Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - CVB FINANCIAL CORPFinancial_Report.xls
EX-31.1 - EX-31.1 - CVB FINANCIAL CORPd899354dex311.htm
EX-32.1 - EX-32.1 - CVB FINANCIAL CORPd899354dex321.htm
EX-32.2 - EX-32.2 - CVB FINANCIAL CORPd899354dex322.htm
EX-31.2 - EX-31.2 - CVB FINANCIAL CORPd899354dex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2015

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: 0-10140

 

 

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)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock of the registrant: 106,256,535 outstanding as of April 30, 2015.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I –

FINANCIAL INFORMATION (UNAUDITED)

  3   
    ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  4   

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  9   
    ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  35   

CRITICAL ACCOUNTING POLICIES

  35   

OVERVIEW

  35   

ANALYSIS OF THE RESULTS OF OPERATIONS

  37   

RESULTS BY BUSINESS SEGMENTS

  45   

ANALYSIS OF FINANCIAL CONDITION

  47   

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

  63   
    ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  65   
    ITEM 4.

CONTROLS AND PROCEDURES

  65   
PART II –

OTHER INFORMATION

  65   
    ITEM 1.

LEGAL PROCEEDINGS

  65   
    ITEM 1A.

RISK FACTORS

  66   
    ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  66   
    ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

  67   
    ITEM 4.

MINE SAFETY DISCLOSURES

  67   
    ITEM 5.

OTHER INFORMATION

  67   
    ITEM 6.

EXHIBITS

  67   
SIGNATURES   68   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Forward Looking Statements

Certain statements in this Report on Form 10-Q, including, but not limited to, statements under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, including but not limited to, statements about anticipated future operating and financial performance and results, financial position and liquidity, business prospects, strategic alternatives, business strategies, regulatory policies, competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for future operations, legal proceedings or investigations, management hiring and retention and other similar forecasts and statements of expectations or assumptions underlying any of the foregoing. Words such as “will likely result, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will” and variations of these words and similar expressions are intended to identify these forward looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on the Company, our customers and/or our assets and liabilities; our ability to attract and maintain deposits, borrowings and other sources of funding or liquidity; supply and demand for real estate and renewed fluctuation or periodic deterioration in values of real estate in California or other jurisdictions where we lend, whether involving residential or commercial property; a prolonged slowdown or decline in sales or construction activity; changes in the financial performance and/or condition of our loan and deposit customers or key vendors or counterparties; changes in the levels of performing and nonperforming assets and charge-offs; the cost or effect of acquisitions or divestitures we may make; the effect of changes in laws and regulations (including laws, regulations and judicial decisions concerning financial reform, taxes, bank or holding company capital levels, securities, employment, executive compensation, insurance, compliance, vendor management and information security) with which we and our subsidiaries must comply; changes in the applicability or costs of deposit insurance; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant legal, regulatory and accounting requirements; inflation, interest rate, securities market and monetary fluctuations; internal and external fraud and cyber-security threats, including theft or loss of Company or customer funds, loss of system functionality or access, or theft or loss of Company or customer information; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, droughts or pandemic diseases; the timely development and acceptance of new banking products and services (including technology-based services and products) and the perceived value of these products and services by customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of key internal or external systems and applications; changes in consumer spending, borrowing and savings preferences or habits; the effects of technological changes, the expanding use of technology in banking (including the adoption of mobile banking applications) and product innovation; the ability to retain or increase market share, retain or grow customers and control expenses; changes in the risk or competitive environment among financial and bank holding companies, banks and other financial service providers; volatility in the credit and equity markets and its effects on the general economy or local or regional business conditions; market fluctuations in the prices of the Company’s common stock or other securities; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other national or international accounting standard setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and our board of directors; the costs and effects of legal, regulatory and compliance changes or developments; the initiation and the favorable or unfavorable resolution of legal proceedings or regulatory or other governmental inquiries involving the Company, including, but not limited to, any consumer or employment class action litigation, and the current investigation by the Securities and Exchange Commission and the related class-action and derivative action lawsuits filed against us; the results of regulatory examinations or reviews or other government actions; and our ongoing relationships with our various federal and state regulators, including the SEC, FDIC and California DBO. The Company cautions that the foregoing factors are not exclusive. For additional information concerning these factors and other factors which may cause actual results to differ from the results discussed in our forward-looking statements, see the periodic filings the Company makes with the Securities and Exchange Commission, and, in particular, the information set forth in Item 1A herein and in “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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.

 

3


Table of Contents
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

 

     March 31,     December 31,  
     2015     2014  

Assets

    

Cash and due from banks

   $ 112,336      $ 95,030   

Interest-earning balances due from Federal Reserve

     289,036        10,738   
  

 

 

   

 

 

 

Total cash and cash equivalents

  401,372      105,768   
  

 

 

   

 

 

 

Interest-earning balances due from depository institutions

  25,873      27,118   

Investment securities available-for-sale, at fair value (with amortized cost of $2,954,443 at March 31, 2015, and $3,083,582 at December 31, 2014)

  3,028,289      3,137,158   

Investment securities held-to-maturity

  1,464      1,528   

Investment in stock of Federal Home Loan Bank (FHLB)

  25,338      25,338   

Loans and lease finance receivables

  3,716,023      3,817,067   

Allowance for loan losses

  (60,709   (59,825
  

 

 

   

 

 

 

Net loans and lease finance receivables

  3,655,314      3,757,242   
  

 

 

   

 

 

 

Premises and equipment, net

  32,628      33,591   

Bank owned life insurance

  127,557      126,927   

Accrued interest receivable

  22,872      23,194   

Intangibles

  2,946      3,214   

Goodwill

  74,244      74,244   

FDIC loss sharing asset

  —        299   

Other real estate owned

  7,122      5,637   

Income taxes

  14,848      31,461   

Other assets

  23,084      25,201   
  

 

 

   

 

 

 

Total assets

$ 7,442,951    $ 7,377,920   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

Deposits:

Noninterest-bearing

$ 3,126,928    $ 2,866,365   

Interest-bearing

  2,770,848      2,738,293   
  

 

 

   

 

 

 

Total deposits

  5,897,776      5,604,658   

Customer repurchase agreements

  560,352      563,627   

FHLB advances

  —        199,479   

Other borrowings

  —        46,000   

Accrued interest payable

  306      1,161   

Deferred compensation

  10,988      10,291   

Junior subordinated debentures

  25,774      25,774   

Payable for securities purchased

  2,350      —     

Other liabilities

  48,287      48,821   
  

 

 

   

 

 

 

Total liabilities

  6,545,833      6,499,811   
  

 

 

   

 

 

 

Commitments and Contingencies

Stockholders’ Equity

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,246,910 at March 31, 2015, and 105,893,216 at December 31, 2014

  499,382      495,220   

Retained earnings

  354,905      351,814   

Accumulated other comprehensive income, net of tax

  42,831      31,075   
  

 

 

   

 

 

 

Total stockholders’ equity

  897,118      878,109   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 7,442,951    $ 7,377,920   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2015     2014  

Interest income:

    

Loans and leases, including fees

   $ 45,542      $ 44,656   

Investment securities:

    

Taxable

     12,961        10,279   

Tax-advantaged

     5,011        5,278   
  

 

 

   

 

 

 

Total investment income

  17,972      15,557   

Dividends from FHLB stock

  469      604   

Federal funds sold

  142      124   

Interest-earning deposits with other institutions

  55      121   
  

 

 

   

 

 

 

Total interest income

  64,180      61,062   
  

 

 

   

 

 

 

Interest expense:

Deposits

  1,293      1,186   

Borrowings

  1,773      2,830   

Junior subordinated debentures

  105      104   
  

 

 

   

 

 

 

Total interest expense

  3,171      4,120   
  

 

 

   

 

 

 

Net interest income before provision for loan losses

  61,009      56,942   

Provision for (recapture of) loan losses

  —        (7,500
  

 

 

   

 

 

 

Net interest income after provision for loan losses

  61,009      64,442   
  

 

 

   

 

 

 

Noninterest income:

Service charges on deposit accounts

  3,961      3,828   

Trust and investment services

  2,151      1,925   

Bankcard services

  733      778   

BOLI income

  649      638   

Gain on sale of loans held-for-sale

  —        5,330   

Decrease in FDIC loss sharing asset, net

  (390   (1,707

Gain on OREO, net

  124      5   

Other

  783      701   
  

 

 

   

 

 

 

Total noninterest income

  8,011      11,498   
  

 

 

   

 

 

 

Noninterest expense:

Salaries and employee benefits

  19,295      19,417   

Occupancy and equipment

  3,652      3,725   

Professional services

  1,153      1,791   

Software licenses and maintenance

  1,030      1,065   

Promotion

  1,327      1,266   

Provision for unfunded loan commitments

  (500   —     

Amortization of intangible assets

  268      122   

Debt termination expense

  13,870      —     

OREO expense

  84      25   

Other

  4,293      3,746   
  

 

 

   

 

 

 

Total noninterest expense

  44,472      31,157   
  

 

 

   

 

 

 

Earnings before income taxes

  24,548      44,783   
  

 

 

   

 

 

 

Income taxes

  8,715      16,122   
  

 

 

   

 

 

 

Net earnings

$ 15,833    $ 28,661   
  

 

 

   

 

 

 

Other comprehensive income:

Unrealized gain on securities arising during the period

$ 20,270    $ 24,781   

Less: Reclassification adjustment for net gain on securities included in net income

  —        —     
  

 

 

   

 

 

 

Other comprehensive income, before tax

  20,270      24,781   

Less: Income tax expense related to items of other comprehensive income

  (8,514   (10,407
  

 

 

   

 

 

 

Other comprehensive income, net of tax

  11,756      14,374   
  

 

 

   

 

 

 

Comprehensive income

$ 27,589    $ 43,035   
  

 

 

   

 

 

 

Basic earnings per common share

$ 0.15    $ 0.27   

Diluted earnings per common share

$ 0.15    $ 0.27   

Cash dividends declared per common share

$ 0.12    $ 0.10   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2015 and 2014

(Dollars and shares in thousands)

(Unaudited)

 

     Common
Shares
Outstanding
    Common
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Balance January 1, 2014

     105,370      $ 491,068      $ 290,149      $ (9,330   $ 771,887   

Repurchase of common stock

     (2     (32         (32

Exercise of stock options

     334        3,684            3,684   

Tax benefit from exercise of stock options

       559            559   

Shares issued pursuant to stock-based compensation plan

     310        656            656   

Cash dividends declared on common stock ($0.10 per share)

         (10,608       (10,608

Net earnings

         28,661          28,661   

Other comprehensive income

           14,374        14,374   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2014

  106,012    $ 495,935    $ 308,202    $ 5,044    $ 809,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

  105,893    $ 495,220    $ 351,814    $ 31,075    $ 878,109   

Repurchase of common stock

  (32   (497   (497

Exercise of stock options

  306      3,313      3,313   

Tax benefit from exercise of stock options

  614      614   

Shares issued pursuant to stock-based compensation plan

  80      732      732   

Cash dividends declared on common stock ($0.12 per share)

  (12,742   (12,742

Net earnings

  15,833      15,833   

Other comprehensive income

  11,756      11,756   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2015

  106,247    $ 499,382    $ 354,905    $ 42,831    $ 897,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2015     2014  

Cash Flows from Operating Activities

    

Interest and dividends received

   $ 68,591      $ 63,935   

Service charges and other fees received

     6,848        7,237   

Interest paid

     (3,981     (4,080

Net cash paid to vendors, employees and others

     (43,608     (37,955

Income taxes paid

     —          —     

Proceeds from (payments to) FDIC loss share agreement

     265        (185
  

 

 

   

 

 

 

Net cash provided by operating activities

  28,115      28,952   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

Proceeds from redemption of FHLB stock

  —        6,771   

Proceeds from maturity of interest-earning balances from depository institutions

  1,245      —     

Proceeds from repayment of investment securities

  94,479      65,093   

Proceeds from maturity of investment securities

  34,014      39,768   

Purchases of investment securities

  (1,967   (99,689

Net decrease in loan and lease finance receivables

  101,774      157,719   

Purchase of premises and equipment

  (157   (301

Proceeds from sales of other real estate owned

  1,418      —     
  

 

 

   

 

 

 

Net cash provided by investing activities

  230,806      169,361   
  

 

 

   

 

 

 

Cash Flows from Financing Activities

Net increase in transaction deposits

  322,642      237,238   

Net decrease in time deposits

  (29,524   (17,083

Repayment of FHLB advances

  (200,000   —     

Net decrease in other borrowings

  (46,000   (69,000

Net decrease in customer repurchase agreements

  (3,275   (16,449

Cash dividends on common stock

  (10,590   (10,537

Repurchase of common stock

  (497   (32

Proceeds from exercise of stock options

  3,313      3,684   

Tax benefit related to exercise of stock options

  614      559   
  

 

 

   

 

 

 

Net cash provided by financing activities

  36,683      128,380   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

  295,604      326,693   

Cash and cash equivalents, beginning of period

  105,768      94,693   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 401,372    $ 421,386   
  

 

 

   

 

 

 

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 (Continued)

(Dollars in thousands)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2015     2014  

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

    

Net earnings

   $ 15,833      $ 28,661   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Gain on sale of loans held-for-sale

     —          (5,330

Gain on sale of investment securities

     —          —     

(Gain) loss on sale of premises and equipment, net

     (1     204   

Gain on sale of other real estate owned

     (112     —     

Amortization of capitalized prepayment penalty on borrowings

     521        68   

Increase in bank owned life insurance

     (630     (622

Net amortization of premiums and discounts on investment securities

     5,025        5,094   

Accretion of SJB discount

     (980     (1,707

Provision for loan losses

     —          (7,500

Provision for unfunded loan commitments

     (500     —     

Valuation adjustment on other real estate owned

     33        —     

Change in FDIC loss sharing asset

     299        1,707   

Proceeds from (Payments to) FDIC loss share agreement

     265        (185

Stock-based compensation

     732        656   

Depreciation and amortization, net

     (271     354   

Change in accrued interest receivable

     322        276   

Change in accrued interest payable

     (855     (28

Change in other assets and liabilities

     8,434        7,304   
  

 

 

   

 

 

 

Total adjustments

  12,282      291   
  

 

 

   

 

 

 

Net cash provided by operating activities

$ 28,115    $ 28,952   
  

 

 

   

 

 

 

Supplemental Disclosure of Noncash Investing Activities

Securities purchased and not settled

$ 2,350    $ 75,392   

Transfer of loans to other real estate owned

$ 2,824    $ —     

See accompanying notes to the unaudited condensed consolidated financial statements.

 

8


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BUSINESS

The condensed consolidated financial statements include the accounts 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 subsidiaries: 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 ASC 810 Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing to customers through its Citizens Financial Services Group and 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 San Bernardino County, Riverside County, Los Angeles County, Orange County, Ventura County, San Diego County, Madera County, Fresno County, Tulare County and Kern County, California. The Bank operates 40 Business Financial Centers, seven Commercial Banking Centers, and three 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 months ended March 31, 2015 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, 2014, 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’ 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, 2014 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, other intangibles and OREO.

Recent Accounting Pronouncements— In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The new guidance reduces the number of consolidation models from four to two as well as simplifies the FASB Accounting Standards Codification and improves GAAP by placing more of an emphasis on risk of loss when

 

9


Table of Contents

determining a controlling financial interest, reducing the frequency of the application of related party guidance when determining a controlling financial interest in a variable interest entity (VIE) and changing the consolidation conclusions for public and private companies in several industries that typically make use of VIEs. ASU 2015-02 will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

4. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service based upon market quotes.

 

     March 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Holding
Gain
     Gross
Unrealized
Holding Loss
    Fair Value      Total
Percent
 
     (Dollars in thousands)  

Investment securities available-for-sale:

             

Government agency

   $ 334,025       $ 140       $ (4,299   $ 329,866         10.89

Residential mortgage-backed securities

     1,807,036         49,360         (1,242     1,855,154         61.26

CMOs / REMICs - residential

     279,918         8,406         (80     288,244         9.52

Municipal bonds

     528,464         21,910         (530     549,844         18.16

Other securities

     5,000         181         —          5,181         0.17
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 2,954,443    $ 79,997    $ (6,151 $ 3,028,289      100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Holding
Gain
     Gross
Unrealized
Holding

Loss
    Fair Value      Total
Percent
 
     (Dollars in thousands)  

Investment securities available-for-sale:

             

Government agency

   $ 339,071       $ —         $ (8,228   $ 330,843         10.55

Residential mortgage-backed securities

     1,884,370         36,154         (3,028     1,917,496         61.12

CMOs / REMICs - residential

     297,318         7,050         (277     304,091         9.69

Municipal bonds

     557,823         22,463         (645     579,641         18.48

Other securities

     5,000         87         —          5,087         0.16
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 3,083,582    $ 65,754    $ (12,178 $ 3,137,158      100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Approximately 82% of the available-for-sale portfolio at March 31, 2015 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale CMO/REMIC issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2015 and December 31, 2014. The Bank had $304,000 in CMOs/REMICs backed by whole loans issued by private-label companies (nongovernment sponsored).

 

10


Table of Contents

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than temporary.

 

     March 31, 2015  
     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)  

Available-for-sale:

                 

Government agency

   $ 14,558       $ 3       $ 289,548       $ 4,296       $ 304,106       $ 4,299   

Residential mortgage-backed securities

     —           —           128,416         1,242         128,416         1,242   

CMOs / REMICs - residential

     —           —           6,679         80         6,679         80   

Municipal bonds

     4,152         47         23,917         483         28,069         530   

Other securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 18,710    $ 50    $ 448,560    $ 6,101    $ 467,270    $ 6,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     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)  

Available-for-sale:

                 

Government agency

   $ 22,224       $ 28       $ 307,873       $ 8,200       $ 330,097       $ 8,228   

Residential mortgage-backed securities

     19,636         4         145,681         3,024         165,317         3,028   

CMOs / REMICs - residential

     —           —           31,143         277         31,143         277   

Municipal bonds

     1,953         23         24,812         622         26,765         645   

Other securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 43,813    $ 55    $ 509,509    $ 12,123    $ 553,322    $ 12,178   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

CMO Held-to-Maturity — The Company has one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A (limited documentation) mortgages. The mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO scores of 715 and an average LTV of 71% at origination. The security was a senior security in the securitization, was rated triple AAA at origination and was supported by subordinate securities. This security is classified as held-to-maturity as the Bank has both the intent and ability to hold this debt security to maturity. The Bank acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security first appeared in August 2008 at the time the crisis in the financial markets occurred and the market for securities collateralized by Alt-A mortgages diminished.

As of March 31, 2015, the unrealized loss on this security was zero and the current fair value on the security was 78.76% of the current par value. This Alt-A bond, with a book value of $1.5 million as of March 31, 2015, has $1.9 million in net impairment losses to date. These losses have been recorded as a reduction to noninterest income. The security is rated non-investment grade. We evaluated the security for an other-than-temporary decline in fair value as of March 31, 2015. The key assumptions include default rates, loss severities and prepayment rates. There were no changes in credit related other-than temporary impairment (“OTTI”) recognized in earnings for the quarter ended March 31, 2015 and 2014.

 

11


Table of Contents

Government Agency & Government-Sponsored Enterprise— The government agency bonds are backed by the full faith and credit of agencies of the U.S. Government. While the Government-Sponsored Enterprise bonds are not expressly guaranteed by the U.S. Government, they are currently being supported by the U.S. Government under a conservatorship arrangement with the Government-Sponsored Enterprises. As of March 31, 2015, approximately $140.9 million in U.S. government agency bonds are callable. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Company will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security.

Mortgage-Backed Securities and CMOs/REMICs— Almost all of the Company’s available-for-sale mortgage-backed and CMOs/REMICs securities are issued by Government Agencies or Government-Sponsored Enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All mortgage-backed securities are considered to be rated investment grade with a weighted average life of approximately 3.8 years. Of the total MBS/CMO, 99.99% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining .01% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds.

Municipal Bonds—The majority of the Company’s municipal bonds, with a weighted-average life of approximately 8.4 years, are insured by the largest bond insurance companies. The Company diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Company’s exposure to any single adverse event. The decline in fair value is attributable to the changes in interest rates and not credit quality. Since the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized costs, these investments are not considered other than temporarily impaired at March 31, 2015.

On an ongoing basis, we monitor the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. Many of the securities that would not be rated without insurance are pre-refunded and/or are general obligation bonds. We continue to monitor municipalities, which includes a review of the respective municipalities’ audited financial statements to determine whether there are any audit or performance issues. We use outside brokers to assist us in these analyses. Based on our monitoring of the municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial problems that would lead us to believe that there is OTTI for any given security.

At March 31, 2015 and December 31, 2014, investment securities having a carrying value of approximately $2.99 billion and $3.11 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 March 31, 2015, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMOs/REMICs have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMOs/REMICs are included in maturity categories based upon estimated prepayment speeds.

 

     March 31, 2015  
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Available-for-sale:

     

Due in one year or less

   $ 160,730       $ 164,801   

Due after one year through five years

     1,946,053         2,009,028   

Due after five years through ten years

     727,902         730,599   

Due after ten years

     119,758         123,861   
  

 

 

    

 

 

 

Total

$ 2,954,443    $ 3,028,289   
  

 

 

    

 

 

 

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 March 31, 2015.

 

12


Table of Contents

5. ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is 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, 2014. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans. The application of the purchase method of accounting resulted in an after-tax gain of $12.3 million which was included in 2009 earnings. The gain is the negative goodwill resulting from the acquired assets and liabilities recognized at fair value.

At March 31, 2015, the remaining discount associated with the PCI loans approximated $6.6 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $4.4 million of the related discount is expected to accrete into interest income over the remaining average lives of the respective pools and individual loans, which approximates 3.7 years and 0.8 years, respectively. The loss sharing agreement for commercial loans expired October 16, 2014. The following table provides a summary of PCI loans and lease finance receivables by type and their credit quality indicators for the periods indicated.

 

     March 31, 2015     December 31, 2014  
     (Dollars in thousands)  

Commercial and industrial

   $ 13,988      $ 14,605   

SBA

     1,073        1,110   

Real estate:

    

Commercial real estate

     102,445        109,350   

Construction

     —          —     

SFR mortgage

     197        205   

Dairy & livestock and agribusiness

     330        4,890   

Municipal lease finance receivables

     —          —     

Consumer and other loans

     2,997        3,336   
  

 

 

   

 

 

 

Gross PCI loans

  121,030      133,496   

Less: Purchase accounting discount

  (6,612   (7,129
  

 

 

   

 

 

 

Gross PCI loans, net of discount

  114,418      126,367   

Less: Allowance for PCI loans losses

  —        —     
  

 

 

   

 

 

 

Net PCI loans

$ 114,418    $ 126,367   
  

 

 

   

 

 

 

Credit Quality Indicators

The following table summarizes PCI loans by internal risk ratings for the periods indicated.

 

     March 31, 2015      December 31, 2014  
     (Dollars in thousands)  

Pass

   $ 25,483       $ 26,706   

Watch list

     69,635         77,371   

Special mention

     7,148         8,203   

Substandard

     18,764         21,216   

Doubtful & loss

     —           —     
  

 

 

    

 

 

 

Total PCI gross loans

$ 121,030    $ 133,496   
  

 

 

    

 

 

 

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology for PCI loans. The ALLL for PCI loans is determined separately from total loans, and is based on expectations of future cash flows from the underlying pools of loans or individual loans in accordance with ASC 310-30, as more fully described in Note 3— Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. As of March 31, 2015 and December 31, 2014, there were no allowance for loan losses recorded for PCI loans.

 

13


Table of Contents

6. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES

The following table provides a summary of the total of loan and lease finance receivables, excluding PCI loans, by type.

 

     March 31, 2015     December 31, 2014  
     (Dollars in thousands)  

Commercial and industrial

   $ 403,600      $ 390,011   

SBA

     126,385        134,265   

Real estate:

    

Commercial real estate

     2,499,183        2,487,803   

Construction

     55,346        55,173   

SFR mortgage

     205,132        205,124   

Dairy & livestock and agribusiness

     173,441        279,173   

Municipal lease finance receivables

     76,220        77,834   

Consumer and other loans

     70,749        69,884   
  

 

 

   

 

 

 

Gross loans, excluding PCI loans

  3,610,056      3,699,267   

Less: Deferred loan fees, net

  (8,451   (8,567
  

 

 

   

 

 

 

Gross loans, excluding PCI loans, net of deferred loan fees

  3,601,605      3,690,700   

Less: Allowance for loan losses

  (60,709   (59,825
  

 

 

   

 

 

 

Net loans, excluding PCI loans

  3,540,896      3,630,875   
  

 

 

   

 

 

 

PCI Loans

  121,030      133,496   

Discount on PCI loans

  (6,612   (7,129
  

 

 

   

 

 

 

PCI loans, net

  114,418      126,367   
  

 

 

   

 

 

 

Total loans and lease finance receivables

$ 3,655,314    $ 3,757,242   
  

 

 

   

 

 

 

As of March 31, 2015, 69.23% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 1.53% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of March 31, 2015, $150.9 million, or 6.04%, of the total commercial real estate loans included loans secured by farmland, compared to $165.6 million, or 6.66%, at December 31, 2014. The loans secured by farmland included $131.5 million for loans secured by dairy & livestock land and $19.4 million for loans secured by agricultural land at March 31, 2015, compared to $144.1 million for loans secured by dairy & livestock land and $21.5 million for loans secured by agricultural land at December 31, 2014. As of March 31, 2015, $173.4 million, or 4.80%, of the total gross loan portfolio (excluding PCI loans) consisted of dairy & livestock and agribusiness commercial loans, compared to $279.2 million, or 7.55%, at December 31, 2014. This was comprised of $161.5 million for dairy & livestock loans and $12.0 million for agribusiness loans at March 31, 2015, compared to $268.1 million for dairy & livestock loans and $11.1 million for agribusiness loans at December 31, 2014. At March 31, 2015, the Company held approximately $1.81 billion of total fixed rate loans.

At March 31, 2015 and December 31, 2014, loans totaling $2.82 billion and $2.78 billion, respectively, were pledged to secure borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

Loans Held-for-Sale

The following table provides a summary of the activity related to loans held-for-sale for the periods presented.

 

     For the
Three Months Ended

March 31,
 
         2015              2014      
     (Dollars in thousands)  

Balance, beginning of period

   $ —         $ 3,667   

Originations of mortgage loans

     —           —     

Sales of mortgage loans

     —           —     

Transfer of mortgage loans to held-for-investment

     —           —     

Sales of other loans

     —           (3,667

Transfers of other loans to held-for-sale

     —           —     

Write-down of loans held-for-sale

     —           —     
  

 

 

    

 

 

 

Balance, end of period

$     —      $     —     
  

 

 

    

 

 

 

 

14


Table of Contents

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating credit officer assigns borrowers 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 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, Pass Watch List, 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 range from minimal credit risk to lower than average, but still acceptable, credit risk.

Pass Watch List — Pass Watch list loans usually require more than normal management attention. Loans which qualify for the Pass 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 are currently protected but are weak. Although concerns exist, the Company is currently protected and loss is unlikely. Such loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

Substandard – Loans classified as substandard include poor liquidity, high leverage, and erratic earnings or losses. The primary source of repayment is no longer realistic, and asset or collateral liquidation may be the only source of repayment. Substandard loans are marginal and require continuing and close supervision by credit management. Substandard loans have the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added provision that the weaknesses make collection or the liquidation, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the assets, their classifications as losses are deferred until their more exact status may be determined.

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as active assets of the Company 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 basically worthless asset even though partial recovery may be achieved in the future.

The following tables summarize each class of loans, excluding PCI Loans, according to our internal risk ratings for the periods presented.

 

     March 31, 2015  
     Pass      Watch List      Special Mention      Substandard      Doubtful & Loss      Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 252,537       $ 96,106       $ 42,377       $ 12,350       $ 230       $ 403,600   

SBA

     80,047         22,423         14,362         8,070         1,483         126,385   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     551,211         139,446         49,994         17,159         —           757,810   

Non-owner occupied

     1,390,414         258,838         37,420         54,701         —           1,741,373   

Construction

                 

Speculative

     27,394         3,101         —           7,651         —           38,146   

Non-speculative

     16,579         621         —           —           —           17,200   

SFR mortgage

     176,298         18,882         4,285         5,667         —           205,132   

Dairy & livestock and agribusiness

     103,616         67,149         2,277         296         103         173,441   

Municipal lease finance receivables

     38,562         32,403         5,255         —           —           76,220   

Consumer and other loans

     54,900         10,487         2,670         2,595         97         70,749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

$ 2,691,558    $ 649,456    $ 158,640    $ 108,489    $ 1,913    $ 3,610,056   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     December 31, 2014  
     Pass      Watch List      Special Mention      Substandard      Doubtful & Loss      Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 234,029       $ 105,904       $ 33,795       $ 16,031       $ 252       $ 390,011   

SBA

     84,769         24,124         15,858         7,920         1,594         134,265   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     552,072         159,908         46,248         32,139         —           790,367   

Non-owner occupied

     1,347,006         241,809         56,353         52,268         —           1,697,436   

Construction

                 

Speculative

     28,310         613         —           7,651         —           36,574   

Non-speculative

     18,071         528         —           —           —           18,599   

SFR mortgage

     174,311         20,218         2,442         8,153         —           205,124   

Dairy & livestock and agribusiness

     174,783         85,660         8,612         10,015         103         279,173   

Municipal lease finance receivables

     35,463         22,349         20,022         —           —           77,834   

Consumer and other loans

     62,904         2,233         1,789         2,763         195         69,884   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

$ 2,711,718    $ 663,346    $ 185,119    $ 136,940    $ 2,144    $ 3,699,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the allowance for loan losses (“ALLL”) methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2014 Annual Report on Form 10-K for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at March 31, 2015 and December 31, 2014. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

The following tables present the balance and activity related to the allowance for loan losses for held-for-investment loans, excluding PCI loans, by portfolio segment for the periods presented.

 

     For the Three Months Ended March 31, 2015  
     Ending
Balance
December 31,
2014
     Charge-offs     Recoveries      Provision for
Loan Losses
    Ending
Balance

March 31,
2015
 
     (Dollars in thousands)  

Commercial and industrial

   $ 7,074       $ (134   $ 35       $ 527      $ 7,502   

SBA

     2,557         (33     34         (362     2,196   

Real estate:

            

Commercial real estate

     33,373         —          857         618        34,848   

Construction

     988         —          9         46        1,043   

SFR mortgage

     2,344         —          185         (104     2,425   

Dairy & livestock and agribusiness

     5,479         —          99         (1,832     3,746   

Municipal lease finance receivables

     1,412         —          —           (382     1,030   

Consumer and other loans

     1,262         (177     9         (269     825   

Unallocated

     5,336         —          —           1,758        7,094   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

$ 59,825    $ (344 $ 1,228    $ —      $ 60,709   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Table of Contents
     For the Three Months Ended March 31, 2014  
     Ending
Balance
December 31,

2013
     Charge-offs     Recoveries      (Recapture of)
Provision for
Loan Losses
    Ending
Balance

March 31,
2014
 
     (Dollars in thousands)  

Commercial and industrial

   $ 8,502       $ (454   $ 392       $ (2,072   $ 6,368   

SBA

     2,332         —          63         73        2,468   

Real estate:

            

Commercial real estate

     39,402         —          68         (70     39,400   

Construction

     1,305         —          778         (1,625     458   

SFR mortgage

     2,718         —          —           (436     2,282   

Dairy & livestock and agribusiness

     11,728         —          144         (2,605     9,267   

Municipal lease finance receivables

     2,335         —          —           (816     1,519   

Consumer and other loans

     960         (13     12         (9     950   

Unallocated

     5,953         —          —           60        6,013   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

$ 75,235    $ (467 $ 1,457    $ (7,500 $ 68,725   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following tables present the recorded investment in loans held-for-investment, excluding PCI loans, and the related allowance for loan losses by portfolio segment, based on the Company’s methodology for determining the allowance for loan losses for the periods presented.

 

     March 31, 2015  
     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

   $ 1,611       $ 401,989       $ 592       $ 6,910   

SBA

     3,158         123,227         42         2,154   

Real estate:

           

Commercial real estate

     41,886         2,457,297         154         34,694   

Construction

     7,651         47,695         —           1,043   

SFR mortgage

     5,913         199,219         —           2,425   

Dairy & livestock and agribusiness

     7,277         166,164         —           3,746   

Municipal lease finance receivables

     —           76,220         —           1,030   

Consumer and other loans

     881         69,868         6         819   

Unallocated

     —           —           —           7,094   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 68,377    $ 3,541,679    $ 794    $ 59,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
     March 31, 2014  
     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

   $ 4,291       $ 354,714       $ 814       $ 5,554   

SBA

     1,649         129,999         68         2,400   

Real estate:

           

Commercial real estate

     33,907         2,160,144         320         39,080   

Construction

     26,688         16,218         —           458   

SFR mortgage

     11,692         178,207         47         2,235   

Dairy & livestock and agribusiness

     27,972         184,985         2,656         6,611   

Municipal lease finance receivables

     —           81,041         —           1,519   

Consumer and other loans

     397         54,418         96         854   

Unallocated

     —           —           —           6,013   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 106,596    $ 3,159,726    $ 4,001    $ 64,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 appropriateness 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, 2014 for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

Loans are reported as a troubled debt restructuring 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 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 loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

Generally, when loans are identified as impaired they are moved to our Special Assets Department. 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.

Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

18


Table of Contents

The following tables present the recorded investment in the aging of past due and nonaccrual loans, excluding PCI loans, by type of loans for the periods presented.

 

     March 31, 2015  
     30-59
Days Past
Due
     60-89
Days Past
Due
     Total Past
Due and
Accruing
     Nonaccrual
(1)
     Current      Total Loans and
Financing
Receivables
 
     (Dollars in thousands)  

Commercial and industrial

   $ 112       $ —         $ 112       $ 952       $ 402,536         403,600   

SBA

     —           —           —           2,463         123,922         126,385   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     35         —           35         2,418         755,357         757,810   

Non-owner occupied

     —           —           —           14,369         1,727,004         1,741,373   

Construction

                 

Speculative

     —           —           —           —           38,146         38,146   

Non-speculative

     —           —           —           —           17,200         17,200   

SFR mortgage

     1,613         —           1,613         2,233         201,286         205,132   

Dairy & livestock and agribusiness

     —           —           —           103         173,338         173,441   

Municipal lease finance receivables

     —           —           —           —           76,220         76,220   

Consumer and other loans

     119         20         139         463         70,147         70,749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI Loans

$ 1,879    $ 20    $ 1,899    $ 23,001    $ 3,585,156    $ 3,610,056   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of March 31, 2015, $20.3 million of nonaccruing loans were current, $553,000 were 30-59 days past due, $86,000 were 60-89 days past due and $2.0 million were 90+ days past due.

 

     December 31, 2014  
     30-59
Days Past
Due
     60-89
Days Past
Due
     Total Past
Due and
Accruing
     Nonaccrual
(1)
     Current      Total Loans and
Financing
Receivables
 
     (Dollars in thousands)  

Commercial and industrial

   $ 943       $ 35       $ 978       $ 2,308       $ 386,725       $ 390,011   

SBA

     75         —           75         2,481         131,709         134,265   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     36         86         122         4,072         786,173         790,367   

Non-owner occupied

     —           —           —           19,246         1,678,190         1,697,436   

Construction

                 

Speculative

     —           —           —           —           36,574         36,574   

Non-speculative

     —           —           —           —           18,599         18,599   

SFR mortgage

     425         —           425         3,240         201,459         205,124   

Dairy & livestock and agribusiness

     —           —           —           103         279,070         279,173   

Municipal lease finance receivables

     —           —           —           —           77,834         77,834   

Consumer and other loans

     64         17         81         736         69,067         69,884   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI Loans

$ 1,543    $ 138    $ 1,681    $ 32,186    $ 3,665,400    $ 3,699,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of December 31, 2014, $20.1 million of nonaccruing loans were current, $3.7 million were 30-59 days past due, $8.5 million were 90+ days.

 

19


Table of Contents

Impaired Loans

At March 31, 2015, the Company had impaired loans, excluding PCI loans, of $68.4 million. Of this amount, there were $16.8 million of nonaccrual commercial real estate loans, $2.2 million of nonaccrual SFR mortgage loans, $952,000 of nonaccrual commercial and industrial loans, $103,000 of nonaccrual dairy & livestock and agribusiness loans and $463,000 of nonaccrual consumer and other loans. These impaired loans included $62.2 million of loans whose terms were modified in a troubled debt restructuring, of which $16.8 million were classified as nonaccrual. The remaining balance of $45.4 million consisted of 34 loans performing according to the restructured terms. The impaired loans had a specific allowance of $794,000 at March 31, 2015. At December 31, 2014, the Company had classified as impaired loans, excluding PCI loans, with a balance of $85.8 million with a related allowance of $1.5 million.

The following tables present information for held-for-investment loans, excluding PCI loans, individually evaluated for impairment by class of loans, as of and for the periods indicated below.

 

     As of and For the Three Months Ended
March 31, 2015
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no related allowance recorded:

              

Commercial and industrial

   $ 1,004       $ 1,819       $ —         $ 1,017       $ 8   

SBA

     3,117         3,667         —           3,177         13   

Real estate:

              

Commercial real estate

              

Owner occupied

     6,117         7,167         —           6,185         64   

Non-owner occupied

     34,808         42,718         —           35,194         350   

Construction

              

Speculative

     7,651         7,651         —           7,651         96   

Non-speculative

     —           —           —           —           —     

SFR mortgage

     5,913         6,642         —           5,940         27   

Dairy & livestock and agribusiness

     7,277         8,991         —           7,533         85   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     783         1,289         —           836         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  66,670      79,944      —        67,533      647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

Commercial and industrial

  607      680      592      617      —     

SBA

  41      54      42      45      —     

Real estate:

Commercial real estate

Owner occupied

  —        —        —        —        —     

Non-owner occupied

  961      1,278      154      973      —     

Construction

Speculative

  —        —        —        —        —     

Non-speculative

  —        —        —        —        —     

SFR mortgage

  —        —        —        —        —     

Dairy & livestock and agribusiness

  —        —        —        —        —     

Municipal lease finance receivables

  —        —        —        —        —     

Consumer and other loans

  98      107      6      99      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,707      2,119      794      1,734      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

$ 68,377    $ 82,063    $ 794    $ 69,267    $ 647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
     As of and For the Three Months Ended
March 31, 2014
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no related allowance recorded:

              

Commercial and industrial

   $ 2,592       $ 2,862       $ —         $ 2,596       $ 15   

SBA

     1,581         1,997         —           1,634         —     

Real estate:

              

Commercial real estate

              

Owner occupied

     10,108         10,768         —           10,221         117   

Non-owner occupied

     21,928         27,740         —           22,103         215   

Construction

              

Speculative

     17,519         18,407         —           17,550         77   

Non-speculative

     9,169         9,169         —           9,184         140   

SFR mortgage

     11,214         12,911         —           11,266         26   

Dairy & livestock and agribusiness

     16,582         17,430         —           16,902         189   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     290         295         —           291         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  90,983      101,579      —        91,747      779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

Commercial and industrial

  1,699      2,033      814      1,701      —     

SBA

  68      76      68      70      —     

Real estate:

Commercial real estate

Owner occupied

  1,871      2,344      320      1,871      —     

Non-owner occupied

  —        —        —        —        —     

Construction

Speculative

  —        —        —        —        —     

Non-speculative

  —        —        —        —        —     

SFR mortgage

  478      486      47      479      —     

Dairy & livestock and agribusiness

  11,390      12,042      2,656      11,608      75   

Municipal lease finance receivables

  —        —        —        —        —     

Consumer and other loans

  107      165      96      107      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  15,613      17,146      4,001      15,836      75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

$ 106,596    $ 118,725    $ 4,001    $ 107,583    $ 854   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     As of December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (Dollars in thousands)  

With no related allowance recorded:

        

Commercial and industrial

   $ 2,391       $ 3,624       $ —     

SBA

     1,853         2,197         —     

Real estate:

        

Commercial real estate

        

Owner occupied

     16,961         18,166         —     

Non-owner occupied

     30,068         38,156         —     

Construction

        

Speculative

     7,651         7,651         —     

Non-speculative

     —           —           —     

SFR mortgage

     6,512         7,493         —     

Dairy & livestock and agribusiness

     15,796         17,587         —     

Municipal lease finance receivables

     —           —           —     

Consumer and other loans

     673         1,094         —     
  

 

 

    

 

 

    

 

 

 

Total

  81,905      95,968      —     
  

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

Commercial and industrial

  629      698      615   

SBA

  1,327      1,591      296   

Real estate:

Commercial real estate

Owner occupied

  —        —        —     

Non-owner occupied

  982      1,278      154   

Construction

Speculative

  —        —        —     

Non-speculative

  —        —        —     

SFR mortgage

  467      484      35   

Dairy & livestock and agribusiness

  —        —        —     

Municipal lease finance receivables

  —        —        —     

Consumer and other loans

  482      508      449   
  

 

 

    

 

 

    

 

 

 

Total

  3,887      4,559      1,549   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

$ 85,792    $ 100,527    $ 1,549   
  

 

 

    

 

 

    

 

 

 

The Company recognizes the charge-off of 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 March 31, 2015 and December 31, 2014 have already been written down to the estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR 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 commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. The Company recorded a reduction of the reserve for unfunded loan

 

22


Table of Contents

commitments of $500,000 for the quarter ended March 31, 2015, compared with no provision or reduction of the reserve for unfunded loan commitments for the same period of 2014. At March 31, 2015 and December 31, 2014, the balance of the reserve was $7.2 million and $7.7 million, respectively, 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, 2014 for a more detailed discussion regarding TDRs.

As of March 31, 2015, there were $62.2 million of loans classified as TDRs, of which $16.8 million were nonperforming and $45.4 million 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 March 31, 2015, performing TDRs were comprised of 12 commercial real estate loans of $25.1 million, one construction loan of $7.6 million, five dairy & livestock loans of $7.2 million, 11 SFR mortgage loans of $3.7 million, four commercial and industrial loans of $1.4 million and one consumer other loan of $418,000. There were no loans removed from TDR classification during the quarters ended March 31, 2015 and 2014.

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 $707,000 and $726,000 of specific allowance to TDRs as of March 31, 2015 and December 31, 2014, respectively.

The following tables provide a summary of the activity related to TDRs for the periods presented.

 

     For the Three Months March 31,  
     2015      2014  
     (Dollars in thousands)  

Performing TDRs:

     

Beginning balance

   $ 53,589       $ 66,955   

New modifications

     —           41   

Payoffs and payments, net

     (8,729      (602

TDRs returned to accrual status

     516         —     

TDRs placed on nonaccrual status

     —           —     
  

 

 

    

 

 

 

Ending balance

$ 45,376    $ 66,394   
  

 

 

    

 

 

 
     For the Three Months March 31,  
     2015      2014  
     (Dollars in thousands)  

Nonperforming TDRs:

     

Beginning balance

   $ 20,285       $ 25,119   

New modifications (1)

     —           —     

Charge-offs

    
—  
  
     —     

Payoffs and payments, net

     (2,995      (1,151

TDRs returned to accrual status

     (516      —     

TDRs placed on nonaccrual status

     —           —     
  

 

 

    

 

 

 

Ending balance

$ 16,774    $ 23,968   
  

 

 

    

 

 

 

 

23


Table of Contents

The following tables summarize loans modified as troubled debt restructurings for the periods presented.

Modifications (1)

 

    For the Three Months Ended March 31, 2015  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding Recorded
Investment at
March 31, 2015
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity

    —          —          —          —          —     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    —          —          —          —       

Non-owner occupied

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    —          —          —          —          —     

Dairy & livestock and agribusiness:

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    —          —          —          —          —     

Consumer

         

Interest rate reduction

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  —      $ —      $ —      $ —      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended March 31, 2014  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding Recorded
Investment at
March 31, 2014
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity

    1        41        41        39        —     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    —          —          —          —          —     

Non-owner occupied

      —           

Interest rate reduction

    —          —          —          —       

Change in amortization period or maturity

    —          —          —          —          —     

Dairy & livestock and agribusiness:

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

      —           

Consumer

         

Interest rate reduction

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  1    $ 41    $ 41    $ 39    $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The tables exclude modified loans that were paid off prior to the end of the period.
(2) Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

As of March 31, 2015, there were no loans that were previously modified as a TDRs within the previous 12 months that subsequently defaulted during the three months ended March 31, 2015.

 

24


Table of Contents

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 tax-effected 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 months ended March 31, 2015 and 2014, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 235,000 and 130,000 shares, respectively.

The table below summarizes earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.

 

     For the Thee Months Ended March 31,  
     2015      2014  
     (In thousands, except per share amounts)  

Earnings per common share:

     

Net earnings

   $ 15,833       $ 28,661   

Less: Net earnings allocated to restricted stock

     81         127   
  

 

 

    

 

 

 

Net earnings allocated to common shareholders

$ 15,752    $ 28,534   
  

 

 

    

 

 

 

Weighted average shares outstanding

  105,523      105,192   

Basic earnings per common share

$ 0.15    $ 0.27   
  

 

 

    

 

 

 

Diluted earnings per common share:

Net income allocated to common shareholders

$ 15,752    $ 28,534   
  

 

 

    

 

 

 

Weighted average shares outstanding

  105,523      105,192   

Incremental shares from assumed exercise of outstanding options

  436      599   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

  105,959      105,791   

Diluted earnings per common share

$ 0.15    $ 0.27   
  

 

 

    

 

 

 

8. 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 March 31, 2015. 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 — Valuation is based upon quoted prices for identical instruments traded in active markets.

 

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

 

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

There were no transfers in and out of Level 1 and Level 2 measurements during the three months ended March 31, 2015 and 2014.

 

25


Table of Contents

Determination of Fair Value

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value.

Cash and Cash Equivalents— The carrying amount of cash and cash equivalents is considered to approximate fair value due to the liquidity of these instruments.

Interest-Bearing Balances Due from Depository Institutions — The carrying value of due from depository institutions is considered to approximate fair value due to the short-term nature of these deposits.

FHLB Stock — The carrying amount of FHLB stock approximates fair value, as the stock may be sold back to the FHLB at carrying value.

Investment Securities Held–to- Maturity — Investment securities held-to-maturity are valued based upon quotes obtained from an independent third-party pricing service. The Company categorized its held-to-maturity investment as a Level 3 valuation.

Investment Securities Available-for-Sale — Investment securities available-for-sale are generally valued based upon quotes obtained from an independent third-party pricing service, which uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

Loans Held-for-Sale — Loans held-for-sale are carried at the lower of cost or fair value. The fair value is derived from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral.

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

The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ specific credit risks since the origination or purchase of such loans. Rather, the allocable portion of the allowance for loan losses and the purchase price discounts are considered to provide for such changes in estimating fair value. As a result, this fair value is not necessarily the value which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy.

Impaired loans and OREO are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell. Appraised values may be adjusted based on factors such as the changes in market conditions from the time of valuation or discounted cash flows of the property. As such, these loans and OREO fall within Level 3 of the fair value hierarchy.

The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the following table because it is not material.

Swaps — The fair value of the interest rate swap contracts are provided by our counterparty using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and 3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.

Deposits & Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and short-term borrowings are considered to approximate fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of long-term borrowings and junior subordinated debentures is estimated using the rates currently offered for borrowings of similar remaining maturities. Interest-bearing deposits and borrowings are included within Level 2 of the fair value hierarchy.

 

26


Table of Contents

Accrued Interest Receivable/Payable — The amounts of accrued interest receivable on loans and lease finance receivables and investments and accrued interest payable on deposits and borrowings are considered to approximate fair value and are included within Level 2 of the fair value hierarchy.

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 for the periods presented.

 

     Carrying Value at      Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     March 31, 2015      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in thousands)  

Description of assets

           

Investment securities - AFS:

           

Government agency

   $ 329,866       $ —         $ 329,866       $ —     

Residential mortgage-backed securities

     1,855,154         —           1,855,154         —     

CMO’s / REMIC’s - residential

     288,244         —           288,244         —     

Municipal bonds

     549,844         —           549,844         —     

Other securities

     5,181         —           5,181         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities - AFS

  3,028,289      —        3,028,289      —     

Interest rate swaps

  11,624      —        11,624      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 3,039,913    $ —      $ 3,039,913    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Description of liability

Interest rate swaps

$ 11,624    $ —      $ 11,624    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 11,624    $ —      $ 11,624    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying Value at      Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     December 31, 2014      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in thousands)  

Description of assets

           

Investment securities - AFS:

           

Government agency

   $ 330,843       $ —         $ 330,843       $ —     

Residential mortgage-backed securities

     1,917,496         —           1,917,496         —     

CMO’s / REMIC’s - residential

     304,091         —           304,091         —     

Municipal bonds

     579,641         —           579,641         —     

Other securities

     5,087         —           5,087         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities - AFS

  3,137,158      —        3,137,158      —     

Interest rate swaps

  10,080      —        10,080      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 3,147,238    $ —      $ 3,147,238    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Description of liability

Interest rate swaps

$ 10,080    $ —      $ 10,080    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 10,080    $ —      $ 10,080    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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 write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were still held on the balance sheet at March 31, 2015 and December 31, 2014, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets for investments that experienced losses during the period.

 

     Carrying Value at      Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total Losses
For the Three
Months Ended
 
     March 31, 2015      (Level 1)      (Level 2)      (Level 3)      March 31, 2015  
     (Dollars in thousands)  

Description of assets

              

Impaired loans, excluding PCI Loans:

              

Commercial and industrial

   $ —         $ —         $ —         $ —         $ —     

SBA

     —           —           —           —           —     

Real estate:

              

Commercial real estate

     —           —           —           —           —     

Construction

     —           —           —           —           —     

SFR mortgage

     —           —           —           —           —     

Dairy & livestock and agribusiness

     —           —           —           —           —     

Consumer and other loans

     209         —           —           209         76   

Other real estate owned

     340         —           —           340         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 549    $ —      $ —      $ 549    $ 109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying Value at      Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total Losses
For the Year Ended
 
     December 31, 2014      (Level 1)      (Level 2)      (Level 3)      December 31, 2014  
     (Dollars in thousands)  

Description of assets

              

Impaired loans, excluding PCI Loans:

              

Commercial and industrial

   $ 1,911       $ —         $ —         $ 1,911       $ 771   

SBA

     1,327         —           —           1,327         296   

Real estate:

              

Commercial real estate

     2,500         —           —           2,500         271   

Construction

     —           —           —           —           —     

SFR mortgage

     —           —           —           —           —     

Dairy & livestock and agribusiness

     103         —           —           103         1,061   

Consumer and other loans

     482         —           —           482         447   

Other real estate owned

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 6,323    $ —      $ —      $ 6,323    $ 2,846   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2015 and December 31, 2014, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

     March 31, 2015  
            Estimated Fair Value  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets

              

Total cash and cash equivalents

   $ 401,372       $ 401,372       $ —         $ —         $ 401,372   

Interest-earning balances due from depository institutions

     25,873         —           25,873         —           25,873   

FHLB stock

     25,338         —           25,338         —           25,338   

Investment securities available-for-sale

     3,028,289         —           3,028,289         —           3,028,289   

Investment securities held-to-maturity

     1,464         —           —           2,040         2,040   

Loans held-for-sale

     —           —           —           —           —     

Total loans, net of allowance for loan losses

     3,655,314         —           —           3,704,042         3,704,042   

Accrued interest receivable

     22,872         —           22,872         —           22,872   

Swaps

     11,624         —           11,624         —           11,624   

Liabilities

              

Deposits:

              

Noninterest-bearing

   $ 3,126,928       $ 3,126,928       $ —         $ —         $ 3,126,928   

Interest-bearing

     2,770,848         —           2,771,030         —           2,771,030   

Borrowings

     560,352         —           560,291         —           560,291   

Junior subordinated debentures

     25,774         —           26,016         —           26,016   

Accrued interest payable

     306         —           306         —           306   

Swaps

     11,624         —           11,624         —           11,624   
     December 31, 2014  
            Estimated Fair Value  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets

              

Total cash and cash equivalents

   $ 105,768       $ 105,768       $ —         $ —         $ 105,768   

Interest-earning balances due from depository institutions

     27,118         —           27,118         —           27,118   

FHLB stock

     25,338         —           25,338         —           25,338   

Investment securities available-for-sale

     3,137,158         —           3,137,158         —           3,137,158   

Investment securities held-to-maturity

     1,528         —           —           2,177         2,177   

Loans held-for-sale

     —           —           —           —           —     

Total loans, net of allowance for loan losses

     3,757,242         —           —           3,794,454         3,794,454   

Accrued interest receivable

     23,194         —           23,194         —           23,194   

Swaps

     10,080         —           10,080         —           10,080   

Liabilities

              

Deposits:

              

Noninterest-bearing

   $ 2,866,365       $ 2,866,365       $ —         $ —         $ 2,866,365   

Interest-bearing

     2,738,293         —           2,739,221         —           2,739,221   

Borrowings

     809,106         —           822,607         —           822,607   

Junior subordinated debentures

     25,774         —           26,005         —           26,005   

Accrued interest payable

     1,161         —           1,161         —           1,161   

Swaps

     10,080         —           10,080         —           10,080   

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2015 and December 31, 2014. 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.

 

29


Table of Contents

9. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and the Treasury Department. The Company’s subsidiary bank has 40 Business Financial Centers and seven Commercial Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and to assess performance. Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity and interest rate risk. Information related to the Company’s remaining operating segments, which include construction lending, dairy & livestock and agribusiness lending, leasing, CitizensTrust, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following table represents the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 — Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the Centers category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the condensed consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

The following tables present the operating results and other key financial measures for the individual operating segments for the periods presented.

 

     For the Three Months Ended March 31, 2015  
     Centers      Treasury     Other      Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 35,368       $ 18,655      $ 10,157       $ —        $ 64,180   

Credit for funds provided (1)

     8,211         —          12,641         (20,852     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

  43,579      18,655      22,798      (20,852   64,180   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

  1,663      1,431      77      —        3,171   

Charge for funds used (1)

  1,067      14,806      4,979      (20,852   —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

  2,730      16,237      5,056      (20,852   3,171   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

  40,849      2,418      17,742      —        61,009   

Provision for loan losses

  —        —        —        —        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

  40,849      2,418      17,742      —        61,009   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

  5,067      —        2,944      —        8,011   

Noninterest expense

  11,849      213      18,540      —        30,602   

Debt termination expense

  —        13,870      —        —        13,870   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment pre-tax profit

$ 34,067    $ (11,665 $ 2,146    $ —      $ 24,548   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment assets as of March 31, 2015

$ 6,216,028    $ 3,450,529    $ 898,554    $ (3,122,160 $ 7,442,951   

 

(1) Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.

 

30


Table of Contents
     For the Three Months Ended March 31, 2014  
     Centers      Treasury      Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 33,091       $ 16,432       $ 11,539      $ —        $ 61,062   

Credit for funds provided (1)

     7,074         —           11,463        (18,537     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

  40,165      16,432      23,002      (18,537   61,062   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

  1,637      2,373      110      —        4,120   

Charge for funds used (1)

  1,090      12,797      4,650      (18,537   —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

  2,727      15,170      4,760      (18,537   4,120   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

  37,438      1,262      18,242      —        56,942   

Provision for loan losses

  —        —        (7,500   —        (7,500
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

  37,438      1,262      25,742      —        64,442   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

  4,782      —        6,716      —        11,498   

Noninterest expense

  11,828      196      19,133      —        31,157   

Debt termination expense

  —        —        —        —        —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

$ 30,392    $ 1,066    $ 13,325    $ —      $ 44,783   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets as of March 31, 2014

$ 5,525,494    $ 3,264,736    $ 843,026    $ (2,730,738 $ 6,902,518   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.

10. 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 March 31, 2015, the Bank has entered into 75 interest-rate swap agreements with customers, all of which also involve a counterparty bank. 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 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 a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. 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. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. 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.

 

31


Table of Contents

Balance Sheet Classification of Derivative Financial Instruments

As of March 31, 2015 and December 31, 2014, the total notional amount of the Company’s swaps was $193.8 million, and $197.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below.

 

     March 31, 2015  
     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    $ 11,624       Other liabilities    $ 11,624   
     

 

 

       

 

 

 

Total derivatives

$ 11,624    $ 11,624   
     

 

 

       

 

 

 
     December 31, 2014  
     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    $ 10,080       Other liabilities    $ 10,080   
     

 

 

       

 

 

 

Total derivatives

$ 10,080    $ 10,080   
     

 

 

       

 

 

 

The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings

There was no gain recognized in the condensed consolidated statements of earnings for the three months ended March 31, 2015 and 2014.

11. OTHER COMPREHENSIVE INCOME (LOSS)

The tables below provide a summary of the components of other comprehensive income (“OCI”) for the periods presented.

 

     For the Three Months Ended March 31, 2015  
     Before-Tax      Tax Effect      After-Tax  
     (Dollars in thousands)  

Investment securities available-for-sale:

        

Net change in fair value recorded in accumulated OCI

   $ 20,270       $ 8,514       $ 11,756   
  

 

 

    

 

 

    

 

 

 

Net change

$ 20,270    $ 8,514    $ 11,756   
  

 

 

    

 

 

    

 

 

 
     For the Three Months Ended March 31, 2014  
     Before-Tax      Tax Effect      After-Tax  
     (Dollars in thousands)  

Investment securities available-for-sale:

        

Net change in fair value recorded in accumulated OCI

   $ 24,781       $ 10,407       $ 14,374   
  

 

 

    

 

 

    

 

 

 

Net change

$     24,781    $     10,407    $     14,374   
  

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

The following table provides a summary of the change in accumulated other comprehensive income for the periods presented.

 

     Investment Securities
Available-for-Sale
 
     (Dollars in thousands)  

Balance, January 1, 2015

   $ 31,075   

Net change in fair value recorded in accumulated OCI

     11,756   

Net realized gains reclassified into earnings

     —     
  

 

 

 

Balance, March 31, 2015

$ 42,831   
  

 

 

 
     Investment Securities
Available-for-Sale
 
     (Dollars in thousands)  

Balance, January 1, 2014

   $ (9,330

Net change in fair value recorded in accumulated OCI

     14,374   

Net realized gains reclassified into earnings

     —     
  

 

 

 

Balance, March 31, 2014

$ 5,044   
  

 

 

 

 

33


Table of Contents

12. 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 a master netting arrangement with one counterparty bank. 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 the counterparty bank continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. In November 2006, we began offering 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
the Condensed
Consolidated
Balance Sheets
     Gross Amounts
offset in the
Condensed
Consolidated
Balance Sheets
    Net Amounts of
Assets 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)  

March 31, 2015

               

Financial assets:

               

Derivatives not designated as hedging instruments

   $ 11,624       $ —        $ —         $ 11,624       $ —        $ 11,624   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

$ 11,624    $ —      $ —      $ 11,624    $ —      $ 11,624   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Financial liabilities:

Derivatives not designated as hedging instruments

$ 11,624    $ —      $ 11,624    $ —      $ (16,761 $ (5,137

Repurchase agreements

  560,352      —        560,352      —        (687,017   (126,665
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

$ 571,976    $ —      $ 571,976    $ —      $ (703,778 $ (131,802
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2014

Financial assets:

Derivatives not designated as hedging instruments

$ 10,080    $ —      $ —      $ 10,080    $ —      $ 10,080   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

$ 10,080    $ —      $ —      $ 10,080    $ —      $ 10,080   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Financial liabilities:

Derivatives not designated as hedging instruments

$ 10,200    $ (120 $ 10,080    $ 120    $ (16,734 $ (6,534

Repurchase agreements

  563,627      —        563,627      —        (624,578   (60,951
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

$ 573,827    $ (120 $ 573,707    $ 120    $ (641,312 $ (67,485
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

34


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. and its wholly owned subsidiaries. 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, 2014, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon its 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.

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 have sought to use the best information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.

 

    Allowance for Loan Losses (“ALLL”)

 

    Troubled Debt Restructurings

 

    Investment Securities

 

    Goodwill Impairment

 

    Acquired Loans

 

    Purchase Credit Impaired (“PCI”) Loans

 

    Other Real Estate Owned

 

    Fair Value of Financial Instruments

 

    Income Taxes

 

    Stock-Based Compensation

Our significant accounting policies are described in greater detail in our 2014 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, 2014, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

For the first quarter of 2015, we reported net income of $15.8 million, compared with $28.7 million for the first quarter of 2014. Diluted earnings per share were $0.15 per share for the first quarter of 2015, compared to $0.27 for the same period of 2014. The first quarter of 2015 included pre-tax debt termination expense of $13.9 million, related to the redemption of $200.0 million of fixed rate debt from the Federal Home Loan Bank (“FHLB”). The FHLB advance carried an interest rate of 4.52% and was scheduled to mature in late November 2016.

At March 31, 2015, total assets were $7.44 billion. This represents an increase of $65.0 million, or 0.88%, from total assets of $7.38 billion at December 31, 2014. Earning assets of $7.09 billion at March 31, 2015 increased $67.1 million, or 0.96%, when compared with $7.02 billion at December 31, 2014. The increase in earning assets during the first quarter of 2015 was primarily due to a $278.3 million increase in interest-earning balances due from the Federal Reserve. This was partially offset by a $108.9 million decrease in investment securities and a $101.0 million decrease in total loans. Approximately $106.6 million of the decrease in loans was due to the decline in dairy & livestock loans, most of which was seasonal.

Investment securities totaled $3.03 billion at March 31, 2015, a decrease of $108.9 million from $3.14 billion at December 31, 2014. As of March 31, 2015, we had a pre-tax unrealized net gain of $73.8 million on our overall investment securities portfolio, compared to a pre-tax unrealized net gain of $53.6 million at December 31, 2014. During the first quarter of 2015, we purchased $4.3 million of municipal securities with an average tax-equivalent (TE) yield of approximately 3.89%.

 

35


Table of Contents

Total loans and leases, net of deferred fees and discount, of $3.72 billion at March 31, 2015, decreased by $101.0 million, or 2.65%, from $3.82 billion at December 31, 2014. The decrease in loans was principally due to a decline of $106.6 million in dairy & livestock loans, a $3.7 million decline in agribusiness loans and a $7.9 million decrease in SBA loans. This was partially offset by growth of $13.0 million in commercial and industrial loans and $4.5 million in commercial real estate loans.

Noninterest-bearing deposits were $3.13 billion at March 31, 2015, an increase of $260.6 million, or 9.09%, compared to $2.87 billion at December 31, 2014. At March 31, 2015, noninterest-bearing deposits were 53.02% of total deposits, compared to 51.14% at December 31, 2014 and 52.61% at March 31, 2014. Our average cost of total deposits for the quarter ended March 31, 2015 was 9 basis points, compared to 10 basis points for the same period of 2014.

On February 23, 2015 we repaid our last remaining FHLB advance with a fixed rate of 4.52%. At December 31, 2014, FHLB advances were $199.5 million, compared to $199.3 million at March 31, 2014.

At March 31, 2015, we had no short-term borrowings, compared to $46.0 million at December 31, 2014 and zero at March 31, 2014.

At March 31, 2015, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2014 and March 31, 2014.

The allowance for loan losses totaled $60.7 million at March 31, 2015, compared to $59.8 million at December 31, 2014. There was no provision for loan losses for the first quarter of 2015, compared to a loan loss provision recapture of $7.5 million for the first quarter of 2014. The quarter-over-quarter increase in the allowance for loan losses was due to $884,000 in net loan recoveries.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of March 31, 2015, our Tier 1 leverage capital ratio totaled 10.94%, our common equity Tier 1 ratio totaled 17.01%, our Tier 1 risk-based capital ratio totaled 17.56%, and our total risk-based capital ratio totaled 18.81%. Refer to our Analysis of Financial Condition-Capital Resources for discussion of the new capital rules effective for the first quarter ended March 31, 2015, included herein.

 

36


Table of Contents

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

 

     For the Three Months Ended
March 31,
    Variance  
     2015     2014     $     %  
     (Dollars in thousands, except per share amounts)  

Net interest income

   $ 61,009      $ 56,942      $ 4,067        7.14

(Provision for) recapture of loan losses

     —          7,500        (7,500     -100.00

Noninterest income

     8,011        11,498        (3,487     -30.33

Noninterest expense

     (44,472     (31,157     (13,315     -42.74

Income taxes

     (8,715     (16,122     7,407        45.94
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

$ 15,833    $ 28,661    $ (12,828   -44.76
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

Basic

$ 0.15    $ 0.27    $ (0.12   -44.43

Diluted

$ 0.15    $ 0.27    $ (0.12   -44.66

Return on average assets

  0.86   1.72   -0.86

Return on average shareholders’ equity

  7.22   14.74   -7.52

Efficiency ratio

  64.43   45.52   18.91

Non interest expense to average assets

  2.42   1.87   0.55

Noninterest Expense and Efficiency Ratio Reconciliation (Non-GAAP)

We use certain non-GAAP financial measures to provide supplemental information regarding our performance. Noninterest expense for the quarter ended March 31, 2015, includes debt termination expense of $13.9 million. We believe that presenting the efficiency ratio, and the ratio of noninterest expense to average assets, excluding the impact of debt termination expense, provides additional clarity to the users of financial statements regarding core financial performance. The Company did not incur debt termination expense during the quarter ended March 31, 2014.

 

     Three Months Ended
March 31,
 
     2015     2014  
     (Dollars in thousands)  

Net interest income

   $ 61,009      $ 56,942   

Noninterest income

     8,011        11,498   

Noninterest expense

     44,472        31,157   

Less: Debt termination expense

     (13,870     —     
  

 

 

   

 

 

 

Adjusted noninterest expense

$ 30,602    $ 31,157   

Efficiency ratio

  64.43   45.52

Adjusted efficiency ratio

  44.34   45.52

Adjusted noninterest expense

$ 30,602    $ 31,157   

Average assets

  7,449,297      6,772,650   

Adjusted noninterest expense to average assets [1]

  1.67   1.87

 

[1] Annualized

 

37


Table of Contents

Income and Expense Related to Acquired SJB Assets

The following table summarizes the components of income and expense related to SJB assets excluding normal accretion of interest income on PCI loans for the periods presented.

 

     For the Three Months
Ended March 31,
 
     2015      2014  
     (Dollars in thousands)  

Interest income

     

Interest income-accretion

   $ 980       $ 1,707   

Noninterest income

     

Decrease in FDIC loss sharing asset (expense)

     (390      (1,707

Noninterest expense

     

Legal and professional

     (31      8   

OREO expenses

     1         (5

Other expenses (appraisals, and etc.)

     29         (43
  

 

 

    

 

 

 

Net income (loss) before income tax (expense) benefit related to SJB assets

$ 589    $ (40
  

 

 

    

 

 

 

Income and expense related to PCI loans include accretion of the difference between the carrying amount of the PCI loans and their expected cash flows, net decrease in the FDIC loss sharing asset as well as the other noninterest income and noninterest expenses related to SJB assets.

The discount accretion of $980,000 for the first quarter 2015, recognized as part of interest income from PCI loans, decreased $727,000, compared to $1.7 million for the first quarter of 2014. The net decrease in the FDIC loss sharing asset was $390,000 for the first quarter of 2015, compared to a net decrease of $1.7 million for the first quarter of 2014.

PCI loans decreased $35.5 million to $121.0 million at March 31, 2015 from $156.5 million at March 31, 2014. At March 31, 2015, the remaining discount associated with the PCI loans approximated $6.6 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $4.4 million of the discount is expected to accrete into interest income over the remaining average lives of the respective pools and individual loans, which approximates 3.7 years and 0.8, respectively. The loss sharing agreement for commercial loans expired October 16, 2014. At March 31, 2015, there was a $713,000 liability for amounts owed to the FDIC as a result of recoveries of previously charged off loans or OREO assets. Refer to Note 5 – Acquired SJB Assets and FDIC Loss Sharing Asset for total loans by type at March 31, 2015 and December 31, 2014, respectively. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014 for a more detailed description of the FDIC loss sharing asset.

There were no gains on sale of OREO assets for the quarters ended March 31, 2015 and 2014.

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 (earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is the taxable-equivalent (TE) of net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average earning assets minus the cost of average interest-bearing liabilities. 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 earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to 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 Operation –Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein.

 

38


Table of Contents

The tables below present the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.

 

     For the Three Months Ended March 31,  
     2015     2014  
     Average
Balance
    Interest      Yield/
Rate
    Average
Balance
    Interest      Yield/
Rate
 
          (Dollars in thousands)        

INTEREST-EARNING ASSETS

              

Investment securities (1)

              

Taxable

   $ 2,493,973      $ 12,961         2.08   $ 2,069,265      $ 10,279         2.01

Tax-advantaged

     562,461        5,011         4.87     571,207        5,278         5.05

Investment in FHLB stock

     25,338        469         7.40     31,729        604         7.72

Federal funds sold and interest-earning deposits with other institutions

     253,375        197         0.31     269,256        245         0.36

Loans held-for-sale

     —          —           —          367        —           —     

Loans (2)

     3,735,430        44,562         4.84     3,483,408        42,949         5.00

Yield adjustment to interest income from discount accretion on PCI loans

     (7,237     980           (12,698     1,707      
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

  7,063,340      64,180      3.77   6,412,534      61,062      3.98

Total noninterest-earning assets

  385,957      360,116   
  

 

 

        

 

 

      

Total assets

$ 7,449,297    $ 6,772,650   
  

 

 

        

 

 

      

INTEREST-BEARING LIABILITIES

Savings deposits (3)

$ 2,006,864      964      0.19 $ 1,720,715      879      0.21

Time deposits

  752,129      329      0.18   671,775      307      0.19
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

  2,758,993      1,293      0.19   2,392,490      1,186      0.20

FHLB advances and other borrowings

  774,463      1,878      0.97   955,817      2,934      1.24
  

 

 

   

 

 

      

 

 

   

 

 

    

Interest-bearing liabilities

  3,533,456      3,171      0.36   3,348,307      4,120      0.50
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-bearing deposits

  2,970,933      2,562,549   

Other liabilities

  55,088      73,029   

Stockholders’ equity

  889,820      788,765   
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

$ 7,449,297    $ 6,772,650   
  

 

 

        

 

 

      

Net interest income

$ 61,009    $ 56,942   
    

 

 

        

 

 

    

Net interest income excluding discount on PCI loans

$ 60,029    $ 55,235   
    

 

 

        

 

 

    

Net interest spread - tax equivalent

  3.41   3.48

Net interest spread - tax equivalent excluding PCI discount

  3.35   3.37

Net interest margin

  3.49   3.60

Net interest margin - tax equivalent

  3.59   3.72

Net interest margin - tax equivalent excluding PCI discount

  3.53   3.60

Net interest margin excluding loan fees

  3.43   3.54

Net interest margin excluding loan fees - tax equivalent

  3.53   3.66

 

(1) Non tax-equivalent (TE) rate was 2.35% and 2.38% for the three months ended March 31, 2015 and 2014, respectively.
(2) Includes loan fees of $936 and $791 for the three months ended March 31, 2015 and 2014, respectively. Prepayment penalty fees of $1,382 and $585 are included in interest income for the three months ended March 31, 2015 and 2014, respectively.
(3) Includes interest-bearing demand and money market accounts.

 

39


Table of Contents

Net Interest Income and Net Interest Margin Reconciliations (Non-GAAP)

We use certain non-GAAP financial measures to provide supplemental information regarding our performance. Net interest income for the quarter ended March 31, 2015 and 2014 include a yield adjustment of $980,000 and $1.7 million, respectively. These yield adjustments relate to discount accretion on PCI loans, and are reflected in the Company’s net interest margin. We believe that presenting net interest income and the net interest margin excluding these yield adjustments provides additional clarity to the users of financial statements regarding core net interest income and net interest margin.

 

     Three Months Ended March 31,  
     2015     2014  
     (Dollars in thousands)  
     Average
Balance
    Interest     Yield     Average
Balance
     Interest     Yield  

Total interest-earning assets (TE)

   $ 7,063,340      $ 66,017        3.77   $ 6,412,534       $ 62,992        3.98

Discount on acquired PCI loans

     (7,237     (980       12,698         (1,707  
  

 

 

   

 

 

     

 

 

    

 

 

   

Total interest-earning assets, excluding PCI loan discount and yield adjustment

$ 7,056,103    $ 65,037      3.71 $ 6,425,232    $ 61,285      3.87
  

 

 

   

 

 

     

 

 

    

 

 

   

Net interest income and net interest margin (TE)

$ 62,846      3.59 $ 58,872      3.72

Yield adjustment to interest income from discount accretion on acquired PCI loans

  (980   (1,707
    

 

 

        

 

 

   

Net interest income and net interest margin (TE), excluding yield adjustment

$ 61,866      3.53 $ 57,165      3.60
    

 

 

        

 

 

   

 

40


Table of Contents

The following tables present a comparison of interest income and interest expense resulting from changes in the volumes and rates on average 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.

 

     Comparision of Three Months Ended March 31,
2015 Compared to 2014
Increase (Decrease) Due to
 
     Volume      Rate      Rate/
Volume
     Total  
     (Dollars in thousands)  

Interest income:

           

Taxable investment securities

   $ 2,234       $ 372       $ 76       $ 2,682   

Tax-advantaged securities

     (83      (187      3         (267

Investment in FHLB stock

     (116      (24      5         (135

Fed funds sold & interest-earning deposits with other institutions

     (14      (36      2         (48

Loans HFS

     —           —           —           —     

Loans

     3,116         (1,401      (102      1,613   

Yield adjustment from discount accretion on PCI loans

     (734      13         (6      (727
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

  4,403      (1,263   (22   3,118   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

Savings deposits

  146      (52   (9   85   

Time deposits

  36      (13   (1   22   

FHLB advances and other borrowings

  (546   (629   119      (1,056
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

  (364   (694   109      (949
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

$ 4,767    $ (569 $ (131 $ 4,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income, before provision for loan losses, of $61.0 million for the first quarter of 2015 increased $4.1 million, or 7.14%, compared to the first quarter of 2014. First quarter earnings were positively impacted by both loan income and income from investment securities. Interest income and fees on loans for the first quarter of 2015 totaled $45.5 million, which included $980,000 of discount accretion from principal reductions, payoffs and improved credit loss experienced on PCI loans acquired from SJB. This represented a $940,000, or 2.02%, decrease when compared to interest income and fees on loans of $46.5 million for the fourth quarter of 2014, which included $1.3 million of discount accretion on PCI loans, and an increase of $886,000, or 1.98%, from the first quarter of 2014, which included $1.7 million of discount accretion on PCI loans.

Our net interest margin, tax equivalent (TE), was 3.59% for the first quarter 2015, compared to 3.58% for the fourth quarter of 2014 and 3.72% for the first quarter of 2014. Total average earning asset yields (TE) were 3.77% for the first quarter of 2015, compared to 3.81% for the fourth quarter of 2014 and 3.98% for the first quarter of 2014. Total cost of funds was 0.20% for the first quarter of 2015, compared to 0.25% for the fourth quarter of 2014 and 0.28% for the first quarter of 2014.

The average balance of total loans (excluding PCI discount) increased $252.0 million to $3.74 billion for the first quarter of 2015, compared to $3.48 billion for the first quarter of 2014. The loans acquired as a result of the American Security Bank (“ASB”) acquisition on May 15, 2014 had a significant impact on this year-over-year growth. Approximately 2% of our year-over-year growth was organic. The average yield on loans (excluding PCI discount) was 4.84% for the first quarter of 2015, compared to 5.00% for the first quarter of 2014. We earned $1.38 million in loan prepayment penalty fees for the first quarter of 2015, compared with $866,000 for the fourth quarter of 2014 and $585,000 for the first quarter of 2014.

Total average earning assets of $7.06 billion increased $650.8 million, or 10.15%, from $6.41 billion for the first quarter of 2014. This increase was principally due to a $416.0 million increase in average investment securities to $3.06 billion for the first quarter of 2015, compared to $2.64 billion for the first quarter of 2014. Total average loans, net of deferred fees and discounts, increased $257.5 million to $3.73 billion for the first quarter of 2015, compared to $3.47 billion for the first quarter of 2014. Average overnight funds sold to the Federal Reserve also increased $27.9 million to $227.1 million for the first quarter of 2015, compared to $199.3 million for the first quarter of 2014. These increases were partially offset by a $43.7 million decrease in average interest-earning deposits with other institutions, as well as a $6.4 million decrease in average investment in FHLB stock.

 

41


Table of Contents

In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans at March 31, 2015 and 2014. As of March 31, 2015 and 2014, we had $23.0 million and $40.2 million of nonaccrual loans (excluding PCI loans), respectively.

Fees collected on loans are an integral part of the loan pricing decision. Net loan fees and the direct costs associated with the origination or purchase of loans are deferred and deducted from total loans on our balance sheet. Net deferred loan fees are recognized in interest income over the term of the loan using the effective-yield method. We recognized loan fee income of $936,000 for the quarter ended March 31, 2015, compared to $791,000 for the quarter ended March 31, 2014.

Interest income on investments of $18.0 million for the first quarter of 2015, increased $2.4 million, or 15.52%, from $15.6 million for the first quarter of 2014. Total TE yield on investments was 2.59% for the first quarter of 2015, compared to 2.67% for the same period in 2014. During the first quarter of 2015, we purchased $4.3 million in municipal securities with an average TE yield of 3.89%.

Interest expense of $3.2 million for the first quarter of 2015, decreased $949,000, or 23.03%, compared to $4.1 million for the first quarter of 2014. The average rate paid on interest-bearing liabilities decreased 14 basis points to 0.36% for the first quarter of 2015, from 0.50% for the first quarter of 2014, as a result of the continued low interest rate environment experienced and repayment of the $200.0 million FHLB advance for the first quarter of 2015, as well as the mix of interest-bearing liabilities.

Provision for Loan Losses

We maintain an allowance for loan losses that is increased by a provision for loan losses charged against operating results. The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to an appropriate level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio.

The allowance for loan losses totaled $60.7 million at March 31, 2015, compared to $59.8 million at December 31, 2014. The quarter-over-quarter increase in the allowance from loan losses was due to $884,000 in net loan recoveries. No loan loss provision was recorded for the quarter ended March 31, 2015, compared to a $7.5 million loan loss provision recapture for the same period of 2014. We believe the allowance is appropriate at March 31, 2015. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. The ratio of the allowance for loan losses to total loans and leases outstanding, excluding PCI loans, as of March 31, 2015 and December 31, 2014 was 1.69% and 1.62%, respectively. Refer to the discussion of “Allowance for Loan 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 not be reflected in increased provisions for loan losses in the future, as the nature of this process requires considerable judgment. Net recoveries totaled $884,000 for the quarter ended March 31, 2015, compared to $990,000 for the same period of 2014.

PCI loans acquired in the FDIC-assisted transaction were initially recorded at their fair value and were covered by a loss sharing agreement with the FDIC, which expired October 16, 2014 for commercial loans. Due to the timing of the acquisition and the October 16, 2009 fair value estimate, there was no provision for loan losses on the PCI loans in 2009. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014 for a more detailed discussion about the FDIC loss sharing asset. During the three months ended March 31, 2015 and 2014, there was zero in net charge-offs or recoveries, respectively, for loans in excess of the amount originally expected in the fair value of the loans at acquisition.

 

42


Table of Contents

Noninterest Income

Noninterest income includes income derived from special services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.

The following table sets forth the various components of noninterest income for the periods presented.

 

     For the Three Months                
     Ended March 31,      Variance  
     2015      2014      $      %  
    

(Dollars in thousands)

 

Noninterest income:

           

Service charges on deposit accounts

   $ 3,961       $ 3,828       $ 133         3.47

Trust and investment services

     2,151         1,925         226         11.74

Bankcard services

     733         778         (45      -5.78

BOLI income

     649         638         11         1.72

Decrease in FDIC loss sharing asset, net

     (390      (1,707      1,317         77.15

Gain on OREO, net

     124         5         119         2380.00

Gain on sale of loans held-for-sale

     —           5,330         (5,330      -100.00

Other

     783         701         82         11.70
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

$ 8,011    $ 11,498    $ (3,487   -30.33
  

 

 

  &