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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 June 30, 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: 106,340,143 outstanding as of July 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

     37   
 

CRITICAL ACCOUNTING POLICIES

     37   
 

OVERVIEW

     37   
 

ANALYSIS OF THE RESULTS OF OPERATIONS

     39   
 

RESULTS BY BUSINESS SEGMENTS

     49   
 

ANALYSIS OF FINANCIAL CONDITION

     51   
 

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

     68   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     70   

ITEM 4.

 

CONTROLS AND PROCEDURES

     70   

PART II – OTHER INFORMATION

     70   

ITEM 1.

 

LEGAL PROCEEDINGS

     70   

ITEM 1A.

 

RISK FACTORS

     71   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     71   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     72   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     72   

ITEM 5.

 

OTHER INFORMATION

     72   

ITEM 6.

 

EXHIBITS

     72   
SIGNATURES      73   

 

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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, technology initiatives and cyber security, regulatory and compliance policies, competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for legacy and future operations, legal proceedings or investigations, board and 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, and the pricing and rates applicable thereto; supply and demand for real estate and renewed fluctuations or periodic deterioration in the market values of real estate in California or other jurisdictions where we lend, whether involving residential or commercial property; a prolonged slowdown or decline in real estate 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 bank 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 (or believe we must comply); changes in the applicability or costs of deposit insurance or other regulatory fees; 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 or contraction; 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 federal class-action and state law 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.

 

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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)

 

     June 30,     December 31,  
     2015     2014  

Assets

    

Cash and due from banks

   $ 125,431     $ 95,030   

Interest-earning balances due from Federal Reserve

     321,015       10,738   
  

 

 

   

 

 

 

Total cash and cash equivalents

     446,446       105,768   
  

 

 

   

 

 

 

Interest-earning balances due from depository institutions

     24,378       27,118   

Investment securities available-for-sale, at fair value (with amortized cost of $3,113,339 at June 30, 2015, and $3,083,582 at December 31, 2014)

     3,154,217       3,137,158   

Investment securities held-to-maturity

     1,400       1,528   

Investment in stock of Federal Home Loan Bank (FHLB)

     17,588       25,338   

Loans and lease finance receivables

     3,784,219       3,817,067   

Allowance for loan losses

     (59,554 )     (59,825
  

 

 

   

 

 

 

Net loans and lease finance receivables

     3,724,665       3,757,242   
  

 

 

   

 

 

 

Premises and equipment, net

     31,894       33,591   

Bank owned life insurance

     129,597       126,927   

Accrued interest receivable

     22,173       23,194   

Intangibles

     2,707       3,214   

Goodwill

     74,244       74,244   

Other real estate owned

     7,835       5,637   

Income taxes

     40,756       31,461   

Other assets

     19,458       25,500   
  

 

 

   

 

 

 

Total assets

   $ 7,697,358     $ 7,377,920   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 3,250,574     $ 2,866,365   

Interest-bearing

     2,743,306       2,738,293   
  

 

 

   

 

 

 

Total deposits

     5,993,880       5,604,658   

Customer repurchase agreements

     662,326       563,627   

FHLB advances

     —          199,479   

Other borrowings

     —          46,000   

Accrued interest payable

     321       1,161   

Deferred compensation

     11,093       10,291   

Junior subordinated debentures

     25,774       25,774   

Payable for securities purchased

     59,693       —     

Other liabilities

     50,280       48,821   
  

 

 

   

 

 

 

Total liabilities

     6,803,367       6,499,811   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,337,106 at June 30, 2015, and 105,893,216 at December 31, 2014

     501,322       495,220   

Retained earnings

     368,960       351,814   

Accumulated other comprehensive income, net of tax

     23,709       31,075   
  

 

 

   

 

 

 

Total stockholders’ equity

     893,991       878,109   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,697,358     $ 7,377,920   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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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
June 30,
    For the Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Interest income:

        

Loans and leases, including fees

   $ 45,322      $ 43,558     $ 90,864     $ 88,214   

Investment securities:

        

Taxable

     12,820        11,686       25,781       21,965   

Tax-advantaged

     4,719        5,186       9,730       10,464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     17,539        16,872       35,511       32,429   

Dividends from FHLB stock

     1,414        526       1,883       1,130   

Federal funds sold

     187        127       329       251   

Interest-earning deposits with other institutions

     53        133       108       254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     64,515        61,216       128,695       122,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,307        1,222       2,600       2,408   

Borrowings

     342        2,729       2,115       5,559   

Junior subordinated debentures

     108        106       213       210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,757        4,057       4,928       8,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income before recapture of provision for loan losses

     62,758        57,159       123,767       114,101   

Recapture of provision for loan losses

     (2,000     (7,600 )     (2,000 )     (15,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     64,758        64,759       125,767       129,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Service charges on deposit accounts

     3,952        3,905       7,913       7,733   

Trust and investment services

     2,181        2,133       4,332       4,058   

Bankcard services

     842        923       1,575       1,701   

BOLI income

     808        601       1,457       1,239   

Gain on sale of loans held-for-sale

     —          —          —          5,330   

Decrease in FDIC loss sharing asset, net

     (413     (1,467 )     (803 )     (3,174

Gain on OREO, net

     132        130       256       135   

Other

     843        825       1,626       1,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     8,345        7,050       16,356       18,548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Salaries and employee benefits

     19,648        18,387       38,943       37,804   

Occupancy and equipment

     3,713        3,676       7,365       7,401   

Professional services

     1,527        1,646       2,680       3,010   

Software licenses and maintenance

     993        1,010       2,023       2,075   

Promotion

     1,201        1,341       2,528       2,607   

Recapture of provision for unfunded loan commitments

     —          —          (500 )     —     

Amortization of intangible assets

     239        193       507       315   

Debt termination expense

     —          —          13,870       —     

OREO expense

     251        113       335       138   

Acquisition related expenses

     —          865       —          1,292   

Other

     3,961        4,093       8,254       7,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     31,533        31,324       76,005       62,481   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     41,570        40,485       66,118       85,268   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

     14,757        15,001       23,472       31,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 26,813      $ 25,484     $ 42,646     $ 54,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Unrealized gain on securities arising during the period

   $ (32,968   $ 32,782     $ (12,698 )   $ 57,563   

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     (32,968     32,782       (12,698 )     57,563   

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

     13,846        (13,769 )     5,332       (24,176
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     (19,122     19,013       (7,366 )     33,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 7,691      $ 44,497     $ 35,280     $ 87,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.25      $ 0.24     $ 0.40     $ 0.51   

Diluted earnings per common share

   $ 0.25      $ 0.24     $ 0.40     $ 0.51   

Cash dividends declared per common share

   $ 0.12      $ 0.10     $ 0.24     $ 0.20   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended June 30, 2015 and 2014

(Dollars and shares in thousands)

(Unaudited)

 

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

Balance January 1, 2014

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

Repurchase of common stock

     (346     (4,908         (4,908

Exercise of stock options

     469        5,109            5,109   

Tax benefit from exercise of stock options

       796            796   

Shares issued pursuant to stock-based compensation plan

     306        1,531            1,531   

Cash dividends declared on common stock ($0.20 per share)

         (21,188       (21,188

Net earnings

         54,145          54,145   

Other comprehensive income

           33,387        33,387   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

     105,799      $ 493,596      $ 323,106      $ 24,057      $ 840,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

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

Repurchase of common stock

     (33     (511 )         (511

Exercise of stock options

     397        4,500           4,500   

Tax benefit from exercise of stock options

       742           742   

Shares issued pursuant to stock-based compensation plan

     80        1,371           1,371   

Cash dividends declared on common stock ($0.24 per share)

         (25,500       (25,500

Net earnings

         42,646          42,646   

Other comprehensive income

           (7,366 )     (7,366
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2015

     106,337      $ 501,322     $ 368,960      $ 23,709     $ 893,991   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     For the Six Months Ended
June 30,
 
     2015     2014  

Cash Flows from Operating Activities

    

Interest and dividends received

   $ 137,747     $ 125,583   

Service charges and other fees received

     13,840       15,036   

Interest paid

     (5,768 )     (7,984

Net cash paid to vendors, employees and others

     (68,710 )     (63,504

Income taxes paid

     (27,000 )     (35,500

Payments to FDIC, loss share agreement

     (460 )     (1,372
  

 

 

   

 

 

 

Net cash provided by operating activities

  49,649     32,259   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

Proceeds from redemption of FHLB stock

  7,750     8,899   

Proceeds from maturity of interest-earning balances from depository institutions

  2,740     1,494   

Proceeds from sale of investment securities

  —        14,271   

Proceeds from repayment of investment securities

  202,162     143,151   

Proceeds from maturity of investment securities

  54,601     47,199   

Purchases of investment securities

  (236,451 )   (413,458

Net decrease in loan and lease finance receivables

  35,862     184,031   

Proceeds from sales of premises and equipment

  —        663   

Purchase of premises and equipment

  (485 )   (964

Proceeds from sales of other real estate owned

  1,538     2,254   

Cash acquired on purchase of American Security Bank, net of cash paid

  —        50,038   
  

 

 

   

 

 

 

Net cash provided by investing activities

  67,717     37,578   
  

 

 

   

 

 

 

Cash Flows from Financing Activities

Net increase in transaction deposits

  430,912     392,737   

Net decrease in time deposits

  (41,690 )   (32,172

Repayment of FHLB advances

  (200,000 )   —     

Net decrease in other borrowings

  (46,000 )   (69,000

Net increase (decrease) in customer repurchase agreements

  98,699     (31,792

Cash dividends on common stock

  (23,340 )   (21,117

Repurchase of common stock

  (511 )   (4,908

Proceeds from exercise of stock options

  4,500     5,109   

Tax benefit related to exercise of stock options

  742     796   
  

 

 

   

 

 

 

Net cash provided by financing activities

  223,312     239,653   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

  340,678     309,490   

Cash and cash equivalents, beginning of period

  105,768     94,693   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 446,446   $ 404,183   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

     For the Six Months Ended
June 30,
 
     2015     2014  

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

    

Net earnings

   $ 42,646     $ 54,145   

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

    

Gain on sale of loans held-for-sale

     —          (5,330

Loss on sale of premises and equipment, net

     52       71   

Gain on sale of other real estate owned

     (232 )     (117

Amortization of capitalized prepayment penalty on borrowings

     521       136   

Increase in bank owned life insurance

     (2,670 )     (1,161

Net amortization of premiums and discounts on investment securities

     9,749       10,044   

Accretion of SJB discount

     (2,012 )     (3,174

Recapture of provision for loan losses

     (2,000 )     (15,100

Recapture of provision for unfunded loan commitments

     (500 )     —     

Valuation adjustment on other real estate owned

     162       —     

Change in FDIC loss share asset

     299       3,174   

Payments to FDIC, loss share agreement

     (460 )     (1,372

Stock-based compensation

     1,371       1,531   

Depreciation and amortization, net

     (229 )     858   

Change in accrued interest receivable

     1,021       331   

Change in accrued interest payable

     (840 )     12   

Change in other assets and liabilities

     2,771       (11,789
  

 

 

   

 

 

 

Total adjustments

  7,003     (21,886
  

 

 

   

 

 

 

Net cash provided by operating activities

$ 49,649   $ 32,259   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

Securities purchased and not settled

$ 59,693    $ 56,430   

Transfer of loans to other real estate owned

$ 3,666    $ 478   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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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. This includes 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 Equipment Financing 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 offices. The Company is headquartered in the city of Ontario, California.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and six months ended June 30, 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

 

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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.

 

     June 30, 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/GSEs

   $ 358,052       $ 16       $ (6,785   $ 351,283         11.14

Residential mortgage-backed securities

     1,830,381         30,770         (4,661     1,856,490         58.86

CMOs/REMICs - residential

     403,108         7,265         (626     409,747         12.99

Municipal bonds

     516,798         16,488         (1,671     531,615         16.85

Other securities

     5,000         82         —          5,082         0.16
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,113,339       $ 54,621       $ (13,743   $ 3,154,217         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/GSEs

   $ 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 83% of the available-for-sale portfolio at June 30, 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 collateralized mortgage obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of June 30, 2015 and December 31, 2014. The Bank had $234,000 in CMOs/REMICs backed by whole loans issued by private-label companies (nongovernment sponsored).

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 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.

 

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     June 30, 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/GSEs

   $ 45,332       $ 119       $ 284,011       $ 6,666       $ 329,343       $ 6,785   

Residential mortgage-backed securities

     212,143         1,128         122,027         3,533         334,170         4,661   

CMOs/REMICs - residential

     114,943         458         6,315         168         121,258         626   

Municipal bonds

     52,881         813         24,599         858         77,480         1,671   

Other securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 425,299       $ 2,518       $ 436,952       $ 11,225       $ 862,251       $ 13,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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/GSEs

   $ 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 subordinated 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 became apparent in August 2008 at the time the crisis in the financial markets occurred and the market for securities collateralized by Alt-A mortgages declined.

This Alt-A bond, with a book value of $1.4 million as of June 30, 2015 and 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 June 30, 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 three and six months ended June 30, 2015 and 2014.

Government Agency & Government-Sponsored Enterprise (“GSE”) — 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

 

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Government-Sponsored Enterprises. As of June 30, 2015, approximately $240.1 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 due to be paid. The contractual terms of these investments provide 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. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the bonds.

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 4.3 years. Of the total MBS/CMO, 99.99% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining 0.01% are issued by banks. Accordingly, it is expected that 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 8.5 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 June 30, 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 June 30, 2015 and December 31, 2014, investment securities having a carrying value of approximately $2.92 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 June 30, 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.

 

     June 30, 2015  
     Amortized      Fair  
     Cost      Value  
     (Dollars in thousands)  

Available-for-sale:

     

Due in one year or less

   $ 177,307       $ 180,332   

Due after one year through five years

     2,063,160         2,104,524   

Due after five years through ten years

     659,129         652,414   

Due after ten years

     213,743         216,947   
  

 

 

    

 

 

 

Total

   $ 3,113,339       $ 3,154,217   
  

 

 

    

 

 

 

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2015.

 

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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 June 30, 2015, the remaining discount associated with the PCI loans approximated $5.7 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $3.5 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 3.4 years and 1.3 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.

 

     June 30, 2015      December 31, 2014  
     (Dollars in thousands)  

Commercial and industrial

   $ 13,310      $ 14,605   

SBA

     440        1,110   

Real estate:

     

Commercial real estate

     93,700        109,350   

Construction

     —           —     

SFR mortgage

     203        205   

Dairy & livestock and agribusiness

     276        4,890   

Municipal lease finance receivables

     —           —     

Consumer and other loans

     2,817        3,336   
  

 

 

    

 

 

 

Gross PCI loans

     110,746        133,496   

Less: Purchase accounting discount

     (5,680 )      (7,129
  

 

 

    

 

 

 

Gross PCI loans, net of discount

     105,066        126,367   

Less: Allowance for PCI loans losses

     —           —     
  

 

 

    

 

 

 

Net PCI loans

   $ 105,066      $ 126,367   
  

 

 

    

 

 

 

Credit Quality Indicators

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

 

     June 30, 2015      December 31, 2014  
     (Dollars in thousands)  

Pass

   $ 21,863       $ 26,706   

Watch list

     65,435         77,371   

Special mention

     6,909         8,203   

Substandard

     16,539         21,216   

Doubtful & loss

     —           —     
  

 

 

    

 

 

 

Total PCI gross loans

   $ 110,746       $ 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

 

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Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2014. As of June 30, 2015 and December 31, 2014, there were no allowances for loan losses recorded for PCI loans.

 

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

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

 

     June 30, 2015      December 31, 2014  
     (Dollars in thousands)  

Commercial and industrial

   $ 406,423      $ 390,011   

SBA

     120,566        134,265   

Real estate:

     

Commercial real estate

     2,569,411        2,487,803   

Construction

     46,927        55,173   

SFR mortgage

     214,503        205,124   

Dairy & livestock and agribusiness

     183,984        279,173   

Municipal lease finance receivables

     74,691        77,834   

Consumer and other loans

     71,176        69,884   
  

 

 

    

 

 

 

Gross loans, excluding PCI loans

     3,687,681        3,699,267   

Less: Deferred loan fees, net

     (8,528 )      (8,567
  

 

 

    

 

 

 

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

     3,679,153        3,690,700   

Less: Allowance for loan losses

     (59,554 )      (59,825
  

 

 

    

 

 

 

Net loans, excluding PCI loans

     3,619,599        3,630,875   
  

 

 

    

 

 

 

PCI Loans

     110,746        133,496   

Discount on PCI loans

     (5,680 )      (7,129
  

 

 

    

 

 

 

PCI loans, net

     105,066        126,367   
  

 

 

    

 

 

 

Total loans and lease finance receivables

   $ 3,724,665      $ 3,757,242   
  

 

 

    

 

 

 

As of June 30, 2015, 69.68% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 1.27% 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 June 30, 2015, $157.2 million, or 6.12%, 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 $130.0 million for loans secured by dairy & livestock land and $27.2 million for loans secured by agricultural land at June 30, 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 June 30, 2015, $184.0 million, or 4.99%, 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 $171.8 million for dairy & livestock loans and $12.2 million for agribusiness loans at June 30, 2015, compared to $268.1 million for dairy & livestock loans and $11.1 million for agribusiness loans at December 31, 2014. At June 30, 2015, the Company held approximately $1.84 billion of total fixed rate loans.

At June 30, 2015 and December 31, 2014, loans totaling $2.80 billion and $2.78 billion, respectively, were pledged to secure borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

 

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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.

 

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

 

     June 30, 2015  
     Pass      Watch List      Special Mention      Substandard      Doubtful & Loss      Total  

Commercial and industrial

   $ 259,171       $ 97,969       $ 37,649       $ 11,578       $ 56       $ 406,423   

SBA

     74,716         22,448         14,202         7,698         1,502         120,566   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     581,824         146,611         49,507         13,456         —           791,398   

Non-owner occupied

     1,445,175         250,818         28,789         53,231         —           1,778,013   

Construction

                 

Speculative

     26,741         2,172         —           7,651         —           36,564   

Non-speculative

     9,710         653         —           —           —           10,363   

SFR mortgage

     185,302         21,230         4,261         3,710         —           214,503   

Dairy & livestock and agribusiness

     105,341         75,217         3,426         —           —           183,984   

Municipal lease finance receivables

     41,726         27,766         5,199         —           —           74,691   

Consumer and other loans

     55,776         10,497         2,032         2,774         97         71,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

   $ 2,785,482       $ 655,381       $ 145,065       $ 100,098       $ 1,655       $ 3,687,681   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Pass      Watch List      Special Mention      Substandard      Doubtful & Loss      Total  

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 June 30, 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, by portfolio segment for the periods presented.

 

16


Table of Contents
                                                                                    
     For the Three Months Ended June 30, 2015  
     Ending
Balance
March 31,
2015
     Charge-offs     Recoveries      (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30,
2015
 
     (Dollars in thousands)  

Commercial and industrial

   $ 7,502       $ —        $ 197       $ (514   $ 7,185   

SBA

     2,196         —          3         (114     2,085   

Real estate:

            

Commercial real estate

     34,848         (107     783         (110 )     35,414   

Construction

     1,043         —          41         (338 )     746   

SFR mortgage

     2,425         (215     —           354       2,564   

Dairy & livestock and agribusiness

     3,746         —          111         117       3,974   

Municipal lease finance receivables

     1,030         —          —           (16 )     1,014   

Consumer and other loans

     825         (20     52         (23 )     834   

Unallocated

     7,094         —          —           (1,356 )     5,738   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 60,709       $ (342   $ 1,187       $ (2,000 )   $ 59,554   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     For the Three Months Ended June 30, 2014  
     Ending
Balance
March 31,
2014
     Charge-offs     Recoveries      (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30,
2014
 
     (Dollars in thousands)  

Commercial and industrial

   $ 6,368       $ (100   $ 43       $ (274   $ 6,037   

SBA

     2,468         —          63         (166     2,365   

Real estate:

            

Commercial real estate

     39,400         (352 )     70         (3,200 )     35,918   

Construction

     458         —          19         128       605   

SFR mortgage

     2,282         —          —           (68 )     2,214   

Dairy & livestock and agribusiness

     9,267         —          98         (3,937 )     5,428   

Municipal lease finance receivables

     1,519         —          —           (55 )     1,464   

Consumer and other loans

     950         (6 )     14         (28 )     930   

Unallocated

     6,013         —          —           —          6,013   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 68,725       $ (458 )   $ 307       $ (7,600 )   $ 60,974   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     For the Six Months Ended June 30, 2015  
     Ending
Balance
December 31,
2014
     Charge-offs     Recoveries      (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30,
2015
 
     (Dollars in thousands)  

Commercial and industrial

   $ 7,074       $ (134   $ 232       $ 13      $ 7,185   

SBA

     2,557         (33     37         (476     2,085   

Real estate:

            

Commercial real estate

     33,373         (107     1,640         508       35,414   

Construction

     988         —          50         (292 )     746   

SFR mortgage

     2,344         (215     185         250       2,564   

Dairy & livestock and agribusiness

     5,479         —          210         (1,715 )     3,974   

Municipal lease finance receivables

     1,412         —          —           (398 )     1,014   

Consumer and other loans

     1,262         (197     61         (292 )     834   

Unallocated

     5,336         —          —           402       5,738   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 59,825       $ (686   $ 2,415       $ (2,000 )   $ 59,554   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

17


Table of Contents
                                                                                    
     For the Six Months Ended June 30, 2014  
     Ending
Balance
December 31,
2013
     Charge-offs     Recoveries      (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30,
2014
 
     (Dollars in thousands)  

Commercial and industrial

   $ 8,502       $ (554   $ 498       $ (2,409   $ 6,037   

SBA

     2,332         —          63         (30     2,365   

Real estate:

            

Commercial real estate

     39,402         (352 )     138         (3,270 )     35,918   

Construction

     1,305         —          797         (1,497 )     605   

SFR mortgage

     2,718         —          —           (504 )     2,214   

Dairy & livestock and agribusiness

     11,728         —          242         (6,542 )     5,428   

Municipal lease finance receivables

     2,335         —          —           (871 )     1,464   

Consumer and other loans

     960         (19 )     26         (37 )     930   

Unallocated

     5,953         —          —           60       6,013   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 75,235       $ (925 )   $ 1,764       $ (15,100 )   $ 60,974   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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.

 

                                                                   
     June 30, 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

   $ 1,562       $ 404,861       $ 435       $ 6,750   

SBA

     3,146         117,420         12         2,073   

Real estate:

           

Commercial real estate

     39,981         2,529,430         —           35,414   

Construction

     7,651         39,276         24         722   

SFR mortgage

     7,044         207,459         77         2,487   

Dairy & livestock and agribusiness

     7,091         176,893         —           3,974   

Municipal lease finance receivables

     —           74,691         —           1,014   

Consumer and other loans

     915         70,261         2         832   

Unallocated

     —           —           —           5,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67,390       $ 3,620,291       $ 550       $ 59,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
                                                                   
     June 30, 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

   $ 5,904       $ 379,661       $ 643       $ 5,394   

SBA

     2,138         126,706         64         2,301   

Real estate:

           

Commercial real estate

     36,873         2,363,991         —           35,918  

Construction

     26,554         32,923         —           605  

SFR mortgage

     10,554         176,370         44         2,170  

Dairy & livestock and agribusiness

     23,355         156,696         1,366         4,062  

Municipal lease finance receivables

     —           78,934         —           1,464  

Consumer and other loans

     470         70,527         96         834  

Unallocated

     —           —           —           6,013  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 105,848       $ 3,385,808       $ 2,213       $ 58,761  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

19


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.

 

     June 30, 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

   $ 246       $ —         $ 246       $ 903       $ 405,274       $ 406,423  

SBA

     —           —           —           2,456         118,110         120,566   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     —           —           —           2,290         789,109         791,399  

Non-owner occupied

     945         388         1,333         12,677         1,764,002         1,778,012  

Construction

                 

Speculative

     —           —           —           —           36,564         36,564  

Non-speculative

     —           —           —           —           10,363         10,363  

SFR mortgage

     —           355         355         3,400         210,748         214,503  

Dairy & livestock and agribusiness

     —           —           —           —           183,984         183,984  

Municipal lease finance receivables

     —           —           —           —           74,691         74,691  

Consumer and other loans

     —           2         2         498         70,676         71,176  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

   $ 1,191       $ 745       $ 1,936       $ 22,224       $ 3,663,521       $ 3,687,681  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) As of June 30, 2015, $18.6 million of nonaccruing loans were current, $599,000 were 30-59 days past due, $668,000 were 60-89 days past due and $2.4 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.

Impaired Loans

At June 30, 2015, the Company had impaired loans, excluding PCI loans, of $67.4 million. Of this amount, there were $15.0 million of nonaccrual commercial real estate loans, $3.4 million of nonaccrual SFR mortgage loans, $2.5 million of nonaccrual SBA loans, $903,000 of nonaccrual commercial and industrial loans and $498,000 of nonaccrual consumer and other loans. These impaired loans included $60.3 million of loans whose terms were modified in a troubled debt restructuring, of which $15.2 million were classified as nonaccrual. The remaining balance of $45.1 million consisted of 33 loans performing according to the restructured terms.

 

20


Table of Contents

The impaired loans had a specific allowance of $550,000 at June 30, 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 Six Months Ended
June 30, 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

   $ 1,097       $ 1,941       $ —         $ 1,172       $ 15  

SBA

     3,087         3,688         —           3,167         26  

Real estate:

              

Commercial real estate

              

Owner occupied

     5,987         7,080         —           5,865         127  

Non-owner occupied

     33,994         39,946         —           34,567         838  

Construction

              

Speculative

     —           —           —           —           —     

Non-speculative

     —           —           —           —           —     

SFR mortgage

     6,228         7,175         —           6,102         50  

Dairy & livestock and agribusiness

     7,091         7,559         —           7,269         167  

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     906         1,426         —           940         8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     58,390         68,815         —           59,082         1,231  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     465         536         435         478         1   

SBA

     59         59         12         63         —     

Real estate:

              

Commercial real estate

              

Owner occupied

     —           —           —           —           —     

Non-owner occupied

     —           —           —           —           —     

Construction

              

Speculative

     7,651         7,651         24         7,651         192  

Non-speculative

     —           —           —           —           —     

SFR mortgage

     816         824         77         826         3  

Dairy & livestock and agribusiness

     —           —           —           —           —     

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     9         14         2         10         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,000         9,084         550         9,028         196  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $   67,390       $   77,899       $   550       $ 68,110       $ 1,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
                                                                                    
     As of and For the Six Months Ended
June 30, 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

   $ 4,376       $ 5,437       $ —         $ 4,396       $ 30   

SBA

     2,074         2,516         —           2,112         —     

Real estate:

              

Commercial real estate

              

Owner occupied

     11,822         12,910         —           11,967         247   

Non-owner occupied

     25,051         31,676         —           25,390         430   

Construction

              

Speculative

     17,418         18,407         —           17,484         154   

Non-speculative

     9,136         9,136         —           9,158         308   

SFR mortgage

     10,078         11,719         —           10,156         52   

Dairy & livestock and agribusiness

     20,015         20,714         —           22,529         456   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     366         718         —           368         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     100,336         113,233         —           103,560         1,677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     1,528         1,852         643         1,531         —     

SBA

     64         72         64         67         —     

Real estate:

              

Commercial real estate

              

Owner occupied

     —           —           —           —           —     

Non-owner occupied

     —           —           —           —           —     

Construction

              

Speculative

     —           —           —           —           —     

Non-speculative

     —           —           —           —           —     

SFR mortgage

     476         486         44         478         —     

Dairy & livestock and agribusiness

     3,340         3,340         1,366         3,408         25   

Municipal lease finance receivables

     —           —           —           —           —     

Consumer and other loans

     104         165         96         105         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,512         5,915         2,213         5,589         25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 105,848       $ 119,148       $ 2,213       $ 109,149       $ 1,702   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 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 zero provision for unfunded loan commitments for the three months ended June 30, 2015 and 2014. A $500,000 recapture of provision for unfunded loan commitments was recorded for the six months ended June 30, 2015, compared to no provision for unfunded commitments for the same period of 2014. At June 30, 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.

 

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Table of Contents

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 June 30, 2015, there were $60.3 million of loans classified as TDRs, of which $15.2 million were nonperforming and $45.1 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 June 30, 2015, performing TDRs were comprised of 10 commercial real estate loans of $25.0 million, one construction loan of $7.7 million, five dairy & livestock and agribusiness loans of $7.1 million, 11 SFR mortgage loans of $3.6 million, four commercial and industrial loans of $659,000, one SBA loan of $691,000 and one consumer loan of $417,000. There were no loans removed from TDR classification during the three and six months ended June 30, 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 $432,000 and $726,000 of specific allowance to TDRs as of June 30, 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
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (Dollars in thousands)      (Dollars in thousands)  

Performing TDRs:

           

Beginning balance

   $ 45,376       $ 66,394       $ 53,589       $ 66,955  

New modifications (1)

     30         —           30         41  

Payoffs and payments, net

     (240      (4,516      (8,969      (5,118 )

TDRs returned to accrual status

     —           —           516         —     

TDRs placed on nonaccrual status

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 45,166       $ 61,878       $ 45,166       $ 61,878  
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the Three Months
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (Dollars in thousands)      (Dollars in thousands)  

Nonperforming TDRs:

           

Beginning balance

   $ 16,774       $ 23,968       $ 20,285       $ 25,119  

New modifications (1)

     330         4,187         330         4,187  

Charge-offs

     —           —           —           —     

Transfer to OREO

     (842      —           (842      —     

Payoffs and payments, net

     (1,095      (758      (4,090      (1,909 )

TDRs returned to accrual status

     —           —           (516      —     

TDRs placed on nonaccrual status

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 15,167       $ 27,397       $ 15,167       $ 27,397  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) New modifications for the three and six months ended June 30, 2014 represent TDRs acquired from ASB.

 

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Table of Contents

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

Modifications (1)

 

    For the Three Months Ended June 30, 2015  
    Number
of
Loans
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded

Investment
    Outstanding
Recorded
Investment at
June 30,

2015
    Financial
Effect
Resulting
From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity

    1        30        30        30        —     

Other

    —          —          —          —          —     

SBA

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    1        330        330        330        12   

Other

    —          —          —          —          —     

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

    2      $   360      $    360      $    360      $ 12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Three Months Ended June 30, 2014  
    Number
of
Loans
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded

Investment
    Outstanding
Recorded
Investment at
June 30,

2014
    Financial
Effect
Resulting
From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity

    —          —          —          —          —     

SBA:

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity (3)

    1        47        47        45        —     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction (3)

    2        389        389        376        —     

Change in amortization period or maturity

    —          —          —          —          —     

Non-owner occupied

         

Interest rate reduction (3)

    4        3,751        3,751        3,710        —     

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

    7      $ 4,187      $ 4,187      $ 4,131      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    For the Six Months Ended June 30, 2015  
    Number
of
Loans
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded

Investment
    Outstanding
Recorded
Investment at
June 30,

2015
    Financial
Effect
Resulting
From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity

    1        30        30        30        —     

Other

    —          —          —          —          —     

SBA

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity

    1        330        330        330        12   

Other

    —          —          —          —          —     

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

    2      $    360      $    360      $    360      $ 12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Six Months Ended June 30, 2014  
    Number
of
Loans
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
June 30,

2014
    Financial
Effect
Resulting
From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    —        $ —        $ —        $ —        $ —     

Change in amortization period or maturity (3)

    1        41        41        39        —     

Other

    —          —          —          —          —     

SBA

         

Interest rate reduction

    —          —          —          —          —     

Change in amortization period or maturity (3)

    1        47        47        45        —     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction (3)

    2        389        389        376        —     

Change in amortization period or maturity

    —          —          —          —          —     

Non-owner occupied

         

Interest rate reduction (3)

    4        3,751        3,751        3,710        —     

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

    8      $ 4,228      $ 4,228      $ 4,170      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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.
  (3) New modifications for the three and six months ended June 30, 2014 represent TDRs acquired from ASB.

As of June 30, 2015, there were no loans that were previously modified as a TDRs within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2015.

 

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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 and six months ended June 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were, 254,000 and 228,000, respectively. For the three and six months ended June 30, 2014, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 222,000 and 186,000 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 Three Months Ended June 30,      For the Six Months Ended June 30,  
     2015      2014      2015      2014  
     (In thousands, except per share amounts)  

Earnings per common share:

           

Net earnings

   $ 26,813       $ 25,484       $ 42,646       $ 54,145   

Less: Net earnings allocated to restricted stock

     143         145         223         274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common shareholders

   $ 26,670       $ 25,339       $ 42,423       $ 53,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     105,707         105,251         105,616         105,222   

Basic earnings per common share

   $ 0.25       $ 0.24       $ 0.40       $ 0.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net income allocated to common shareholders

   $ 26,670       $ 25,339       $ 42,423       $ 53,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     105,707         105,251         105,616         105,222   

Incremental shares from assumed exercise of outstanding options

     451         504         445         552   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     106,158         105,755         106,061         105,774   

Diluted earnings per common share

   $ 0.25       $ 0.24       $ 0.40       $ 0.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 June 30, 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 six months ended June 30, 2015 and 2014.

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.

 

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Table of Contents

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.

 

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Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.

 

     Carrying Value at
June 30, 2015
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (Dollars in thousands)  

Description of assets

           

Investment securities - AFS:

           

Government agency/GSEs

   $ 351,283       $ —         $ 351,283       $ —     

Residential mortgage-backed securities

     1,856,490         —           1,856,490         —     

CMO’s/REMIC’s - residential

     409,747         —           409,747         —     

Municipal bonds

     531,615         —           531,615         —     

Other securities

     5,082         —           5,082         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities - AFS

     3,154,217         —           3,154,217         —     

Interest rate swaps

     8,861         —           8,861         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,163,078       $ —         $ 3,163,078       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Description of liability

           

Interest rate swaps

   $ 8,861       $ —         $ 8,861       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 8,861       $ —         $ 8,861       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Carrying Value at
December 31, 2014
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (Dollars in thousands)  

Description of assets

           

Investment securities - AFS:

           

Government agency/GSEs

   $ 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       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 June 30, 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
June 30, 2015
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Losses For
the Six
    Months Ended    
June 30, 2015
 
     (Dollars in thousands)  

Description of assets

              

Impaired loans, excluding PCI Loans:

              

Commercial and industrial

   $ 37       $ —         $ —         $ 37       $ 22  

SBA

     59         —           —           59         12  

Real estate:

              

Commercial real estate

     —           —           —           —           —     

Construction

     7,651         —           —           7,651         24  

SFR mortgage

     1,389         —           —           1,389         292  

Dairy & livestock and agribusiness

     —           —           —           —           —     

Consumer and other loans

     206         —           —           206         77  

Other real estate owned

     948         —           —           948         162  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 10,290       $ —         $ —         $ 10,290       $ 589  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Carrying Value at
December 31, 2014
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Losses
For the Year Ended
December 31, 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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 June 30, 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.

 

     June 30, 2015  
            Estimated Fair Value  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets

              

Total cash and cash equivalents

   $ 446,446       $ 446,446       $ —         $ —         $ 446,446   

Interest-earning balances due from depository institutions

     24,378         —           24,378         —           24,378   

FHLB stock

     17,588         —           17,588         —           17,588   

Investment securities available-for-sale

     3,154,217         —           3,154,217         —           3,154,217   

Investment securities held-to-maturity

     1,400         —           —           2,066         2,066   

Loans held-for-sale

     —           —           —           —           —     

Total loans, net of allowance for loan losses

     3,724,665         —           —           3,747,468         3,747,468   

Swaps

     8,861         —           8,861         —           8,861   

Liabilities

              

Deposits:

              

Noninterest-bearing

   $ 3,250,574       $ 3,250,574       $ —         $ —         $ 3,250,574   

Interest-bearing

     2,743,306         —           2,743,129         —           2,743,129   

Borrowings

     662,326         —           662,254         —           662,254   

Junior subordinated debentures

     25,774         —           26,024         —           26,024   

Swaps

     8,861         —           8,861         —           8,861   

 

     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   

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   

Swaps

     10,080         —           10,080         —           10,080   

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 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.

 

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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 June 30, 2015  
     Centers      Treasury      Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 35,813       $ 19,210       $ 9,492      $ —        $ 64,515  

Credit for funds provided (1)

     8,530         —           13,024        (21,554     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     44,343         19,210         22,516        (21,554     64,515  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     1,628         31         98        —          1,757  

Charge for funds used (1)

     1,052         15,441         5,061        (21,554     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,680         15,472         5,159        (21,554     1,757  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     41,663         3,738         17,357        —          62,758  

Recapture of provision for loan losses

     —           —           (2,000     —          (2,000 )
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     41,663         3,738         19,357        —          64,758  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

     5,319         —           3,026        —          8,345  

Noninterest expense

     12,259         211         19,063        —          31,533  

Debt termination expense

     —           —           —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

   $ 34,723       $ 3,527       $ 3,320      $ —        $ 41,570  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets as of June 30, 2015

   $ 6,436,216       $ 3,624,321       $ 875,585      $ (3,238,764   $ 7,697,358  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents
     For the Three Months Ended June 30, 2014  
     Centers      Treasury      Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 34,683       $ 17,675       $ 8,858      $ —        $ 61,216   

Credit for funds provided (1)

     7,660         —           11,414        (19,074     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     42,343         17,675         20,272        (19,074     61,216   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     1,561         2,390         106        —          4,057   

Charge for funds used (1)

     953         13,436         4,685        (19,074     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,514         15,826         4,791        (19,074     4,057   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     39,829         1,849         15,481        —          57,159   

Recapture of provision for loan losses

     —           —           (7,600     —          (7,600
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     39,829         1,849         23,081        —          64,759   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

     5,162         —           1,888        —          7,050   

Noninterest expense

     11,420         182         19,722        —          31,324   

Debt termination expense

     —           —           —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

   $ 33,571       $ 1,667       $ 5,247      $ —        $ 40,485   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets as of June 30, 2014

   $ 5,928,456       $ 3,511,341       $ 782,783      $ (2,798,587   $ 7,423,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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

 

     For the Six Months Ended June 30, 2015  
     Centers      Treasury     Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 71,181       $ 37,865      $ 19,649      $ —        $ 128,695   

Credit for funds provided (1)

     16,741         —          25,665        (42,406     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     87,922         37,865        45,314        (42,406     128,695   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     3,291         1,462        175        —          4,928   

Charge for funds used (1)

     2,119         30,247        10,040        (42,406     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,410         31,709        10,215        (42,406     4,928   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     82,512         6,156        35,099        —          123,767   

Recapture of provision for loan losses

     —           —          (2,000     —          (2,000
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     82,512         6,156        37,099        —          125,767   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

     10,386         —          5,970        —          16,356   

Noninterest expense

     24,108         424        37,603        —          62,135   

Debt termination expense

     —           13,870        —          —          13,870   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment pre-tax profit (loss)

   $ 68,790       $ (8,138   $ 5,466      $ —        $ 66,118   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets as of June 30, 2015

   $ 6,436,216       $ 3,624,321      $ 875,585      $ (3,238,764   $ 7,697,358   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     For the Six Months Ended June 30, 2014  
     Centers      Treasury      Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 67,774       $ 34,107       $ 20,397      $ —        $ 122,278   

Credit for funds provided (1)

     14,734         —           22,877        (37,611     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     82,508         34,107         43,274        (37,611     122,278   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     3,198         4,763         216        —          8,177   

Charge for funds used (1)

     1,917         26,233         9,461        (37,611     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     5,115         30,996         9,677        (37,611     8,177   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     77,393         3,111         33,597        —          114,101   

Recapture of provision for loan losses

     —           —           (15,100     —          (15,100
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     77,393         3,111         48,697        —          129,201   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

     9,944         —           8,604        —          18,548   

Noninterest expense

     23,248         378         38,855        —          62,481   

Debt termination expense

     —           —           —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

   $ 64,089       $ 2,733       $ 18,446      $ —        $ 85,268   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets as of June 30, 2014

   $ 5,928,456       $ 3,511,341       $ 782,783      $ (2,798,587   $ 7,423,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents
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 June 30, 2015, the Bank has entered into 75 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with 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 to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into 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.

Balance Sheet Classification of Derivative Financial Instruments

As of June 30, 2015 and December 31, 2014, the total notional amount of the Company’s swaps was $184.7 million, and $197.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the table below.

 

     June 30, 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       $ 8,861         Other liabilities       $ 8,861  
     

 

 

       

 

 

 

Total derivatives

      $   8,861          $   8,861  
     

 

 

       

 

 

 

 

     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  
     

 

 

       

 

 

 

 

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Table of Contents

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

The following table summarizes the effect of derivative financial instruments on the consolidated statement of earnings for the periods presented.

 

Derivatives Not Designated as Hedging Instruments

  

Location of Gain
Recognized in Income on
Derivative Instruments

   Amount of Gain Recognized in Income on
Derivative Instruments
 
          For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
          2015      2014      2015      2014  
          (Dollars in thousands)  

Interest rate swaps

   Other income    $ 199       $ —         $ 199       $ —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 199       $ —