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 JuneSeptember 30, 2020
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
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 ☐
  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: 135,519,143135,505,605 outstanding as of July 31,October 30, 2020.
Table of Contents
TABLE OF CONTENTS
 
PART I –
FINANCIAL INFORMATION (UNAUDITED)3
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS10
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS37
CRITICAL ACCOUNTING POLICIES38
OVERVIEW39
ANALYSIS OF THE RESULTS OF OPERATIONS41
ANALYSIS OF FINANCIAL CONDITION51
ASSET/LIABILITY AND MARKET RISK MANAGEMENT65
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK68
ITEM 4.
CONTROLS AND PROCEDURES68
PART II –
OTHER INFORMATION69
ITEM 1.
LEGAL PROCEEDINGS69
ITEM 1A.
RISK FACTORS70
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS71
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES71
ITEM 4.
MINE SAFETY DISCLOSURES71
ITEM 5.
OTHER INFORMATION72
ITEM 6.
EXHIBITS72
SIGNATURES
73
2
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TABLE OF CONTENTS
PART I –
FINANCIAL INFORMATION (UNAUDITED)
3
    ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10
    ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37
CRITICAL ACCOUNTING POLICIES
38
OVERVIEW
40
ANALYSIS OF THE RESULTS OF OPERATIONS
42
ANALYSIS OF FINANCIAL CONDITION
52
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
66
    ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
69
    ITEM 4.
CONTROLS AND PROCEDURES
69
PART II –
OTHER INFORMATION
70
    ITEM 1.
LEGAL PROCEEDINGS
70
    ITEM 1A.
RISK FACTORS
71
    ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
72
    ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
72
    ITEM 4.
MINE SAFETY DISCLOSURES
73
    ITEM 5.
OTHER INFORMATION
73
    ITEM 6.
EXHIBITS
73
SIGNATURES
74
2
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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:to the following:
•
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;
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 other pertinent 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 in 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;
3
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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;
•
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;
•
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.
cyber incidents, attacks, infiltrations, exfiltrations, 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 change or extreme weather events, that may affect electrical, environmental and communications or other services, computer 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, block-chain technology and other banking products, systems or services);
our ability to retain and increase market share, to retain and grow customers and to 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 capital, 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 principal regulatory agencies with jurisdiction over the Company, 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 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, 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 economy, our customers and our business partners, and actions taken by governmental authorities in response to the pandemic.
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.
 
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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,  
 
  December 31,  
  
       June 30,       

2020
 
  December 31,  

2019
   
2020
 
2019
Assets
      
Cash and due from banks
    $158,397    $158,310     $145,455    $158,310 
Interest-earning balances due from Federal Reserve
   1,768,886  27,208    1,339,498  27,208 
  
 
  
 
   
 
 
 
Total cash and cash equivalents
   1,927,283  185,518    1,484,953  185,518 
  
 
  
 
   
 
 
 
Interest-earning balances due from depository institutions
   38,611  2,931    44,367  2,931 
Investment securities
available-for-sale,
at fair value (with amortized cost of $1,618,811 at June 30, 2020, and $1,718,357 at December 31, 2019)
   1,676,067  1,740,257 
Investment securities
held-to-maturity
(with fair value of $638,950 at June 30, 2020, and $678,948 at December 31, 2019)
   613,169  674,452 
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
   2,289,236  2,414,709    2,783,340  2,414,709 
  
 
  
 
   
 
 
 
Investment in stock of Federal Home Loan Bank (FHLB)
   17,688  17,688    17,688  17,688 
Loans and lease finance receivables
   8,402,534  7,564,577    8,407,872  7,564,577 
Allowance for credit losses
   (93,983)  (68,660)    (93,869)  (68,660) 
  
 
  
 
   
 
 
 
Net loans and lease finance receivables
   8,308,551  7,495,917    8,314,003  7,495,917 
  
 
  
 
   
 
 
 
Premises and equipment, net
   51,766  53,978    51,477  53,978 
Bank owned life insurance (BOLI)
   226,330  226,281    228,132  226,281 
Accrued interest receivable
   29,842  28,122    30,004  28,122 
Intangibles
   38,096  42,986    35,804  42,986 
Goodwill
   663,707  663,707    663,707  663,707 
Other real estate owned (OREO)
   4,889  4,889    4,189  4,889 
Income taxes
   22,945  35,587    21,412  35,587 
Other assets
   132,353  110,137    139,635  110,137 
  
 
  
 
   
 
 
 
Total assets
    $13,751,297    $11,282,450     $13,818,711    $11,282,450 
  
 
  
 
   
 
 
 
Liabilities and Stockholders’ Equity
      
Liabilities:
      
Deposits:
      
Noninterest-bearing
    $6,901,368    $5,245,517     $6,919,423    $5,245,517 
Interest-bearing
   4,082,212  3,459,411    4,249,411  3,459,411 
  
 
  
 
   
 
 
 
Total deposits
   10,983,580  8,704,928    11,168,834  8,704,928 
Customer repurchase agreements
   468,156  428,659    483,420  428,659 
Other borrowings
   10,000   -    10,000   - 
Deferred compensation
   22,558  22,666    21,259  22,666 
Junior subordinated debentures
   25,774  25,774    25,774  25,774 
Payable for securities purchased
   162,090   - 
Other liabilities
   120,041  106,325    127,467  106,325 
  
 
  
 
   
 
 
 
Total liabilities
   11,792,199  9,288,352    11,836,754  9,288,352 
  
 
  
 
   
 
 
 
Commitments and Contingencies
      
Stockholders’ Equity
      
Common stock, authorized, 225,000,000 shares without par; issued and outstanding
135,516,316 at June 30, 2020, and 140,102,480 at December 31, 2019
   1,209,449  1,298,792 
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
   712,145  682,692    735,218  682,692 
Accumulated other comprehensive income, net of tax
   37,504  12,614    36,093  12,614 
  
 
  
 
   
 
 
 
Total stockholders’ equity
   1,959,098  1,994,098    1,981,957  1,994,098 
  
 
  
 
   
 
 
 
Total liabilities and stockholders’ equity
    $13,751,297    $11,282,450     $13,818,711    $11,282,450 
  
 
  
 
   
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
  
    Three Months Ended    
June 30,
 
    Six Months Ended    
June 30,
  
    Three Months Ended    
September 30,
 
    Nine Months Ended    
September 30,
  
2020
 
2019
 
2020
 
2019
  
2020
 
2019
 
2020
 
2019
Interest income:
          
Loans and leases, including fees
  $95,352  $101,843  $187,469  $201,530     $94,200    $98,796    $ 281,669    $ 300,326 
Investment securities:
          
Investment securities
available-for-sale
   8,449  10,118  18,498  20,763    8,447  9,222  26,945  29,985 
Investment securities
held-to-maturity
   3,660  4,426  7,658  8,951    3,375  4,298  11,033  13,249 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total investment income
   12,109  14,544  26,156  29,714    11,822  13,520  37,978  43,234 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Dividends from FHLB stock
   214  298  546  630    215  301  761  931 
Interest-earning deposits with other institutions
   283  100  896  194    389  946  1,285  1,140 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total interest income
   107,958  116,785  215,067  232,068    106,626  113,563  321,693  345,631 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Interest expense:
          
Deposits
   2,995  4,093  7,119  7,964    2,958  4,589  10,077  12,553 
Borrowings and customer repurchase agreements
   261  1,377  740  2,987    232  568  972  3,555 
Junior subordinated debentures
   133  258  333  524    111  247  444  771 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total interest expense
   3,389  5,728  8,192  11,475    3,301  5,404  11,493  16,879 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Net interest income before provision for credit losses
   104,569  111,057  206,875  220,593    103,325  108,159  310,200  328,752 
Provision for credit losses
   11,500  2,000  23,500  3,500    -  1,500  23,500  5,000 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Net interest income after provision for credit losses
   93,069  109,057  183,375  217,093    103,325  106,659  286,700  323,752 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Noninterest income:
          
Service charges on deposit accounts
   3,809  5,065  8,585  10,206    3,970  4,833  12,555  15,039 
Trust and investment services
   2,477  2,452  4,897  4,634    2,405  2,330  7,302  6,964 
Bankcard services
   405  1,027  982  1,977    456  637  1,438  2,614 
BOLI income
   1,683  1,349  3,742  2,685    1,469  1,797  5,211  4,482 
Gain on OREO, net
   -  24  10  129    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    -   -   -  5,685 
Other
   3,778  2,603  5,576  4,647    3,160  2,297  8,736  6,944 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total noninterest income
   12,152  18,205  23,792  34,508    13,153  11,894  36,945  46,402 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Noninterest expense:
          
Salaries and employee benefits
   28,706  28,862  59,583  58,164    31,034  30,122  90,617  88,286 
Occupancy and equipment
   5,031  5,427  9,868  10,851    5,275  4,879  15,143  15,730 
Professional services
   2,368  2,040  4,624  3,965    2,019  1,688  6,643  5,653 
Computer software expense
   2,754  2,756  5,570  5,369    2,837  2,663  8,407  8,032 
Marketing and promotion
   1,255  1,238  2,810  2,632    728  1,517  3,538  4,149 
Amortization of intangible assets
   2,445  2,833  4,890  5,690    2,292  2,648  7,182  8,338 
Acquisition related expenses
   -  2,612   -  5,761    -  244   -  6,005 
Other
   3,839  4,760  7,694  9,700    5,403  3,774  13,097  13,474 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total noninterest expense
   46,398  50,528  95,039  102,132    49,588  47,535  144,627  149,667 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Earnings before income taxes
   58,823  76,734  112,128  149,469    66,890  71,018  179,018  220,487 
Income taxes
   17,192  22,253  32,517  43,346    19,398  20,595  51,915  63,941 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Net earnings
    $41,631    $54,481    $79,611    $106,123     $47,492    $50,423    $127,103    $156,546 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Other comprehensive income:
          
Unrealized (loss) gain on securities arising during the period, before tax
    $(1,280)    $19,486    $35,338    $37,713     $(2,004)    $5,423    $33,334    $43,136 
Less: Reclassification adjustment for net gain on securities included in net income
   -  (5)   -  (5) 
  
 
 
 
 
 
 
 
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
   378  (5,761)  (10,448)  (11,149)    593  (1,602)  (9,855)  (12,751) 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
   (902)  13,725  24,890  26,564 
Other comprehensive (loss) income, net of tax
   (1,411)  3,816  23,479  30,380 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Comprehensive income
    $40,729    $68,206    $104,501    $132,687     $46,081    $54,239    $150,582    $186,926 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Basic earnings per common share
    $0.31  $0.39    $0.58    $0.76     $0.35    $0.36    $0.93    $1.12 
Diluted earnings per common share
    $0.31    $0.39    $0.58    $0.76     $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)
Three Months Ended JuneSeptember 30, 2020 and 2019
 
  
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance, April 1, 2020
  135,511    $1,208,049    $694,931    $38,406    $1,941,386 
Repurchase of common stock
  (1)   (28)   -   -   (28) 
Exercise of stock options
  6   79   -   -   79 
Shares issued pursuant to stock-based compensation plan
  -   1,349   -   -   1,349 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (24,417)   -   (24,417) 
Net earnings
  -   -   41,631   -   41,631 
Other comprehensive income
  -   -   -   (902)   (902) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2020
  135,516    $1,209,449    $712,145    $37,504    $1,959,098 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, April 1, 2019
  140,009    $1,294,093    $602,279    $(5,445)    $1,890,927 
Repurchase of common stock
  (3)   (77)   -   -   (77) 
Exercise of stock options
  136   1,917   -   -   1,917 
Shares issued pursuant to stock-based compensation plan
  -   952   -   -   952 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (25,248)   -   (25,248) 
Net earnings
  -   -   54,481   -   54,481 
Other comprehensive income
  -   -   -   13,725   13,725 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
  140,142    $1,296,885    $631,512    $8,280    $1,936,677 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        
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 
 
 
 
 
 
 
 
 
��
 
 
 
 
 
 
 
 
 
 
 
SixNine Months Ended JuneSeptember 30, 2020 and 2019
 
       
Accumulated
  
 
Common
     
Other
  
 
Shares
 
Common
 
Retained
 
Comprehensive
  
  
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
  
Outstanding
 
Stock
 
Earnings
 
Income (Loss)
 
Total
Balance, January 1, 2020
   140,102    $1,298,792    $682,692    $12,614    $1,994,098  140,102    $1,298,792    $682,692    $12,614    $1,994,098 
Cumulative adjustment upon adoption of ASU
2016-13
   -   -  (1,325)   -  (1,325)   -   -  (1,325)   -  (1,325) 
Repurchase of common stock
   (4,989)  (92,430)   -   -  (92,430)  (5,004)  (92,687)   -   -  (92,687) 
Exercise of stock options
   10  121   -   -  121  14  168   -   -  168 
Shares issued pursuant to stock-based compensation plan
   393  2,966   -   -  2,966  397  4,373   -   -  4,373 
Cash dividends declared on common stock ($0.36 per share)
   -   -  (48,833)   -  (48,833) 
Cash dividends declared on common stock ($0.54 per share)
  -   -  (73,252)   -  (73,252) 
Net earnings
   -   -  79,611   -  79,611   -   -  127,103   -  127,103 
Other comprehensive income
   -   -   -  24,890  24,890   -   -   -  23,479  23,479 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Balance, June 30, 2020
   135,516    $1,209,449    $712,145    $37,504    $1,959,098 
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  140,000  $ 1,293,669  $ 575,805  $ (18,284)  $ 1,851,190 
Repurchase of common stock
   (36)  (812)   -   -  (812)  (70)  (1,535)   -   -  (1,535) 
Exercise of stock options
   145  2,057   -   -  2,057  160  2,212   -   -  2,212 
Shares issued pursuant to stock-based compensation plan
   33  1,971   -   -  1,971  67  3,792   -   -  3,792 
Cash dividends declared on common stock ($0.36 per share)
   -   -  (50,416)   -  (50,416) 
Cash dividends declared on common stock ($0.54 per share)
  -   -  (75,692)   -  (75,692) 
Net earnings
   -   -  106,123   -  106,123   -   -  156,546   -  156,546 
Other comprehensive income
   -   -   -  26,564  26,564   -   -   -  30,380  30,380 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
   140,142    $1,296,885    $631,512    $8,280    $1,936,677 
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)
 
   
    Six Months Ended    

June 30,
   
2020
 
2019
Cash Flows from Operating Activities
   
Interest and dividends received
    $202,574    $221,542 
Service charges and other fees received
   19,935   21,368 
Interest paid
   (7,840)   (10,889) 
Net cash paid to vendors, employees and others
   (88,778)   (106,919) 
Income taxes
   (28,810)   (42,500) 
  
 
 
 
 
 
 
 
Net cash provided by operating activities
   97,081   82,602 
  
 
 
 
 
 
 
 
Cash Flows from Investing Activities
   
Net change in interest-earning balances from depository institutions
   (35,680)   1,245 
Proceeds from repayment of investment securities
available-for-sale
   243,397   164,571 
Proceeds from maturity of investment securities
available-for-sale
   3,490   4,255 
Proceeds from repayment and maturity of investment securities
held-to-maturity
   71,597   51,690 
Purchases of investment securities
held-to-maturity
   (1,509)   (37,110) 
Net increase in equity investments
   (3,040)   (2,811) 
Net (increase) decrease in loan and lease finance receivables
   (821,352)   247,450 
Proceeds on eminent domain condemnation, net
   -   5,685 
Proceeds from sale of building, net
   -   5,487 
Purchase of premises and equipment
   (1,550)   (2,628) 
Proceeds from BOLI death benefit
   3,159   175 
Proceeds from sales of other real estate owned
   -   523 
  
 
 
 
 
 
 
 
Net cash (used in) provided by investing activities
   (541,488)   438,532 
  
 
 
 
 
 
 
 
Cash Flows from Financing Activities
   
Net increase (decrease) in other deposits
   2,265,270   (112,317) 
Net increase (decrease) in time deposits
   13,382   (52,350) 
Net increase (decrease) in other borrowings
   10,000   (280,000) 
Net increase (decrease) in customer repurchase agreements
   39,497   (20,984) 
Cash dividends on common stock
   (49,668)   (44,836) 
Repurchase of common stock
   (92,430)   (812) 
Proceeds from exercise of stock options
   121   2,057 
  
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
   2,186,172   (509,242) 
  
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
   1,741,765   11,892 
Cash and cash equivalents, beginning of period
   185,518   163,948 
  
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
    $1,927,283    $175,840 
  
 
 
 
 
 
 
 
   
    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        
  
    Six Months Ended    

June 30,
  
September 30,
  
2020
 
2019
  
2020
 
2019
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
      
Net earnings
    $    79,611    $    106,123     $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
   -  (5,685)    0  (5,685) 
Gain on sale of building, net
   -  (4,545)    (1,680)  (4,545) 
Gain on sale of other real estate owned
   -  (105)    0  (105) 
Increase in BOLI
   (2,578)  (3,589)    (4,028)  (5,592) 
Net amortization of premiums and discounts on investment securities
   5,931  5,054    10,181  7,593 
Accretion of discount for acquired loans, net
   (8,795)  (15,215)    (13,106)  (22,369) 
Provision for
credit
losses
   23,500  3,500    23,500  5,000 
Valuation allowance on other real estate owned
   700   0 
Stock-based compensation
   2,966  1,971    4,373  3,792 
Depreciation and amortization, net
   3,685  7,832    2,173  16,993 
Change in other assets and liabilities
   (7,239)  (12,739)    (11,197)  (4,213) 
  
 
 
 
  
 
 
 
Total adjustments
   17,470  (23,521)    10,916  (9,136) 
  
 
 
 
  
 
 
 
Net cash provided by operating activities
    $97,081    $82,602     $138,019    $147,410 
  
 
 
 
  
 
 
 
Supplemental Disclosure of Non-cash Investing Activities
      
Securities purchased and not settled
  $162,090  $- 
Transfer of loans to other real estate owned
  $-  $2,275     $0    $9,450 
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 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.
 
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 sixnine months ended JuneSeptember 30, 2020 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, 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, 2019 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 credit 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.
 
10
Table of Contents
Adoption of New Accounting Standard
Provision and Allowance for Credit Losses
— On January 1, 2020, the Company adopted ASU
No. 2016-13,
“Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial 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. This 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, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off balance sheet credit exposures. This includes, but is not limited to, loans,
held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to
available-for-sale
(“AFS”) debt securities. For AFS debt securities with unrealized losses, we will measure credit impairment in a manner similar to 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, we will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as 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 secondthird quarter of 2020.
The Company adopted this ASU using the modified retrospective method for all financial assets measured at amortized cost and
off-balance
sheet credit exposures. Results for reporting periods beginning after January 1,
2020
are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to beginning retained earnings of $1.3 million, net of tax as of January 
1,
,
2020
for the cumulative adjustment upon adoption of ASC
326
. 326. The transition adjustment of $1.8 million was added to the 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 accounting for AFS or HTM investment securities.
The Company developed a CECLan 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 addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, the ASU 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 utilizeutilized a single economic forecast that is based on probability weighted scenarios to incorporate macroeconomic uncertainty over a 2 or
3-year
forecast 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.
During
Beginning in the second half of March 2020 and through June 30, 2020, the broader economy experienced a significant deterioration in the economic environment driven by the
COVID-19
pandemic resulting in adverse changes to the forecasted macroeconomic variables utilized in our modeling processes. This expected economic deterioration, coupled with the implementation of the expected loss methodology for determining our provision for credit losses, have contributed to an increased provision for credit losses of $23.5 
$23.5 
million forin the six months ended June 30,first half of 2020. We continue to monitor the impact of
on the economy 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 results during the remainderfinal quarter of 2020 is highly 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.
 
11
Table of Contents
4.
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.
 
 
June 30, 2020
 
September 30, 2020
 
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
 
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
 
(Dollars in thousands)
 
(Dollars in thousands)
Investment securities
available-for-sale:
          
Mortgage-backed securities
     $1,191,431    $46,868    $-    $1,238,299  73.88%    $1,710,160    $46,713    $(2)    $1,756,871  79.65% 
CMO/REMIC
 391,586  8,962  (12)  400,536  23.90%  404,380  7,326  (212)  411,494  18.66% 
Municipal bonds
 35,015  1,438   -  36,453  2.17%  35,011  1,457   -  36,468  1.65% 
Other securities
 779   -   -  779  0.05%  813   -   -  813  0.04% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $1,618,811    $57,268    $(12)    $1,676,067  100.00%    $2,150,364    $55,496    $(214)    $2,205,646  100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
   $106,981    $6,285    $-    $113,266  17.45%    $103,317    $6,627    $-    $109,944  17.88% 
Mortgage-backed securities
 164,174  8,135   -  172,309  26.77%  152,285  7,837   -  160,122  26.36% 
CMO/REMIC
 171,821  5,283   -  177,104  28.02%  159,676  5,315   -  164,991  27.64% 
Municipal bonds
 170,193  6,418  (340)  176,271  27.76%  162,416  6,387  (338)  168,465  28.12% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $613,169    $26,121    $(340)    $638,950  100.00%    $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% 
 
 
 
 
 
 
 
 
 
 
  
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% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
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.
 
   
    Three Months Ended    

June 30,
   
    Six Months Ended    

June 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
 
(Dollars in thousands)
 
Investment securities
available-for-sale:
        
Taxable
    $8,244     $9,821     $18,069     $20,130 
Tax-advantaged
   205    297    429    633 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest income from
available-for-sale
securities
   8,449    10,118    18,498    20,763 
  
 
 
   
 
 
   
 
 
   
 
 
 
Investment securities
held-to-maturity:
        
Taxable
   2,447    2,932    5,145    5,842 
Tax-advantaged
   1,213    1,494    2,513    3,109 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest income from
held-to-maturity
securities
   3,660    4,426    7,658    8,951 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest income from investment securities
    $12,109     $14,544     $26,156     $29,714 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
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 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
The adoption of CECL did not have a material impact on the accounting for investment securities, as approximately 91%93% of the total investment securities portfolio at JuneSeptember 30, 2020 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 JuneSeptember 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 secondthird 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
no
t not been recorded as of JuneSeptember 30, 2020.
 
 
June 30, 2020
 
September 30, 2020
 
    Less Than 12 Months    
 
    12 Months or Longer    
 
    Total    
 
    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
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
 
(Dollars in thousands)
 
 
(Dollars in thousands)
Investment securities
available-for-sale:
            
Mortgage-backed securities
   $-    $-     $-    $-    $-    $-    $30,851    $(2)    $-    $-    $30,851    $(2) 
CMO/REMIC
 2,754  (12)   -   -  2,754  (12)  71,781  (212)   -   -  71,781  (212) 
Municipal bonds
  -   -    -   -   -   -   -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $2,754    $(12)    $-    $-    $2,754    $(12)    $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.
 
13
Table of Contents
  
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) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
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 JuneSeptember 30, 2020 and December 31, 2019, investment securities having a carrying value of approximately $1.87$1.86 billion and $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 JuneSeptember 30, 2020, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have weighted average remaining contractual maturities through 2058,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.
 
  
June 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
   $40,755    $41,076    $2,075    $2,113 
Due after one year through five years
  1,224,722   1,275,526   341,272   354,456 
Due after five years through ten years
  154,864   159,124   96,738   100,064 
Due after ten years
  198,470   200,341   173,084   182,317 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment securities
   $1,618,811    $1,676,067    $613,169    $638,950 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
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
as of
June September 30, 2020.
 
14
Table of Contents
5.
LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following table provides a summary of total loans and lease finance receivables by type.
 
                                                    
  
June 30, 2020
 
December 31, 2019
  
(Dollars in thousands)
Commercial and industrial
   $840,738    $935,127 
SBA
  300,156   305,008 
SBA - Paycheck Protection Program (PPP)
  1,097,150   - 
Real estate:
  
Commercial real estate
  5,365,120   5,374,617 
Construction
  125,815   116,925 
SFR mortgage
  286,526   283,468 
Dairy & livestock and agribusiness
  251,821   383,709 
Municipal lease finance receivables
  49,876   53,146 
Consumer and other loans
  85,332   116,319 
 
 
 
 
 
 
 
 
Total loans
  8,402,534   7,568,319 
Less: Deferred loan fees, net (1)
  -   (3,742) 
 
 
 
 
 
 
 
 
Total loans, net of deferred loan fees
  8,402,534   7,564,577 
Less: Allowance for credit losses
  (93,983)   (68,660) 
 
 
 
 
 
 
 
 
Total loans and lease finance receivables, net
   $8,308,551    $7,495,917 
 
 
 
 
 
 
 
 
                                                    
  
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, totalgross loans are presented net of deferred loan fees by respective class of financing receivables.
As of JuneSeptember 30, 2020, 68.76%69.04% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 63.85%64.56% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of JuneSeptember 30, 2020, $248.6$271.2 million, or 4.63%5.00% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $121.9$121.1 million for loans secured by dairy & livestock land and $126.7$150.2 million infor loans secured by agricultural land at JuneSeptember 30, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of JuneSeptember 30, 2020, dairy & livestock and agribusiness loans of $251.8$252.8 million were comprised of $201.7$210.4 million for dairy & livestock loans and $50.1$42.4 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.
At JuneSeptember 30, 2020 and December 31, 2019, loans totaling $6.00 billion and $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 JuneSeptember 30, 2020 and December 31, 2019.
 
15
Table of ContentsContents
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
  
               
June 30, 2020
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
  
(Dollars in thousands)
Commercial and industrial loans:
         
Risk Rating:
         
Pass
   $58,626     $166,910     $75,223     $67,777     $43,833     $79,031     $299,536     $9,139     $800,075  
Special Mention
  2,013    240    5,074    563    401    4,647    5,531    1,459    19,928  
Substandard
  1,898    151    1,917    1,987    522    36    12,860    1,364    20,735  
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial and industrial loans:
   $62,537     $167,301     $82,214     $70,327     $44,756     $83,714     $317,927     $11,962     $840,738  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA:
         
Risk Rating:
         
Pass
   $26,248     $13,448     $46,979     $76,029     $27,432     $90,955     $-     $-     $281,091  
Special Mention
  -    -    -    1,144    1,370    7,099    -    -    9,613  
Substandard
  -    -    1,042    2,627    1,411    4,372    -    -    9,452  
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total SBA:
   $26,248     $13,448    $48,021    $79,800    $30,213    $102,426    $-     $-     $300,156 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA- PPP
         
Risk Rating:
          
Pass
   $1,097,150     $-     $-     $-     $-     $-     $-     $-     $1,097,150  
Special Mention
  -    -    -    -    -    -    -    -    -  
Substandard
  -    -    -    -    -    -    -    -    -  
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total SBA- PPP
:
   $1,097,150     $-     $-     $-     $-     $-     $-     $-     $ 1,097,150 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans:
         
Risk Rating:
         
Pass
   $364,047     $722,734     $719,239     $703,597     $614,850     $1,897,358     $192,321     $20,802     $5,234,948  
Special Mention
  4,637    5,353    9,685    16,423    3,953    56,510    1,339    -    97,900  
Substandard
  -    -    4,437    7,341    1,327    18,633    231    303    32,272  
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial real estate loans:
   $368,684     $728,087     $733,361     $727,361     $620,130     $1,972,501     $193,891     $21,105    $5,365,120 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction loans:
         
Risk Rating:
         
Pass
   $5,259     $16,733     $17,013    $17,780    $10,592    $5    $52,949    $5,484    $125,815 
Special Mention
  -    -    -    -    -    -    -    -    -  
Substandard
  -    -    -    -    -    -    -    -    -  
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Construction loans:
   $5,259     $16,733    $17,013    $17,780    $10,592    $5    $52,949    $5,484    $125,815 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFR mortgage loans:
         
Risk Rating:
         
Pass
   $30,749     $65,948    $36,731    $26,637    $33,192    $89,651    $-     $-     $282,908 
Special Mention
  -    -    -    -    -    1,925   -    -    1,925 
Substandard
  -    -    -    375   231   641   -    446   1,693 
Doubtful & Loss
  -    -    -    -    -    -    -    -    -  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total SFR mortgage loans:
   $30,749     $65,948    $36,731    $27,012    $33,423    $92,217    $-     $446    $286,526 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                
                
                
                
                
                
                
                
                
   
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
  
               
June 30, 2020
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
  
(Dollars in thousands)
Dairy & livestock and agribusiness loans:
         
Risk Rating:
         
Pass
   $72    $2,763    $1,852    $8,064    $2,795    $9,955    $185,698    $327    $211,526 
Special Mention
  -   -   -   712   -   -   14,750   3,389   18,851 
Substandard
  -   -   882   -   3,635   -   4,562   12,365   21,444 
Doubtful & Loss
  -   -   -   -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Dairy &
livestock and
agribusiness loans:
   $72    $2,763    $2,734    $8,776    $6,430    $9,955    $205,010    $16,081    $251,821 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal lease
finance receivables
loans:
         
Risk Rating:
         
Pass
   $135    $-    $2,557    $10,766    $7,856    $28,115    $-    $-    $49,429 
Special Mention
  -   -   -   -   -   447   -   -   447 
Substandard
  -   -   -   -   -   -   -   -   - 
Doubtful & Loss
  -   -   -   -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Municipal lease
finance receivables
loans:
   $135    $-    $2,557    $10,766    $7,856    $28,562    $-    $-    $49,876 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer and other
loans:
         
Risk Rating:
         
Pass
   $2,079    $2,918    $1,067    $1,165    $1,932    $1,672    $71,191    $1,704    $83,728 
Special Mention
  -   -   -   -   -   139   733   -   872 
Substandard
  -   -   4   -   4   177   6   541   732 
Doubtful & Loss
  -   -   -   -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Consumer and
other loans:
   $2,079    $2,918    $1,071    $1,165    $1,936    $1,988    $71,930    $2,245    $85,332 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross loans:
         
Risk Rating:
         
Pass
 $1,584,365    $991,454    $900,661    $911,815    $742,482    $2,196,742    $801,695    $37,456    $8,166,670 
Special Mention
  6,650   5,593   14,759   18,842   5,724   70,767   22,353   4,848   149,536 
Substandard
  1,898   151   8,282   12,330   7,130   23,859   17,659   15,019   86,328 
Doubtful & Loss
  -   -   -   -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Gross loans:
 $1,592,913    $997,198    $923,702    $942,987    $755,336    $2,291,368    $841,707    $57,323    $8,402,534 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                
                
                
                
                
                
                
                
                
   
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 date presented.
 
                                                                                          
   
December 31, 2019
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful &
Loss
   
Total
 
   
(Dollars in thousands)
 
Commercial and industrial
    $895,234     $35,473   $4,420   $-     $935,127 
SBA
   283,430    11,032    10,546    -    305,008 
Real estate:
          
Commercial real estate
          
Owner occupied
   1,977,007    78,208    28,435    -    2,083,650 
Non-owner
occupied
   3,280,580    10,005    382    -    3,290,967 
Construction
          
Speculative
   106,895    -    -    -    106,895 
Non-speculative
   10,030    -    -    -    10,030 
SFR mortgage
   280,010    1,957    1,501    -    283,468 
Dairy & livestock and agribusiness
   320,670    35,920    27,119    -    383,709 
Municipal lease finance receivables
   52,676    470    -    -    53,146 
Consumer and other loans
   114,870    421    1,028    -    116,319 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total gross loans
    $7,321,402     $173,486   $73,431   $-     $7,568,319 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
                                                                                          
  
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 Credit Losses
The allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
contained herein for a more detailed discussion concerning the allowance for credit losses.
Our allowance for credit losses increaseddecreased in the secondthird quarter by $11.3 million,$114,000, as a result of a $11.5 millionnet charge-offs of $114,000. There was 0 provision for credit loss and net charge-offslosses in the third quarter of $158,000.2020. Our allowance for credit losses at JuneSeptember 30, 2020 was $94.0$93.9 million or 1.12% of total loans. The provision for credit loss was primarily due to the estimated losses over the expected life of our loans that result from the current and forecasted economic downturn. During the second quarter, the economy in the areas we operate, as well as the broader economy, continued to reflect a significant decline in economic activity due to the
COVID-19
pandemic.
Our forecast of macroeconomic variables utilized in the estimate of future credit losses deteriorated from the end of the first quarter, due to both broader economic factors and the recent reversals in California’s phased approach to re-opening the economy. Our economic forecast is a blend of multiple forecasts produced by Moody’s. The resulting forecast at quarter end assumed the decline in GDP for the second quarter was
approximately
33
%, with GDP growth of
18
% in the third quarter, followed by a modest decline in GDP in the fourth quarter. For
2020
, as a whole, GDP is forecasted to decrease by almost
6
%. GDP is forecasted to rebound in the second half of
2021
, with full-year GDP growing in
2021
by approximately
1
%. In
2022
, GDP is forecasted to grow more robustly by approximately
6.4
%. The forecast also assumes heightened levels of unemployment, reflected by a
14
% unemployment rate in the second quarter and unemployment exceeding
9
% for the remainder of
2020
.
Unemployment is forecasted to stay elevated in
both
2021
and
2022
, at
9.7
% and
7.5
%, respectively. For the sixnine months ended June 
September 30,
,
2020,
, the allowance for credit lossesACL increased by $
25.3
$25.2 million, due toincluding a $
23.5
 million provision for credit loss resulting from the forecasted downturn in macroeconomic variables related to the pandemic and a $
1.8
$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
1
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
2020
 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 ACL was appropriate at JuneSeptember 30, 2020 and December 31, 2019. 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 that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.
 
19
Table of Contents
The following tables present the
balance
and activity related to the allowance for credit losses for
held-for-investment
loans by type for the periods presented.
 
                                                                                          
   
Three Months Ended June 30, 2020
 
   
 Ending Balance 
March 31, 2020
   
Charge-offs
  
Recoveries
   
Provision for
(Recapture of)
Credit Losses
  
Ending Balance
June 30, 2020
 
   
(Dollars in thousands)
 
Commercial and industrial
    $9,387     $(11)    $3     $(1,388)    $7,991 
SBA
   3,946    (156)   3    (142)   3,651 
SBA - PPP
   -        -       -        -       -     
Real estate:
        
Commercial real estate
   58,427    -       -        16,501   74,928 
Construction
   4,632    -       3    (2,345)   2,290 
SFR mortgage
   281    -       -        (59)   222 
Dairy & livestock and agribusiness
   4,266    -       -        (887)   3,379 
Municipal lease finance receivables
   277    -       -        25   302 
Consumer and other loans
   1,425    -       -        (205)   1,220 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Total allowance for credit losses
    $82,641     $(167)    $9     $11,500    $93,983 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
                                                                                          
  
Three Months Ended September 30, 2020
  
 Ending Balance 
June 30, 2020
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Credit Losses
 
 Ending Balance 
September 30,
2020
  
(Dollars in thousands)
Commercial and industrial
   $7,991    $(161)    $2    $761    $8,593 
SBA
  3,651   (47)   69   (169)   3,504 
SBA - PPP
  0   0   0   0   0 
Real estate:
     
Commercial real estate
  74,928   0   0   (473)   74,455 
Construction
  2,290   0   3   (355)   1,938 
SFR mortgage
  222   0   0   15   237 
Dairy & livestock and agribusiness
  3,379   0   0   330   3,709 
Municipal lease finance receivables
  302   0   0   (153)   149 
Consumer and other loans
  1,220   (23)   43   44   1,284 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for credit losses
   $93,983    $(231)    $117    $0    $93,869 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                                                                                    
  
Three Months Ended June 30, 2019
  
Three Months Ended September 30, 2019
  
 Ending Balance 
March 31, 2019
   
Charge-offs
 
Recoveries
   
Provision for
(Recapture of)
Loan Losses
 
Ending Balance
June 30, 2019
  
 Ending Balance 
June 30, 2019
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
2019
  
(Dollars in thousands)
  
(Dollars in thousands)
Commercial and industrial
    $7,608     $(48)    $49     $248    $7,857    $7,857    $0    $94    $287    $8,238 
SBA
   1,294    (210)   4    31   1,119   1,119   (65)   0   412   1,466 
Real estate:
             
Commercial real estate
   46,227    -       -        2,060   48,287   48,287   0   0   624   48,911 
Construction
   864    -       3    4   871   871   0   3   55   929 
SFR mortgage
   2,189    -       115    19   2,323   2,323   0   8   44   2,375 
Dairy & livestock and agribusiness
   5,699    -       19    (377)   5,341   5,341   0   0   88   5,429 
Municipal lease finance receivables
   738    -       -        (12)   726   726   0   0   (64)   662 
Consumer and other loans
   582    (3)   2    27   608   608   (3)   3   54   662 
  
 
   
 
  
 
   
 
  
 
  
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
    $65,201     $(261)    $192     $2,000    $67,132    $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
  
Six Months Ended June 30, 2020
 
  
Ending Balance,
prior to adoption
of ASU
2016-13

December 31,
2019
  
Impact of
Adoption ASU
2016-13
  
Charge-offs
  
Recoveries
  
Provision for
(Recapture of)
Credit Losses
  
Ending Balance
June 30, 2020
 
  
(Dollars in thousands)
 
Commercial and industrial
   $8,880    $(2,442)    $(11)    $5    $1,559    $7,991 
SBA
  1,453   1,818   (156)   3   533   3,651 
SBA - PPP
  -       -       -       -       -       -     
Real estate:
      
Commercial real estate
  48,629   3,547   -       -       22,752   74,928 
Construction
  858   655   -       6   771   2,290 
SFR mortgage
  2,339   (2,043)   -       206   (280)   222 
Dairy & livestock and agribusiness
  5,255   (186)   -       -       (1,690)   3,379 
Municipal lease finance receivables
  623   (416)   -       -       95   302 
Consumer and other loans
  623   907   (86)   16   (240)   1,220 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total allowance for credit losses
   $68,660    $1,840    $(253)    $236    $23,500    $93,983 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
     
Six Months Ended June 30, 2019
 
     
  Ending Balance  
December 31,
2018
     
  Charge-offs  
     
  Recoveries  
     
Provision for
(Recapture of)
    Loan Losses    
     
  Ending Balance  
June 30, 2019
 
     
(Dollars in thousands)
 
Commercial and industrial
      $7,528       $(48)       $159       $218       $7,857 
SBA
     1,078      (230)      9      262      1,119 
Real estate:
                    
Commercial real estate
     45,097      -          -          3,190      48,287 
Construction
     981      -          6      (116)      871 
SFR mortgage
     2,197      -          183      (57)      2,323 
Dairy & livestock and agribusiness
     5,225      (78)      19      175      5,341 
Municipal lease finance receivables
     775      -          -          (49)      726 
Consumer and other loans
     732      (4)      3      (123)      608 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
 
Total allowance for loan losses
      $63,613       $(360)       $379       $3,500       $67,132 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
 
  
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 table presents the recorded investment in loans
held-for-investment
and the related ACL by loan type, based on the Company’s methodology for determining the ACL for the periods presented.
 
     
June 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
      $2,088       $915,865       $276       $7,581 
SBA
     5,632      321,974      93      1,026 
Real estate:
                
Commercial real estate
     1,531      5,415,820      -      48,287 
Construction
     -      116,457      -      871 
SFR mortgage
     4,858      273,427      -      2,323 
Dairy & livestock and agribusiness
     -      301,752      -      5,341 
Municipal lease finance receivables
     -      59,985      -      726 
Consumer and other loans
     397      120,382      2      606 
    
 
 
     
 
 
     
 
 
     
 
 
 
Total
      $14,506       $7,525,662       $371       $66,761 
    
 
 
     
 
 
     
 
 
     
 
 
 
21
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 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, 2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
21
Table of Contents
The following table presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as of the date presented.
 
   
June 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
    $630     $218     $1,004     $1,852     $838,886     $840,738 
SBA
   -    214    1,588    1,802    298,354    300,156 
SBA - PPP
   -    -    -    -    1,097,150    1,097,150 
Real estate:
            
Commercial real estate
            
Owner occupied
   -    -    232    232    2,074,233    2,074,465 
Non-owner
occupied
   4    -    1,715    1,719    3,288,936    3,290,655 
Construction
            
Speculative (1)
   -    -    -    -    111,222    111,222 
Non-speculative
   -    -    -    -    14,593    14,593 
SFR mortgage
   -    446    704    1,150    285,376    286,526 
Dairy & livestock and agribusiness
   882    -    -    882    250,939    251,821 
Municipal lease finance receivables
   -    -    -    -    49,876    49,876 
Consumer and other loans
   409    52    220    681    84,651    85,332 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total gross loans
    $1,925     $930     $5,463     $8,318     $8,394,216     $8,402,534 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
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.
22
Table of Contents
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 JuneSeptember 30, 2020 by type of loan.
 
                                                            
   
June 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
    $567     $1,197     $25 
SBA
   1,140    1,598    - 
SBA - PPP
   -    -    - 
Real estate:
      
Commercial real estate
      
Owner occupied
   534    684    - 
Non-owner
occupied
   228    1,944    - 
Construction
      
Speculative (2)
   -    -    - 
Non-speculative
   -    -    - 
SFR mortgage
   1,079    1,080    - 
Dairy & livestock and agribusiness
   -    -    - 
Municipal lease finance receivables
   -    -    - 
Consumer and other loans
   289    289    - 
  
 
 
   
 
 
   
 
 
 
Total gross loans
    $3,837     $6,792     $25 
  
 
 
   
 
 
   
 
 
 
   
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 JuneSeptember 30, 2020, $1.1$1.8 million of nonaccruing loans were current, $267,000$571,000 were
30-59
days past due, $2.1 million were
60-89
days past due, and $5.5$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 $1.3 million$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 presented.
 
   
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     $-     $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
   -    -    -    479    2,083,171    2,083,650 
Non-owner
occupied
   -    -    -    245    3,290,722    3,290,967 
Construction
            
Speculative (2)
   -    -    -    -    106,895    106,895 
Non-speculative
   -    -    -    -    10,030    10,030 
SFR mortgage
   6    243    249    878    282,341    283,468 
Dairy & livestock and agribusiness
   -    -    -    -    383,709    383,709 
Municipal lease finance receivables
   -    -    -    -    53,146    53,146 
Consumer and other loans
   -    -    -    377    115,942    116,319 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total gross loans
    $878     $775     $1,653     $5,277     $7,561,389     $7,568,319 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
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 December 31, 2019, $1.2 million of nonaccruing loans were current, $59,000 were
30-59
days past due, $1.1 million were
60-89
days past due and $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)
Excludes $2.0 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
 
23
Table of Contents
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
.
removed. As a result of the change, the following tables present information about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of JuneSeptember 30, 2019 and December 31, 2019, prior to the date of adoption of the amendments to the credit loss standard.
 
                                                                                
   
Six Months Ended June 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
    $898     $1,033     $-         $1,022     $2 
SBA
   4,369    5,714    -        3,703    21 
Real estate:
                
Commercial real estate
          
Owner occupied
   502    616    -        515    -     
Non-owner
occupied
   1,029    1,209    -        1,068    14 
Construction
          
Speculative
   -        -        -        -        -     
Non-speculative
   -        -        -        -        -     
SFR mortgage
   4,858    5,467    -        4,893    42 
Dairy & livestock and agribusiness
   -        -        -        -        -     
Municipal lease finance receivables
   -        -        -        -        -     
Consumer and other loans
   395    518    -        407    -     
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   12,051    14,557    -        11,608    79 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
With a related allowance recorded:
          
Commercial and industrial
   1,190    1,263    276    1,251    -     
SBA
   1,263    1,534    93    1,179    -     
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
   2    3    2    2    -     
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   2,455    2,800    371    2,432    -     
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans
    $14,506     $17,357     $371     $14,040     $79 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
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 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
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     $
-    
SBA
   2,243    2,734    -     
Real estate:
      
Commercial real estate
      
Owner occupied
   479    613    -     
Non-owner
occupied
   642    643    -     
Construction
      
Speculative
   -        -        -     
Non-speculative
   -        -        -     
SFR mortgage
   2,979    3,310    -     
Dairy & livestock and agribusiness
   -        -        -     
Municipal lease finance receivables
   -        -        -     
Consumer and other loans
   377    514    -     
  
 
 
   
 
 
   
 
 
 
Total
   7,811    9,075    -     
  
 
 
   
 
 
   
 
 
 
With a related allowance recorded:
      
Commercial and industrial
   253    347    251 
SBA
   325    324    257 
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
   578    671    508 
  
 
 
   
 
 
   
 
 
 
Total impaired loans
    $8,389     $9,746     $508 
  
 
 
   
 
 
   
 
 
 
   
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 
  
 
 
 
  
 
 
 
  
 
 
 
 
25
Table of Contents
Collateral Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the recorded investment in collateral-dependent loans by type of loans as of the date presented.
 
                                                                                                            
  
June 30, 2020
 
Number of
Loans
Dependent on
Collateral
  
Real Estate
 
Business Assets
 
Other
  
(Dollars in thousands)
  
Commercial and industrial
   $231    $828    $189   15 
SBA
  997   583   8   12 
SBA - PPP
  -       -       -       -     
Real estate:
    
Commercial real estate
  2,998   -       -       6 
Construction
  -       -       -       -     
SFR mortgage
  1,080   -       -       4 
Dairy & livestock and agribusiness
  -       -       -       -     
Municipal lease finance receivables
  -       -       -       -     
Consumer and other loans
  268   -       21   5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total collateral-dependent loans
   $      5,574    $      1,411    $              218             42 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
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 it 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 0 provision or recapture of provision for unfunded commitments for the sixnine months ended JuneSeptember 30, 2020. As of JuneSeptember 30, 2020 and December 31, 2019, the balance in this reserve was $9.0 million and was included in other liabilities.
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered nonperforming 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, 2019 for a more detailed discussion regarding TDRs.
As of JuneSeptember 30, 2020, there were $2.8 
$2.2 million of loans classified as a TDR, all of
which
were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At JuneSeptember 30, 2020, performing TDRs were comprised of seven SFR mortgage loans
of $
1.8
$1.8 million, one SBA loan of $
517,000
, one commercial real estate loan of $
371,000
,$354,000, and one commercial and industrial loan of $
51,000
.$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 0 allocated allowance to TDRs as of JuneSeptember 30, 2020 and December 31, 2019.
26
Table of Contents
The following table provides a summary of the activity related to TDRs for the periods presented.
 
                                                                        
   
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2020
  
2019
  
2020
  
2019
   
(Dollars in thousands)
Performing TDRs:
        
Beginning balance
    $2,813     $3,299     $3,112     $3,594 
New modifications
   -    -    -    - 
Payoffs/payments, net and other
   (42)    (80)    (341)    (375) 
TDRs returned to accrual status
   -    -    -    - 
TDRs placed on nonaccrual status
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  Ending balance
    $2,771     $3,219     $2,771     $3,219 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Nonperforming TDRs:
        
Beginning balance
    $-     $277     $244   $3,509 
New modifications
   -    -    -    - 
Charge-offs
   -    -    -    (78) 
Transfer to OREO
   -    -    -    (2,275) 
Payoffs/payments, net and other
   -    (14)    (244)    (893) 
TDRs returned to accrual status
   -    -    -    - 
TDRs placed on nonaccrual status
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  Ending balance
    $-     $263     $-     $263 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  Total TDRs
    $2,771     $3,482     $2,771     $3,482 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
   
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 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
As of JuneSeptember 30, 2020 and 2019, there were no loans that were modified as TDRs during the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively.
There were 0 loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the sixnine months ended JuneSeptember 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 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.
 
27
Table of Contents
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 sixnine months ended JuneSeptember 30, 2020, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 338,000517,000 and 303,000,361,000, respectively. For the three and sixnine months ended JuneSeptember 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 360,000240,000 and 396,000,184,000, 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.
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
(In thousands, except per share amounts)
 
Earnings per common share:
        
Net earnings
    $    41,631     $    54,481     $    79,611     $    106,123 
Less: Net earnings allocated to restricted stock
   158    134    237    276 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net earnings allocated to common shareholders
    $41,473     $54,347     $79,374     $105,847 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding
   134,998    139,748    137,052    139,682 
Basic earnings per common share
    $0.31     $0.39     $0.58     $0.76 
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings per common share:
        
Net income allocated to common shareholders
   41,473    54,347    79,374    105,847 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding
   134,998    139,748    137,052    139,682 
Incremental shares from assumed exercise of outstanding options
   156    149    176    179 
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted weighted average shares outstanding
   135,154    139,897    137,228    139,861 
Diluted earnings per common share
    $0.31     $0.39     $0.58     $0.76 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
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 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
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 JuneSeptember 30, 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.
 
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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  

June 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
   $1,238,299     $-     $1,238,299     $-  
CMO/REMIC
  400,536    -    400,536    -  
Municipal bonds
  36,453    -    36,453    -  
Other securities
  779    -    779    -  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total investment securities - AFS
  1,676,067    -    1,676,067    -  
Interest rate swaps
  38,626    -    38,626    -  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
   $1,714,693     $-     $1,714,693     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
Description of liability
    
Interest rate swaps
   $38,626     $-     $38,626     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
   $38,626     $-     $38,626     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
  
  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     $-     $1,206,313     $-  
CMO/REMIC
  493,710    -    493,710    -  
Municipal bonds
  39,354    -    39,354    -  
Other securities
  880    -    880    -  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total investment securities - AFS
  1,740,257    -    1,740,257    -  
Interest rate swaps
  11,502    -    11,502    -  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
   $1,751,759     $-     $1,751,759     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
Description of liability
    
Interest rate swaps
   $11,502     $-     $11,502     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
   $11,502     $-     $11,502     $-  
 
 
 
  
 
 
  
 
 
  
 
 
 
  
  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  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
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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 JuneSeptember 30, 2020 and December 31, 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

June 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 Six

Months Ended

June 30, 2020
 
  
(Dollars in thousands)
 
Description of assets
     
Loans:
     
Commercial and industrial
   $411     $-     $-��    $411     $305  
SBA
  -    -    -    -    -  
Real estate:
     
Commercial real estate
  1,715    -    -    1,715    432  
Construction
  -    -    -    -    -  
SFR mortgage
  -    -    -    -    -  
Dairy & livestock and agribusiness
  -    -    -    -    -  
Consumer and other loans
  -    -    -    -    -  
Other real estate owned
  -    -    -    -    -  
Asset
held-for-sale
  -    -    -    -    -  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
   $2,126     $-     $-     $2,126     $737  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
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     $-     $-     $253     $251  
SBA
  359    -    -    359    513  
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
   $1,056     $-     $-     $1,056     $828  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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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 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 JuneSeptember 30, 2020 and December 31, 2019, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
                                                                                          
 
June 30, 2020
 
September 30, 2020
   
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in thousands)
 
(Dollars in thousands)
Assets
          
Total cash and cash equivalents
   $1,927,283    $1,927,283    $-    $-    $1,927,283    $1,484,953    $1,484,953    $0    $0    $1,484,953 
Interest-earning balances due from depository
institutions
 38,611   -  38,667   -  38,667   44,367   0   44,414   0   44,414 
Investment securities
available-for-sale
 1,676,067   -  1,676,067   -  1,676,067   2,205,646   0   2,205,646   0   2,205,646 
Investment securities
held-to-maturity
 613,169   -  638,950   -  638,950   577,694   0   603,522   0   603,522 
Total loans, net of allowance for credit losses
 8,308,551   -   -  8,252,796  8,252,796   8,314,003   0   0   8,326,796   8,326,796 
Swaps
 38,626   -  38,626   -  38,626   37,255   0   37,255   0   37,255 
Liabilities
          
Deposits:
          
Interest-bearing
   $4,082,212    $-    $4,083,910    $-    $4,083,910    $4,249,411    $0    $4,250,728    $0    $4,250,728 
Borrowings
 478,156   -  478,056   -  478,056   493,420   0   493,344   0   493,344 
Junior subordinated debentures
 25,774   -   -  17,284  17,284   25,774   0   0   18,917   18,917 
Swaps
 38,626   -  38,626   -  38,626   37,255   0   37,255   0   37,255 
 
December 31, 2019
   
Estimated Fair Value
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in thousands)
Assets
     
Total cash and cash equivalents
   $185,518    $185,518    $-    $-    $185,518 
Interest-earning balances due from depository
institutions
 2,931   -  2,938   -  2,938 
Investment securities
available-for-sale
 1,740,257   -  1,740,257   -  1,740,257 
Investment securities
held-to-maturity
 674,452   -  678,948   -  678,948 
Total loans, net of allowance for loan losses
 7,495,917   -   -  7,343,167  7,343,167 
Swaps
 11,502   -  11,502   -  11,502 
Liabilities
     
Deposits:
     
Interest-bearing
   $3,459,411    $-    $3,457,922    $-    $3,457,922 
Borrowings
 428,659   -  428,330   -  428,330 
Junior subordinated debentures
 25,774   -   -  20,669  20,669 
Swaps
 11,502   -  11,502   -  11,502 
                                                                                          
  
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 JuneSeptember 30, 2020 and December 31, 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.
 
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Table of Contents
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 JuneSeptember 30, 2020, the Bank has entered into 112133 interest-rate swap agreements with customers with a notional amount totaling $389.4$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. NaNne 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 JuneSeptember 30, 2020 and December 31, 2019, the total notional amount of the Company’s swaps was $389.4$455.2 million, and $260.0 million, respectively. The location of the asset and liability, and their respective fair values, are summarized in the tables below.
 
                                                                        
  
June 30, 2020
  
September 30, 2020
  
Asset Derivatives
   
Liability Derivatives
  
Asset Derivatives
 
Liability Derivatives
  
    Balance Sheet    
Location
   
Fair
    Value    
   
    Balance Sheet    
Location
   
Fair
    Value    
  
 Balance Sheet 
Location
 
Fair
  Value  
 
 Balance Sheet 
Location
 
Fair
  Value  
  
(Dollars in thousands)
  
(Dollars in thousands)
Derivatives not designated as hedging instruments:
            
Interest rate swaps
   Other assets     $38,626      Other liabilities     $38,626     Other assets    $37,255   Other liabilities    $37,255 
    
 
     
 
   
 
  
 
Total derivatives
      $38,626         $38,626       $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   
    
 
     
 
 
                                                                        
  
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 
  
 
 
 
  
 
 
 
 
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
 
       
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
       
2020
   
2019
   
2020
   
2019
 
       
(Dollars in thousands)
 
Interest rate swaps
   Other income     $2,185     $373     $2,558     $757 
    
 
 
   
 
 
   
 
 
   
 
 
 
Total
      $2,185     $373     $2,558     $757 
    
 
 
   
 
 
   
 
 
   
 
 
 
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 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
9.
OTHER COMPREHENSIVE INCOME
The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.
 
  
Three Months Ended June 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
   $(1,263)    $373    $(890)    $19,564    $(5,784)    $13,780 
Amortization of net unrealized losses on securities
transferred from
available-for-sale
to
held-to-maturity
  (17)   5   (12)   (78)   23   (55) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net change
   $(1,280)    $378    $(902)    $19,486    $(5,761)    $13,725 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Six Months Ended June 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
   $35,356    $(10,453)    $24,903    $38,914    $(11,504)    $27,410 
Amortization of net unrealized losses on securities
transferred from
available-for-sale
to
held-to-maturity
  (18)   5   (13)   (1,201)   355   (846) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net change
   $35,338    $(10,448)    $24,890    $37,713    $(11,149)    $26,564 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                        
   
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.
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Table of Contents
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 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
 
Gross Amounts
Offset in the
 
Net Amounts of
Assets Presented
 
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
  
  
the Condensed
Consolidated
Balance Sheets
 
Condensed
Consolidated
Balance Sheets
 
in the Condensed
Consolidated
Balance Sheets
 
Financial

Instruments
 
Collateral

Pledged
 
Net Amount
  
(Dollars in thousands)
June 30, 2020
      
Financial assets:
      
Derivatives not designated as hedging instruments
   $38,626    $-    $-    $38,626    $-    $38,626 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   $38,626    $-    $-    $38,626    $-    $38,626 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
      
Derivatives not designated as hedging instruments
   $38,626    $-    $38,626    $-    $(64,863)    $(26,237) 
Repurchase agreements
  468,156   -   468,156   -   (479,445)   (11,289) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   $506,782    $-    $506,782    $-    $(544,308)    $(37,526) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                
   
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) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
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Table of Contents
11.
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 tables below present the components of lease costs and supplemental information related to leases as of and for the periods presented.
 
   
June 30,
2020
   
December 31,
2019
 
   
(Dollars in thousands)
 
Lease Assets and Liabilities
    
ROU assets
    $17,269     $18,522 
Total lease liabilities
   19,595    21,392 
                                                    
  
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  
June 30,
  
  Six Months Ended  
June 30,
   
2020
  
2019
  
2020
  
2019
   
(Dollars in thousands)
  
(Dollars in thousands)
Lease Cost
        
Operating lease expense (1)
    $1,623     $1,906     $3,246     $4,006 
Sublease income
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total lease expense
    $1,623     $1,906     $3,246     $4,006 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(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
    $1,869     $2,113     $3,804     $4,859 
                                                                        
  
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 
 
   
June 30,
2020
   
December 31,
2019
 
Lease Term and Discount Rate
    
Weighted average remaining lease term (years)
   4.12    4.18 
Weighted average discount rate
   3.24%    3.34% 
                                                    
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% 
 
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Table of Contents
The Company’s lease arrangements that have not yet commenced as of JuneSeptember 30, 2020 and the Company’s short-term lease costs and variable lease costs, for the sixnine months ended JuneSeptember 30, 2020 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 JuneSeptember 30, 2020, excluding property taxes and insurance, are as follows:
 
   
June 30, 2020
 
   
 (Dollars in thousands)
 
 
Year:
  
2020 (excluding the six months ended June 30, 2020)
    $3,505   
2021
   5,811   
2022
   4,634   
2023
   2,805   
2024
   1,748   
Thereafter
   2,425   
  
 
 
 
Total future lease payments
   20,928   
Less: Imputed interest
   (1,333)  
  
 
 
 
Present value of lease liabilities
    $19,595   
  
 
 
 
   
      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 
  
 
 
 
 
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
our
 2019 Annual Report on Form
10-K
for the year ended December 31, 2019 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      
  
      Six Months Ended       
   
June 30,
  
June 30,
   
      2020      
  
      2019      
  
      2020      
  
      2019      
   
(Dollars in thousands)
Noninterest income:
        
In-scope
of Topic 606:
        
Service charges on deposit accounts
    $3,809       $5,065       $8,585       $10,206   
Trust and investment services
   2,477      2,452      4,897      4,634   
Bankcard services
   405      1,027      982      1,977   
Gain on OREO, net
   -      24      10      129   
Other
   3,778      2,603      5,576      4,647   
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Noninterest Income
(in-scope
of Topic 606)
   10,469      11,171      20,050      21,593   
Noninterest Income
(out-of-scope
of Topic 606)
   1,683      7,034      3,742      12,915   
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total noninterest income
    $12,152       $18,205       $23,792       $34,508   
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
                                                                        
  
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

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, 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 arewere 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, through June,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. Through July 10,As of October 9, 2020, we have grantedremaining temporary payment deferments of principal, interest or of principal and interest (80%in response to the CARES Act for 33 loans totaling $68.6 million. These deferments were primarily for 90 days, with 89% of the defermentsthese loans being pass rated. Of these loans, 27 have been for both principal and interest) for 820 loans with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio, at June 30, 2020. As of July 10, 2020, 6% of the initial deferments have requested and been grantedreceived a second deferment but it is likely that additional deferments will be granted in future periods.
and the remaining six loans are first deferments.
Our allowance for credit losses increased in the secondThe third quarter asof 2020 did not include a result of our forecast of a greater decline in economic activity due to the
COVID-19
pandemic. We recorded a $12 million 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 quarterhalf of 2020, and recorded an additionalincluding $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 remainderfourth quarter of 2020 is highly uncertain, but we may experience increased provision for credit losses if this pandemic results in additional economic stress greater than forecasted on our borrowers and loan portfolios.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 Credit Losses (“ACL”)
 
 · 
Business Combinations
 
 · 
Valuation and Recoverability of Goodwill
 
 · 
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.
38
Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of JuneSeptember 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—Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
Issued January 2020
  
The FASB issued ASU
2020-01,
“Investments—Investments – Equity Securities (Topic 321), Investments—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 JanuaryAugust 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.
 
38
39
Table of Contents
OVERVIEW
For the secondthird quarter of 2020, we reported net earnings of $41.6$47.5 million, compared with $38.0$41.6 million for the firstsecond quarter of 2020 and $54.5$50.4 million for the secondthird quarter of 2019. Diluted earnings per share were $0.31$0.35 for the secondthird quarter, compared to $0.27$0.31 for the prior quarter and $0.39$0.36 for the same period last year.
The allowance for credit losses for the second quarter of 2020 was increased by $11.5 million inNo 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 severe economic disruption and forecasted asimpact resulting from
COVID-19.
In comparison to the prior year, a result$1.5 million loan loss provision was incurred for the third quarter of the
COVID-19
pandemic.2019. During the third quarter of 2020, we experienced minimal credit charge-offs of $167,000$231,000 and total recoveries of $9,000,$117,000, resulting in net charge-offs of $158,000.$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 JuneSeptember 30, 2020, resulting in recognition of2020. Interest and fee income from PPP loans increased from approximately $8.5 million in loan interest and fee income during the second quarter of 2020, to $9.5 million in the third quarter of 2020.
At JuneSeptember 30, 2020, total assets of $13.75$13.82 billion increased $2.47$2.54 billion, or 21.88%22.48%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $12.52$12.59 billion at JuneSeptember 30, 2020 increased $2.49$2.57 billion, or 24.83%25.59%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.74$1.31 billion increase in interest-earning balances due from the Federal Reserve, and an $838.0$843.3 million increase in total loans, partially offset byand a $125.5$368.6 million decreaseincrease in investment securities. Excluding PPP loans, total loans declined by $259.2$257.8 million from December 31, 2019.
Total investment securities were $2.29$2.78 billion at JuneSeptember 30, 2020, a decreasean increase of $125.5$368.6 million, or 5.20%15.27%, from $2.41 billion at December 31, 2019. At JuneSeptember 30, 2020, investment securities
held-to-maturity
(“HTM”) totaled $613.2$577.7 million. At JuneSeptember 30, 2020, investment securities
available-for-sale
(“AFS”) totaled $1.68$2.21 billion, inclusive of a net
pre-tax
unrealized gain of $57.3$55.3 million, an increase of $35.4$33.4 million from December 31, 2019. HTM securities declined by $61.3$96.8 million, or 9.09%14.35%, and AFS securities declinedincreased by $64.2$465.4 million, or 3.69%26.74%, from December 31, 2019. Our tax equivalent yield on investments was 2.22%1.99% for the quarter ended JuneSeptember 30, 2020, compared to 2.45%2.22% for the firstsecond quarter of 2020 and 2.53%2.47% for the secondthird quarter of 2019.
Total loans and leases, net of deferred fees and discounts, of $8.40$8.41 billion at JuneSeptember 30, 2020 increased by $838.0$843.3 million, or 11.08%11.15%, from December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $131.9$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 $127.3$126.9 million, or 1.77%. The $127.3$126.9 million decrease in loans included decreases of $94.4$118.1 million in commercial and industrial (C&I) loans, $31.0$27.3 million in consumer and other loans, $9.5$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 and collectively $4.4 million in other loan segments. Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1 million, respectively.$53.6 million. Our yield on loans was 4.77%4.47% for the quarter ended JuneSeptember 30, 2020, compared to 4.95%4.77% for the firstsecond quarter of 2020 and 5.40%5.23% for the secondthird 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 $4.1$4.2 million for the quarter ended JuneSeptember 30, 2020, compared to $4.8$4.1 million for the firstsecond quarter of 2020 and $8.0$7.2 million for the secondthird quarter of 2019.
Noninterest-bearing deposits were $6.90$6.92 billion at JuneSeptember 30, 2020, an increase of $1.66$1.67 billion, or 31.57%31.91%, when compared to December 31, 2019. The significant deposit growth in the second quarterfirst nine months of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity. At JuneSeptember 30, 2020, noninterest-bearing deposits were 62.83%61.95% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits was 0.12%0.11% for the quarter ended JuneSeptember 30, 2020, compared to 0.19%0.12% for the firstsecond quarter of 2020 and 0.19%0.21% for the secondthird quarter of 2019.
Customer repurchase agreements totaled $468.2$483.4 million at JuneSeptember 30, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.12%0.11% for the quarter ended JuneSeptember 30, 2020, compared to 0.20%0.12% for both the firstsecond quarter of 2020 and 0.22% for the secondthird quarter of 2019.
At JuneSeptember 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and JuneSeptember 30, 2019. At JuneSeptember 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.13%0.11% for the quarter ended JuneSeptember 30, 2020, 0.21% for the first quarter of 2020, and 0.25%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 $94.0$93.9 million at JuneSeptember 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 sixnine months of 2020 due to the severe economic disruption forecasted to result from the
COVID-19
pandemic. At JuneSeptember 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.29%1.28% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of JuneSeptember 30, 2020, total discounts on acquired loans were $39.4$35.2 million.
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Table of Contents
The Company’s total equity was $1.96$1.98 billion at JuneSeptember 30, 2020. This represented a decrease of $35.0$12.1 million, or 1.76%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 $48.8$73.3 million in cash dividends, offset by net earnings of $79.6$127.1 million and a $24.9$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 9.6%9.8% at JuneSeptember 30, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of JuneSeptember 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 10.59%9.88%, our common equity Tier 1 ratio totaled 14.47%14.60%, our Tier 1 risk-based capital ratio totaled 14.76%14.89%, and our total risk-based capital ratio totaled 15.97%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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ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
 
   
Three Months Ended
   
Variance
 
   
June 30,

2020
   
March 31,

2020
   
$
   
%
 
   
(Dollars in thousands, except per share amounts)
 
Net interest income
    $    104,569       $102,306       $2,263      2.21% 
Provision for credit losses
   (11,500)       (12,000)     500      4.17% 
Noninterest income
   12,152      11,640      512      4.40% 
Noninterest expense
   (46,398)     (48,641)     2,243      4.61% 
Income taxes
   (17,192)     (15,325)     (1,867)     -12.18% 
  
 
 
   
 
 
   
 
 
   
Net earnings
    $41,631       $37,980       $3,651      9.61% 
  
 
 
   
 
 
   
 
 
   
Earnings per common share:
        
Basic
    $0.31     $0.27     $0.04     
Diluted
    $0.31     $0.27     $0.04     
Return on average assets
   1.33%    1.34%    -0.01%     
Return on average shareholders’ equity
   8.51%    7.61%    0.90%     
Efficiency ratio
   39.75%    42.69%    -2.94%     
Noninterest expense to average assets
   1.48%    1.72%    -0.24%     
   
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

June 30,
 
Variance
   
Six Months Ended

June 30,
 
Variance
 
   
2020
 
2019
 
$
   
%
  
2020
 
2019
 
$
   
%
       
(Dollars in thousands, except per share amounts)
       
Net interest income
    $104,569    $111,057    $(6,488)     -5.84%     $206,875    $220,593    $(13,718)     -6.22% 
Provision for credit losses
   (11,500)   (2,000)   (9,500)     -475.00%    (23,500)   (3,500)   (20,000)     -571.43% 
Noninterest income
   12,152   18,205   (6,053)     -33.25%    23,792   34,508   (10,716)     -31.05% 
Noninterest expense
   (46,398)   (50,528)   4,130      8.17%    (95,039)   (102,132)   7,093      6.94% 
Income taxes
   (17,192)   (22,253)   5,061      22.74%    (32,517)   (43,346)   10,829      24.98% 
  
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
   
Net earnings
    $41,631    $54,481    $(12,850)     -23.59%     $79,611    $106,123    $(26,512)     -24.98% 
  
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
   
Earnings per common share:
            
Basic
    $0.31    $0.39    $(0.08)        $0.58    $0.76    $(0.18)    
Diluted
    $0.31    $0.39    $(0.08)        $0.58    $0.76    $(0.18)    
Return on average assets
   1.33%   1.95%   -0.62%��      1.33%   1.89%   -0.56%    
Return on average shareholders’ equity
   8.51%   11.38%   -2.87%       8.06%   11.26%   -3.20%    
Efficiency ratio
   39.75%   39.09%   0.66%       41.20%   40.04%   1.16%    
Noninterest expense to average assets
   1.48%   1.81%   -0.33%       1.59%   1.82%   -0.23%    
  
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
   
Six Months Ended
 
   
June 30,

2020
   
March 31,

2020
   
June 30,

2019
   
June 30,

2020
   
June 30,

2019
 
       
(Dollars in thousands)
     
Net Income
    $41,631     $37,980     $54,481     $79,611     $106,123 
Add: Amortization of intangible assets
   2,445    2,445    2,833    4,890    5,690 
Less: Tax effect of amortization of intangible assets (1)
   (723)    (723)    (838)    (1,446)    (1,682) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Tangible net income
    $43,353     $39,702     $56,476     $83,055     $110,131 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Average stockholders’ equity
    $1,966,600     $2,006,464   $1,919,888     $1,986,532     $1,899,898 
Less: Average goodwill
   (663,707)    (663,707)    (666,196)    (663,707)    (666,366) 
Less: Average intangible assets
   (39,287)    (41,732)    (49,615)    (40,510)    (51,188) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Average tangible common equity
    $1,263,606     $1,301,025     $1,204,077     $1,282,315     $1,182,344 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Return on average equity, annualized
   8.51%    7.61%    11.38%    8.06%    11.26% 
Return on average tangible common equity, annualized
   13.80%    12.27%    18.81%    13.03%    18.78% 
   
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 sixnine months ended JuneSeptember 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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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 June 30,
 
   
2020
   
2019
 
   
Average

Balance
   
Interest
   
Yield/

Rate
   
Average

Balance
   
Interest
   
Yield/

Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,580,483     $8,244    2.09%     $1,590,959     $9,821    2.47% 
Tax-advantaged
   36,424    205    3.27%    43,719    297    3.75% 
Held-to-maturity
securities:
            
Taxable
   448,667    2,447    2.18%    511,938    2,932    2.29% 
Tax-advantaged
   177,890    1,213    3.30%    215,366    1,494    3.35% 
Investment in FHLB stock
   17,688    214    4.87%    17,688    298    6.76% 
Interest-earning deposits with other institutions
   1,080,433    283    0.11%    18,022    100    2.23% 
Loans (2)
   8,047,054    95,352    4.77%    7,558,483    101,843    5.40% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   11,388,639    107,958    3.82%    9,956,175    116,785    4.72% 
Total noninterest-earning assets
   1,222,416        1,264,592     
  
 
 
       
 
 
     
Total assets
    $12,611,055         $11,220,767     
  
 
 
       
 
 
     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
    $3,393,105    2,010    0.24%     $3,024,664    2,973    0.39% 
Time deposits
   450,920    985    0.88%    494,507    1,120    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   3,844,025    2,995    0.31%    3,519,171    4,093    0.47% 
FHLB advances, other borrowings, and customer repurchase agreements
   472,335    394    0.33%    585,550    1,635    1.11% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,316,360    3,389    0.32%    4,104,721    5,728    0.56% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,204,329        5,093,781     
Other liabilities
   123,766        102,377     
Stockholders’ equity
   1,966,600        1,919,888     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $12,611,055         $  11,220,767     
  
 
 
       
 
 
     
Net interest income
      $    104,569         $111,057   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.50%        4.16% 
Net interest margin
       3.69%        4.47% 
Net interest margin - tax equivalent
       3.70%        4.49% 
   
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 JuneSeptember 30, 2020 and 2019. The non TE rates were 2.16%1.93% and 2.46%2.40% for the three months ended JuneSeptember 30, 2020 and 2019, respectively.
 (2)
Includes loan fees of $7.3$7.4 million and $727,000$782,000 for the three months ended JuneSeptember 30, 2020 and 2019, respectively. Prepayment penalty fees of $2.1$1.8 million and $1.3$1.0 million are included in interest income for the three months ended JuneSeptember 30, 2020 and 2019, respectively.
 (3)
Includes interest-bearing demand and money market accounts.
 
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Table of Contents
   
 Six Months Ended June 30,
   
2020
 
2019
   
Average

Balance
  
Interest
  
Yield/

Rate
 
Average

Balance
  
Interest
  
Yield/

Rate
   
(Dollars in thousands)
INTEREST-EARNING ASSETS
           
Investment securities (1)
           
Available-for-sale
securities:
           
Taxable
    $1,619,929     $18,069    2.23%    $1,622,465     $20,130    2.48% 
Tax-advantaged
   37,256    429    3.32%   44,048    633    3.91% 
Held-to-maturity
securities:
           
Taxable
   459,039    5,145    2.24%   510,781    5,842    2.29% 
Tax-advantaged
   183,706    2,513    3.31%   221,602    3,109    3.39% 
Investment in FHLB stock
   17,688    546    6.21%   17,688    630    7.18% 
Interest-earning deposits with other institutions
   670,737    896    0.27%   18,356    194    2.13% 
Loans (2)
   7,764,930    187,469    4.85%   7,610,241    201,530    5.34% 
  
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
Total interest-earning assets
   10,753,285    215,067    4.03%   10,045,181    232,068    4.67% 
Total noninterest-earning assets
   1,240,143       1,268,812     
  
 
 
 
     
 
 
 
    
Total assets
    $11,993,428        $11,313,993     
  
 
 
 
     
 
 
 
    
INTEREST-BEARING LIABILITIES
           
Savings deposits (3)
    $3,224,924    5,121    0.32%    $3,075,966    5,658    0.37% 
Time deposits
   448,176    1,998    0.90%   509,581    2,306    0.91% 
  
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
Total interest-bearing deposits
   3,673,100    7,119    0.39%   3,585,547    7,964    0.45% 
FHLB advances, other borrowings, and customer repurchase agreements
   488,460    1,073    0.44%   638,463    3,511    1.10% 
  
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
Interest-bearing liabilities
   4,161,560    8,192    0.40%   4,224,010    11,475    0.55% 
  
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
Noninterest-bearing deposits
   5,725,677       5,089,795     
Other liabilities
   119,659       100,290     
Stockholders’ equity
   1,986,532       1,899,898     
  
 
 
 
     
 
 
 
    
Total liabilities and stockholders’ equity
    $11,993,428        $  11,313,993     
  
 
 
 
     
 
 
 
    
Net interest income
      $    206,875        $220,593   
    
 
 
 
     
 
 
 
  
Net interest spread - tax equivalent
       3.64%       4.12% 
Net interest margin
       3.87%       4.42% 
Net interest margin - tax equivalent
       3.88%       4.44% 
   
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 21% in effect for the sixnine months ended JuneSeptember 30, 2020 and 2019. The non TE rates were 2.28%2.16% and 2.48%2.45% for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively.
 (2)
Includes loan fees of $7.8$15.3 million and $1.6$2.3 million for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively. Prepayment penalty fees of $3.6$5.4 million and $2.3$3.4 million are included in interest income for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively.
 (3)
Includes interest-bearing demand and money market accounts.
 
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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 June 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
    $(80)    $(1,485)    $(12)    $(1,577) 
Tax-advantaged
investment securities
   (42)   (43)   (7)   (92) 
Held-to-maturity
securities:
     
Taxable investment securities
   (339)   (130)   (16)   (485) 
Tax-advantaged
investment securities
   (252)   (25)   (4)   (281) 
Investment in FHLB stock
   -   (84)   -   (84) 
Interest-earning deposits with other institutions
   5,871   (95)   (5,593)   183 
Loans
   6,851   (12,532)   (810)   (6,491) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
   12,009   (14,394)   (6,442)   (8,827) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
     
Savings deposits
   364   (1,183)   (144)   (963) 
Time deposits
   (96)   (36)   (3)   (135) 
FHLB advances, other borrowings, and customer repurchase agreements
   (234)   (844)   (163)   (1,241) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
   34   (2,063)   (310)   (2,339) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
    $11,975    $(12,331)    $(6,132)    $(6,488) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Comparision of Six Months Ended June 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
    $(48)    $(2,018)    $5    $(2,061) 
Tax-advantaged
investment securities
   (97)   (126)   19   (204) 
Held-to-maturity
securities:
     
Taxable investment securities
   (580)   (130)   13   (697) 
Tax-advantaged
investment securities
   (532)   (78)   14   (596) 
Investment in FHLB stock
   -   (84)   -   (84) 
Interest-earning deposits with other institutions
   6,917   (170)   (6,045)   702 
Loans
   3,954   (17,656)   (359)   (14,061) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
   9,614   (20,262)   (6,353)   (17,001) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
     
Savings deposits
   267   (767)   (37)   (537) 
Time deposits
   (273)   (40)   5   (308) 
FHLB advances, other borrowings, and customer repurchase agreements
   (825)   (2,108)   495   (2,438) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
   (831)   (2,915)   463   (3,283) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
    $10,445    $(17,347)    $(6,816)    $(13,718) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
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
Second
Third Quarter of 2020 Compared to the SecondThird Quarter of 2019
Net interest income, before provision for credit losses, of $104.6$103.3 million for the secondthird quarter of 2020 decreased $6.5$4.8 million, or 5.84%4.47%, compared to $111.1$108.2 million for the secondthird quarter of 2019. Interest-earning assets increased on average by $1.43$2.55 billion, or 14.39%25.65%, from $9.96$9.94 billion for the secondthird quarter of 2019 to $11.39$12.50 billion for the secondthird quarter of 2020. Our net interest margin (TE) was 3.70%3.34% for the secondthird quarter of 2020, compared to 4.49%4.34% for the secondthird quarter of 2019.
Interest income for the secondthird quarter of 2020 was $108.0$106.6 million, which represented an $8.8a $6.9 million, or 7.56%6.11%, decrease when compared to the same period of 2019. Average interest-earning assets increased by $1.43to $12.50 billion and the average interest-earning asset yield of 3.82%3.45%, compared to 4.72%4.55% for the secondthird quarter of 2019. The 90110 basis point decrease in the interest-earning asset yield over the secondthird quarter of 2019 was primarily due to a combination of a 6376 basis point decrease in loan yields, a 3148 basis point decrease in investment yields and a change in mix of earningsearning assets with average balances at the Federal Reserve growing to 9.21%11.62% of earning assetassets for the secondthird quarter of 2020, compared to 0.12%1.69% for the secondthird quarter of 2019. The increase in balances at the Federal Reserve resulted from $1.43$2.22 billion in average deposit growth during the second quarter.third quarter of 2020.
Interest income and fees on loans for the secondthird quarter of 2020 of $95.4$94.2 million decreased $6.5$4.6 million, or 6.37%4.65%, when compared to the secondthird quarter of 2019. Average loans increased $488.6$887.0 million for the secondthird quarter of 2020 when compared with the same period of 2019, primarily due to $669.6 million$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 $8.5$9.5 million in loan interest and fee income in the secondthird quarter of 2020. Discount accretion on acquired loans decreased by $3.9$2.9 million compared to the secondthird quarter of 2019. The Federal Reserve lowered short-term interest rates by 225175 basis points when compared to the end of secondthe 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 4244 basis points from the secondthird quarter of 2019.
Interest income from investment securities was $12.1$11.8 million for the secondthird quarter of 2020, a $2.4$1.7 million, or 16.74%12.56%, decrease from $14.5$13.5 million for the secondthird quarter of 2019. This decrease was primarily the result of a $118.547 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 secondthird quarter of 2020, compared to the same period of 2019. As a result of the decline in interest rates over the past four quarters, the non
tax-equivalent
yield on investments decreased by 30 basis points compared to the second quarter of 2019.
Interest expense of $3.4$3.3 million for the secondthird quarter of 2020, decreased $2.3$2.1 million, or 40.83%38.92%, compared to the secondthird quarter of 2019. Total cost of fundsThe average rate paid on interest-bearing liabilities declined to 0.13%0.28% for the secondthird quarter of 2020 from 0.25%0.55% for the secondthird quarter of 2019. On average, noninterest-bearing deposits were 61.74%61.67% of our total deposits for the secondthird quarter of 2020, compared to 59.14%60.14% for the secondthird quarter of 2019. In comparison to the secondthird quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.11 billion and overnight borrowings decreased by $129.6 million.$1.50 billion. Average interest-bearing deposits increased by $324.9$720.0 million compared to the secondthird quarter of 2019, while the cost of interest-bearing deposits decreased by 1625 basis points.
SixNine Months of 2020 Compared to the SixNine Months of 2019
Net interest income, before provision for credit losses, was $206.9$310.2 million for the sixnine months ended JuneSeptember 30, 2020, a decrease of $13.7$18.6 million, or 6.22%5.64%, compared to $220.6$328.8 million for the same period of 2019. Interest-earning assets increased on average by $708.1 million,$1.33 billion, or 7.05%13.26%, from $10.05$10.01 billion for the sixnine months ended JuneSeptember 30, 2019 to $10.75$11.34 billion for the current year. Our net interest margin (TE) was 3.88%3.68% during the first sixnine months of 2020, compared to 4.44%4.41% for the same period of 2019.
Interest income for the sixnine months ended JuneSeptember 30, 2020 was $215.1$321.7 million, which represented a $17.0$23.9 million, or 7.33%6.93%, decrease when compared to the same period of 2019. Compared to the first sixnine months of 2019, average interest-earning assets increased by $708.1 million$1.33 billion primarily due to PPP loans, and the yield on interest-earning assets decreased by 6481 basis points. The 6481 basis point decrease in the earning asset yield over the first sixnine months of 2020, resulted from a 4958 basis point decrease in loan yields from 5.34%5.30% for first sixnine months of 2019 to 4.85%4.72% for the same period of 2020, and a 2131 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from a $634.8an $852.6 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 75.76%75.63% for the first sixnine months of 2019 to 72.21%70.31% for the first sixnine months of 2020. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.11%0.64% in the prior year to 6.01%8.09% for the first sixnine months of 2020.
 
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Interest income and fees on loans for the first sixnine months of 2020 of $187.5$281.7 million decreased $14.1$18.7 million, or 6.98%6.21%, when compared to the same period of 2019. Average loans increased $154.7$400.7 million for the first sixnine months of 2020 when compared with the same period of 2019, primarily due to $334.8$591.4 million in average PPP loans. The PPP loans we originated resulted in approximately $6.8$13.5 million in fee income and $1.7$4.5 million in loan interest during the second quarterfirst nine months of 2020. The first sixnine months of 2020 reflected a $6.9$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 4958 basis points from the prior sixnine month period, primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 3033 basis points lower than the second quarterfirst 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 $26.2$38.0 million for the sixnine months ended JuneSeptember 30, 2020, a $3.6$5.3 million decrease from $29.7$43.2 million for the first sixnine months of 2019. This decrease was the net result of a $99.0 million decrease in the average investment securities for the first six months of 2020 and a 2029 basis point decline in the non
tax-equivalent
yield on securities, compared to the same periodfirst nine months of 2019.2019, partially offset by a $50.0 million increase in the average investment securities for the first nine months of 2020.
Interest expense of $8.2$11.5 million for the sixnine months ended JuneSeptember 30, 2020, decreased by $3.3$5.4 million from the same period of 2019. The average rate paid on interest-bearing liabilities decreased by 1520 basis points, to 0.40%0.35% for the first sixnine months of 2020, from 0.55% for the same period of 2019. The rate on interest-bearing deposits for the first sixnine months of 2020 decreased by six12 basis points from the same period in 2019. Average interest-bearing liabilities were $62.5$232.1 million lowerhigher for the first sixnine months of 2020 when compared with the same period of 2019. Average interest-bearing deposits grew by $87.6 million.$300.1 million when compared to the first nine months of 2019. Average noninterest-bearing deposits represented 60.92%61.20% of our total deposits for the sixnine months ended JuneSeptember 30, 2020, compared to 58.67%59.17% for the same period of 2019. Total cost of funds for the first sixnine months of 20192020 was 0.17%0.15%, compared with 0.25%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 $94.0$93.9 million at JuneSeptember 30, 2020, compared to $68.7 million at December 31, 2019 and $67.1$68.7 million as of JuneSeptember 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 sixnine months of 2020 due to the severe economic disruption forecasted as a result of the
COVID-19
pandemic. DuringFor the sixnine months ended JuneSeptember 30, 2020, we experienced minimal credit charge-offs of $253,000$484,000 and total recoveries of $236,000,$353,000, resulting in net charge-offs of $17,000.$131,000. This compares to a $3.5$5.0 million loan loss provision and net recoveries of $19,000$59,000 for the same period of 2019. We believe the allowance is appropriate at June 30, 2020. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of JuneSeptember 30, 2020, was 1.12%, or 1.29%1.28% when PPP loans are excluded. This compares to 0.91% and 0.89%0.92%, as of December 31, 2019 and JuneSeptember 30, 2019, respectively. As of JuneSeptember 30, 2020, remaining discounts on acquired loans were $39.4$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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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

June 30,
   
Variance
   
Six Months Ended

June 30,
   
Variance
 
   
2020
   
2019
   
$
   
%
   
2020
   
2019
   
$
   
%
 
           
(Dollars in thousands)
             
Noninterest income:
                
Service charges on deposit accounts
    $3,809     $5,065     $(1,256)    -24.80%     $8,585     $10,206     $(1,621)    -15.88% 
Trust and investment services
   2,477    2,452    25    1.02%    4,897    4,634    263    5.68% 
Bankcard services
   405    1,027    (622)    -60.56%    982    1,977    (995)    -50.33% 
BOLI income
   1,683    1,349    334    24.76%    3,742    2,685    1,057    39.37% 
Gain on OREO, net
   -    24    (24)    -100.00%    10    129    (119)    -92.25% 
Gain on sale of building, net
   -    -    -    -    -    4,545    (4,545)    -100.00% 
Gain on eminent domain condemnation, net
   -    5,685    (5,685)    -100.00%    -    5,685    (5,685)    -100.00% 
Other
   3,778    2,603    1,175    45.14%    5,576    4,647    929    19.99% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total noninterest income
    $  12,152     $  18,205     $  (6,053)    -33.25%     $  23,792     $  34,508     $  (10,716)    -31.05% 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  
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% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
SecondThird Quarter of 2020 Compared to the SecondThird Quarter of 2019
The $6.1$1.3 million decreaseincrease in noninterest income was primarily due to a $5.7$1.7 million net gain fromon the legal settlement of an eminent domain condemnationsale of one of our bank owned buildings, related to a banking center buildings locatedthat was closed in BakersfieldSeptember in the secondthird quarter of 2019.2020.
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 –
DerivativeIncome 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 InstrumentsStatements
ASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the notes to the unaudited condensed consolidated financial statementsEffects of this report for additional information). The second quarter of 2020 included higher swap fee income of $1.8 million compared to the second quarter of 2019, due to higher volume of swap transactions. We executedReference Rate Reform on swap agreements related to new loan originations with a notional amount totaling $126.2 million for the second quarter of 2020, compared to $17.4 million for the second quarter of 2019.
Service charges on deposit accounts decreased by $1.3 million from the second quarter of 2019. This decrease was partially 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. The Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $400,000 when compared to the second quarter of 2019.
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 June 30, 2020, CitizensTrust had approximately $2.83 billion in assets under management and administration, including $2.02 billion in assets under management. CitizensTrust generated fees of $2.5 million for both the second quarter of 2020 and the second 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 selected 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 $450,000 were included in our BOLI policies for the second quarter of 2020.
Financial Reporting
 
48
Issued March 2020
Table of Contents
Six Months of 2020 Compared to the Six Months of 2019
The $10.7 million decreaseFASB issued ASU
2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in noninterest incomethis 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 six months ended June 30, 2020, was primarily due to a $5.7 million net gain fromsale or transfer of debt securities classified as
held-to-maturity.
This guidance is effective immediately and the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings in the first six months of 2019. Service charges on deposit accounts decreased by $1.6 million from the first six months of 2019. This decrease was partially 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. In addition, the Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $700,000 when compared to 2019. The $1.1 million increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first six months of 2020. The $929,000 increase in other income included $1.8 million in higher swap fee income, partially offset by decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the prior six month period.
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
amendments may be applied prospectively through December 31, 2022.
 
  
  Three Months Ended  
June 30,
 
Variance
 
  Six Months Ended  

June 30,
 
Variance
  
2020
 
2019
 
$
 
%
 
2020
 
2019
 
$
 
%
      
(Dollars in thousands)
      
Noninterest expense:
        
Salaries and employee benefits
   $28,706    $28,862    $(156)   -0.54%    $59,583    $58,164    $1,419   2.44%  
Occupancy
  4,078   4,388   (310)   -7.06%   7,881   8,795   (914)   -10.39%  
Equipment
  953   1,039   (86)   -8.28%   1,987   2,056   (69)   -3.36%  
Professional services
  2,368   2,040   328   16.08%   4,624   3,965   659   16.62%  
Computer software expense
  2,754   2,756   (2)   -0.07%   5,570   5,369   201   3.74%  
Marketing and promotion
  1,255   1,238   17   1.37%   2,810   2,632   178   6.76%  
Amortization of intangible assets
  2,445   2,833   (388)   -13.70%   4,890   5,690   (800)   -14.06%  
Telecommunications expense
  650   712   (62)   -8.71%   1,286   1,470   (184)   -12.52%  
Regulatory assessments
  167   734   (567)   -77.25%   315   1,658   (1,343)   -81.00%  
Insurance
  386   469   (83)   -17.70%   792   938   (146)   -15.57%  
Loan expense
  369   491   (122)   -24.85%   626   807   (181)   -22.43%  
Directors’ expenses
  358   356   2   0.56%   709   679   30   4.42%  
Stationery and supplies
  382   316   66   20.89%   667   608   59   9.70%  
Acquisition related expenses
  -   2,612   (2,612)   -100.00%   -   5,761   (5,761)   -100.00%  
Other
  1,527   1,682   (155)   -9.22%   3,299   3,540   (241)   -6.81%  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest expense
   $  46,398    $  50,528    $  (4,130)   -8.17%    $  95,039    $  102,132    $  (7,093)   -6.94%  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense to average assets
  1.48%   1.81%     1.59%   1.82%   
Efficiency ratio (1)
  39.75%   39.09%     41.20%   40.04%   
 
(1)
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.
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.
Second Quarter of 2020 Compared to the Second Quarter of 2019
ASU
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 1.48% for the second quarter of 2020, compared to 1.81% for the second quarter of 2019. This decline mostly reflects the $1.39 billion growth in average assets that resulted primarily from $1.43 billion in average deposit growth.2020-01,
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 ratioInvestments – Equity Securities (Topic 321), Investments – Equity Method and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.75% for the second quarter of 2020, compared to 39.09% for the second quarter of 2019.
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
 
49
Issued January 2020
The FASB issued ASU
2020-01,
TableInvestments – 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 Contentsthe 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
Noninterest expense
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 $46.4accounting 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.
39
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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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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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 effect for the three months ended September 30, 2020 and 2019. The non TE rates were 1.93% and 2.40% for the three months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of $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 for the three 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 21% in effect for the nine months ended September 30, 2020 and 2019. The non TE rates were 2.16% and 2.45% for the nine months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of $15.3 million and $2.3 million for the second quarternine months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of 2020 was $4.1$5.4 million or 8.17%, lower than the second quarter of 2019. There were no merger related expenses related to the Community Bank (“CB”) acquisitionand $3.4 million are included in interest income for the second quarter of 2020, compared to $2.6 million for the second quarter of 2019 primarily due to the consolidation of four banking centers. Approximately $900,000, or a 4% increase in salary expense from the prior year was offset by an increase in net deferred loan costs of $1.2 million during the current quarter that were primarily related to the origination of PPP loans. The year-over-year decrease also included a $567,000 decrease in regulatory assessments, a $396,000 decrease in occupancy and equipment expense primarily due to the consolidation of banking centers, and a $388,000 decrease in Core Deposit Intangible (“CDI”) amortization. These decreases were partially offset by a $328,000 increase in professional services.
Six Months of 2020 Compared to the Six Months of 2019
Noninterest expense of $95.0 million for the first six months of 2020 was $7.1 million lower than the prior year period. The decrease was primarily due to $5.8 million in merger related expenses for the sixnine months ended June 30, 2019, compared to no merger related expense for the same period of 2020. The year-over-year decrease also included a $1.3 million decrease in regulatory assessments, a $983,000 decrease in occupancy and equipment expense and an $800,000 decrease in amortization of CDI. These decreases were partially offset by a $1.4 million increase in salaries and benefit costs, a $659,000 increase in professional services and a $201,000 increase in computer software expense. Salary and benefit expense would have increased by $2.8 million, or approximately 5%, when a $1.3 million increase in net deferred loan costs is excluded. As a percentage of average assets, noninterest expense was 1.59% for the six months ended JuneSeptember 30, 2020 compared to 1.82% for the same period of 2019. For the six months ended 2020, the efficiency ratio was 41.20%, compared to 40.04%and 2019, respectively.
(3)
Includes interest-bearing demand and money market accounts.
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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.
47
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 –
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.
38
Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020
Standard
Description
Adoption Timing
Impact on Financial Statements
The Company’s effective tax rate forASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the three and six months ended June 30, 2020 was 29.23% and 29.00%, respectively, compared to 29.00% for the same periodsEffects of 2019. Our estimated annual effective tax rate also 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.Reference Rate Reform on Financial Reporting
 
50
Issued March 2020
Table of Contents
ANALYSIS OF FINANCIAL CONDITION
Total assets of $13.75 billion at June 30, 2020 increased $2.47 billion, or 21.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $12.52 billion at June 30, 2020, an increase of $2.49 billion, or 24.83%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.74 billion increase in interest-earning balances due from the Federal Reserve and an $838.0 million increase in total loans, partially offset by a $125.5 million decrease in investment securities. The increase in total loans was due to the origination of approximately 4,100 PPP loans, totaling $1.10 billion at June 30, 2020. Excluding PPP loans, total loans declined by $259.2 million from December 31, 2019.
Total liabilities were $11.79 billion at June 30, 2020, an increase of $2.50 billion, or 29.96%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $2.28 billion, or 26.18%. This significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity. Total equity decreased $35.0 million, or 1.76%, to $1.96 billion at June 30, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $35.0 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 uncertainty of the
COVID-19
pandemic. We had $79.6 million in net earnings during the first six months of 2020, offset by $48.8 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 $24.9 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 maintainsFASB 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 portfolio
one-time
election for the sale or transfer of investmentdebt securities to provide interest incomeclassified as
held-to-maturity.
This guidance is effective immediately and to serve as a source of liquidity for its ongoing operations. At June 30, 2020, we reported total investment securities of $2.29 billion. This represented a decrease of $125.5 million, or 5.20%, from total investment securities of $2.41 billion atthe amendments may be applied prospectively through December 31, 2019. 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 decreaseFASB 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 investment securities was dueEntity’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 cash outflowqualify for equity classification.
1st Quarter 2022
The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
39
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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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 effect for the portfolio exceeding new securities purchased in the first six months of 2020, partially offset by an increase in the fair value of AFS investment securities as a result of declining interest rates. At June 30, 2020, investment securities HTM totaled $613.2 million. At June 30, 2020, our AFS investment securities totaled $1.68 billion, inclusive of a
pre-tax
net unrealized gain of $57.3 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $40.3 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the sixthree months ended JuneSeptember 30, 2020 and 2019, repayments/maturities of investment securities totaled $318.5 million2019. The non TE rates were 1.93% and $220.5 million, respectively. The Company purchased additional investment securities totaling $163.6 million and $37.1 million2.40% for the sixthree months ended JuneSeptember 30, 2020 and 2019, respectively. There were no investment securities sold during
(2)
Includes loan fees of $7.4 million and $782,000 for the first sixthree months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of $1.8 million and $1.0 million are included in interest income for the three 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 21% in effect for the nine months ended September 30, 2020 and 2019. The average durationnon TE rates were 2.16% and 2.45% for the nine months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of our investment securities portfolio was approximately 2.8 years at June$15.3 million and $2.3 million for the nine months ended September 30, 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)
Includes interest-bearing demand and money market accounts.
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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.
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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)
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The tables below set forth our investment securities AFS and HTM portfolioNoninterest expense divided by type for the dates presented.
   
June 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
    $1,191,431     $46,868     $-      $1,238,299    73.88% 
CMO/REMIC
   391,586    8,962    (12)    400,536    23.90% 
Municipal bonds
   35,015    1,438    -     36,453    2.17% 
Other securities
   779    -    -     779    0.05% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $  1,618,811     $57,268     $(12)     $1,676,067    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
    $106,981     $6,285     $-      $113,266    17.45% 
Mortgage-backed securities
   164,174    8,135    -     172,309    26.77% 
CMO/REMIC
   171,821    5,283    -     177,104    28.02% 
Municipal bonds
   170,193    6,418    (340)    176,271    27.76% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
held-to-maturity
securities
    $613,169     $26,121     $(340)     $638,950    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 June 30, 2020, approximately $69.3 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 9% 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 allowancenet interest income before provision for credit losses is established on our
available-for-saleplus noninterest income.
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 second quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.
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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 June 30, 2020.
   
June 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
    $-     $-    $-     $-     $-     $- 
CMO/REMIC
   2,754    (12)   -    -    2,754    (12) 
Municipal bonds
   -    -   -    -    -    - 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $2,754     $(12)    $-     $-     $2,754     $(12) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
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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Loans
Total loans and leases, net of deferred fees and discounts, of $8.40 billion at June 30, 2020 increased by $838.0 million, or 11.08%, from $7.56 billion at December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $131.9 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 $127.3 million, or 1.77%. The $127.3 million decrease in loans included decreases of $94.4 million in commercial and industrial loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and collectively $4.4 million in other loan segments. Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1
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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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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Table of Contents
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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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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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
 
  
    June 30, 2020    
 
  December 31, 2019  
  
(Dollars in thousands)
Commercial and industrial
   $840,738    $935,127 
SBA
  300,156   305,008 
SBA - Paycheck Protection Program (PPP)
  1,097,150   - 
Real estate:
  
Commercial real estate
  5,365,120   5,374,617 
Construction
  125,815   116,925 
SFR mortgage
  286,526   283,468 
Dairy & livestock and agribusiness
  251,821   383,709 
Municipal lease finance receivables
  49,876   53,146 
Consumer and other loans
  85,332   116,319 
 
 
 
 
 
 
 
 
Total loans
  8,402,534   7,568,319 
Less: Deferred loan fees, net (1)
  -   (3,742) 
 
 
 
 
 
 
 
 
Total loans, net of deferred loan fees
  8,402,534   7,564,577 
Less: Allowance for credit losses
  (93,983)   (68,660) 
 
 
 
 
 
 
 
 
Total loans and lease finance receivables, net
   $8,308,551    $7,495,917 
 
 
 
 
 
 
 
 
   
  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 JuneSeptember 30, 2020, 68.76%69.04% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 63.85%64.56% of total loans. As of JuneSeptember 30, 2020, $248.6$271.2 million, or 4.63%5.00% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $121.9$121.1 million for loans secured by dairy & livestock land and $126.7$150.2 million infor loans secured by agricultural land at JuneSeptember 30, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of JuneSeptember 30, 2020, dairy & livestock and agribusiness loans of $251.8$252.8 million were comprised of $201.7$210.4 million for dairy & livestock loans and $50.1$42.4 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 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 JuneSeptember 30, 2020, the Company had $181.2$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 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 of 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
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real estate acquisition. As of JuneSeptember 30, 2020, the Company had $119.0$119.5 million of total SBA 7(a) loans that include a guarantee of payment formfrom 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 JuneSeptember 30, 2020.
As of JuneSeptember 30, 2020, the Company had $125.8$101.9 million in construction loans. This represents 1.50%1.21% of total 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 JuneSeptember 30, 2020.
Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total
held-for-investment
commercial real estate loans, by region as of JuneSeptember 30, 2020.
 
   
June 30, 2020
   
Total Loans
  
Commercial Real Estate
Loans
   
(Dollars in thousands)
Los Angeles County
    $3,634,362    43.3%     $2,222,552    41.4% 
Central Valley
   1,271,770    15.1%    909,330    17.0% 
Orange County
   1,120,793    13.3%    658,092    12.3% 
Inland Empire
   1,188,132    14.2%    831,614    15.5% 
Central Coast
   522,025    6.2%    359,920    6.7% 
San Diego
   238,460    2.8%    134,770    2.5% 
Other California
   131,686    1.6%    81,087    1.5% 
Out of State
   295,306    3.5%    167,755    3.1% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
    $        8,402,534          100.0%     $    5,365,120        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.
 
   
June 30, 2020
 
   
  Loan Balance  
  
  Percent  
  
Percent

Owner-

    Occupied (1)    
  
Average
Loan
    Balance    
 
      
(Dollars in thousands)
    
Commercial real estate:
     
Industrial
    $1,844,152   34.4%   54.5%    $1,373 
Office
   944,552   17.6%   25.1%   1,536 
Retail
   784,139   14.6%   13.1%   1,654 
Multi-family
   619,073   11.6%   0.5%   1,682 
Medical
   286,174   5.3%   45.8%   1,767 
Secured by farmland (2)
   248,558   4.6%   98.2%   2,005 
Other (3)
   638,472   11.9%   55.1%   1,373 
  
 
 
  
 
 
   
Total commercial real estate
    $        5,365,120       100.0%   38.7%    $1,511 
  
 
 
  
 
 
   
   
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 $121.9$121.1 million for loans secured by dairy & livestock land and $126.7$150.2 million for loans secured by agricultural land at JuneSeptember 30, 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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CommercialThe 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 15%9% of our CRE loan portfolio at June 30, 2020.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 50%53%. Approximately 56%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 JuneSeptember 30, 2020, commercial and industrial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately 4%$96 million in loans, or approximately 1% of our C&I loan portfoliototal loans; $1.6 million of these loans are classified and loans to customers in retail trade were approximately 2% of our C&I loans.$1.4 million are on deferment.
Nonperforming Assets
The following table provides information on nonperforming assets as of the dates presented.
 
   
    June 30, 2020    
   
 December 31, 2019 
 
   
(Dollars in thousands)
 
Nonaccrual loans
    $6,792       $5,033   
Loans past due 90 days or more and still accruing interest
   25      -   
Nonperforming troubled debt restructured loans (TDRs)
   -      244   
  
 
 
   
 
 
 
Total nonperforming loans
  
 
6,817  
 
  
 
5,277  
 
OREO, net
   4,889      4,889   
  
 
 
   
 
 
 
Total nonperforming assets
  
  $
11,706  
 
  
  $
10,166  
 
  
 
 
   
 
 
 
Performing TDRs
  
  $
2,771  
 
  
  $
3,112  
 
  
 
 
   
 
 
 
Total nonperforming loans and performing TDRs (1)
    $9,588       $8,389   
Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees
   0.11%    0.11% 
Percentage of nonperforming assets to total loans, net of deferred fees, and OREO
   0.14%    0.13% 
Percentage of nonperforming assets to total assets
   0.09%    0.09% 
(1)
Includes $7.2 million that were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year).
   
    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 $2.8$2.2 million at JuneSeptember 30, 2020, compared to $3.4 million at December 31, 2019. At JuneSeptember 30, 2020, all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only 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.
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. Through July 10,As of October 9, 2020, we have granted temporary payment deferments of principal, interest or of principal and interest for primarily 90 days on 82033 loans with a gross balancein the amount of $1.27 billion,$68.6 million, or approximately 15%less than 1% of our total loan portfolio, at JuneSeptember 30, 2020. Principal and interestThese deferments represented 80%were primarily for 90 days, with 89% of the total deferred payments and approximately 6% werethese loans being pass rated; 27 of these loans have received a second deferment requests approved byand the Bank as of July 10, 2020. It is likely that additional deferments will be granted in future periods.remaining six loans are first deferments. The majority of the loans with payment deferments were Commercial Real Estatecommercial real estate loans, which represented approximately $1.10 billion$65.9 million of the $1.27 billion. Approximately 7% of the loans with deferred payments are considered classified.$68.6 million.
 
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The following table provides a summary of TDRs as of the dates presented.
 
   
June 30, 2020
  
December 31, 2019
   
Balance
  
Number of
Loans
  
Balance
  
Number of
Loans
   
(Dollars in thousands)
Performing TDRs:
        
Commercial and industrial
    $51    1     $78    2 
SBA
   517    1    536    1 
Real Estate:
        
Commercial real estate
   371    1    397    1 
Construction
   -    -    -    - 
SFR mortgage
   1,832    7    2,101    8 
Dairy & livestock and agribusiness
   -    -    -    - 
Consumer and other
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total performing TDRs
    $    2,771    10     $    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
    $2,771    10     $3,356    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
   
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 JuneSeptember 30, 2020, there was no allowance for credit lossesACL allocated to TDRs. At December 31, 2019, there was no allowance for creditloan losses specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. There were no charge-offs on TDRs for the sixnine months ended JuneSeptember 30, 2020, compared to $78,000 for the sixnine months ended JuneSeptember 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.
 
                        
                        
                        
                        
                        
  
June 30,
2020
  
March 31,
2020
  
December 31,
2019
  
September 30,
2019
  
June 30,
2019
 
September 30,
2020
 
June 30,

2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
  
(Dollars in thousands)
 
(Dollars in thousands)
Nonperforming loans (1)
:
          
Nonperforming loans (1):
     
Commercial and industrial
    $1,222     $1,703     $1,266     $1,550     $1,993    $1,822    $1,222    $1,703    $1,266    $1,550 
SBA
   1,598    2,748    2,032    2,706    5,082   1,724   1,598   2,748   2,032   2,706 
Real estate:
               
Commercial real estate
   2,628    947    724    1,083    1,095   6,481   2,628   947   724   1,083 
Construction
   -    -    -    -    -   -   -   -   -   - 
SFR mortgage
   1,080    864    878    888    2,720   675   1,080   864   878   888 
Dairy & livestock and agribusiness
   -    -    -    -    -   849   -   -   -   - 
Consumer and other loans
   289    166    377    385    397   224   289   166   377   385 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total
  
  $
6,817
 
  
  $
6,428
 
  
  $
5,277
 
  
  $
6,612
 
  
  $
11,287
 
 
  $
11,775
 
 
  $
6,817
 
 
  $
6,428
 
 
  $
5,277
 
 
  $
6,612
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
  
 
0.08%
 
  
 
0.09%
 
  
 
0.07%
 
  
 
0.09%
 
  
 
0.15%
 
 
 
0.14%
 
 
 
0.08%
 
 
 
0.09%
 
 
 
0.07%
 
 
 
0.09%
 
Past due
30-89
days:
               
Commercial and industrial
    $630     $665     $2     $756     $310    $3,627    $630    $665    $2    $756 
SBA
   214    3,086    1,402    303    -   66   214   3,086   1,402   303 
Real estate:
               
Commercial real estate
   4    210    -    368    -   -   4   210   -   368 
Construction
   -    -    -    -    -   -   -   -   -   - 
SFR mortgage
   446    233    249    -    -   -   446   233   249   - 
Dairy & livestock and agribusiness
   882    166    -    -    -   -   882   166   -   - 
Consumer and other loans
   413    -    -    -    22   67   413   -   -   - 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total
  
  $
2,589
 
  
  $
4,360
 
  
  $
1,653
 
  
  $
1,427
 
  
  $
332
 
 
  $
3,760
 
 
  $
2,589
 
 
  $
4,360
 
 
  $
1,653
 
 
  $
1,427
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
  
 
0.03%
 
  
 
0.06%
 
  
 
0.02%
 
  
 
0.02%
 
  
 
0.004%
 
 
 
0.04%
 
 
 
0.03%
 
 
 
0.06%
 
 
 
0.02%
 
 
 
0.02%
 
OREO:
               
SBA
    $797     $797     $797     $444     $-    $797    $797    $797    $797    $444 
Real estate:
               
Commercial real estate
   2,275    2,275    2,275    2,275    2,275   1,575   2,275   2,275   2,275   2,275 
SFR mortgage
   1,817    1,817    1,817    6,731    -   1,817   1,817   1,817   1,817   6,731 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total
  
  $
4,889
 
  
  $
4,889
 
  
  $
4,889
 
  
  $
9,450
 
  
  $
2,275
 
 
  $
4,189
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
9,450
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total nonperforming, past due, and OREO
  
  $
    14,295
 
  
  $
    15,677
 
  
  $
    11,819
 
  
  $
    17,489
 
  
  $
    13,894
 
 
  $
19,724
 
 
  $
14,295
 
 
  $
15,677
 
 
  $
11,819
 
 
  $
17,489
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
  
 
0.17%
 
  
 
0.21%
 
  
 
0.16%
 
  
 
0.23%
 
  
 
0.18%
 
 
 
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, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $6.8$11.8 million at JuneSeptember 30, 2020, or 0.08%0.14% of total loans. Total nonperforming loans at JuneSeptember 30, 2020 included $4.3$9.3 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $5.3 million, or 0.07% of total loans, at December 31, 2019 and $11.3$6.6 million, or 0.15%0.09% of total loans, at JuneSeptember 30, 2019. The $389,000$5.0 million quarter-over-quarter increase in nonperforming loans was primarily due to increases of $1.7$3.9 million in nonperforming commercial real estate loans, $216,000$849,000 in nonperforming SFR mortgagedairy & livestock and agribusiness loans, $600,000 in nonperforming commercial and industrial loans, and $123,000$126,000 in nonperforming consumer and otherSBA loans. This was partially offset by a $1.2 million$405,000 decrease in nonperforming SBASFR mortgage loans and a $481,000$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 JuneSeptember 30, 2020, and December 31, 2019, we had four OREO properties with a carrying value of $4.9$4.2 million, compared to onefour OREO propertyproperties with a carrying value of $2.3$4.9 million at JuneDecember 31, 2019 and three OREO properties with a carrying value of $9.5 million at September 30, 2019. We reflected a $700,000 write-down of one OREO property in the third quarter of 2020. There were no additions to or sales of OREO properties for the sixnine months ended JuneSeptember 30, 2020.
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Table of Contents
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, 2019.
Allowance for Credit 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—3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled $94.0$93.9 million as of JuneSeptember 30, 2020, compared to $68.7 million as of December 31, 2019 and $67.1$68.7 million as of JuneSeptember 30, 2019. Our allowance for credit losses at JuneSeptember 30, 2020 was 1.12%, or 1.29%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 and was increased by a $23.5 million credit loss provision in the first sixnine months of 2020 due to the severe economic disruption forecasted as a result ofresulting from the
COVID-19
pandemic. Net charge-offs were $17,000$131,000 for the sixnine months ended JuneSeptember 30, 2020. This compares to a $3.5$5.0 million loan loss provision and $19,000$59,000 in net recoveries for the same period of 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. TheOur economic forecast continues to reflect the most recent available information on the evolving impacts on macroeconomic variables from the
COVID-19
pandemic. The resulting stressed economicbe a blend of multiple forecasts produced by Moody’s. Moody’s baseline forecast includescontinues to represent more than a significant contraction50% weighting in our multi-weighted forecast scenario. This U.S. baseline forecast assumes GDP of 30% in the second quarter of 2020, followedwill increase by an 18% rebound in GDP27% in the third quarter, 2.9% in the fourth quarter and economic growth not returning until the second half of 2021. In addition, thethen grow by 3.5% in 2021 and 5% in 2022. The unemployment rate in this baseline forecast is forecasted to rise to more than 14%be 8.9% in the secondthird quarter and is expected to beof 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
epidemic,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 charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.
 
   
As of and For

the Six Months

Ended June 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
   (11)   (48) 
SBA
   (156)   (230) 
Commercial real estate
   -      -    
Construction
   -      -    
SFR mortgage
   -      -    
Dairy & livestock and agribusiness
   -      (78) 
Consumer and other loans
   (86)   (4) 
  
 
 
 
 
 
 
 
Total charge-offs
   (253)   (360) 
  
 
 
 
 
 
 
 
Recoveries:
   
Commercial and industrial
   5   159 
SBA
   3   9 
Commercial real estate
   -      -    
Construction
   6   6 
SFR mortgage
   206   183 
Dairy & livestock and agribusiness
   -      19 
Consumer and other loans
   16   3 
  
 
 
 
 
 
 
 
Total recoveries
   236   379 
  
 
 
 
 
 
 
 
Net (charge-offs) recoveries
   (17)   19 
Provision for credit losses
   23,500   3,500 
  
 
 
 
 
 
 
 
Allowance for credit losses at end of period
    $93,983    $67,132 
  
 
 
 
 
 
 
 
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
   0.52%   0.53% 
Amount of total loans at end of period (1)
    $  8,402,534    $  7,535,690 
Average total loans outstanding (1)
    $7,764,930    $7,610,241 
Net recoveries to average total loans
   -0.0002%   0.0002% 
Net recoveries to total loans at end of period
   -0.0002%   0.0003% 
Allowance for credit losses to average total loans
   1.21%   0.88% 
Allowance for credit losses to total loans at end of period
   1.12%   0.89% 
Net (charge-offs) recoveries to allowance for credit losses
   -0.02%   0.03% 
Net (charge-offs) recoveries to provision for credit losses
   -0.07%   0.54% 
   
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)
Net of deferred loan origination fees, costs and discounts.
 
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The ACL/Total Loan Coverage Ratio as of JuneSeptember 30, 2020 increased to 1.12%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resultedforecasted impact on the economy from the
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 was unchanged from the allowance at January 1, 2020.
While we believe that the allowance at JuneSeptember 30, 2020 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 credit losses in the future.
Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were $10.98$11.17 billion at JuneSeptember 30, 2020. This represented an increase of $2.28$2.46 billion, or 26.18%28.30%, over total deposits of $8.70 billion at December 31, 2019. The composition of deposits is summarized as of the dates presented in the table below.
 
   
June 30, 2020
 
December 31, 2019
  
 
 
 
 
 
 
 
   
Balance
  
Percent
 
Balance
  
Percent
  
 
 
 
 
 
 
 
   
(Dollars in thousands)
Noninterest-bearing deposits
    $6,901,368    62.83%    $5,245,517    60.26% 
Interest-bearing deposits
       
Investment checking
   472,509    4.30%   454,565    5.22% 
Money market
   2,681,962    24.42%   2,158,161    24.79% 
Savings
   468,051    4.26%   400,377    4.60% 
Time deposits
   459,690    4.19%   446,308    5.13% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
Total deposits
    $    10,983,580        100.00%    $    8,704,928        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 $6.90$6.92 billion at JuneSeptember 30, 2020, representing an increase of $1.66$1.67 billion, or 31.57%31.91%, from noninterest-bearing deposits of $5.25 billion at December 31, 2019. Noninterest-bearing deposits represented 62.83%61.95% of total deposits for JuneSeptember 30, 2020, compared to 60.26% of total deposits for December 31, 2019.
Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $3.62$3.80 billion at JuneSeptember 30, 2020, representing an increase of $609.4$791.2 million, or 20.23%26.26%, from savings deposits of $3.01 billion at December 31, 2019.
Time deposits totaled $459.7$445.1 million at JuneSeptember 30, 2020, representing an increasea decrease of $13.4$1.2 million, or 3.00%0.26%, from total time deposits of $446.3 million for December 31, 2019.
 
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Borrowings
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 JuneSeptember 30, 2020 and December 31, 2019, total funds borrowed under these agreements were $468.2$483.4 million and $428.7 million, respectively, with a weighted average interest rate of 0.20%0.14% and 0.44%, respectively.
At JuneSeptember 30, 2020, we had $10.0 million in short-term borrowings that arewere interest-free advances from the FHLB. We had zero inno short-term borrowings at December 31, 2019.
At JuneSeptember 30, 2020, $6.00 billion of loans and $1.87$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.
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of JuneSeptember 30, 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)
    $10,983,580     $10,942,750     $30,610     $9,626     $594 
Customer repurchase agreements (1)
   468,156    468,156    -    -    - 
Junior subordinated debentures (1)
   25,774    -    -    -    25,774 
Deferred compensation
   23,241    678    1,245    622    20,696 
Operating leases
   20,928    6,619    8,958    3,443    1,908 
Affordable housing investment
   3,159    2,285    814    47    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $    11,524,838     $    11,420,488     $    41,627     $    13,738     $    48,985 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
      
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 JuneSeptember 30, 2020, we had $10.0 million in FHLB short-term borrowings with a cost of 0.0%, compared to zero at December 31, 2019 and JuneSeptember 30, 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 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 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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Off-Balance
Sheet Arrangements
The following table summarizes the
off-balance
sheet items at JuneSeptember 30, 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
    $949,212     $647,113     $193,588     $9,023     $99,488 
SBA
   221    187    4    -    30 
SBA - PPP
   -    -    -    -    - 
Real estate:
          
Commercial real estate
   284,860    52,947    81,256    141,025    9,632 
Construction
   82,734    53,625    29,109    -    - 
SFR Mortgage
   1,885    -    -    -    1,885 
Dairy & livestock and agribusiness (1)
   218,722    126,287    91,357    378    700 
Consumer and other loans
   136,150    10,558    10,391    5,833    109,368 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total commitment to extend credit
       1,673,784    890,717    405,705    156,259    221,103 
Obligations under letters of credit
   46,705    37,325    9,332    48    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $1,720,489     $    928,042     $    415,037     $    156,307     $    221,103 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
      
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 $17.1$17.2 million at JuneSeptember 30, 2020.
As of JuneSeptember 30, 2020, we had commitments to extend credit of approximately $1.67$1.75 billion, and obligations under letters of credit of $46.7$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 sixnine months ended JuneSeptember 30, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of JuneSeptember 30, 2020 and December 31, 2019 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.
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 our capital.
Total equity decreased $35.0$12.1 million, or 1.76%0.61%, to $1.96$1.98 billion at JuneSeptember 30, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $35.0$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 uncertainty of the
COVID-19
pandemic. We had $79.6$127.1 million in net earnings during the first sixnine months of 2020, offset by $48.8$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 $24.9$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 9.63%9.78% at JuneSeptember 30, 2020.
 
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During the secondthird quarter of 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 were 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 sixnine months ended JuneSeptember 30, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of JuneSeptember 30, 2020, we have 4,585,145 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 JuneSeptember 30, 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, 2019.
At JuneSeptember 30, 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.
 
       
June 30, 2020
 
December 31, 2019
        
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
  
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%  10.59%  10.45%  12.33%  12.19%  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%  14.47%  14.58%  14.83%  14.94%  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%  14.76%  14.58%  15.11%  14.94%  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%  15.97%  15.79%  16.00%  15.83%  8.00%  10.50%  10.00%  16.08%  15.83%  16.00%  15.83% 
 
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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 $10.98$11.17 billion at JuneSeptember 30, 2020 increased $2.28$2.46 billion, or 26.18%28.30%, over total deposits of $8.70 billion at December 31, 2019. This significant deposit growth was primarily due to proceeds from PPP loans and 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 JuneSeptember 30, 2020, we had only $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 three and sixnine months ended JuneSeptember 30, 2020 and 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
 
   
Six Months Ended June 30,
   
2020
  
2019
   
(Dollars in thousands)
Average cash and cash equivalents
    $799,989     $184,301 
Percentage of total average assets
   6.67%    1.63% 
Net cash provided by operating activities
    $97,081     $82,602 
Net cash (used in) provided by investing activities
   (541,488)    438,532 
Net cash provided by (used in) financing activities
   2,186,172    (509,242) 
  
 
 
 
  
 
 
 
Net increase in cash and cash equivalents
    $      1,741,765     $      11,892 
  
 
 
 
  
 
 
 
   
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 increased by $615.7$834.1 million, or 334.07%351.60%, to $800.0 million$1.07 billion for the sixnine months ended JuneSeptember 30, 2020, compared to $184.3$237.2 million for the same period of 2019.
At JuneSeptember 30, 2020, cash and cash equivalents totaled $1.93$1.48 billion. This represented an increase of $1.75$1.05 billion, or 996.04%239.38%, from $175.8$437.5 million at JuneSeptember 30, 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 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)
  
June 30, 2020
   
December 31, 2019
    Interest Rate Scenario        
 
12-month Period
 
24-month Period

(Cumulative)
 
Interest Rate Scenario
 
12-month Period
 
24-month Period

(Cumulative)
+ 200 basis points
 5.80% 11.30% + 200 basis points 5.20% 10.00%
- 100 basis points
 -0.90% -2.00% - 100 basis points -2.10% -4.60%
                    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 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 0.25%0.01%.
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 JuneSeptember 30, 2020 and December 31, 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
  
    June 30, 2020    
    
    December 31, 2019    
100 bp decrease in interest rates
  -20.3%   -17.5%
100 bp increase in interest rates
  11.7%   14.2%
200 bp increase in interest rates
  21.1%   25.5%
300 bp increase in interest rates
  24.1%   30.0%
400 bp increase in interest rates
  28.8%   36.2%
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, 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 JuneSeptember 30, 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
Except 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, 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 and as more of ouror partially open. Our customers arecould 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 sixnine months ended JuneSeptember 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 July 10,October 9, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 82033 loans, with a gross balance of $1.27 billion,$68.6 million, or approximately 15%less than 1% of our total loan portfolio at JuneSeptember 30, 2020. Depending on the scope and duration of the
COVID-19
pandemic, we believe there is a high likelihoodreasonable possibility that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for futurethe final calendar quartersquarter 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
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and
medium-sizedbusinesses,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 JuneSeptember 30, 2020.
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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. There is no expiration date for this repurchase program. On March 31, 2020, the Company announced that it suspended its
10b5-1
stock repurchase program. During the three months ended JuneSeptember 30, 2020, the Company did not repurchase any shares of CVB common stock outstanding under this program. As of JuneSeptember 30, 2020, we have 4,585,145 shares of CVB common stock available for repurchase under the common stock repurchase program.
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.     MINE SAFETY DISCLOSURES
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  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
  31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
  32.1  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
  32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
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 JuneSeptember 30, 2020, has been formatted in Inline XBRL.
 
*
Filed herewith
**
Furnished herewith
 
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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: August 10,November 6, 2020
    
    
/s/ E. Allen Nicholson
    
E. Allen Nicholson
    
Executive Vice President and Chief Financial Officer
    
(Principal Financial Officer)
 
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