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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 March 31, 2016

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: 107,806,175 outstanding as of April 29, 2016.


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 CONDITIONAND RESULTS OF OPERATIONS      39   
   CRITICAL ACCOUNTING POLICIES      39   
   OVERVIEW      39   
   ANALYSIS OF THE RESULTS OF OPERATIONS      41   
   RESULTS BY BUSINESS SEGMENTS      51   
   ANALYSIS OF FINANCIAL CONDITION      54   
   ASSET/LIABILITY AND MARKET RISK MANAGEMENT      72   

    ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      74   

    ITEM 4.

   CONTROLS AND PROCEDURES      74   

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      76   

    ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      76   

    ITEM 4.

   MINE SAFETY DISCLOSURES      76   

    ITEM 5.

   OTHER INFORMATION      76   

    ITEM 6.

   EXHIBITS      77   

SIGNATURES

     78   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. 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, compliance, fair lending, 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 commercial or consumer spending, borrowing and savings preferences or behaviors; technological changes and the expanding use of technology in banking (including the adoption of mobile banking and funds transfer 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; 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 and the resulting impact on the Company’s ability to raise capital or make acquisitions; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our 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 securities, 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, 2015, 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.

 

3


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)

           March 31,      
2016
       December 31,  
2015
 

Assets

     

Cash and due from banks

     $ 108,145           $ 102,772     

Interest-earning balances due from Federal Reserve and federal funds sold

     131,441           3,325     
  

 

 

    

 

 

 

Total cash and cash equivalents

     239,586           106,097     
  

 

 

    

 

 

 

Interest-earning balances due from depository institutions

     90,718           32,691     

Investment securities available-for-sale, at fair value (with amortized cost of $2,235,684 at March 31, 2016, and $2,337,715 at December 31, 2015)

     2,294,659           2,368,646     

Investment securities held-to-maturity (with fair value of $825,928 at March 31, 2016, and $853,039 at December 31, 2015)

     812,893           850,989     

Investment in stock of Federal Home Loan Bank (FHLB)

     18,501           17,588     

Loans and lease finance receivables

     4,173,409           4,016,937     

Allowance for loan losses

     (59,336)          (59,156)    
  

 

 

    

 

 

 

Net loans and lease finance receivables

     4,114,073           3,957,781     
  

 

 

    

 

 

 

Premises and equipment, net

     39,922           31,382     

Bank owned life insurance

     131,594           130,956     

Accrued interest receivable

     23,067           22,732     

Intangibles

     5,882           2,265     

Goodwill

     88,174           74,244     

Other real estate owned

     6,545           6,993     

Income taxes

     23,029           47,251     

Other assets

     32,193           21,585     
  

 

 

    

 

 

 

Total assets

     $ 7,920,836           $ 7,671,200     
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Deposits:

     

Noninterest-bearing

     $ 3,352,128           $ 3,250,174     

Interest-bearing

     2,864,150           2,667,086     
  

 

 

    

 

 

 

Total deposits

     6,216,278           5,917,260     

Customer repurchase agreements

     626,860           690,704     

FHLB advances

     5,000           -         

Other borrowings

     -               46,000     

Accrued interest payable

     275           264     

Deferred compensation

     11,809           11,269     

Junior subordinated debentures

     25,774           25,774     

Payable for securities purchased

     4,152           1,696     

Other liabilities

     58,826           54,834     
  

 

 

    

 

 

 

Total liabilities

     6,948,974           6,747,801     
  

 

 

    

 

 

 

Commitments and Contingencies

     

Stockholders’ Equity

     

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 107,786,175 at March 31, 2016, and 106,384,982 at December 31, 2015

     524,760           502,571     

Retained earnings

     410,376           399,919     

Accumulated other comprehensive income, net of tax

     36,726           20,909     
  

 

 

    

 

 

 

Total stockholders’ equity

     971,862           923,399     
  

 

 

    

 

 

 

 Total liabilities and stockholders’ equity

     $ 7,920,836           $ 7,671,200     
  

 

 

    

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended
March 31,
 
     2016      2015  

Interest income:

     

Loans and leases, including fees

     $ 45,770           $ 45,542     

Investment securities:

     

Investment securities available-for-sale

     12,799           17,934     

Investment securities held-to-maturity

     5,348           38     
  

 

 

    

 

 

 

Total investment income

     18,147           17,972     
  

 

 

    

 

 

 

  Dividends from FHLB stock

     368           469     

  Federal funds sold

     105           142     

  Interest-earning deposits with other institutions

     110           55     
  

 

 

    

 

 

 

Total interest income

     64,500           64,180     
  

 

 

    

 

 

 

Interest expense:

     

Deposits

     1,437           1,293     

Borrowings

     423           1,773     

Junior subordinated debentures

     124           105     
  

 

 

    

 

 

 

Total interest expense

     1,984           3,171     
  

 

 

    

 

 

 

Net interest income before provision for loan losses

     62,516           61,009     

Provision for loan losses

     -           -     
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     62,516           61,009     
  

 

 

    

 

 

 

Noninterest income:

     

Service charges on deposit accounts

     3,747           3,961     

Trust and investment services

     2,203           2,151     

Bankcard services

     555           733     

BOLI income

     547           649     

Gain on sale of loans

     1,101           -     

Other

     530           517     
  

 

 

    

 

 

 

Total noninterest income

     8,683           8,011     
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries and employee benefits

     21,253           19,295     

Occupancy and equipment

     3,713           3,652     

Professional services

     1,366           1,153     

Software licenses and maintenance

     909           1,030     

Promotion

     1,427           1,327     

Recapture of provision for unfunded loan commitments

     -           (500)    

Debt termination expense

     -           13,870     

Acquisition related expenses

     849           -     

Other

     4,847           4,645     
  

 

 

    

 

 

 

Total noninterest expense

     34,364           44,472     
  

 

 

    

 

 

 

Earnings before income taxes

     36,835           24,548     
  

 

 

    

 

 

 

Income taxes

     13,444           8,715     
  

 

 

    

 

 

 

Net earnings

     $             23,391           $             15,833     
  

 

 

    

 

 

 

Other comprehensive income:

     

Unrealized gain on securities arising during the period, before tax

     $ 27,270           $ 20,270     

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

     (11,453)          (8,514)    
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     15,817           11,756     
  

 

 

    

 

 

 

Comprehensive income

     $ 39,208           $ 27,589     
  

 

 

    

 

 

 

Basic earnings per common share

     $ 0.22           $ 0.15     

Diluted earnings per common share

     $ 0.22           $ 0.15     

Cash dividends declared per common share

     $ 0.12           $ 0.12     

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

Three months ended March 31, 2016 and 2015

(Dollars and shares in thousands)

(Unaudited)

 

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

Balance, January 1, 2015

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

Repurchase of common stock

     (32)          (497)          -           -           (497)    

Exercise of stock options

     306           3,313           -           -           3,313     

Tax benefit from exercise of stock options

     -           614           -           -           614     

Shares issued pursuant to stock-based
compensation plan

     80           732           -           -           732     

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

     -           -           (12,742)          -           (12,742)    

Net earnings

     -           -           15,833           -           15,833     

Other comprehensive loss

     -           -           -           11,756           11,756     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, March 31, 2015

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, January 1, 2016

     106,385           $ 502,571           $ 399,919           $ 20,909           $ 923,399     

Repurchase of common stock

     (31)          (392)          -           -           (392)    

Issuance of common stock for acquisition of County Commerce Bank

     1,394           21,642           -           -           21,642     

Exercise of stock options

     25           285           -           -           285     

Tax benefit from exercise of stock options

     -           -           -           -           -     

Shares issued pursuant to stock-based
compensation plan

     13           654           -           -           654     

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

     -           -           (12,934)          -           (12,934)    

Net earnings

     -           -           23,391           -           23,391     

Other comprehensive income

     -           -           -           15,817           15,817     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, March 31, 2016

     107,786           $ 524,760           $ 410,376           $ 36,726           $ 971,862     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Three Months Ended        
March 31,
 
     2016      2015  

Cash Flows from Operating Activities

     

Interest and dividends received

     $ 68,927           $ 68,591     

Service charges and other fees received

     8,081           6,848     

Interest paid

     (1,980)          (3,981)    

Net cash paid to vendors, employees and others

     (43,524)          (43,608)    

Income taxes paid

     -           -     

(Payments to) proceeds from FDIC, loss share agreement

     (174)          265     
  

 

 

    

 

 

 

Net cash provided by operating activities

     31,330           28,115     
  

 

 

    

 

 

 

Cash Flows from Investing Activities

     

Proceeds from redemption of FHLB stock

     610           -     

Proceeds from maturity of interest-earning balances from depository institutions

     4,309           1,245     

Proceeds from repayment of investment securities available-for-sale

     95,004           94,479     

Proceeds from maturity of investment securities available-for-sale

     16,505           34,014     

Purchases of investment securities available-for-sale

     (9,888)          (1,967)    

Proceeds from repayment of investment securities held-to-maturity

     12,236           -     

Proceeds from maturity of investment securities held-to-maturity

     24,796           -     

Net decrease in loan and lease finance receivables

     8,331           101,774     

Proceeds from sale of loans

     6,417           -     

Purchase of premises and equipment

     (911)          (157)    

Proceeds from sales of other real estate owned

     200           1,418     

Cash paid for County Commerce Bank (CCB) acquisition, net of cash acquired

     (7,504)          -     
  

 

 

    

 

 

 

Net cash provided by investing activities

     150,105           230,806     
  

 

 

    

 

 

 

Cash Flows from Financing Activities

     

Net increase in other deposits

     101,042           322,642     

Net decrease in time deposits

     (26,271)          (29,524)    

Repayment of FHLB advances

     -           (200,000)    

Net decrease in other borrowings

     (46,000)          (46,000)    

Net decrease in customer repurchase agreements

     (63,844)          (3,275)    

Cash dividends on common stock

     (12,766)          (10,590)    

Repurchase of common stock

     (392)          (497)    

Proceeds from exercise of stock options

     285           3,313     

Tax benefit related to exercise of stock options

     -           614     
  

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (47,946)          36,683     
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     133,489           295,604     

Cash and cash equivalents, beginning of period

     106,097           105,768     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 239,586           $ 401,372     
  

 

 

    

 

 

 

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 Three Months Ended        
March 31,
 
     2016      2015  

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

     

Net earnings

     $ 23,391           $ 15,833     

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

     

Gain on sale of loans

     (1,101)          -     

Gain on sale of premises and equipment, net

     -           (1)    

Gain on sale of other real estate owned

     -           (112)    

Amortization of capitalized prepayment penalty on borrowings

     -           521     

Increase in bank owned life insurance

     (638)          (630)    

Net amortization of premiums and discounts on investment securities

     5,177           5,025     

Accretion of PCI discount

     (800)          (980)    

Provision for unfunded loan commitments

     -           (500)    

Valuation adjustment on other real estate owned

     248           33     

Change in FDIC loss share liability/asset

     53           299     

(Payments to) proceeds from FDIC, loss share agreement

     (174)          265     

Stock-based compensation

     654           732     

Depreciation and amortization, net

     137           (271)    

Change in accrued interest receivable

     160           322     

Change in accrued interest payable

     3           (855)    

Change in other assets and liabilities

     4,220           8,434     
  

 

 

    

 

 

 

Total adjustments

     7,939           12,282     
  

 

 

    

 

 

 

Net cash provided by operating activities

     $ 31,330           $ 28,115     
  

 

 

    

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

     

Securities purchased and not settled

     $ 4,152           $ 2,350     

Transfer of loans to other real estate owned

     $ -               $ 2,824     

Issuance of common stock for CCB acquistion

     $ 21,642           $ -         

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BUSINESS

The condensed consolidated financial statements include the accounts of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary: Citizens Business Bank (the “Bank” or “CBB”) after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through 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, San Diego County, Ventura County, Santa Barbara, and the Central Valley area of California. The Bank operates 44 Business Financial Centers, eight Commercial Banking Centers, and three trust offices. The Company is headquartered in the city of Ontario, California.

On February 29, 2016, we announced the completion of our acquisition of County Commerce Bank (“CCB”), headquartered in Ventura County with four branch locations in Ventura County with total assets of approximately $253 million. This acquisition extends our geographic footprint northward into the central coast of California. Our condensed consolidated financial statements for the first quarter include 31 days of CCB operations, post-merger. See Note 4 – Business Combinations, included herein.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2016 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, 2015, 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, 2015 as filed with the SEC (“Form 10-K”).

Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates which may be subject to change include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.

 

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Recent Accounting Pronouncements— In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 amends the guidance in U.S. GAAP on the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is currently evaluating the impact on its consolidated financial statements.

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for the fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

 

4. BUSINESS COMBINATIONS

County Commerce Bank Acquisition

On February 29, 2016, the Bank acquired all of the assets and assumed all of the liabilities of CCB for $20.6 million in cash and $21.6 million in stock. As a result, CCB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction serves to further expand its footprint northward into and along the central coast of California. At close, CCB had four branches located in the communities of: Ventura, Oxnard, Camarillo, and Westlake Village. The integration of CCB and CBB was completed in April 2016. This included personnel decisions and system conversions.

Goodwill of $13.9 million from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

The total fair value of assets acquired approximated $252.4 million, which included $54.8 million in cash and balances due from depository institutions, $1.5 million in FHLB stock, $168.0 million in loans and lease finance receivables, $8.6 million in fixed assets, $3.9 million in core deposit intangible assets acquired and $1.7 million in other assets. The total fair value of liabilities assumed was $230.8 million, which included $224.2 million in deposits, $5.0 million in FHLB advances and $1.6 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of February 29, 2016. The assets acquired and liabilities assumed have been accounted for under the acquisition method accounting. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.

For the three months ended March 31, 2016, the Company incurred non-recurring merger related expenses associated with the CCB acquisition of $849,000.

 

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5. INVESTMENT SECURITIES

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

 

    March 31, 2016  
      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

   $ 5,750         $ 10         $ -          $ 5,760          0.25%    

Residential mortgage-backed securities

    1,710,383          48,667          -           1,759,050          76.66%    

CMOs/REMICs - residential

    360,790          7,745          -           368,535          16.06%    

Municipal bonds

    153,761          2,523          (59)         156,225          6.81%    

Other securities

    5,000          89          -           5,089          0.22%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $   2,235,684         $ 59,034         $ (59)        $   2,294,659          100.00%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held-to-maturity (1):

         

Government agency/GSEs

   $ 272,934         $ 5,687         $ -          $ 278,621          33.58%    

Residential mortgage-backed securities

    225,079          3,085          -           228,164          27.69%    

CMO

    1,226          499          -           1,725          0.15%    

Municipal bonds

    313,654          4,788          (1,024)         317,418          38.58%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

   $ 812,893         $         14,059         $         (1,024)        $ 825,928                  100.00%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2015  
    Amortized
Cost
    Gross
Unrealized
Holding

Gain
    Gross
Unrealized
Holding

Loss
    Fair Value     Total
Percent
 
    (Dollars in thousands)  

Investment securities available-for-sale:

         

Government agency/GSEs

   $ 5,752         $ -         $ (7)        $ 5,745          0.24%    

Residential mortgage-backed securities

    1,788,857          26,001          (1,761)         1,813,097          76.55%    

CMOs/REMICs - residential

    380,166          4,689          (1,074)         383,781          16.20%    

Municipal bonds

    157,940          3,036          (3)         160,973          6.80%    

Other securities

    5,000          50          -           5,050          0.21%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 2,337,715         $ 33,776         $ (2,845)        $ 2,368,646          100.00%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held-to-maturity (1):

         

Government agency/GSEs

   $ 293,338         $ 1,176         $ (734)        $ 293,780          34.47%    

Residential mortgage-backed securities

    232,053          -          (1,293)         230,760          27.27%    

CMO

    1,284          569          -           1,853          0.15%    

Municipal bonds

    324,314          3,051          (719)         326,646          38.11%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

   $ 850,989         $ 4,796         $ (2,746)        $ 853,039          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. At March 31, 2016, investment securities HTM totaled $812.9 million. The after-tax unrealized gain reported in AOCI on investment securities HTM was $2.5 million at March 31, 2016.

 

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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 March 31,
        
     2016      2015    
     (Dollars in thousands)    

Investment securities available-for-sale:

       

Taxable

    $ 11,380          $ 12,923       

Tax-advantaged

     1,419           5,011       

Investment securities held-to-maturity:

       

Taxable

     2,620           38       

Tax-advantaged

     2,728           -       
  

 

 

    

 

 

   

Total interest income from investment securities

    $     18,147          $     17,972       
  

 

 

    

 

 

   

Approximately 85% of the total investment securities portfolio at March 31, 2016 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale Collateralized Mortgage Obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2016 and December 31, 2015. At March 31, 2016, the Bank had $1.4 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 March 31, 2016 and December 31, 2015. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.

 

    March 31, 2016  
    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

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

Residential mortgage-backed securities

    -          -           -          -           -          -      

CMOs/REMICs - residential

    -          -           -          -           -          -      

Municipal bonds

    3,656          (58)         5,966          (1)         9,622          (59)    

Other securities

    -          -           -          -           -          -      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale  securities

   $ 3,656         $ (58)        $         5,966         $           (1)        $ 9,622         $ (59)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held-to-maturity:

           

Government agency/GSEs

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

Residential mortgage-backed securities

    -          -           -          -           -          -      

CMO

    -          -           -          -           -          -      

Municipal bonds

    92,467          (1,024)         -          -           92,467          (1,024)    

Other securities

    -          -           -          -           -          -      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity  securities

   $       92,467         $       (1,024)        $ -         $ -          $       92,467         $       (1,024)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    December 31, 2015  
    Less Than 12 Months     12 Months or Longer     Total  
    Fair Value     Gross
Unrealized
Holding
Losses
    Fair Value     Gross
  Unrealized  
Holding
Losses
    Fair Value     Gross
Unrealized
Holding
Losses
 
    (Dollars in thousands)  

Investment securities available-for-sale:

           

Government agency/GSEs

    $ 5,745          $ (7)         $ -          $ -           $ 5,745          $ (7)    

Residential mortgage-backed securities

    437,699          (1,761)         -          -           437,699          (1,761)    

CMOs/REMICs - residential

    171,923          (1,074)         -          -           171,923          (1,074)    

Municipal bonds

    398          (2)         5,961          (1)         6,359          (3)    

Other securities

    -          -           -          -           -          -      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

    $     615,765          $ (2,844)         $         5,961          $             (1)         $ 621,726          $ (2,845)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held-to-maturity:

           

Government agency/GSEs

    $ 84,495          $ (734)         $ -          $ -           $ 84,495          $ (734)    

Residential mortgage-backed securities

    230,760          (1,293)         -          -           230,760          (1,293)    

CMO

    -          -          -          -           -          -      

Municipal bonds

    110,119          (719)         -          -           110,119          (719)    

Other securities

    -          -           -          -           -          -      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

    $ 425,374          $ (2,746)         $ -          $ -           $     425,374          $       (2,746)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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. As of March 31, 2016, approximately $201.1 million in U.S. government agency bonds were callable. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Company will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the bonds.

Mortgage-Backed Securities (“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 3.8 years. Of the total MBS/CMO, 99.94% have the implied guarantee of U.S. Government-Sponsored Agencies and Enterprises. The remaining 0.06% 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 months ended March 31, 2016 and December 31, 2015.

Municipal Bonds—The majority of the municipal bonds, with maturities of approximately 8.5 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 March 31, 2016.

 

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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.

At March 31, 2016 and December 31, 2015, investment securities having a carrying value of approximately $2.76 billion and $2.81 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at March 31, 2016, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMOs/REMICs have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMOs/REMICs are included in maturity categories based upon estimated prepayment speeds.

 

    March 31, 2016     

    

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

Due in one year or less

    $ 15,931          $ 16,125          $ -          $ -        

Due after one year through five years

    1,789,155          1,837,957          149,171          150,627        

Due after five years through ten years

    145,732          148,847          366,305          370,388        

Due after ten years

    284,866          291,730          297,417          304,913        
 

 

 

   

 

 

   

 

 

   

 

 

    

Total investment securities

    $   2,235,684          $   2,294,659          $     812,893          $     825,928        
 

 

 

   

 

 

   

 

 

   

 

 

    

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2016.

 

6. 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, 2015. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans. The application of the purchase method of accounting resulted in an after-tax gain of $12.3 million which was included in 2009 earnings. The gain is the negative goodwill resulting from the acquired assets and liabilities recognized at fair value.

At March 31, 2016, the remaining discount associated with the PCI loans approximated $3.1 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $1.6 million of the related discount is expected to accrete into interest income over the remaining average lives of the respective pools, which approximates 3 years. The loss sharing agreement for commercial loans expired October 16, 2014.

 

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The following table provides a summary of PCI loans and lease finance receivables by type and their credit quality indicators for the periods indicated.

 

      March 31, 2016       December 31, 2015 
    (Dollars in thousands)

Commercial and industrial

      $ 7,147            $ 7,473       

SBA

      370            393       

Real estate:

           

Commercial real estate

      74,598            81,786       

Construction

      -            -       

SFR mortgage

      190            193       

Dairy & livestock and agribusiness

      255            1,429       

Municipal lease finance receivables

      -            -       

Consumer and other loans

      2,400            2,438       
   

 

 

      

 

 

      

Gross PCI loans

      84,960            93,712       

Less: Purchase accounting discount

      (3,110)           (3,872)      
   

 

 

      

 

 

      

Gross PCI loans, net of discount

      81,850            89,840       

Less: Allowance for PCI loan losses

      -            -       
   

 

 

      

 

 

      

Net PCI loans

      $           81,850            $            89,840       
   

 

 

      

 

 

      

Credit Quality Indicators

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

 

      March 31, 2016       December 31, 2015 
    (Dollars in thousands)     

Pass

      $ 68,474            $ 76,401       

Special mention

      10,842            11,142       

Substandard

      5,644            6,169       

Doubtful & loss

      -            -       
   

 

 

      

 

 

      

Total PCI gross loans

      $            84,960            $            93,712       
   

 

 

      

 

 

      

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, 2015. As of March 31, 2016 and December 31, 2015, there were no allowances for loan losses recorded for PCI loans.

 

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7. 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.

 

      March 31, 2016       December 31, 2015  
    (Dollars in thousands)     

Commercial and industrial

      $ 466,961            $ 434,099        

SBA

      113,703            106,867        

Real estate:

          

Commercial real estate

            2,819,119                  2,643,184        

Construction

      89,648            68,563        

SFR mortgage

      232,965            233,754        

Dairy & livestock and agribusiness

      227,710            305,509        

Municipal lease finance receivables

      73,098            74,135        

Consumer and other loans

      76,103            69,278        
   

 

 

     

 

 

      

Gross loans, excluding PCI loans

      4,099,307            3,935,389        

Less: Deferred loan fees, net

      (7,748)           (8,292)       
   

 

 

     

 

 

      

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

      4,091,559            3,927,097        

Less: Allowance for loan losses

      (59,336)           (59,156)       
   

 

 

     

 

 

      

Net loans, excluding PCI loans

      4,032,223            3,867,941        
   

 

 

     

 

 

      

PCI Loans

      84,960            93,712        

Discount on PCI loans

      (3,110)           (3,872)       
   

 

 

     

 

 

      

PCI loans, net

      81,850            89,840        
   

 

 

     

 

 

      

Total loans and lease finance receivables

      $ 4,114,073            $ 3,957,781        
   

 

 

     

 

 

      

As of March 31, 2016, 68.77% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 2.19% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of March 31, 2016, $178.9 million, or 6.35% of the total commercial real estate loans included loans secured by farmland, compared to $173.0 million, or 6.54%, at December 31, 2015. The loans secured by farmland included $135.1 million for loans secured by dairy & livestock land and $43.8 million for loans secured by agricultural land at March 31, 2016, compared to $128.4 million for loans secured by dairy & livestock land and $44.6 million for loans secured by agricultural land at December 31, 2015. As of March 31, 2016, dairy & livestock and agribusiness loans of $227.7 million were comprised of $210.2 million for dairy & livestock loans and $17.5 million for agribusiness loans, compared to $287.0 million for dairy & livestock loans and $18.5 million for agribusiness loans at December 31, 2015.

At March 31, 2016, the Company held approximately $2.03 billion of total fixed rate loans, including PCI loans.

At March 31, 2016 and December 31, 2015, loans totaling $3.02 billion and $2.91 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

 

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Table of Contents

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass – These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – Loans classified as substandard are inadequately protected by current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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

 

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Table of Contents

The following table summarizes each type of loans, excluding PCI loans, according to our internal risk ratings for the periods presented.

 

    March 31, 2016  
    Pass     Special
Mention
     Substandard       Doubtful & 
Loss
    Total  
    (Dollars in thousands)  

Commercial and industrial

    $ 428,824          $ 30,887          $ 7,211          $ 39          $ 466,961     

SBA

    94,609          12,729          6,127          238          113,703     

Real estate:

         

Commercial real estate

         

Owner occupied

    810,362          80,555          10,831          -          901,748     

Non-owner occupied

    1,861,506          22,715          33,150          -          1,917,371     

Construction

         

Speculative

    48,091          -          7,651          -          55,742     

Non-speculative

    33,906          -          -          -          33,906     

SFR mortgage

    226,444          3,535          2,986          -          232,965     

Dairy & livestock and agribusiness

    173,056          48,009          6,645          -          227,710     

Municipal lease finance receivables

    68,157          4,941          -          -          73,098     

Consumer and other loans

    71,424          1,839          2,753          87          76,103     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI loans

    $   3,816,379          $   205,210          $ 77,354          $ 364          $   4,099,307     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial and industrial

    $ 398,651          $ 33,000          $ 2,403          $ 45          $ 434,099     

SBA

    87,441          13,169          4,854          1,403          106,867     

Real estate:

         

Commercial real estate

         

Owner occupied

    772,114          54,758          11,481          -          838,353     

Non-owner occupied

    1,741,615          26,170          37,046          -          1,804,831     

Construction

         

Speculative

    38,186          -          7,651          -          45,837     

Non-speculative

    22,726          -          -          -          22,726     

SFR mortgage

    227,207          3,556          2,991          -          233,754     

Dairy & livestock and agribusiness

    285,647          19,862          -          -          305,509     

Municipal lease finance receivables

    69,194          4,941          -          -          74,135     

Consumer and other loans

    64,844          1,618          2,708          108          69,278     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI loans

    $ 3,707,625          $ 157,074          $ 69,134          $ 1,556          $ 3,935,389     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses

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

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at March 31, 2016 and December 31, 2015. 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.

 

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

 

    For the Three Months Ended March 31, 2016  
    Ending
Balance
 December 31, 
2015
      Charge-offs         Recoveries       Provision for
Loan Losses
    Ending
Balance
  March 31,  
2016
 
    (Dollars in thousands)  

Commercial and industrial

    $ 8,588           $ (61)         $ 63           $ 141          $ 8,731      

SBA

    993           -           1           242          1,236      

Real estate:

         

Commercial real estate

    36,995           -           139           1,152          38,286      

Construction

    2,389           -           9           (1,247)         1,151      

SFR mortgage

    2,103           (102)         -           201          2,202      

Dairy & livestock and agribusiness

    6,029           -           99           (952)         5,176      

Municipal lease finance receivables

    1,153           -           -           12          1,165      

Consumer and other loans

    906           -           32           451          1,389      

Unallocated (1)

    -           -           -           -           -      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

    $ 59,156           $ (163)         $ 343           $ -           $ 59,336      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial and industrial

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

SBA

    2,557           (33)         34           (362)         2,196      

Real estate:

         

Commercial real estate

    33,373           -           857           618          34,848      

Construction

    988           -           9           46          1,043      

SFR mortgage

    2,344           -           185           (104)         2,425      

Dairy & livestock and agribusiness

    5,479           -           99           (1,832)         3,746      

Municipal lease finance receivables

    1,412           -           -           (382)         1,030      

Consumer and other loans

    1,262           (177)         9           (269)         825      

Unallocated (1)

    5,336           -           -           1,758          7,094      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

    $ 59,825           $ (344)         $ 1,228           $ -           $ 60,709      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Based upon changes to our ALLL methodology, as described in Note 3 — Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015, beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance.

 

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

 

     March 31, 2016  
     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

     $ 1,477           $ 465,484           $ 575           $ 8,156     

SBA

     3,304           110,399           55           1,181     

Real estate:

           

Commercial real estate

     35,577           2,783,542           -           38,286     

Construction

     7,651           81,997           48           1,103     

SFR mortgage

     5,874           227,091           16           2,186     

Dairy & livestock and agribusiness

     714           226,996           -           5,176     

Municipal lease finance receivables

     -           73,098           -           1,165     

Consumer and other loans

     868           75,235           -           1,389     

Unallocated (1)

     -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 55,465           $ 4,043,842           $ 694           $ 58,642     
  

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2015  
     Recorded Investment in Loans      Allowance for Loan Losses  
     Individually
  Evaluated for  
Impairment
     Collectively
  Evaluated for  
Impairment
     Individually
  Evaluated for  
Impairment
     Collectively
  Evaluated for  
Impairment
 
     (Dollars in thousands)  

Commercial and industrial

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

SBA

     3,158           123,227           42           2,154     

Real estate:

           

Commercial real estate

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

Construction

     7,651           47,695           -           1,043     

SFR mortgage

     5,913           199,219           -           2,425     

Dairy & livestock and agribusiness

     7,277           166,164           -           3,746     

Municipal lease finance receivables

     -           76,220           -           1,030     

Consumer and other loans

     881           69,868           6           819     

Unallocated (1)

     -           -           -           7,094     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Based upon changes to our ALLL methodology, as described in Note 3 — Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015, beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance.

 

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Table of Contents

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a Troubled Debt Restructured (“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.

 

21


Table of Contents

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

 

    March 31, 2016  
     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

    $ 111          $ -          $ 111          $ 622          $ 466,228          466,961     

SBA

    -          -          -          2,435          111,268          113,703     

Real estate:

           

Commercial real estate

           

Owner occupied

    -          -          -          2,086          899,662          901,748     

Non-owner occupied

    -          -          -          9,996          1,907,375          1,917,371     

Construction

           

Speculative (2)

    -          -          -          -          55,742          55,742     

Non-speculative

    -          -          -          -          33,906          33,906     

SFR mortgage

    625          -          625          2,549          229,791          232,965     

Dairy & livestock and agribusiness

    -          -          -          -          227,710          227,710     

Municipal lease finance receivables

    -          -          -          -          73,098          73,098     

Consumer and other loans

    47          117          164          456          75,483          76,103     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI Loans

    $ 783          $ 117          $ 900          $ 18,144          $   4,080,263          $ 4,099,307     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) As of March 31, 2016, $16.1 million of nonaccruing loans were current, $20,000 were 30-59 days past due, $836,000 were 60-89 days past due and $1.2 million were 90+ days past due.
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

    December 31, 2015  
     30-59 Days 
Past Due
     60-89 Days 
Past Due
   

 

 Total Past 
Due and
Accruing

      Nonaccrual  
(1)
    Current     Total Loans
 and Financing 
Receivables
 
                (Dollars in thousands)              

Commercial and industrial

    $ -          $ -          $ -          $ 704          $ 433,395          $ 434,099     

SBA

    -          -          -          2,567          104,300          106,867     

Real estate:

           

Commercial real estate

           

Owner occupied

    -          -          -          4,174          834,179          838,353     

Non-owner occupied

    354          -          354          10,367          1,794,110          1,804,831     

Construction

           

Speculative (2)

    -          -          -          -          45,837          45,837     

Non-speculative

    -          -          -          -          22,726          22,726     

SFR mortgage

    1,082          -          1,082          2,688          229,984          233,754     

Dairy & livestock and agribusiness

    -          -          -          -          305,509          305,509     

Municipal lease finance receivables

    -          -          -          -          74,135          74,135     

Consumer and other loans

    -          -          -          519          68,759          69,278     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI Loans

    $   1,436          $ -          $   1,436          $   21,019          $   3,912,934          $ 3,935,389     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) As of December 31, 2015, $7.9 million of nonaccruing loans were current, $456,000 were 30-59 days past due, $9.1 million were 60-89 days past due and $3.5 million were 90+ days past due.
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

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Impaired Loans

At March 31, 2016, the Company had impaired loans, excluding PCI loans, of $55.5 million. Of this amount, there was $12.1 million of nonaccrual commercial real estate loans, $2.5 million of nonaccrual single-family residential (“SFR”) mortgage loans, $2.4 million of nonaccrual SBA loans, $622,000 of nonaccrual commercial and industrial loans, and $456,000 of nonaccrual consumer and other loans. These impaired loans included $49.7 million of loans whose terms were modified in a troubled debt restructuring, of which $12.4 million were classified as nonaccrual. The remaining balance of $37.3 million consisted of 35 loans performing according to the restructured terms. The impaired loans had a specific allowance of $694,000 at March 31, 2016. At December 31, 2015, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $63.7 million with a related allowance of $669,000.

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

 

     As of and For the Three Months Ended March 31, 2016  
     Recorded
  Investment  
     Unpaid
  Principal  
Balance
     Related
  Allowance  
     Average
Recorded
  Investment  
     Interest
Income
  Recognized   
 
     (Dollars in thousands)  

With no related allowance recorded:

              

Commercial and industrial

     $ 805           $ 1,677           $ -           $ 831           $ 7     

SBA

     3,050           3,765           -           3,089           13     

Real estate:

              

Commercial real estate

              

Owner occupied

     5,315           6,507           -           5,095           51     

Non-owner occupied

     30,262           33,368           -           30,400           343     

Construction

              

Speculative

     -           -           -           -           -     

Non-speculative

     -           -           -           -           -     

SFR mortgage

     5,499           6,406           -           5,512           27     

Dairy & livestock and agribusiness

     714           714           -           710           8     

Municipal lease finance receivables

     -           -           -           -           -     

Consumer and other loans

     868           1,420           -           888           4     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     46,513           53,857           -           46,525           453     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     672           741           575           687           3     

SBA

     254           274           55           254           2     

Real estate:

              

Commercial real estate

              

Owner occupied

     -           -           -           -           -     

Non-owner occupied

     -           -           -           -           -     

Construction

              

Speculative

     7,651           7,651           48           7,651           97     

Non-speculative

     -           -           -           -           -     

SFR mortgage

     375           426           16           515           2     

Dairy & livestock and agribusiness

     -           -           -           -           -     

Municipal lease finance receivables

     -           -           -           -           -     

Consumer and other loans

     -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,952           9,092           694           9,107           104     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

     $ 55,465           $ 62,949           $ 694           $ 55,632           $ 557     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

With no related allowance recorded:

         

Commercial and industrial

    $ 1,004          $ 1,819          $ -          $ 1,017          $ 8     

SBA

    3,117          3,667          -          3,177          13     

Real estate:

         

Commercial real estate

         

Owner occupied

    6,117          7,167          -          6,185          64     

Non-owner occupied

    34,808          42,718          -          35,194          350     

Construction

         

Speculative

    7,651          7,651          -          7,651          96     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    5,913          6,642          -          5,940          27     

Dairy & livestock and agribusiness

    7,277          8,991          -          7,533          85     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    783          1,289          -          836          4     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    66,670          79,944          -          67,533          647     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With a related allowance recorded:

         

Commercial and industrial

    607          680          592          617          -     

SBA

    41          54          42          45          -     

Real estate:

         

Commercial real estate

         

Owner occupied

    -          -          -          -          -     

Non-owner occupied

    961          1,278          154          973          -     

Construction

         

Speculative

    -          -          -          -          -     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    -          -          -          -          -     

Dairy & livestock and agribusiness

    -          -          -          -          -     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    98          107          6          99          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,707          2,119          794          1,734          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    As of December 31, 2015         
    Recorded
  Investment  
    Unpaid
    Principal    
Balance
    Related
  Allowance  
   
    (Dollars in thousands)    

With no related allowance recorded:

       

Commercial and industrial

    $ 1,017          $ 1,894          $ -       

SBA

    3,207          3,877          -       

Real estate:

       

Commercial real estate

       

Owner occupied

    6,252          7,445          -       

Non-owner occupied

    34,041          37,177          -       

Construction

       

Speculative

    -          -          -       

Non-speculative

    -          -          -       

SFR mortgage

    5,665          6,453          -       

Dairy & livestock and agribusiness

    3,685          3,684          -       

Municipal lease finance receivables

    -          -          -       

Consumer and other loans

    890          1,454          -       
 

 

 

   

 

 

   

 

 

   

Total

    54,757          61,984          -       
 

 

 

   

 

 

   

 

 

   

With a related allowance recorded:

       

Commercial and industrial

    626          695          626       

SBA

    41          47          10       

Real estate:

       

Commercial real estate

       

Owner occupied

    -          -          -       

Non-owner occupied

    -          -          -       

Construction

       

Speculative

    7,651          7,651          13       

Non-speculative

    -          -          -       

SFR mortgage

    588          640          20       

Dairy & livestock and agribusiness

    -          -          -       

Municipal lease finance receivables

    -          -          -       

Consumer and other loans

    43          45          -       
 

 

 

   

 

 

   

 

 

   

Total

    8,949          9,078          669       
 

 

 

   

 

 

   

 

 

   

Total impaired loans

    $ 63,706          $ 71,062          $ 669       
 

 

 

   

 

 

   

 

 

   

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 March 31, 2016 and December 31, 2015 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.

 

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Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three months ended March 31, 2016, compared with a recapture of provision for unfunded loan commitments of $500,000 for the same period of 2015. As of March 31, 2016 and December 31, 2015, the balance in this reserve was $7.2 million and was included in other liabilities.

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion regarding TDRs.

As of March 31, 2016, there were $49.7 million of loans classified as a TDR, of which $12.4 million were nonperforming and $37.3 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At March 31, 2016, performing TDRs were comprised of 14 commercial real estate loans of $23.5 million, one construction loan of $7.7 million, one dairy & livestock and agribusiness loan of $714,000, 11 SFR mortgage loans of $3.3 million, five commercial and industrial loans of $855,000, one consumer loan of $412,000 and two SBA loans of $869,000. There were no loans removed from TDR classification during the three months ended March 31, 2016 and 2015.

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 $642,000 and $607,000 of specific allowance to TDRs as of March 31, 2016 and December 31, 2015, respectively.

The following table provides a summary of the activity related to TDRs for the periods presented.

 

              For the Three Months Ended      
March 31,
     
        2016        2015      
        (Dollars in thousands)      

Performing TDRs:

          

Beginning balance

      $ 42,687             $ 53,589       

New modifications

      1,006             -           

Payoffs and payments, net

      (6,372)            (8,729)      

TDRs returned to accrual status

      -                 516       

TDRs placed on nonaccrual status

      -                 -           
   

 

 

      

 

 

   

Ending balance

      $ 37,321             $ 45,376       
   

 

 

      

 

 

   

Nonperforming TDRs:

          

Beginning balance

      $ 12,622             $ 20,285       

New modifications

      82             -           

Charge-offs

      (38)            -           

Payoffs and payments, net

      (306)            (2,995)      

TDRs returned to accrual status

      -                 (516)      

TDRs placed on nonaccrual status

      -                 -           
   

 

 

      

 

 

   

Ending balance

      $ 12,360             $ 16,774       
   

 

 

      

 

 

   

Total TDRs

      $ 49,681             $ 62,150       
   

 

 

      

 

 

   

 

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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 March 31, 2016  
     Number of 
Loans
      Pre-Modification  
Outstanding
Recorded

Investment
      Post-Modification  
Outstanding
Recorded

Investment
    Outstanding
Recorded
Investment at
  March 31, 2016  
    Financial Effect
Resulting From
    Modifications (2)    
 
    (Dollars in thousands)  

SBA:

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    1          194          194          193          28     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    2          812          812          778          -     

Non-owner occupied

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    -          -          -          -          -     

Consumer:

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    2          82          82          75          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    5          $ 1,088          $ 1,088          $ 1,046          $ 28     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

For the Three Months Ended March 31, 2015

 
    Number of
Loans
    Pre-Modification
Outstanding

Recorded
Investment
    Post-Modification
Outstanding

Recorded
Investment
    Outstanding
Recorded
Investment at
March 31, 2015
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

SBA:

         

Interest rate reduction

    -             -             -             -             -        

Change in amortization period or maturity

    -             -             -             -             -        

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -             -             -             -             -        

Change in amortization period or maturity

    -             -             -             -             -        

Non-owner occupied

         

Interest rate reduction

    -             -             -             -             -        

Change in amortization period or maturity

    -             -             -             -             -        

Consumer:

         

Interest rate reduction

    -             -             -             -             -        

Change in amortization period or maturity

    -             -             -             -             -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    -             $ -             $ -             $ -             $ -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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.

As of March 31, 2016, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2016.

 

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8. EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three months ended March 31, 2016 and 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 262,000 and 235,000, respectively.

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

 

     For the Three Months
Ended March 31,
 
     2016      2015  
     (In thousands, except per share amounts)  

Earnings per common share:

     

Net earnings

     $ 23,391           $ 15,833     

Less: Net earnings allocated to restricted stock

     104           81     
  

 

 

    

 

 

 

Net earnings allocated to common shareholders

     $ 23,287           $ 15,752     
  

 

 

    

 

 

 

Weighted average shares outstanding

     106,392           105,523     

Basic earnings per common share

     $ 0.22           $ 0.15     
  

 

 

    

 

 

 

 

Diluted earnings per common share:

     

Net income allocated to common shareholders

     $ 23,287           $ 15,752     
  

 

 

    

 

 

 

Weighted average shares outstanding

     106,392           105,523     

Incremental shares from assumed exercise of outstanding options

     392           436     
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     106,784           105,959     

Diluted earnings per common share

     $ 0.22           $ 0.15     
  

 

 

    

 

 

 

 

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9. FAIR VALUE INFORMATION

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The following disclosure provides the fair value information for financial assets and liabilities as of March 31, 2016. 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.

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 during the three months ended March 31, 2016 and 2015.

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.

 

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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 — 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 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.

 

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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    
March 31, 2016
    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

    $ 5,760         $        $ 5,760         $   

Residential mortgage-backed securities

    1,759,050                1,759,050           

CMOs/REMICs - residential

    368,535                368,535           

Municipal bonds

    156,225                156,225           

Other securities

    5,089                5,089           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities - AFS

    2,294,659                2,294,659           

Interest rate swaps

    13,132                13,132           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $             2,307,791         $        $             2,307,791         $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 13,132         $        $ 13,132         $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 13,132         $                     -         $ 13,132         $                     -    
 

 

 

   

 

 

   

 

 

   

 

 

 
    Carrying Value at
December 31, 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

    $ 5,745         $        $ 5,745         $   

Residential mortgage-backed securities

    1,813,097                1,813,097           

CMOs/REMICs - residential

    383,781                383,781           

Municipal bonds

    160,973                160,973           

Other securities

    5,050                5,050           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities - AFS

    2,368,646                2,368,646           

Interest rate swaps

    9,344                9,344           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $             2,377,990         $        $             2,377,990         $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 9,344         $        $ 9,344         $   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 9,344         $                     -         $ 9,344         $                     -    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at March 31, 2016 and December 31, 2015, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

 

    Carrying Value at
March 31, 2016
    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 Three
Months Ended
March 31, 2016
 
    (Dollars in thousands)  

Description of assets

         

Impaired loans, excluding PCI Loans:

         

Commercial and industrial

    $ 110         $        $        $ 110         $ 13    

SBA

    213                       213         48    

Real estate:

         

Commercial real estate

                                  

Construction

    7,651                       7,651         35    

SFR mortgage

    504                       504         102    

Dairy & livestock and agribusiness

                                  

Consumer and other loans

                                  

Other real estate owned

    1,611                       1,611         248    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $             10,089         $                     -         $                     -         $             10,089         $             446    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Carrying Value at
 December 31, 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 Year Ended 
December 31, 2015
 
    (Dollars in thousands)  

Description of assets

         

Impaired loans, excluding PCI Loans:

         

Commercial and industrial

    $ 228         $        $        $ 228         $ 228    

SBA

    41                       41         15    

Real estate:

         

Commercial real estate

                                  

Construction

    7,651                       7,651         13    

SFR mortgage

    588                       588         20    

Dairy & livestock and agribusiness

                                  

Consumer and other loans

    258                       258         101    

Other real estate owned

    948                       948         162    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $             9,714         $                 -         $                     -         $             9,714         $             539    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 March 31, 2016 and December 31, 2015, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

    March 31, 2016  
          Estimated Fair Value  
    Carrying
Amount
    Level 1     Level 2     Level 3     Total  
    (Dollars in thousands)  

Assets

         

Total cash and cash equivalents

    $ 239,586          $     239,586          $ -          $ -          $ 239,586     

Interest-earning balances due from depository institutions

    90,718          -          90,718          -          90,718     

FHLB stock

    18,501          -          18,501          -          18,501     

Investment securities available-for-sale

    2,294,659          -                2,294,659          -          2,294,659     

Investment securities held-to-maturity

    812,893          -          824,203          1,725          825,928     

Total loans, net of allowance for loan losses

    4,114,073          -          -                4,166,203          4,166,203     

Swaps

    13,132          -          13,132          -          13,132     

Liabilities

         

Deposits:

         

Noninterest-bearing

    $     3,352,128          3,352,128          -          -          $       3,352,128     

Interest-bearing

    2,864,150          -          2,863,784          -          2,863,784     

Borrowings

    631,860          -          631,749          -          631,749     

Junior subordinated debentures

    25,774          -          27,284          -          27,284     

Swaps

    13,132          -          13,132          -          13,132     
    December 31, 2015  
          Estimated Fair Value  
    Carrying
Amount
    Level 1     Level 2     Level 3     Total  
    (Dollars in thousands)  

Assets

         

Total cash and cash equivalents

    $ 106,097          $       106,097          $ -          $ -          $ 106,097     

Interest-earning balances due from depository institutions

    32,691          -          32,691          -          32,691     

FHLB stock

    17,588          -          17,588          -          17,588     

Investment securities available-for-sale

    2,368,646          -                2,368,646          -          2,368,646     

Investment securities held-to-maturity

    850,989          -          851,186          1,853          853,039     

Total loans, net of allowance for loan losses

    3,957,781          -          -                3,971,329          3,971,329     

Swaps

    9,344          -          9,344          -          9,344     

Liabilities

         

Deposits:

         

Noninterest-bearing

    $     3,250,174          3,250,174          -          -          $       3,250,174     

Interest-bearing

    2,667,086          -          2,666,186          -          2,666,186     

Borrowings

    736,704          -          736,575          -          736,575     

Junior subordinated debentures

    25,774          -          27,210          -          27,210     

Swaps

    9,344          -          9,344          -          9,344     

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2016 and December 31, 2015. 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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10. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and the Treasury Department. The Bank has 44 Business Financial Centers and eight Commercial Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and to assess performance. Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity and interest rate risk. Information related to the Company’s remaining operating segments, which include construction lending, dairy & livestock and agribusiness lending, leasing, CitizensTrust, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following tables represent 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, 2015. 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.

 

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

 

    For the Three Months Ended March 31, 2016  
    Centers     Treasury     Other     Eliminations     Total  
    (Dollars in thousands)  

Interest income, including loan fees

    $ 36,504         $ 18,757         $ 9,239          $ -              $ 64,500    

Credit for funds provided (1)

    8,697         -             13,681          (22,378)         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    45,201         18,757         22,920          (22,378)         64,500    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

    1,680         184         120          -              1,984    

Charge for funds used (1)

    1,287         15,349         5,742          (22,378)         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    2,967         15,533         5,862          (22,378)         1,984    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    42,234         3,224         17,058          -              62,516    

Provision for loan losses

    -             -             -              -              -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    42,234         3,224         17,058          -              62,516    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

    4,827         -             3,856          -              8,683    

Noninterest expense

    12,610         216         21,538          -              34,364    

Debt termination expense

    -             -             -              -              -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pre-tax profit (loss)

    $ 34,451         $ 3,008         $ (624)         $ -              $ 36,835    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets as of March 31, 2016

    $     6,602,994         $     3,417,737         $     976,032          $   (3,075,927)         $     7,920,836    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Interest income, including loan fees

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

Credit for funds provided (1)

    8,211         -              12,641         (20,852)         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

    1,663         1,431          77         -              3,171    

Charge for funds used (1)

    1,067         14,806          4,979         (20,852)         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

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

Provision for loan losses

    -             -              -             -              -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

    5,067         -              2,944         -              8,011    

Noninterest expense

    11,849         213          18,540         -              30,602    

Debt termination expense

    -             13,870          -             -              13,870    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pre-tax profit (loss)

    $ 34,067         $ (11,665)         $ 2,146         $ -              $ 24,548    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets as of March 31, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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11. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of March 31, 2016, the Bank has entered into 77 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of March 31, 2016 and December 31, 2015, the total notional amount of the Company’s swaps was $188.5 million, and $189.0 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

 

     March 31, 2016  
     Asset Derivatives      Liability Derivatives  
         Balance Sheet    
Location
   Fair
Value
         Balance Sheet    
Location
   Fair
Value
 
     (Dollars in thousands)  

Derivatives not designated as hedging instruments:

           

Interest rate swaps

   Other assets      $ 13,132        Other liabilities      $ 13,132    
     

 

 

       

 

 

 

Total derivatives

        $   13,132             $   13,132    
     

 

 

       

 

 

 
    

 

December 31, 2015

 
     Asset Derivatives      Liability Derivatives  
     Balance Sheet
Location
   Fair
Value
     Balance Sheet
Location
   Fair
Value
 
     (Dollars in thousands)  

Derivatives not designated as hedging instruments:

           

Interest rate swaps

   Other assets      $ 9,344        Other liabilities      $ 9,344    
     

 

 

       

 

 

 

Total derivatives

        $ 9,344             $ 9,344    
     

 

 

       

 

 

 

 

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Table of Contents

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

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

 

                                                  

Derivatives Not Designated as

            Hedging  Instruments            

  Location of Gain Recognized in
  Income on Derivative Instruments  
     Amount of Gain Recognized in Income  
on Derivative Instruments
 
           For the Three Months Ended March 31,    
         2016     2015  
         (Dollars in thousands)  

Interest rate swaps

  Other income      $                         58         $                         -     
    

 

 

   

 

 

 

Total

       $                         58         $                         -     
    

 

 

   

 

 

 

 

12. OTHER COMPREHENSIVE INCOME

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

 

    For the Three Months Ended March 31,  
    2016     2015  
   

 

  Before-tax  

 

      Tax effect         After-tax         Before-tax         Tax effect         After-tax    
 

 

 

   

 

 

 
    (Dollars in thousands)  

Investment securities:

           

Net change in fair value recorded in accumulated OCI

   $ 28,044         $ 11,778         $ 16,266         $ 20,270         $ 8,514         $ 11,756     

Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity

    -              -              -              -              -              -         

Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity

    (774)         (325)         (449)         -              -              -         

Net realized loss reclassified into earnings

    -              -              -              -              -              -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

   $ 27,270         $ 11,453         $ 15,817         $ 20,270         $ 8,514         $ 11,756     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    Investment
Securities
 
     (Dollars in thousands)   

Balance, January 1, 2016

    $ 20,909     

Net change in fair value recorded in accumulated OCI

    15,817     

Net realized loss reclassified into earnings

    -         
 

 

 

 

Balance, March 31, 2016

    $ 36,726     
 

 

 

 
    Investment
Securities
 
    (Dollars in thousands)  

Balance, January 1, 2015

    $ 31,075     

Net change in fair value recorded in accumulated OCI

    11,756     

Net realized loss reclassified into earnings

    -         
 

 

 

 

Balance, March 31, 2015

    $ 42,831     
 

 

 

 

 

37


Table of Contents
13. BALANCE SHEET OFFSETTING

Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to the counterparty bank continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the condensed consolidated balances.

 

     Gross Amounts 
Recognized in
the Condensed
Consolidated
Balance Sheets
     Gross Amounts 
offset in the
Condensed
Consolidated
Balance Sheets
    Net Amounts of
Assets Presented
 in the Condensed 
Consolidated
Balance Sheets
        Gross Amounts Not Offset in the    
Condensed Consolidated
Balance Sheets
       
            
Financial
Instruments
    Collateral
Pledged
        Net Amount      
    (Dollars in thousands)  

March 31, 2016

           

Financial assets:

           

Derivatives not designated as hedging instruments

   $ 13,132        $ -         $       $ 13,132        $ -         $ 13,132     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 13,132        $ -         $       $ 13,132        $ -         $ 13,132     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

           

Derivatives not designated as hedging instruments

   $ 13,132        $ -         $ 13,132        $       $ (14,291)        $ (1,159)    

Repurchase agreements

    626,860         -          626,860                (734,711)         (107,851)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 639,992        $ -         $ 639,992        $       $ (749,002)        $ (109,010)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

           

Financial assets:

           

Derivatives not designated as hedging instruments

   $ 9,344        $ -         $       $ 9,344        $ -         $ 9,344     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 9,344        $ -         $       $ 9,344        $ -         $ 9,344