Attached files

file filename
EX-32.2 - EX-32.2 - CVB FINANCIAL CORPd207952dex322.htm
EX-32.1 - EX-32.1 - CVB FINANCIAL CORPd207952dex321.htm
EX-31.2 - EX-31.2 - CVB FINANCIAL CORPd207952dex312.htm
EX-31.1 - EX-31.1 - CVB FINANCIAL CORPd207952dex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 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: 107,957,513 outstanding as of July 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 CONDITION AND RESULTS OF OPERATIONS

     40   
  CRITICAL ACCOUNTING POLICIES      40   
  OVERVIEW      40   
  ANALYSIS OF THE RESULTS OF OPERATIONS      42   
  RESULTS BY BUSINESS SEGMENTS      53   
  ANALYSIS OF FINANCIAL CONDITION      56   
  ASSET/LIABILITY AND MARKET RISK MANAGEMENT      74   

      ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      75   

      ITEM 4.

  CONTROLS AND PROCEDURES      75   

PART II - OTHER INFORMATION

     76   

      ITEM 1.

  LEGAL PROCEEDINGS      76   

      ITEM 1A.

  RISK FACTORS      77   

      ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      77   

      ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      77   

      ITEM 4.

  MINE SAFETY DISCLOSURES      77   

      ITEM 5.

  OTHER INFORMATION      78   

      ITEM 6.

  EXHIBITS      78   

SIGNATURES

     79   

 

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. Words such as “will likely result, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will” and variations of these words and similar expressions help to identify these forward looking statements, which involve risks and uncertainties. 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, sales or leasing activities; changes in the financial performance and/or condition of our borrowers or key vendors or counterparties; changes in our levels of delinquent loans, 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, consumer, commercial or secured lending, 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, Federal Reserve Board, 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)

 

         June 30,            December 31,    
     2016      2015  

Assets

     

Cash and due from banks

     $ 107,779           $ 102,772     

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

     591,403           3,325     
  

 

 

    

 

 

 

Total cash and cash equivalents

     699,182           106,097     
  

 

 

    

 

 

 

Interest-earning balances due from depository institutions

     91,272           32,691     

Investment securities available-for-sale, at fair value (with amortized cost of $2,181,478 at June 30, 2016, and $2,337,715 at December 31, 2015)

     2,248,032           2,368,646     

Investment securities held-to-maturity (with fair value of $743,481 at June 30, 2016, and $853,039 at December 31, 2015)

     724,357           850,989     
  

 

 

    

 

 

 

Total investment securities

     2,972,389           3,219,635     
  

 

 

    

 

 

 

Investment in stock of Federal Home Loan Bank (FHLB)

     17,688           17,588     

Loans and lease finance receivables

     4,237,928           4,016,937     

Allowance for loan losses

     (60,938)          (59,156)    
  

 

 

    

 

 

 

Net loans and lease finance receivables

     4,176,990           3,957,781     
  

 

 

    

 

 

 

Premises and equipment, net

     39,702           31,382     

Bank owned life insurance

     133,231           130,956     

Accrued interest receivable

     21,389           22,732     

Intangibles

     5,586           2,265     

Goodwill

     88,174           74,244     

Income taxes

     27,693           47,251     

Other assets

     39,011           28,578     
  

 

 

    

 

 

 

Total assets

     $       8,312,307           $       7,671,200     
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Deposits:

     

Noninterest-bearing

     $ 3,666,206           $ 3,250,174     

Interest-bearing

     2,919,780           2,667,086     
  

 

 

    

 

 

 

Total deposits

     6,585,986           5,917,260     

Customer repurchase agreements

     590,465           690,704     

Other borrowings

     -               46,000     

Deferred compensation

     11,920           11,269     

Junior subordinated debentures

     25,774           25,774     

Payable for securities purchased

     44,723           1,696     

Other liabilities

     61,976           55,098     
  

 

 

    

 

 

 

Total liabilities

     7,320,844           6,747,801     
  

 

 

    

 

 

 

Commitments and Contingencies

     

Stockholders’ Equity

     

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 107,946,952 at June 30, 2016, and 106,384,982 at December 31, 2015

     527,452           502,571     

Retained earnings

     422,939           399,919     

Accumulated other comprehensive income, net of tax

     41,072           20,909     
  

 

 

    

 

 

 

Total stockholders’ equity

     991,463           923,399     
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

     $ 8,312,307           $ 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    
June 30,
         For the Six Months Ended    
June 30,
 
     2016      2015      2016      2015  

Interest income:

           

Loans and leases, including fees

     $ 50,257           $ 45,322           $ 96,027           $ 90,864     

Investment securities:

           

Investment securities available-for-sale

     12,018           17,503           24,817           35,437     

Investment securities held-to-maturity

     4,743           36           10,091           74     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

     16,761           17,539           34,908           35,511     
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends from FHLB stock

     439           1,414           807           1,883     

Federal funds sold

     383           187           488           329     

Interest-earning deposits with other institutions

     175           53           285           108     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     68,015           64,515           132,515           128,695     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     1,582           1,307           3,019           2,600     

Borrowings

     345           342           768           2,115     

Junior subordinated debentures

     132           108           256           213     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     2,059           1,757           4,043           4,928     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income before recapture of provision for loan losses

     65,956           62,758           128,472           123,767     

Recapture of provision for loan losses

     -           (2,000)          -           (2,000)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after recapture of provision for loan losses

     65,956           64,758           128,472           125,767     
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges on deposit accounts

     3,822           3,952           7,569           7,913     

Trust and investment services

     2,508           2,181           4,711           4,332     

Bankcard services

     784           842           1,339           1,575     

BOLI income

     752           808           1,299           1,457     

Gain on sale of loans

     -           -           1,101           -     

Other

     1,408           562           1,938           1,079     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     9,274           8,345           17,957           16,356     
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and employee benefits

     21,558           19,648           42,811           38,943     

Occupancy and equipment

     4,125           3,713           7,838           7,365     

Professional services

     1,188           1,527           2,554           2,680     

Software licenses and maintenance

     1,065           993           1,974           2,023     

Promotion

     1,192           1,201           2,619           2,528     

Recapture of provision for unfunded loan commitments

     -           -           -           (500)    

Debt termination expense

     16           -           16           13,870     

Acquisition related expenses

     355           -           1,204           -     

Other

     4,939           4,451           9,786           9,096     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     34,438           31,533           68,802           76,005     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     40,792           41,570           77,627           66,118     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income taxes

     15,278           14,757           28,722           23,472     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     $ 25,514           $ 26,813           $ 48,905           $ 42,646     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss):

           

Unrealized gain (loss) on securities arising during the period, before tax

     $ 7,493           $ (32,968)          $ 34,763           $ (12,698)    

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

    

 

(3,147) 

 

  

 

    

 

13,846  

 

  

 

    

 

(14,600) 

 

  

 

    

 

5,332  

 

  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     4,346           (19,122)          20,163           (7,366)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     $ 29,860           $ 7,691           $ 69,068           $ 35,280     
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

     $ 0.23           $ 0.25           $ 0.46           $ 0.40     

Diluted earnings per common share

     $ 0.23           $ 0.25           $ 0.45           $ 0.40     

Cash dividends declared per common share

     $ 0.12           $ 0.12           $ 0.24           $ 0.24     

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended June 30, 2016 and 2015

(Dollars and shares in thousands)

(Unaudited)

 

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

Balance, January 1, 2015

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

Repurchase of common stock

    (33)         (511)         -          -          (511)    

Exercise of stock options

    397          4,500          -          -          4,500     

Tax benefit from exercise of stock options

    -          742          -          -          742     

Shares issued pursuant to stock-based compensation plan

    80          1,371          -          -          1,371     

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

    -          -          (25,500)         -          (25,500)    

Net earnings

    -          -          42,646          -          42,646     

Other comprehensive loss

    -          -          -          (7,366)         (7,366)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2016

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

Repurchase of common stock

    (40)         (408)         -          -          (408)    

Issuance of common stock for acquisition of County Commerce Bank

    1,394          21,642          -          -          21,642     

Exercise of stock options

    175          2,254          -          -          2,254     

Tax benefit from exercise of stock options

    -          86          -          -          86     

Shares issued pursuant to stock-based compensation plan

    33          1,307          -          -          1,307     

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

    -          -          (25,885)         -          (25,885)    

Net earnings

    -          -          48,905          -          48,905     

Other comprehensive income

    -          -          -          20,163          20,163     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

    107,947          $ 527,452          $ 422,939          $ 41,072          $ 991,463     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     For the Six Months Ended  
     June 30,  
     2016      2015  

Cash Flows from Operating Activities

     

Interest and dividends received

     $         138,664           $         137,747     

Service charges and other fees received

     16,908           13,840     

Interest paid

     (4,030)          (5,768)    

Net cash paid to vendors, employees and others

     (69,730)          (68,710)    

Income taxes paid

     (23,000)          (27,000)    

Payments to FDIC, loss share agreement

     (203)          (460)    
  

 

 

    

 

 

 

Net cash provided by operating activities

     58,609           49,649     
  

 

 

    

 

 

 

Cash Flows from Investing Activities

     

Proceeds from redemption of FHLB stock

     1,423           7,750     

Net change in interest-earning balances from depository institutions

     3,755           2,740     

Proceeds from repayment of investment securities available-for-sale

     228,070           202,162     

Proceeds from maturity of investment securities available-for-sale

     56,006           54,601     

Purchases of investment securities available-for-sale

     (97,368)          (236,451)    

Proceeds from repayment and maturity of investment securities held-to-maturity

     128,497           -     

Net (increase) decrease in loan and lease finance receivables

     (54,623)          35,862     

Proceeds from sale of loans

     6,417           -     

Purchase of premises and equipment

     (2,045)          (485)    

Proceeds from sales of other real estate owned

     621           1,538     

Cash used in sale of branch, net

     (8,217)          -     

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

     (7,504)          -     
  

 

 

    

 

 

 

Net cash provided by investing activities

     255,032           67,717     
  

 

 

    

 

 

 

Cash Flows from Financing Activities

     

Net increase in other deposits

     512,784           430,912     

Net decrease in time deposits

     (58,754)          (41,690)    

Repayment of FHLB advances

     (5,000)          (200,000)    

Net decrease in other borrowings

     (46,000)          (46,000)    

Net (decrease) increase in customer repurchase agreements

     (99,818)          98,699     

Cash dividends on common stock

     (25,700)          (23,340)    

Repurchase of common stock

     (408)          (511)    

Proceeds from exercise of stock options

     2,254           4,500     

Tax benefit related to exercise of stock options

     86           742     
  

 

 

    

 

 

 

Net cash provided by financing activities

     279,444           223,312     
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     593,085           340,678     

Cash and cash equivalents, beginning of period

     106,097           105,768     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 699,182           $ 446,446     
  

 

 

    

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

     For the Six Months Ended  
     June 30,  
     2016      2015  

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

     

Net earnings

     $         48,905           $         42,646     

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

     

Gain on sale of loans

     (1,101)          -     

Gain on sale of branch

     (272)          -     

Gain on sale of other real estate owned

     (14)          (232)    

Increase in bank owned life insurance

     (2,275)          (2,670)    

Net amortization of premiums and discounts on investment securities

     10,192           9,749     

Accretion of PCI discount

     (1,569)          (2,012)    

Recapture of provision for loan losses

     -           (2,000)    

Recapture of provision for unfunded loan commitments

     -           (500)    

Valuation adjustment on other real estate owned

     337           162     

Payments to FDIC, loss share agreement

     (203)          (460)    

Stock-based compensation

     1,307           1,371     

Depreciation and amortization, net

     1,685           292     

Change in other assets and liabilities

     1,617           3,303     
  

 

 

    

 

 

 

Total adjustments

     9,704           7,003     
  

 

 

    

 

 

 

Net cash provided by operating activities

     $ 58,609           $ 49,649     
  

 

 

    

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

     

Securities purchased and not settled

     $ 44,723           $ 59,693     

Transfer of loans to other real estate owned

     $ -               $ 3,666     

Issuance of common stock for CCB acquistion

     $ 21,642           $ -         

See accompanying notes to the unaudited condensed consolidated financial statements.

 

8


Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     BUSINESS

The condensed consolidated financial statements include 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 County, and the Central Valley area of California. The Bank operates 43 Business Financial Centers, eight Commercial Banking Centers, and three trust office locations. The Company is headquartered in the city of Ontario, California.

On February 29, 2016, we completed the 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 2016 include 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 six months ended June 30, 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.

 

9


Table of Contents

Recent Accounting Pronouncements— In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

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 systems integration of CCB and CBB was completed in April 2016.

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 and six months ended June 30, 2016, the Company incurred non-recurring merger related expenses associated with the CCB acquisition of $355,000 and $1.2 million, respectively.

 

10


Table of Contents

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.

 

     June 30, 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/GSE

     $ 4,750           $ 13           $ -           $ 4,763           0.21%    

Residential mortgage-backed securities

     1,663,091           54,359           -           1,717,450           76.40%    

CMO/REMIC - residential

     388,881           9,015           -           397,896           17.70%    

Municipal bonds

     119,756           2,893           (1)          122,648           5.46%    

Other securities

     5,000           275           -           5,275           0.23%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale  securities

     $ 2,181,478           $     66,555           $ (1)          $ 2,248,032           100.00%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity (1):

              

Government agency/GSE

     $ 209,301           $ 6,336           $ -           $ 215,637           28.90%    

Residential mortgage-backed securities

     215,762           6,274           -           222,036           29.79%    

CMO

     974           501           -           1,475           0.13%    

Municipal bonds

     298,320           6,983           (970)          304,333           41.18%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity  securities

     $ 724,357           $ 20,094           $ (970)          $ 743,481           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/GSE

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

Residential mortgage-backed securities

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

CMO/REMIC - 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/GSE

     $ 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 June 30, 2016, investment securities HTM totaled $724.4 million. The after-tax unrealized gain reported in AOCI on investment securities HTM was $2.5 million at June 30, 2016.

 

11


Table of Contents

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
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
    (Dollars in thousands)  

Investment securities available-for-sale:

       

Taxable

    $ 10,827          $ 12,784          $ 22,207          $ 25,707     

Tax-advantaged

    1,191          4,719          2,610          9,730     

Investment securities held-to-maturity:

       

Taxable

    2,215          36          4,835          74     

Tax-advantaged

    2,528          -          5,256          -     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income from investment securities    

    $     16,761          $     17,539          $     34,908          $     35,511     
 

 

 

   

 

 

   

 

 

   

 

 

 

Approximately 86% of the total investment securities portfolio at June 30, 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 June 30, 2016 and December 31, 2015. At June 30, 2016, the Bank had $1.1 million in total CMO backed by whole loans issued by private-label companies (nongovernment sponsored).

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

 

     June 30, 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/GSE

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

Residential mortgage-backed securities

     -           -           -           -           -           -     

CMO/REMIC - residential

     -           -           -           -           -           -     

Municipal bonds

     -           -           5,971           (1)          5,971           (1)    

Other securities

     -           -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale  securities    

     $ -           $ -           $     5,971           $ (1)          $ 5,971           $ (1)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity:

                 

Government agency/GSE

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

Residential mortgage-backed securities

     -           -           -           -           -           -     

CMO

     -           -           -           -           -           -     

Municipal bonds

     67,573           (970)          -           -           67,573           (970)    

Other securities

     -           -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

     $     67,573           $     (970)          $ -           $         -           $     67,573           $     (970)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents
    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/GSE

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

Residential mortgage-backed securities

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

CMO/REMIC - 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/GSE

    $ 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)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2016 and December 31, 2015, investment securities having a carrying value of approximately $2.59 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 June 30, 2016, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMO/REMIC 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 CMO/REMIC are included in maturity categories based upon estimated prepayment speeds.

 

     June 30, 2016       
     Available-for-sale      Held-to-maturity     
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
    
     (Dollars in thousands)     

 

Due in one year or less

     $ 12,202           $ 12,343           $ -           $ -        

Due after one year through five years

     1,795,806           1,851,485           167,856           171,966        

Due after five years through ten years

     131,286           134,700           240,842           245,295        

Due after ten years

     242,184           249,504           315,659           326,220        
  

 

 

    

 

 

    

 

 

    

 

 

    

Total investment securities

     $   2,181,478           $   2,248,032           $   724,357           $   743,481        
  

 

 

    

 

 

    

 

 

    

 

 

    

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2016.

 

13


Table of Contents

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 June 30, 2016, the remaining discount associated with the PCI loans approximated $2.4 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $1.0 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.

The following table provides a summary of PCI loans and lease finance receivables by type and by internal risk ratings (credit quality indicators) for the periods indicated.

 

                                               
         June 30, 2016            December 31, 2015         
     (Dollars in thousands)      

Commercial and industrial

     $ 2,580           $ 7,473        

SBA

     348           393        

Real estate:

        

Commercial real estate

     70,589           81,786        

Construction

     -           -        

SFR mortgage

     186           193        

Dairy & livestock and agribusiness

     503           1,429        

Municipal lease finance receivables

     -           -        

Consumer and other loans

     1,816           2,438        
  

 

 

    

 

 

    

Gross PCI loans

     76,022           93,712        

Less: Purchase accounting discount

     (2,430)          (3,872)       
  

 

 

    

 

 

    

Gross PCI loans, net of discount

     73,592           89,840        

Less: Allowance for PCI loan losses

     (310)          -        
  

 

 

    

 

 

    

Net PCI loans

     $ 73,282           $ 89,840        
  

 

 

    

 

 

    

Credit Quality Indicators

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

 

                               
         June 30, 2016            December 31, 2015    
     (Dollars in thousands)   

Pass

     $ 60,181           $ 76,401     

Special mention

     10,255           11,142     

Substandard

     5,586           6,169     

Doubtful & loss

     -           -     
  

 

 

    

 

 

 

Total gross PCI loans

     $     76,022           $     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 June 30, 2016, the allowance for loan losses included $310,000 for PCI loans, compared to no allowance for loan losses at December 31, 2015.

 

14


Table of Contents

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.

 

         June 30, 2016            December 31, 2015    
     (Dollars in thousands)   

Commercial and industrial

     $ 479,133           $ 434,099     

SBA

     111,762           106,867     

Real estate:

     

Commercial real estate

     2,884,332           2,643,184     

Construction

     94,009           68,563     

SFR mortgage

     237,488           233,754     

Dairy & livestock and agribusiness

     213,830           305,509     

Municipal lease finance receivables

     71,929           74,135     

Consumer and other loans

     79,725           69,278     
  

 

 

    

 

 

 

Gross loans, excluding PCI loans

     4,172,208           3,935,389     

Less: Deferred loan fees, net

     (7,872)          (8,292)    
  

 

 

    

 

 

 

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

     4,164,336           3,927,097     

Less: Allowance for loan losses

     (60,628)          (59,156)    
  

 

 

    

 

 

 

Net loans, excluding PCI loans

     4,103,708           3,867,941     
  

 

 

    

 

 

 

PCI Loans

     76,022           93,712     

Discount on PCI loans

     (2,430)          (3,872)    

Less: Allowance for loan losses

     (310)          -     
  

 

 

    

 

 

 

PCI loans, net

     73,282           89,840     
  

 

 

    

 

 

 

Total loans and lease finance receivables

     $     4,176,990           $   3,957,781     
  

 

 

    

 

 

 

As of June 30, 2016, 69.13% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 2.25% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2016, $190.5 million, or 6.60% 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 $135.6 million for loans secured by dairy & livestock land and $54.8 million for loans secured by agricultural land at June 30, 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 June 30, 2016, dairy & livestock and agribusiness loans of $213.8 million were comprised of $200.2 million for dairy & livestock loans and $14.1 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 June 30, 2016, the Company held approximately $2.04 billion of total fixed rate loans, including PCI loans.

At June 30, 2016 and December 31, 2015, loans totaling $3.13 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.

 

15


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.

 

16


Table of Contents

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

 

    June 30, 2016  
    Pass     Special
Mention
    Substandard     Doubtful &
Loss
    Total  
    (Dollars in thousands)  

Commercial and industrial

    $ 440,455          $ 21,264          $ 17,407          $ 7          $ 479,133     

SBA

    93,259          11,697          6,582          224          111,762     

Real estate:

         

Commercial real estate

         

Owner occupied

    827,887          87,431          18,617          -          933,935     

Non-owner occupied

    1,909,707          24,804          15,886          -          1,950,397     

Construction

         

Speculative

    47,301          -          7,651          -          54,952     

Non-speculative

    39,057          -          -          -          39,057     

SFR mortgage

    229,984          4,965          2,539          -          237,488     

Dairy & livestock and agribusiness

    145,897          48,122          19,811          -          213,830     

Municipal lease finance receivables

    67,188          4,741          -          -          71,929     

Consumer and other loans

    75,378          1,867          2,377          103          79,725     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI loans

    $   3,876,113          $   204,891          $ 90,870          $ 334          $   4,172,208     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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 June 30, 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.

 

17


Table of Contents

The following tables present the balance and activity related to the allowance for loan losses for held-for-investment loans by type for the periods presented.

 

    For the Three Months Ended June 30, 2016  
    Ending
Balance
March 31,
2016
    Charge-offs     Recoveries     (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30, 2016
 
    (Dollars in thousands)  

Commercial and industrial

    $ 8,731          $ (24)         $ 141          $ 539          $ 9,387     

SBA

    1,236          -          2          (61)         1,177     

Real estate:

         

Commercial real estate

    38,286          -          496          1,137          39,919     

Construction

    1,151          -          875          (798)         1,228     

SFR mortgage

    2,202          -          -          299          2,501     

Dairy & livestock and agribusiness

    5,176          -          107          (401)         4,882     

Municipal lease finance receivables

    1,165          -          -          (50)         1,115     

Consumer and other loans

    1,389          (1)         6          (975)         419     

PCI loans

    -          -          -          310          310     

Unallocated (1)

    -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

    $       59,336          $ (25)         $   1,627          $ -          $ 60,938     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial and industrial

    $ 7,502          $ -          $ 197          $ (514)         $ 7,185     

SBA

    2,196          -          3          (114)         2,085     

Real estate:

         

Commercial real estate

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

Construction

    1,043          -          41          (338)         746     

SFR mortgage

    2,425          (215)         -          354         2,564     

Dairy & livestock and agribusiness

    3,746          -          111          117         3,974     

Municipal lease finance receivables

    1,030          -          -          (16)         1,014     

Consumer and other loans

    825          (20)         52          (23)         834     

Unallocated (1)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents
     For the Six Months Ended June 30, 2016  
     Ending
Balance
December 31,
2015
    Charge-offs     Recoveries     (Recapture of)
Provision for
Loan Losses
    Ending
Balance
June 30, 2016
 
     (Dollars in thousands)  

Commercial and industrial

     $ 8,588          $ (85)         $ 204          $ 680          $ 9,387     

SBA

     993          -          3          181          1,177     

Real estate:

          

Commercial real estate

     36,995          -          635          2,289          39,919     

Construction

     2,389          -          884          (2,045)         1,228     

SFR mortgage

     2,103          (102)         -          500          2,501     

Dairy & livestock and agribusiness

     6,029          -          206          (1,353)         4,882     

Municipal lease finance receivables

     1,153          -          -          (38)         1,115     

Consumer and other loans

     906          (1)         38          (524)         419     

PCI loans

     -          -          -          310          310     

Unallocated (1)

     -          -          -          -          -     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

     $ 59,156          $ (188)         $ 1,970          $ -          $ 60,938     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial and industrial

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

SBA

     2,557          (33)         37          (476)         2,085     

Real estate:

          

Commercial real estate

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

Construction

     988          -          50          (292)         746     

SFR mortgage

     2,344          (215)         185          250          2,564     

Dairy & livestock and agribusiness

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

Municipal lease finance receivables

     1,412          -          -          (398)         1,014     

Consumer and other loans

     1,262          (197)         61          (292)         834     

Unallocated (1)

     5,336          -          -          402          5,738     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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.

 

19


Table of Contents

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

 

    June 30, 2016  
    Recorded Investment in Loans     Allowance for Loan Losses  
    Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired with
Deterioriated
Credit Quality
    Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired with
Deterioriated
Credit Quality
 
    (Dollars in thousands)  

Commercial and industrial

    $ 1,447          $ 477,686          $ -          $ 526          $ 8,861          $ -     

SBA

    3,498          108,264          -          42          1,135          -     

Real estate:

           

Commercial real estate

    17,908          2,866,424          -          1          39,918          -     

Construction

    7,651          86,358          -          45          1,183          -     

SFR mortgage

    5,734          231,754          -          13          2,488          -     

Dairy & livestock and agribusiness

    697          213,133          -          -          4,882          -     

Municipal lease finance receivables

    -          71,929          -          -          1,115          -     

Consumer and other loans

    829          78,896          -          3          416          -     

PCI loans

    -          -          76,022          -          -          310     

Unallocated (1)

    -          -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 37,764          $ 4,134,444          $ 76,022          $ 630          $ 59,998          $ 310     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    June 30, 2015  
    Recorded Investment in Loans     Allowance for Loan Losses  
    Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired with
Deterioriated
Credit Quality
    Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired with
Deterioriated
Credit Quality
 
    (Dollars in thousands)  

Commercial and industrial

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

SBA

    3,146          117,420          -          12          2,073          -     

Real estate:

           

Commercial real estate

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

Construction

    7,651          39,276          -          24          722          -     

SFR mortgage

    7,044          207,459          -          77          2,487          -     

Dairy & livestock and agribusiness

    7,091          176,893          -          -          3,974          -     

Municipal lease finance receivables

    -          74,691          -          -          1,014          -     

Consumer and other loans

    915          70,261          -          2          832          -     

PCI loans

    -          -          110,746          -          -          -     

Unallocated (1)

    -          -          -          -          5,738          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 67,390          $   3,620,291          $ 110,746          $ 550          $ 59,004          $ -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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.

 

20


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.

 

    June 30, 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

    $ 61          $ -          $ 61          $ 568          $ 478,504          479,133     

SBA

    -          -          -          2,637          109,125          111,762     

Real estate:

           

Commercial real estate

           

Owner occupied

    -          -          -          1,759          932,176          933,935     

Non-owner occupied

    320          -          320          9,637          1,940,440          1,950,397     

Construction

           

Speculative (2)

    -          -          -          -          54,952          54,952     

Non-speculative

    -          -          -          -          39,057          39,057     

SFR mortgage

    -          -          -          2,443          235,045          237,488     

Dairy & livestock and agribusiness

    -          -          -          -          213,830          213,830     

Municipal lease finance receivables

    -          -          -          -          71,929          71,929     

Consumer and other loans

    97          -          97          428          79,200          79,725     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans, excluding PCI Loans

    $ 478          $ -          $ 478          $ 17,472          $   4,154,258          $ 4,172,208     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) As of June 30, 2016, $15.6 million of nonaccruing loans were current, $84,000 were 30-59 days past due, $338,000 were 60-89 days past due and $1.4 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.

 

22


Table of Contents

Impaired Loans

At June 30, 2016, the Company had impaired loans, excluding PCI loans, of $37.8 million. Of this amount, there was $11.4 million of nonaccrual commercial real estate loans, $2.6 million of nonaccrual Small Business Administration (“SBA”) loans, $2.4 million of nonaccrual single-family residential (“SFR”) mortgage loans, $568,000 of nonaccrual commercial and industrial loans, and $428,000 of nonaccrual consumer and other loans. These impaired loans included $32.3 million of loans whose terms were modified in a troubled debt restructuring, of which $12.0 million were classified as nonaccrual. The remaining balance of $20.3 million consisted of 31 loans performing according to the restructured terms. The impaired loans had a specific allowance of $630,000 at June 30, 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 Six Months Ended
June 30, 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

    $ 840          $ 1,727          $ -          $ 904          $ 14     

SBA

    3,266          4,026          -          3,347          25     

Real estate:

         

Commercial real estate

         

Owner occupied

    4,386          5,573          -          4,623          87     

Non-owner occupied

    12,522          15,110          -          12,760          83     

Construction

         

Speculative

    -          -          -          -          -     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    5,464          6,331          -          5,591          60     

Dairy & livestock and agribusiness

    697          697          -          709          17     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    816          1,373          -          845          8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    27,991          34,837          -          28,779          294     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With a related allowance recorded:

         

Commercial and industrial

    607          668          526          638          6     

SBA

    232          250          42          238          6     

Real estate:

         

Commercial real estate

         

Owner occupied

    1,000          1,000          1          392          28     

Non-owner occupied

    -          -          -          -          -     

Construction

         

Speculative

    7,651          7,651          45          7,651          193     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    270          270          13          277          3     

Dairy & livestock and agribusiness

    -          -          -          -          -     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    13          13          3          13          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    9,773          9,852          630          9,209          236     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

    $   37,764          $   44,689          $   630          $   37,988          $ 530     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents
    As of and For the Six Months Ended
June 30, 2015
 
    Recorded
    Investment    
    Unpaid
    Principal    
Balance
    Related
    Allowance    
    Average
Recorded
    Investment    
    Interest
Income
    Recognized    
 
    (Dollars in thousands)   

With no related allowance recorded:

         

Commercial and industrial

    $ 1,097          $ 1,941          $ -          $ 1,172          $ 15     

SBA

    3,087          3,688          -          3,167          26     

Real estate:

         

Commercial real estate

         

Owner occupied

    5,987          7,080          -          5,865          127     

Non-owner occupied

    33,994          39,946          -          34,567          838     

Construction

         

Speculative

    -          -          -          -          -     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    6,228          7,175          -          6,102          50     

Dairy & livestock and agribusiness

    7,091          7,559          -          7,269          167     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    906          1,426          -          940          8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With a related allowance recorded:

         

Commercial and industrial

    465          536          435          478          1     

SBA

    59          59          12          63          -     

Real estate:

         

Commercial real estate

         

Owner occupied

    -          -          -          -          -     

Non-owner occupied

    -          -          -          -          -     

Construction

         

Speculative

    7,651          7,651          24          7,651          192     

Non-speculative

    -          -          -          -          -     

SFR mortgage

    816          824          77          826          3     

Dairy & livestock and agribusiness

    -          -          -          -          -     

Municipal lease finance receivables

    -          -          -          -          -     

Consumer and other loans

    9          14          2          10          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    9,000          9,084          550          9,028          196     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


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 June 30, 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.

 

25


Table of Contents

Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2016, compared to zero and a $500,000 recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2015, respectively. As of June 30, 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 June 30, 2016, there were $32.3 million of loans classified as a TDR, of which $12.0 million were nonperforming and $20.3 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 June 30, 2016, performing TDRs were comprised of one construction loan of $7.7 million, nine commercial real estate loans of $6.5 million, 11 SFR mortgage loans of $3.3 million, six commercial and industrial loans of $879,000, two SBA loans of $861,000, one dairy & livestock and agribusiness loan of $697,000 and one consumer loan of $401,000. There were no loans removed from TDR classification during the three and six months ended June 30, 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 $609,000 and $607,000 of specific allowance to TDRs as of June 30, 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
June 30,
     For the Six Months Ended
June 30,
 
     2016      2015      2016      2015  
     (Dollars in thousands)  

Performing TDRs:

           

Beginning balance

     $ 37,321           $ 45,376           $ 42,687           $ 53,589     

New modifications

     112           30           1,118           30     

Payoffs and payments, net

     (17,141)          (240)          (23,513)          (8,969)    

TDRs returned to accrual status

     -             -             -             516     

TDRs placed on nonaccrual status

     -             -             -             -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

     $ 20,292           $ 45,166           $ 20,292           $ 45,166     
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming TDRs:

           

Beginning balance

     $ 12,360           $ 16,774           $ 12,622           $ 20,285     

New modifications

     -             330           82           330     

Charge-offs

     -             -             (38)          -       

Transfer to OREO

     -             -             -             (842)    

Payoffs and payments, net

     (331)          (842)          (637)          (4,090)    

TDRs returned to accrual status

     -             (1,095)          -             (516)    

TDRs placed on nonaccrual status

     -             -             -             -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

     $ 12,029           $ 15,167           $ 12,029           $ 15,167     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

     $ 32,321           $   60,333           $   32,321           $   60,333     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

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

Modifications (1)

    For the Three Months Ended June 30, 2016  
    Number of
Loans
    Pre-Modification
Outstanding

Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
June 30, 2016
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    -          $ -          $ -          $ -          $ -     

Change in amortization period or maturity

    1          112          112          110          -     

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          $ 112          $ 112          $ 110          $ -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial and industrial:

         

Interest rate reduction

    -          $ -          $ -          $ -          $ -     

Change in amortization period or maturity

    1          30          30          30          -     

SBA:

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    1          330          330          330          12     

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

    2          $ 360          $ 360          $ 360          $ 12     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents
    For the Six Months Ended June 30, 2016  
    Number of
Loans
    Pre-Modification
Outstanding

Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
June 30, 2016
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    -          $ -          $ -          $ -          $ -     

Change in amortization period or maturity

    1          112          112          110          -     

SBA:

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    1          194          194          190          28     

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    2          812          812          761          -     

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          72          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    6          $ 1,200          $ 1,200          $ 1,133          $ 28     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Six Months Ended June 30, 2015  
    Number of
Loans
    Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Outstanding
Recorded
Investment at
June 30, 2015
    Financial Effect
Resulting From
Modifications (2)
 
    (Dollars in thousands)  

Commercial and industrial:

         

Interest rate reduction

    -          $ -          $ -          $ -          $ -     

Change in amortization period or maturity

    1          30          30          30          -     

SBA:

         

Interest rate reduction

    -          -          -          -          -     

Change in amortization period or maturity

    1          330          330          330          12     

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

    2          $ 360          $ 360          $ 360          $ 12     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 June 30, 2016, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2016.

 

28


Table of Contents

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 and six months ended June 30, 2016, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 262,000 and 267,000, respectively. For the three and six months ended June 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 254,000 and 228,000, respectively.

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     For the Six Months  
    Ended June 30,     Ended June 30,  
    2016     2015     2016     2015  
    (In thousands, except per share amounts)  

Earnings per common share:

       

Net earnings

    $       25,514          $       26,813          $       48,905          $       42,646     

Less: Net earnings allocated to restricted stock

    99          143          205          223     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings allocated to common shareholders

    $ 25,415          $ 26,670          $ 48,700          $ 42,423     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

    108,834          105,707          106,917          105,616     

Basic earnings per common share

    $ 0.23          $ 0.25          $ 0.46          $ 0.40     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share:

       

Net income allocated to common shareholders

    $ 25,415          $ 26,670          $ 48,700          $ 42,423     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

    108,834          105,707          106,917          105,616     

Incremental shares from assumed exercise of outstanding options

    410          451          406          445     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

    109,244          106,158          107,323          106,061     

Diluted earnings per common share

    $ 0.23          $ 0.25          $ 0.45          $ 0.40     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

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 June 30, 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 six months ended June 30, 2016 and 2015.

 

30


Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

     Carrying Value at
June 30, 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/GSE

     $ 4,763         $ -         $ 4,763         $ -   

Residential mortgage-backed securities

     1,717,450         -         1,717,450         -   

CMO/REMIC - residential

     397,896         -         397,896         -   

Municipal bonds

     122,648         -         122,648         -   

Other securities

     5,275         -         5,275         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities - AFS

     2,248,032         -         2,248,032         -   

Interest rate swaps

     15,161         -         15,161         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 2,263,193         $ -         $ 2,263,193         $ -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Description of liability

           

Interest rate swaps

     $ 15,161         $ -         $ 15,161         $ -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 15,161         $ -         $ 15,161         $ -   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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/GSE

     $ 5,745         $ -         $ 5,745         $ -   

Residential mortgage-backed securities

     1,813,097         -         1,813,097         -   

CMO/REMIC - 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         $ -   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

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

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at June 30, 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
June 30, 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 Six Months
Ended
June 30, 2016
 
                   (Dollars in thousands)               

Description of assets

             

Impaired loans, excluding PCI loans:

             

Commercial and industrial

     $ 95          $         $        $ 95          $ 14    

SBA

     232                         232          42    

Real estate:

             

Commercial real estate

     1,000                         1,000            

Construction

     7,651                         7,651          31    

SFR mortgage

                                      

Dairy & livestock and agribusiness

                                      

Consumer and other loans

     13                         13            

Other real estate owned

     1,522                         1,522          337    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

     $ 10,513          $         $        $ 10,513          $ 429    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     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    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

32


Table of Contents

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of June 30, 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.

 

     June 30, 2016  
            Estimated Fair Value  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
            (Dollars in thousands)         

Assets

              

Total cash and cash equivalents

   $ 699,182         $ 699,182         $ -         $ -         $ 699,182     

Interest-earning balances due from depository institutions

     91,272           -           91,272           -           91,272     

FHLB stock

     17,688           -           17,688           -           17,688     

Investment securities available-for-sale

     2,248,032           -           2,248,032           -           2,248,032     

Investment securities held-to-maturity

     724,357           -           742,006           1,475           743,481     

Total loans, net of allowance for loan losses

     4,176,990           -           -           4,243,374           4,243,374     

Swaps

     15,161           -           15,161           -           15,161     

Liabilities

              

Deposits:

              

Noninterest-bearing

   $     3,666,206           3,666,206           -           -         $     3,666,206     

Interest-bearing

     2,919,780           -           2,919,677           -           2,919,677     

Borrowings

     590,465           -           590,342           -           590,342     

Junior subordinated debentures

     25,774           -           27,383           -           27,383     

Swaps

     15,161           -           15,161           -           15,161     
     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 June 30, 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.

 

33


Table of Contents

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 43 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 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.

 

34


Table of Contents

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

 

     For the Three Months Ended June 30, 2016  
     Centers      Treasury      Other     Eliminations     Total  
            (Dollars in thousands)        

Interest income, including loan fees

     $ 38,953         $ 17,779         $ 11,283        $ -              $ 68,015   

Credit for funds provided (1)

     8,820         -           14,004        (22,824     -         
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     47,773         17,779         25,287        (22,824     68,015   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

     1,723         203         133        -              2,059   

Charge for funds used (1)

     1,467         15,629         5,728