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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

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 ☒   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 ☒    No ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

Emerging growth company

      

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of common stock of the registrant: 110,138,557 outstanding as of April 30, 2017.


Table of Contents

TABLE OF CONTENTS

 

PART I –

  FINANCIAL INFORMATION (UNAUDITED)      3  

    ITEM 1.

  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)      5  
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)      10  

    ITEM 2.

 

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

     41  
  CRITICAL ACCOUNTING POLICIES      41  
  OVERVIEW      41  
  ANALYSIS OF THE RESULTS OF OPERATIONS      43  
  RESULTS BY BUSINESS SEGMENTS      50  
  ANALYSIS OF FINANCIAL CONDITION      53  
  ASSET/LIABILITY AND MARKET RISK MANAGEMENT      70  

    ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      72  

    ITEM 4.

  CONTROLS AND PROCEDURES      72  

PART II –

  OTHER INFORMATION      73  

    ITEM 1.

  LEGAL PROCEEDINGS      73  

    ITEM 1A.

  RISK FACTORS      73  

    ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      74  

    ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      74  

    ITEM 4.

  MINE SAFETY DISCLOSURES      74  

    ITEM 5.

  OTHER INFORMATION      74  

    ITEM 6.

  EXHIBITS      74  

SIGNATURES

     75  

 

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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”, “strategy”, “possibility”, 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 political 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, depositors 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;

   

our ability to realize cost savings in connection with our recent acquisition of Valley Commerce Bancorp within expected time frames or at all;

   

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, bank operations, compliance, fair lending, employment, executive compensation, insurance, cybersecurity, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us, including additional legal and regulatory requirements to which we may become subject in the event our total assets exceed $10 billion;

   

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;

   

the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments;

   

inflation, changes in interest rate, securities market and monetary fluctuations;

   

changes in government interest rates or monetary policies;

   

changes in the amount and availability of deposit insurance;

   

disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access, cyber incidents, terrorist and political uncertainties or activities, disease pandemics, catastrophic events, natural disasters such as earthquakes, drought, extreme weather events, electrical, environmental, computer servers, and communications or other services we use, or that affect our employees or third parties with whom we conduct business;

   

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);

   

our 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;

 

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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 workforce, management team and/or 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, bank operations, consumer or employee class action litigation),

   

the possibility that any settlement of any of the putative class action lawsuits may not be approved by the relevant court or that significant numbers of putative class members may opt out of any settlement;

   

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, 2016, and particularly the discussion of risk factors within that document.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

 

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ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

          March 31,           December 31,  
    2017   2016

Assets

   

Cash and due from banks

    $ 118,772       $ 119,445  

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

    263,669       2,188  
 

 

 

 

 

 

 

 

Total cash and cash equivalents

    382,441       121,633  
 

 

 

 

 

 

 

 

Interest-earning balances due from depository institutions

    30,321       47,848  

Investment securities available-for-sale, at fair value (with amortized cost of $2,255,904 at March 31, 2017, and $2,255,874 at December 31, 2016)

    2,271,703       2,270,466  

Investment securities held-to-maturity (with fair value of $871,755 at March 31, 2017, and $897,374 at December 31, 2016)

    885,057       911,676  
 

 

 

 

 

 

 

 

Total investment securities

    3,156,760       3,182,142  
 

 

 

 

 

 

 

 

Investment in stock of Federal Home Loan Bank (FHLB)

    19,640       17,688  

Loans and lease finance receivables

    4,615,497       4,395,064  

Allowance for loan losses

    (59,212     (61,540
 

 

 

 

 

 

 

 

Net loans and lease finance receivables

    4,556,285       4,333,524  
 

 

 

 

 

 

 

 

Premises and equipment, net

    47,262       42,086  

Bank owned life insurance

    145,056       134,785  

Accrued interest receivable

    21,886       22,259  

Intangibles

    7,892       5,010  

Goodwill

    119,193       89,533  

Other real estate owned (OREO)

    4,527       4,527  

Income taxes

    40,832       45,429  

Asset held-for-sale

    3,411       3,411  

Other assets

    23,615       23,832  
 

 

 

 

 

 

 

 

Total assets

    $ 8,559,121       $ 8,073,707  
 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

   

Deposits:

   

Noninterest-bearing

    $ 3,999,107       $ 3,673,541  

Interest-bearing

    2,843,706       2,636,139  
 

 

 

 

 

 

 

 

Total deposits

    6,842,813       6,309,680  

Customer repurchase agreements

    564,387       603,028  

Other borrowings

    -       53,000  

Deferred compensation

    18,168       12,361  

Junior subordinated debentures

    25,774       25,774  

Payable for securities purchased

    -       23,777  

Other liabilities

    61,646       55,225  
 

 

 

 

 

 

 

 

Total liabilities

    7,512,788       7,082,845  
 

 

 

 

 

 

 

 

Commitments and Contingencies

   

Stockholders’ Equity

   

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,108,757 at March 31, 2017, and 108,251,981 at December 31, 2016

    570,997       531,192  

Retained earnings

    464,919       449,499  

Accumulated other comprehensive income, net of tax

    10,417       10,171  
 

 

 

 

 

 

 

 

Total stockholders’ equity

    1,046,333       990,862  
 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

    $ 8,559,121       $ 8,073,707  
 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

       For the Three Months Ended  
March 31,
     2017   2016

Interest income:

    

  Loans and leases, including fees

     $   48,641       $   45,770  

  Investment securities:

    

  Investment securities available-for-sale

     12,640       12,799  

  Investment securities held-to-maturity

     5,507       5,348  
  

 

 

 

 

 

 

 

   Total investment income

     18,147       18,147  
  

 

 

 

 

 

 

 

  Dividends from FHLB stock

     393       368  

  Interest-earning deposits with other institutions and federal funds sold

     267       215  
  

 

 

 

 

 

 

 

   Total interest income

     67,448       64,500  
  

 

 

 

 

 

 

 

Interest expense:

    

  Deposits

     1,433       1,437  

  Borrowings and customer repurchase agreements

     429       423  

  Junior subordinated debentures

     153       124  
  

 

 

 

 

 

 

 

   Total interest expense

     2,015       1,984  
  

 

 

 

 

 

 

 

  Net interest income before recapture of provision for loan losses

     65,433       62,516  

Recapture of provision for loan losses

     (4,500     -  
  

 

 

 

 

 

 

 

  Net interest income after recapture of provision for loan losses

     69,933       62,516  
  

 

 

 

 

 

 

 

Noninterest income:

    

  Service charges on deposit accounts

     3,727       3,747  

  Trust and investment services

     2,296       2,203  

  Bankcard services

     765       555  

  BOLI income

     715       547  

  Gain on sale of loans

     -       1,101  

  Other

     1,219       530  
  

 

 

 

 

 

 

 

   Total noninterest income

     8,722       8,683  
  

 

 

 

 

 

 

 

Noninterest expense:

    

  Salaries and employee benefits

     21,575       21,198  

  Occupancy and equipment

     3,684       3,713  

  Professional services

     1,257       1,248  

  Software licenses and maintenance

     1,561       1,274  

  Marketing and promotion

     1,239       1,427  

  Acquisition related expenses

     676       849  

  Other

     4,125       4,655  
  

 

 

 

 

 

 

 

   Total noninterest expense

     34,117       34,364  
  

 

 

 

 

 

 

 

Earnings before income taxes

     44,538       36,835  
  

 

 

 

 

 

 

 

Income taxes

     16,034       13,444  
  

 

 

 

 

 

 

 

  Net earnings

     $ 28,504       $ 23,391  
  

 

 

 

 

 

 

 

Other comprehensive income:

    

  Unrealized gain on securities arising during the period, before tax

     $ 424       $ 27,270  

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

     (178     (11,453
  

 

 

 

 

 

 

 

  Other comprehensive income, net of tax

     246       15,817  
  

 

 

 

 

 

 

 

  Comprehensive income

     $ 28,750       $ 39,208  
  

 

 

 

 

 

 

 

Basic earnings per common share

     $ 0.26       $ 0.22  

Diluted earnings per common share

     $ 0.26       $ 0.22  

Cash dividends declared per common share

     $ 0.12       $ 0.12  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

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Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2017 and 2016

(Dollars and shares in thousands)

(Unaudited)

 

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

Balance, January 1, 2016

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

Repurchase of common stock

     (31     (392     -       -        (392

Issuance of common stock for acquisition of County Commerce Bank

     1,394       21,642       -       -        21,642  

Exercise of stock options

     25       285       -       -        285  

Tax benefit from exercise of stock options

     -       -       -       -        -  

Shares issued pursuant to stock-based compensation plan

     13       654       -       -        654  

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

     -       -       (12,934     -        (12,934

Net earnings

     -       -       23,391       -        23,391  

Other comprehensive income

     -       -       -       15,817        15,817  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Balance, March 31, 2016

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Balance, January 1, 2017

     108,252       $ 531,192       $ 449,499       $ 10,171        $ 990,862  

Cumulative adjustment upon adoption of ASU 2016-09

     -       116       (66     -        50  

Repurchase of common stock

     (36     (817     -       -        (817

Issuance of common stock for acquisition of Valley Commerce Bancorp

     1,634       37,637       -       -        37,637  

Exercise of stock options

     240       2,190       -       -        2,190  

Shares issued pursuant to stock-based compensation plan

     19       679       -       -        679  

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

     -       -       (13,018     -        (13,018

Net earnings

     -       -       28,504       -        28,504  

Other comprehensive income

     -       -       -       246        246  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Balance, March 31, 2017

     110,109       $ 570,997       $     464,919       $ 10,417        $   1,046,333  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

         For the Three Months Ended    
     March 31,
     2017   2016

Cash Flows from Operating Activities

    

Interest and dividends received

     $ 71,499       $ 68,927  

Service charges and other fees received

     8,008       8,081  

Interest paid

     (2,047     (1,980

Net cash paid to vendors, employees and others

     (20,026     (43,524

Income taxes

     165       -  

Payments to FDIC, loss share agreement

     (450     (174
  

 

 

 

 

 

 

 

Net cash provided by operating activities

     57,149       31,330  
  

 

 

 

 

 

 

 

Cash Flows from Investing Activities

    

Proceeds from redemption of FHLB stock

     -       610  

Net change in interest-earning balances from depository institutions

     18,006       4,309  

Proceeds from repayment of investment securities available-for-sale

     102,426       95,004  

Proceeds from maturity of investment securities available-for-sale

     5,374       16,505  

Purchases of investment securities available-for-sale

     (134,572     (9,888

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

     33,411       37,032  

Purchases of investment securities held-to-maturity

     (8,895     -  

Net decrease in loan and lease finance receivables

     92,505       8,331  

Proceeds from sale of loans

     -       6,417  

Purchase of premises and equipment

     (998     (911

Proceeds from sales of other real estate owned

     -       200  

Cash acquired from acquisition, net of cash paid

     28,325       (7,504
  

 

 

 

 

 

 

 

Net cash provided by investing activities

     135,582       150,105  
  

 

 

 

 

 

 

 

Cash Flows from Financing Activities

    

Net increase in other deposits

     181,485       101,042  

Net decrease in time deposits

     (10,149     (26,271

Net decrease in other borrowings

     (53,000     (46,000

Net decrease in customer repurchase agreements

     (38,641     (63,844

Cash dividends on common stock

     (12,991     (12,766

Repurchase of common stock

     (817     (392

Proceeds from exercise of stock options

     2,190       285  
  

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

     68,077       (47,946
  

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

     260,808       133,489  

Cash and cash equivalents, beginning of period

     121,633       106,097  
  

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

     $     382,441       $     239,586  
  

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

         For the Three Months Ended    
     March 31,
     2017   2016

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

    

  Net earnings

     $ 28,504       $ 23,391  

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

    

  Gain on sale of loans

     -       (1,101

  Increase in bank owned life insurance

     (849     (638

  Net amortization of premiums and discounts on investment securities

     4,614       5,177  

  Accretion of PCI discount

     (253     (800

  Recapture of provision for loan losses

     (4,500     -  

  Valuation adjustment on other real estate owned

     -       248  

  Payments to FDIC, loss share agreement

     (450     (174

  Stock-based compensation

     679       654  

  Depreciation and amortization, net

     558       137  

  Change in other assets and liabilities

     28,846       4,436  
  

 

 

 

 

 

 

 

    Total adjustments

     28,645       7,939  
  

 

 

 

 

 

 

 

      Net cash provided by operating activities

     $           57,149       $               31,330  
  

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

    

  Securities purchased and not settled

     $ -       $ 4,152  

  Issuance of common stock for acquistion

     $ 37,637       $ 21,642  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BUSINESS

The condensed consolidated financial statements include 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 the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 54 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On March 10, 2017, we completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for Valley Business Bank (“VBB”), headquartered in the Central Valley area of California with four branch locations and total assets of approximately $400 million. This acquisition strengthens our market share in the Central Valley area of California. Our condensed consolidated financial statements for 2017 include VBB operations, post-merger. See Note 4 – Business Combinations, included herein.

 

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2017 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, 2016, 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.

 

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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, 2016 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.

Adoption of New Accounting Standard— In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for the fiscal years beginning after December 15, 2016, and interim periods within those years. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company’s condensed consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by approximately $1.3 million for the three months ended March 31, 2017. We also elected to account for forfeitures as they occur, rather than to estimate forfeitures over the vesting period. The remaining provisions of this accounting standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements— In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. This update to the ASC requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In applying the revenue model to contracts within its scope, an entity should apply the following steps: (1) Identify the contract(s) with a customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. The standard applies to all contracts with customers except those that are within the scope of other topics in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date”, which deferred the effective date for us of ASU No. 2014-09 to January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company has not yet selected a transition method. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements as substantially all of the Company’s revenues are excluded from the scope of the new standard.

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

In 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 are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply

 

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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.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In January, 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March, 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted this ASU effective January 1, 2017 and the adoption did not have a significant impact on its consolidated financial statements.

 

4. BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

On March 10, 2017, the Company acquired all of the assets and assumed all of the liabilities of VCBP for $23.2 million in cash and $37.6 million in stock. As a result, VBB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction serves to further strengthen its presence in the Central Valley area of California. At close, VBB had four branches located in Visalia, Tulare, Fresno, and Woodlake.

Goodwill of $29.7 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 $406.1 million, which included $51.5 million in cash and cash equivalents, $2.0 million in FHLB stock, $309.7 million in loans and lease finance receivables, $5.3 million in fixed assets, $9.4 million in Bank-Owned Life Insurance (“BOLI”), $3.2 million in core deposit intangible assets acquired and $18.5 million in other assets. The total fair value of liabilities assumed was $368.5 million, which included $361.8 million in deposits, and $6.7 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of March 10, 2017. 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.

 

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For the three months ended March 31, 2017, the Company incurred non-recurring merger related expenses associated with the VCBP acquisition of $651,000.

County Commerce Bank Acquisition

On February 29, 2016, the Bank acquired all of the assets and assumed all of the liabilities of County Commerce Bank (“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 served to further expand its footprint northward into and along the central coast of California. At close, CCB had four branches located in Ventura, Oxnard, Camarillo, and Westlake Village. The systems integration of CCB and CBB was completed in April 2016.

Goodwill of $15.3 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 $289,000 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. The purchase price allocation was finalized in the fourth quarter of 2016.

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

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

 

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5. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are traded in markets where similar assets are actively traded. Estimated fair values were obtained from an independent pricing service based upon market quotes.

 

     March 31, 2017
     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

     $ 1,749        $ 1        $ -       $ 1,750        0.08

   Residential mortgage-backed securities

     1,848,307        19,131        (5,685     1,861,753        81.95

   CMO/REMIC - residential

     324,283        3,403        (1,242     326,444        14.37

   Municipal bonds

     75,886        716        (881     75,721        3.33

   Other securities

     5,679        356        -       6,035        0.27
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total available-for-sale securities

     $   2,255,904        $ 23,607        $ (7,808     $   2,271,703        100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

             

   Government agency/GSE

     $ 176,281        $ 751        $ (1,620     $ 175,412        19.92

   Residential mortgage-backed securities

     186,480        -        (1,528     184,952        21.07

   CMO

     238,397        -        (7,563     230,834        26.93

   Municipal bonds

     283,899        1,210        (4,552     280,557        32.08
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total held-to-maturity securities

     $ 885,057        $       1,961        $     (15,263     $ 871,755              100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

     December 31, 2016
     Amortized
Cost
   Gross
Unrealized
Holding
Gain
   Gross
Unrealized
Holding

Loss
  Fair Value    Total
Percent
     (Dollars in thousands)

Investment securities available-for-sale:

             

   Government agency/GSE

     $ 2,750        $ 2        $ -       $ 2,752        0.12

   Residential mortgage-backed securities

     1,822,168        18,812        (6,232     1,834,748        80.81

   CMO/REMIC - residential

     345,313        3,361        (1,485     347,189        15.29

   Municipal bonds

     80,137        889        (955     80,071        3.53

   Other securities

     5,506        200        -       5,706        0.25
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total available-for-sale securities

     $ 2,255,874        $ 23,264        $ (8,672     $ 2,270,466        100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

             

   Government agency/GSE

     $ 182,648        $ 362        $ (1,972     $ 181,038        20.03

   Residential mortgage-backed securities

     193,699        -        (1,892     191,807        21.25

   CMO

     244,419        -        (6,808     237,611        26.81

   Municipal bonds

     290,910        776        (4,768     286,918        31.91
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total held-to-maturity securities

     $ 911,676        $ 1,138        $ (15,440     $ 897,374        100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

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

 

     For the Three Months Ended
March 31,
                       
     2017    2016   
     (Dollars in thousands)   

Investment securities available-for-sale:

        

   Taxable

     $     11,926        $     11,380     

   Tax-advantaged

     714        1,419     
  

 

 

 

  

 

 

 

  

   Total interest income from available-for-sale securities

     12,640        12,799     
  

 

 

 

  

 

 

 

  

Investment securities held-to-maturity:

        

   Taxable

     3,277        2,620     

   Tax-advantaged

     2,230        2,728     
  

 

 

 

  

 

 

 

  

   Total interest income from held-to-maturity securities

     5,507        5,348     
  

 

 

 

  

 

 

 

  

       Total interest income from investment securities

     $     18,147        $     18,147     
  

 

 

 

  

 

 

 

  

Approximately 88% of the total investment securities portfolio at March 31, 2017 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale Collateralized Mortgage Obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2017 and December 31, 2016. At March 31, 2017, the Bank had $5,000 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 March 31, 2017 and December 31, 2016. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“OTTI”).

 

     March 31, 2017
     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

     498,198        (5,685     -        -       498,198        (5,685

CMO/REMIC - residential

     97,275        (1,242     -        -       97,275        (1,242

Municipal bonds

     23,231        (880     5,986        (1     29,217        (881
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total available-for-sale securities

     $   618,704        $ (7,807     $ 5,986        $ (1     $ 624,690        $ (7,808
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

               

Government agency/GSE

     $ 46,205        $ (1,620     $ -        $ -       $ 46,205        $ (1,620

Residential mortgage-backed securities

     184,952        (1,528     -        -       184,952        (1,528

CMO

     230,834        (7,563     -        -       230,834        (7,563

Municipal bonds

     110,334        (3,491     33,200        (1,061     143,534        (4,552
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total held-to-maturity securities

     $     572,325        $     (14,202     $     33,200        $     (1,061     $   605,525        $   (15,263
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

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     December 31, 2016
     Less Than 12 Months   12 Months or Longer   Total
   Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
     (Dollars in thousands)  

Investment securities available-for-sale:

               

Government agency/GSE

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

Residential mortgage-backed securities

     583,143        (6,232     -        -       583,143        (6,232

CMO/REMIC - residential

     128,595        (1,485     -        -       128,595        (1,485

Municipal bonds

     23,255        (954     5,981        (1     29,236        (955
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total available-for-sale securities

     $ 734,993        $     (8,671     $ 5,981        $ (1     $ 740,974        $ (8,672
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

               

Government agency/GSE

     $ 76,854        $ (1,972     $ -        $ -       $ 76,854        $ (1,972

Residential mortgage-backed securities

     191,807        (1,892     -        -       191,807        (1,892

CMO

     237,611        (6,808     -        -       237,611        (6,808

Municipal bonds

     145,804        (3,711     36,971        (1,057     182,775        (4,768
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total held-to-maturity securities

     $     652,076        $     (14,383     $     36,971        $     (1,057     $   689,047        $   (15,440
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

At March 31, 2017 and December 31, 2016, investment securities having a carrying value of approximately $2.15 billion and $2.19 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at March 31, 2017, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

 

     March 31, 2017                    
     Avaliable-for-sale    Held-to-maturity   
     Amortized    Fair    Amortized    Fair   
     Cost    Value    Cost    Value   
     (Dollars in thousands)   

Due in one year or less

     $ 22,498        $ 22,719        $ 424        $ 424     

Due after one year through five years

     1,848,800        1,867,464        165,814        162,958     

Due after five years through ten years

     327,338        323,905        312,610        308,128     

Due after ten years

     57,268        57,615        406,209        400,245     
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

Total investment securities

     $   2,255,904        $   2,271,703        $     885,057        $     871,755     
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2017.

 

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, 2016. 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.

At March 31, 2017, the remaining discount associated with the PCI loans approximated $1.3 million. The loss sharing agreement for commercial loans expired October 16, 2014.

 

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Table of Contents

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.

 

       March 31, 2017       December 31, 2016    

            

     (Dollars in thousands)  

Commercial and industrial

     $ 1,911       $ 2,309    

SBA

     1,575       327    

Real estate:

      

Commercial real estate

     52,293       67,594    

Construction

     -       -    

SFR mortgage

     175       178    

Dairy & livestock and agribusiness

     460       1,216    

Municipal lease finance receivables

     -       -    

Consumer and other loans

     1,371       1,469    
  

 

 

 

 

 

 

 

 

Gross PCI loans

     57,785       73,093    

Less: Purchase accounting discount

     (1,258     (1,508  
  

 

 

 

 

 

 

 

 

Gross PCI loans, net of discount

     56,527       71,585    

Less: Allowance for PCI loan losses

     (725     (1,219  
  

 

 

 

 

 

 

 

 

Net PCI loans

     $ 55,802       $ 70,366    
  

 

 

 

 

 

 

 

 

Credit Quality Indicators

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

 

      March 31, 2017      December 31, 2016 
     (Dollars in thousands)

Pass

     $ 45,205        $ 59,409  

Special mention

     383        1,162  

Substandard

     12,197        12,522  

Doubtful & loss

     -        -  
  

 

 

 

  

 

 

 

Total gross PCI loans

     $ 57,785        $ 73,093  
  

 

 

 

  

 

 

 

 

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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.

 

      March 31, 2017     December 31, 2016 
     (Dollars in thousands)

Commercial and industrial

     $ 528,945       $ 485,078  

SBA

     112,690       97,184  

Real estate:

    

Commercial real estate

     3,219,299       2,930,141  

Construction

     72,782       85,879  

SFR mortgage

     245,362       250,605  

Dairy & livestock and agribusiness

     244,264       338,631  

Municipal lease finance receivables

     62,416       64,639  

Consumer and other loans

     80,163       78,274  
  

 

 

 

 

 

 

 

Gross loans, excluding PCI loans

     4,565,921       4,330,431  

Less: Deferred loan fees, net

     (6,951     (6,952
  

 

 

 

 

 

 

 

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

     4,558,970       4,323,479  

Less: Allowance for loan losses

     (58,487     (60,321
  

 

 

 

 

 

 

 

Net loans, excluding PCI loans

     4,500,483       4,263,158  
  

 

 

 

 

 

 

 

PCI Loans

     57,785       73,093  

Discount on PCI loans

     (1,258     (1,508

Less: Allowance for loan losses

     (725     (1,219
  

 

 

 

 

 

 

 

PCI loans, net

     55,802       70,366  
  

 

 

 

 

 

 

 

Total loans and lease finance receivables

     $ 4,556,285       $ 4,333,524  
  

 

 

 

 

 

 

 

As of March 31, 2017, 77.47% of the total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 70.51% of which consisted of commercial real estate loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of March 31, 2017, $164.9 million, or 5.12% of the total commercial real estate loans included loans secured by farmland, compared to $180.6 million, or 6.16%, at December 31, 2016. The loans secured by farmland included $111.6 million for loans secured by dairy & livestock land and $53.3 million for loans secured by agricultural land at March 31, 2017, compared to $127.1 million for loans secured by dairy & livestock land and $53.6 million for loans secured by agricultural land at December 31, 2016. As of March 31, 2017, dairy & livestock and agribusiness loans of $244.3 million were comprised of $216.3 million for dairy & livestock loans and $28.0 million for agribusiness loans, compared to $317.9 million for dairy & livestock loans and $20.7 million for agribusiness loans at December 31, 2016.

At March 31, 2017, the Company held approximately $2.07 billion of total fixed rate loans, including PCI loans.

At March 31, 2017 and December 31, 2016, loans totaling $3.12 billion and $3.11 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loans held-for-sale as of March 31, 2017 and December 31, 2016.

 

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Table of Contents

Credit Quality Indicators

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

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

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

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

Substandard – Loans classified as substandard are inadequately protected by the 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 asset with insignificant value even though partial recovery may be effected in the future.

 

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Table of Contents

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

 

                                                                                    
     March 31, 2017
     Pass    Special
Mention
   Substandard    Doubtful &
Loss
   Total
     (Dollars in thousands)

Commercial and industrial

     $ 491,534        $ 25,393        $ 12,018        $ -        $ 528,945  

SBA

     97,795        10,098        4,788        9        112,690  

Real estate:

              

Commercial real estate

              

Owner occupied

     939,031        85,700        22,700        -        1,047,431  

Non-owner occupied

     2,132,104        22,541        17,223        -        2,171,868  

Construction

              

Speculative

     53,305        -        384        -        53,689  

Non-speculative

     19,093        -        -        -        19,093  

SFR mortgage

     239,390        4,989        983        -        245,362  

Dairy & livestock and agribusiness

     137,440        75,054        31,770        -        244,264  

Municipal lease finance receivables

     58,088        4,328        -        -        62,416  

Consumer and other loans

     75,864        2,198        2,098        3        80,163  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

     $ 4,243,644        $ 230,301        $ 91,964        $ 12        $ 4,565,921  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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

Commercial and industrial

     $ 449,658        $ 21,610        $ 13,809        $ 1        $ 485,078  

SBA

     80,138        10,553        6,482        11        97,184  

Real estate:

              

Commercial real estate

              

Owner occupied

     842,992        87,781        19,046        -        949,819  

Non-owner occupied

     1,941,203        23,534        15,585        -        1,980,322  

Construction

              

Speculative

     48,841        -        -        -        48,841  

Non-speculative

     37,038        -        -        -        37,038  

SFR mortgage

     243,374        4,930        2,301        -        250,605  

Dairy & livestock and agribusiness

     187,819        114,106        36,706        -        338,631  

Municipal lease finance receivables

     60,102        4,537        -        -        64,639  

Consumer and other loans

     74,328        2,123        1,819        4        78,274  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

     $   3,965,493        $ 269,174        $ 95,748        $ 16        $   4,330,431  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Allowance for Loan Losses

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 2016 Annual Report on Form 10-K for the year ended December 31, 2016 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at March 31, 2017 and December 31, 2016. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

 

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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 March 31, 2017
     Ending Balance
December 31,
2016
   Charge-offs   Recoveries    (Recapture of)
Provision for
Loan Losses
  Ending Balance
March 31,
2017
     (Dollars in thousands)

Commercial and industrial

     $ 8,154        $ -       $ 52        $ (250     $ 7,956  

SBA

     871        -       4        (4     871  

Real estate:

            

Commercial real estate

     37,443        -       -        1,543       38,986  

Construction

     1,096        -       2,025        (2,301     820  

SFR mortgage

     2,287        -       64        (165     2,186  

Dairy & livestock and agribusiness

     8,541        -       -        (2,699     5,842  

Municipal lease finance receivables

     941        -       -        (52     889  

Consumer and other loans

     988        (2     29        (78     937  

PCI loans

     1,219        -       -        (494     725  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

     $ 61,540        $ (2     $ 2,174        $ (4,500     $ 59,212  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

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

Commercial and industrial

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

SBA

     993        -       1        242       1,236  

Real estate:

            

Commercial real estate

     36,995        -       139        1,152       38,286  

Construction

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

SFR mortgage

     2,103        (102     -        201       2,202  

Dairy & livestock and agribusiness

     6,029        -       99        (952     5,176  

Municipal lease finance receivables

     1,153        -       -        12       1,165  

Consumer and other loans

     906        -       32        451       1,389  

PCI loans

     -        -       -        -       -  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

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

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

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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. The Company’s ALLL methodology for the first quarter of 2017 excludes the impact of the recent VBB acquisition from certain of the Bank’s qualitative factors that are otherwise designed to capture incremental risk in the legacy loan portfolio. The VBB acquired loans are also supported by a credit mark established through the determination of fair value for the acquired loan portfolio.

 

                                                                                               
    March 31, 2017
    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

    $ 1,150       $ 527,795       $ -       $ 88       $ 7,868       $ -  

SBA

    1,926       110,764       -       9       862       -  

Real estate:

           

Commercial real estate

    20,216       3,199,083       -       -       38,986       -  

Construction

    384       72,398       -       -       820       -  

SFR mortgage

    4,248       241,114       -       -       2,186       -  

Dairy & livestock and agribusiness

    1,324       242,940       -       -       5,842       -  

Municipal lease finance receivables

    -       62,416       -       -       889       -  

Consumer and other loans

    801       79,362       -       -       937       -  

PCI loans

    -       -       56,527       -       -       725  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 30,049       $ 4,535,872       $ 56,527       $ 97       $ 58,390       $ 725  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    March 31, 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

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

SBA

    3,304       110,399       -       55       1,181       -  

Real estate:

           

Commercial real estate

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

Construction

    7,651       81,997       -       48       1,103       -  

SFR mortgage

    5,874       227,091       -       16       2,186       -  

Dairy & livestock and agribusiness

    714       226,996       -       -       5,176       -  

Municipal lease finance receivables

    -       73,098       -       -       1,165       -  

Consumer and other loans

    868       75,235       -       -       1,389       -  

PCI loans

    -       -       81,850       -       -       -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 55,465       $ 4,043,842       $ 81,850       $ 694       $ 58,642       $ -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a 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.

 

23


Table of Contents

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

 

                                                                                                                 
     March 31, 2017
     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

     $ 42        $ 177        $ 219        $ 506        $ 528,220        $ 528,945  

SBA

     328        1        329        1,089        111,272        112,690  

Real estate:

                 

Commercial real estate

                 

Owner occupied

     -        -        -        2,374        1,045,057        1,047,431  

Non-owner occupied

     -        -        -        3,249        2,168,619        2,171,868  

Construction

                 

Speculative (2)

     -        -        -        384        53,305        53,689  

Non-speculative

     -        -        -        -        19,093        19,093  

SFR mortgage

     403        -        403        983        243,976        245,362  

Dairy & livestock and agribusiness

     -        -        -        1,324        242,940        244,264  

Municipal lease finance receivables

     -        -        -        -        62,416        62,416  

Consumer and other loans

     30        399        429        438        79,296        80,163  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI Loans

     $ 803        $ 577        $ 1,380        $ 10,347        $ 4,554,194        $ 4,565,921  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

(1)    As of March 31, 2017, $6.2 million of nonaccruing loans were current, $2.2 million were 30-59 days past due, $81,000 were 60-89 days past due and $1.9 million were 90+ days past due.

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

 

                                                                                                                 
     December 31, 2016
     30-59 Days
Past Due
   60-89 Days
Past Due
   Total Past
Due and
Accruing
   Nonaccrual (1)    Current    Total Loans
and Financing
Receivables
     (Dollars in thousands)

Commercial and industrial

     $ -        $ -        $ -        $ 156        $ 484,922        $ 485,078  

SBA

     352        -        352        2,737        94,095        97,184  

Real estate:

                 

Commercial real estate

                 

Owner occupied

     -        -        -        635        949,184        949,819  

Non-owner occupied

     -        -        -        1,048        1,979,274        1,980,322  

Construction

                 

Speculative (2)

     -        -        -        -        48,841        48,841  

Non-speculative

     -        -        -        -        37,038        37,038  

SFR mortgage

     -        -        -        2,207        248,398        250,605  

Dairy & livestock and agribusiness

     -        -        -        -        338,631        338,631  

Municipal lease finance receivables

     -        -        -        -        64,639        64,639  

Consumer and other loans

     84        -        84        369        77,821        78,274  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI Loans

     $ 436        $ -        $ 436        $ 7,152        $ 4,322,843        $ 4,330,431  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

  (1) As of December 31, 2016, $4.7 million of nonaccruing loans were current, $514,000 were 30-59 days past due, $435,000 were 60-89 days past due and $1.5 million were 90+ days past due.
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

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Table of Contents

Impaired Loans

At March 31, 2017, the Company had impaired loans, excluding PCI loans, of $30.0 million and included $6.4 million of loans acquired from VBB in the first quarter of 2017. Of this amount, there was $5.6 million of nonaccrual commercial real estate loans, $1.3 million of nonaccrual dairy & livestock and agribusiness loans, $1.1 million of nonaccrual Small Business Administration (“SBA”) loans, $983,000 of nonaccrual single-family residential (“SFR”) mortgage loans, $506,000 of nonaccrual commercial and industrial loans, $438,000 of nonaccrual consumer and other loans, and $384,000 of nonaccrual construction loans. These impaired loans included $21.1 million of loans whose terms were modified in a troubled debt restructuring, of which $1.4 million were classified as nonaccrual. The remaining balance of $19.7 million consisted of 25 loans performing according to the restructured terms. The impaired loans had a specific allowance of $97,000 at March 31, 2017. At December 31, 2016, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $26.4 million with a related allowance of $141,000.

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

 

                                                                                              
     As of and For the Three Months Ended
March 31, 2017
     Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
     (Dollars in thousands)

With no related allowance recorded:

              

Commercial and industrial

   $ 1,015        $ 1,985        $ -        $ 1,045        $ 6  

SBA

     1,917        2,272        -        1,960        16  

Real estate:

              

Commercial real estate

              

Owner occupied

     6,669        7,081        -        6,434        32  

Non-owner occupied

     13,547        16,198        -        13,479        401  

Construction

              

Speculative

     384        402        -        384        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     4,248        5,024        -        4,259        34  

Dairy & livestock and agribusiness

     1,324        1,610        -        1,839        1  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     801        1,379        -        809        5  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

     29,905        35,951        -        30,209        495  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     135        136        88        152        2  

SBA

     9        25        9        10        -  

Real estate:

              

Commercial real estate

              

Owner occupied

     -        -        -        -        -  

Non-owner occupied

     -        -        -        -        -  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     -        -        -        -        -  

Dairy & livestock and agribusiness

     -        -        -        -        -  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     -        -        -        -        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

     144        161        97        162        2  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total impaired loans

     $ 30,049        $ 36,112        $ 97        $ 30,371        $ 497  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

25


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

With no related allowance recorded

              

Commercial and industrial

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

SBA

     3,050        3,765        -        3,089        13  

Real estate:

              

Commercial real estate

              

Owner occupied

     5,315        6,507        -        5,095        51  

Non-owner occupied

     30,262        33,368        -        30,400        343  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     5,499        6,406        -        5,512        27  

Dairy & livestock and agribusiness

     714        714        -        710        8  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     868        1,420        -        888        4  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

     46,513        53,857        -        46,525        453  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

With a related allowance recorded

              

Commercial and industrial

     672        741        575        687        3  

SBA

     254        274        55        254        2  

Real estate:

              

Commercial real estate

              

Owner occupied

     -        -        -        -        -  

Non-owner occupied

     -        -        -        -        -  

Construction

              

Speculative

     7,651        7,651        48        7,651        97  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     375        426        16        515        2  

Dairy & livestock and agribusiness

     -        -        -        -        -  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     -        -        -        -        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

     8,952        9,092        694        9,107        104  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total impaired loans

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

26


Table of Contents
                                                                                   
     As of December 31, 2016   

                             

     Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
  
     (Dollars in thousands)   

With no related allowance recorded

           

Commercial and industrial

     $ 730        $ 1,646        $ -     

SBA

     3,386        4,189        -     

Real estate:

           

Commercial real estate

           

Owner occupied

     1,797        2,276        -     

Non-owner occupied

     13,331        15,842        -     

Construction

           

Speculative

     -        -        -     

Non-speculative

     -        -        -     

SFR mortgage

     5,174        6,075        -     

Dairy & livestock and agribusiness

     747        747        -     

Municipal lease finance receivables

     -        -        -     

Consumer and other loans

     853        1,423        -     
  

 

 

 

  

 

 

 

  

 

 

 

  

Total

     26,018        32,198        -     
  

 

 

 

  

 

 

 

  

 

 

 

  

With a related allowance recorded

           

Commercial and industrial

     171        171        114     

SBA

     196        212        27     

Real estate:

           

Commercial real estate

           

Owner occupied

     -        -        -     

Non-owner occupied

     -        -        -     

Construction

           

Speculative

     -        -        -     

Non-speculative

     -        -        -     

SFR mortgage

     -        -        -     

Dairy & livestock and agribusiness

     -        -        -     

Municipal lease finance receivables

     -        -        -     

Consumer and other loans

     -        -        -     
  

 

 

 

  

 

 

 

  

 

 

 

  

Total

     367        383        141     
  

 

 

 

  

 

 

 

  

 

 

 

  

Total impaired loans

     $ 26,385        $ 32,581        $ 141     
  

 

 

 

  

 

 

 

  

 

 

 

  

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of March 31, 2017 and December 31, 2016 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 mortgage loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

 

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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 months ended March 31, 2017 and 2016. As of March 31, 2017 and December 31, 2016, the balance in this reserve was $6.7 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, 2016 for a more detailed discussion regarding TDRs.

As of March 31, 2017, there were $21.1 million of loans classified as a TDR, of which $1.4 million were nonperforming and $19.7 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At March 31, 2017, performing TDRs were comprised of six commercial real estate loans of $14.6 million, 11 SFR mortgage loans of $3.3 million, two SBA loans of $837,000, five commercial and industrial loans of $644,000, and one consumer loan of $363,000.

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 $97,000 and $141,000 of specific allowance to TDRs as of March 31, 2017 and December 31, 2016, respectively.

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

 

       For the Three Months Ended  
March 31,
                               
     2017    2016   
     (Dollars in thousands)   

Performing TDRs:

        

Beginning balance

     $ 19,233        $ 42,687     

New modifications

     3,143        1,006     

Payoffs and payments, net

     (3,003      (6,372   

TDRs returned to accrual status

     329        -     

TDRs placed on nonaccrual status

     -        -     
  

 

 

 

  

 

 

 

  

Ending balance

     $       19,702        $       37,321     
  

 

 

 

  

 

 

 

  

Nonperforming TDRs:

        

Beginning balance

     $ 1,626        $ 12,622     

New modifications

     2,066        82     

Charge-offs

     -        (38   

Payoffs and payments, net

     (1,956      (306   

TDRs returned to accrual status

     (329      -     

TDRs placed on nonaccrual status

     -        -     
  

 

 

 

  

 

 

 

  

Ending balance

     $ 1,407        $ 12,360     
  

 

 

 

  

 

 

 

  

Total TDRs

     $ 21,109        $ 49,681     
  

 

 

 

  

 

 

 

  

 

28


Table of Contents

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

Modifications (1)

    For the Three Months Ended March 31, 2017
    Number of
Loans
  Pre-Modification
Outstanding
Recorded
Investment
  Post-Modification
Outstanding
Recorded
Investment
  Outstanding
Recorded
Investment at
March 31, 2017
  Financial Effect
Resulting From
Modifications (2)
    (Dollars in thousands)

Commercial and industrial:

         

Interest rate reduction

    -       $ -       $ -       $ -       $ -  

Change in amortization period or maturity

    -       -       -       -       -  

SBA:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       3,143       3,143       3,143       -  

Non-owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Dairy & livestock and agribusiness:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       1,984       1,984       78       -  

Consumer:

         

Interest rate reduction

              -       -       -       -       -  

Change in amortization period or maturity

    1       82       82       80                       -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

    3       $ 5,209       $ 5,209       $ 3,301       $ -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    For the Three Months Ended March 31, 2016
    Number of
Loans
  Pre-Modification
Outstanding
Recorded
Investment
  Post-Modification
Outstanding
Recorded
Investment
  Outstanding
Recorded
Investment at
March 31, 2016
  Financial Effect
Resulting From
Modifications (2)
    (Dollars in thousands)

Commercial and industrial:

         

Interest rate reduction

    -       $ -       $ -       $ -       $ -  

Change in amortization period or maturity

    -       -       -       -       -  

SBA:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       194       194       193       28  

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    2       812       812       778       -  

Non-owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Consumer:

         

Interest rate reduction

              -       -       -       -       -  

Change in amortization period or maturity

    2       82       82       75                       -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

As of March 31, 2017, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2017.

 

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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 months ended March 31, 2017 and 2016, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 1,000 and 262,000, respectively.

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

 

                                                                 
       For the Three Months  
Ended March 31,
                                        
     2017    2016   
     (In thousands, except per share amounts)   

Earnings per common share:

        

Net earnings

     $ 28,504        $ 23,391     

Less: Net earnings allocated to restricted stock

     112        104     
  

 

 

 

  

 

 

 

  

Net earnings allocated to common shareholders

     $ 28,392        $ 23,287     
  

 

 

 

  

 

 

 

  

Weighted average shares outstanding

     108,339        106,392     

Basic earnings per common share

     $ 0.26        $ 0.22     
  

 

 

 

  

 

 

 

  

Diluted earnings per common share:

        

Net income allocated to common shareholders

     $ 28,392        $ 23,287     
  

 

 

 

  

 

 

 

  

Weighted average shares outstanding

     108,339        106,392     

Incremental shares from assumed exercise of outstanding options

     467        392     
  

 

 

 

  

 

 

 

  

Diluted weighted average shares outstanding

     108,806        106,784     

Diluted earnings per common share

     $ 0.26        $ 0.22     
  

 

 

 

  

 

 

 

  

 

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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 March 31, 2017. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

 

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

 

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

 

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

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

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

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

There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2017 and 2016.

 

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Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

                                                                           
    Carrying Value at
March 31, 2017
    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

    $ 1,750       $ -       $ 1,750       $ -  

Residential mortgage-backed securities

    1,861,753       -       1,861,753       -  

CMO/REMIC - residential

    326,444       -       326,444       -  

Municipal bonds

    75,721       -       75,721       -  

Other securities

    6,035       -       6,035       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities - AFS

    2,271,703       -       2,271,703       -  

Interest rate swaps

    4,985       -       4,985       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 2,276,688       $ -       $ 2,276,688       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 4,985       $ -       $ 4,985       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 4,985       $ -       $ 4,985       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 
    Carrying Value at
December 31, 2016
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 
    (Dollars in thousands)  

Description of assets

       

Investment securities - AFS:

       

Government agency/GSE

    $ 2,752       $ -       $ 2,752       $ -  

Residential mortgage-backed securities

    1,834,748       -       1,834,748       -  

CMO/REMIC - residential

    347,189       -       347,189       -  

Municipal bonds

    80,071       -       80,071       -  

Other securities

    5,706       -       5,706       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities - AFS

    2,270,466       -       2,270,466       -  

Interest rate swaps

    5,783       -       5,783       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 2,276,249       $ -       $ 2,276,249       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 5,783       $ -       $ 5,783       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 5,783       $ -       $ 5,783       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. There were no assets outstanding at March 31, 2017 that were measured at fair value on a non-recurring basis and that had losses during the three months ended March 31, 2017. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at December 31, 2016, the following table provides 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
December 31, 2016
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
    Total Losses
For the Year Ended
December 31, 2016
 
    (Dollars in thousands)  

Description of assets

         

Impaired loans, excluding PCI loans:

         

Commercial and industrial

    $ 65       $ -       $ -       $ 65       $ 8  

SBA

    196       -       -       196       27  

Real estate:

         

Commercial real estate

    -       -       -       -       -  

Construction

    -       -       -       -       -  

SFR mortgage

    -       -       -       -       -  

Dairy & livestock and agribusiness

    -       -       -       -       -  

Consumer and other loans

    -       -       -       -       -  

Other real estate owned

    -       -       -       -       -  

Asset held-for-sale

    3,411           3,411       2,558  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 3,672       $ -       $ -       $ 3,672       $ 2,593  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2017 and December 31, 2016, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

                                                                               
     March 31, 2017
          Estimated Fair Value
     Carrying
Amount
   Level 1    Level 2    Level 3    Total
     (Dollars in thousands)

Assets

              

Total cash and due from banks

     $ 118,772        $ 118,772        $ -        $ -        $ 118,772  

Interest-earning balances due from depository institutions and federal funds sold

     263,669        -        263,669        -        263,669  

FHLB stock

     19,640        -        19,640        -        19,640  

Investment securities available-for-sale

     2,271,703        -        2,271,703        -        2,271,703  

Investment securities held-to-maturity

     885,057        -        871,755        -        871,755  

Total loans, net of allowance for loan losses

     4,556,285        -        -        4,520,673        4,520,673  

Swaps

     4,985        -        4,985        -        4,985  

Liabilities

              

Deposits:

              

Noninterest-bearing

     $ 3,999,107        $ 3,999,107        $ -        $ -        $ 3,999,107  

Interest-bearing

     2,843,706        -        2,841,739        -        2,841,739  

Borrowings

     564,387        -        564,147        -        564,147  

Junior subordinated debentures

     25,774        -        -        18,913        18,913  

Swaps

     4,985        -        4,985        -        4,985  
     December 31, 2016
          Estimated Fair Value
     Carrying
Amount
   Level 1    Level 2    Level 3    Total
     (Dollars in thousands)

Assets

              

Total cash and due from banks

     $ 119,445        $ 119,445        $ -        $ -        $ 119,445  

Interest-earning balances due from depository institutions

     2,188        -        2,188        -        2,188  

FHLB stock

     17,688        -        17,688        -        17,688  

Investment securities available-for-sale

     2,270,466        -        2,270,466        -        2,270,466  

Investment securities held-to-maturity

     911,676        -        897,374        -        897,374  

Total loans, net of allowance for loan losses

     4,333,524        -        -        4,306,225        4,306,225  

Swaps

     5,783        -        5,783        -        5,783  

Liabilities

              

Deposits:

              

Noninterest-bearing

     $ 3,673,541        $ 3,673,541        $ -        $ -        $ 3,673,541  

Interest-bearing

     2,636,139        -        2,634,443        -        2,634,443  

Borrowings

     656,028        -        655,820        -        655,820  

Junior subordinated debentures

     25,774        -        -        18,463        18,463  

Swaps

     5,783        -        5,783        -        5,783  

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

 

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Table of Contents
10. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. The Bank has 54 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 departments 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 two segments in deciding how to allocate resources and to assess performance. Our two principal reporting segments, Centers and Dairy & Livestock and Agribusiness, are aggregated into separate operating segments 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. In 2016, Dairy & Livestock and Agribusiness was reflected as our second reportable segment. All other operating departments have been aggregated and included in “Other” for reporting purposes. Recapture of provision for loan losses was allocated by segment based on loan type in 2016. Prior period information has been conformed to the current presentation. 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 the “Other” category.

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, 2016. 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 Centers’ business segment are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

 

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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 March 31, 2017
    Centers   Dairy &
livestock and
agribusiness
  Other (1)   Total
    (Dollars in thousands)

Net interest income

    $ 45,578       $ 2,144       $ 17,711       $ 65,433  

(Recapture of) provision for loan losses

    511       (2,699     (2,312     (4,500
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after (recapture of) provision for loan losses

    45,067       4,843       20,023       69,933  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

    5,207       55       3,460       8,722  

Noninterest expense

    12,438       501       21,178       34,117  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment pre-tax profit

    $ 37,836       $ 4,397       $ 2,305       $ 44,538  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

    $ 119,193       $ -           $ -           $ 119,193  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets as of March 31, 2017

    $   7,399,909       $     363,029       $     796,183       $   8,559,121  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

 

    For the Three Months Ended March 31, 2016
    Centers   Dairy &
livestock and
agribusiness
  Other (1)   Total
    (Dollars in thousands)

Net interest income

    $ 42,234       $ 1,933       $ 18,349       $ 62,516  

(Recapture of) provision for loan losses

    2,200       (952     (1,248     -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after (recapture of) provision for loan losses

    40,034       2,885       19,597       62,516  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

    4,827       53       3,803       8,683  

Noninterest expense

    12,610       479       21,275       34,364  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment pre-tax profit

    $ 32,251       $ 2,459       $ 2,125       $ 36,835  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

    $ 88,174       $ -           $ -           $ 88,174  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets as of March 31, 2016

    $   6,586,237       $     386,804       $     947,795       $   7,920,836  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

 

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Table of Contents
11. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of March 31, 2017, the Bank has entered into 80 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

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

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

Balance Sheet Classification of Derivative Financial Instruments

As of March 31, 2017 and December 31, 2016, the total notional amount of the Company’s swaps was $207.0 million, and $202.7 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

 

     March 31, 2017
     Asset Derivatives    Liability Derivatives
     Balance Sheet
Location
   Fair
Value
   Balance Sheet
Location
   Fair
Value
     (Dollars in thousands)

Derivatives not designated as hedging instruments:

           

  Interest rate swaps

     Other assets        $ 4,985        Other liabilities        $ 4,985  
     

 

 

 

     

 

 

 

  Total derivatives

        $     4,985           $     4,985  
     

 

 

 

     

 

 

 

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

Derivatives not designated as hedging instruments:

           

  Interest rate swaps

     Other assets        $ 5,783        Other liabilities        $ 5,783  
     

 

 

 

     

 

 

 

  Total derivatives

        $ 5,783            $ 5,783   
     

 

 

 

     

 

 

 

 

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Table of Contents

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

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

 

Derivatives Not Designated as

Hedging Instruments

   Location of Gain Recognized in
Income on Derivative Instruments
   Amount of Gain Recognized in Income on
Derivative Instruments
          For the Three Months Ended
March 31,
          2017    2016
          (Dollars in thousands)

Interest rate swaps

     Other income        $ 323        $ 58  
     

 

 

 

  

 

 

 

Total

        $ 323        $ 58  
     

 

 

 

  

 

 

 

 

12. OTHER COMPREHENSIVE INCOME

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

 

                                                                                         
     For the Three Months Ended March 31,
     2017   2016
     Before-tax   Tax effect   After-tax   Before-tax   Tax effect   After-tax
     (Dollars in thousands)

Investment securities:

            

Net change in fair value recorded in accumulated OCI

     $ 1,207       $ 507       $ 700       $ 28,044       $ 11,778       $ 16,266  

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

     -           -           -           -           -           -      

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

     (783     (329     (454     (774     (325     (449

Net realized (gain)/loss reclassified into earnings

     -           -           -           -           -           -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Change

     $ 424       $ 178       $ 246       $ 27,270       $ 11,453       $ 15,817  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
13. BALANCE SHEET OFFSETTING

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

 

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

March 31, 2017

               

Financial assets:

               

Derivatives not designated as hedging instruments

     $ 4,985        $ -       $ -        $ 4,985        $ -       $ 4,985  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

&