SECURITIES AND EXCHANGE COMMISSION
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
(Exact name of registrant as specified in its charter)
| | | |
| | |
(State or other jurisdiction of | | |
Incorporation or organization) | | |
| | | |
701 North Haven Ave., Suite 350 | | |
| | |
(Address of principal executive offices) | | |
(Registrant’s telephone number,
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):
| | | | | | | | | |
| | | | | | | | |
| | | | | | Smaller reporting company | | |
| | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock of the registrant:
140,143,607
outstanding as of July 31, 2019.
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.
The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust. 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 58 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.
On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 –
, included herein.
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 six months ended June 30, 2019 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2018, 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.
— 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. The operating segments previously reported have been aggregated into one segment to conform to the current period’s presentation format. These reclassifications do not affect previously reported net earnings.
| 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, 2018 as filed with the SEC (“Form
10-K”).
Use of Estimates in the Preparation of Financial Statements
— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.
Adoption of New Accounting Standards
— In August 2017, the FASB issued ASU No.
2017-12,
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU
2017-12
changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both
non-financial
and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No.
2017-12
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No.
2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Accounting.” The intention of ASU
2018-07
is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be
re-measured
through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU
2018-07
is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU No.
2016-02,
“Leases (Topic 842)”. ASU
2016-02
establishes a
right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU
2018-10,
“Codification Improvements to Topic 842, Leases”, which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU
2018-10
are the same as the effective date and transition requirements of
2016-02.
In July 2018, the FASB issued ASU No.
2018-11,
“Leases (Topic 842): Targeted Improvements”, which creates a new optional transition method for implementing the new standard on leases, ASU No.
2016-02,
and provides lessors with a practical expedient for separating lease and
non-lease
components. Specifically, under the amendments in ASU
2018-11:
(1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and
non-lease
components when certain conditions are met. The amendments have the same effective date as ASU
2016-02.
— The Company elected several practical expedients made available by the FASB. The Company elected not to restate comparative financial statements upon adoption of the new accounting standard. In addition, the Company elected the package of practical expedients whereby the Company did not reassess (i) whether existing contracts are, or contain, leases. and (ii) lease classification for existing leases. Lastly, the Company elected not to separate lease and
non-lease
components in determining the consideration in the lease agreement.
The Company’s leasing portfolio consists of real estate leases, which are used primarily for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The adoption of this ASU during the first quarter of 2019 did not have a material impact on the Company’s consolidated financial statements. At adoption, the Company recognized a lease liability and a corresponding ROU asset of approximately $20 million on the consolidated balance sheet related to its future lease payments as a lessee under operating leases. See Note 13—
for more information.
Operating lease ROU assets and lease liabilities are included in
and
, respectively, on the consolidated balance sheet. The Company uses its incremental borrowing rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset, at adoption of this ASU, was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.
Recent Accounting Pronouncements
— In June 2016, the FASB issued 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. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply 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, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit impairment in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements. A cross-functional team, consisting of finance, credit management, and information technology is currently developing the allowance methodology, models and assumptions that will be used under the new life of loan methodology. In determining the appropriate methodology, the Company has reviewed portfolio segmentation, and data quality and its availability. The Company continues to review and update assumptions and models, as appropriate.
In January 2017, the FASB issued ASU No.
2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU
2017-04
eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No.
2018-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
Community Bank Acquisition
On
August 10, 2018
, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas. The systems integration of CB and CBB was completed in November 2018.
The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers that were in close proximity were consolidated. For the first six months of 2019, a total of 10 banking centers were consolidated, including nine former CB centers.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 10, 2018 acquisition date.
The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019.
The application of the acquisition method of accounting resulted in the recognition of goodwill of $547.1 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.
At the date of acquisition, the gross contractual loan amounts receivable, inclusive of all principal and interest, was approximately $3 billion. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected at the date of acquisition was approximately $4.5 million.
We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.
The Company incurred merger related expenses associated with the CB acquisition of $
2.6
million and $
5.8
million for the three and six months ended June 30, 2019,
respectively
, and $
494,000
and $
1.3
million for the three and six months ended June 30, 2018, respectively
.
For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and six months ended June 30, 2018. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented.
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.
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| | For the Three Months Ended
June 30, | | | | |
| | | | | | | | | | | | |
| | | |
Investment securities available-for-sale: | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total interest income from available-for-sale securities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Investment securities held-to-maturity: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total interest income from held-to-maturity securities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total interest income from investment securities | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
Approximately 89% of the total investment securities portfolio at June 30, 2019 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 tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018. Management has 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 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 (“OTTI”).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | |
| | | | Gross
Unrealized
Holding
Losses | | | | Gross
Unrealized
Holding
Losses | | | | Gross
Unrealized
Holding
Losses | |
| | |
Investment securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | ) |
| | | | | | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | ) | | | | | | | | ) |
Total available-for-sale securities | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | ) |
Investment securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | ) |
Residential mortgage-backed securities | | | | | | | | ) | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | ) | | | | | | | | ) |
Total held-to-maturity securities | | $ | | | | $ | | ) | | $ | | | | $ | | ) | | $ | | | | $ | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | |
| | | | Gross
Unrealized
Holding Losses | | | | Gross
Unrealized
Holding Losses | | | | Gross
Unrealized
Holding
Losses | |
| | |
Investment securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale securities | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Investment securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Residential mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total held-to-maturity securities | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
At June 30, 2019 and December 31, 2018, investment securities having a carrying value of approximately $1.51 billion and $1.66 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at June 30, 2019, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.
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| | |
| | | | |
| | | | | | | | | |
| | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Due after one year through five years | | | | | | | | | | | | | | | | |
Due after five years through ten years | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total investment securities | | $ | | | | $ | | | | $ | | | | $ | | |
The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2019.
| 6. | LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES |
Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans (“Non-PCI loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form 10-K for the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at June 30, 2019 and December 31, 2018. As of June 30, 2019, PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables.
The following table provides a summary of the Company’s total loans and lease finance receivables by type.
| | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | |
| | |
Commercial and industrial | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Less: Deferred loan fees, net | | | | ) | | | | ) | | | | | | | | ) |
Gross loans, net of deferred loan fees | | | | | | | | | | | | | | | | |
Less: Allowance for loan losses | | | | ) | | | | ) | | | | ) | | | | ) |
Total loans and lease finance receivables | | $ | | | | $ | | | | $ | | | | $ | | |
As of June 30, 2019, 77.08% of the Company’s total gross loan portfolio consisted of real estate loans, 71.85% of which consisted of commercial real estate loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2019, $225.6 million, or 4.16% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December 31, 2018. The loans secured by farmland included $122.7 million for loans secured by dairy & livestock land and $102.9 million for loans secured by agricultural land at June 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $104.1 million for loans secured by agricultural land at December 31, 2018. As of June 30, 2019, dairy & livestock and agribusiness loans of $301.8 million were comprised of $245.7 million for dairy & livestock loans and $56.1 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $54.0 million for agribusiness loans at December 31, 2018.
At June 30, 2019, the Company held approximately $3.81 billion of total fixed rate loans.
At June 30, 2019 and December 31, 2018, loans totaling $6.05 billion and $5.71 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no outstanding loans
held-for-sale
as of June 30, 2019 and December 31, 2018.
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. Credits are monitored by line and credit management personnel 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.
The following table summarizes loans by type, according to our internal risk ratings for the periods presented.
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| | |
| | | | | | | | | | | |
| | |
| Commercial and industrial | | $ | 883,044 | | | $ | 28,611 | | | $ | 6,298 | | | $ | - | | | $ | 917,953 | |
| SBA | | | 303,947 | | | | 14,444 | | | | 9,215 | | | | - | | | | 327,606 | |
| Real estate: | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | | | | |
| Owner occupied | | | 1,985,951 | | | | 87,246 | | | | 20,446 | | | | - | | | | 2,093,643 | |
| | | 3,310,103 | | | | 12,850 | | | | 755 | | | | - | | | | 3,323,708 | |
| Construction | | | | | | | | | | | | | | | | | | | | |
| Speculative | | | 93,170 | | | | - | | | | - | | | | - | | | | 93,170 | |
| | | 23,287 | | | | - | | | | - | | | | - | | | | 23,287 | |
| SFR mortgage | | | 272,767 | | | | 2,158 | | | | 3,360 | | | | - | | | | 278,285 | |
| Dairy & livestock and agribusiness | | | 239,481 | | | | 54,003 | | | | 8,268 | | | | - | | | | 301,752 | |
| Municipal lease finance receivables | | | 59,481 | | | | 504 | | | | - | | | | - | | | | 59,985 | |
| Consumer and other loans | | | 118,706 | | | | 1,019 | | | | 1,054 | | | | - | | | | 120,779 | |
| Total gross loans | | $ | 7,289,937 | | | $ | 200,835 | | | $ | 49,396 | | | $ | - | | | $ | 7,540,168 | |
| | (1) | Includes $ 19.9 million of classified loans acquired from CB in the third quarter of 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Recorded Investment in Loans | | Allowance for Loan Losses |
| | | | Collectively
Evaluated for
Impairment | | Acquired with
Deterioriated
Credit Quality | | Individually
Evaluated for
Impairment | | Collectively
Evaluated for
Impairment | | Acquired with
Deterioriated
Credit Quality | |
| | |
Commercial and industrial | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
A loan is reported as a TDR when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of one or more of these concessions, restructured loans are classified as impaired. Impairment reserves on
non-collateral
dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the carrying value of the loan. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.
When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.
At June 30, 2019, the Company had impaired loans of $14.5 million. Impaired loans included $5.1 million of nonaccrual
Small Business Administration (“SBA”)
loans, $
2.7
million of nonaccrual single-family residential (“SFR”) mortgage loans, $
2.0
million of nonaccrual
commercial and industrial
loans, $
1.1
million of nonaccrual commercial real estate loans, and $
397,000
of nonaccrual consumer and other loans. These impaired loans included $
3.5
million of loans whose terms were modified in a troubled debt restructuring, of which $
263,000
were classified as nonaccrual. The remaining balance of $
3.2
million consisted of
12
loans performing according to the restructured terms. The impaired loans had a specific allowance of $
371,000
at June
30
,
2019
. At December
31
,
2018
, the Company had classified as impaired, loans with a balance of $
23.5
million with a related allowance of $
561,000
.
The following tables present information for
held-for-investment
loans, individually evaluated for impairment by type of loans, as and for the periods presented.
| | | | | | | | | | | | | | | | | | | | | |
| | As of and For the Six Months Ended |
| | | | | | | | | | | |
| | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
With a related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | As of December 31, 2018 (1) |
| | | | | | | |
| | |
With no related allowance recorded: | | | | | | | | | | | | |
Commercial and industrial | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
With a related allowance recorded: | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Dairy & livestock and agribusiness | | | | | | | | | | | | |
Municipal lease finance receivables | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | |
The Company recognizes the
charge-off
of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2019, December 31, 2018 and June 30, 2018 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a
charge-off
is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance
non-collateral
dependent loans.
Reserve for Unfunded Loan Commitments
The allowance for
off-balance
sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the
off-balance
sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was
no
provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2019, and 2018. As of June 30, 2019 and December 31, 2018, 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 impaired and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion regarding TDRs.
As of June 30, 2019, there were $3.5 million of loans classified as a TDR, of which $3.2 million were performing and $263,000 were nonperforming. 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 June 30, 2019, performing TDRs were comprised of eight SFR mortgage loans of $2.1 million, one SBA loan of $550,000, one commercial real estate loan of $436,000, and two commercial and industrial loans of $95,000.
The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated zero and $490,000 of specific allowance to TDRs as of June 30, 2019 and December 31, 2018, respectively.
The following table provides a summary of the activity related to TDRs for the periods presented.
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | | For the Six Months Ended
June 30, | |
| | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Payoffs/payments, net and other | | | | ) | | | | ) | | | | ) | | | | ) |
TDRs returned to accrual status | | | | | | | | | | | | | | | | |
TDRs placed on nonaccrual status | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ) | | | | |
| Transfer to OREO | | | - | | | | - | | | | (2,275 | ) | | | - | |
Payoffs/payments, net and other | | | | ) | | | | ) | | | | ) | | | | ) |
TDRs returned to accrual status | | | | | | | | | | | | | | | | |
TDRs placed on nonaccrual status | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
There were no loans that were modified as TDRs during the three and six months ended June 30, 2019.
| 7. | EARNINGS PER SHARE RECONCILIATION |
Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of 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 six months ended June 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 360,000 and 396,000, respectively. For the three and six months ended June 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 14,000 and 13,000, 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.
| | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
| | (In thousands, except per share amounts) | |
Earnings per common share: | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Less: Net earnings allocated to restricted stock | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net earnings allocated to common shareholders | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Diluted earnings per common share: | | | | | | | | | | | | | | | | |
Net income allocated to common shareholders | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | |
Incremental shares from assumed exercise of outstanding options | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Diluted weighted average shares outstanding | | | | | | | | | | | | | | | | |
Diluted earnings per common share | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
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 June 30, 2019 and December 31, 2018, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | |
| | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | |
| Total cash and cash equivalents | | $ | 175,840 | | | $ | 175,840 | | | $ | - | | | $ | - | | | $ | 175,840 | |
Interest-earning balances due from depository institutions | | | 6,425 | | | | - | | | | 6,295 | | | | - | | | | 6,295 | |
Investment securities available-for-sale | | | 1,600,020 | | | | - | | | | 1,600,020 | | | | - | | | | 1,600,020 | |
Investment securities held-to-maturity | | | 728,113 | | | | - | | | | 729,032 | | | | - | | | | 729,032 | |
| Total loans, net of allowance for loan losses | | | 7,468,558 | | | | - | | | | - | | | | 7,433,835 | | | | 7,433,835 | |
| Swaps | | | 10,744 | | | | - | | | | 10,744 | | | | - | | | | 10,744 | |
| | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing | | $ | 3,412,588 | | | $ | - | | | $ | 3,409,516 | | | $ | - | | | $ | 3,409,516 | |
| Borrowings | | | 421,271 | | | | - | | | | 420,841 | | | | - | | | | 420,841 | |
| Junior subordinated debentures | | | 25,774 | | | | - | | | | - | | | | 20,703 | | | | 20,703 | |
| Swaps | | | 10,744 | | | | - | | | | 10,744 | | | | - | | | | 10,744 | |
| | | |
| | |
| | | | |
| | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | |
| Total cash and due from banks | | $ | 163,948 | | | $ | 163,948 | | | $ | - | | | $ | - | | | $ | 163,948 | |
Interest-earning balances due from depository
institutions | | | 7,670 | | | | - | | | | 7,339 | | | | - | | | | 7,339 | |
Investment securities available-for-sale | | | 1,734,085 | | | | - | | | | 1,734,085 | | | | - | | | | 1,734,085 | |
Investment securities held-to-maturity | | | 744,440 | | | | - | | | | 721,537 | | | | - | | | | 721,537 | |
| Total loans, net of allowance for loan losses | | | 7,700,998 | | | | - | | | | - | | | | 7,514,964 | | | | 7,514,964 | |
| Swaps | | | 1,938 | | | | - | | | | 1,938 | | | | - | | | | 1,938 | |
| | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing | | $ | 3,622,703 | | | $ | - | | | $ | 3,614,682 | | | $ | - | | | $ | 3,614,682 | |
| Borrowings | | | 722,255 | | | | - | | | | 721,601 | | | | - | | | | 721,601 | |
| Junior subordinated debentures | | | 25,774 | | | | - | | | | - | | | | 21,176 | | | | 21,176 | |
| Swaps | | | 1,938 | | | | - | | | | 1,938 | | | | - | | | | 1,938 | |
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2019 and December 31, 2018. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
| 9. | 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 June 30, 2019, the Bank has entered into 77 interest-rate swap agreements with customers. 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 require 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.
None
of our derivative assets and liabilities are offset in the balance sheet.
We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.
Balance Sheet Classification of Derivative Financial Instruments
As of June 30, 2019 and December 31, 2018, the total notional amount of the Company’s swaps was $224.8 million, and $195.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.
| | | | | | | | | | | | | | | | |
| | | |
| | | | | | |
| | | | | | | | | | | | |
| | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| | | | |
| | | |
| | | | | | |
| | | | | | | | | | | | |
| | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| 11. | 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 condensed consolidated balances.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts
Recognized in | | | Gross Amounts
Offset in the | | | | | | Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets | | | | | |
| | the Condensed
Consolidated
Balance Sheets | | | Condensed
Consolidated
Balance Sheets | | | Condensed
Consolidated
Balance Sheets | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | $ | | ) |
| | | | | | | | | | | | | | | | | | | | ) | | | | ) |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | $ | | ) |
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Derivatives not designated as hedging instruments | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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Derivatives not designated as hedging instruments | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | |
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| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | $ | | ) |
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.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The following presents the components of lease costs and supplemental information related to leases as of June 30, 2019 and for the three and six months ended June 30, 2019.
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Lease Assets and Liabilities | | | | | | | | |
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Operating lease expense (1) | | $ | | | | $ | | |
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(1) Includes short-term leases and variable lease costs, which are immaterial.
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Cash paid for amounts included in the measurement of lease
liabilities: | | | | | | | | |
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Operating cash outflows from operating leases | | $ | 2,113 | | | $ | | |
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Lease Term and Discount Rate | | | | |
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Weighted average remaining lease term (years) | | | 4.11 | |
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Weighted average discount rate | | | | % |
The Company’s lease arrangements that have not yet commenced as of June 30, 2019 and the Company’s short-term lease costs and variable lease costs, for the three and six months ended June 30, 2019 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 June 30, 2019, excluding property taxes and insurance, are as follows:
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2019 (excluding the six months ended June 30, 2019) | | $ | | |
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Total future lease payments | | | | |
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Present value of lease liabilities | | $ | | |
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On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –
Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition
of the 2018 Annual Report on Form 10-K for the year ended December 31, 2018 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.
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| | For the Three Months Ended | | | | |
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Service charges on deposit accounts | | $ | | | | $ | | | | $ | | | | $ | | |
Trust and investment services | | | | | | | | | | | | | | | | |
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| Gain on OREO, net | | | 24 | | | | - | | | | 129 | | | | 3,540 | |
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Noninterest Income (in-scope of Topic 606) | | | | | | | | | | | | | | | | |
Noninterest Income (out-of-scope of Topic 606) | | | | | | | | | | | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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