-sale
investment securities portfolio. Our tangible common equity ratio was 9.8% at September 30, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of September 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 9.88%, our common equity Tier 1 ratio totaled 14.60%, our Tier 1 risk-based capital ratio totaled 14.89%, and our total risk-based capital ratio totaled 16.08%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our
Analysis of Financial Condition – Capital Resources
.
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Table of Contents
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
   
Three Months Ended
 
Variance
 
   
September 30,
 
June 30,
   
   
2020
 
2020
 
$
   
%
   
(Dollars in thousands, except per share amounts)
Net interest income
    $    103,325    $104,569    $(1,244)     -1.19% 
Provision for credit losses
   -         (11,500)   11,500      100.00% 
Noninterest income
   13,153   12,152   1,001      8.24% 
Noninterest expense
   (49,588)   (46,398)   (3,190)     -6.88% 
Income taxes
   (19,398)   (17,192)   (2,206)     -12.83% 
  
 
 
 
 
 
 
 
 
 
 
   
Net earnings
    $47,492    $41,631    $5,861      14.08% 
  
 
 
 
 
 
 
 
 
 
 
   
Earnings per common share:
      
Basic
    $0.35    $0.31    $0.04     
Diluted
    $0.35    $0.31    $0.04     
Return on average assets
   1.38%   1.33%   0.05%     
Return on average shareholders’ equity
   9.51%   8.51%   1.00%     
Efficiency ratio
   42.57%   39.75%   2.82%     
Noninterest expense to average assets
   1.44%   1.48%   -0.04%     
  
Three Months Ended
     
Nine Months Ended
   
  
September 30,
  
Variance
  
September 30,
  
Variance
  
2020
 
2019
  
$
 
%
  
2020
  
2019
  
$
 
%
  
(Dollars in thousands, except per share amounts)
Net interest income
   $103,325    $108,159       $(4,834)    -4.47%       $310,200       $328,752       $(18,552)    -5.64% 
Provision for credit losses
  -         (1,500)     1,500     100.00%      (23,500)     (5,000)     (18,500)    -370.00% 
Noninterest income
  13,153   11,894      1,259     10.59%      36,945      46,402      (9,457)    -20.38% 
Noninterest expense
  (49,588)   (47,535)     (2,053)    -4.32%      (144,627)     (149,667)     5,040     3.37% 
Income taxes
  (19,398)   (20,595)     1,197     5.81%      (51,915)     (63,941)     12,026     18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Net earnings
   $47,492    $50,423       $(2,931)    -5.81%       $127,103       $156,546       $(29,443)    -18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Earnings per common share:
               
Basic
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Diluted
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Return on average assets
  1.38%   1.78%      -0.40%       1.35%      1.86%      -0.51%    
Return on average shareholders’ equity
  9.51%   10.18%      -0.67%       8.55%      10.89%      -2.34%    
Efficiency ratio
  42.57%   39.60%      2.97%       41.66%      39.89%      1.77%    
Noninterest expense to average assets
  1.44%   1.68%      -0.24%       1.54%      1.77%      -0.23%    
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Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
   
Three Months Ended
  
Nine Months Ended
 
   
September 30,
  
June 30,
  
September 30,
  
September 30,
  
September 30,
 
   
2020
  
2020
  
2019
  
2020
  
2019
 
   
(Dollars in thousands)
 
Net Income
    $47,492      $41,631      $50,423      $127,103      $156,546   
Add: Amortization of intangible assets
   2,292     2,445     2,648     7,182     8,338   
Less: Tax effect of amortization of intangible assets (1)
   (678)    (723)    (783)    (2,123)    (2,465)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Tangible net income
    $49,106      $43,353      $52,288      $132,162      $162,419   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average stockholders’ equity
    $1,985,842    $1,966,600      $1,965,427      $1,986,300      $1,921,981   
Less: Average goodwill
   (663,707)    (663,707)    (663,707)    (663,707)    (665,470)  
Less: Average intangible assets
   (37,133)    (39,287)    (46,720)    (39,376)    (49,682)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average tangible common equity
    $1,285,002      $1,263,606      $1,255,000      $1,283,217      $1,206,829   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Return on average equity, annualized
   9.51%   8.51%   10.18%   8.55%   10.89% 
Return on average tangible common equity, annualized
   15.20%   13.80%   16.53%   13.76%   17.99% 
(1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended September 30, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
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Table of Contents
The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
   
Three Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,970,636     $8,244    1.82%     $1,505,087     $8,949    2.38% 
Tax-advantaged
   36,193    203    3.26%    40,189    273    3.75% 
Held-to-maturity
securities:
            
Taxable
   429,897    2,265    2.11%    506,203    2,883    2.28% 
Tax-advantaged
   164,854    1,110    3.26%    205,996    1,415    3.32% 
Investment in FHLB stock
   17,688    215    4.84%    17,688    301    6.75% 
Interest-earning deposits with other institutions
   1,494,149    389    0.10%    174,119    946    2.16% 
Loans (2)
   8,382,257    94,200    4.47%    7,495,289    98,796    5.23% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   12,495,674    106,626    3.45%    9,944,571    113,563    4.55% 
Total noninterest-earning assets
   1,231,502        1,269,845     
  
 
 
       
 
 
     
Total assets
    $13,727,176         $11,214,416     
  
 
 
       
 
 
     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
    $3,735,204    2,010    0.21%     $2,991,330    3,501    0.46% 
Time deposits
   449,484    948    0.84%    473,347    1,088    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   4,184,688    2,958    0.28%    3,464,677    4,589    0.53% 
FHLB advances, other borrowings, and customer repurchase agreements
   539,833    343    0.25%    446,087    815    0.72% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,724,521    3,301    0.28%    3,910,764    5,404    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,731,711        5,227,595     
Other liabilities
   285,102        110,630     
Stockholders’ equity
   1,985,842        1,965,427     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  13,727,176         $  11,214,416     
  
 
 
       
 
 
     
Net interest income
      $    103,325         $108,159   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.17%        4.00% 
Net interest margin
       3.33%        4.32% 
Net interest margin - tax equivalent
       3.34%        4.34% 
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in noninterest expenseeffect for the third quarter of 2019 reflects both the impact of merger related expense in the third quarter of 2018, which was $6.4 million higher than the current quarter,three months ended September 30, 2020 and year-over-year increase in salaries2019. The non TE rates were 1.93% and benefit costs of $3.8 million. Higher expense for accelerated vesting of stock grants and bonus compensation of approximately $1 million, related to the amended employment agreement and consulting agreement2.40% for the Company’s retiring Chief Executive Officer contributed to the increase in compensation costs. Year-over-year growththree months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of approximately $2$7.4 million was primarily due to additional compensation related expensesand $782,000 for the former CB employees who were retained after the merger. CDI amortization increased by $912,000 as a resultthree months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of core deposits assumed from CB. The third quarter of 2019 also reflected a $780,000 decrease$1.8 million and $1.0 million are included in FDIC assessment expense.
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Table of Contents
Nine Months of 2019 Compared to the Nine Months of 2018
Noninterest expense of $149.7 millioninterest income for the first ninethree months ended September 30, 2020 and 2019, respectively.
(3)
Includes interest-bearing demand and money market accounts.
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Table of Contents
   
Nine Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,737,723     $26,313    2.08%     $1,582,902     $29,079    2.45% 
Tax-advantaged
   36,897    632    3.30%    42,746    906    3.87% 
Held-to-maturity
securities:
            
Taxable
   449,230    7,410    2.20%    509,247    8,725    2.29% 
Tax-advantaged
   177,364    3,623    3.29%    216,343    4,524    3.37% 
Investment in FHLB stock
   17,688    761    5.75%    17,688    931    7.04% 
Interest-earning deposits with other institutions
   947,211    1,285    0.18%    70,848    1,140    2.15% 
Loans (2)
   7,972,208    281,669    4.72%    7,571,502    300,326    5.30% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   11,338,321    321,693    3.82%    10,011,276    345,631    4.63% 
            
Total noninterest-earning assets
   1,237,241        1,269,160     
  
 
 
       
 
 
     
Total assets
    $12,575,562         $11,280,436     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
  $3,396,259    7,131    0.28%   $3,047,444    9,159    0.40% 
Time deposits
   448,615    2,946    0.88%    497,370    3,394    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   3,844,874    10,077    0.35%    3,544,814    12,553    0.47% 
FHLB advances, other borrowings, and customer repurchase agreements
   505,710    1,416    0.37%    573,633    4,326    1.00% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,350,584    11,493    0.35%    4,118,447    16,879    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,063,469        5,136,233     
Other liabilities
   175,209        103,775     
Stockholders’ equity
   1,986,300        1,921,981     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  12,575,562         $  11,280,436     
  
 
 
       
 
 
     
Net interest income
      $    310,200         $328,752   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.47%        4.08% 
Net interest margin
       3.67%        4.39% 
Net interest margin - tax equivalent
       3.68%        4.41% 
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 2019 was $30.6 million higher than the prior year period. Salaries and benefit costs increased by $18.6 million primarily due to additional compensation related expenses for the newly hired and former CB employees who were retained after the merger and $1.4 million21% in higher stock related compensation expense. The year-over-year increase also included a $5.9 million increase in amortization of intangible assets due to core deposits assumed from CB. The primary driver of a $2.5 million increase in occupancy and equipment expense, a $1.6 million increase in software licenses and maintenance, and a $1.3 million increase in professional services, was the merger with CB. These increases were partially offset by a $1.9 million decrease in merger related expenses. The $1.4 million increase in other expenses was also primarily related to higher expenses related to the operations of a larger Bank after the CB merger. As a percentage of average assets, noninterest expense was 1.77%effect for the nine months ended September 30, 2019, compared to 1.80%2020 and 2019. The non TE rates were 2.16% and 2.45% for the same period of 2018. For the nine months ended September 30, 2020 and 2019, the efficiency ratio was 39.89%, compared to 44.31%respectively.
(2)
Includes loan fees of $15.3 million and $2.3 million for the same periodnine months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of 2018.$5.4 million and $3.4 million are included in interest income for the nine months ended September 30, 2020 and 2019, respectively.
(3)
Includes interest-bearing demand and money market accounts.
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The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
   
Comparison of Three Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,835    $(2,108)    $(432)    $(705) 
Tax-advantaged
investment securities
   (24)   (42)   (4)   (70) 
Held-to-maturity
securities:
     
Taxable investment securities
   (395)   (194)   (29)   (618) 
Tax-advantaged
investment securities
   (273)   (27)   (5)   (305) 
Investment in FHLB stock
   -   (86)   -   (86) 
Interest-earning deposits with other institutions
   7,184   (902)   (6,839)   (557) 
Loans
   12,369   (15,170)   (1,795)   (4,596) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   20,696   (18,529)   (9,104)   (6,937) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   874   (1,894)   (471)   (1,491) 
Time deposits
   (53)   (83)   (4)   (140) 
FHLB advances, other borrowings, and customer repurchase agreements
   172   (532)   (112)   (472) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   993   (2,509)   (587)   (2,103) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $19,703    $(16,020)    $(8,517)    $(4,834) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Comparision of Nine Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,861    $(4,349)    $(278)    $(2,766) 
Tax-advantaged
investment securities
   (124)   (174)   24   (274) 
Held-to-maturity
securities:
     
Taxable investment securities
   (1,015)   (339)   39   (1,315) 
Tax-advantaged
investment securities
   (815)   (105)   19   (901) 
Investment in FHLB stock
   -   (170)   -   (170) 
Interest-earning deposits with other institutions
   14,238   (1,054)   (13,039)   145 
Loans
   15,682   (32,613)   (1,726)   (18,657) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   29,827   (38,804)   (14,961)   (23,938) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   1,045   (2,758)   (315)   (2,028) 
Time deposits
   (331)   (130)   13   (448) 
FHLB advances, other borrowings, and customer repurchase agreements
   (513)   (2,719)   322   (2,910) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   201   (5,607)   20   (5,386) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $29,626    $(33,197)    $(14,981)    $(18,552) 
  
 
 
  
 
 
  
 
 
  
 
 
 
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Table of Contents
Third Quarter of 2020 Compared to the Third Quarter of 2019
Net interest income, before provision for credit losses, of $103.3 million for the third quarter of 2020 decreased $4.8 million, or 4.47%, compared to $108.2 million for the third quarter of 2019. Interest-earning assets increased on average by $2.55 billion, or 25.65%, from $9.94 billion for the third quarter of 2019 to $12.50 billion for the third quarter of 2020. Our net interest margin (TE) was 3.34% for the third quarter of 2020, compared to 4.34% for the third quarter of 2019.
Interest income for the third quarter of 2020 was $106.6 million, which represented a $6.9 million, or 6.11%, decrease when compared to the same period of 2019. Average interest-earning assets increased to $12.50 billion and the average interest-earning asset yield of 3.45%, compared to 4.55% for the third quarter of 2019. The 110 basis point decrease in the interest-earning asset yield over the third quarter of 2019 was primarily due to a combination of a 76 basis point decrease in loan yields, a 48 basis point decrease in investment yields and a change in mix of earning assets with average balances at the Federal Reserve growing to 11.62% of earning assets for the third quarter of 2020, compared to 1.69% for the third quarter of 2019. The increase in balances at the Federal Reserve resulted from $2.22 billion in average deposit growth during the third quarter of 2020.
Interest income and fees on loans for the third quarter of 2020 of $94.2 million decreased $4.6 million, or 4.65%, when compared to the third quarter of 2019. Average loans increased $887.0 million for the third quarter of 2020 when compared with the same period of 2019, primarily due to $1.10 billion in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in the recognition of approximately $9.5 million in loan interest and fee income in the third quarter of 2020. Discount accretion on acquired loans decreased by $2.9 million compared to the third quarter of 2019. The Federal Reserve lowered short-term interest rates by 175 basis points when compared to the end of the third quarter of 2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 44 basis points from the third quarter of 2019.
Interest income from investment securities was $11.8 million for the third quarter of 2020, a $1.7 million, or 12.56%, decrease from $13.5 million for the third quarter of 2019. This decrease was primarily the result of a 47 basis point decline in the non
tax-equivalent
yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities. Partially offsetting the decline from lower rates was a $344.1 million increase in average investment securities for the third quarter of 2020, compared to the same period of 2019.
Interest expense of $3.3 million for the third quarter of 2020, decreased $2.1 million, or 38.92%, compared to the third quarter of 2019. The average rate paid on interest-bearing liabilities declined to 0.28% for the third quarter of 2020 from 0.55% for the third quarter of 2019. On average, noninterest-bearing deposits were 61.67% of our total deposits for the third quarter of 2020, compared to 60.14% for the third quarter of 2019. In comparison to the third quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.50 billion. Average interest-bearing deposits increased by $720.0 million compared to the third quarter of 2019, while the cost of interest-bearing deposits decreased by 25 basis points.    
Nine Months of 2020 Compared to the Nine Months of 2019
Net interest income, before provision for credit losses, was $310.2 million for the nine months ended September 30, 2020, a decrease of $18.6 million, or 5.64%, compared to $328.8 million for the same period of 2019. Interest-earning assets increased on average by $1.33 billion, or 13.26%, from $10.01 billion for the nine months ended September 30, 2019 to $11.34 billion for the current year. Our net interest margin (TE) was 3.68% during the first nine months of 2020, compared to 4.41% for the same period of 2019.
Interest income for the nine months ended September 30, 2020 was $321.7 million, which represented a $23.9 million, or 6.93%, decrease when compared to the same period of 2019. Compared to the first nine months of 2019, average interest-earning assets increased by $1.33 billion primarily due to PPP loans, and the yield on interest-earning assets decreased by 81 basis points. The 81 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 58 basis point decrease in loan yields from 5.30% for first nine months of 2019 to 4.72% for the same period of 2020, and a 31 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from an $852.6 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 75.63% for the first nine months of 2019 to 70.31% for the first nine months of 2020. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.64% in the prior year to 8.09% for the first nine months of 2020.
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Table of Contents
Interest income and fees on loans for the first nine months of 2020 of $281.7 million decreased $18.7 million, or 6.21%, when compared to the same period of 2019. Average loans increased $400.7 million for the first nine months of 2020 when compared with the same period of 2019, primarily due to $591.4 million in average PPP loans. The PPP loans we originated resulted in approximately $13.5 million in fee income and $4.5 million in loan interest during the first nine months of 2020. The first nine months of 2020 reflected a $9.3 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019. Loan yields decreased by 58 basis points from the prior nine month period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 33 basis points lower than the first nine months of 2019. This decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.
Interest income from investment securities was $38.0 million for the nine months ended September 30, 2020, a $5.3 million decrease from $43.2 million for the first nine months of 2019. This decrease was the net result of a 29 basis point decline in the non
tax-equivalent
yield on securities, compared to the first nine months of 2019, partially offset by a $50.0 million increase in the average investment securities for the first nine months of 2020.
Interest expense of $11.5 million for the nine months ended September 30, 2020, decreased by $5.4 million from the same period of 2019. The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.35% for the first nine months of 2020, from 0.55% for the same period of 2019. The rate on interest-bearing deposits for the first nine months of 2020 decreased by 12 basis points from the same period in 2019. Average interest-bearing liabilities were $232.1 million higher for the first nine months of 2020 when compared with the same period of 2019. Average interest-bearing deposits grew by $300.1 million when compared to the first nine months of 2019. Average noninterest-bearing deposits represented 61.20% of our total deposits for the nine months ended September 30, 2020, compared to 59.17% for the same period of 2019. Total cost of funds for the first nine months of 2020 was 0.15%, compared with 0.24% for the same period of 2019.
Provision for Credit Losses
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU
2016-13,
commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan.
The allowance for credit losses on loans totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019 and $68.7 million as of September 30, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted as a result of the
COVID-19
pandemic. For the nine months ended September 30, 2020, we experienced minimal credit charge-offs of $484,000 and total recoveries of $353,000, resulting in net charge-offs of $131,000. This compares to a $5.0 million loan loss provision and net recoveries of $59,000 for the same period of 2019. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2020, was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% and 0.92%, as of December 31, 2019 and September 30, 2019, respectively. As of September 30, 2020, remaining discounts on acquired loans were $35.2 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the
COVID-19
pandemic. See “Allowance for Credit Losses” under
Analysis of Financial Condition
herein.
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Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
  
Three Months Ended
September 30,
  
Variance
  
Nine Months Ended
September 30,
  
Variance
 
  
2020
  
2019
  
$
  
%
  
2020
  
2019
  
$
  
%
 
           
(Dollars in thousands)
          
Noninterest income:
        
Service charges on deposit accounts
   $3,970    $4,833    $(863)   -17.86%    $12,555    $15,039    $(2,484)   -16.52% 
Trust and investment services
  2,405   2,330   75   3.22%   7,302   6,964   338   4.85% 
Bankcard services
  456   637   (181)   -28.41%   1,438   2,614   (1,176)   -44.99% 
BOLI income
  1,469   1,797   (328)   -18.25%   5,211   4,482   729   16.27% 
Swap fee income
  1,591   378   1,213   320.90%   4,149   1,135   3,014   265.55% 
Gain on OREO, net
  13   -   13   -   23   129   (106)   -82.17% 
Gain on sale of building, net
  1,680   -   1,680   -   1,680   4,545   (2,865)   -63.04% 
Gain on eminent domain condemnation, net
  -   -   -   -   -   5,685   (5,685)   -100.00% 
Other
  1,569   1,919   (350)   -18.24%   4,587   5,809   (1,222)   -21.04% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total noninterest income
   $13,153    $11,894    $1,259         10.59%    $36,945    $46,402    $(9,457)         -20.38% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Third Quarter of 2020 Compared to the Third Quarter of 2019
The $1.3 million increase in noninterest income was primarily due to a $1.7 million net gain on the sale of one of our bank owned buildings, related to a banking center that was closed in September in the third quarter of 2020.
The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 –
Derivative Financial Instruments
of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The third quarter of 2020 included higher swap fee income of $1.2 million compared to the third quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020, compared to $19.0 million for the third quarter of 2019.
Service charges on deposit accounts decreased by $863,000 from the third quarter of 2019. This decrease was primarily due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At September 30, 2020, CitizensTrust had approximately $2.91 billion in assets under management and administration, including $2.08 billion in assets under management. CitizensTrust generated fees of $2.4 million for the third quarter of 2020, compared to $2.3 million for the third quarter of 2019.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from BOLI declined by $328,000 compared to the third quarter of 2019.
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Table of Contents
Nine Months of 2020 Compared to the Nine Months of 2019
The $9.5 million decrease in noninterest income for the nine months ended September 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield during the first nine month of 2019. In addition, there was a $2.9 million decrease in net gains on sale of bank owned buildings between the first nine months of 2020 and the first nine months of 2019. Service charges on deposit accounts decreased by $2.5 million from the first nine months of 2019. This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately $1.2 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. Swap fee income increased $3.0 million compared to the third quarter of 2019, due to higher volume of swap transactions. The $729,000 increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first nine months of 2020. The $1.2 million decrease in other income in the first nine months of 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the same period of 2019.
Income Taxes
Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Adoption of Allowance for Credit Losses
We adopted ASU
2016-13,
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU
2016-13,
resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements.
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Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020
Standard
Description
Adoption Timing
Impact on Financial Statements
ASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Issued March 2020
The FASB issued ASU
2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a
one-time
election for the sale or transfer of debt securities classified as
held-to-maturity.
This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.
1st Quarter 2020 through the 4th Quarter 2022
Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s effectiveconsolidated financial statements.
ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
Issued January 2020
The FASB issued ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.
1st Quarter 2021
The adoption of this ASU will not have an impact on our consolidated financial statements.
ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
Issued August 2020
The FASB issued ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.
1st Quarter 2022
The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
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Table of Contents
OVERVIEW
For the third quarter of 2020, we reported net earnings of $47.5 million, compared with $41.6 million for the second quarter of 2020 and $50.4 million for the third quarter of 2019. Diluted earnings per share were $0.35 for the third quarter, compared to $0.31 for the prior quarter and $0.36 for the same period last year.
No provision for credit losses was recorded for the third quarter of 2020. The Company’s economic forecast of macro-economic variables was generally consistent with the forecast at the end of the second quarter. A $23.5 million provision for credit losses was recorded in the first half of 2020, due to the economic disruption and forecasted impact resulting from
COVID-19.
In comparison to the prior year, a $1.5 million loan loss provision was incurred for the third quarter of 2019. During the third quarter of 2020, we experienced minimal credit charge-offs of $231,000 and total recoveries of $117,000, resulting in net charge-offs of $114,000. During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at September 30, 2020. Interest and fee income from PPP loans increased from approximately $8.5 million in the second quarter of 2020, to $9.5 million in the third quarter of 2020.
At September 30, 2020, total assets of $13.82 billion increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $12.59 billion at September 30, 2020 increased $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.31 billion increase in interest-earning balances due from the Federal Reserve, an $843.3 million increase in total loans, and a $368.6 million increase in investment securities. Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.
Total investment securities were $2.78 billion at September 30, 2020, an increase of $368.6 million, or 15.27%, from $2.41 billion at December 31, 2019. At September 30, 2020, investment securities
held-to-maturity
(“HTM”) totaled $577.7 million. At September 30, 2020, investment securities
available-for-sale
(“AFS”) totaled $2.21 billion, inclusive of a net
pre-tax
unrealized gain of $55.3 million, an increase of $33.4 million from December 31, 2019. HTM securities declined by $96.8 million, or 14.35%, and AFS securities increased by $465.4 million, or 26.74%, from December 31, 2019. Our tax equivalent yield on investments was 1.99% for the quarter ended September 30, 2020, compared to 2.22% for the second quarter of 2020 and 2.47% for the third quarter of 2019.
Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%. The $126.9 million decrease in loans included decreases of $118.1 million in commercial and industrial loans, $27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million. Our yield on loans was 4.47% for the quarter ended September 30, 2020, compared to 4.77% for the second quarter of 2020 and 5.23% for the third quarter of 2019. This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans. Interest income for yield adjustments related to discount accretion on acquired loans was $4.2 million for the quarter ended September 30, 2020, compared to $4.1 million for the second quarter of 2020 and $7.2 million for the third quarter of 2019.
Noninterest-bearing deposits were $6.92 billion at September 30, 2020, an increase of $1.67 billion, or 31.91%, when compared to December 31, 2019. The significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. At September 30, 2020, noninterest-bearing deposits were 61.95% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.21% for the third quarter of 2019.
Customer repurchase agreements totaled $483.4 million at September 30, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.22% for the third quarter of 2019.
At September 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and September 30, 2019. At September 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.11% for the quarter ended September 30, 2020, 0.13% for the second quarter of 2020, and 0.23% for the third quarter of 2019.
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Table of Contents
The allowance for credit losses totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted to result from the
COVID-19
pandemic. At September 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of September 30, 2020, total discounts on acquired loans were $35.2 million.
The Company’s total equity was $1.98 billion at September 30, 2020. This represented a decrease of $12.1 million, or 0.61%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our
10b5-1
stock repurchase program, and $73.3 million in cash dividends, offset by net earnings of $127.1 million and a $23.5 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our
available-for-sale
investment securities portfolio. Our tangible common equity ratio was 9.8% at September 30, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of September 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 9.88%, our common equity Tier 1 ratio totaled 14.60%, our Tier 1 risk-based capital ratio totaled 14.89%, and our total risk-based capital ratio totaled 16.08%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our
Analysis of Financial Condition – Capital Resources
.
41
Table of Contents
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
   
Three Months Ended
 
Variance
 
   
September 30,
 
June 30,
   
   
2020
 
2020
 
$
   
%
   
(Dollars in thousands, except per share amounts)
Net interest income
    $    103,325    $104,569    $(1,244)     -1.19% 
Provision for credit losses
   -         (11,500)   11,500      100.00% 
Noninterest income
   13,153   12,152   1,001      8.24% 
Noninterest expense
   (49,588)   (46,398)   (3,190)     -6.88% 
Income taxes
   (19,398)   (17,192)   (2,206)     -12.83% 
  
 
 
 
 
 
 
 
 
 
 
   
Net earnings
    $47,492    $41,631    $5,861      14.08% 
  
 
 
 
 
 
 
 
 
 
 
   
Earnings per common share:
      
Basic
    $0.35    $0.31    $0.04     
Diluted
    $0.35    $0.31    $0.04     
Return on average assets
   1.38%   1.33%   0.05%     
Return on average shareholders’ equity
   9.51%   8.51%   1.00%     
Efficiency ratio
   42.57%   39.75%   2.82%     
Noninterest expense to average assets
   1.44%   1.48%   -0.04%     
  
Three Months Ended
     
Nine Months Ended
   
  
September 30,
  
Variance
  
September 30,
  
Variance
  
2020
 
2019
  
$
 
%
  
2020
  
2019
  
$
 
%
  
(Dollars in thousands, except per share amounts)
Net interest income
   $103,325    $108,159       $(4,834)    -4.47%       $310,200       $328,752       $(18,552)    -5.64% 
Provision for credit losses
  -         (1,500)     1,500     100.00%      (23,500)     (5,000)     (18,500)    -370.00% 
Noninterest income
  13,153   11,894      1,259     10.59%      36,945      46,402      (9,457)    -20.38% 
Noninterest expense
  (49,588)   (47,535)     (2,053)    -4.32%      (144,627)     (149,667)     5,040     3.37% 
Income taxes
  (19,398)   (20,595)     1,197     5.81%      (51,915)     (63,941)     12,026     18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Net earnings
   $47,492    $50,423       $(2,931)    -5.81%       $127,103       $156,546       $(29,443)    -18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Earnings per common share:
               
Basic
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Diluted
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Return on average assets
  1.38%   1.78%      -0.40%       1.35%      1.86%      -0.51%    
Return on average shareholders’ equity
  9.51%   10.18%      -0.67%       8.55%      10.89%      -2.34%    
Efficiency ratio
  42.57%   39.60%      2.97%       41.66%      39.89%      1.77%    
Noninterest expense to average assets
  1.44%   1.68%      -0.24%       1.54%      1.77%      -0.23%    
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Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
   
Three Months Ended
  
Nine Months Ended
 
   
September 30,
  
June 30,
  
September 30,
  
September 30,
  
September 30,
 
   
2020
  
2020
  
2019
  
2020
  
2019
 
   
(Dollars in thousands)
 
Net Income
    $47,492      $41,631      $50,423      $127,103      $156,546   
Add: Amortization of intangible assets
   2,292     2,445     2,648     7,182     8,338   
Less: Tax effect of amortization of intangible assets (1)
   (678)    (723)    (783)    (2,123)    (2,465)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Tangible net income
    $49,106      $43,353      $52,288      $132,162      $162,419   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average stockholders’ equity
    $1,985,842    $1,966,600      $1,965,427      $1,986,300      $1,921,981   
Less: Average goodwill
   (663,707)    (663,707)    (663,707)    (663,707)    (665,470)  
Less: Average intangible assets
   (37,133)    (39,287)    (46,720)    (39,376)    (49,682)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average tangible common equity
    $1,285,002      $1,263,606      $1,255,000      $1,283,217      $1,206,829   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Return on average equity, annualized
   9.51%   8.51%   10.18%   8.55%   10.89% 
Return on average tangible common equity, annualized
   15.20%   13.80%   16.53%   13.76%   17.99% 
(1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended September 30, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
43
Table of Contents
The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
   
Three Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,970,636     $8,244    1.82%     $1,505,087     $8,949    2.38% 
Tax-advantaged
   36,193    203    3.26%    40,189    273    3.75% 
Held-to-maturity
securities:
            
Taxable
   429,897    2,265    2.11%    506,203    2,883    2.28% 
Tax-advantaged
   164,854    1,110    3.26%    205,996    1,415    3.32% 
Investment in FHLB stock
   17,688    215    4.84%    17,688    301    6.75% 
Interest-earning deposits with other institutions
   1,494,149    389    0.10%    174,119    946    2.16% 
Loans (2)
   8,382,257    94,200    4.47%    7,495,289    98,796    5.23% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   12,495,674    106,626    3.45%    9,944,571    113,563    4.55% 
Total noninterest-earning assets
   1,231,502        1,269,845     
  
 
 
       
 
 
     
Total assets
    $13,727,176         $11,214,416     
  
 
 
       
 
 
     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
    $3,735,204    2,010    0.21%     $2,991,330    3,501    0.46% 
Time deposits
   449,484    948    0.84%    473,347    1,088    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   4,184,688    2,958    0.28%    3,464,677    4,589    0.53% 
FHLB advances, other borrowings, and customer repurchase agreements
   539,833    343    0.25%    446,087    815    0.72% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,724,521    3,301    0.28%    3,910,764    5,404    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,731,711        5,227,595     
Other liabilities
   285,102        110,630     
Stockholders’ equity
   1,985,842        1,965,427     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  13,727,176         $  11,214,416     
  
 
 
       
 
 
     
Net interest income
      $    103,325         $108,159   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.17%        4.00% 
Net interest margin
       3.33%        4.32% 
Net interest margin - tax equivalent
       3.34%        4.34% 
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 2019 was 29.00%, compared to 28.00%2020 and 2019. The non TE rates were 1.93% and 2.40% for the same periodsthree months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of 2018. The increase was due to higher$7.4 million and $782,000 for the three months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of $1.8 million and $1.0 million are included in interest income growth from
non-tax
advantaged revenue sources. Our estimated annual effective tax rate also varies depending uponfor the level of
tax-advantaged
income as well as available tax credits.
The Company’s effective tax rates are below the nominal combined Federalthree months ended September 30, 2020 and State tax rate primarily as a result of2019, respectively.
(3)
tax-advantaged
income from certain municipal security investments, municipal loans
Includes interest-bearing demand and leases and BOLI, as well as available tax credits for each period. money market accounts.
44
Table of Contents
   
Nine Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,737,723     $26,313    2.08%     $1,582,902     $29,079    2.45% 
Tax-advantaged
   36,897    632    3.30%    42,746    906    3.87% 
Held-to-maturity
securities:
            
Taxable
   449,230    7,410    2.20%    509,247    8,725    2.29% 
Tax-advantaged
   177,364    3,623    3.29%    216,343    4,524    3.37% 
Investment in FHLB stock
   17,688    761    5.75%    17,688    931    7.04% 
Interest-earning deposits with other institutions
   947,211    1,285    0.18%    70,848    1,140    2.15% 
Loans (2)
   7,972,208    281,669    4.72%    7,571,502    300,326    5.30% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   11,338,321    321,693    3.82%    10,011,276    345,631    4.63% 
            
Total noninterest-earning assets
   1,237,241        1,269,160     
  
 
 
       
 
 
     
Total assets
    $12,575,562         $11,280,436     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
  $3,396,259    7,131    0.28%   $3,047,444    9,159    0.40% 
Time deposits
   448,615    2,946    0.88%    497,370    3,394    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   3,844,874    10,077    0.35%    3,544,814    12,553    0.47% 
FHLB advances, other borrowings, and customer repurchase agreements
   505,710    1,416    0.37%    573,633    4,326    1.00% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,350,584    11,493    0.35%    4,118,447    16,879    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,063,469        5,136,233     
Other liabilities
   175,209        103,775     
Stockholders’ equity
   1,986,300        1,921,981     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  12,575,562         $  11,280,436     
  
 
 
       
 
 
     
Net interest income
      $    310,200         $328,752   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.47%        4.08% 
Net interest margin
       3.67%        4.39% 
Net interest margin - tax equivalent
       3.68%        4.41% 
 
52
 
(1)
TableIncludes tax equivalent (TE) adjustments utilizing federal statutory rates of Contents
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $11.33 billion at September 30, 2019. This represented a decrease of $196.4 million, or 1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $10.01 billion at September 30, 2019 decreased $281.0 million, or 2.73%, when compared with $10.29 billion at December 31, 2018. The decrease21% in interest-earning assets was primarily due to a $270.2 million decrease in total loans and a $204.2 million decrease in investment securities, partially offset by a $195.4 million increase in interest-earning balances due from the Federal Reserve. The decrease in total loans included an $89.2 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans declined by $181.9 million, or 2.45%. Total liabilities were $9.37 billion at September 30, 2019, a decrease of $312.1 million, or 3.22%, from total liabilities of $9.68 billion at December 31, 2018. Total deposits declined by $33.2 million, or 0.38%. Total equity increased $115.7 million, or 6.25%, to $1.97 billion at September 30, 2019, compared to total equity of $1.85 billion at December 31, 2018. The $115.7 million increase in equity was due to $156.5 million in net earnings, a $30.4 million increase in other comprehensive income, net of tax, resulting from the net increase in market value of our investment securities portfolio, and $4.5 millioneffect for various stock based compensation items. This was offset by $75.7 million in cash dividends declared during the first nine months of 2019.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At September 30, 2019, we reported total investment securities of $2.27 billion. This represented a decrease of $204.2 million, or 8.24%, from total investment securities of $2.48 billion at December 31, 2018. The decrease in investment securities was due to cash outflow from the portfolio, partially offset by reinvesting activity during the first nine months of 2019. At September 30, 2019, investment securities HTM totaled $704.0 million. At September 30, 2019, our AFS investment securities totaled $1.57 billion, inclusive of a
pre-tax
unrealized gain of $21.0 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $14.8 million.
As of September 30, 2019, the Company had a
pre-tax
net unrealized holding gain on AFS investment securities of $21.0 million, compared to a
pre-tax
net unrealized holding loss of $23.6 million at December 31, 2018. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the nine months ended September 30, 20192020 and 2018, repayments/maturities of investment securities totaled $355.8 million2019. The non TE rates were 2.16% and $385.0 million, respectively. The Company purchased additional investment securities totaling $268.3 million and $98.7 million2.45% for the first nine months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of $15.3 million and 2018, respectively. During$2.3 million for the first nine months of 2019, we sold 14 investment securities at book value of approximately $152.6 million. At the close of the merger in the third quarter of 2018, we liquidated the entire investment security portfolio of $717.0 million acquired from CB. No other investment securities were sold during the first nine months ended September 30, 2018.2020 and 2019, respectively. Prepayment penalty fees of $5.4 million and $3.4 million are included in interest income for the nine months ended September 30, 2020 and 2019, respectively.
(3)
The tables below set forth investment securities AFSIncludes interest-bearing demand and HTM as of the dates presented.money market accounts.
                     
 
September 30, 2019
 
  Amortized  
Cost
 
Gross
  Unrealized  
Holding
Gain
 
Gross
  Unrealized  
Holding
Loss
 
  Fair Value  
 
 Total Percent 
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
               
Residential mortgage-backed securities
   $
1,127,395
    $
20,105
    $
(1,341)
    $
1,146,159
   
72.99%
 
CMO/REMIC - residential
  
381,615
   
1,649
   
(336)
   
382,928
   
24.38%
 
Municipal bonds
  
39,564
   
924
   
(1)
   
40,487
   
2.58%
 
Other securities
  
832
   
-
   
- 
   
832
   
0.05%
 
                     
Total
available-for-sale
securities
   $
   1,549,406
    $
22,678
    $
(1,678)
    $
1,570,406
   
100.00%
 
                     
Investment securities
held-to-maturity:
               
Government agency/GSE
   $
123,917
    $
3,238
    $
(170)
    $
126,985
   
17.60%
 
Residential mortgage-backed securities
  
172,919
   
2,624
   
(3)
   
175,540
   
24.56%
 
CMO
  
204,263
   
76
   
(1,467)
   
202,872
   
29.02%
 
Municipal bonds
  
202,854
   
4,198
   
(558)
   
206,494
   
28.82%
 
                     
Total
held-to-maturity
securities
   $
703,953
    $
         10,136
    $
(2,198)
    $
711,891
   
100.00%
 
                     
53
45
Table of Contents
The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
   
Comparison of Three Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,835    $(2,108)    $(432)    $(705) 
Tax-advantaged
investment securities
   (24)   (42)   (4)   (70) 
Held-to-maturity
securities:
     
Taxable investment securities
   (395)   (194)   (29)   (618) 
Tax-advantaged
investment securities
   (273)   (27)   (5)   (305) 
Investment in FHLB stock
   -   (86)   -   (86) 
Interest-earning deposits with other institutions
   7,184   (902)   (6,839)   (557) 
Loans
   12,369   (15,170)   (1,795)   (4,596) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   20,696   (18,529)   (9,104)   (6,937) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   874   (1,894)   (471)   (1,491) 
Time deposits
   (53)   (83)   (4)   (140) 
FHLB advances, other borrowings, and customer repurchase agreements
   172   (532)   (112)   (472) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   993   (2,509)   (587)   (2,103) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $19,703    $(16,020)    $(8,517)    $(4,834) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Comparision of Nine Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,861    $(4,349)    $(278)    $(2,766) 
Tax-advantaged
investment securities
   (124)   (174)   24   (274) 
Held-to-maturity
securities:
     
Taxable investment securities
   (1,015)   (339)   39   (1,315) 
Tax-advantaged
investment securities
   (815)   (105)   19   (901) 
Investment in FHLB stock
   -   (170)   -   (170) 
Interest-earning deposits with other institutions
   14,238   (1,054)   (13,039)   145 
Loans
   15,682   (32,613)   (1,726)   (18,657) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   29,827   (38,804)   (14,961)   (23,938) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   1,045   (2,758)   (315)   (2,028) 
Time deposits
   (331)   (130)   13   (448) 
FHLB advances, other borrowings, and customer repurchase agreements
   (513)   (2,719)   322   (2,910) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   201   (5,607)   20   (5,386) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $29,626    $(33,197)    $(14,981)    $(18,552) 
  
 
 
  
 
 
  
 
 
  
 
 
 
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Table of Contents
Third Quarter of 2020 Compared to the Third Quarter of 2019
Net interest income, before provision for credit losses, of $103.3 million for the third quarter of 2020 decreased $4.8 million, or 4.47%, compared to $108.2 million for the third quarter of 2019. Interest-earning assets increased on average by $2.55 billion, or 25.65%, from $9.94 billion for the third quarter of 2019 to $12.50 billion for the third quarter of 2020. Our net interest margin (TE) was 3.34% for the third quarter of 2020, compared to 4.34% for the third quarter of 2019.
Interest income for the third quarter of 2020 was $106.6 million, which represented a $6.9 million, or 6.11%, decrease when compared to the same period of 2019. Average interest-earning assets increased to $12.50 billion and the average interest-earning asset yield of 3.45%, compared to 4.55% for the third quarter of 2019. The 110 basis point decrease in the interest-earning asset yield over the third quarter of 2019 was primarily due to a combination of a 76 basis point decrease in loan yields, a 48 basis point decrease in investment yields and a change in mix of earning assets with average balances at the Federal Reserve growing to 11.62% of earning assets for the third quarter of 2020, compared to 1.69% for the third quarter of 2019. The increase in balances at the Federal Reserve resulted from $2.22 billion in average deposit growth during the third quarter of 2020.
Interest income and fees on loans for the third quarter of 2020 of $94.2 million decreased $4.6 million, or 4.65%, when compared to the third quarter of 2019. Average loans increased $887.0 million for the third quarter of 2020 when compared with the same period of 2019, primarily due to $1.10 billion in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in the recognition of approximately $9.5 million in loan interest and fee income in the third quarter of 2020. Discount accretion on acquired loans decreased by $2.9 million compared to the third quarter of 2019. The Federal Reserve lowered short-term interest rates by 175 basis points when compared to the end of the third quarter of 2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 44 basis points from the third quarter of 2019.
Interest income from investment securities was $11.8 million for the third quarter of 2020, a $1.7 million, or 12.56%, decrease from $13.5 million for the third quarter of 2019. This decrease was primarily the result of a 47 basis point decline in the non
tax-equivalent
yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities. Partially offsetting the decline from lower rates was a $344.1 million increase in average investment securities for the third quarter of 2020, compared to the same period of 2019.
Interest expense of $3.3 million for the third quarter of 2020, decreased $2.1 million, or 38.92%, compared to the third quarter of 2019. The average rate paid on interest-bearing liabilities declined to 0.28% for the third quarter of 2020 from 0.55% for the third quarter of 2019. On average, noninterest-bearing deposits were 61.67% of our total deposits for the third quarter of 2020, compared to 60.14% for the third quarter of 2019. In comparison to the third quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.50 billion. Average interest-bearing deposits increased by $720.0 million compared to the third quarter of 2019, while the cost of interest-bearing deposits decreased by 25 basis points.    
Nine Months of 2020 Compared to the Nine Months of 2019
Net interest income, before provision for credit losses, was $310.2 million for the nine months ended September 30, 2020, a decrease of $18.6 million, or 5.64%, compared to $328.8 million for the same period of 2019. Interest-earning assets increased on average by $1.33 billion, or 13.26%, from $10.01 billion for the nine months ended September 30, 2019 to $11.34 billion for the current year. Our net interest margin (TE) was 3.68% during the first nine months of 2020, compared to 4.41% for the same period of 2019.
Interest income for the nine months ended September 30, 2020 was $321.7 million, which represented a $23.9 million, or 6.93%, decrease when compared to the same period of 2019. Compared to the first nine months of 2019, average interest-earning assets increased by $1.33 billion primarily due to PPP loans, and the yield on interest-earning assets decreased by 81 basis points. The 81 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 58 basis point decrease in loan yields from 5.30% for first nine months of 2019 to 4.72% for the same period of 2020, and a 31 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from an $852.6 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 75.63% for the first nine months of 2019 to 70.31% for the first nine months of 2020. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.64% in the prior year to 8.09% for the first nine months of 2020.
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Table of Contents
Interest income and fees on loans for the first nine months of 2020 of $281.7 million decreased $18.7 million, or 6.21%, when compared to the same period of 2019. Average loans increased $400.7 million for the first nine months of 2020 when compared with the same period of 2019, primarily due to $591.4 million in average PPP loans. The PPP loans we originated resulted in approximately $13.5 million in fee income and $4.5 million in loan interest during the first nine months of 2020. The first nine months of 2020 reflected a $9.3 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019. Loan yields decreased by 58 basis points from the prior nine month period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 33 basis points lower than the first nine months of 2019. This decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.
Interest income from investment securities was $38.0 million for the nine months ended September 30, 2020, a $5.3 million decrease from $43.2 million for the first nine months of 2019. This decrease was the net result of a 29 basis point decline in the non
tax-equivalent
yield on securities, compared to the first nine months of 2019, partially offset by a $50.0 million increase in the average investment securities for the first nine months of 2020.
Interest expense of $11.5 million for the nine months ended September 30, 2020, decreased by $5.4 million from the same period of 2019. The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.35% for the first nine months of 2020, from 0.55% for the same period of 2019. The rate on interest-bearing deposits for the first nine months of 2020 decreased by 12 basis points from the same period in 2019. Average interest-bearing liabilities were $232.1 million higher for the first nine months of 2020 when compared with the same period of 2019. Average interest-bearing deposits grew by $300.1 million when compared to the first nine months of 2019. Average noninterest-bearing deposits represented 61.20% of our total deposits for the nine months ended September 30, 2020, compared to 59.17% for the same period of 2019. Total cost of funds for the first nine months of 2020 was 0.15%, compared with 0.24% for the same period of 2019.
Provision for Credit Losses
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU
2016-13,
commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan.
The allowance for credit losses on loans totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019 and $68.7 million as of September 30, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted as a result of the
COVID-19
pandemic. For the nine months ended September 30, 2020, we experienced minimal credit charge-offs of $484,000 and total recoveries of $353,000, resulting in net charge-offs of $131,000. This compares to a $5.0 million loan loss provision and net recoveries of $59,000 for the same period of 2019. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2020, was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% and 0.92%, as of December 31, 2019 and September 30, 2019, respectively. As of September 30, 2020, remaining discounts on acquired loans were $35.2 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the
COVID-19
pandemic. See “Allowance for Credit Losses” under
Analysis of Financial Condition
herein.
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Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
  
Three Months Ended
September 30,
  
Variance
  
Nine Months Ended
September 30,
  
Variance
 
  
2020
  
2019
  
$
  
%
  
2020
  
2019
  
$
  
%
 
           
(Dollars in thousands)
          
Noninterest income:
        
Service charges on deposit accounts
   $3,970    $4,833    $(863)   -17.86%    $12,555    $15,039    $(2,484)   -16.52% 
Trust and investment services
  2,405   2,330   75   3.22%   7,302   6,964   338   4.85% 
Bankcard services
  456   637   (181)   -28.41%   1,438   2,614   (1,176)   -44.99% 
BOLI income
  1,469   1,797   (328)   -18.25%   5,211   4,482   729   16.27% 
Swap fee income
  1,591   378   1,213   320.90%   4,149   1,135   3,014   265.55% 
Gain on OREO, net
  13   -   13   -   23   129   (106)   -82.17% 
Gain on sale of building, net
  1,680   -   1,680   -   1,680   4,545   (2,865)   -63.04% 
Gain on eminent domain condemnation, net
  -   -   -   -   -   5,685   (5,685)   -100.00% 
Other
  1,569   1,919   (350)   -18.24%   4,587   5,809   (1,222)   -21.04% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total noninterest income
   $13,153    $11,894    $1,259         10.59%    $36,945    $46,402    $(9,457)         -20.38% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Third Quarter of 2020 Compared to the Third Quarter of 2019
The $1.3 million increase in noninterest income was primarily due to a $1.7 million net gain on the sale of one of our bank owned buildings, related to a banking center that was closed in September in the third quarter of 2020.
The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 –
Derivative Financial Instruments
of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The third quarter of 2020 included higher swap fee income of $1.2 million compared to the third quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020, compared to $19.0 million for the third quarter of 2019.
Service charges on deposit accounts decreased by $863,000 from the third quarter of 2019. This decrease was primarily due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At September 30, 2020, CitizensTrust had approximately $2.91 billion in assets under management and administration, including $2.08 billion in assets under management. CitizensTrust generated fees of $2.4 million for the third quarter of 2020, compared to $2.3 million for the third quarter of 2019.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from BOLI declined by $328,000 compared to the third quarter of 2019.
49
Table of Contents
Nine Months of 2020 Compared to the Nine Months of 2019
The $9.5 million decrease in noninterest income for the nine months ended September 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield during the first nine month of 2019. In addition, there was a $2.9 million decrease in net gains on sale of bank owned buildings between the first nine months of 2020 and the first nine months of 2019. Service charges on deposit accounts decreased by $2.5 million from the first nine months of 2019. This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately $1.2 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. Swap fee income increased $3.0 million compared to the third quarter of 2019, due to higher volume of swap transactions. The $729,000 increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first nine months of 2020. The $1.2 million decrease in other income in the first nine months of 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the same period of 2019.
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
   
  Three Months Ended  
           
  Nine Months Ended  
         
   
September 30,
   
Variance
   
September 30,
   
Variance
 
   
2020
   
2019
   
$
   
%
   
2020
   
2019
   
$
   
%
 
               
(Dollars in thousands)
             
Noninterest expense:
                
Salaries and employee benefits
    $31,034     $30,122     $912    3.03%     $90,617     $88,286     $2,331    2.64%  
Occupancy
   4,290    3,976    314    7.90%    12,171    12,771    (600)    -4.70%  
Equipment
   985    903    82    9.08%    2,972    2,959    13    0.44%  
Professional services
   2,019    1,688    331    19.61%    6,643    5,653    990    17.51%  
Computer software expense
   2,837    2,663    174    6.53%    8,407    8,032    375    4.67%  
Marketing and promotion
   728    1,517    (789)    -52.01%    3,538    4,149    (611)    -14.73%  
Amortization of intangible assets
   2,292    2,648    (356)    -13.44%    7,182    8,338    (1,156)    -13.86%  
Telecommunications expense
   643    656    (13)    -1.98%    1,929    2,126    (197)    -9.27%  
Regulatory assessments
   998    147    851    578.91%    1,313    1,805    (492)    -27.26%  
Insurance
   400    430    (30)    -6.98%    1,192    1,368    (176)    -12.87%  
Loan expense
   207    308    (101)    -32.79%    833    1,115    (282)    -25.29%  
OREO expense
   830    -    830    -    1,200    37    1,163    3143.24%  
Directors’ expenses
   358    350    8    2.29%    1,067    1,029    38    3.69%  
Stationery and supplies
   227    259    (32)    -12.36%    894    867    27    3.11%  
Acquisition related expenses
   -    244    (244)    -100.00%    -    6,005    (6,005)    -100.00%  
Other
   1,740    1,624    116    7.14%    4,669    5,127    (458)    -8.93%  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total noninterest expense
    $49,588     $47,535     $2,053    4.32%     $144,627     $149,667     $(5,040)    -3.37%  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Noninterest expense to average assets
   1.44%    1.68%        1.54%    1.77%     
Efficiency ratio (1)
   42.57%    39.60%        41.66%    39.89%     
 
(1)
Table of Contents
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.
                     
 
December 31, 2018
 
  Amortized  
Cost
 
Gross
  Unrealized  
Holding
Gain
 
Gross
  Unrealized  
Holding
Loss
 
  Fair Value  
 
 Total Percent 
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
               
Residential mortgage-backed securities
 $
  1,494,106
  $
  1,348
    $
(20,946)
    $
1,474,508
   
85.03%
 
CMO/REMIC - residential
  
217,223
   
353
   
(3,525)
   
214,051
   
12.34%
 
Municipal bonds
  
45,621
   
332
   
(1,143)
   
44,810
   
2.59%
 
Other securities
  
716
   
-
   
- 
   
716
   
0.04%
 
                     
Total
available-for-sale
securities
 $
  1,757,666
  $
  2,033
    $
(25,614)
    $
1,734,085
   
100.00%
 
                     
Investment securities
held-to-maturity:
               
Government agency/GSE
 $
  138,274
  $
  572
    $
(2,622)
    $
136,224
   
18.57%
 
Residential mortgage-backed securities
  
153,874
   
-
   
(3,140)
   
150,734
   
20.67%
 
CMO
  
215,336
   
-
   
(12,081)
   
203,255
   
28.93%
 
Municipal bonds
  
236,956
   
556
   
(6,188)
   
231,324
   
31.83%
 
                     
Total
held-to-maturity
securities
 $
  744,440
  $
  1,128
    $
(24,031)
    $
721,537
   
100.00%
 
                     
The weighted-average yield (TE) on the total investment portfolio at September 30, 2019 was 2.56% with a weighted-average life of 3.6 years. This compares to a weighted-average yield of 2.55% at December 31, 2018 with a weighted-average life of 4.3 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
pay-downs.
Approximately 89% of the securities in the total investment portfolio, at September 30, 2019, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of September 30, 2019, approximately $80.2 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 11% of the total investment portfolio, are predominately AA or higher rated securities.
54
Table of Contents
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be other-than-temporarily-impaired (“OTTI”). A summary of our analysis of these securities and the unrealized losses is described more fully in Note 5 —
Investment Securities
of the notes to the unaudited condensed consolidated financial statements. Economic trends or market interest rates may adversely affect the value of the portfolio of investment securities that we hold.
                         
 
September 30, 2019
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
                  
Residential mortgage-backed securities
   $
2
    $
-
    $
127,904
    $
(1,341
)   $
127,906
    $
(1,341
)
CMO/REMIC - residential
  
122,595
   
(156
)  
39,498
   
(180
)  
162,093
   
(336
)
Municipal bonds
  
-
   
-
   
564
   
(1
)  
564
   
(1
)
                         
Total
available-for-sale
securities
   $
122,597
    $
(156
)   $
167,966
    $
(1,522
)   $
290,563
    $
(1,678
)
                         
Investment securities
held-to-maturity:
                  
Government agency/GSE
   $
-
    $
-
    $
19,923
    $
(170
)   $
19,923
    $
(170
)
Residential mortgage-backed securities
  
5,021
   
(3
)  
-
   
-
   
5,021
   
(3
)
CMO
  
-
   
-
   
178,297
   
(1,467
)  
178,297
   
(1,467
)
Municipal bonds
  
3,037
   
(5
)  
32,217
   
(553
)  
35,254
   
(558
)
                         
Total
held-to-maturity
securities
   $
8,058
    $
(8
)   $
230,437
    $
(2,190
)   $
238,495
    $
(2,198
)
                         
   
 
December 31, 2018
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
   
(Dollars in thousands)
   
Investment securities
available-for-sale:
                  
Residential mortgage-backed securities
   $
692,311
    $
(4,864
)   $
593,367
    $
(16,082
)   $
1,285,678
    $
(20,946
)
CMO/REMIC - residential
  
36,582
   
(365
)  
135,062
   
(3,160
)  
171,644
   
(3,525
)
Municipal bonds
  
9,568
   
(188
)  
14,181
   
(955
)  
23,749
   
(1,143
)
                         
Total
available-for-sale
securities
   $
738,461
    $
(5,417
)   $
742,610
    $
(20,197
)   $
1,481,071
    $
(25,614
)
                         
Investment securities
held-to-maturity:
                  
Government agency/GSE
   $
7,479
  $
(15
)   $
54,944
    $
(2,607
)   $
62,423
    $
(2,622
)
Residential mortgage-backed securities
  
59,871
   
(484
)  
90,863
   
(2,656
)  
150,734
   
(3,140
)
CMO
  
-
   
-
   
203,254
   
(12,081
)  
203,254
   
(12,081
)
Municipal bonds
  
70,989
   
(778
)  
77,723
   
(5,410
)  
148,712
   
(6,188
)
                         
Total
held-to-maturity
securities
   $
138,339
    $
(1,277
)   $
426,784
    $
(22,754
)   $
565,123
    $
(24,031
)
                         
55
Loans
Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans
(“Non-PCI
loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018. At September 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at September 30, 2019 and December 31, 2018. Beginning with June 30, 2019, PCI loans were accounted for and combined with
Non-PCI
loans and were reflected in total loans and lease finance receivables.
Total loans and leases, net of deferred fees and discounts, of $7.49 billion at September 30, 2019 decreased by $270.2 million, or 3.48%, from December 31, 2018. The decrease in total loans included a $89.2 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. The decrease in total loans included declines of $81.1 million in commercial and industrial loans, $33.0 million in commercial real estate loans, $31.7 million in SBA loans, $18.0 million in SFR mortgage loans, and $11.5 million in consumer and other loans. The decline in these loan categories was generally the result of increased competition for new loan originations and higher levels of loan prepayments, including loans acquired from the recent CB merger.
Third Quarter of 2020 Compared to the Third Quarter of 2019
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.44% for the third quarter of 2020, compared to 1.68% for the third quarter of 2019. This decline mostly reflects the $2.51 billion growth in average assets that resulted primarily from $2.22 billion in average deposit growth.
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.57% for the third quarter of 2020, compared to 39.60% for the third quarter of 2019.
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Table of Contents
Noninterest expense of $49.6 million for the third quarter of 2020 was $2.1 million, or 4.32%, higher than the third quarter of 2019. There were no merger related expenses related to the Community Bank (“CB”) acquisition for the third quarter of 2020, compared to $244,000 for the third quarter of 2019. The $912,000 increase in salary expense from the prior year was primarily due to $1.1 million in additional bonus expense for “Thank You Awards” paid to all Bank employees during the third quarter of 2020. The third quarter of 2020 also reflected an $833,000 increase in regulatory assessments resulting from final application of assessment credits provided by the FDIC at the end of the second quarter of 2020 and a $700,000 write-down of one OREO property. These increases were partially offset by a $789,000 decrease in marketing and promotion expense.
Nine Months of 2020 Compared to the Nine Months of 2019
Noninterest expense of $144.6 million for the first nine months of 2020 was $5.0 million lower than the prior year period. The decrease was primarily due to $6.0 million in merger related expenses for the nine months ended September 30, 2019, compared to no merger related expense for the same period of 2020. The year-over-year decrease also included a $1.2 million decrease in amortization of CDI. These decreases were partially offset by a $2.3 million increase in salaries and benefit costs. Salary and benefit expense would have increased by $3.9 million, or approximately 4%, when a $1.6 million increase in net deferred loan costs, primarily related to the origination of PPP loans, is excluded for the nine months ended September 30, 2020. This $3.9 million increase was primarily due to $3.0 million, or 3.93%, in higher salaries, payroll taxes and benefits when compared to the prior year period. As a percentage of average assets, noninterest expense was 1.54% for the nine months ended September 30, 2020, compared to 1.77% for the same period of 2019. For the nine months ended September 30, 2020, the efficiency ratio was 41.66%, compared to 39.89% for the same period of 2019.
Income Taxes
The Company’s effective tax rate for the three and nine months ended September 30, 2020 was 29.00%, compared to 29.00% for the same periods of 2019. Our estimated annual effective tax rate varies depending upon the level of
tax-advantaged
income as well as available tax credits.
The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of
tax-advantaged
income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.
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Table of Contents
ANALYSIS OF FINANCIAL CONDITION
Total assets of $13.82 billion at September 30, 2020 increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $12.59 billion at September 30, 2020, an increase of $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.31 billion increase in interest-earning balances due from the Federal Reserve, an $843.3 million increase in total loans, and a $368.6 million increase in investment securities. The increase in total loans was due to the origination of approximately 4,100 PPP loans, totaling $1.10 billion at September 30, 2020. Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.
Total liabilities were $11.84 billion at September 30, 2020, an increase of $2.55 billion, or 27.44%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $2.46 billion, or 28.30%. This significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. Total equity decreased $12.1 million, or 0.61%, to $1.98 billion at September 30, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $12.1 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our
10b5-1
stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the Company’s outlook due to the uncertainty of the
COVID-19
pandemic. We had $127.1 million in net earnings during the first nine months of 2020, offset by $73.3 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $23.5 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our
available-for-sale
investment securities.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At September 30, 2020, total investment securities were $2.78 billion. This represented an increase of $368.6 million, or 15.27%, from total investment securities of $2.41 billion at December 31, 2019. The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first nine months of 2020. At September 30, 2020, investment securities HTM totaled $577.7 million. At September 30, 2020, our AFS investment securities totaled $2.21 billion, inclusive of a
pre-tax
net unrealized gain of $55.3 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $38.9 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the nine months ended September 30, 2020 and 2019, repayments/maturities of investment securities totaled $536.7 million and $355.8 million, respectively. The Company purchased additional investment securities totaling $882.1 million and $268.3 million for the nine months ended September 30, 2020 and 2019, respectively. There were no investment securities sold during the first nine months of 2020. During the first nine months of 2019, we sold 14 investment securities at book value of approximately $152.6 million. The average duration of our investment securities portfolio was approximately 2.7 years at September 30, 2020.
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The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
   
September 30, 2020
   
  Amortized  
Cost
  
Gross
  Unrealized  
Holding
Gain
  
Gross

  Unrealized  
Holding

Loss
  
  Fair Value  
  
 Total Percent 
   
(Dollars in thousands)
Investment securities
available-for-sale:
          
Mortgage-backed securities
    $1,710,160     $46,713     $(2)     $1,756,871    79.65% 
CMO/REMIC
   404,380    7,326    (212)    411,494    18.66% 
Municipal bonds
   35,011    1,457    -     36,468    1.65% 
Other securities
   813    -    -     813    0.04% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $2,150,364     $55,496     $(214)     $2,205,646    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
    $103,317     $6,627     $-      $109,944    17.88% 
Mortgage-backed securities
   152,285    7,837    -     160,122    26.36% 
CMO/REMIC
   159,676    5,315    -     164,991    27.64% 
Municipal bonds
   162,416    6,387    (338)    168,465    28.12% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
held-to-maturity
securities
    $577,694     $26,166     $(338)     $603,522    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
   
December 31, 2019
   
  Amortized  
Cost
  
Gross
  Unrealized  
Holding

Gain
  
Gross
  Unrealized  
Holding

Loss
  
  Fair Value  
  
 Total Percent 
   
(Dollars in thousands)
Investment securities
available-for-sale:
          
Mortgage-backed securities
    $1,185,757     $21,306     $(750)     $1,206,313    69.32% 
CMO/REMIC
   493,214    1,392    (896)    493,710    28.37% 
Municipal bonds
   38,506    850    (2)    39,354    2.26% 
Other securities
   880    -    -     880    0.05% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $  1,718,357     $23,548     $(1,648)     $1,740,257    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
    $117,366     $2,280     $(657)     $118,989    17.40% 
Mortgage-backed securities
   168,479    2,083    (54)    170,508    24.98% 
CMO/REMIC
   192,548    -    (2,458)    190,090    28.55% 
Municipal bonds
   196,059    3,867    (565)    199,361    29.07% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
held-to-maturity
securities
    $674,452     $8,230     $(3,734)     $678,948    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
As of September 30, 2020, approximately $66.7 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 7% of the total investment portfolio, are predominately AA or higher rated securities.
We adopted ASU
2016-13
on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
and
held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the third quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.
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Table of Contents
The following table presents the Company’s
available-for-sale
investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2020.
  
September 30, 2020
  
Less Than 12 Months
 
12 Months or Longer
 
Total
  
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
  
(Dollars in thousands)
Investment securities
available-for-sale:
      
Mortgage-backed securities
   $30,851    $(2)    $-    $    -    $30,851    $(2) 
CMO/REMIC
  71,781   (212)   -   -   71,781   (212) 
Municipal bonds
  -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $102,632    $(214)    $    -    $-    $102,632    $(214) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The table below presents the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019, prior to adoption of ASU
2016-13.
Management previously reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired.
  
December 31, 2019
 
  
Less Than 12 Months
  
12 Months or Longer
  
Total
 
  
  Fair Value  
  
Gross
  Unrealized  
Holding
Losses
  
  Fair Value  
  
Gross
  Unrealized  
Holding
Losses
  
  Fair Value  
  
Gross
  Unrealized  
Holding
Losses
 
  
(Dollars in thousands)
 
Investment securities
available-for-sale:
      
Mortgage-backed securities
   $20,289    $(6)    $97,964    $(744)    $118,253    $(750) 
CMO/REMIC
  177,517   (705)   34,565   (191)   212,082   (896) 
Municipal bonds
  -   -   563   (2)   563   (2) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
available-for-sale
securities
   $197,806    $(711)    $133,092    $(937)    $330,898    $(1,648) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment securities
held-to-maturity:
      
Government agency/GSE
   $28,359    $(252)    $19,405    $(405)    $47,764    $(657) 
Mortgage-backed securities
  10,411   (54)   -   -   10,411   (54) 
CMO/REMIC
  23,897   (104)   166,193   (2,354)   190,090   (2,458) 
Municipal bonds
  7,583   (32)   29,981   (533)   37,564   (565) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
held-to-maturity
securities
   $70,250    $(442)    $215,579    $(3,292)    $285,829    $(3,734) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Refer to Note 4 –
Investment Securities
of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio.
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Table of Contents
Loans
Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from $7.56 billion at December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%. The $126.9 million decrease in loans included decreases of $118.1 million in commercial and industrial loans, $27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million.
The following table presents our loan portfolio by type as of the dates presented.
Distribution of Loan Portfolio by Type
                 
 
    September 30, 2019    
 
  December 31, 2018  
 
Total Loans
and Leases
 
Non-PCI
 Loans
and Leases
 
PCI Loans
 
Total Loans
and Leases
 
  
(Dollars in thousands)
  
Commercial and industrial
   $
921,678
    $
1,002,209
    $
519
    $
1,002,728
 
SBA
  
319,571
   
350,043
   
1,258
   
351,301
 
Real estate:
            
Commercial real estate
  
5,375,668
   
5,394,229
   
14,407
   
5,408,636
 
Construction
  
119,931
   
122,782
   
-
   
122,782
 
SFR mortgage
  
278,644
   
296,504
   
145
   
296,649
 
Dairy & livestock and agribusiness
  
311,229
   
393,843
   
700
   
394,543
 
Municipal lease finance receivables
  
54,468
   
64,186
   
-
   
64,186
 
Consumer and other loans
  
117,128
   
128,429
   
185
   
128,614
 
                 
Gross loans
  
7,498,317
   
7,752,225
   
17,214
   
7,769,439
 
Less: Deferred loan fees, net
  
(3,866
)  
(4,828
)  
-
   
(4,828
)
                 
Gross loans, net of deferred loan fees
  
7,494,451
   
7,747,397
   
17,214
   
7,764,611
 
Less: Allowance for loan losses
  
(68,672
)  
(63,409
)  
(204
)  
(63,613
)
                 
Total loans and lease finance receivables
   $
7,425,779
    $
7,683,988
    $
17,010
    $
     7,700,998
 
                 
 
   
  September 30, 2020  
   
  December 31, 2019  
 
   
(Dollars in thousands)
 
Commercial and industrial
    $817,056     $935,127 
SBA
   304,987    305,008 
SBA - Paycheck Protection Program (PPP)
   1,101,142    - 
Real estate:
    
Commercial real estate
   5,428,223    5,374,617 
Construction
   101,903    116,925 
SFR mortgage
   274,731    283,468 
Dairy & livestock and agribusiness
   252,802    383,709 
Municipal lease finance receivables
   38,040    53,146 
Consumer and other loans
   88,988    116,319 
  
 
 
   
 
 
 
Total loans
   8,407,872    7,568,319 
Less: Deferred loan fees, net (1)
   -    (3,742) 
  
 
 
   
 
 
 
Total loans, net of deferred loan fees
   8,407,872    7,564,577 
Less: Allowance for credit losses
   (93,869)    (68,660) 
  
 
 
   
 
 
 
Total loans and lease finance receivables, net
    $8,314,003     $7,495,917 
  
 
 
   
 
 
 
 
(1)
Beginning with March 31, 2020, total loans are presented net of deferred loan fees by respective class of financing receivables.
As of September 30, 2019, $245.62020, 69.04% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 64.56% of total loans. As of September 30, 2020, $271.2 million, or 4.57%5.00% of the total commercial real estate loans included loans secured by farmland, compared to $231.0$241.8 million, or 4.27%4.50%, at December 31, 2018.2019. The loans secured by farmland included $130.4$121.1 million for loans secured by dairy & livestock land and $115.1$150.2 million for loans secured by agricultural land at September 30, 2019,2020, compared to $126.9$125.9 million for loans secured by dairy & livestock land and $104.1$115.9 million for loans secured by agricultural land at December 31, 2018.2019. As of September 30, 2019,2020, dairy & livestock and agribusiness loans of $311.2$252.8 million were comprised of $251.3$210.4 million for dairy & livestock loans and $60.0$42.4 million for agribusiness loans, compared to $340.5$323.5 million for dairy & livestock loans and $54.0$60.2 million for agribusiness loans at December 31, 2018.2019.
Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.
As of September 30, 2019,2020, the Company had $170.9$185.5 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first
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and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment representingof 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of September 30, 2019,2020, the Company had $148.7$119.5 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
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As an active participant in the SBA’s Paycheck Protection Program, we have originated approximately 4,100 PPP loans, totaling $1.10 billion as of September 30, 2020.
As of September 30, 2019,2020, the Company had $119.9$101.9 million in construction loans. This represents 1.60%1.21% of total gross loans
held-for-investment.
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at September 30, 2019.2020.
Our loan portfolio is from a variety of areasgeographically disbursed throughout our marketplace. The following is the breakdown of our total
held-for-investment
commercial real estate loans, by region as of September 30, 2019.2020.
                 
 
September 30, 2019
 
Total Loans
 
Commercial Real Estate
Loans
 
(Dollars in thousands)
Los Angeles County
   $
3,301,874
   
44.0%
    $
2,267,332
   
42.2%
 
Central Valley
  
1,112,079
   
14.8%
   
879,344
   
16.3%
 
Orange County
  
1,008,152
   
13.5%
   
665,360
   
12.4%
 
Inland Empire
  
976,892
   
13.0%
   
853,110
   
15.9%
 
Central Coast
  
420,226
   
5.6%
   
343,152
   
6.4%
 
San Diego
  
227,235
   
3.0%
   
129,115
   
2.4%
 
Other California
  
140,005
   
1.9%
   
70,640
   
1.3%
 
Out of State
  
311,854
   
4.2%
   
167,615
   
3.1%
 
                 
   $
       7,498,317
   
      100.0%
    $
     5,375,668
   
    100.0%
 
                 
 
   
September 30, 2020
   
Total Loans
 
Commercial Real Estate
Loans
   
(Dollars in thousands)
Los Angeles County
    $3,609,538    42.9%    $2,219,742    40.9% 
Central Valley
   1,316,422    15.7%   941,699    17.3% 
Orange County
   1,119,311    13.3%   666,886    12.3% 
Inland Empire
   1,183,026    14.1%   829,791    15.3% 
Central Coast
   523,297    6.2%   368,346    6.8% 
San Diego
   234,903    2.8%   144,973    2.7% 
Other California
   127,669    1.5%   83,544    1.5% 
Out of State
   293,706    3.5%   173,242    3.2% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
    $      8,407,872          100.0%    $      5,428,223        100.0% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
The table below breaks down our commercial real estate portfolio.
                 
 
September 30, 2019
 
  Loan Balance  
 
  Percent  
 
Percent
Owner-
    Occupied (1)    
 
Average
Loan
    Balance    
 
  
(Dollars in thousands)
  
Commercial real estate:
            
Industrial
   $
1,890,465
   
35.2%
   
54.6%
    $
1,430
 
Office
  
921,565
   
17.1%
   
26.9%
   
1,506
 
Retail
  
800,406
   
14.9%
   
13.1%
   
1,707
 
Multi-family
  
577,700
   
10.7%
   
0.5%
   
1,596
 
Medical
  
279,805
   
5.2%
   
45.3%
   
1,829
 
Secured by farmland (2)
  
245,574
   
4.6%
   
100.0%
   
2,030
 
                 
Other (3)
  
660,153
   
12.3%
   
50.7%
   
1,423
 
                 
Total commercial real estate
   $
         5,375,668
   
    100.0%
   
39.0%
   
1,535
 
                 
 
   
September 30, 2020
 
   
  Loan Balance  
   
  Percent  
   
Percent

Owner-
    Occupied (1)    
   
Average
    Loan Balance    
 
   
(Dollars in thousands)
 
Commercial real estate:
        
Industrial
    $1,842,412    33.9%    54.4%   $1,390 
Office
   992,216    18.3%    25.1%    1,603 
Retail
   771,125    14.2%    13.3%    1,673 
Multi-family
   608,374    11.2%    2.1%    1,662 
Medical
   300,867    5.6%    47.7%    1,791 
Secured by farmland (2)
   271,242    5.0%    97.4%    1,858 
Other (3)
   641,987    11.8%    54.7%    1,417 
  
 
 
   
 
 
     
Total commercial real estate
    $    5,428,223    100.0%    39.2%   $1,534 
  
 
 
   
 
 
     
 
 (1)
Represents percentage of reported owner-occupied at origination in each real estate loan category.
 (2)
The loans secured by farmland included $130.4$121.1 million for loans secured by dairy & livestock land and $115.1$150.2 million for loans secured by agricultural land at September 30, 2019.2020.
 (3)
Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans.loans at September 30, 2020.
 
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56
The pandemic has had a greater impact on certain industries, such a retail, hospitality, and entertainment.
At September 30, 2020, commercial real estate loans on retail properties comprised $771.1 million and approximately 9% of total loans; 1% of these loans are on deferment and $7 million of these loans are classified. At origination, these loans on retail properties were underwritten with
loan-to-values
averaging approximately 53%. Approximately 53% of these loans were originated prior to 2017. We also have $66.6 million of commercial real estate loans for hospitality properties, which is less than 1% of total loans; none of these loans are classified, but 16% of these loans are on deferment.
At September 30, 2020, commercial and industrial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $96 million in loans, or approximately 1% of total loans; $1.6 million of these loans are classified and $1.4 million are on deferment.
Nonperforming Assets
The following table provides information on nonperforming assets as of the dates presented.
         
 
    September 30, 2019    
  
  
December 31, 2018
 (1)  
 
 
(Dollars in thousands)
 
Nonaccrual loans
   $
6,363  
    $
16,442  
 
Troubled debt restructured loans (nonperforming)
  
249  
   
3,509  
 
OREO, net
  
9,450  
   
420  
 
         
Total nonperforming assets
   $
16,062  
    $
20,371  
 
         
Troubled debt restructured performing loans
   $
3,168  
    $
3,594  
 
         
Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO
  
0.21%
   
0.26%
 
Percentage of nonperforming assets to total assets
  
0.14%
   
0.18%
 
 
(1)Excludes PCI loans.
At September 30, 2019, loans classified as impaired totaled $9.8 million, or 0.13% of total gross loans, compared to $23.5 million, or 0.30% of total loans at December 31, 2018. At September 30, 2019, impaired loans resulting from troubled debt restructures represented $3.4 million, of which $249,000 were nonperforming and $3.2 million were performing.
Of the $9.8 million total impaired loans as of September 30, 2019, $6.9 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within one year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate was $2.9 million.
   
    September 30, 2020    
   
  December 31, 2019  
 
   
(Dollars in thousands)
 
Nonaccrual loans
    $11,775       $5,033   
Loans past due 90 days or more and still accruing interest
   -      -   
Nonperforming troubled debt restructured loans (TDRs)
   -      244   
  
 
 
   
 
 
 
Total nonperforming loans
   11,775      5,277   
OREO, net
   4,189      4,889   
  
 
 
   
 
 
 
Total nonperforming assets
    $15,964       $10,166   
  
 
 
   
 
 
 
Performing TDRs
    $2,217       $3,112   
  
 
 
   
 
 
 
Total nonperforming loans and performing TDRs
    $13,992       $8,389   
Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees
   0.17%    0.11% 
Percentage of nonperforming assets to total loans, net of deferred fees, and OREO
   0.19%    0.13% 
Percentage of nonperforming assets to total assets
   0.12%    0.09% 
Troubled Debt Restructurings (“TDRs”)
Total TDRs were $3.4$2.2 million at September 30, 2019,2020, compared to $7.1$3.4 million at December 31, 2018.2019. At September 30, 2019, we had $249,000 in nonperforming TDR loans and $3.2 million2020, all of performingour TDRs were performing and accruing interest as restructured loans. PerformingOur performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only impaired loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. We
In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans and enter into loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. As of October 9, 2020, we have not restructured loans into multipletemporary payment deferments of principal, interest or of principal and interest on 33 loans in what is typically referred to as an “A/B” note structure, where normally the “A” note meets current underwriting standardsamount of $68.6 million, or less than 1% of our total loan portfolio, at September 30, 2020. These deferments were primarily for 90 days, with 89% of these loans being pass rated; 27 of these loans have received a second deferment and the “B” note is typically immediately charged off upon restructuring.remaining six loans are first deferments. The majority of the loans with payment deferments were commercial real estate loans, which represented approximately $65.9 million of the $68.6 million.
 
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The following table provides a summary of TDRs as of the dates presented.
                 
 
September 30, 2019
 
December 31, 2018
 
Balance
 
Number of
Loans
 
Balance
 
Number of
Loans
 
  
(Dollars in thousands)
  
Performing TDRs:
            
Commercial and industrial
   $
88
   
2
    $
135
   
2
 
SBA
  
542
   
1
   
575
   
1
 
Real Estate:
            
Commercial real estate
  
417
   
1
   
472
   
1
 
Construction
  
-
   
-
   
-
   
-
 
SFR mortgage
  
2,121
   
8
   
2,412
   
9
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
-
 
Consumer and other
  
-
   
-
   
-
   
-
 
                 
Total performing TDRs
   $
     3,168
   
        12
    $
     3,594
   
        13
 
                 
                 
Nonperforming TDRs:
            
Commercial and industrial
   $
1
   
1
    $
21
   
1
 
SBA
  
-
   
-
   
-
   
-
 
Real Estate:
            
Commercial real estate
  
-
   
-
   
3,143
   
1
 
Construction
  
-
   
-
   
-
   
-
 
SFR mortgage
  
-
   
-
   
-
   
-
 
Dairy & livestock and agribusiness
  
-
   
-
   
78
   
1
 
Consumer and other
  
248
   
1
   
267
   
1
 
                 
Total nonperforming TDRs
   $
249
   
2
    $
3,509
   
4
 
                 
Total TDRs
   $
3,417
   
14
    $
7,103
   
17
 
                 
 
   
September 30, 2020
  
December 31, 2019
   
Balance
  
Number of
Loans
  
Balance
  
Number of
Loans
   
(Dollars in thousands)
Performing TDRs:
        
Commercial and industrial
    $47    1     $78    2 
SBA
   -    -    536    1 
Real Estate:
        
Commercial real estate
   354    1    397    1 
Construction
   -    -    -    - 
SFR mortgage
   1,816    7    2,101    8 
Dairy & livestock and agribusiness
   -    -    -    - 
Consumer and other
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total performing TDRs
    $2,217    9     $3,112    12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Nonperforming TDRs:
        
Commercial and industrial
    $-    -     $-    - 
SBA
   -    -    -    - 
Real Estate:
        
Commercial real estate
   -    -    -    - 
Construction
   -    -    -    - 
SFR mortgage
   -    -    -    - 
Dairy & livestock and agribusiness
   -    -    -    - 
Consumer and other
   -    -    244    1 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total nonperforming TDRs
    $-    -     $244    1 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total TDRs
    $2,217    9     $3,356    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
At September 30, 2020, there was no ACL allocated to TDRs. At December 31, 2019, there was no allowance for loan losses specifically allocated to TDRs. At December 31, 2018, $490,000 of the allowance for loan losses was specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. TotalThere were no charge-offs on TDRs for the nine months ended September 30, 2019 were $78,000,2020, compared to no charge-offs$78,000 for the same period of 2018.nine months ended September 30, 2019.
 
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Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
                     
 
September 30,
2019
  
June 30,
2019
  
March 31,
2019
  
December 31,
2018
  
September 30,
2018
 
 
(Dollars in thousands)
 
Nonperforming loans:
               
Commercial and industrial
   $
1,550
    $
1,993
    $
8,388
    $
7,490
    $
3,026
 
SBA
  
2,706
   
5,082
   
4,098
   
2,892
   
3,005
 
Real estate:
               
Commercial real estate
  
1,083
   
1,095
   
1,134
   
6,068
   
5,856
 
Construction
  
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
888
   
2,720
   
2,894
   
2,937
   
2,961
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
78
   
775
 
Consumer and other loans
  
385
   
397
   
477
   
486
   
807
 
                     
Total
   $
6,612
    $
11,287
    $
16,991
    $
19,951
    $
16,430
 
                     
% of Total gross loans
  
0.09%
   
0.15%
   
0.22%
   
0.26%
   
0.22%
 
                     
Past due
30-89
days:
               
Commercial and industrial
   $
756
    $
310
    $
369
    $
909
    $
274
 
SBA
  
303
   
-
   
601
   
1,307
   
123
 
Real estate:
               
Commercial real estate
  
368
   
-
   
124
   
2,789
   
-
 
Construction
  
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
-
   
-
   
-
   
285
   
-
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
-
   
-
 
Consumer and other loans
  
-
   
22
   
101
   
-
   
98
 
                     
Total
   $
1,427
    $
332
    $
1,195
    $
5,290
    $
495
 
                     
% of Total gross loans
  
0.02%
   
0.004%
   
0.02%
   
0.07%
   
0.01%
 
                     
OREO:
               
SBA
   $
444
    $
-
    $
-
    $
-
    $
-
 
Real estate:
               
Commercial real estate
  
2,275
   
2,275
   
2,275
   
-
   
-
 
SFR mortgage
  
6,731
   
-
   
-
   
420
   
420
 
                     
Total
   $
9,450
    $
2,275
    $
2,275
    $
420
    $
420
 
                     
Total nonperforming, past due, and OREO
   $
17,489
    $
       13,894
    $
       20,461
    $
25,661
    $
17,345
 
                     
% of Total gross loans
  
0.23%
   
0.18%
   
0.27%
   
0.33%
   
0.23%
 
 
                        
                        
                        
                        
                        
  
September 30,
2020
 
June 30,

2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
  
(Dollars in thousands)
Nonperforming loans (1):
     
Commercial and industrial
   $1,822    $1,222    $1,703    $1,266    $1,550 
SBA
  1,724   1,598   2,748   2,032   2,706 
Real estate:
     
Commercial real estate
  6,481   2,628   947   724   1,083 
Construction
  -   -   -   -   - 
SFR mortgage
  675   1,080   864   878   888 
Dairy & livestock and agribusiness
  849   -   -   -   - 
Consumer and other loans
  224   289   166   377   385 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
11,775
 
 
  $
6,817
 
 
  $
6,428
 
 
  $
5,277
 
 
  $
6,612
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.14%
 
 
 
0.08%
 
 
 
0.09%
 
 
 
0.07%
 
 
 
0.09%
 
Past due
30-89
days:
     
Commercial and industrial
   $3,627    $630    $665    $2    $756 
SBA
  66   214   3,086   1,402   303 
Real estate:
     
Commercial real estate
  -   4   210   -   368 
Construction
  -   -   -   -   - 
SFR mortgage
  -   446   233   249   - 
Dairy & livestock and agribusiness
  -   882   166   -   - 
Consumer and other loans
  67   413   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
3,760
 
 
  $
2,589
 
 
  $
4,360
 
 
  $
1,653
 
 
  $
1,427
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.04%
 
 
 
0.03%
 
 
 
0.06%
 
 
 
0.02%
 
 
 
0.02%
 
OREO:
     
SBA
   $797    $797    $797    $797    $444 
Real estate:
     
Commercial real estate
  1,575   2,275   2,275   2,275   2,275 
SFR mortgage
  1,817   1,817   1,817   1,817   6,731 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
4,189
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
9,450
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonperforming, past due, and OREO
 
  $
19,724
 
 
  $
14,295
 
 
  $
15,677
 
 
  $
11,819
 
 
  $
17,489
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.23%
 
 
 
0.17%
 
 
 
0.21%
 
 
 
0.16%
 
 
 
0.23%
 
 
(1)
As of June 30, 2020, nonperforming loans included $25,000 of commercial and industrial loans past due 90 days or more and still accruing interest.
Nonperforming loans, defined as nonaccrual loans, plus nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $6.6$11.8 million at September 30, 2019,2020, or 0.09%0.14% of total loans. Total nonperforming loans at September 30, 20192020 included $4.5$9.3 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $20.0$5.3 million, or 0.26%0.07% of total loans, at December 31, 20182019 and $16.4$6.6 million, or 0.22%,0.09% of total loans, at September 30, 2018.2019. The $4.7$5.0 million decreasequarter-over-quarter increase in nonperforming loans quarter-over-quarter was primarily due to a $2.4increases of $3.9 million decreasein nonperforming commercial real estate loans, $849,000 in nonperforming dairy & livestock and agribusiness loans, $600,000 in nonperforming commercial and industrial loans, and $126,000 in nonperforming SBA loans,loans. This was partially offset by a $1.8 million$405,000 decrease in nonperforming SFR mortgage loans and a $443,000$65,000 decrease in nonperforming commercialconsumer and industrialother loans.
In response to the
COVID-19
pandemic, we have implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.    
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At September 30, 2019,2020, we had four OREO properties with a carrying value of $4.2 million, compared to four OREO properties with a carrying value of $4.9 million at December 31, 2019 and three OREO properties with a carrying value of $9.5 million compared toat September 30, 2019. We reflected a $700,000 write-down of one OREO property with a carrying value of $420,000 at both December 31, 2018 and September 30, 2018. Duringin the firstthird quarter of 2019, we sold one OREO property, realizing a net gain on sale of $105,000.2020. There were threeno additions to or sales of OREO properties for the nine months ended September 30, 2019.2020.
Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “
Risk Management – Credit Risk Management
” contained in our Annual Report on Form
10-K
for the year ended December 31, 2018.2019.
60
Allowance for LoanCredit Losses
We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements. The allowance for loan losses is established as management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased (decreased) by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are added to the allowance. The determination of the balance in the allowance for loan losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is appropriate to provide for probable credit losses inherent in the portfolio, after giving considerationtotaled $93.9 million as of September 30, 2020, compared to the character$68.7 million as of the loan portfolio, current economic conditions, past loan loss experience,December 31, 2019 and such other factors that are considered in estimating inherent credit losses.
The allowance for loan losses totaled $68.7 million as of September 30, 2019, compared to $63.6 million as of December 31, 2018 and $60.0 million as of2019. Our allowance for credit losses at September 30, 2018. The2020 was 1.12%, or 1.28% of total loans when excluding the $1.10 billion in PPP loans. Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance for loan lossesand was increased by a $23.5 million credit loss provision in the first nine months of 2020 due to the severe economic disruption resulting from the
COVID-19
pandemic. Net charge-offs were $131,000 for the nine months ended September 30, 2020. This compares to a $5.0 million loan loss provision and $59,000 in net recoveries for the nine months ended September 30, 2019. This compares to a $1.5 million loan loss provision recapture, offset by net recoveries of $1.9 million for the same period of 2018.
2019.
Our modeling processes incorporate a lifetime historical loss rate methodology by different asset classes. These models use key loan attributes by asset class and macroeconomic variables. Macroeconomic variables include GDP, and unemployment rate, among others. Our economic forecast incorporates a weighting of multiple forecasts. The forecast includes a reasonable and supportable forecast period of two to three years for the macroeconomic variables, which revert to a historical mean based on an input reversion approach. We consider publicly published economic forecasts from multiple sources, including Moody’s. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. Moody’s baseline forecast continues to represent more than a 50% weighting in our multi-weighted forecast scenario. This U.S. baseline forecast assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5% in 2021 and 5% in 2022. The unemployment rate in this baseline forecast is forecasted to be 8.9% in the third quarter of 2021, stay at an elevated level over 8% through 2021, before declining to 6.4% percent in 2022. With California slowly
re-opening
its economy and currently having an unemployment rate greater than 11% percent, our forecast includes a partial weighting of downside economic forecast scenarios from Moody’s. If the economic forecast deteriorates further due to the
COVID-19
pandemic, or the economic impact on our borrowers is more severe than we have forecasted, we may experience increases in the allowance for credit losses in future periods.
 
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The table below presents a summary of net charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for loan losses and recapture of provision for loancredit losses for the periods presented.
     
 
As of and For the
Nine Months Ended
September 30,
 
2019
 
2018
 
(Dollars in thousands)
Allowance for loan losses at beginning of period
 
  $        63,613  
 
  $        59,585  
Charge-offs:
  
Commercial and industrial
 
(48) 
 
-     
SBA
 
(295) 
 
(257) 
Commercial real estate
 
-     
 
-     
Construction
 
-     
 
-     
SFR mortgage
 
-     
 
-     
Dairy & livestock and agribusiness
 
(78) 
 
-     
Consumer and other loans
 
(7) 
 
(10) 
     
Total charge-offs
 
(428) 
 
(267) 
     
Recoveries:
  
Commercial and industrial
 
253  
 
81  
SBA
 
9  
 
15  
Commercial real estate
 
-     
 
-     
Construction
 
9  
 
1,945  
SFR mortgage
 
191  
 
-     
Dairy & livestock and agribusiness
 
19  
 
19  
Consumer and other loans
 
6  
 
129  
     
Total recoveries
 
487  
 
2,189  
     
Net recoveries
 
59  
 
1,922  
Provision for (recapture of) loan losses
 
5,000  
 
(1,500) 
     
Allowance for loan losses at end of period
 
  $        68,672  
 
  $        60,007  
     
Summary of reserve for unfunded loan commitments:
  
Reserve for unfunded loan commitments at beginning of period
 
  $          8,959  
 
  $          6,306  
Estimated fair value of reserve for unfunded loan commitment assumed from Community Bank
 
-     
 
2,903  
Provision for unfunded loan commitments
 
-     
 
-     
     
Reserve for unfunded loan commitments at end of period
 
  $          8,959  
 
  $          9,209  
     
Reserve for unfunded loan commitments to total unfunded loan commitments
 
0.55% 
 
0.54% 
     
Amount of total loans at end of period (1)
 
  $   7,494,451  
 
  $   7,582,459  
Average total loans outstanding (1)
 
  $   7,571,502  
 
  $   5,312,558  
     
Net recoveries to average total loans
 
0.00% 
 
0.04% 
Net recoveries to total loans at end of period
 
0.00% 
 
0.03% 
Allowance for loan losses to average total loans
 
0.91% 
 
1.13% 
Allowance for loan losses to total loans at end of period
 
0.92% 
 
0.79% 
Net recoveries to allowance for loan losses
 
0.09% 
 
3.20% 
Net recoveries to provision for (recapture of) loan losses
 
1.18% 
 
-128.13% 
 
   
As of and For the

Nine Months Ended

September 30,
 
   
2020
   
2019
 
   
(Dollars in thousands)
 
Allowance for credit losses at beginning of period
    $        68,660       $        63,613   
Impact of adopting ASU 2016-13
   1,840      -      
Charge-offs:
    
Commercial and industrial
   (172)     (48)  
SBA
   (203)     (295)  
Commercial real estate
   -         -      
Construction
   -         -      
SFR mortgage
   -         -      
Dairy & livestock and agribusiness
   -         (78)  
Consumer and other loans
   (109)     (7)  
  
 
 
   
 
 
 
Total charge-offs
   (484)     (428)  
  
 
 
   
 
 
 
Recoveries:
    
Commercial and industrial
   7      253   
SBA
   72      9   
Commercial real estate
   -         -      
Construction
   9      9   
SFR mortgage
   206      191   
Dairy & livestock and agribusiness
   -         19   
Consumer and other loans
   59      6   
  
 
 
   
 
 
 
Total recoveries
   353      487   
  
 
 
   
 
 
 
Net (charge-offs) recoveries
   (131)     59   
Provision for credit losses
   23,500      5,000   
  
 
 
   
 
 
 
Allowance for credit losses at end of period
    $93,869       $68,672   
  
 
 
   
 
 
 
Summary of reserve for unfunded loan commitments:
    
Reserve for unfunded loan commitments at beginning of period
    $8,959       $8,959   
Impact of adopting ASU 2016-13
   41      -      
Provision for unfunded loan commitments
   -         -      
  
 
 
   
 
 
 
Reserve for unfunded loan commitments at end of period
    $9,000       $8,959   
  
 
 
   
 
 
 
Reserve for unfunded loan commitments to total unfunded loan commitments
   0.50%     0.55%  
Amount of total loans at end of period (1)
    $8,407,872       $7,494,451   
Average total loans outstanding (1)
    $7,972,208       $7,571,502   
Net recoveries to average total loans
   -0.002%     0.001%  
Net recoveries to total loans at end of period
   -0.002%     0.001%  
Allowance for credit losses to average total loans
   1.18%     0.91%  
Allowance for credit losses to total loans at end of period
   1.12%     0.92%  
Net (charge-offs) recoveries to allowance for credit losses
   -0.14%     0.09%  
Net (charge-offs) recoveries to provision for credit losses
   -0.56%     1.18%  
 (1)Includes PCI loans and is net
Net of deferred loan origination fees, costs and discounts.
 
62
61
Specific allowance:
For impaired loans, we incorporate specific allowances based on loans individually evaluated utilizing one of three valuation methods, as prescribed under ASC
310-10.
If the measured value of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the ALLL or, alternatively, a specific allocation will be established and included in the overall ALLL balance. The specific allocation represents $540,000 (0.79%), $561,000 (0.88%) and $83,000 (0.14%) of the total allowanceACL/Total Loan Coverage Ratio as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
General allowance:
The remaining loan portfolio is collectively evaluated for impairment under ASC
450-20
and is divided into risk rating classes2020 increased to 1.12%, compared to 0.93% as of loan receivables between “Classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and is further disaggregated into loan segments by loan type with similar risk characteristics. BothJanuary 1, 2020 due to the classified and
non-classified
loan categories are divided into eight (8) specific loan segments. An allowance is provided for each segment based upon that segment’s average historical loss experience over an established look back period, adjusted forforecasted impact on the applicable loss emergence periods (i.e., the amount of timeeconomy from the point at
COVID-19
crisis.
At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our
off-balance
sheet credit exposures. The Bank’s ACL methodology also produced an allowance of $9.0 million for our
off-balance
sheet credit exposures, which a loss is incurred to the point at which the loss is confirmed). For each segment,was unchanged from the allowance is adjusted further for current conditions based on our analysis of specific environmental or qualitative loss factors (as prescribed in the 2006 Interagency Policy Statement on ALLL) affecting the collectability of our loan portfolio that may cause actual loss rates to differ from historical loss experience.
There have been no material changes to the Bank’s ALLL methodology during the first nine months of 2019. The ALLL balance increased during the first nine months of 2019 by $5.0 million in provision for loan losses and a net recovery of loans of $59,000. The Bank determined that the ALLL balance of $68.7 million was appropriate and the result of the net effect of additional requirements related to loan growth experienced during the nine month period within the commercial and industrial and commercial real estate segments of the
non-acquired
loan portfolio, modest increase in certain qualitative loss factors and reduced reserve requirements for the continued but moderate reductions in the historical loss rates for predominately all portfolio segments. The ALLL balance also increased as a result of reserve requirements for acquired loan portfolios that exceeded remaining unaccreted fair value credit discounts.at January 1, 2020.
While we believe that the allowance at September 30, 20192020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for loancredit losses in the future.
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Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were $8.79$11.17 billion at September 30, 2019.2020. This represented a decreasean increase of $33.2 million,$2.46 billion, or 0.38%28.30%, over total deposits of $8.83$8.70 billion at December 31, 2018.2019. The composition of deposits is summarized as of the dates presented in the table below.
                 
 
September 30, 2019
 
December 31, 2018
     
 
Balance
 
Percent
 
Balance
 
Percent
 
     
 
(Dollars in thousands)
                 
Noninterest-bearing deposits
   $
5,385,104
   
61.23%
    $
5,204,787
   
58.96%
 
Interest-bearing deposits
            
Investment checking
  
433,615
   
4.93%
   
460,972
   
5.22%
 
Money market
  
2,110,780
   
24.00%
   
2,236,018
   
25.33%
 
Savings
  
403,108
   
4.59%
   
393,769
   
4.46%
 
Time deposits
  
461,723
   
5.25%
   
531,944
   
6.03%
 
                 
Total deposits
   $
     8,794,330
   
    100.00%
    $
     8,827,490
   
    100.00%
 
                 
 
   
September 30, 2020
 
December 31, 2019
  
 
 
 
 
 
 
 
   
Balance
  
Percent
 
Balance
  
Percent
  
 
 
 
 
 
 
 
   
(Dollars in thousands)
Noninterest-bearing deposits
    $6,919,423    61.95%    $5,245,517    60.26% 
Interest-bearing deposits
       
Investment checking
   447,910    4.01%   454,565    5.22% 
Money market
   2,878,457    25.77%   2,158,161    24.79% 
Savings
   477,896    4.28%   400,377    4.60% 
Time deposits
   445,148    3.99%   446,308    5.13% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
Total deposits
    $    11,168,834        100.00%    $    8,704,928        100.00% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $5.39$6.92 billion at September 30, 2019,2020, representing an increase of $180.3 million,$1.67 billion, or 3.46%31.91%, from noninterest-bearing deposits of $5.20$5.25 billion at December 31, 2018.2019. Noninterest-bearing deposits represented 61.23%61.95% of total deposits for September 30, 2019,2020, compared to 58.96%60.26% of total deposits for December 31, 2018.2019.
Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $2.95$3.80 billion at September 30, 2019,2020, representing a decreasean increase of $143.3$791.2 million, or 4.63%26.26%, from savings deposits of $3.09$3.01 billion at December 31, 2018.2019.
Time deposits totaled $461.7$445.1 million at September 30, 2019,2020, representing a decrease of $70.2$1.2 million, or 13.20%0.26%, from total time deposits of $531.9$446.3 million for December 31, 2018.2019.
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Borrowings
In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was 4.61% for the third quarter of 2019, compared to 5.35% for the same period of 2018.
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a
pre-determined
balance in a demand deposit account, in order to earn interest. As of September 30, 20192020 and December 31, 2018,2019, total funds borrowed under these agreements were $407.9$483.4 million and $442.3$428.7 million, respectively, with a weighted average interest rate of 0.57%0.14% and 0.39%0.44%, respectively.
At September 30, 2020, we had $10.0 million in short-term borrowings that were interest-free advances from the FHLB. We had $4.9 million in otherno short-term borrowings at September 30, 2019, compared to $280.0 million at December 31, 2018.2019.
At September 30, 2019, $5.912020, $6.00 billion of loans and $1.46$1.86 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
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Table of Contents
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of September 30, 2019.2020.
                     
   
Maturity by Period
 
 
Total
  
Less Than
One
Year
  
One Year
Through
Three Years
  
Four Years
Through
Five Years
  
Over
Five
Years
 
 
(Dollars in thousands)
 
Deposits (1)
   $
8,794,330
    $
8,674,968
    $
107,752
    $
3,251
    $
8,359
 
Customer repurchase agreements (1)
  
        407,850
   
        407,850
   
-
   
-
   
-
 
Junior subordinated debentures (1)
  
25,774
   
-
   
-
   
-
   
        25,774
 
Deferred compensation
  
23,305
   
723
   
1,356
   
807
   
20,419
 
Operating leases
  
23,533
   
7,349
   
9,905
   
        4,297
   
1,982
 
Affordable housing investment
  
6,242
   
4,167
   
1,984
   
55
   
36
 
                     
Total
   $
 9,281,034
    $
 9,095,057
    $
 120,997
    $
   8,410
    $
 56,570
 
                     
 
      
Maturity by Period
   
Total
  
Less Than One

Year
  
One Year
Through
Three Years
  
Four Years
Through
Five Years
  
Over
Five
Years
   
(Dollars in thousands)
Deposits (1)
    $    11,168,834     $    11,126,422     $    32,422     $9,394     $596 
Customer repurchase agreements (1)
   483,420    483,420    -    -    - 
Junior subordinated debentures (1)
   25,774    -    -    -    25,774 
Deferred compensation
   21,864    681    1,172    619    19,392 
Operating leases
   23,416    6,880    9,921    4,476    2,139 
Affordable housing investment
   3,159    2,285    814    47    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $11,726,467     $11,619,688     $44,329     $14,536     $47,914 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 (1)
Amounts exclude accrued interest.
Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.
Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.
At September 30, 2019,2020, we had $4.9$10.0 million in otherFHLB short-term borrowings with a cost of 0.0%, compared to $280.0 millionzero at December 31, 2018,2019 and $30.0 million at September 30, 2018.2019.
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.
Deferred compensation represents the amounts that are due to former employees’employees based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under
non-cancelable
operating leases. Refer to Note 12 —11 –
Leases
of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.
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Table of Contents
Off-Balance
Sheet Arrangements
The following table summarizes the
off-balance
sheet items at September 30, 2019.
2020.
                     
   
Maturity by Period
 
 
Total
  
Less Than
One
Year
  
One Year
to Three
Years
  
Four Years
to Five
Years
  
After
Five
Years
 
 
(Dollars in thousands)
 
Commitment to extend credit:
               
Commercial and industrial
   $
951,334
    $
695,927
    $
160,214
    $
7,333
    $
87,860
 
SBA
  
410
   
60
   
4
   
-
   
346
 
Real estate:
               
Commercial real estate
  
253,648
   
48,533
   
86,165
   
100,747
   
18,203
 
Construction
  
80,342
   
63,445
   
13,697
   
-
   
3,200
 
SFR Mortgage
  
6,998
   
5,006
   
-
   
-
   
1,992
 
Dairy & livestock and agribusiness (1)
  
151,947
   
81,488
   
70,254
   
205
   
-
 
Consumer and other loans
  
139,059
   
17,430
   
7,036
   
4,894
   
109,699
 
                     
Total commitment to extend credit
  
1,583,738
   
911,889
   
337,370
   
113,179
   
221,300
 
Obligations under letters of credit
  
50,244
   
41,383
   
8,613
   
248
   
-
 
                     
Total
   $
1,633,982
    $
   953,272
    $
345,983
    $
113,427
    $
221,300
 
                     
 
      
Maturity by Period
   
Total
  
Less Than
One

Year
  
One Year to
Three
Years
  
Four Years
to Five
Years
  
After Five
Years
   
(Dollars in thousands)
Commitment to extend credit:
          
Commercial and industrial
    $989,178     $672,740     $197,626     $5,295     $113,517 
SBA
   591    185    -    -    406 
SBA - PPP
   -    -    -    -    - 
Real estate:
          
Commercial real estate
   310,666    49,450    91,984    126,299    42,933 
Construction
   78,623    63,329    15,294    -    - 
SFR Mortgage
   1,706    -    -    -    1,706 
Dairy & livestock and agribusiness (1)
   232,870    188,380    43,873    130    487 
Consumer and other loans
   131,693    10,354    12,069    3,952    105,318 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total commitment to extend credit
   1,745,327    984,438    360,846    135,676    264,367 
Obligations under letters of credit
   48,776    46,337    2,391    48    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $    1,794,103     $    1,030,775     $    363,237     $    135,724     $    264,367 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 (1)
Total commitments to extend credit to agribusiness were $13.3$17.2 million at September 30, 2019.2020.
As of September 30, 2019,2020, we had commitments to extend credit of approximately $1.58$1.75 billion, and obligations under letters of credit of $50.2$48.8 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for
on-balance
sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000 was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments for the three and nine months ended September 30, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of September 30, 20192020 and December 31, 20182019 included in other liabilities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
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Table of Contents
Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of the Company’sour capital.
The Company’s totalTotal equity was $1.97decreased $12.1 million, or 0.61%, to $1.98 billion at September 30, 2019. This represented an increase of $115.7 million, or 6.25%, from2020, compared to total equity of $1.85$1.99 billion at December 31, 2018. This increase2019. The $12.1 million decrease in equity was primarily due to $156.5the repurchase of 4.9 million shares of common stock for $91.7 million under our
10b5-1
stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. We had $127.1 million in net earnings a $30.4 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio, and $4.5 million for various stock based compensation items. This was offset by $75.7 million in cash dividends declared by the Company during the first nine months of 2019.2020, offset by $73.3 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $23.5 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our
available-for-sale
investment securities. Our tangible common equity ratio was 9.78% at September 30, 2020.
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Table of Contents
During the third quarter of 2019,2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to timewere available for repurchase under the Company’s current
10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. On March 31, 2020, the Company announced that it suspended its
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. For the nine months ended September 30, 2019,2020, the Company repurchased 9054,944,290 shares of CVB common stock outstanding under this program. As of September 30, 2019,2020, we have 9,577,0124,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.
The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At September 30, 2019,2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.
Business —– Capital Adequacy Requirements
” as described in our Annual Report on Form
10-K
for the year ended December 31, 2018.2019.
At September 30, 2019,2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies.
The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.
                         
     
September 30, 2019
  
December 31, 2018
 
Capital Ratios
 
  Adequately  
Capitalized
Ratios
  
Well
  Capitalized  
Ratios
  
CVB Financial
Corp.
Consolidated
  
Citizens
  Business  
Bank
  
CVB Financial
Corp.
Consolidated
  
Citizens
  Business  
Bank
 
                         
Tier 1 leverage capital ratio
  
4.00%
   
5.00%
   
12.23%
   
12.09%
   
10.98%
   
10.90%
 
Common equity Tier I capital ratio
  
4.50%
   
6.50%
   
14.64%
   
14.75%
   
13.04%
   
13.22%
 
Tier 1 risk-based capital ratio
  
6.00%
   
8.00%
   
14.93%
   
14.75%
   
13.32%
   
13.22%
 
Total risk-based capital ratio
  
8.00%
   
10.00%
   
15.83%
   
15.65%
   
14.13%
   
14.03%
 
 
           
September 30, 2020
  
December 31, 2019
 
Capital Ratios
 
Adequately
Capitalized
Ratios
  
Minimum Required
Plus Capital
Conservation Buffer
  
Well
Capitalized
Ratios
  
CVB Financial
Corp.
Consolidated
  
Citizens

Business

Bank
  
CVB Financial
Corp.
Consolidated
  
Citizens

Business

Bank
 
Tier 1 leverage capital ratio
  4.00%   4.00%   5.00%   9.88%   9.71%   12.33%   12.19% 
Common equity Tier 1 capital ratio
  4.50%   7.00%   6.50%   14.60%   14.64%   14.83%   14.94% 
Tier 1 risk-based capital ratio
  6.00%   8.50%   8.00%   14.89%   14.64%   15.11%   14.94% 
Total risk-based capital ratio
  8.00%   10.50%   10.00%   16.08%   15.83%   16.00%   15.83% 
 
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Basel III also introduces a new “capital conservation buffer,” composed entirely of CET1, on top of minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum requirement but below the capital conservation buffer will face constraints on dividends, equity repurchases and payment of discretionary bonuses based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and has been fully phased in over a four-year period reaching 2.5% on January 1, 2019. The Company and the Bank are now required to maintain minimum capital ratios as follows:
                 
 
Equity
  Tier 1 Ratio  
  
Tier 1
  Capital Ratio  
  
Total
  Capital Ratio  
  
Leverage
        Ratio        
 
Regulatory minimum ratio
  
4.5%
   
6.0%
   
8.0%
   
4.0%
 
Plus: Capital conservation buffer requirement
  
2.5%
   
2.5%
   
2.5%
   
-
 
Regulatory minimum ratio plus capital conservation buffer
  
7.0%
   
8.5%
   
10.5%
   
4.0%
 
It is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III final rule. The exact amount, however, will depend upon regulatory determinations and our prevailing risk profile under various stress scenarios.
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ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Liquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.
Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from
period-to-period
due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $8.79$11.17 billion at September 30, 2019 decreased $33.2 million,2020 increased $2.46 billion, or 0.38%28.30%, over total deposits of $8.83$8.70 billion at December 31, 2018.2019. This significant deposit growth was primarily due to our customers maintaining greater liquidity.
In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.
At September 30, 2020, we had $25.8 million in subordinated debt and $10.0 million in FHLB short-term borrowings at 0% cost. The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant
off-balance
sheet sources of liquidity.
CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.
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Below is a summary of our average cash position and statement of cash flows for the nine months ended September 30, 20192020 and 2018.2019. For further details see our “
Condensed Consolidated Statements of Cash Flows
(Unaudited)” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
         
 
For the Nine Months Ended September 30,
 
 
2019
  
2018
 
 
(Dollars in thousands)
 
         
Average cash and cash equivalents
   $
237,244  
    $
237,817  
 
Percentage of total average assets
  
2.10%  
   
2.69%  
 
         
Net cash provided by operating activities
   $
147,410  
    $
116,564  
 
Net cash provided by investing activities
  
538,256  
   
874,202  
 
Net cash used in financing activities
  
(412,066) 
   
(940,668) 
 
         
Net increase in cash and cash equivalents
   $
273,600  
    $
50,098  
 
         
 
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Table of Contents
   
Nine Months Ended September 30,
 
   
2020
   
2019
 
   
(Dollars in thousands)
 
Average cash and cash equivalents
    $1,071,392       $237,244   
Percentage of total average assets
   8.52%      2.10%   
Net cash provided by operating activities
    $138,019       $147,410   
Net cash (used in) provided by investing activities
   (1,200,664)      538,256   
Net cash provided by (used in) financing activities
   2,362,080      (412,066)   
  
 
 
   
 
 
 
Net increase in cash and cash equivalents
    $1,299,435       $273,600   
  
 
 
   
 
 
 
Average cash and cash equivalents decreasedincreased by $573,000,$834.1 million, or 0.24%351.60%, to $237.2 million$1.07 billion for the nine months ended September 30, 2019,2020, compared to $237.8$237.2 million for the same period of 2018.2019.
At September 30, 2019,2020, cash and cash equivalents totaled $437.5 million.$1.48 billion. This represented an increase of $243.1 million,$1.05 billion, or 124.99%239.38%, from $194.5$437.5 million at September 30, 2018.2019.
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to
re-price
interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability
re-pricing
re pricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure.
One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a
one-year
and
two-year
cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a
one-year
horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the
12-month
and
24-month
time horizon.
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The following depicts the Company’s net interest income sensitivity analysis as of the periods presented below.
                     
                    Estimated Net Interest Income Sensitivity (1)
 
 
September 30, 2019
    
December 31, 2018
 
    Interest Rate Scenario        
 
12-month
 Period
  
24-month
 Period
(Cumulative)
  
Interest Rate Scenario
  
12-month
 Period
  
24-month
 Period
(Cumulative)
 
+ 200 basis points
  
4.50%
   
8.70%
   
+ 200 basis points
   
3.80%
   
7.40%
 
- 100 basis points
  
-2.30%
   
-5.00%
   
- 200 basis points
   
-5.29%
   
-10.26%
 
 
                    Estimated Net Interest Income Sensitivity (1)
  
September 30, 2020
   
December 31, 2019
    
24-month Period
     
24-month Period
    Interest Rate Scenario        
 
12-month Period
 
(Cumulative)
 
Interest Rate Scenario
 
12-month Period
 
(Cumulative)
+ 200 basis points
 9.30% 18.30% + 200 basis points 5.20% 10.00%
- 100 basis points
 -0.60% -1.40% - 100 basis points -2.10% -4.60%
 
 (1)
Percentage change from base.base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.
Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a
one-year
and a
two-year
horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape,
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.01%.
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We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term
re-pricing
risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the
EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At September 30, 20192020 and December 31, 2018,2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.
Economic Value of Equity Sensitivity
             
Instantaneous Rate Change
 
    September 30, 2019    
    
    December 31, 2018    
 
             
100 bp decrease in interest rates
  
-19.6%
      
-10.2%
 
100 bp increase in interest rates
  
13.3%
      
5.8%
 
200 bp increase in interest rates
  
23.3%
      
10.3%
 
300 bp increase in interest rates
  
31.0%
      
13.8%
 
400 bp increase in interest rates
  
37.1%
      
16.6%
 
 
Instantaneous Rate Change
  
    September 30, 2020    
 
 
  
    December 31, 2019    
 
100 bp decrease in interest rates
  -21.6%    -17.5% 
100 bp increase in interest rates
  15.2%    14.2% 
200 bp increase in interest rates
  26.5%    25.5% 
300 bp increase in interest rates
  30.7%    30.0% 
400 bp increase in interest rates
  36.3%    36.2% 
As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “
Asset/Liability Management and Interest Rate Sensitivity Management
” included in Item 2 “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2018.2019. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.
ITEM 4.   CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the fiscal quarter ended September 30, 2019,2020, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and
non-ordinary
course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer claims, regulatory compliance claims, data privacy claims, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.
For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws and regulations applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.
Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.
We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.
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ITEM 1A.   RISK FACTORS
ThereExcept as discussed below there have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form
10-K
for the year ended December 31, 2018.2019. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form
10-K
and any subsequent Form
10-Q
or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” in this Quarterly Report on Form
10-Q.
The
COVID-19
pandemic has significantly impacted the banking industry and our business. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic
.
The
COVID-19
pandemic has negatively impacted the global, U.S., California and local economies, disrupted supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and sharply increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including in California and the principal counties and cities in which our banking centers are located. Our operations, like those of other financial institutions that operate in our markets, are significantly influenced by economic conditions in California, including the strength of the real estate market and business conditions in the industries to which we lend or from which we gather deposits. The
COVID-19
pandemic has resulted in a substantial decline in the revenues of many business sectors as well as in commercial and residential property sales and construction activities. As a result, the demand for our products and services has been, and may continue to be, significantly impacted.
Furthermore, the pandemic could further influence the recognition of credit losses in our loan portfolios and further increase our allowance for credit losses, particularly as many businesses remain closed or partially open. Our customers could be expected to draw further on their lines of credit or to seek deferments of scheduled loan payments to help mitigate the effects of lost revenues. As previously noted, we have already increased our allowance for expected credit losses by $23.5 million for the nine months ended September 30, 2020, due to the continuing anticipated impact of
COVID-19-related
economic distress on our loan portfolios, coupled with the implementation of CECL for determining our overall provision for credit losses in the first quarter of 2020. In addition, as also noted above, through October 9, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 33 loans, with a gross balance of $68.6 million, or less than 1% of our total loan portfolio at September 30, 2020. Depending on the scope and duration of the
COVID-19
pandemic, we believe there is a reasonable possibility that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for the final calendar quarter in 2020.
Similarly, because of changing economic and market conditions affecting bond issuers, we may be required to recognize credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant or critical portions of our workforce or managers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, and to comply with or follow various government recommendations or mandates, we have also suspended certain real property foreclosure actions and sales, and in certain instances, we are providing fee waivers, payment deferrals, and other expanded assistance for our business and mortgage customers. The extent to which the
COVID-19
pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Our bank has elected to participate as a lender in the Small Business Administration’s Paycheck Protection Program (PPP) and to register as an Eligible Lender under the Federal Reserve’s Main Street Lending Program (MSLP), and has accordingly become subject to a number of significant risks applicable to lenders under the PPP and MSLP, respectively.
As one set of responses to the
COVID-19
pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate. One such program is the Paycheck Protection Program (PPP) enacted under the federal CARES Act. This program is designed, among other things, to provide employee payroll maintenance support for small and
medium-sized
businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA). Because the Company is an authorized SBA lender and our primary customer base consists of small and
medium-sized
businesses, the Company has actively participated in the PPP. Including the second round of funding after Legislation passed on April 24, 2020, we have originated and funded approximately 4,100 PPP loans from our customers and, through two separate rounds of authorized funding for the PPP, totaling $1.10 billion as of September 30, 2020.    
 
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71
Under interim final regulations promulgated by the SBA, PPP lenders are entitled to rely on borrower certifications with respect to issues such as program eligibility and eligible loan amounts, and PPP loans are designed to be subsequently forgivable, in whole or part, if certain additional criteria are met by the borrower with respect to employee payroll maintenance. However, in view of the fact that the PPP was by design intended to support economically distressed businesses, the SBA’s guarantee of PPP loan amounts to participating lenders is a critical feature of the program. In this regard, because the PPP was quickly implemented into operation and the SBA’s interim regulations have been repeatedly revised and are continuing to evolve, there are significant risks to the Company’s participation in the PPP, including whether certain borrowers will ultimately be found to have been eligible for PPP loans, whether eligible PPP loan amounts for certain borrowers were correctly calculated, whether certain PPP loans will ultimately be determined to be forgivable, and if not, whether the SBA’s guarantee will continue to apply to any unforgiven PPP loan amounts. As of November 5, 2020, 69 loans, representing approximately $43 million, were submitted to the SBA and granted forgiveness. To date, our customers who have had their forgiveness requests reviewed by the SBA have received nearly 100% loan forgiveness.
Another program enacted pursuant to the federal CARES Act and designed to help provide support to small and
medium-sized
business and their employees throughout the U.S., including California, is the Federal Reserve’s Main Street Lending Program (MSLP). The Company has elected to participate as an Eligible Lender under at least three
sub-facilities
of the MSLP, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility. Each of these lending facilities offers different terms and conditions, including with respect to borrower eligibility criteria, maximum loan amounts, whether loan proceeds can be utilized to refinance borrower indebtedness to other lenders, contractual priority,
non-subordination
and collateralization requirements, etc. Eligible Lenders may extend new MSLP loans to eligible borrowers and sell a 95% participation in each MSLP loan to a special purpose vehicle established by the Federal Reserve Bank of Boston (Main Street SPV), subject to numerous borrower and lender certifications and covenants and the terms of a Loan Participation Agreement and a Servicing Agreement.
In contrast to the PPP, loans under the MSLP are not forgivable, carry an adjustable rate of interest at LIBOR (one or three month) plus 300 basis points, require the payment of specified fees, and must be repaid in full at the end of a five year maturity period, with principal repayment commencing after a deferment period consisting of the first two years following loan origination. In addition, eligible lenders must retain five percent of each MSLP loan and continue to service such loan until it matures or the Main Street SPV sells all of its 95% participation interest. In this regard, because the MSLP is a newly constituted program without any established operating history, there are significant risks to the Company’s participation in the MSLP, including whether certain borrowers will ultimately be found to have been eligible for MSLP loans, whether the numerous required lender and borrower certifications will be found to have been made in good faith, whether the borrower will remain in compliance with the terms and conditions of its MSLP loan throughout its applicable term, whether any given lender or MSLP loan will be found to have been in compliance with the terms of the Main Street SPV’s Loan Participation Agreement and/or Servicing Agreement, and whether any individual MSLP loan will be repaid by the borrower on schedule, and, if not, whether the Main Street SPV will seek recourse against the originating lender.    
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations.transactions. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to time underOn March 31, 2020, the Company’s currentCompany announced that it suspended its
10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. Forstock repurchase program. During the three months ended September 30, 2019,2020, the Company repurchased 905did not repurchase any shares of CVB common stock outstanding under this program. As of September 30, 2019,2020, we have 9,577,0124,585,145 shares of CVB common stock remaining that are eligibleavailable for repurchase under the common stock repurchase program.
             
Period
 
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
  
    Average Price    
    Paid Per Share    
  
Maximum Number of Shares
Available for Repurchase Under
the Plans or Programs
 
July 1 - 31, 2019
  
-  
  $
-
   
9,577,917
 
August 1 - 31, 2019
  
584  
   
20.03
   
9,577,333
 
September 1 - 30, 2019
  
321  
   
20.03
   
9,577,012
 
             
Total
  
905  
   
20.03
   
9,577,012
 
             
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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ITEM 4.   MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5.   OTHER INFORMATION
None
ITEM 6.   EXHIBITS
Exhibit No.
  
Description of Exhibits
  31.1  
  10.1
Retirement and Consulting Agreement for Christopher D. Myers, dated July 17, 2019† (1)
  10.2
Amendment to Employment Agreement for Christopher D. Myers, dated July 17, 2019† (2)
  31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002*
  
31.2
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002*
  
32.1
  
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002**
  
32.2
  
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002**
101.INS
  
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
  
Inline XBRL Taxonomy Extension Schema Document
101.CAL
  
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
  
The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended September 30, 2019,2020, has been formatted in Inline XBRL.
*
Filed herewith
**
Furnished herewith
 
†Indicates a management contract or compensation plan.
(1)Incorporated herein by reference to Exhibit 10.1 to our Form
8-K
filed with the SEC on July 19, 2019.
(2)Incorporated herein by reference to Exhibit 10.2 to our Form
8-K
filed with the SEC on July 19, 2019.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
    
CVB FINANCIAL CORP.
    
(Registrant)
Date: November 12, 20196, 2020
    
    
/s/ E. Allen Nicholson
    
E. Allen Nicholson
    
Executive Vice President and Chief Financial Officer
    
(Principal Financial Officer)
 
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