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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 September 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:106,364,548 outstanding as of October 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      40   
  CRITICAL ACCOUNTING POLICIES      40   
  OVERVIEW      40   
  ANALYSIS OF THE RESULTS OF OPERATIONS      42   
  RESULTS BY BUSINESS SEGMENTS      53   
  ANALYSIS OF FINANCIAL CONDITION      55   
  ASSET/LIABILITY AND MARKET RISK MANAGEMENT      73   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      75   

ITEM 4.

  CONTROLS AND PROCEDURES      75   

PART II - OTHER INFORMATION

     75   

ITEM 1.

  LEGAL PROCEEDINGS      75   

ITEM 1A.

  RISK FACTORS      76   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      77   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      77   

ITEM 4.

  MINE SAFETY DISCLOSURES      77   

ITEM 5.

  OTHER INFORMATION      77   

ITEM 6.

  EXHIBITS      77   

SIGNATURES

     78   

 

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Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Forward Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities; our ability to attract deposits and other sources of funding or liquidity; supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate; a prolonged slowdown or decline in real estate construction or sales activity; changes in the financial performance and/or condition of our borrowers or key vendors or counterparties; changes in the levels of nonperforming assets, allowance for loan losses and charge-offs; the costs or effects of acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits associated with any such acquisitions or dispositions; the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, banking capital levels, securities and securities trading and hedging, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk; inflation, interest rate, securities market and monetary fluctuations; changes in government interest rates or monetary policies; changes in the amount and availability of deposit insurance; cyber-security threats, including loss of system functionality or theft or loss of Company or customer data or money; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, drought, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services and the perceived overall value of these products and services by customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of certain of the Company’s key internal and external systems and applications; changes in consumer spending, borrowing and savings preferences or habits; technological changes and the expanding use of technology in banking (including the adoption of mobile banking applications); the ability to retain and increase market share, retain and grow customers and control expenses; changes in the competitive environment among financial and bank holding companies, banks and other financial service providers; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; continued volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions; fluctuations in the price of the Company’s common stock or other securities; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and/or our board of directors; the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as consumer or employee class action litigation), regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; our ongoing relations with our various federal and state regulators, including the SEC, FDIC and California DBO; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2014, and particularly the discussion of risk factors within that document. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

 

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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 amounts)

(Unaudited)

 

     September 30,
2015
    December 31,
2014
 

Assets

    

Cash and due from banks

   $ 100,334      $ 95,030   

Interest-earning balances due from Federal Reserve

     207,893        10,738   
  

 

 

   

 

 

 

Total cash and cash equivalents

     308,227        105,768   
  

 

 

   

 

 

 

Interest-earning balances due from depository institutions

     33,189        27,118   

Investment securities available-for-sale, at fair value (with amortized cost of $2,259,505 at September 30, 2015, and $3,083,582 at December 31, 2014)

     2,312,721        3,137,158   

Investment securities held-to-maturity (with fair value of $876,383 at September 30, 2015, and $2,177 at December 31, 2014)

     869,650        1,528   

Investment in stock of Federal Home Loan Bank (FHLB)

     17,588        25,338   

Loans and lease finance receivables

     3,822,171        3,817,067   

Allowance for loan losses

     (59,149     (59,825
  

 

 

   

 

 

 

Net loans and lease finance receivables

     3,763,022        3,757,242   
  

 

 

   

 

 

 

Premises and equipment, net

     31,797        33,591   

Bank owned life insurance

     130,076        126,927   

Accrued interest receivable

     22,769        23,194   

Intangibles

     2,487        3,214   

Goodwill

     74,244        74,244   

Other real estate owned

     7,003        5,637   

Income taxes

     30,402        31,461   

Other assets

     23,287        25,500   
  

 

 

   

 

 

 

Total assets

   $ 7,626,462      $ 7,377,920   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 3,304,967      $ 2,866,365   

Interest-bearing

     2,654,505        2,738,293   
  

 

 

   

 

 

 

Total deposits

     5,959,472        5,604,658   

Customer repurchase agreements

     610,174        563,627   

FHLB advances

     -            199,479   

Other borrowings

     -            46,000   

Accrued interest payable

     273        1,161   

Deferred compensation

     11,100        10,291   

Junior subordinated debentures

     25,774        25,774   

Payable for securities purchased

     42,317        -       

Other liabilities

     56,625        48,821   
  

 

 

   

 

 

 

Total liabilities

     6,705,735        6,499,811   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,355,098 at September 30, 2015, and 105,893,216 at December 31, 2014

     502,102        495,220   

Retained earnings

     384,072        351,814   

Accumulated other comprehensive income, net of tax

     34,553        31,075   
  

 

 

   

 

 

 

Total stockholders’ equity

     920,727        878,109   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,626,462      $ 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     For the Nine Months Ended  
     September 30,     September 30,  
     2015     2014     2015     2014  

Interest income:

        

Loans and leases, including fees

   $ 48,822      $ 46,923      $ 139,686      $ 135,137   

Investment securities:

        

Investment securities available-for-sale

     14,734        17,647        50,171        49,991   

Investment securities held-to-maturity

     3,436        40        3,510        125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     18,170        17,687        53,681        50,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends from FHLB stock

     509        518        2,392        1,648   

Federal funds sold

     167        112        496        363   

Interest-earning deposits with other institutions

     63        55        171        309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     67,731        65,295        196,426        187,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,333        1,228        3,933        3,636   

Borrowings

     371        2,724        2,486        8,283   

Junior subordinated debentures

     110        105        323        315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,814        4,057        6,742        12,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income before recapture of provision for loan losses

     65,917        61,238        189,684        175,339   

Recapture of provision for loan losses

     (2,500     (1,000     (4,500     (16,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     68,417        62,238        194,184        191,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Service charges on deposit accounts

     3,930        4,065        11,843        11,798   

Trust and investment services

     2,275        2,045        6,607        6,103   

Bankcard services

     805        868        2,380        2,569   

BOLI income

     491        613        1,948        1,852   

Gain on sale of loans held-for-sale

     -        -        -        5,330   

Decrease in FDIC loss sharing asset, net

     -        (479     (803     (3,653

Gain on OREO, net

     158        127        414        262   

Other

     754        770        2,380        2,296   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     8,413        8,009        24,769        26,557   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Salaries and employee benefits

     20,395        19,366        59,338        57,170   

Occupancy and equipment

     3,853        4,147        11,218        11,548   

Professional services

     1,937        2,080        4,617        5,090   

Software licenses and maintenance

     901        1,324        2,924        3,399   

Promotion

     1,297        1,349        3,825        3,956   

Recapture of provision for unfunded loan commitments

     -        (1,250     (500     (1,250

Amortization of intangible assets

     220        466        727        781   

Debt termination expense

     -        -        13,870        -   

OREO expense

     28        102        363        240   

Acquisition related expenses

     75        640        75        1,932   

Other

     4,036        4,257        12,290        12,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     32,742        32,481        108,747        94,962   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     44,088        37,766        110,206        123,034   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

     16,202        13,471        39,674        44,594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 27,886      $ 24,295      $ 70,532      $ 78,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Unrealized gain/(loss) on securities arising during the period

   $ 18,674      $ (10,291   $ 5,974      $ 47,272   

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

     22        -            22        -       
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     18,696        (10,291     5,996        47,272   

Less: Income tax benefit (expense) related to items of other comprehensive income (loss)

     (7,852     4,322        (2,518     (19,854
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     10,844        (5,969     3,478        27,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 38,730      $ 18,326      $ 74,010      $ 105,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.26      $ 0.23      $ 0.66      $ 0.74   

Diluted earnings per common share

   $ 0.26      $ 0.23      $ 0.66      $ 0.74   

Cash dividends declared per common share

   $ 0.12      $ 0.10      $ 0.36      $ 0.30   

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

Nine months ended September 30, 2015 and 2014

(Dollars and shares in thousands)

(Unaudited)

 

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

Balance January 1, 2014

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

Repurchase of common stock

     (377     (5,383     -            -            (5,383

Exercise of stock options

     498        5,378        -            -            5,378   

Tax benefit from exercise of stock options

     -            983        -            -            983   

Shares issued pursuant to stock-based compensation plan

     306        2,277        -            -            2,277   

Cash dividends declared on common stock ($0.30 per share)

     -            -            (31,769     -            (31,769

Net earnings

     -            -            78,440        -            78,440   

Other comprehensive income

     -            -            -            27,418        27,418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

     105,797      $ 494,323      $ 336,820      $ 18,088      $ 849,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2015

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

Repurchase of common stock

     (41     (606     -            -            (606

Exercise of stock options

     411        4,672        -            -            4,672   

Tax benefit from exercise of stock options

     -            772        -            -            772   

Shares issued pursuant to stock-based compensation plan

     92        2,044        -            -            2,044   

Cash dividends declared on common stock ($0.36 per share)

     -            -            (38,274     -            (38,274

Net earnings

     -            -            70,532        -            70,532   

Other comprehensive income

     -            -            -            3,478        3,478   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2015

     106,355      $ 502,102      $ 384,072      $ 34,553      $ 920,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months Ended  
     September 30,  
     2015     2014  

Cash Flows from Operating Activities

    

Interest and dividends received

   $ 208,549      $ 193,605   

Service charges and other fees received

     21,604        22,653   

Interest paid

     (7,631     (12,120

Net cash paid to vendors, employees and others

     (98,692     (92,766

Income taxes paid

     (38,000     (44,000

Payments to FDIC, loss share agreement

     (460     (1,186
  

 

 

   

 

 

 

Net cash provided by operating activities

     85,370        66,186   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Proceeds from redemption of FHLB stock

     7,750        10,413   

Net change in interest-earning balances from depository institutions

     (6,071     62,491   

Proceeds from sale of investment securities available-for-sale

     975        14,271   

Proceeds from repayment of investment securities available-for-sale

     300,959        238,495   

Proceeds from maturity of investment securities available-for-sale

     83,322        63,216   

Purchases of investment securities available-for-sale

     (431,650     (738,882

Proceeds from repayment of investment securities held-to-maturity

     13,177        -       

Proceeds from maturity of investment securities held-to-maturity

     20,550        -       

Net decrease in loan and lease finance receivables

     2,647        101,432   

Proceeds from sales of premises and equipment

     -            663   

Purchase of premises and equipment

     (1,249     (1,668

Proceeds from sales of other real estate owned

     2,579        2,588   

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

     -            50,038   
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,011     (196,943
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net increase in other deposits

     416,830        492,720   

Net decrease in time deposits

     (62,016     (2,433

Repayment of FHLB advances

     (200,000     -       

Net decrease in other borrowings

     (46,000     (69,000

Net increase (decrease) in customer repurchase agreements

     46,547        (114,427

Cash dividends on common stock

     (36,099     (31,718

Repurchase of common stock

     (606     (5,383

Proceeds from exercise of stock options

     4,672        5,378   

Tax benefit related to exercise of stock options

     772        983   
  

 

 

   

 

 

 

Net cash provided by financing activities

     124,100        276,120   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     202,459        145,363   

Cash and cash equivalents, beginning of period

     105,768        94,693   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 308,227      $ 240,056   
  

 

 

   

 

 

 

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 Nine Months Ended  
     September 30,  
     2015     2014  

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

    

Net earnings

   $ 70,532      $ 78,440   

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 investment securities

     22        -       

Loss on sale of premises and equipment, net

     154        68   

Gain on sale of other real estate owned

     (386     (222

Amortization of capitalized prepayment penalty on borrowings

     521        204   

Increase in bank owned life insurance

     (3,149     (1,757

Net amortization of premiums and discounts on investment securities

     14,605        15,515   

Accretion of SJB discount

     (3,010     (4,546

Recapture of provision for loan losses

     (4,500     (16,100

Recapture of provision for unfunded loan commitments

     (500     (1,250

Valuation adjustment on other real estate owned

     162        65   

Change in FDIC loss share asset

     299        3,653   

Payments to FDIC, loss share agreement

     (460     (1,186

Stock-based compensation

     2,044        2,277   

Depreciation and amortization, net

     (701     488   

Change in accrued interest receivable

     425        (684

Change in accrued interest payable

     (888     (36

Change in other assets and liabilities

     10,200        (3,413
  

 

 

   

 

 

 

Total adjustments

     14,838        (12,254
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 85,370      $ 66,186   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

    

Securities purchased and not settled

   $ 42,317      $ 643   

Transfer of loans to other real estate owned

   $ 3,721      $ 640   

Transfer of AFS securities to HTM securities

   $ 898,598      $ -       

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 subsidiary: Citizens Business Bank (the “Bank” or “CBB”) after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with ASC 810 Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in 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 intends to open a new Commercial Banking Center in Santa Barbara in the fourth quarter of 2015. The Company is headquartered in the city of Ontario, California.

On October 14, 2015, we announced that we have entered into a merger agreement with County Commerce Bank, pursuant to which County Commerce Bank will merge into Citizens Business Bank when the transaction closes. County Commerce Bank is headquartered in Ventura County with four branch locations in Ventura and Santa Barbara Counties and total assets of approximately $250 million. This acquisition would extend our geographic footprint northward into the central coast of California. We expect to close this announced acquisition in the first quarter of 2016, subject to regulatory and County Commerce Bank shareholders’ approvals.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and nine months ended September 30, 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’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3—Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 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

 

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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 other real estate owned (“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 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 No. 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.

In September 2015, the FASB issued ASU 2015-16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statement for measurement-period adjustments that occur in periods after a business combination is consummated. ASU 2015-16 will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. 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.

 

     September 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

   $ 20,753       $ 16       $ (1   $ 20,768         0.90

Residential mortgage-backed securities

     1,670,643         40,902         -        1,711,545         74.00

CMOs/REMICs - residential

     380,260         8,237         -        388,497         16.80

Municipal bonds

     182,849         4,049         -        186,898         8.08

Other securities

     5,000         13         -        5,013         0.22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,259,505       $ 53,217       $ (1   $ 2,312,721         100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held-to-maturity (1):

             

Government agency/GSEs

   $ 297,204       $ 3,321       $ -      $ 300,525         34.18

Residential mortgage-backed securities

     238,993         1,384         -        240,377         27.48

CMO

     1,348         589         -        1,937         0.15

Municipal bonds

     332,105         1,635         (196     333,544         38.19
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity securities

   $ 869,650       $ 6,929       $ (196   $ 876,383         100.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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    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 available-for-sale securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held-to-maturity (1):

         

CMO

  $ 1,528      $ 649      $ -      $ 2,177        100.00%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

  $ 1,528      $ 649      $ -      $ 2,177        100.00%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1) Securities held-to-maturity are presented in the condensed consolidated balance sheets at amortized cost.

During the quarter ended September 30, 2015, investment securities were transferred from the available-for-sale security portfolio to the held-to-maturity security portfolio. Transfers of securities into the held-to-maturity category from the available-for-sale category are transferred at fair value at the date of transfer. The fair value of these securities at the date of transfer was $898.6 million. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income (“AOCI”) and in the carrying value of the held-to-maturity securities. The net unrealized holding gain at the date of transfer was $3.9 million after-tax and will continue to be reported in AOCI and amortized over the remaining life of the securities as a yield adjustment.

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Dollars in thousands)  

Investment securities available-for-sale:

           

Taxable

   $ 11,840       $ 12,420       $ 37,548       $ 34,300   

Tax-advantaged

     2,894         5,227         12,623         15,691   

Investment securities held-to-maturity:

           

Taxable

     1,688         40         1,762         125   

Tax-advantaged

     1,748         -         1,748         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income from investment securities

   $ 18,170       $ 17,687       $ 53,681       $ 50,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately 84% of the total investment securities portfolio at September 30, 2015 represent 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 September 30, 2015 and December 31, 2014. The Bank had $1.5 million in CMOs 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 September 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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     September 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)  

Investment securities available-for-sale:

                 

Government agency/GSEs

   $ 9,000       $ 1       $ -       $ -       $ 9,000       $ 1   

Residential mortgage-backed securities

     -         -         -         -         -         -   

CMOs/REMICs - residential

     -         -         -         -         -         -   

Municipal bonds

     -         -         -         -         -         -   

Other securities

     -         -         -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 9,000       $ 1       $ -       $ -       $ 9,000       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity:

                 

Government agency/GSEs

   $ -       $ -       $ -       $ -       $ -       $ -   

Residential mortgage-backed securities

     -         -         -         -         -         -   

CMO

     -         -         -         -         -         -   

Municipal bonds

     81,956         196         -         -         81,956         196   

Other securities

     -         -         -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 81,956       $ 196       $ -       $ -       $ 81,956       $ 196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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)  

Investment securities 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 available-for-sale securities

   $ 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.

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 Government-Sponsored Enterprises. As of September 30, 2015, approximately $221.2 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.

 

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Mortgage-Backed Securities(“MBS”) and CMOs/REMICs— Most of the Company’s 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 4.1 years. Of the total MBS/CMO, 99.93% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining 0.07% 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. There were no credit-related other-than-temporary impairment (“OTTI”) recognized in earnings for the three and nine months ended September 30, 2015 and 2014.

Municipal Bonds—The majority of the Company’s municipal bonds, with a weighted-average life of approximately 8.3 years, are insured by the largest U.S. 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 September 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 September 30, 2015 and December 31, 2014, investment securities having a carrying value of approximately $2.81 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 September 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.

 

     September 30, 2015  
     Available-for-sale      Held-to-maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Due in one year or less

   $ 91,512       $ 92,781       $ 124,536       $ 125,460   

Due after one year through five years

     1,894,584         1,939,712         139,716         141,134   

Due after five years through ten years

     118,633         121,282         554,537         558,832   

Due after ten years

     154,776         158,946         50,861         50,957   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 2,259,505       $ 2,312,721       $ 869,650       $ 876,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 for the nine months ended September 30, 2015.

 

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

 

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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 September 30, 2015, the remaining discount associated with the PCI loans approximated $4.8 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $2.8 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 3.2 years and 0.9 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.

 

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

Commercial and industrial

   $ 8,062       $ 14,605   

SBA

     414         1,110   

Real estate:

     

Commercial real estate

     87,522         109,350   

Construction

     -         -   

SFR mortgage

     198         205   

Dairy & livestock and agribusiness

     523         4,890   

Municipal lease finance receivables

     -         -   

Consumer and other loans

     2,466         3,336   
  

 

 

    

 

 

 

Gross PCI loans

     99,185         133,496   

Less: Purchase accounting discount

     (4,754      (7,129
  

 

 

    

 

 

 

Gross PCI loans, net of discount

     94,431         126,367   

Less: Allowance for PCI loans losses

     -         -   
  

 

 

    

 

 

 

Net PCI loans

   $ 94,431       $ 126,367   
  

 

 

    

 

 

 

Credit Quality Indicators

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

 

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

Pass

   $ 22,108       $ 26,706   

Watch list

     57,308         77,371   

Special mention

     13,379         8,203   

Substandard

     6,390         21,216   

Doubtful & loss

     -             -       
  

 

 

    

 

 

 

Total PCI gross loans

   $ 99,185       $ 133,496   
  

 

 

    

 

 

 

Allowance for Loan Losses (“ALLL”)

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

 

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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.

 

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

Commercial and industrial

   $ 413,709       $ 390,011   

SBA

     116,126         134,265   

Real estate:

     

Commercial real estate

     2,569,128         2,487,803   

Construction

     57,578         55,173   

SFR mortgage

     221,696         205,124   

Dairy & livestock and agribusiness

     212,670         279,173   

Municipal lease finance receivables

     75,839         77,834   

Consumer and other loans

     69,630         69,884   
  

 

 

    

 

 

 

Gross loans, excluding PCI loans

     3,736,376         3,699,267   

Less: Deferred loan fees, net

     (8,636      (8,567
  

 

 

    

 

 

 

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

     3,727,740         3,690,700   

Less: Allowance for loan losses

     (59,149      (59,825
  

 

 

    

 

 

 

Net loans, excluding PCI loans

     3,668,591         3,630,875   
  

 

 

    

 

 

 

PCI Loans

     99,185         133,496   

Discount on PCI loans

     (4,754      (7,129
  

 

 

    

 

 

 

PCI loans, net

     94,431         126,367   
  

 

 

    

 

 

 

Total loans and lease finance receivables

   $ 3,763,022       $ 3,757,242   
  

 

 

    

 

 

 

As of September 30, 2015, 68.76% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 1.54% 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 September 30, 2015, $171.0 million, or 6.66% 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 $132.8 million for loans secured by dairy & livestock land and $38.2 million for loans secured by agricultural land at September 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 September 30, 2015, dairy & livestock and agribusiness loans of $212.7 million was comprised of $197.9 million for dairy & livestock loans and $14.8 million for agribusiness loans, compared to $268.1 million for dairy & livestock loans and $11.1 million for agribusiness loans at December 31, 2014. At September 30, 2015, the Company held approximately $1.84 billion of total fixed rate loans.

At September 30, 2015 and December 31, 2014, loans totaling $2.89 billion and $2.78 billion, respectively, were pledged to secure borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating credit officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by Credit Management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration 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.

 

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Table of Contents

Pass Watch List — Pass Watch list loans usually require more than normal management attention. Loans which qualify for the Pass Watch List may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category are currently protected but are weak. Although concerns exist, the Company is currently protected and loss is unlikely. Such loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

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

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

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be achieved in the future.

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

 

     September 30, 2015  
     Pass      Watch List      Special Mention      Substandard      Doubtful & Loss      Total  
     (Dollars in thousands)  

Commercial and industrial

   $ 278,042       $ 95,419       $ 36,338       $ 3,668       $ 242       $ 413,709   

SBA

     72,280         22,218         13,648         6,531         1,449         116,126   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     613,734         145,354         50,171         13,560         -             822,819   

Non-owner occupied

     1,462,203         216,513         27,413         40,180         -             1,746,309   

Construction

                 

Speculative

     28,962         6,302         -             7,651         -             42,915   

Non-speculative

     14,663         -             -             -             -             14,663   

SFR mortgage

     194,265         20,104         4,241         3,086         -             221,696   

Dairy & livestock and agribusiness

     88,147         112,419         12,104         -             -             212,670   

Municipal lease finance receivables

     46,084         24,787         4,968         -             -             75,839   

Consumer and other loans

     53,327         11,797         1,667         2,748         91         69,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

   $ 2,851,707       $ 654,913       $ 150,550       $ 77,424       $ 1,782       $ 3,736,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Commercial and industrial

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

SBA

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

Real estate:

                 

Commercial real estate

                 

Owner occupied

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

Non-owner occupied

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

Construction

                 

Speculative

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

Non-speculative

     18,071         528         -         -         -         18,599   

SFR mortgage

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

Dairy & livestock and agribusiness

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

Municipal lease finance receivables

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

Consumer and other loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the allowance for loan losses 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 September 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.

 

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

Commercial and industrial

   $ 7,185       $ (82   $ 50       $ (620   $ 6,533   

SBA

     2,085         -        2         (122     1,965   

Real estate:

            

Commercial real estate

     35,414         (10     2,018         (2,811     34,611   

Construction

     746         -        8         119        873   

SFR mortgage

     2,564         -        -         75        2,639   

Dairy & livestock and agribusiness

     3,974         -        98         796        4,868   

Municipal lease finance receivables

     1,014         -        -         17        1,031   

Consumer and other loans

     834         -        11         (16     829   

Unallocated

     5,738         -        -         62        5,800   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 59,554       $ (92   $ 2,187       $ (2,500   $ 59,149   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

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

Commercial and industrial

   $ 6,037       $ (2   $ 187       $ 1,254      $ 7,476   

SBA

     2,365         -        -         (1,157     1,208   

Real estate:

            

Commercial real estate

     35,918         -        2         (286     35,634   

Construction

     605         -        37         148        790   

SFR mortgage

     2,214         -        188         (97     2,305   

Dairy & livestock and agribusiness

     5,428         (1,061     151         (241     4,277   

Municipal lease finance receivables

     1,464         -        -         4        1,468   

Consumer and other loans

     930         (7     113         (169     867   

Unallocated

     6,013         -        -         (456     5,557   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 60,974       $ (1,070   $ 678       $ (1,000   $ 59,582   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

Commercial and industrial

   $ 7,074       $ (216   $ 282       $ (607   $ 6,533   

SBA

     2,557         (33     39         (598     1,965   

Real estate:

            

Commercial real estate

     33,373         (117     3,658         (2,303     34,611   

Construction

     988         -        58         (173     873   

SFR mortgage

     2,344         (215     185         325        2,639   

Dairy & livestock and agribusiness

     5,479         -        308         (919     4,868   
Municipal lease finance receivables      1,412         -        -         (381     1,031   

Consumer and other loans

     1,262         (197     72         (308     829   

Unallocated

     5,336         -        -         464        5,800   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 59,825       $ (778   $ 4,602       $ (4,500   $ 59,149   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

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

Commercial and industrial

   $ 8,502       $ (556   $ 685       $ (1,155   $ 7,476   

SBA

     2,332         -        63         (1,187     1,208   

Real estate:

            

Commercial real estate

     39,402         (352     140         (3,556     35,634   

Construction

     1,305         -        834         (1,349     790   

SFR mortgage

     2,718         -        188         (601     2,305   

Dairy & livestock and agribusiness

     11,728         (1,061     393         (6,783     4,277   
Municipal lease finance receivables      2,335         -        -         (867     1,468   

Consumer and other loans

     960         (26     139         (206     867   

Unallocated

     5,953         -        -         (396     5,557   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 75,235       $ (1,995   $ 2,442       $ (16,100   $ 59,582   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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.

 

     September 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

   $ 1,687       $ 412,022       $ 607       $ 5,926   

SBA

     3,319         112,807         4         1,961   

Real estate:

           

Commercial real estate

     43,647         2,525,481         -         34,611   

Construction

     7,651         49,927         23         850   

SFR mortgage

     6,389         215,307         22         2,617   
Dairy & livestock and agribusiness      5,262         207,408         -         4,868   
Municipal lease finance receivables      -         75,839         -         1,031   

Consumer and other loans

     906         68,724         6         823   

Unallocated

     -         -         -         5,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,861       $ 3,667,515       $ 662       $ 58,487   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 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

   $ 4,467       $ 376,009       $ 652       $ 6,824   

SBA

     3,242         129,926         59         1,149   

Real estate:

           

Commercial real estate

     31,375         2,434,540         -         35,634   

Construction

     26,419         40,810         -         790   

SFR mortgage

     7,755         185,450         39         2,266   
Dairy & livestock and agribusiness      18,939         173,991         -         4,277   
Municipal lease finance receivables      -         80,013         -         1,468   

Consumer and other loans

     461         69,350         4         863   

Unallocated

     -         -         -         5,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 92,658       $ 3,490,089       $ 754       $ 58,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

A loan is reported as a troubled debt restructuring (“TDR”) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of 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.

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.

 

     September 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

   $ -       $ -       $ -       $ 1,051       $ 412,658       $ 413,709   

SBA

     -         -         -         2,634         113,492         116,126   

Real estate:

                 

Commercial real estate

                 

Owner occupied

     -         -         -         4,279         818,540         822,819   

Non-owner occupied

     266         -         266         12,417         1,733,626         1,746,309   

Construction

        -               

Speculative (2)

     -         -         -         -         42,915         42,915   

Non-speculative

     -         -         -         -         14,663         14,663   

SFR mortgage

     -         -         -         2,778         218,918         221,696   
Dairy & livestock and agribusiness      -         -         -         -         212,670         212,670   
Municipal lease finance receivables      -         -         -         -         75,839         75,839   

Consumer and other loans

     52         -         52         489         69,089         69,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans, excluding PCI Loans

   $ 318       $ -       $ 318       $ 23,648       $ 3,712,410       $ 3,736,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) As of September 30, 2015, $19.1 million of nonaccruing loans were current, $371,000 were 30-59 days past due, $2.3 million were 60-89 days past due and $1.9 million were 90+ days past due.
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

20


Table of Contents
     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 past due.

 

21


Table of Contents

Impaired Loans

At September 30, 2015, the Company had impaired loans, excluding PCI loans, of $68.9 million. Of this amount, there were $16.7 million of nonaccrual commercial real estate loans, $2.8 million of nonaccrual SFR mortgage loans, $2.6 million of nonaccrual SBA loans, $1.1 million of nonaccrual commercial and industrial loans and $489,000 of nonaccrual consumer and other loans. These impaired loans included $60.4 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 $45.2 million consisted of 32 loans performing according to the restructured terms. The impaired loans had a specific allowance of $662,000 at September 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 Nine Months Ended
September 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

   $ 1,067       $ 1,926       $ -       $ 1,166       $ 23   

SBA

     3,273         3,911         -         3,385         39   

Real estate:

              

Commercial real estate

              

Owner occupied

     7,665         8,806         -         7,935         178   

Non-owner occupied

     35,982         40,591         -         36,490         1,338   

Construction

              

Speculative

     -         -         -         -         -   

Non-speculative

     -         -         -         -         -   

SFR mortgage

     5,788         6,739         -         6,392         82   

Dairy & livestock and agribusiness

     5,262         5,650         -         5,569         180   

Municipal lease finance receivables

     -         -         -         -         -   

Consumer and other loans

     852         1,379         -         881         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     59,889         69,002         -         61,818         1,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
With a related allowance recorded:               

Commercial and industrial

     620         694         607         637         -   

SBA

     46         47         4         58         -   

Real estate:

              

Commercial real estate

              

Owner occupied

     -         -         -         -         -   

Non-owner occupied

     -         -         -         -         -   

Construction

              

Speculative

     7,651         7,651         23         7,651         290   

Non-speculative

     -         -         -         -         -   

SFR mortgage

     601         653         22         612         9   

Dairy & livestock and agribusiness

     -         -         -         -         -   

Municipal lease finance receivables

     -         -         -         -         -   

Consumer and other loans

     54         59         6         56         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,972         9,104         662         9,014         299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 68,861       $ 78,106       $ 662       $ 70,832       $ 2,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     As of and For the Nine Months Ended
September 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

   $ 2,913       $ 3,954       $ -       $ 2,912       $ 44   

SBA

     3,183         3,907         -         2,937         -   

Real estate:

              

Commercial real estate

              

Owner occupied

     8,742         9,896         -         9,025         238   

Non-owner occupied

     22,633         29,545         -         23,252         541   

Construction

              

Speculative

     17,318         18,407         -         17,440         232   

Non-speculative

     9,101         9,101         -         9,145         463   

SFR mortgage

     7,285         9,685         -         7,934         82   

Dairy & livestock and agribusiness

     18,939         20,698         -         21,205         819   

Municipal lease finance receivables

     -         -         -         -         -   

Consumer and other loans

     450         876         -         455         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     90,564         106,069         -         94,305         2,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     1,554         1,882         652         1,560         -   

SBA

     59         69         59         66         -   

Real estate:

              

Commercial real estate

              

Owner occupied

     -         -         -         -         -   

Non-owner occupied

     -         -         -         -         -   

Construction

              

Speculative

     -         -         -         -         -   

Non-speculative

     -         -         -         -         -   

SFR mortgage

     470         484         39         476         -   

Dairy & livestock and agribusiness

     -         -         -         -         -   

Municipal lease finance receivables

     -         -         -         -         -   

Consumer and other loans

     11         15         4         12         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,094         2,450         754         2,114         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 92,658       $ 108,519       $ 754       $ 96,419       $ 2,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 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 September 30, 2015, compared to a $1.3 million recapture of provision for unfunded commitments for the same period in 2014. A $500,000 recapture of provision for unfunded loan commitments was recorded for the nine months ended September 30, 2015, compared to a $1.3 million recapture of provision for unfunded commitments for the same

 

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period of 2014. At September 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.

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 September 30, 2015, there were $60.4 million of loans classified as TDRs, of which $15.2 million were nonperforming and $45.2 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 September 30, 2015, performing TDRs were comprised of 11 commercial real estate loans of $27.0 million, one construction loan of $7.6 million, three dairy & livestock and agribusiness loans of $5.3 million, 11 SFR mortgage loans of $3.6 million, four commercial and industrial loans of $636,000, one SBA loan of $685,000 and one consumer loan of $417,000. There were no loans removed from TDR classification during the three and nine months ended September 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 $419,000 and $726,000 of specific allowance to TDRs as of September 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
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Dollars in thousands)  

Performing TDRs:

           

Beginning balance

   $ 45,166       $ 61,878       $ 53,589       $ 66,955   

New modifications (1)

     2,353         -             2,383         41   

Payoffs and payments, net

     (2,306      (6,270      (11,275      (11,388

TDRs returned to accrual status

     -             -             516         -       

TDRs placed on nonaccrual status

     -             -             -             -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 45,213       $ 55,608       $ 45,213       $ 55,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming TDRs:

           

Beginning balance

   $ 15,167       $ 27,397       $ 20,285       $ 25,119   

New modifications (1)

     330         -             661         4,187   

Charge-offs

     -             (1,061      -             (1,061

Transfer to OREO

     -             -             (842      -       

Payoffs and payments, net

     (349      (3,730      (4,440      (5,639

TDRs returned to accrual status

     -             -             (516      -       

TDRs placed on nonaccrual status

     -             -             -             -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 15,148       $ 22,606       $ 15,148       $ 22,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 60,361       $ 78,214       $ 60,361       $ 78,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Modifications (1)

 

    For the Three Months Ended September 30, 2015  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
September 30, 2015
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  
Commercial and industrial:          

Interest rate reduction

    -          $ -          $ -          $ -          $ -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

SBA:

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

Non-owner occupied

         

Interest rate reduction

    1        2,376        2,376        2,353        -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

SFR mortgage:

         

Interest rate reduction

    1        322        322        330        -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

Consumer:

         

Interest rate reduction

    -            -            -            -            -       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    2      $ 2,698      $ 2,698      $ 2,683      $ -       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended September 30, 2014  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
September 30, 2014
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  
Commercial and industrial:          

Interest rate reduction

    -          $ -          $ -          $ -          $ -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

SBA:

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

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

    -          $ -          $ -          $ -          $ -       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    For the Nine Months Ended September 30, 2015  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
September 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        15        12   

Other

    -            -            -            -            -       

SBA:

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    1        330        330        325        -       

Other

    -            -            -            -            -       

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

Non-owner occupied

         

Interest rate reduction

    1        2,376        2,376        2,353        -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

SFR mortgage:

         

Interest rate reduction

    1        322        322        330        -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       
Dairy & livestock and agribusiness:          

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

Consumer:

         

Interest rate reduction

    -            -            -            -            -       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    4      $ 3,058      $ 3,058      $ 3,023      $ 12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine Months Ended September 30, 2014  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
September 30, 2014
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction (3)

    2      $ 368      $ 368      $ 337      $ -       

Change in amortization period or maturity

    -            -            -            -            -       

SBA:

         

Interest rate reduction

    -            -            -            -            -       

Change in amortization period or maturity

    -            -            -            -            -       

Other

    -            -            -            -            -       

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction (3)

    1        199        199        187        -       

Change in amortization period or maturity

    -            -            -            -            -       

Non-owner occupied

         

Interest rate reduction (3)

    3        3,573        3,573        3,469        -       

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

    6      $ 4,140      $ 4,140      $ 3,993      $ -       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1) The tables above 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 nine months ended September 30, 2014 represent TDRs acquired from ASB.

 

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

 

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 nine months ended September 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 251,000 and 234,000, respectively. For the three and nine months ended September 30, 2014, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 222,000 and 199,000 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
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (In thousands, except per share amounts)  

Earnings per common share:

           

Net earnings

   $ 27,886       $ 24,295       $ 70,532       $ 78,440   

Less: Net earnings allocated to restricted stock

     149         134         371         409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common shareholders

   $ 27,737       $ 24,161       $ 70,161       $ 78,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     105,783         104,875         105,672         105,218   

Basic earnings per common share

   $ 0.26       $ 0.23       $ 0.66       $ 0.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net income allocated to common shareholders

   $ 27,737       $ 24,161       $ 70,161       $ 78,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     105,783         104,875         105,672         105,218   

Incremental shares from assumed exercise of outstanding options

     498         531         467         542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     106,281         105,406         106,139         105,760   

Diluted earnings per common share

   $ 0.26       $ 0.23       $ 0.66       $ 0.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 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- includes assets and liabilities that have an active market that provides an objective quoted value for each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most objective measurement of fair value. Level 2 is less objective and Level 3 is the least objective (most subjective) in estimating fair value.

 

    Level 2- assets and liabilities are ones where there is no active market in the same assets, but where there are parallel markets or alternative means to estimate fair value using observable information inputs such as the value placed on similar assets or liability that were recently traded.

 

    Level 3 -fair values are based on information from the entity that reports these values in their financial statements. Such data are referred to as unobservable, in that the valuations are not based on data available to parties outside the entity.

 

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Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy. Inputs here refer explicitly to the types of information used to obtain the fair value of the asset or liability.

Observable inputs include data sources and market prices available and visible outside of the entity. While there will continue to be judgments required when an active market price is not available, these inputs are external to the entity and observable outside the entity; they are consequently considered more objective than internal unobservable inputs used for Level 3 fair value.

Unobservable inputs are data and analyses that are developed within the entity to assess the fair value, such as management estimates of future benefits from use of assets.

There were no transfers in and out of Level 1 and Level 2 measurements during the nine months ended September 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.

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 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.

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

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

 

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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, each 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.

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
September 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

  $ 20,768      $ -      $ 20,768      $ -   

Residential mortgage-backed securities

    1,711,545        -        1,711,545        -   

CMO’s/REMIC’s - residential

    388,497        -        388,497        -   

Municipal bonds

    186,898        -        186,898        -   

Other securities

    5,013        -        5,013        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities - AFS

    2,312,721        -        2,312,721        -   

Interest rate swaps

    11,694        -        11,694        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,324,415      $ -      $ 2,324,415      $ -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

  $ 11,694      $ -      $ 11,694      $ -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 11,694      $ -      $ 11,694      $ -   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    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      $ -   
 

 

 

   

 

 

   

 

 

   

 

 

 

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 September 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
September 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 Nine
Months Ended
September 30, 2015
 
    (Dollars in thousands)  

Description of assets

         

Impaired loans, excluding PCI Loans:

         

Commercial and industrial

  $ 202      $ -      $ -      $ 202      $ 202   

SBA

    46        -        -        46        4   

Real estate:

         

Commercial real estate

    -        -        -        -        -   

Construction

    7,651        -        -        7,651        23   

SFR mortgage

    610        -        -        610        237   

Dairy & livestock and agribusiness

    -        -        -        -        -   

Consumer and other loans

    249        -        -        249        81   

Other real estate owned

    948        -        -        948        162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 9,706      $ -      $ -      $ 9,706      $ 709   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of September 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.

 

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

Assets

              

Total cash and cash equivalents

   $ 308,227       $ 308,227       $ -           $ -           $ 308,227   

Interest-earning balances due from depository institutions

     33,189         -             33,189         -             33,189   

FHLB stock

     17,588         -             17,588         -             17,588   

Investment securities available-for-sale

     2,312,721         -             2,312,721         -             2,312,721   

Investment securities held-to-maturity

     869,650         -             874,446         1,937         876,383   

Total loans, net of allowance for loan losses

     3,763,022         -             -             3,809,324         3,809,324   

Swaps

     11,694         -             11,694         -             11,694   

Liabilities

              

Deposits:

              

Noninterest-bearing

   $ 3,304,967       $ 3,304,967       $ -           $ -           $ 3,304,967   

Interest-bearing

     2,654,505         -             2,654,501         -             2,654,501   

Borrowings

     610,174         -             610,103         -             610,103   

Junior subordinated debentures

     25,774         -             26,031         -             26,031   

Swaps

     11,694         -             11,694         -             11,694   

 

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Table of Contents
     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   

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 September 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 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, and the Bank will have four additional Business Financial Centers if, as expected, the acquisition of County Commerce Bank is consummated. 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 September 30, 2015  
     Centers      Treasury     Other     Eliminations     Total  
     (Dollars in thousands)  

Interest income, including loan fees

   $ 36,998       $ 18,927      $ 11,806      $ -          $ 67,731   

Credit for funds provided (1)

     8,977         -            13,249        (22,226     -       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     45,975         18,927        25,055        (22,226     67,731   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     1,654         58        102        -            1,814   

Charge for funds used (1)

     1,088         15,983        5,155        (22,226     -       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,742         16,041        5,257        (22,226     1,814   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     43,233         2,886        19,798        -            65,917   

Recapture of provision for loan losses

     -             -            (2,500     -            (2,500
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     43,233         2,886        22,298        -            68,417   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

     5,276         (22     3,159        -            8,413   

Noninterest expense

     12,496         219        20,027        -            32,742   

Debt termination expense

     -             -            -            -            -       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

   $ 36,013       $ 2,645      $ 5,430      $ -          $ 44,088   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets as of September 30, 2015

   $ 6,419,264       $ 3,505,392      $ 809,514      $ (3,107,708   $ 7,626,462   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 September 30, 2014  
     Centers      Treasury      Other     Eliminations     Total  
            (Dollars in thousands)        

Interest income, including loan fees

   $ 35,384       $ 18,397       $ 11,514      $ -          $ 65,295   

Credit for funds provided (1)

     8,190         -             12,037        (20,227     -       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     43,574         18,397         23,551        (20,227     65,295   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     1,637         2,415         5        -            4,057   

Charge for funds used (1)

     1,061         14,374         4,792        (20,227     -       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,698         16,789         4,797        (20,227     4,057   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     40,876         1,608         18,754        -            61,238   

Recapture of provision for loan losses

     -             -             (1,000     -            (1,000
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     40,876         1,608         19,754        -            62,238   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

     5,288         -             2,721        -            8,009   

Noninterest expense

     12,221         186         20,074        -            32,481   

Debt termination expense

     -             -             -            -            -       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment pre-tax profit

   $ 33,943       $ 1,422       $ 2,401      $ -          $ 37,766   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets as of September 30, 2014

   $ 6,086,641       $ 3,431,467       $ 792,404      $ (2,887,663   $ 7,422,849   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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

 

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

Interest income, including loan fees

   $ 108,179       $ 56,792      $ 31,455      $ -          $ 196,426   

Credit for funds provided (1)

     25,718         -            38,914        (64,632     -       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     133,897         56,792        70,369        (64,632     196,426   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     4,945         1,520        277        -            6,742   

Charge for funds used (1)

     3,207         46,230        15,195        (64,632     -       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     8,152         47,750        15,472        (64,632     6,742   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     125,745         9,042        54,897        -            189,684   

Recapture of provision for loan losses

     -             -            (4,500     -            (4,500
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after recapture of provision for loan losses

     125,745         9,042        59,397        -            194,184   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

     15,662         (22     9,129        -            24,769   

Noninterest expense

     36,604         643        57,630        -            94,877   

Debt termination expense

     -             13,870        -            -            13,870   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment pre-tax profit (loss)

   $ 104,803       $ (5,493   $ 10,896      $ -          $ 110,206   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets as of September 30, 2015

   $ 6,419,264       $ 3,505,392      $ 809,514      $ (3,107,708   $ 7,626,462   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 Nine Months Ended September 30, 2014  
     Centers      Treasury      Other     Eliminations     Total  
            (Dollars in thousands)        

Interest income, including loan fees

   $ 103,158       $ 52,504       $ 31,911      $ -          $ 187,573   

Credit for funds provided (1)

     22,924         -             34,914        (57,838     -       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     126,082         52,504         66,825        (57,838     187,573   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     4,835         7,178         221        -            12,234   

Charge for funds used (1)

     2,978         40,607         14,253        (57,838     -       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     7,813         47,785         14,474        (57,838     12,234   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     118,269         4,719