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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, 2018

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: 110,259,842 outstanding as of April 30, 2018.


Table of Contents

TABLE OF CONTENTS

 

PART I –    FINANCIAL INFORMATION (UNAUDITED)    1

ITEM 1.

   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    3
   NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    8

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    38
   CRITICAL ACCOUNTING POLICIES    38
   OVERVIEW    38
   ANALYSIS OF THE RESULTS OF OPERATIONS    40
   RESULTS BY BUSINESS SEGMENTS    47
   ANALYSIS OF FINANCIAL CONDITION    50
   ASSET/LIABILITY AND MARKET RISK MANAGEMENT    66

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    68

ITEM 4.

   CONTROLS AND PROCEDURES    68
PART II –    OTHER INFORMATION    69

ITEM 1.

   LEGAL PROCEEDINGS    69

ITEM 1A.

   RISK FACTORS    70

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    70

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES    70

ITEM 4.

   MINE SAFETY DISCLOSURES    70

ITEM 5.

   OTHER INFORMATION    70

ITEM 6.

   EXHIBITS    70
SIGNATURES       71


Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “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 events and the impact they may have on us, our customers and our assets and liabilities;
    our ability to attract deposits and other sources of funding or liquidity;
    supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate;
    a prolonged slowdown or decline in real estate construction, sales or leasing activities;
    changes in the financial performance and/or condition of our borrowers or key vendors or counterparties;
    changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs;
    the costs or effects of mergers, acquisitions or dispositions we may make, including the pending merger of Community Bank with and into Citizens Business Bank, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits, including any anticipated cost savings or synergies, associated with any such mergers, acquisitions or dispositions;
    the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, fair lending, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply, 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, interest rate, securities market and monetary fluctuations;
    changes in government interest rates or monetary policies;
    changes in the amount and availability of deposit insurance;
    political developments, uncertainties or instability;
    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 activities, disease pandemics, catastrophic events, natural disasters such as earthquakes, extreme weather events, electrical, facilities, computer servers, and communications or other services we use, or that affect our employees or third parties with whom we conduct business;
    our 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 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, funds transfer applications and electronic marketplaces for loans and other banking products or services);
    our ability to retain and increase market share, retain and grow customers and control expenses;

 

1


Table of Contents
    changes in the competitive environment among financial and bank holding companies, banks and other financial service providers;
    competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies;
    volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions;
    fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;
    the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters;
    changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our 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),
    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; and
    our success at managing the risks involved in the foregoing items.
    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, 2017, and particularly the discussion of risk factors within that document.

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

 

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Table of Contents

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

           March 31,      
2018
    December 31,  
2017

Assets

    

Cash and due from banks

     $ 101,714       $ 119,841  

Interest-earning balances due from Federal Reserve

     354,524       24,536  
  

 

 

 

 

 

 

 

Total cash and cash equivalents

     456,238       144,377  
  

 

 

 

 

 

 

 

Interest-earning balances due from depository institutions

     10,100       17,952  

Investment securities available-for-sale, at fair value (with amortized cost of $1,970,076 at March 31, 2018, and $2,078,131 at December 31, 2017)

     1,941,592       2,080,985  

Investment securities held-to-maturity (with fair value of $776,130 at March 31, 2018, and $819,215 at December 31, 2017)

     798,284       829,890  
  

 

 

 

 

 

 

 

Total investment securities

     2,739,876       2,910,875  
  

 

 

 

 

 

 

 

Investment in stock of Federal Home Loan Bank (FHLB)

     17,688       17,688  

Loans and lease finance receivables

     4,794,983       4,830,631  

Allowance for loan losses

     (59,935     (59,585
  

 

 

 

 

 

 

 

Net loans and lease finance receivables

     4,735,048       4,771,046  
  

 

 

 

 

 

 

 

Premises and equipment, net

     45,542       46,166  

Bank owned life insurance (BOLI)

     146,702       146,486  

Accrued interest receivable

     21,722       22,704  

Intangibles

     6,507       6,838  

Goodwill

     116,564       116,564  

Other real estate owned (OREO)

     -           4,527  

Income taxes

     35,223       40,046  

Other assets

     24,950       25,317  
  

 

 

 

 

 

 

 

Total assets

     $ 8,356,160       $ 8,270,586  
  

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

     $ 4,062,691       $ 3,846,436  

Interest-bearing

     2,646,744       2,700,417  
  

 

 

 

 

 

 

 

Total deposits

     6,709,435       6,546,853  

Customer repurchase agreements

     487,277       553,773  

Deferred compensation

     18,861       18,223  

Junior subordinated debentures

     25,774       25,774  

Other liabilities

     47,955       56,697  
  

 

 

 

 

 

 

 

Total liabilities

     7,289,302       7,201,320  
  

 

 

 

 

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,259,046 at March 31, 2018, and 110,184,922 at December 31, 2017

     574,225       573,453  

Retained earnings

     513,484       494,361  

Accumulated other comprehensive income, net of tax

     (20,851     1,452  
  

 

 

 

 

 

 

 

Total stockholders’ equity

     1,066,858       1,069,266  
  

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

     $ 8,356,160       $ 8,270,586  
  

 

 

 

 

 

 

 

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,
     2018   2017

Interest income:

    

Loans and leases, including fees

     $ 55,196       $ 48,641  

Investment securities:

    

Investment securities available-for-sale

     11,868       12,640  

Investment securities held-to-maturity

     4,765       5,507  
  

 

 

 

 

 

 

 

Total investment income

     16,633       18,147  
  

 

 

 

 

 

 

 

Dividends from FHLB stock

     332       393  

Interest-earning deposits with other institutions and federal funds sold

     536       267  
  

 

 

 

 

 

 

 

Total interest income

     72,697       67,448  
  

 

 

 

 

 

 

 

Interest expense:

    

Deposits

     1,525       1,433  

Borrowings and customer repurchase agreements

     453       429  

Junior subordinated debentures

     198       153  
  

 

 

 

 

 

 

 

Total interest expense

     2,176       2,015  
  

 

 

 

 

 

 

 

Net interest income before recapture of provision for loan losses

     70,521       65,433  

Recapture of provision for loan losses

     (1,000     (4,500
  

 

 

 

 

 

 

 

Net interest income after recapture of provision for loan losses

     71,521       69,933  
  

 

 

 

 

 

 

 

Noninterest income:

    

Service charges on deposit accounts

     4,045       3,727  

Trust and investment services

     2,157       2,296  

Bankcard services

     804       765  

BOLI income

     979       715  

Gain on OREO, net

     3,540       -      

Other

     1,391       1,219  
  

 

 

 

 

 

 

 

Total noninterest income

     12,916       8,722  
  

 

 

 

 

 

 

 

Noninterest expense:

    

Salaries and employee benefits

     22,314       21,575  

Occupancy and equipment

     4,192       3,684  

Professional services

     1,530       1,257  

Software licenses and maintenance

     1,760       1,561  

Marketing and promotion

     1,356       1,239  

Acquisition related expenses

     803       676  

Other

     3,991       4,125  
  

 

 

 

 

 

 

 

Total noninterest expense

     35,946       34,117  
  

 

 

 

 

 

 

 

Earnings before income taxes

     48,491       44,538  
  

 

 

 

 

 

 

 

Income taxes

     13,578       16,034  
  

 

 

 

 

 

 

 

Net earnings

     $ 34,913       $ 28,504  
  

 

 

 

 

 

 

 

Other comprehensive income (loss):

    

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

     $ (32,170     $ 424  

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

     9,511       (178
  

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

     (22,659     246  
  

 

 

 

 

 

 

 

Comprehensive income

     $ 12,254       $ 28,750  
  

 

 

 

 

 

 

 

Basic earnings per common share

     $ 0.32       $ 0.26  

Diluted earnings per common share

     $ 0.32       $ 0.26  

Cash dividends declared per common share

     $ 0.14       $ 0.12  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2018 and 2017

(Dollars and shares in thousands)

(Unaudited)

 

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

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  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

    110,185       $ 573,453       $ 494,361       $ 1,452       $ 1,069,266  

Cumulative adjustment upon adoption of ASU 2018-02

    -           -           (356     356       -      

Repurchase of common stock

    (34     (792     -           -           (792

Exercise of stock options

    87       828       -           -           828  

Shares issued pursuant to stock-based compensation plan

    21       736       -           -           736  

Cash dividends declared on common stock ($0.14 per share)

    -           -           (15,434     -           (15,434

Net earnings

    -           -           34,913       -           34,913  

Other comprehensive income

    -           -           -           (22,659     (22,659
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

    110,259       $ 574,225       $ 513,484       $ (20,851     $ 1,066,858  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,
 
            2018                     2017          

Cash Flows from Operating Activities

   

Interest and dividends received

    $ 75,103         $ 71,499    

Service charges and other fees received

    8,414         8,008    

Interest paid

    (2,172)        (2,047)   

Net cash paid to vendors, employees and others

    (41,509)        (20,026)   

Income taxes

    622         165    

Payments to FDIC, loss share agreement

    (39)        (450)   
 

 

 

   

 

 

 

Net cash provided by operating activities

    40,419         57,149    
 

 

 

   

 

 

 

Cash Flows from Investing Activities

   

Net change in interest-earning balances from depository institutions

    7,852         18,006    

Proceeds from repayment of investment securities available-for-sale

    95,018         102,426    

Proceeds from maturity of investment securities available-for-sale

    9,945         5,374    

Purchases of investment securities available-for-sale

    -         (134,572)   

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

    30,273         33,411    

Purchases of investment securities held-to-maturity

    -         (8,895)   

Net decrease in loan and lease finance receivables

    39,424         92,505    

Proceeds from BOLI death benefit

    882         -    

Purchase of premises and equipment

    (716)        (998)   

Proceeds from sales of other real estate owned

    8,067         -    

Cash acquired from acquisition, net of cash paid

    -         28,325    
 

 

 

   

 

 

 

Net cash provided by investing activities

    190,745         135,582    
 

 

 

   

 

 

 

Cash Flows from Financing Activities

   

Net increase in other deposits

    175,839         181,485    

Net decrease in time deposits

    (13,257)        (10,149)   

Net decrease in other borrowings

    -         (53,000)   

Net decrease in customer repurchase agreements

    (66,496)        (38,641)   

Cash dividends on common stock

    (15,425)        (12,991)   

Repurchase of common stock

    (792)        (817)   

Proceeds from exercise of stock options

    828         2,190    
 

 

 

   

 

 

 

Net cash provided by financing activities

    80,697         68,077    
 

 

 

   

 

 

 

Net increase in cash and cash equivalents

    311,861         260,808    

Cash and cash equivalents, beginning of period

    144,377         121,633    
 

 

 

   

 

 

 

Cash and cash equivalents, end of period

    $             456,238         $             382,441    
 

 

 

   

 

 

 

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,
 
            2018                     2017          

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

   

   Net earnings

    $ 34,913         $ 28,504    

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

   

  Gain on sale of other real estate owned

    (3,540)        -    

  Increase in BOLI

    (1,098)        (849)   

  Net amortization of premiums and discounts on investment securities

    3,839         4,614    

  Accretion of PCI discount

    (1,012)        (253)   

  Recapture of provision for loan losses

    (1,000)        (4,500)   

  Payments to FDIC, loss share agreement

    (39)        (450)   

  Stock-based compensation

    736         679    

  Depreciation and amortization, net

    257         558    

  Change in other assets and liabilities

    7,363         28,846    
 

 

 

   

 

 

 

     Total adjustments

    5,506         28,645    
 

 

 

   

 

 

 

    Net cash provided by operating activities

    $             40,419         $             57,149    
 

 

 

   

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

   

   Issuance of common stock for acquisition

    $ -             $ 37,637    

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 51 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On February 26, 2018, we entered into a definitive agreement to merge Community Bank with and into Citizens Business Bank. As of December 31, 2017, Community Bank had approximately $3.75 billion in total assets, $2.74 billion in gross loans and $2.86 billion in total deposits. Under the terms of the merger, Community Bank shareholders will have the right to receive, in respect of each share of common stock of Community Bank, 9.4595 shares of CVB common stock and $56.00 per share in cash, subject to any adjustments set forth in the Merger Agreement. The merger transaction is valued at approximately $885.2 million based on CVB’s closing stock price of $23.60 on February 26, 2018. Consummation of the merger is subject to customary closing conditions, including, among others, shareholder and regulatory approvals. The merger is expected to close in the third quarter of 2018.

 

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, 2018 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, 2017, 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, 2017 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 Standards — 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 replaces most existing revenue recognition guidance in U.S. GAAP. 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 of ASU No. 2014-09 to January 1, 2018. The Company adopted the ASU during the first quarter of 2018, as required, using the modified retrospective approach. The adoption of this ASU did not 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. Since there was no net income impact upon adoption of this ASU, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See Note 14 Revenue Recognition for more information

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance in this ASU among other things, (i) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio at March 31, 2018 using an exit price notion. See Note 9 Fair Value Information.

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 adopted this ASU retrospectively effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.

 

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In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU No. 2017-09 are effective for annual periods, and interim within those annual reporting periods, beginning after December 15, 2017; early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act (“Tax Reform Act”). The amendments in this update also require entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and the provisions of the amendment should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company elected to early adopt ASU 2018-02 in the first quarter of 2018 and reclassified $356,000 related to the stranded tax effects from accumulated other comprehensive income to retained earnings within our consolidated statements of stockholders’ equity.

Recent Accounting Pronouncements — 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 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 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 recognized 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.

 

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In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

4. BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

On March 10, 2017, the Company completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for Valley Business Bank (“VBB”), headquartered in the Central Valley area of California. 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. The systems integration of VCBP and CBB was completed in May 2017. Three of these center locations were consolidated with nearby CBB locations in the third quarter of 2017 and the Company sold the Woodlake branch in the fourth quarter of 2017.

Goodwill of $27.0 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 $405.9 million, which included $28.3 million in cash and cash equivalents net of cash paid, $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 BOLI, $3.2 million in core deposit intangible assets acquired and $21.0 million in other assets. The total fair value of liabilities assumed was $368.3 million, which included $361.8 million in deposits, and $6.5 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. The purchase price allocation was finalized in the third quarter of 2017.

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, 2018, the Company did not incur any merger related expenses associated with the VCBP acquisition and incurred $651,000 for the three months ended March 31, 2017.

 

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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, 2018
       Amortized   
Cost
  Gross
   Unrealized   
Holding
Gain
 

 

Gross

   Unrealized   
Holding
Loss

     Fair Value      Total
     Percent     
   

 

(Dollars in thousands)

Investment securities available-for-sale:

         

Residential mortgage-backed securities

    $ 1,655,742       $ 2,158       $ (26,560)       $ 1,631,340       84.02%  

CMO/REMIC - residential

    259,180       644       (4,178)       255,646       13.17%  

Municipal bonds

    54,416       445       (993)       53,868       2.77%  

Other securities

    738       -             738       0.04%  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

    $ 1,970,076       $ 3,247       $ (31,731)       $ 1,941,592       100.00%  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities held-to-maturity:

         

Government agency/GSE

    $ 154,194       $ 473       $ (2,453)       $ 152,214       19.32%  

Residential mortgage-backed securities

    170,573       -       (3,191)       167,382       21.36%  

CMO

    221,051       -       (11,522)       209,529       27.69%  

Municipal bonds

    252,466       760       (6,221)       247,005       31.63%  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total held-to-maturity securities

    $ 798,284       $ 1,233       $ (23,387)       $ 776,130       100.00%  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     December 31, 2017
       Amortized  
Cost
  Gross
  Unrealized  
Holding
Gain
 

 

Gross

  Unrealized  
Holding
Loss

    Fair Value     Total
    Percent    
    

 

(Dollars in thousands)

Investment securities available-for-sale:

          

Residential mortgage-backed securities

     $ 1,747,780       $ 11,231       $ (8,102)       $ 1,750,909       84.14%  

CMO/REMIC - residential

     274,634       1,277       (2,082)       273,829       13.16%  

Municipal bonds

     54,966       774       (244)       55,496       2.66%  

Other securities

     751       -             751       0.04%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

     $ 2,078,131       $ 13,282       $ (10,428)       $ 2,080,985       100.00%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities held-to-maturity:

          

Government agency/GSE

     $ 159,716       $ 854       $ (2,134)       $ 158,436       19.25%  

Residential mortgage-backed securities

     176,427       667       (382)       176,712       21.26%  

CMO

     225,072       -       (8,641)       216,431       27.12%  

Municipal bonds

     268,675       2,751       (3,790)       267,636       32.37%  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total held-to-maturity securities

     $ 829,890       $ 4,272       $ (14,947)       $ 819,215       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,
             2018                     2017         
   

 

(Dollars in thousands)

Investment securities available-for-sale:

   

Taxable

    $ 11,445       $ 11,926  

Tax-advantaged

    423       714  
 

 

 

 

 

 

 

 

Total interest income from available-for-sale securities

    11,868       12,640  
 

 

 

 

 

 

 

 

Investment securities held-to-maturity:

   

Taxable

    2,878       3,277  

Tax-advantaged

    1,887       2,230  
 

 

 

 

 

 

 

 

Total interest income from held-to-maturity securities

    4,765       5,507  
 

 

 

 

 

 

 

 

Total interest income from investment securities

    $ 16,633        $ 18,147   
 

 

 

 

 

 

 

 

Approximately 89% of the total investment securities portfolio at March 31, 2018 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.

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, 2018 and December 31, 2017. 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, 2018
        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:

           

Residential mortgage-backed securities

    $  1,131,944       $  (15,259)       $ 286,313       $ (11,301)       $   1,418,257       $  (26,560)  

CMO/REMIC - residential

    132,728       (1,662)       67,578       (2,516)       200,306       (4,178)  

Municipal bonds

    9,363       (156)       13,357       (837)       22,720       (993)  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

    $ 1,274,035       $ (17,077)       $ 367,248       $ (14,654)       $ 1,641,283       $ (31,731)  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities held-to-maturity:

                                                                                                                                         

Government agency/GSE

    $ 53,538       $ (262)       $ 42,693       $ (2,191)       $ 96,231       $ (2,453)  

Residential mortgage-backed securities

    115,425       (1,649)       51,956       (1,542)       167,381       (3,191)  

CMO

    -       -       209,529       (11,522)       209,529       (11,522)  

Municipal bonds

    97,851       (1,714)       57,679       (4,507)       155,530       (6,221)  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total held-to-maturity securities

    $ 266,814         $ (3,625)        $ 361,857         $ (19,762)        $ 628,671         $ (23,387)   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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    December 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:

           

Residential mortgage-backed securities

    $ 414,091       $ (1,828     $ 303,746       $ (6,274     $ 717,837       $ (8,102

CMO/REMIC - residential

    95,137       (487     71,223       (1,595     166,360       (2,082

Municipal bonds

    946       (4     13,956       (240     14,902       (244
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total available-for-sale securities

    $ 510,174       $ (2,319     $ 388,925       $ (8,109     $ 899,099       $ (10,428
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities held-to-maturity:

                                                                                                                                         

Government agency/GSE

    $ 18,950       $ (27     $ 43,495       $ (2,107     $ 62,445       $ (2,134

Residential mortgage-backed securities

    51,297       (188     55,306       (194     106,603       (382

CMO

    -       -       216,431       (8,641     216,431       (8,641

Municipal bonds

    32,069       (492     66,217       (3,298     98,286       (3,790
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total held-to-maturity securities

    $ 102,316         $ (707     $ 381,449       $ (14,240     $ 483,765         $ (14,947
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2018 and December 31, 2017, investment securities having a carrying value of approximately $1.90 billion and $1.91 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, 2018, 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, 2018
    Available-for-sale   Held-to-maturity
      Amortized  
Cost
    Fair Value    

 

  Amortized  
Cost

    Fair Value  
   

 

(Dollars in thousands)

Due in one year or less

    $ 24,088       $ 24,417       $ 459       $ 450  

Due after one year through five years

    1,718,590       1,694,629       148,566       144,099  

Due after five years through ten years

    192,161       188,031       283,808       276,367  

Due after ten years

    35,237       34,515       365,451       355,214  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

    $   1,970,076         $   1,941,592         $     798,284         $     776,130    
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2018.

 

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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, 2017. 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, 2018, the remaining discount associated with the PCI loans approximated $1.1 million. The loss sharing agreement for commercial loans expired October 16, 2014 and will expire for single-family residential loans on October 16, 2019.

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, 2018     December 31, 2017    
    (Dollars in thousands)  

Commercial and industrial

    $ 908         $ 934    

SBA

    1,356         1,383    

Real estate:

   

Commercial real estate

    24,275         27,431    

Construction

    -         -    

SFR mortgage

    158         162    

Dairy & livestock and agribusiness

    10         770    

Municipal lease finance receivables

    -         -    

Consumer and other loans

    228         228    
 

 

 

   

 

 

 

 Gross PCI loans

    26,935         30,908    

Less: Purchase accounting discount

    (1,074)        (2,026)   
 

 

 

   

 

 

 

 Gross PCI loans, net of discount

    25,861         28,882    

Less: Allowance for PCI loan losses

    (312)        (367)   
 

 

 

   

 

 

 

      Net PCI loans

    $                     25,549         $                     28,515    
 

 

 

   

 

 

 

Credit Quality Indicators

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

 

    March 31, 2018     December 31, 2017    
    (Dollars in thousands)  

Pass

    $ 22,892         $ 26,439    

Special mention

    1,066         1,088    

Substandard

    2,977         3,381    

Doubtful & loss

    -         -    
 

 

 

   

 

 

 

Total gross PCI loans

    $                     26,935         $                     30,908    
 

 

 

   

 

 

 

 

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

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

 

         March 31, 2018         December 31, 2017  
     (Dollars in thousands)

Commercial and industrial

     $ 514,229       $ 513,325  

SBA

     123,432       122,055  

Real estate:

    

Commercial real estate

     3,411,216       3,376,713  

Construction

     79,898       77,982  

SFR mortgage

     237,618       236,202  

Dairy & livestock and agribusiness

     276,379       347,289  

Municipal lease finance receivables

     67,892       70,243  

Consumer and other loans

     64,159       64,229  
  

 

 

 

 

 

 

 

Gross loans, excluding PCI loans

     4,774,823       4,808,038  

Less: Deferred loan fees, net

     (5,701     (6,289
  

 

 

 

 

 

 

 

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

     4,769,122       4,801,749  

Less: Allowance for loan losses

     (59,623     (59,218
  

 

 

 

 

 

 

 

Net loans, excluding PCI loans

     4,709,499       4,742,531  
  

 

 

 

 

 

 

 

PCI Loans

     26,935       30,908  

Discount on PCI loans

     (1,074     (2,026

Less: Allowance for loan losses

     (312     (367
  

 

 

 

 

 

 

 

PCI loans, net

     25,549       28,515  
  

 

 

 

 

 

 

 

Total loans and lease finance receivables

     $ 4,735,048       $ 4,771,046  
  

 

 

 

 

 

 

 

As of March 31, 2018, 78.09% of the Company’s total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 71.44% 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, 2018, $203.4 million, or 5.96% of the total commercial real estate loans included loans secured by farmland, compared to $206.1 million, or 6.10%, at December 31, 2017. The loans secured by farmland included $117.1 million for loans secured by dairy & livestock land and $86.3 million for loans secured by agricultural land at March 31, 2018, compared to $118.2 million for loans secured by dairy & livestock land and $87.9 million for loans secured by agricultural land at December 31, 2017. As of March 31, 2018, dairy & livestock and agribusiness loans of $276.4 million were comprised of $245.3 million for dairy & livestock loans and $31.1 million for agribusiness loans, compared to $310.6 million for dairy & livestock loans and $36.7 million for agribusiness loans at December 31, 2017.

At March 31, 2018, the Company held approximately $2.18 billion of total fixed rate loans, including PCI loans.

At March 31, 2018 and December 31, 2017, loans totaling $3.62 billion and $3.68 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, 2018 and December 31, 2017.

 

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Table of Contents

Credit Quality Indicators

An important element of our approach to 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 or improvement 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 affected 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, 2018
    Pass   Special
Mention
  Substandard   Doubtful &
Loss
  Total
    (Dollars in thousands)

Commercial and industrial

    $ 486,079       $ 17,312       $ 10,838       $ -       $ 514,229  

SBA

    114,632       5,294       3,506       -       123,432  

Real estate:

         

Commercial real estate

         

Owner occupied

    1,017,210       73,607       4,913       -       1,095,730  

Non-owner occupied

    2,291,202       18,337       5,947       -       2,315,486  

Construction

         

Speculative

    63,544       -       -       -       63,544  

Non-speculative

    16,354       -       -       -       16,354  

SFR mortgage

    230,517       3,100       4,001       -       237,618  

Dairy & livestock and agribusiness

    253,498       12,706       10,175       -       276,379  

Municipal lease finance receivables

    67,324       568       -       -       67,892  

Consumer and other loans

    62,225       1,113       821       -       64,159  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross loans, excluding PCI loans

    $ 4,602,585       $ 132,037       $ 40,201       $ -       $ 4,774,823  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Commercial and industrial

    $ 483,641       $ 19,566       $ 10,118       $ -       $ 513,325  

SBA

    112,835       5,358       3,862       -       122,055  

Real estate:

         

Commercial real estate

         

Owner occupied

    1,009,199       76,111       10,970       -       1,096,280  

Non-owner occupied

    2,257,130       16,434       6,869       -       2,280,433  

Construction

         

Speculative

    60,042       -       -       -       60,042  

Non-speculative

    17,940       -       -       -       17,940  

SFR mortgage

    229,032       3,124       4,046       -       236,202  

Dairy & livestock and agribusiness

    321,413       9,047       16,829       -       347,289  

Municipal lease finance receivables

    69,644       599       -       -       70,243  

Consumer and other loans

    61,715       1,255       1,259       -       64,229  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross loans, excluding PCI loans

    $     4,622,591        $       131,494        $         53,953        $             -        $     4,808,038   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses (“ALLL”)

The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approves the ALLL 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 2017 Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at March 31, 2018 and December 31, 2017. 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, 2018
    Ending Balance
December 31,
2017
  Charge-offs   Recoveries   (Recapture of)
Provision for
Loan Losses
  Ending Balance
March 31, 2018
    (Dollars in thousands)

Commercial and industrial

    $ 7,280       $             -       $ 10       $                 209       $               7,499  

SBA

    869       -       5       10       884  

Real estate:

         

Commercial real estate

    41,722       -       -           141       41,863  

Construction

    984       -       1,334       (1,331     987  

SFR mortgage

    2,112       -       -           90       2,202  

Dairy & livestock and agribusiness

    4,647       -       -           19       4,666  

Municipal lease finance receivables

    851       -       -           (17     834  

Consumer and other loans

    753       (7)      8       (66     688  

PCI loans

    367       -       -           (55     312  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total allowance for loan losses

    $           59,585        $   (7)      $             1,357        $ (1,000     $ 59,935   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.

 

    March 31, 2018
    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

    $ 432         $ 513,797         $ -         $ -         $ 7,499         $ -    

SBA

    1,201       122,231       -       -       884       -  

Real estate:

           

  Commercial real estate

    7,992       3,403,224       -       -       41,863       -  

  Construction

    -       79,898       -       -       987       -  

  SFR mortgage

    3,576       234,042       -       -       2,202       -  

Dairy & livestock and agribusiness

    818       275,561       -       -       4,666       -  

Municipal lease finance receivables

    -       67,892       -       -       834       -  

Consumer and other loans

    438       63,721       -       -       688       -  

PCI loans

    -       -       25,861       -       -       312  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total

    $           14,457       $     4,760,366       $           25,861       $         -           $           59,623       $             312  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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, 2017, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a Troubled Debt Restructuring (“TDR”) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of one or more of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

Generally, when loans are identified as impaired they are moved to our Special Assets Department. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.

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

 

    March 31, 2018
    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

    $ -         $ -         $ -         $ 272         $ 513,957         $ 514,229    

SBA

    -       -       -       589       122,843       123,432  

Real estate:

           

 Commercial real estate

           

  Owner occupied

    -       -       -       4,332       1,091,398       1,095,730  

  Non-owner occupied

    -       -       -       2,414       2,313,072       2,315,486  

 Construction

           

  Speculative (2)

    -       -       -       -       63,544       63,544  

  Non-speculative

    -       -       -       -       16,354       16,354  

 SFR mortgage

    680       -       680       1,309       235,629       237,618  

Dairy & livestock and agribusiness

    -       -       -       818       275,561       276,379  

Municipal lease finance receivables

    -       -       -       -       67,892       67,892  

Consumer and other loans

    63       -       63       438       63,658       64,159  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total gross loans, excluding PCI loans

    $           743       $             -       $           743       $             10,172       $     4,763,908       $     4,774,823  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) As of March 31, 2018, $3.6 million of nonaccruing loans were current, $431,000 were 30-59 days past due, and $6.2 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
    December 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

    $ 768         $ -         $ 768         $ 250         $ 512,307         $ 513,325    

SBA

    403       -       403       906       120,746       122,055  

Real estate:

           

 Commercial real estate

           

  Owner occupied

    -       -       -       4,365       1,091,915       1,096,280  

  Non-owner occupied

    -       -       -       2,477       2,277,956       2,280,433  

 Construction

           

  Speculative (2)

    -       -       -       -       60,042       60,042  

  Non-speculative

    -       -       -       -       17,940       17,940  

 SFR mortgage

    -       -       -       1,337       234,865       236,202  

Dairy & livestock and agribusiness

    -       -       -       829       346,460       347,289  

Municipal lease finance receivables

    -       -       -       -       70,243       70,243  

Consumer and other loans

    1       -       1       552       63,676       64,229  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total gross loans, excluding PCI loans

    $           1,172       $             -       $           1,172       $           10,716       $     4,796,150       $     4,808,038  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) As of December 31, 2017, $3.6 million of nonaccruing loans were current, $376,000 were 60-89 days past due and $6.8 million were 90+ days past due.
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

Impaired Loans

At March 31, 2018, the Company had impaired loans, excluding PCI loans, of $14.5 million. Impaired loans included $6.7 million of nonaccrual commercial real estate loans, $1.3 million of nonaccrual single-family residential (“SFR”) mortgage loans, $818,000 of nonaccrual dairy & livestock and agribusiness loans, $589,000 of nonaccrual Small Business Administration (“SBA”) loans, $438,000 of nonaccrual consumer and other loans, and $272,000 of nonaccrual commercial and industrial loans. These impaired loans included $8.2 million of loans whose terms were modified in a troubled debt restructuring, of which $3.9 million were classified as nonaccrual. The remaining balance of $4.3 million consisted of 15 loans performing according to the restructured terms. The impaired loans had a specific allowance of zero at March 31, 2018. At December 31, 2017, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $15.5 million with a related allowance of $75,000.

 

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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, 2018
     Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   Average
Recorded
Investment
  Interest
Income
Recognized
     (Dollars in thousands)

With no related allowance recorded:

           

Commercial and industrial

     $ 432       $ 986       $ -            $ 461       $ 2  

SBA

     1,201       1,327       -            1,220       12  

Real estate:

           

Commercial real estate

           

  Owner occupied

     4,332       4,755       -            4,348       -      

Non-owner occupied

     3,660       5,033       -            3,715       22  

Construction

           

Speculative

     -           -           -            -           -      

Non-speculative

     -            -            -            -           -      

SFR mortgage

     3,576       4,236       -            3,599       25  

Dairy & livestock and agribusiness

     818       1,091       -            826       -      

Municipal lease finance receivables

     -           -           -            -            -      

Consumer and other loans

     438       640       -            519       -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total

     14,457       18,068       -            14,688       61   
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

With a related allowance recorded:

           

Commercial and industrial

     -           -           -            -           -      

SBA

     -           -           -            -           -      

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

     -           -           -            -           -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  Total impaired loans

     $         14,457       $         18,068       $             -            $         14,688       $               61  
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

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Table of Contents
     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   
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
     As of December 31, 2017
     Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
     (Dollars in thousands)

With no related allowance recorded:

      

Commercial and industrial

     $ 440       $ 980       $ -      

SBA

     1,530       1,699       -      

Real estate:

      

Commercial real estate

      

Owner occupied

     4,365       4,763       -      

Non-owner occupied

     3,768       5,107       -      

Construction

      

Speculative

     -           -           -      

Non-speculative

     -           -           -      

SFR mortgage

     4,040       4,692       -      

Dairy & livestock and agribusiness

     829       1,091       -      

Municipal lease finance receivables

     -           -           -      

Consumer and other loans

     174       370       -      
  

 

 

 

 

 

 

 

 

 

 

 

Total

     15,146       18,702       -      
  

 

 

 

 

 

 

 

 

 

 

 

With a related allowance recorded:

      

Commercial and industrial

     -           -           -      

SBA

     1       18       1  

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

     378       391       74  
  

 

 

 

 

 

 

 

 

 

 

 

Total

     379       409       75  
  

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

     $         15,525        $         19,111        $             75   
  

 

 

 

 

 

 

 

 

 

 

 

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, 2018, December 31, 2017 and March 31, 2017 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a charge-off is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet 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, 2018, and 2017. As of March 31, 2018 and December 31, 2017, the balance in this reserve was $6.3 million and was included in other liabilities.

 

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Table of Contents

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion regarding TDRs.

As of March 31, 2018, there were $8.2 million of loans classified as a TDR, of which $3.9 million were nonperforming and $4.3 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At March 31, 2018, performing TDRs were comprised of nine SFR mortgage loans of $2.3 million, two commercial real estate loans of $1.2 million, one SBA loan of $612,000, and three commercial and industrial loans of $160,000.

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 zero and $1,000 of specific allowance to TDRs as of March 31, 2018 and December 31, 2017, respectively.

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

 

     For the Three Months Ended
     March 31,
             2018                    2017        
     (Dollars in thousands)

Performing TDRs:

     

Beginning balance

     $ 4,809        $ 19,233  

New modifications

     -        3,143  

Payoffs/payments, net and other

     (524      (3,003

TDRs returned to accrual status

     -        329  

TDRs placed on nonaccrual status

     -        -  
  

 

 

 

  

 

 

 

Ending balance

     $ 4,285        $ 19,702  
  

 

 

 

  

 

 

 

Nonperforming TDRs:

     

Beginning balance

     $ 4,200        $ 1,626  

New modifications

     -            2,066  

Charge-offs

     -            -      

Payoffs/payments, net and other

     (291      (1,956

TDRs returned to accrual status

     -            (329

TDRs placed on nonaccrual status

     -            -      
  

 

 

 

  

 

 

 

Ending balance

     $ 3,909        $ 1,407  
  

 

 

 

  

 

 

 

Total TDRs

     $             8,194        $             21,109  
  

 

 

 

  

 

 

 

 

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There were no loans that were modified as TDRs during the three months ended March 31, 2018.

The following table summarizes loans modified as troubled debt restructurings for the period 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        $                       -   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (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, 2018 and 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, 2018 and 2017, respectively.

 

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 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, 2018 and 2017, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 16,000 and 1,000, respectively.

 

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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,
     2018    2017
       (In thousands, except per share amounts)  

Earnings per common share:

     

Net earnings

     $ 34,913        $ 28,504  

  Less: Net earnings allocated to restricted stock

     108        112  
  

 

 

 

  

 

 

 

Net earnings allocated to common shareholders

     $ 34,805        $ 28,392  
  

 

 

 

  

 

 

 

Weighted average shares outstanding

     109,859        108,339  

Basic earnings per common share

     $ 0.32        $ 0.26  
  

 

 

 

  

 

 

 

Diluted earnings per common share:

     

Net income allocated to common shareholders

     $ 34,805        $ 28,392  
  

 

 

 

  

 

 

 

  Weighted average shares outstanding

     109,859        108,339  

  Incremental shares from assumed exercise of outstanding options

     364        467  
  

 

 

 

  

 

 

 

Diluted weighted average shares outstanding

     110,223        108,806  

Diluted earnings per common share

     $ 0.32        $ 0.26  
  

 

 

 

  

 

 

 

 

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, 2018. 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, 2018 and 2017.

 

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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, 2018
    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:

       

Residential mortgage-backed securities

    $ 1,631,340       $ -       $ 1,631,340       $ -  

CMO/REMIC - residential

    255,646       -       255,646       -  

Municipal bonds

    53,868       -       53,868       -  

Other securities

    738       -       738       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

  Total investment securities - AFS

    1,941,592       -       1,941,592       -  

Interest rate swaps

    1,645       -       1,645       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 1,943,237       $ -       $ 1,943,237       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 1,645       $ -       $ 1,645       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 1,645       $ -       $ 1,645       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 
    Carrying Value at
December 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:

       

Residential mortgage-backed securities

    $ 1,750,909       $ -       $ 1,750,909       $ -  

CMO/REMIC - residential

    273,829       -       273,829       -  

Municipal bonds

    55,496       -       55,496       -  

Other securities

    751       -       751       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

  Total investment securities - AFS

    2,080,985       -       2,080,985       -  

Interest rate swaps

    3,211       -       3,211       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 2,084,196       $ -       $ 2,084,196       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Description of liability

       

Interest rate swaps

    $ 3,211       $ -       $ 3,211       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 3,211       $ -       $ 3,211       $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 impairment write-downs of individual assets.

There were no assets measured at fair value on a non-recurring basis that were held on the balance sheet at March 31, 2018. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at December 31, 2017, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

 

    Carrying Value at
 December 31, 2017 
    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, 2017 
 
    (Dollars in thousands)  

Description of assets

         

Impaired loans, excluding PCI loans:

         

Commercial and industrial

    $ -       $ -       $ -       $ -       $ -  

SBA

    -       -       -       -       -  

Real estate:

         

Commercial real estate

    -       -       -       -       -  

Construction

    -       -       -       -       -  

SFR mortgage

    -       -       -       -       -  

Dairy & livestock and agribusiness

    -       -       -       -       -  

Consumer and other loans

    378       -       -       378       74  

Other real estate owned

    -       -       -       -       -  

Asset held-for-sale

    -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 378       $ -       $ -       $ 378       $ 74  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2018 and December 31, 2017, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

    March 31, 2018
        Estimated Fair Value
    Carrying
Amount
  Level 1   Level 2   Level 3   Total
    (Dollars in thousands)

Assets

         

Total cash and cash equivalents

    $ 456,238        $ 456,238        $ -        $ -        $ 456,238   

Interest-earning balances due from depository institutions

    10,100       -       10,095       -       10,095  

FHLB stock

    17,688       -       17,688       -       17,688  

Investment securities available-for-sale

    1,941,592       -       1,941,592       -       1,941,592  

Investment securities held-to-maturity

    798,284       -       776,130       -       776,130  

Total loans, net of allowance for loan losses (1)

    4,735,048       -       -       4,555,459       4,555,459  

Swaps

    1,645       -       1,645       -       1,645  

Liabilities

         

Deposits:

         

  Noninterest-bearing

    $     4,062,691       $     4,062,691       $ -           $ -       $       4,062,691  

  Interest-bearing

    2,646,744       -       2,643,627       -       2,643,627  

Borrowings

    487,277       -       486,924       -       486,924  

Junior subordinated debentures

    25,774       -       -       19,909       19,909  

Swaps

    1,645       -       1,645       -       1,645  
    December 31, 2017
        Estimated Fair Value
    Carrying
Amount
  Level 1   Level 2   Level 3   Total
    (Dollars in thousands)

Assets

         

Total cash and due from banks

    $ 144,377       $ 144,377       $ -           $ -           $ 144,377  

Interest-earning balances due from depository institutions

    17,952       -           17,951       -           17,951  

FHLB stock

    17,688       -           17,688       -           17,688  

Investment securities available-for-sale

    2,080,985       -           2,080,985       -           2,080,985  

Investment securities held-to-maturity

    829,890       -           819,215       -           819,215  

Total loans, net of allowance for loan losses

    4,771,046       -           -           4,678,402       4,678,402  

Swaps

    3,211       -           3,211       -           3,211  

Liabilities

         

Deposits:

         

  Noninterest-bearing

    $ 3,846,436       $ 3,846,436       $ -           $ -           $ 3,846,436  

  Interest-bearing

    2,700,417       -           2,697,781       -           2,697,781  

Borrowings

    553,773       -           553,416       -           553,416  

Junior subordinated debentures

    25,774       -           -           18,070       18,070  

Swaps

    3,211       -           3,211       -           3,211  

 

  (1) The fair value of loans as of March 31, 2018 was measured using an exit price notion.

 

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Table of Contents

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2018 and December 31, 2017. 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.

 

10. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Banking Centers (“Centers”) and Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. The Bank has 51 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. All other operating departments have been aggregated and included in “Other” for reporting purposes. Recapture of provision for loan losses was allocated by reporting segment based on loan type. 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, 2017. 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.

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, 2018
    Centers   Dairy &
livestock and
agribusiness
  Other (1)   Total
    (Dollars in thousands)

Net interest income

    $ 49,583         $ 3,851         $ 17,087         $ 70,521    

(Recapture of) provision for loan losses

    329       19       (1,348     (1,000
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

    49,254       3,832       18,435       71,521  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

    5,301       45       7,570       12,916  

Noninterest expense

    13,225       517       22,204       35,946  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment pre-tax profit

    $ 41,330       $ 3,360       $ 3,801       $ 48,491  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

    $ 116,564       $ -       $ -       $ 116,564  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets as of March 31, 2018

    $   7,231,624       $       407,527       $      717,009       $  8,356,160  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (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
    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.

 

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, 2018, the Bank has entered into 77 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate, which has the effect of passing on the interest-rate risk associated with the customer’s fixed rate swap to the counterparty bank. 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.

 

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Table of Contents

Balance Sheet Classification of Derivative Financial Instruments

As of March 31, 2018 and December 31, 2017, the total notional amount of the Company’s swaps was $191.4 million, and $198.5 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

 

     March 31, 2018  
     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        $     1,645          Other liabilities        $     1,645    
     

 

 

       

 

 

 

Total derivatives

        $ 1,645             $ 1,645    
     

 

 

       

 

 

 
     December 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        $ 3,211          Other liabilities        $ 3,211    
     

 

 

       

 

 

 

Total derivatives

        $ 3,211             $ 3,211    
     

 

 

       

 

 

 

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,
 
            2018      2017  
            (Dollars in thousands)  

Interest rate swaps

     Other income        $ 116          $ 323    
     

 

 

    

 

 

 

Total

        $ 116          $ 323    
     

 

 

    

 

 

 

 

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,
    2018   2017
     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

    $ (31,338     $ (9,265     $ (22,073     $ 1,207       $ 507       $ 700  

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

    (832     (246     (586     (783     (329     (454
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change

    $ (32,170     $ (9,511     $ (22,659     $ 424       $ 178       $ 246  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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

the Condensed

 

Gross Amounts

Offset in the

Condensed

 

Net Amounts of

Assets Presented

in the Condensed

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

March 31, 2018

           

Financial assets:

           

Derivatives not designated as hedging instruments

    $ 1,645       $ -       $ -       $ 1,645       $ -       $ 1,645  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 1,645       $ -       $ -       $ 1,645       $ -       $ 1,645  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

           

Derivatives not designated as hedging instruments

    $ 5,014       $ (3,369     $ 1,645       $ 3,369       $ (12,526     $ (7,512

Repurchase agreements

    487,277       -       487,277       -       (626,413     (139,136
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 492,291       $ (3,369     $ 488,922       $ 3,369       $ (638,939     $ (146,648
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

           

Financial assets:

           

Derivatives not designated as hedging instruments

    $ 3,211       $ -       $ -       $ 3,211       $ -       $ 3,211  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 3,211       $ -       $ -       $ 3,211       $ -       $ 3,211  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

           

Derivatives not designated as hedging instruments

    $ 4,495       $ (1,284     $ 3,211       $ 1,284       $ (12,760     $ (8,265

Repurchase agreements

    553,773       -       553,773       -       (573,759     (19,986
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 558,268       $ (1,284     $ 556,984       $ 1,284       $ (586,519     $ (28,251
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
14. REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 3 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Trust and Investment Services

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Wealth Management contracts with customers have no clauses that would entitle customers to additional services. Fees are earned based on market value of assets under management (AUM) and miscellaneous fees are transaction driven and are charged based on an agreed upon fee schedule. Performance obligation is satisfied upon execution of the transaction and there is no need to allocate transaction price to the performance obligation(s) in the contract. Wealth management customers can also terminate the contract at will. Based on our review, we did not find provisions in the contracts that will require changes to the current accounting under Topic 606.

For Investment Services, the fees are earned based on services performed for customers of an affiliated broker-dealer. Fees are earned from gross dealer commission based on trade date. Performance obligation is satisfied upon execution of the transaction and there is no need to allocate transaction price to the performance obligation(s) in the contract. Based on our review, we did not find provisions in the contracts that will require changes to the current accounting under Topic 606.

Deposit-related Fees

Service charges on deposit accounts consist of account analysis fees earned on analyzed business checking accounts, monthly service fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Bankcard Services

The Bank generates revenues from merchant servicing to its clients. A fee schedule is part of the contract and is calculated based on sales of merchants on a monthly basis. There is no future promise or claim to deliver services as merchant fees are based on monthly merchant transactions. The Company’s performance obligations are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Therefore, the new revenue standard has no impact on revenues generated from bankcard services.

 

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Table of Contents

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017.

 

      For the Three Months Ended  
March 31,
 
    2018     2017  
    (Dollars in thousands)  

Noninterest income:

   

In-scope of Topic 606:

   

 Service charges on deposit accounts

    $ 4,045         $ 3,727    

 Trust and investment services

    2,157         2,296    

 Bankcard services

    804         765    

 Other

    1,391         1,219    
 

 

 

   

 

 

 

Noninterest Income (in-scope of Topic 606)

    8,397         8,007    

Noninterest Income (out-of-scope of Topic 606)

    4,519         715    
 

 

 

   

 

 

 

Total noninterest income

    $         12,916         $           8,722    
 

 

 

   

 

 

 

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2018 and December 31, 2017, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient, which allows entities to immediately expense contra