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 September 30, 2020

2021

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:

000-10140

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.Ave., Suite 350

Ontario, California

91764

Ontario, California

91764

(Address of principal executive offices)

(Zip Code)

(909) 980-4030

(Registrant's telephone number,

including area code)

(909)
980-4030
(Registrant’s telephone number,
including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, No Par Value

CVBF

CVBF

The Nasdaq Stock Market, LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T
(§ 232.405 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

☐

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: 135,505,605135,521,535 outstanding as of October 30, 2020.

29, 2021.

Table of Contents

TABLE OF CONTENTS

PART I –

FINANCIAL INFORMATION (UNAUDITED)

3

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10

ITEM 2.

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

37

36

CRITICAL ACCOUNTING POLICIES

38

37

OVERVIEW

38

OVERVIEW

40
ANALYSIS OF THE RESULTS OF OPERATIONS

42

40

ANALYSIS OF FINANCIAL CONDITION

52

51

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

66

64

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

69

67

ITEM 4.

CONTROLS AND PROCEDURES

69

67

PART II –

OTHER INFORMATION

70

68

ITEM 1.

LEGAL PROCEEDINGS

68

ITEM 1.

1A.

RISK FACTORS

LEGAL PROCEEDINGS
70

68

    ITEM 1A.
RISK FACTORS
71

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

72

70

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

72

70

ITEM 4.

MINE SAFETY DISCLOSURES

73

70

ITEM 5.

OTHER INFORMATION

70

ITEM 5.

6.

EXHIBITS

OTHER INFORMATION
73

71

    ITEM 6.

EXHIBITS

73
SIGNATURES

74

72

2

Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “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 the following:

•
local, regional, national and international economic and market conditions and political events and public health developments and the impact they may have on us, our customers and our assets and liabilities;
•
local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;
•
•
our ability to attract deposits and other sources of funding or liquidity;
•
supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;
•
a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;
•
changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;
•
changes in our levels of delinquent loans, nonperforming assets, allowance for credit losses and charge-offs;
•
the costs or effects of mergers, acquisitions or dispositions we may make, 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 or cost savings associated with any such mergers, acquisitions or dispositions;
•
the effects of new laws, regulations and/or government programs, including those laws, regulations and programs enacted by federal, state or local governments in the geographic jurisdictions in which we do business in response to the recent national emergency declared in connection with the
COVID-19
pandemic;
•
the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;
•
the effects of the Company’s participation in one or more of the new lending programs recently established by the Federal Reserve, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility, and the impact of any related actions or decisions by the Federal Reserve Bank of Boston and its special purpose vehicle established pursuant to such lending programs;
•
the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for credit losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;
•
changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;
•
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 or currently expected credit losses or delinquencies;
•
the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for credit losses;
•
inflation, changes in market interest rates, securities market and monetary fluctuations;
•
changes in government-established interest rates, reference rates or monetary policies, including the possible imposition of negative interest rates on bank reserves;
•
the impact of the anticipated
phase-out
of the London Interbank Offered Rate (LIBOR) on interest rate indexes specified in certain of our customer loan agreements and our interest rate swap arrangements, including any economic and compliance effects related to the expected change from LIBOR to an alternative reference rate;
•
changes in the amount, cost and availability of deposit insurance;
•
3
supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;
•
a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;
Table•
changes in the financial performance and/or condition of Contentsour borrowers, depositors, key vendors or counterparties;
•
changes in our levels of delinquent loans, nonperforming assets, allowance for credit losses and charge-offs;
•
the costs or effects of mergers, acquisitions or dispositions we may make, 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 or cost savings associated with any such mergers, acquisitions or dispositions, including our recently announced agreement to acquire Suncrest Bank headquartered in Visalia, California;
•
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 and/or communication facilities;
•
cyber incidents, attacks, infiltrations, exfiltrations, or theft or loss of Company or customer or employee data or money;
•
political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes or extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;
•
our timely development and implementation 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 outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;
•
changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
•
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);
•
our ability to retain and increase market share, retain and grow customers and control expenses;
•
changes in the competitive environment among banks and other financial services and technology 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 or on the Company’s assets, liabilities, or customers;
•
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, key executive positions and/or our board of directors;
•
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
•
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, lender liability, bank operations, financial product or service, data privacy, 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 DFPI;
•
our success at managing the risks involved in the foregoing items; and
•
all other factors set forth in the Company’s public reports, including its Annual Report on Form
10-K
for the year ended December 31, 2019, and particularly the discussion of risk factors within that document.
•
the effects of new laws, regulations and/or government programs, including those laws, regulations and programs enacted by federal, state or local governments in the geographic jurisdictions in which we do business in response to the recent national emergency declared in connection with the COVID-19 pandemic;
•
the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;
•
the effects of the Company’s participation in one or more of the new lending programs recently established by the Federal Reserve, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility, and the impact of any related actions or decisions by the Federal Reserve Bank of Boston and its special purpose vehicle established pursuant to such lending programs;
•
the effect of changes in other pertinent laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for credit losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, director or employee diversity requirements, insurance, cybersecurity, customer and employee privacy, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;
•
changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;
•
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 or currently expected credit losses or delinquencies;
•
the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for credit losses;
•
inflation, changes in market interest rates, securities market and monetary fluctuations;
•
changes in government-established interest rates, reference rates or monetary policies, including the possible imposition of negative interest rates on bank reserves;
•
the impact of the anticipated phase-out of the London Interbank Offered Rate (LIBOR) on interest rate indexes specified in certain of our customer loan agreements and our interest rate swap arrangements, including any

3

economic and compliance effects related to the expected change from LIBOR to an alternative reference rate;
•
changes in the amount, cost and availability of deposit insurance;
•
disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to public health, physical site access and/or communication facilities;
•
cyber incidents, attacks, infiltrations, exfiltrations, or theft or loss of any Company or customer or employee data or money;
•
political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes or extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services, computer services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;
•
our timely development and implementation of new banking products and services and the perceived overall value of these products and services by our customers and potential customers;
•
the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;
•
changes in commercial or consumer spending, borrowing and savings patterns, preferences or behaviors;
•
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other financial products, systems or services);
•
our ability to retain and increase market share, retain and grow customers and control expenses;
•
changes in the competitive environment among banks and other financial services and technology 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 or on the Company’s capital, deposits, assets, or customers;
•
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 principal regulatory agencies with jurisdiction over the Company, 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 recruit and retain or expand our workforce, management team, key executive positions and/or our board of directors, including compliance with any applicable diversity requirements;
•
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
•
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, lender liability, bank operations, check or wire fraud, financial product or service, data privacy, 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 DFPI;
•
our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports, including its Annual Report on Form 10-K for the year ended December 31, 2020, and particularly the discussion of risk factors within that document.

Among other risks, the ongoing COVID-19COVID-19 pandemic may significantly affect the banking industry, the health and safety of the Company’s employees, and the Company’s business prospects. The ultimate impact of the COVID-19 pandemic on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact on the economy, our customers, our employees and our business partners, the safety, effectiveness, distribution and acceptance of vaccines developed to mitigate the pandemic, and actions taken by governmental authorities in response to the pandemic.

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.

4

Table of Contents

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

   
  September 30,  
 
  December 31,  
   
2020
 
2019
Assets
   
Cash and due from banks
    $145,455    $158,310 
Interest-earning balances due from Federal Reserve
   1,339,498   27,208 
  
 
 
 
 
 
 
 
Total cash and cash equivalents
   1,484,953   185,518 
  
 
 
 
 
 
 
 
Interest-earning balances due from depository institutions
   44,367   2,931 
Investment securities
available-for-sale,
at fair value (with amortized cost of $2,150,364 at September 30, 2020, and $1,718,357 at December 31, 2019)
   2,205,646   1,740,257 
Investment securities
held-to-maturity
(with fair value of $603,522 at September 30, 2020, and $678,948 at December 31, 2019)
   577,694   674,452 
  
 
 
 
 
 
 
 
Total investment securities
   2,783,340   2,414,709 
  
 
 
 
 
 
 
 
Investment in stock of Federal Home Loan Bank (FHLB)
   17,688   17,688 
Loans and lease finance receivables
   8,407,872   7,564,577 
Allowance for credit losses
   (93,869)   (68,660) 
  
 
 
 
 
 
 
 
Net loans and lease finance receivables
   8,314,003   7,495,917 
  
 
 
 
 
 
 
 
Premises and equipment, net
   51,477   53,978 
Bank owned life insurance (BOLI)
   228,132   226,281 
Accrued interest receivable
   30,004   28,122 
Intangibles
   35,804   42,986 
Goodwill
   663,707   663,707 
Other real estate owned (OREO)
   4,189   4,889 
Income taxes
   21,412   35,587 
Other assets
   139,635   110,137 
  
 
 
 
 
 
 
 
Total assets
    $13,818,711    $11,282,450 
  
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
   
Liabilities:
   
Deposits:
   
Noninterest-bearing
    $6,919,423    $5,245,517 
Interest-bearing
   4,249,411   3,459,411 
  
 
 
 
 
 
 
 
Total deposits
   11,168,834   8,704,928 
Customer repurchase agreements
   483,420   428,659 
Other borrowings
   10,000   - 
Deferred compensation
   21,259   22,666 
Junior subordinated debentures
   25,774   25,774 
Other liabilities
   127,467   106,325 
  
 
 
 
 
 
 
 
Total liabilities
   11,836,754   9,288,352 
  
 
 
 
 
 
 
 
Commitments and Contingencies
   
Stockholders’ Equity
   
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 135,509,143 at September 30, 2020, and 140,102,480 at December 31, 2019
   1,210,646   1,298,792 
Retained earnings
   735,218   682,692 
Accumulated other comprehensive income, net of tax
   36,093   12,614 
  
 
 
 
 
 
 
 
Total stockholders’ equity
   1,981,957   1,994,098 
  
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
    $13,818,711    $11,282,450 
  
 
 
 
 
 
 
 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

159,563

 

 

$

122,305

 

Interest-earning balances due from Federal Reserve

 

 

2,401,800

 

 

 

1,835,855

 

Total cash and cash equivalents

 

 

2,561,363

 

 

 

1,958,160

 

Interest-earning balances due from depository institutions

 

 

27,260

 

 

 

43,563

 

Investment securities available-for-sale, at fair value (with amortized cost of
   $2,916,300 at September 30, 2021, and $2,344,174 at December 31, 2020)

 

 

2,925,060

 

 

 

2,398,923

 

Investment securities held-to-maturity (with fair value of $1,717,230 at
   September 30, 2021, and $604,223 at December 31, 2020)

 

 

1,710,938

 

 

 

578,626

 

Total investment securities

 

 

4,635,998

 

 

 

2,977,549

 

Investment in stock of Federal Home Loan Bank (FHLB)

 

 

17,688

 

 

 

17,688

 

Loans and lease finance receivables

 

 

7,849,520

 

 

 

8,348,808

 

Allowance for credit losses

 

 

(65,364

)

 

 

(93,692

)

Net loans and lease finance receivables

 

 

7,784,156

 

 

 

8,255,116

 

Premises and equipment, net

 

 

49,812

 

 

 

51,144

 

Bank owned life insurance (BOLI)

 

 

251,781

 

 

 

226,818

 

Accrued interest receivable

 

 

30,253

 

 

 

31,306

 

Intangibles

 

 

27,286

 

 

 

33,634

 

Goodwill

 

 

663,707

 

 

 

663,707

 

Other real estate owned (OREO)

 

 

0

 

 

 

3,392

 

Income taxes

 

 

36,870

 

 

 

29,540

 

Other assets

 

 

115,424

 

 

 

127,697

 

Total assets

 

$

16,201,598

 

 

$

14,419,314

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

8,310,709

 

 

$

7,455,387

 

Interest-bearing

 

 

4,619,507

 

 

 

4,281,114

 

Total deposits

 

 

12,930,216

 

 

 

11,736,501

 

Customer repurchase agreements

 

 

659,579

 

 

 

439,406

 

Other borrowings

 

 

0

 

 

 

5,000

 

Deferred compensation

 

 

20,675

 

 

 

21,611

 

Junior subordinated debentures

 

 

0

 

 

 

25,774

 

Payable for securities purchased

 

 

421,751

 

 

 

60,113

 

Other liabilities

 

 

105,457

 

 

 

122,919

 

Total liabilities

 

 

14,137,678

 

 

 

12,411,324

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

Common stock, authorized, 225,000,000 shares without par; issued and
   outstanding 135,516,404 at September 30, 2021 and 135,600,501 at
   December 31, 2020

 

 

1,208,569

 

 

 

1,211,780

 

Retained earnings

 

 

852,273

 

 

 

760,861

 

Accumulated other comprehensive income, net of tax

 

 

3,078

 

 

 

35,349

 

Total stockholders' equity

 

 

2,063,920

 

 

 

2,007,990

 

Total liabilities and stockholders' equity

 

$

16,201,598

 

 

$

14,419,314

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

   
    Three Months Ended    
September 30,
 
    Nine Months Ended    
September 30,
   
2020
 
2019
 
2020
 
2019
Interest income:
     
Loans and leases, including fees
    $94,200    $98,796    $ 281,669    $ 300,326 
Investment securities:
     
Investment securities
available-for-sale
   8,447   9,222   26,945   29,985 
Investment securities
held-to-maturity
   3,375   4,298   11,033   13,249 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment income
   11,822   13,520   37,978   43,234 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends from FHLB stock
   215   301   761   931 
Interest-earning deposits with other institutions
   389   946   1,285   1,140 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
   106,626   113,563   321,693   345,631 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
     
Deposits
   2,958   4,589   10,077   12,553 
Borrowings and customer repurchase agreements
   232   568   972   3,555 
Junior subordinated debentures
   111   247   444   771 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
   3,301   5,404   11,493   16,879 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income before provision for credit losses
   103,325   108,159   310,200   328,752 
Provision for credit losses
   -   1,500   23,500   5,000 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for credit losses
   103,325   106,659   286,700   323,752 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest income:
     
Service charges on deposit accounts
   3,970   4,833   12,555   15,039 
Trust and investment services
   2,405   2,330   7,302   6,964 
Bankcard services
   456   637   1,438   2,614 
BOLI income
   1,469   1,797   5,211   4,482 
Gain on OREO, net
   13   -   23   129 
Gain on sale of building, net
   1,680   -   1,680   4,545 
Gain on eminent domain condemnation, net
   -   -   -   5,685 
Other
   3,160   2,297   8,736   6,944 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest income
   13,153   11,894   36,945   46,402 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense:
     
Salaries and employee benefits
   31,034   30,122   90,617   88,286 
Occupancy and equipment
   5,275   4,879   15,143   15,730 
Professional services
   2,019   1,688   6,643   5,653 
Computer software expense
   2,837   2,663   8,407   8,032 
Marketing and promotion
   728   1,517   3,538   4,149 
Amortization of intangible assets
   2,292   2,648   7,182   8,338 
Acquisition related expenses
   -   244   -   6,005 
Other
   5,403   3,774   13,097   13,474 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest expense
   49,588   47,535   144,627   149,667 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
   66,890   71,018   179,018   220,487 
Income taxes
   19,398   20,595   51,915   63,941 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
    $47,492    $50,423    $127,103    $156,546 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income:
     
Unrealized (loss) gain on securities arising during the period, before tax
    $(2,004)    $5,423    $33,334    $43,136 
Less: Reclassification adjustment for net gain on securities included in net income
   -   (5)   -   (5) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, before tax
   (2,004)   5,418   33,334   43,131 
Less: Income tax benefit (expense) related to items of other comprehensive income
   593   (1,602)   (9,855)   (12,751) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
   (1,411)   3,816   23,479   30,380 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
    $46,081    $54,239    $150,582    $186,926 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
    $0.35    $0.36    $0.93    $1.12 
Diluted earnings per common share
    $0.35    $0.36    $0.93    $1.12 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases, including fees

 

$

88,390

 

 

$

94,200

 

 

$

271,911

 

 

$

281,669

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

9,813

 

 

 

8,447

 

 

 

28,382

 

 

 

26,945

 

Investment securities held-to-maturity

 

 

5,188

 

 

 

3,375

 

 

 

14,258

 

 

 

11,033

 

Total investment income

 

 

15,001

 

 

 

11,822

 

 

 

42,640

 

 

 

37,978

 

Dividends from FHLB stock

 

 

258

 

 

 

215

 

 

 

758

 

 

 

761

 

Interest-earning deposits with other institutions

 

 

898

 

 

 

389

 

 

 

1,790

 

 

 

1,285

 

Total interest income

 

 

104,547

 

 

 

106,626

 

 

 

317,099

 

 

 

321,693

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,113

 

 

 

2,958

 

 

 

4,350

 

 

 

10,077

 

Borrowings and customer repurchase agreements

 

 

135

 

 

 

232

 

 

 

408

 

 

 

972

 

Junior subordinated debentures

 

 

0

 

 

 

111

 

 

 

186

 

 

 

444

 

Total interest expense

 

 

1,248

 

 

 

3,301

 

 

 

4,944

 

 

 

11,493

 

Net interest income before (recapture of) provision for credit losses

 

 

103,299

 

 

 

103,325

 

 

 

312,155

 

 

 

310,200

 

(Recapture of) provision for credit losses

 

 

(4,000

)

 

 

0

 

 

 

(25,500

)

 

 

23,500

 

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

 

 

107,299

 

 

 

103,325

 

 

 

337,655

 

 

 

286,700

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

4,513

 

 

 

3,970

 

 

 

12,667

 

 

 

12,555

 

Trust and investment services

 

 

2,681

 

 

 

2,405

 

 

 

8,459

 

 

 

7,302

 

Bankcard services

 

 

479

 

 

 

456

 

 

 

1,362

 

 

 

1,438

 

BOLI income

 

 

1,229

 

 

 

1,469

 

 

 

7,093

 

 

 

5,211

 

Gain on OREO, net

 

 

0

 

 

 

13

 

 

 

477

 

 

 

23

 

Gain on sale of building, net

 

 

 

 

 

1,680

 

 

 

 

 

 

1,680

 

Other

 

 

1,581

 

 

 

3,160

 

 

 

4,942

 

 

 

8,736

 

Total noninterest income

 

 

10,483

 

 

 

13,153

 

 

 

35,000

 

 

 

36,945

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

29,741

 

 

 

31,034

 

 

 

88,283

 

 

 

90,617

 

Occupancy and equipment

 

 

5,122

 

 

 

5,275

 

 

 

14,934

 

 

 

15,143

 

Professional services

 

 

1,626

 

 

 

2,019

 

 

 

6,042

 

 

 

6,643

 

Computer software expense

 

 

3,020

 

 

 

2,837

 

 

 

8,521

 

 

 

8,407

 

Marketing and promotion

 

 

857

 

 

 

728

 

 

 

3,381

 

 

 

3,538

 

Amortization of intangible assets

 

 

2,014

 

 

 

2,292

 

 

 

6,348

 

 

 

7,182

 

(Recapture of) provision for unfunded loan commitments

 

 

0

 

 

 

0

 

 

 

(1,000

)

 

 

0

 

Acquisition related expenses

 

 

809

 

 

 

0

 

 

 

809

 

 

 

0

 

Other

 

 

4,910

 

 

 

5,403

 

 

 

14,489

 

 

 

13,097

 

Total noninterest expense

 

 

48,099

 

 

 

49,588

 

 

 

141,807

 

 

 

144,627

 

Earnings before income taxes

 

 

69,683

 

 

 

66,890

 

 

 

230,848

 

 

 

179,018

 

Income taxes

 

 

19,930

 

 

 

19,398

 

 

 

66,023

 

 

 

51,915

 

Net earnings

 

$

49,753

 

 

$

47,492

 

 

$

164,825

 

 

$

127,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(14,443

)

 

$

(2,004

)

 

$

(45,816

)

 

$

33,334

 

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

 

 

4,270

 

 

 

593

 

 

 

13,545

 

 

 

(9,855

)

Other comprehensive income (loss), net of tax

 

 

(10,173

)

 

 

(1,411

)

 

 

(32,271

)

 

 

23,479

 

Comprehensive income

 

$

39,580

 

 

$

46,081

 

 

$

132,554

 

 

$

150,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.37

 

 

$

0.35

 

 

$

1.21

 

 

$

0.93

 

Diluted earnings per common share

 

$

0.37

 

 

$

0.35

 

 

$

1.21

 

 

$

0.93

 

See accompanying notes to the unaudited condensed consolidated financial statements.

6

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and shares in thousands)

(Unaudited)

Three Months Ended September 30, 20202021 and 2019

        
Accumulated
  
  
Common
     
Other
  
  
Shares
 
Common
 
Retained
 
Comprehensive
  
  
Outstanding
 
Stock
 
Earnings
 
Income (Loss)
 
Total
Balance, July 1, 2020
  135,516    $ 1,209,449    $ 712,145    $ 37,504    $ 1,959,098 
Repurchase of common stock
  (15)   (257)   -   -   (257) 
Exercise of stock options
  4   47   -   -   47 
Shares issued pursuant to stock-based compensation plan
  4   1,407   -   -   1,407 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (24,419)   -   (24,419) 
Net earnings
  -   -   47,492   -   47,492 
Other comprehensive loss
  -   -   -   (1,411)   (1,411) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2020
  135,509    $ 1,210,646    $ 735,218    $ 36,093    $ 1,981,957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2019
  140,142  $1,296,885  $631,512  $8,280  $1,936,677 
Repurchase of common stock
  (34)   (723)   -   -   (723) 
Exercise of stock options
  15   155   -   -   155 
Shares issued pursuant to stock-based compensation plan
  34   1,821   -   -   1,821 
Cash dividends declared on common stock ($0.18 per share)
  -   -   (25,276)   -   (25,276) 
Net earnings
  -   -   50,423   -   50,423 
Other comprehensive income
  -   -   -   3,816   3,816 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
  140,157    $1,298,138    $656,659    $12,096    $1,966,893 
 
 
 
 
 
 
 
 
��
 
 
 
 
 
 
 
 
 
 
 
2020

 

Common Shares Outstanding

 

 

Common Stock

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance, July 1, 2021

 

135,927

 

 

$

1,214,882

 

 

$

826,941

 

 

$

13,251

 

 

$

2,055,074

 

Repurchase of common stock

 

(406

)

 

 

(7,712

)

 

 

-

 

 

 

-

 

 

 

(7,712

)

Exercise of stock options

 

1

 

 

 

22

 

 

 

-

 

 

 

-

 

 

 

22

 

Shares issued pursuant to stock-based
   compensation plan

 

(5

)

 

 

1,377

 

 

 

-

 

 

 

-

 

 

 

1,377

 

Cash dividends declared on common stock
   ($0.18 per share)

 

-

 

 

 

-

 

 

 

(24,421

)

 

 

-

 

 

 

(24,421

)

Net earnings

 

-

 

 

 

-

 

 

 

49,753

 

 

 

-

 

 

 

49,753

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,173

)

 

 

(10,173

)

Balance, September 30, 2021

 

135,517

 

 

$

1,208,569

 

 

$

852,273

 

 

$

3,078

 

 

$

2,063,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2020

 

135,516

 

 

$

1,209,449

 

 

$

712,145

 

 

$

37,504

 

 

$

1,959,098

 

Repurchase of common stock

 

(15

)

 

 

(257

)

 

 

-

 

 

 

-

 

 

 

(257

)

Exercise of stock options

 

4

 

 

 

47

 

 

 

-

 

 

 

-

 

 

 

47

 

Shares issued pursuant to stock-based
   compensation plan

 

4

 

 

 

1,407

 

 

 

-

 

 

 

-

 

 

 

1,407

 

Cash dividends declared on common stock
   ($0.18 per share)

 

-

 

 

 

-

 

 

 

(24,419

)

 

 

-

 

 

 

(24,419

)

Net earnings

 

-

 

 

 

-

 

 

 

47,492

 

 

 

-

 

 

 

47,492

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,411

)

 

 

(1,411

)

Balance, September 30, 2020

 

135,509

 

 

$

1,210,646

 

 

$

735,218

 

 

$

36,093

 

 

$

1,981,957

 

Nine Months Ended September 30, 20202021 and 2019

        
Accumulated
  
  
Common
     
Other
  
  
Shares
 
Common
 
Retained
 
Comprehensive
  
  
Outstanding
 
Stock
 
Earnings
 
Income (Loss)
 
Total
Balance, January 1, 2020
  140,102    $1,298,792    $682,692    $12,614    $1,994,098 
Cumulative adjustment upon adoption of ASU
2016-13
  -   -   (1,325)   -   (1,325) 
Repurchase of common stock
  (5,004)   (92,687)   -   -   (92,687) 
Exercise of stock options
  14   168   -   -   168 
Shares issued pursuant to stock-based compensation plan
  397   4,373   -   -   4,373 
Cash dividends declared on common stock ($0.54 per share)
  -   -   (73,252)   -   (73,252) 
Net earnings
  -   -   127,103   -   127,103 
Other comprehensive income
  -   -   -   23,479   23,479 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2020
  135,509    $ 1,210,646    $ 735,218    $ 36,093    $ 1,981,957 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
  140,000  $ 1,293,669  $ 575,805  $ (18,284)  $ 1,851,190 
Repurchase of common stock
  (70)   (1,535)   -   -   (1,535) 
Exercise of stock options
  160   2,212   -   -   2,212 
Shares issued pursuant to stock-based compensation plan
  67   3,792   -   -   3,792 
Cash dividends declared on common stock ($0.54 per share)
  -   -   (75,692)   -   (75,692) 
Net earnings
  -   -   156,546   -   156,546 
Other comprehensive income
  -   -   -   30,380   30,380 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
  140,157    $1,298,138    $656,659    $12,096    $1,966,893 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2020

 

Common Shares Outstanding

 

 

Common Stock

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance, January 1, 2021

 

135,601

 

 

$

1,211,780

 

 

$

760,861

 

 

$

35,349

 

 

$

2,007,990

 

Repurchase of common stock

 

(430

)

 

 

(8,246

)

 

 

-

 

 

 

-

 

 

 

(8,246

)

Exercise of stock options

 

46

 

 

 

986

 

 

 

-

 

 

 

-

 

 

 

986

 

Shares issued pursuant to stock-based
   compensation plan

 

300

 

 

 

4,049

 

 

 

-

 

 

 

-

 

 

 

4,049

 

Cash dividends declared on common stock
  ($0.54 per share)

 

-

 

 

 

-

 

 

 

(73,413

)

 

 

-

 

 

 

(73,413

)

Net earnings

 

-

 

 

 

-

 

 

 

164,825

 

 

 

-

 

 

 

164,825

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(32,271

)

 

 

(32,271

)

Balance, September 30, 2021

 

135,517

 

 

$

1,208,569

 

 

$

852,273

 

 

$

3,078

 

 

$

2,063,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2020

 

140,102

 

 

$

1,298,792

 

 

$

682,692

 

 

$

12,614

 

 

$

1,994,098

 

Cumulative adjustment upon adoption of
   ASU 2016-13

 

-

 

 

 

-

 

 

 

(1,325

)

 

 

-

 

 

 

(1,325

)

Repurchase of common stock

 

(5,004

)

 

 

(92,687

)

 

 

-

 

 

 

-

 

 

 

(92,687

)

Exercise of stock options

 

14

 

 

 

168

 

 

 

-

 

 

 

-

 

 

 

168

 

Shares issued pursuant to stock-based
   compensation plan

 

397

 

 

 

4,373

 

 

 

-

 

 

 

-

 

 

 

4,373

 

Cash dividends declared on common stock
  ($0.54 per share)

 

-

 

 

 

-

 

 

 

(73,252

)

 

 

-

 

 

 

(73,252

)

Net earnings

 

-

 

 

 

-

 

 

 

127,103

 

 

 

-

 

 

 

127,103

 

Other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

23,479

 

 

 

23,479

 

Balance, September 30, 2020

 

135,509

 

 

$

1,210,646

 

 

$

735,218

 

 

$

36,093

 

 

$

1,981,957

 

See accompanying notes to the unaudited condensed consolidated financial statements.

7

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

   
    Nine Months Ended    
   
September 30,
   
2020
 
2019
Cash Flows from Operating Activities
   
Interest and dividends received
    $301,634    $331,953 
Service charges and other fees received
   29,918   31,441 
Interest paid
   (10,975)   (16,155) 
Net cash paid to vendors, employees and others
   (136,948)   (140,482) 
Income taxes
   (45,610)   (59,347) 
  
 
 
 
 
 
 
 
Net cash provided by operating activities
   138,019   147,410 
  
 
 
 
 
 
 
 
Cash Flows from Investing Activities
   
Net change in interest-earning balances from depository institutions
   (41,436)   1,997 
Proceeds from sale of investment securities
held-for-sale
   0   152,644 
Proceeds from repayment of investment securities
available-for-sale
   426,684   268,766 
Proceeds from maturity of investment securities
available-for-sale
   3,506   6,059 
Purchases of investment securities
available-for-sale
   (870,934)   (225,416) 
Proceeds from repayment and maturity of investment securities
held-to-maturity
   106,491   81,001 
Purchases of investment securities
held-to-maturity
   (11,210)   (42,917) 
Net increase in equity investments
   (2,890)   (3,511) 
Net (increase) decrease in loan and lease finance receivables
   (815,151)   289,490 
Proceeds on eminent domain condemnation, net
   0   5,685 
Proceeds from sale of building, net of selling costs
   2,131   5,487 
Purchase of premises and equipment
   (2,444)   (3,061) 
Proceeds from BOLI death benefit
   4,589   1,509 
Proceeds from sales of other real estate owned
   0   523 
  
 
 
 
 
 
 
 
Net cash (used in) provided by investing activities
   (1,200,664)   538,256 
  
 
 
 
 
 
 
 
Cash Flows from Financing Activities
   
Net increase in other deposits
   2,465,066   37,061 
Net decrease in time deposits
   (1,160)   (70,221) 
Net increase (decrease) in other borrowings
   10,000   (275,086) 
Net increase (decrease) in customer repurchase agreements
   54,761   (34,405) 
Cash dividends on common stock
   (74,068)   (70,092) 
Repurchase of common stock
   (92,687)   (1,535) 
Proceeds from exercise of stock options
   168   2,212 
  
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
   2,362,080   (412,066) 
  
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
   1,299,435   273,600 
Cash and cash equivalents, beginning of period
   185,518   163,948 
  
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
    $1,484,953    $437,548 
  
 
 
 
 
 
 
 

 

Nine Months Ended

 

 

September 30,

 

 

2021

 

 

2020

 

Cash Flows from Operating Activities

 

 

 

 

 

Interest and dividends received

$

308,061

 

 

$

301,634

 

Service charges and other fees received

 

27,427

 

 

 

29,918

 

Interest paid

 

(4,866

)

 

 

(10,975

)

Net cash paid to vendors, employees and others

 

(135,640

)

 

 

(136,948

)

Income taxes

 

(58,402

)

 

 

(45,610

)

Net cash provided by operating activities

 

136,580

 

 

 

138,019

 

Cash Flows from Investing Activities

 

 

 

 

 

Net change in interest-earning balances from depository institutions

 

16,303

 

 

 

(41,436

)

Proceeds from repayment of investment securities available-for-sale

 

599,139

 

 

 

426,684

 

Proceeds from maturity of investment securities available-for-sale

 

0

 

 

 

3,506

 

Purchases of investment securities available-for-sale

 

(1,247,286

)

 

 

(870,934

)

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

 

113,134

 

 

 

106,491

 

Purchases of investment securities held-to-maturity

 

(830,886

)

 

 

(11,210

)

Net increase in equity investments

 

(4,934

)

 

 

(2,890

)

Net decrease (increase) in loan and lease finance receivables

 

529,771

 

 

 

(815,151

)

Proceeds from sale of building, net of selling costs

 

1,157

 

 

 

2,131

 

Purchase of premises and equipment

 

(2,278

)

 

 

(2,444

)

Purchase of BOLI

 

(25,000

)

 

 

0

 

Proceeds from BOLI death benefit

 

11,121

 

 

 

4,589

 

Proceeds from sales of other real estate owned

 

3,869

 

 

 

0

 

Net cash used in investing activities

 

(835,890

)

 

 

(1,200,664

)

Cash Flows from Financing Activities

 

 

 

 

 

Net increase in other deposits

 

1,250,970

 

 

 

2,465,066

 

Net decrease in time deposits

 

(57,255

)

 

 

(1,160

)

Net (decrease) increase in other borrowings

 

(5,000

)

 

 

10,000

 

Net increase in customer repurchase agreements

 

220,173

 

 

 

54,761

 

Repayment of junior subordinated debentures

 

(25,774

)

 

 

0

 

Cash dividends on common stock

 

(73,341

)

 

 

(74,068

)

Repurchase of common stock

 

(8,246

)

 

 

(92,687

)

Proceeds from exercise of stock options

 

986

 

 

 

168

 

Net cash provided by financing activities

 

1,302,513

 

 

 

2,362,080

 

Net increase in cash and cash equivalents

 

603,203

 

 

 

1,299,435

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,958,160

 

 

 

185,518

 

Cash and cash equivalents, end of period

$

2,561,363

 

 

$

1,484,953

 

See accompanying notes to the unaudited condensed consolidated financial statements.

8

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

   
        Nine Months Ended        
   
September 30,
   
2020
 
2019
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
   
   Net earnings
    $127,103    $156,546 
   Adjustments to reconcile net earnings to net cash provided by operating activities:
   
  Gain on sale of investment securities, net
   0   (5) 
  Gain on eminent domain condemnation, net
   0   (5,685) 
  Gain on sale of building, net
   (1,680)   (4,545) 
  Gain on sale of other real estate owned
   0   (105) 
  Increase in BOLI
   (4,028)   (5,592) 
  Net amortization of premiums and discounts on investment securities
   10,181   7,593 
  Accretion of discount for acquired loans, net
   (13,106)   (22,369) 
  Provision for credit losses
   23,500   5,000 
  Valuation allowance on other real estate owned
   700   0 
  Stock-based compensation
   4,373   3,792 
  Depreciation and amortization, net
   2,173   16,993 
  Change in other assets and liabilities
   (11,197)   (4,213) 
  
 
 
 
 
 
 
 
     Total adjustments
   10,916   (9,136) 
  
 
 
 
 
 
 
 
    Net cash provided by operating activities
    $138,019    $147,410 
  
 
 
 
 
 
 
 
Supplemental Disclosure of
Non-cash
Investing Activities
   
   Transfer of loans to other real estate owned
    $0    $9,450 

 

Nine Months Ended

 

 

September 30,

 

 

2021

 

 

2020

 

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

 

 

 

 

 

Net earnings

$

164,825

 

 

$

127,103

 

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

 

 

 

 

 

Gain on sale of building, net

 

(189

)

 

 

(1,680

)

Gain on sale of other real estate owned

 

(477

)

 

 

0

 

Increase in BOLI

 

(7,093

)

 

 

(4,028

)

Net amortization of premiums and discounts on investment securities

 

23,221

 

 

 

10,181

 

Accretion of discount for acquired loans, net

 

(10,158

)

 

 

(13,106

)

(Recapture of) provision for credit losses

 

(25,500

)

 

 

23,500

 

(Recapture of) provision for unfunded loan commitments

 

(1,000

)

 

 

0

 

Valuation allowance on other real estate owned

 

0

 

 

 

700

 

Stock-based compensation

 

4,049

 

 

 

4,373

 

Depreciation and amortization, net

 

(7,143

)

 

 

2,173

 

Change in other assets and liabilities

 

(3,955

)

 

 

(11,197

)

Total adjustments

 

(28,245

)

 

 

10,916

 

Net cash provided by operating activities

$

136,580

 

 

$

138,019

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

 

 

 

 

 

Securities purchased and not settled

$

421,751

 

 

$

0

 

See accompanying notes to the unaudited condensed consolidated financial statements.

9

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Unaudited)
1.
BUSINESS

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,”“we”, “our” or the “Company”) and its wholly owned subsidiary,subsidiary: Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has 1 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 5758 banking centers 1 loan production office in Modesto, California and 3 trust office locations. The Company is headquartered in the city of Ontario, California.

2.
BASIS OF PRESENTATION

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form

10-Q
and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and nine months ended September 30, 20202021 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, 2019,2020, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification

— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 20192020 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 credit 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.

10

10
Table of Contents
Adoption of New Accounting Standard
Provision and Allowance for Credit Losses
— On January 1, 2020, the Company adopted 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. This ASU replaces the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, applies 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,
held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to
available-for-sale
(“AFS”) debt securities. For AFS debt securities with unrealized losses, we will measure credit impairment in a manner similar to the approach used prior to the adoption of CECL, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, we will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as required prior to the adoption of CECL. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet. If accrued interest is not received, it is reversed against interest income, which was zero for the third quarter of 2020.
The Company adopted this ASU using the modified retrospective method for all financial assets measured at amortized cost and
off-balance
sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to beginning retained earnings of $1.3 million, net of tax as of January 1, 2020 for the cumulative adjustment upon adoption of ASC 326. The transition adjustment of $1.8 million was added to the beginning balance of the allowance for credit losses (“ACL”) for loans and $41,000 was added to the beginning balance of reserve for unfunded loan commitments. Upon adoption of CECL there was no impact on the accounting for AFS or HTM investment securities.
The Company developed an allowance model that calculates reserves over the life of the loan and is largely driven by portfolio characteristics, risk grading, macroeconomic variables and the associated economic outlook, as well as other key methodology assumptions. The allowance is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, the ASU indicates management has the opportunity to layer on current conditions and forecast adjustments to ensure that the life of loan loss rate reflects both the current state of the portfolio, and expectations for macroeconomic changes in the near future. We utilized a single economic forecast that is based on probability weighted scenarios to incorporate macroeconomic uncertainty over a 2 or
3-year
forecast horizon. After the initial 2 to 3 year forecast horizon, we use an input reversion methodology in the model structure to complete a reasonable and supportable forecast period for the life of the loan.
Beginning in the second half of March 2020, the broader economy experienced a significant deterioration in the economic environment driven by the COVID-19 pandemic resulting in adverse changes to the forecasted macroeconomic variables utilized in our modeling processes. This economic deterioration, coupled with the implementation of the expected loss methodology for determining our provision for credit losses, have contributed to an increased provision for credit losses of
$23.5 
million in the first half of 2020. We continue to monitor the impact on the economy from COVID-19 closely, as well as any effects that may result from the CARES Act. The extent to which the COVID-19 pandemic will impact our operations and financial results during the final quarter of 2020 is uncertain, but we may experience increased provision for credit losses if the COVID-19 pandemic results in additional economic stress on our borrowers and loan portfolios.
11
Table of Contents
4.
INVESTMENT SECURITIES

4. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are

available-for-sale
securities with fair value based on quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. Estimated fair values were obtained from an independent pricing service based upon market quotes.

 

September 30, 2021

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gain

 

 

Gross Unrealized Holding Loss

 

 

Fair Value

 

 

Total Percent

 

 

(Dollars in thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

2,256,252

 

 

$

31,251

 

 

$

(18,430

)

 

$

2,269,073

 

 

 

77.57

%

CMO/REMIC

 

630,351

 

 

 

2,846

 

 

 

(8,030

)

 

 

625,167

 

 

 

21.37

%

Municipal bonds

 

28,697

 

 

 

1,123

 

 

 

0

 

 

 

29,820

 

 

 

1.02

%

Other securities

 

1,000

 

 

 

0

 

 

 

0

 

 

 

1,000

 

 

 

0.04

%

Total available-for-sale securities

$

2,916,300

 

 

$

35,220

 

 

$

(26,460

)

 

$

2,925,060

 

 

 

100.00

%

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency/GSE

$

585,022

 

 

$

6,785

 

 

$

(8,112

)

 

$

583,695

 

 

 

34.19

%

Mortgage-backed securities

 

648,613

 

 

 

5,450

 

 

 

(1,502

)

 

 

652,561

 

 

 

37.91

%

CMO/REMIC

 

264,324

 

 

 

1,642

 

 

 

(1,118

)

 

 

264,848

 

 

 

15.45

%

Municipal bonds

 

212,979

 

 

 

4,761

 

 

 

(1,614

)

 

 

216,126

 

 

 

12.45

%

Total held-to-maturity securities

$

1,710,938

 

 

$

18,638

 

 

$

(12,346

)

 

$

1,717,230

 

 

 

100.00

%

 

December 31, 2020

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gain

 

 

Gross Unrealized Holding Loss

 

 

Fair Value

 

 

Total Percent

 

 

(Dollars in thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

1,857,030

 

 

$

48,006

 

 

$

(101

)

 

$

1,904,935

 

 

 

79.41

%

CMO/REMIC

 

457,548

 

 

 

5,515

 

 

 

(249

)

 

 

462,814

 

 

 

19.29

%

Municipal bonds

 

28,707

 

 

 

1,578

 

 

 

0

 

 

 

30,285

 

 

 

1.26

%

Other securities

 

889

 

 

 

0

 

 

 

0

 

 

 

889

 

 

 

0.04

%

Total available-for-sale securities

$

2,344,174

 

 

$

55,099

 

 

$

(350

)

 

$

2,398,923

 

 

 

100.00

%

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency/GSE

$

98,663

 

 

$

5,877

 

 

$

0

 

 

$

104,540

 

 

 

17.05

%

Mortgage-backed securities

 

146,382

 

 

 

7,644

 

 

 

(32

)

 

 

153,994

 

 

 

25.30

%

CMO/REMIC

 

145,309

 

 

 

5,202

 

 

 

0

 

 

 

150,511

 

 

 

25.11

%

Municipal bonds

 

188,272

 

 

 

6,980

 

 

 

(74

)

 

 

195,178

 

 

 

32.54

%

Total held-to-maturity securities

$

578,626

 

 

$

25,703

 

 

$

(106

)

 

$

604,223

 

 

 

100.00

%

11

  
September 30, 2020
  
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
  
(Dollars in thousands)
Investment securities
available-for-sale:
     
Mortgage-backed securities
   $1,710,160    $46,713    $(2)    $1,756,871   79.65% 
CMO/REMIC
  404,380   7,326   (212)   411,494   18.66% 
Municipal bonds
  35,011   1,457   -   36,468   1.65% 
Other securities
  813   -   -   813   0.04% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $2,150,364    $55,496    $(214)    $2,205,646   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
     
Government agency/GSE
   $103,317    $6,627    $-    $109,944   17.88% 
Mortgage-backed securities
  152,285   7,837   -   160,122   26.36% 
CMO/REMIC
  159,676   5,315   -   164,991   27.64% 
Municipal bonds
  162,416   6,387   (338)   168,465   28.12% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $577,694    $26,166    $(338)    $603,522   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
December 31, 2019
  
   Amortized   

Cost
 
Gross

   Unrealized   

Holding

Gain
 
 
Gross
   Unrealized   

Holding

Loss
 
   Fair Value   
 
  Total Percent  
  
(Dollars in thousands)
Investment securities
available-for-sale:
     
Mortgage-backed securities
   $1,185,757    $21,306    $(750)    $1,206,313   69.32% 
CMO/REMIC
  493,214   1,392   (896)   493,710   28.37% 
Municipal bonds
  38,506   850   (2)   39,354   2.26% 
Other securities
  880   -   -   880   0.05% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $1,718,357    $23,548    $(1,648)    $1,740,257   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
     
Government agency/GSE
   $117,366    $2,280    $(657)    $118,989   17.40% 
Mortgage-backed securities
  168,479   2,083   (54)   170,508   24.98% 
CMO/REMIC
  192,548   -   (2,458)   190,090   28.55% 
Municipal bonds
  196,059   3,867   (565)   199,361   29.07% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $674,452    $8,230    $(3,734)    $678,948   100.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
Table of Contents

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

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(Dollars in thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

Taxable

$

9,630

 

 

$

8,244

 

 

$

27,824

 

 

$

26,313

 

Tax-advantaged

 

183

 

 

 

203

 

 

 

558

 

 

 

632

 

Total interest income from available-for-sale securities

 

9,813

 

 

 

8,447

 

 

 

28,382

 

 

 

26,945

 

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

4,099

 

 

 

2,265

 

 

 

10,917

 

 

 

7,410

 

Tax-advantaged

 

1,089

 

 

 

1,110

 

 

 

3,341

 

 

 

3,623

 

Total interest income from held-to-maturity securities

 

5,188

 

 

 

3,375

 

 

 

14,258

 

 

 

11,033

 

Total interest income from investment securities

$

15,001

 

 

$

11,822

 

 

$

42,640

 

 

$

37,978

 

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
     2020     
  
     2019     
  
     2020     
  
     2019     
   
(Dollars in thousands)
Investment securities
available-for-sale:
        
Taxable
    $8,244     $8,949     $26,313     $29,079 
Tax-advantaged
   203    273    632    906 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from
available-for-sale
securities
   8,447    9,222    26,945    29,985 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
        
Taxable
   2,265    2,883    7,410    8,725 
Tax-advantaged
   1,110    1,415    3,623    4,524 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from
held-to-maturity
securities
   3,375    4,298    11,033    13,249 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total interest income from investment securities
    $11,822     $13,520     $37,978     $43,234 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 

The adoption of CECL did not and continues to not have a material impact on the accounting for investment securities, as approximately 93%95% of the total investment securities portfolio at September 30, 20202021 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 remaining securities are predominately

AA-
or better general-obligation municipal bonds. The allowance for credit losses for
held-to-maturity
investment securities under the new CECL model was zero 0at September 30, 2021 and December 31, 2020.

We adopted ASU

2016-13
on January 1, 2020, on a prospectivemodified retrospective basis. Under the new guidance,this ASU, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
AFS and
held-to-maturity
HTM securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the third quarter of 2020, managementManagement determined that there were 0credit losses did not exist for securities in an unrealized loss position.
position as of September 30, 2021 and December 31, 2020.

The following table presents the Company’s

available-for-sale
investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2020.
  
September 30, 2020
  
    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:
      
Mortgage-backed securities
   $30,851    $(2)    $-    $-    $30,851    $(2) 
CMO/REMIC
  71,781   (212)   -   -   71,781   (212) 
Municipal bonds
  -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $102,632    $(214)    $-    $-    $102,632    $(214) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The table below presents the Company’s investment securities’ gross unrealized losses2021 and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019, prior to adoption of ASU
2016-13.2020.

 

September 30, 2021

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

1,349,856

 

 

$

(18,243

)

 

$

21,273

 

 

$

(187

)

 

$

1,371,129

 

 

$

(18,430

)

CMO/REMIC

 

510,308

 

 

 

(7,758

)

 

 

11,162

 

 

 

(272

)

 

 

521,470

 

 

 

(8,030

)

Municipal bonds

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total available-for-sale securities

$

1,860,164

 

 

$

(26,001

)

 

$

32,435

 

 

$

(459

)

 

$

1,892,599

 

 

$

(26,460

)

 

December 31, 2020

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

72,219

 

 

$

(101

)

 

$

0

 

 

$

0

 

 

$

72,219

 

 

$

(101

)

CMO/REMIC

 

96,974

 

 

 

(249

)

 

 

0

 

 

 

0

 

 

 

96,974

 

 

 

(249

)

Municipal bonds

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total available-for-sale securities

$

169,193

 

 

$

(350

)

 

$

0

 

 

$

0

 

 

$

169,193

 

 

$

(350

)

12

Management previously 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 interest 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.
13
Table of Contents
  
December 31, 2019
  
    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:
      
Mortgage-backed securities
   $20,289    $(6)    $97,964    $(744)    $118,253    $(750) 
CMO/REMIC
  177,517   (705)   34,565   (191)   212,082   (896) 
Municipal bonds
  -   -   563   (2)   563   (2) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $197,806    $(711)    $133,092    $(937)    $330,898    $(1,648) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
held-to-maturity:
      
Government agency/GSE
   $28,359    $(252)    $19,405    $(405)    $47,764    $(657) 
Mortgage-backed securities
  10,411   (54)   -   -    10,411   (54) 
CMO/REMIC
  23,897   (104)   166,193   (2,354)   190,090   (2,458) 
Municipal bonds
  7,583   (32)   29,981   (533)   37,564   (565) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
held-to-maturity
securities
   $70,250    $(442)    $215,579    $(3,292)    $285,829    $(3,734) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At September 30, 20202021 and December 31, 2019,2020, investment securities having a carrying value of approximately $1.86$2.20 billion and $1.64$1.81 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at September 30, 2020,2021, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have weighted average remaining contractual maturities of approximately 17 22years, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty

.
penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

 

September 30, 2021

 

 

Available-for-sale

 

 

Held-to-maturity

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Due in one year or less

$

23,634

 

 

$

23,919

 

 

$

3,769

 

 

$

3,834

 

Due after one year through five years

 

1,803,142

 

 

 

1,820,712

 

 

 

270,074

 

 

 

276,504

 

Due after five years through ten years

 

721,776

 

 

 

718,076

 

 

 

798,605

 

 

 

798,051

 

Due after ten years

 

367,748

 

 

 

362,353

 

 

 

638,490

 

 

 

638,841

 

Total investment securities

$

2,916,300

 

 

$

2,925,060

 

 

$

1,710,938

 

 

$

1,717,230

 

  
September 30, 2020
  
Available-for-sale
 
Held-to-maturity
  
  Amortized  
Cost
 
  Fair Value  
 
 
  Amortized  
Cost
 
  Fair Value  
  
 
(Dollars in thousands)
Due in one year or less
   $27,816    $27,968    $2,730    $2,764 
Due after one year through five years
  1,960,912   2,012,028   327,785   341,060 
Due after five years through ten years
  119,315   121,652   81,246   84,329 
Due after ten years
  42,321   43,998   165,933   175,369 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment securities
   $2,150,364    $2,205,646    $577,694    $603,522 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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. NaN impairment losses have been recorded as ofthrough September 30, 2020.

2021.

5. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

14
Table of Contents
5.
LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

The following table provides a summary of total loans and lease finance receivables by type.

 

September 30, 2021

 

 

December 31, 2020

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Commercial real estate

$

5,734,699

 

 

$

5,501,509

 

Construction

 

77,398

 

 

 

85,145

 

SBA

 

307,533

 

 

 

303,896

 

SBA - Paycheck Protection Program (PPP)

 

330,960

 

 

 

882,986

 

Commercial and industrial

 

769,977

 

 

 

812,062

 

Dairy & livestock and agribusiness

 

279,584

 

 

 

361,146

 

Municipal lease finance receivables

 

47,305

 

 

 

45,547

 

SFR mortgage

 

231,323

 

 

 

270,511

 

Consumer and other loans

 

70,741

 

 

 

86,006

 

Total loans, at amortized cost

 

7,849,520

 

 

 

8,348,808

 

Less: Allowance for credit losses

 

(65,364

)

 

 

(93,692

)

 Total loans and lease finance receivables, net

$

7,784,156

 

 

$

8,255,116

 

                                                    
  
September 30, 2020
 
December 31, 2019
  
(Dollars in thousands)
Commercial and industrial
   $817,056    $935,127 
SBA
  304,987   305,008 
SBA - Paycheck Protection Program (PPP)
  1,101,142   - 
Real estate:
  
Commercial real estate
  5,428,223   5,374,617 
Construction
  101,903   116,925 
SFR mortgage
  274,731   283,468 
Dairy & livestock and agribusiness
  252,802   383,709 
Municipal lease finance receivables
  38,040   53,146 
Consumer and other loans
  88,988   116,319 
 
 
 
 
 
 
 
 
Total loans
  8,407,872   7,568,319 
Less: Deferred loan fees, net (1)
  -   (3,742) 
 
 
 
 
 
 
 
 
Total loans, net of deferred loan fees
  8,407,872   7,564,577 
Less: Allowance for credit losses
  (93,869)   (68,660) 
 
 
 
 
 
 
 
 
Total loans and lease finance receivables, net
   $8,314,003    $7,495,917 
 
 
 
 
 
 
 
 
(1)
Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables.

As of September 30, 2020, 69.04%2021, 76.99% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 64.56%73.06% of total loans. Substantially all of theThe Company’s real estate loans and construction loans are secured by real properties primarily located in California. As of September 30, 2020, $271.22021, $354.3 million, or 5.00%6.18% of the total commercial real estate loans included loans secured by farmland, compared to $241.8$314.4 million, or 4.50%5.72%, at December 31, 2019.2020. The loans secured by farmland included $121.1$125.1 million for loans secured by dairy & livestock land and $150.2$229.2 million for loans secured by agricultural land at September 30, 2020,2021, compared to $125.9$132.9 million for loans secured by dairy & livestock land and $115.9$181.5 million for loans secured by agricultural land at December 31, 2019.2020. As of September 30, 2020,2021, dairy & livestock and agribusiness loans of $252.8$279.6 million were comprised of $210.4$242.0 million for dairy & livestock loans and $42.4$37.6 million for agribusiness loans, compared to $323.5$320.1 million for dairy & livestock loans and $60.2$41.0 million for agribusiness loans at December 31, 2019.

2020.

At September 30, 20202021 and December 31, 2019,2020, loans totaling $6.00$6.26 billion and $6.03$6.07 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were 0 outstanding loans
held-for-sale
as of September 30, 20202021 and December 31, 2019.
15
2020.

13

Table of Content

s

Credit Quality Indicators

We monitor credit quality by evaluating various risk attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. Internal credit risk ratings, within our loan risk rating system, are the credit quality indicators that we most closely monitor.

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. LoansCredits are monitored by line and credit management personnel on an ongoing basis 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):categories: 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.

14

16
Table of Contents

The following table summarizes loans by type and origination year, according to our internal risk ratings as of the datedates presented.

 

Origination Year

 

 

Revolving loans amortized

 

 

Revolving loans converted to

 

 

 

 

September 30, 2021

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

cost basis

 

 

term loans

 

 

Total

 

 

(Dollars in thousands)

 

Commercial real estate
   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

878,859

 

 

$

979,652

 

 

$

622,674

 

 

$

547,936

 

 

$

511,804

 

 

$

1,812,200

 

 

$

169,358

 

 

$

44,792

 

 

$

5,567,275

 

Special Mention

 

11,986

 

 

 

5,575

 

 

 

9,078

 

 

 

21,902

 

 

 

43,612

 

 

 

46,359

 

 

 

6,418

 

 

 

5,500

 

 

 

150,430

 

Substandard

 

2,446

 

 

 

0

 

 

 

463

 

 

 

0

 

 

 

4,877

 

 

 

8,892

 

 

 

0

 

 

 

316

 

 

 

16,994

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Commercial real
   estate loans:

$

893,291

 

 

$

985,227

 

 

$

632,215

 

 

$

569,838

 

 

$

560,293

 

 

$

1,867,451

 

 

$

175,776

 

 

$

50,608

 

 

$

5,734,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

7,465

 

 

$

22,258

 

 

$

7,148

 

 

$

3,142

 

 

$

0

 

 

$

0

 

 

$

37,385

 

 

$

0

 

 

$

77,398

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Construction
   loans:

$

7,465

 

 

$

22,258

 

 

$

7,148

 

 

$

3,142

 

 

$

0

 

 

$

0

 

 

$

37,385

 

 

$

0

 

 

$

77,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

63,286

 

 

$

42,468

 

 

$

11,233

 

 

$

38,918

 

 

$

43,891

 

 

$

88,592

 

 

$

0

 

 

$

0

 

 

$

288,388

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

4,121

 

 

 

6,075

 

 

 

0

 

 

 

0

 

 

 

10,196

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

840

 

 

 

5,471

 

 

 

2,638

 

 

 

0

 

 

 

0

 

 

 

8,949

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SBA loans:

$

63,286

 

 

$

42,468

 

 

$

11,233

 

 

$

39,758

 

 

$

53,483

 

 

$

97,305

 

 

$

0

 

 

$

0

 

 

$

307,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA - PPP loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

278,560

 

 

$

50,877

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

329,437

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

0

 

 

 

1,523

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,523

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SBA - PPP loans:

$

278,560

 

 

$

52,400

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

330,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and
   industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

100,677

 

 

$

87,523

 

 

$

134,219

 

 

$

59,713

 

 

$

38,121

 

 

$

81,999

 

 

$

237,284

 

 

$

5,919

 

 

$

745,455

 

Special Mention

 

921

 

 

 

2,353

 

 

 

1,001

 

 

 

1,481

 

 

 

515

 

 

 

140

 

 

 

7,597

 

 

 

198

 

 

 

14,206

 

Substandard

 

2,643

 

 

 

7

 

 

 

106

 

 

 

2,016

 

 

 

1,142

 

 

 

612

 

 

 

343

 

 

 

3,447

 

 

 

10,316

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Commercial and
   industrial loans:

$

104,241

 

 

$

89,883

 

 

$

135,326

 

 

$

63,210

 

 

$

39,778

 

 

$

82,751

 

 

$

245,224

 

 

$

9,564

 

 

$

769,977

 

15

 

Origination Year

 

 

Revolving loans amortized

 

 

Revolving loans converted to

 

 

 

 

September 30, 2021

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

cost basis

 

 

term loans

 

 

Total

 

 

(Dollars in thousands)

 

Dairy & livestock and
   agribusiness loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

13

 

 

$

988

 

 

$

1,420

 

 

$

1,152

 

 

$

126

 

 

$

322

 

 

$

258,432

 

 

$

886

 

 

$

263,339

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

5,094

 

 

 

2,300

 

 

 

7,394

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

119

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

8,732

 

 

 

8,851

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Dairy & livestock
   and agribusiness
   loans:

$

13

 

 

$

988

 

 

$

1,420

 

 

$

1,271

 

 

$

126

 

 

$

322

 

 

$

263,526

 

 

$

11,918

 

 

$

279,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal lease finance
   receivables loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

9,557

 

 

$

7,875

 

 

$

0

 

 

$

279

 

 

$

9,720

 

 

$

19,498

 

 

$

0

 

 

$

0

 

 

$

46,929

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

376

 

 

 

0

 

 

 

0

 

 

 

376

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Municipal lease
   finance receivables
   loans:

$

9,557

 

 

$

7,875

 

 

$

0

 

 

$

279

 

 

$

9,720

 

 

$

19,874

 

 

$

0

 

 

$

0

 

 

$

47,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFR mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

27,356

 

 

$

52,771

 

 

$

44,447

 

 

$

20,072

 

 

$

17,176

 

 

$

66,847

 

 

$

152

 

 

$

0

 

 

$

228,821

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,088

 

 

 

0

 

 

 

414

 

 

 

2,502

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SFR mortgage
   loans:

$

27,356

 

 

$

52,771

 

 

$

44,447

 

 

$

20,072

 

 

$

17,176

 

 

$

68,935

 

 

$

152

 

 

$

414

 

 

$

231,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other
   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

5,196

 

 

$

2,825

 

 

$

1,539

 

 

$

558

 

 

$

454

 

 

$

1,901

 

 

$

53,550

 

 

$

2,195

 

 

$

68,218

 

Special Mention

 

909

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

591

 

 

 

403

 

 

 

1,903

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

167

 

 

 

5

 

 

 

448

 

 

 

620

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Consumer and
   other loans:

$

6,105

 

 

$

2,825

 

 

$

1,539

 

 

$

558

 

 

$

454

 

 

$

2,068

 

 

$

54,146

 

 

$

3,046

 

 

$

70,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

1,370,969

 

 

$

1,247,237

 

 

$

822,680

 

 

$

671,770

 

 

$

621,292

 

 

$

2,071,359

 

 

$

756,161

 

 

$

53,792

 

 

$

7,615,260

 

Special Mention

 

13,816

 

 

 

7,928

 

 

 

10,079

 

 

 

23,383

 

 

 

48,248

 

 

 

52,950

 

 

 

19,700

 

 

 

8,401

 

 

 

184,505

 

Substandard

 

5,089

 

 

 

1,530

 

 

 

569

 

 

 

2,975

 

 

 

11,490

 

 

 

14,397

 

 

 

348

 

 

 

13,357

 

 

 

49,755

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Loans:

$

1,389,874

 

 

$

1,256,695

 

 

$

833,328

 

 

$

698,128

 

 

$

681,030

 

 

$

2,138,706

 

 

$

776,209

 

 

$

75,550

 

 

$

7,849,520

 

16

 

Origination Year

 

 

Revolving loans amortized

 

 

Revolving loans converted to

 

 

 

 

December 31, 2020

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

cost basis

 

 

term loans

 

 

Total

 

 

(Dollars in thousands)

 

Commercial real estate
   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

979,499

 

 

$

691,091

 

 

$

607,753

 

 

$

617,640

 

 

$

550,105

 

 

$

1,646,876

 

 

$

192,583

 

 

$

24,548

 

 

$

5,310,095

 

Special Mention

 

9,332

 

 

 

7,162

 

 

 

30,049

 

 

 

43,870

 

 

 

17,398

 

 

 

49,840

 

 

 

5,720

 

 

 

994

 

 

 

164,365

 

Substandard

 

0

 

 

 

491

 

 

 

2,157

 

 

 

7,382

 

 

 

2,528

 

 

 

13,790

 

 

 

360

 

 

 

341

 

 

 

27,049

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Commercial real
   estate loans:

$

988,831

 

 

$

698,744

 

 

$

639,959

 

 

$

668,892

 

 

$

570,031

 

 

$

1,710,506

 

 

$

198,663

 

 

$

25,883

 

 

$

5,501,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

14,511

 

 

$

9,350

 

 

$

14,945

 

 

$

2,258

 

 

$

0

 

 

$

4

 

 

$

44,077

 

 

$

0

 

 

$

85,145

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Construction
   loans:

$

14,511

 

 

$

9,350

 

 

$

14,945

 

 

$

2,258

 

 

$

0

 

 

$

4

 

 

$

44,077

 

 

$

0

 

 

$

85,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

47,901

 

 

$

12,821

 

 

$

44,950

 

 

$

58,839

 

 

$

26,136

 

 

$

86,085

 

 

$

0

 

 

$

2,976

 

 

$

279,708

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

5,446

 

 

 

1,336

 

 

 

5,648

 

 

 

0

 

 

 

0

 

 

 

12,430

 

Substandard

 

0

 

 

 

0

 

 

 

904

 

 

 

5,503

 

 

 

1,554

 

 

 

3,797

 

 

 

0

 

 

 

0

 

 

 

11,758

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SBA loans:

$

47,901

 

 

$

12,821

 

 

$

45,854

 

 

$

69,788

 

 

$

29,026

 

 

$

95,530

 

 

$

0

 

 

$

2,976

 

 

$

303,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA - PPP loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

882,986

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

882,986

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SBA - PPP loans:

$

882,986

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

882,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and
   industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

104,478

 

 

$

168,050

 

 

$

62,453

 

 

$

56,043

 

 

$

32,149

 

 

$

76,019

 

 

$

257,250

 

 

$

6,058

 

 

$

762,500

 

Special Mention

 

1,995

 

 

 

1,081

 

 

 

1,892

 

 

 

1,028

 

 

 

95

 

 

 

4,882

 

 

 

17,395

 

 

 

1,132

 

 

 

29,500

 

Substandard

 

4,346

 

 

 

860

 

 

 

3,996

 

 

 

2,282

 

 

 

285

 

 

 

94

 

 

 

6,677

 

 

 

1,522

 

 

 

20,062

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Commercial and
   industrial loans:

$

110,819

 

 

$

169,991

 

 

$

68,341

 

 

$

59,353

 

 

$

32,529

 

 

$

80,995

 

 

$

281,322

 

 

$

8,712

 

 

$

812,062

 

17

 

Origination Year

 

 

Revolving loans amortized

 

 

Revolving loans converted to

 

 

 

 

December 31, 2020

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

cost basis

 

 

term loans

 

 

Total

 

 

(Dollars in thousands)

 

Dairy & livestock and
   agribusiness loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

1,041

 

 

$

1,765

 

 

$

1,199

 

 

$

5,680

 

 

$

120

 

 

$

320

 

 

$

319,211

 

 

$

363

 

 

$

329,699

 

Special Mention

 

878

 

 

 

0

 

 

 

364

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

13,255

 

 

 

1,511

 

 

 

16,008

 

Substandard

 

0

 

 

 

0

 

 

 

784

 

 

 

693

 

 

 

2,285

 

 

 

0

 

 

 

0

 

 

 

11,677

 

 

 

15,439

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Dairy & livestock
   and agribusiness
   loans:

$

1,919

 

 

$

1,765

 

 

$

2,347

 

 

$

6,373

 

 

$

2,405

 

 

$

320

 

 

$

332,466

 

 

$

13,551

 

 

$

361,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal lease finance
   receivables loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

8,478

 

 

$

0

 

 

$

2,556

 

 

$

10,249

 

 

$

3,586

 

 

$

20,266

 

 

$

0

 

 

$

0

 

 

$

45,135

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

412

 

 

 

0

 

 

 

0

 

 

 

412

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Municipal lease
   finance receivables
   loans:

$

8,478

 

 

$

0

 

 

$

2,556

 

 

$

10,249

 

 

$

3,586

 

 

$

20,678

 

 

$

0

 

 

$

0

 

 

$

45,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFR mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

65,463

 

 

$

59,596

 

 

$

29,142

 

 

$

22,452

 

 

$

27,192

 

 

$

62,593

 

 

$

3

 

 

$

0

 

 

$

266,441

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

452

 

 

 

0

 

 

 

0

 

 

 

452

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

229

 

 

 

2,957

 

 

 

0

 

 

 

432

 

 

 

3,618

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total SFR mortgage
   loans:

$

65,463

 

 

$

59,596

 

 

$

29,142

 

 

$

22,452

 

 

$

27,421

 

 

$

66,002

 

 

$

3

 

 

$

432

 

 

$

270,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other
   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

8,557

 

 

$

2,077

 

 

$

871

 

 

$

969

 

 

$

1,586

 

 

$

961

 

 

$

67,774

 

 

$

1,688

 

 

$

84,483

 

Special Mention

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

91

 

 

 

517

 

 

 

22

 

 

 

630

 

Substandard

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

172

 

 

 

0

 

 

 

721

 

 

 

893

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Consumer and
   other loans:

$

8,557

 

 

$

2,077

 

 

$

871

 

 

$

969

 

 

$

1,586

 

 

$

1,224

 

 

$

68,291

 

 

$

2,431

 

 

$

86,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

2,112,914

 

 

$

944,750

 

 

$

763,869

 

 

$

774,130

 

 

$

640,874

 

 

$

1,893,124

 

 

$

880,898

 

 

$

35,633

 

 

$

8,046,192

 

Special Mention

 

12,205

 

 

 

8,243

 

 

 

32,305

 

 

 

50,344

 

 

 

18,829

 

 

 

61,325

 

 

 

36,887

 

 

 

3,659

 

 

 

223,797

 

Substandard

 

4,346

 

 

 

1,351

 

 

 

7,841

 

 

 

15,860

 

 

 

6,881

 

 

 

20,810

 

 

 

7,037

 

 

 

14,693

 

 

 

78,819

 

Doubtful & Loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total Loans:

$

2,129,465

 

 

$

954,344

 

 

$

804,015

 

 

$

840,334

 

 

$

666,584

 

 

$

1,975,259

 

 

$

924,822

 

 

$

53,985

 

 

$

8,348,808

 

                
                
                
                
                
                
                
                
                
   
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted
to term
loans
   
September 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Commercial and
industrial loans:
                  
Risk Rating:
                  
Pass
    $81,480     $170,738     $72,345     $62,918     $41,860     $80,669     $255,407     $8,153     $773,570 
Special Mention
   0    1,235    3,087    814    241    5,015    15,970    1,022    27,384 
Substandard
   4,545    111    1,500    1,815    448    8    6,472    1,203    16,102 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial and
industrial loans:
    $86,025     $172,084     $76,932     $65,547     $42,549     $85,692     $277,849     $10,378     $817,056 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA loans:
                  
Risk Rating:
                  
Pass
    $37,389     $13,394     $46,193     $72,665     $26,687     $88,255     $0     $2,873     $287,456 
Special Mention
   0    0    0    1,113    1,352    6,910    0    0    9,375 
Substandard
   0    0    955    1,998    1,546    3,657    0    0    8,156 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA loans:
    $37,389     $13,394     $47,148     $75,776     $29,585     $98,822     $0     $2,873     $304,987 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SBA - PPP loans:
                  
Risk Rating:
                  
Pass
    $1,101,142     $0     $0     $0     $0     $0     $0     $0     $1,101,142 
Special Mention
   0    0    0    0    0    0    0    0    0 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SBA - PPP loans:
    $1,101,142     $0     $0     $0     $0     $0     $0     $0     $1,101,142 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Commercial real estate loans:
                  
Risk Rating:
                  
Pass
    $617,068     $701,648     $680,997     $684,519     $589,553     $1,776,989     $201,021     $26,329     $5,278,124 
Special Mention
   4,619    11,125    18,168    21,767    13,865    48,591    5,447    297    123,879 
Substandard
   0    793    3,815    5,497    1,281    14,597    237    0    26,220 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Commercial real estate loans:
    $621,687     $713,566     $702,980     $711,783     $604,699     $1,840,177     $206,705     $26,626     $5,428,223 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Construction loans:
                  
Risk Rating:
                  
Pass
    $11,160     $8,614     $14,399     $15,667     $10,592     $4     $41,467     $0     $101,903 
Special Mention
   0    0    0    0    0    0    0    0    0 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Construction loans:
    $11,160     $8,614     $14,399     $15,667     $10,592     $4     $41,467     $0     $101,903 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
SFR mortgage loans:
                  
Risk Rating:
                  
Pass
    $52,050     $62,087     $33,614     $25,069     $28,344     $69,215     $0     $0     $270,379 
Special Mention
   15    0    0    0    0    456    0    0    471 
Substandard
   0    238    0    0    229    2,974    0    440    3,881 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total SFR mortgage loans:
    $52,065     $62,325     $33,614     $25,069     $28,573     $72,645     $0     $440     $274,731 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
17
Table of Contents
                
                
                
                
                
                
                
                
                
   
Origination Year
  
Revolving
loans
amortized
cost basis
  
Revolving
loans
converted
to term
loans
   
September 30, 2020
  
2020
  
2019
  
2018
  
2017
  
2016
  
Prior
  
Total
   
(Dollars in thousands)
Dairy & livestock and agribusiness loans:
                  
Risk Rating:
                  
Pass
    $742     $2,201     $1,675     $5,709     $152     $341     $210,610     $494     $221,924 
Special Mention
   13    0    0    0    0    0    11,596    1,631    13,240 
Substandard
   0    0    849    703    2,985    0    824    12,277    17,638 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Dairy & livestock and agribusiness loans:
    $755     $2,201     $2,524     $6,412     $3,137     $341     $223,030     $14,402     $252,802 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Municipal lease finance receivables loans:
                  
Risk Rating:
                  
Pass
    $123     $0     $2,556     $10,436     $3,587     $20,926     $0     $0     $37,628 
Special Mention
   0    0    0    0    0    412    0    0    412 
Substandard
   0    0    0    0    0    0    0    0    0 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Municipal lease finance receivables loans:
    $123     $0     $2,556     $10,436     $3,587     $21,338     $0     $0     $38,040 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Consumer and other
loans:
                  
Risk Rating:
                  
Pass
    $5,483     $2,334     $971     $1,068     $1,714     $1,380     $72,501     $1,994     $87,445 
Special Mention
   0    0    0    0    0    91    737    0    828 
Substandard
   0    0    0    0    0    174    0    541    715 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Consumer and other loans:
    $5,483     $2,334     $971     $1,068     $1,714     $1,645     $73,238     $2,535     $88,988 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Gross loans:
                  
Risk Rating:
                  
Pass
    $1,906,637     $961,016     $852,750     $878,051     $702,489     $2,037,779     $781,006     $39,843     $8,159,571 
Special Mention
   4,647    12,360    21,255    23,694    15,458    61,475    33,750    2,950    175,589 
Substandard
   4,545    1,142    7,119    10,013    6,489    21,410    7,533    14,461    72,712 
Doubtful & Loss
   0    0    0    0    0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total Gross loans:
    $1,915,829     $974,518     $881,124     $911,758     $724,436     $2,120,664     $822,289     $57,254     $8,407,872 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
18
Table of Contents
The following table summarizes loans by type, according to our internal risk ratings as of the date presented.
                                                                                          
  
December 31, 2019
  
Pass
 
Special
Mention
 
Substandard
 
Doubtful &
Loss
 
Total
  
(Dollars in thousands)
Commercial and industrial
   $895,234    $35,473    $4,420    $0    $935,127 
SBA
  283,430   11,032   10,546   0   305,008 
Real estate:
     
Commercial real estate
     
Owner occupied
  1,977,007   78,208   28,435   0   2,083,650 
Non-owner
occupied
  3,280,580   10,005   382   0   3,290,967 
Construction
     
Speculative
  106,895   0   0   0   106,895 
Non-speculative
  10,030   0   0   0   10,030 
SFR mortgage
  280,010   1,957   1,501   0   283,468 
Dairy & livestock and agribusiness
  320,670   35,920   27,119   0   383,709 
Municipal lease finance receivables
  52,676   470   0   0   53,146 
Consumer and other loans
  114,870   421   1,028   0   116,319 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gross loans
   $7,321,402    $173,486    $73,431    $0    $7,568,319 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Allowance for Credit Losses

The ("ACL")

Our allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated bydeveloped from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan segments:pools: Commercial Real Estate, Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real estate loans include OLTV, origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Payment Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of SBA loans (excluding Payment Protection Program loans). The Consumer Retail.methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the amortized cost basis of the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the

18

portfolio, and expectations for macroeconomic changes. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 –

Summary of Significant Accounting Policies
contained herein for a more detailed discussion concerning the allowance for credit losses.
Our allowance for credit losses decreased in the third quarter by $114,000, as a result of net charge-offs of $114,000. There was 0 provision for credit losses in the third quarter of 2020.

Our allowance for credit losses at September 30, 20202021 decreased from the prior quarter end by $4.0 million, due to a $4.0 million recapture of provision for credit losses, primarily due to a modest improvement in our economic forecast. In comparison, the second quarter of 2021 included $2.0 million in recapture of provision that was $93.9also a result of an improving forecast of macroeconomic variables. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our economic forecasts have continued to reflect improvements in key macroeconomic variables, including GDP, the commercial real estate price index and the unemployment rate. As a result, a $25.5 million or 1.12%recapture of total loans. Forprovision for credit losses was recorded for the nine months ended September 30, 2021. In comparison, $23.5 million in provision for credit losses was recorded for the nine months ended September 30, 2020 the ACL increased by $25.2 million, including a $1.8 million increase from the adoption of CECL on January 1, 2020. The increase in the ACL was primarily due to $23.5 million in provision for credit losses recorded in the first halfsevere economic forecast at that time as a result of 2020 resulting from the forecasted changes in macroeconomic variables related to the

COVID
-19
COVID-19 pandemic.Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. Moody’sThese U.S. economic forecasts include a baseline forecast, continues to represent more than a 50% weighting in our multi-weightedas well as upside and downside forecasts. Our weighted forecast scenario. This U.S. baseline forecastat the end of the third quarter of 2021, assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5%5.7% in 2021 and 5%then grows by more than 2% in 2022.both 2022 and 2023. The forecast for the unemployment rate
is 5.7% in this baseline forec
as
t
 is forecasted to be 8.9%2021 and then 5.6% in the third quarter of 2021, stay at an elevated level over 8% through 2021,2022, before declining to 6.4% percent5.3% in 2022. With California slowly
re-opening
its
 economy2023. At September 30, 2021, the allowance for credit losses of $65.4 million was 0.83% of total loans, compared to 1.12% and
currently
having an unemployment rate greater than 11% percent, our forecast includes a partial weighting o
f
 downside economic forecast scenarios from Moody’s.    
1.12% at December 31, 2020 and September 30, 2020, respectively.

Management believes that the ACL was appropriate at September 30, 20202021 and December 31, 2019. There is a high2020. Due to the degree of uncertainty around the epidemiological assumptions and on-going impact of government responses to the pandemic that impact our economic forecast, so no assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.

19
Table of Contents

The following tables present the balance and activity related to the allowance for credit losses for

held-for-investment
loans by type for the periods presented.
                                                                                          
  
Three Months Ended September 30, 2020
  
 Ending Balance 
June 30, 2020
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Credit Losses
 
 Ending Balance 
September 30,
2020
  
(Dollars in thousands)
Commercial and industrial
   $7,991    $(161)    $2    $761    $8,593 
SBA
  3,651   (47)   69   (169)   3,504 
SBA - PPP
  0   0   0   0   0 
Real estate:
     
Commercial real estate
  74,928   0   0   (473)   74,455 
Construction
  2,290   0   3   (355)   1,938 
SFR mortgage
  222   0   0   15   237 
Dairy & livestock and agribusiness
  3,379   0   0   330   3,709 
Municipal lease finance receivables
  302   0   0   (153)   149 
Consumer and other loans
  1,220   (23)   43   44   1,284 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for credit losses
   $93,983    $(231)    $117    $0    $93,869 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                          
  
Three Months Ended September 30, 2019
  
 Ending Balance 
June 30, 2019
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
2019
  
(Dollars in thousands)
Commercial and industrial
   $7,857    $0    $94    $287    $8,238 
SBA
  1,119   (65)   0   412   1,466 
Real estate:
     
Commercial real estate
  48,287   0   0   624   48,911 
Construction
  871   0   3   55   929 
SFR mortgage
  2,323   0   8   44   2,375 
Dairy & livestock and agribusiness
  5,341   0   0   88   5,429 
Municipal lease finance receivables
  726   0   0   (64)   662 
Consumer and other loans
  608   (3)   3   54   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
   $67,132    $(68)    $108    $1,500    $68,672 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                            
  
Nine Months Ended September 30, 2020
  
Ending Balance,
prior to adoption
of ASU
2016-13

December 31,
2019
 
Impact of
Adoption of
ASU 2016-13
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Credit Losses
 
 Ending Balance 
September 30,
2020
  
(Dollars in thousands)
Commercial and industrial
   $8,880    $(2,442)    $(172)    $7    $2,320    $8,593 
SBA
  1,453   1,818   (203)   72   364   3,504 
SBA - PPP
  0   0   0   0   0   0 
Real estate:
      
Commercial real estate
  48,629   3,547   0   0   22,279   74,455 
Construction
  858   655   0   9   416   1,938 
SFR mortgage
  2,339   (2,043)   0   206   (265)   237 
Dairy & livestock and agribusiness
  5,255   (186)   0   0   (1,360)   3,709 
Municipal lease finance receivables
  623   (416)   0   0   (58)   149 
Consumer and other loans
  623   907   (109)   59   (196)   1,284 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for credit losses
   $68,660    $1,840    $(484)    $353    $23,500    $93,869 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20

 

Three Months Ended September 30, 2021

 

 

Ending Balance June 30, 2021

 

 

Charge-offs

 

 

Recoveries

 

 

(Recapture of)
Provision for
Credit Losses

 

 

Ending Balance September 30, 2021

 

 

(Dollars in thousands)

 

Commercial real estate

$

55,200

 

 

$

0

 

 

$

0

 

 

$

(2,888

)

 

$

52,312

 

Construction

 

1,825

 

 

 

0

 

 

 

11

 

 

 

(775

)

 

 

1,061

 

SBA

 

2,546

 

 

 

0

 

 

 

5

 

 

 

376

 

 

 

2,927

 

Commercial and industrial

 

5,667

 

 

 

(10

)

 

 

6

 

 

 

(755

)

 

 

4,908

 

Dairy & livestock and agribusiness

 

2,775

 

 

 

0

 

 

 

0

 

 

 

391

 

 

 

3,166

 

Municipal lease finance receivables

 

67

 

 

 

0

 

 

 

0

 

 

 

18

 

 

 

85

 

SFR mortgage

 

284

 

 

 

0

 

 

 

0

 

 

 

(94

)

 

 

190

 

Consumer and other loans

 

978

 

 

 

(1

)

 

 

11

 

 

 

(273

)

 

 

715

 

Total allowance for credit losses

$

69,342

 

 

$

(11

)

 

$

33

 

 

$

(4,000

)

 

$

65,364

 

 

Three Months Ended September 30, 2020

 

 

Ending Balance June 30, 2020

 

 

Charge-offs

 

 

Recoveries

 

 

Provision for
(Recapture of)
Credit Losses

 

 

Ending Balance September 30, 2020

 

 

(Dollars in thousands)

 

Commercial real estate

$

74,928

 

 

$

0

 

 

$

0

 

 

$

(473

)

 

$

74,455

 

Construction

 

2,290

 

 

 

0

 

 

 

3

 

 

 

(355

)

 

 

1,938

 

SBA

 

3,651

 

 

 

(47

)

 

 

69

 

 

 

(169

)

 

 

3,504

 

Commercial and industrial

 

7,991

 

 

 

(161

)

 

 

2

 

 

 

761

 

 

 

8,593

 

Dairy & livestock and agribusiness

 

3,379

 

 

 

0

 

 

 

0

 

 

 

330

 

 

 

3,709

 

Municipal lease finance receivables

 

302

 

 

 

0

 

 

 

0

 

 

 

(153

)

 

 

149

 

SFR mortgage

 

222

 

 

 

0

 

 

 

0

 

 

 

15

 

 

 

237

 

Consumer and other loans

 

1,220

 

 

 

(23

)

 

 

43

 

 

 

44

 

 

 

1,284

 

Total allowance for credit losses

$

93,983

 

 

$

(231

)

 

$

117

 

 

$

0

 

 

$

93,869

 

19

Table

 

Nine Months Ended September 30, 2021

 

 

Ending Balance December 31, 2020

 

 

Charge-offs

 

 

Recoveries

 

 

(Recapture of)
Provision for
Credit Losses

 

 

Ending Balance September 30, 2021

 

 

(Dollars in thousands)

 

Commercial real estate

$

75,439

 

 

$

0

 

 

$

0

 

 

$

(23,127

)

 

$

52,312

 

Construction

 

1,934

 

 

 

0

 

 

 

55

 

 

 

(928

)

 

 

1,061

 

SBA

 

2,992

 

 

 

0

 

 

 

13

 

 

 

(78

)

 

 

2,927

 

Commercial and industrial

 

7,142

 

 

 

(2,985

)

 

 

10

 

 

 

741

 

 

 

4,908

 

Dairy & livestock and agribusiness

 

3,949

 

 

 

0

 

 

 

0

 

 

 

(783

)

 

 

3,166

 

Municipal lease finance receivables

 

74

 

 

 

0

 

 

 

0

 

 

 

11

 

 

 

85

 

SFR mortgage

 

367

 

 

 

0

 

 

 

79

 

 

 

(256

)

 

 

190

 

Consumer and other loans

 

1,795

 

 

 

(11

)

 

 

11

 

 

 

(1,080

)

 

 

715

 

Total allowance for credit losses

$

93,692

 

 

$

(2,996

)

 

$

168

 

 

$

(25,500

)

 

$

65,364

 

 

Nine Months Ended September 30, 2020

 

 

Ending Balance,
prior to adoption
of ASU 2016-13
December 31, 2019

 

 

Impact of Adoption of ASU 2016-13

 

 

Charge-offs

 

 

Recoveries

 

 

Provision for (Recapture of) Credit Losses

 

 

Ending Balance September 30, 2020

 

 

(Dollars in thousands)

 

Commercial real estate

$

48,629

 

 

$

3,547

 

 

$

0

 

 

$

0

 

 

$

22,279

 

 

$

74,455

 

Construction

 

858

 

 

 

655

 

 

 

0

 

 

 

9

 

 

 

416

 

 

 

1,938

 

SBA

 

1,453

 

 

 

1,818

 

 

 

(203

)

 

 

72

 

 

 

364

 

 

 

3,504

 

Commercial and industrial

 

8,880

 

 

 

(2,442

)

 

 

(172

)

 

 

7

 

 

 

2,320

 

 

 

8,593

 

Dairy & livestock and agribusiness

 

5,255

 

 

 

(186

)

 

 

0

 

 

 

0

 

 

 

(1,360

)

 

 

3,709

 

Municipal lease finance receivables

 

623

 

 

 

(416

)

 

 

0

 

 

 

0

 

 

 

(58

)

 

 

149

 

SFR mortgage

 

2,339

 

 

 

(2,043

)

 

 

0

 

 

 

206

 

 

 

(265

)

 

 

237

 

Consumer and other loans

 

623

 

 

 

907

 

 

 

(109

)

 

 

59

 

 

 

(196

)

 

 

1,284

 

Total allowance for credit losses

$

68,660

 

 

$

1,840

 

 

$

(484

)

 

$

353

 

 

$

23,500

 

 

$

93,869

 

As of Contents

  
Nine Months Ended September 30, 2019
  
 Ending Balance 
December 31,
2018
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
September 30,
2019
  
(Dollars in thousands)
Commercial and industrial
   $7,528    $(48)    $253    $505    $8,238 
SBA
  1,078   (295)   9   674   1,466 
Real estate:
     
Commercial real estate
  45,097   0   0   3,814   48,911 
Construction
  981   0   9   (61)   929 
SFR mortgage
  2,197   0   191   (13)   2,375 
Dairy & livestock and agribusiness
  5,225   (78)   19   263   5,429 
Municipal lease finance receivables
  775   0   0   (113)   662 
Consumer and other loans
  732   (7)   6   (69)   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total allowance for loan losses
   $63,613    $(428)    $487    $5,000    $68,672 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presentsSeptember 30, 2021, the recorded investment inremaining outstanding balance of PPP loans
held-for-investment
and was $331.0 million. As these loans are fully guaranteed by the related ACL by loan type, based on the Company’s methodology for determiningSBA, the ACL for the periods presented.does not include an allowance.

  
September 30, 2019
  
Recorded Investment in Loans
 
Allowance for Loan Losses
  
Individually
 Evaluated for 
Impairment
 
Collectively
 Evaluated for 
Impairment
 
 Individually
 Evaluated for 
Impairment
 
Collectively
 Evaluated for 
Impairment
  
(Dollars in thousands)
Commercial and industrial
   $1,638    $920,040    $254    $7,984 
SBA
  3,248   316,323   286   1,180 
Real estate:
    
  Commercial real estate
  1,500   5,374,168   0   48,911 
  Construction
  0   119,931   0   929 
  SFR mortgage
  3,009   275,635   0   2,375 
Dairy & livestock and agribusiness
  0   311,229   0   5,429 
Municipal lease finance receivables
  0   54,468   0   662 
Consumer and other loans
  385   116,743   0   662 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
   $9,780    $7,488,537    $540    $68,132 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20

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 loancredit losses, and to determine the adequacy of the ACL, 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 loancredit 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, 2019,2020, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

21
Table of Contents

The following table presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as of the datedates presented.

 

September 30, 2021

 

 

30-59 Days Past Due

 

 

60-89 Days Past Due

 

 

Greater than 89 Days
Past Due

 

 

Total Past Due

 

 

Loans Not Past Due

 

 

Total Loans and Financing Receivables

 

 

(Dollars in thousands)

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

$

0

 

 

$

199

 

 

$

3,641

 

 

$

3,840

 

 

$

2,115,928

 

 

$

2,119,768

 

Non-owner occupied

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,614,931

 

 

 

3,614,931

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Speculative (1)

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

52,856

 

 

 

52,856

 

Non-speculative

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

24,542

 

 

 

24,542

 

SBA

 

0

 

 

 

0

 

 

 

1,218

 

 

 

1,218

 

 

 

306,315

 

 

 

307,533

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

330,960

 

 

 

330,960

 

Commercial and industrial

 

584

 

 

 

382

 

 

 

1,013

 

 

 

1,979

 

 

 

767,998

 

 

 

769,977

 

Dairy & livestock and agribusiness

 

1,000

 

 

 

0

 

 

 

118

 

 

 

1,118

 

 

 

278,466

 

 

 

279,584

 

Municipal lease finance receivables

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

47,305

 

 

 

47,305

 

SFR mortgage

 

0

 

 

 

0

 

 

 

218

 

 

 

218

 

 

 

231,105

 

 

 

231,323

 

Consumer and other loans

 

0

 

 

 

0

 

 

 

188

 

 

 

188

 

 

 

70,553

 

 

 

70,741

 

Total loans

$

1,584

 

 

$

581

 

 

$

6,396

 

 

$

8,561

 

 

$

7,840,959

 

 

$

7,849,520

 

(1)
Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

December 31, 2020

 

 

30-59 Days Past Due

 

 

60-89 Days Past Due

 

 

Greater than 89 Days
Past Due

 

 

Total Past Due

 

 

Loans Not Past Due

 

 

Total Loans and Financing Receivables

 

 

(Dollars in thousands)

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

$

0

 

 

$

0

 

 

$

7,208

 

 

$

7,208

 

 

$

2,136,051

 

 

$

2,143,259

 

Non-owner occupied

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,358,250

 

 

 

3,358,250

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Speculative (1)

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

72,126

 

 

 

72,126

 

Non-speculative

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

13,019

 

 

 

13,019

 

SBA

 

531

 

 

 

2,415

 

 

 

1,025

 

 

 

3,971

 

 

 

299,925

 

 

 

303,896

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

882,986

 

 

 

882,986

 

Commercial and industrial

 

608

 

 

 

811

 

 

 

2,338

 

 

 

3,757

 

 

 

808,305

 

 

 

812,062

 

Dairy & livestock and agribusiness

 

0

 

 

 

0

 

 

 

784

 

 

 

784

 

 

 

360,362

 

 

 

361,146

 

Municipal lease finance receivables

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

45,547

 

 

 

45,547

 

SFR mortgage

 

0

 

 

 

0

 

 

 

229

 

 

 

229

 

 

 

270,282

 

 

 

270,511

 

Consumer and other loans

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

86,006

 

 

 

86,006

 

Total loans

$

1,139

 

 

$

3,226

 

 

$

11,584

 

 

$

15,949

 

 

$

8,332,859

 

 

$

8,348,808

 

(1)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
   
September 30, 2020
   
30-59 Days

Past Due
  
60-89 Days

Past Due
  
Greater than
89 Days

Past Due
  
Total

Past Due
  
Loans Not
Past Due
  
Total Loans
  and Financing  
Receivables
   
(Dollars in thousands)
Commercial and industrial
    $3,582     $1,209     $560     $5,351     $811,705     $817,056 
SBA
   468    270    777    1,515    303,472    304,987 
SBA - PPP
   0    0    0    0    1,101,142    1,101,142 
Real estate:
            
 Commercial real estate
            
  Owner occupied
   0    0    3,770    3,770    2,121,430    2,125,200 
  Non-owner
occupied
   0    0    1,715    1,715    3,301,308    3,303,023 
 Construction
            
  Speculative (1)
   0    0    0    0    94,232    94,232 
  Non-speculative
   0    0    0    0    7,671    7,671 
 SFR mortgage
   0    0    467    467    274,264    274,731 
Dairy & livestock and agribusiness
   0    849    0    849    251,953    252,802 
Municipal lease finance receivables
   0    0    0    0    38,040    38,040 
Consumer and other loans
   68    0    34    102    88,886    88,988 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total gross loans
    $        4,118     $        2,328     $        7,323     $      13,769     $    8,394,103     $8,407,872 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized

21

Amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance are presented as of September 30, 2021 and December 31, 2020 by type of loan.

 

September 30, 2021

 

 

Nonaccrual with No Allowance for Credit Losses

 

 

Total
Nonaccrual
(1)

 

 

Loans Past Due Over 89 Days Still Accruing

 

 

(Dollars in thousands)

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

$

3,521

 

 

$

4,073

 

 

$

0

 

Non-owner occupied

 

0

 

 

 

0

 

 

 

0

 

Construction

 

 

 

 

 

 

 

 

Speculative (2)

 

0

 

 

 

0

 

 

 

0

 

Non-speculative

 

0

 

 

 

0

 

 

 

0

 

SBA

 

804

 

 

 

1,513

 

 

 

0

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial

 

370

 

 

 

2,038

 

 

 

0

 

Dairy & livestock and agribusiness

 

0

 

 

 

118

 

 

 

0

 

Municipal lease finance receivables

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage

 

400

 

 

 

399

 

 

 

0

 

Consumer and other loans

 

305

 

 

 

305

 

 

 

0

 

Total loans

$

5,400

 

 

$

8,446

 

 

$

0

 

(1)
   
September 30, 2020
   
Nonaccrual
with No
Allowance for
Credit Losses
  
Total
Nonaccrual
(1) (3)
  
Loans Past
Due Over

89 Days Still
Accruing
   
(Dollars in thousands)
Commercial and industrial
    $1,421     $1,822     $0 
SBA
   850    1,724    0 
SBA - PPP
   0    0    0 
Real estate:
      
 Commercial real estate
      
  Owner occupied
   4,766    4,766    0 
  Non-owner
occupied
   0    1,715    0 
 Construction
      
  Speculative (2)
   0    0    0 
  Non-speculative
   0    0    0 
 SFR mortgage
   675    675    0 
Dairy & livestock and agribusiness
   849    849    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   224    224    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total gross loans
    $        8,785     $        11,775     $0 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
As of September 30, 2020, $1.8 million of nonaccruing loans were current, $571,000 were
30-59
days past due, $2.1 million were
60-89
days past due, and $7.3 million were 90+ days past due.
(2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
(3)
Excludes $51,000 of guaranteed portion of nonaccrual SBA loans that are in process of collection.
22
Table of Contents
The following table presents the recorded investment in, and the agingSeptember 30, 2021, $1.0 million of nonaccruing loans were current, $463,000 were 30-59 days past due, $581,000 were 60-89 days past due, and nonaccrual$6.4 million were 90+ days past due.
(2)
Speculative construction loans by type of loans as of the date presented.are generally for properties where there is no identified buyer or renter.

 

December 31, 2020

 

 

Nonaccrual with No Allowance for Credit Losses

 

 

Total
Nonaccrual
(1) (3)

 

 

Loans Past Due Over 89 Days Still Accruing

 

 

(Dollars in thousands)

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

$

7,563

 

 

$

7,563

 

 

$

0

 

Non-owner occupied

 

0

 

 

 

0

 

 

 

0

 

Construction

 

 

 

 

 

 

 

 

Speculative (2)

 

0

 

 

 

0

 

 

 

0

 

Non-speculative

 

0

 

 

 

0

 

 

 

0

 

SBA

 

2,035

 

 

 

2,273

 

 

 

0

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial

 

1,576

 

 

 

3,129

 

 

 

0

 

Dairy & livestock and agribusiness

 

785

 

 

 

785

 

 

 

0

 

Municipal lease finance receivables

 

430

 

 

 

0

 

 

 

0

 

SFR mortgage

 

0

 

 

 

430

 

 

 

0

 

Consumer and other loans

 

167

 

 

 

167

 

 

 

0

 

Total loans

$

12,556

 

 

$

14,347

 

 

$

0

 

(1)
   
December 31, 2019
   
30-59 Days

Past Due
  
60-89 Days

Past Due
  
 Total Past Due 
and Accruing
  
Nonaccrual

(1) (3)
  
Current
  
Total Loans
  and Financing  
Receivables
   
(Dollars in thousands)
Commercial and industrial
    $2     $0     $2     $1,266     $933,859     $935,127 
SBA
   870    532    1,402    2,032    301,574    305,008 
Real estate:
            
 Commercial real estate
            
  Owner occupied
   0    0    0    479    2,083,171    2,083,650 
  Non-owner
occupied
   0    0    0    245    3,290,722    3,290,967 
 Construction
            
  Speculative (2)
   0    0    0    0    106,895    106,895 
  Non-speculative
   0    0    0    0    10,030    10,030 
 SFR mortgage
   6    243    249    878    282,341    283,468 
Dairy & livestock and agribusiness
   0    0    0    0    383,709    383,709 
Municipal lease finance receivables
   0    0    0    0    53,146    53,146 
Consumer and other loans
   0    0    0    377    115,942    116,319 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 Total gross loans
    $        878     $        775     $        1,653     $        5,277     $    7,561,389     $    7,568,319 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
As of December 31, 2019, $1.2 million of nonaccruing loans were current, $59,000 were
30-59
days past due, $1.1 million were
60-89
days past due and $2.9 million were 90+ days past due.
(2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
(3)
Excludes $2.0 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
23
Table of Contents
Impaired Loans (prior to adoption of CECL)
Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. As a result of the change, the following tables present information about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of September 30, 2019 and December 31, 2019, prior to the date2020, $1.4 million of adoptionnonaccruing loans were current, $2,000 were 30-59 days past due, $1.3 million were 60-89 days past due, and $11.6 million were 90+ days past due.
(2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
(3)
Excludes $184,000 of the amendments to the credit loss standard.
   
As of and For the Nine Months Ended
September 30, 2019
   
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
   
(Dollars in thousands)
With no related allowance recorded:
          
Commercial and industrial
    $1,382     $1,537     $0     $1,560     $4 
SBA
   2,447    3,554    0    2,606    31 
Real estate:
          
Commercial real estate
          
Owner occupied
   494    614    0    508    0 
Non-owner occupied
   1,006    1,190    0    1,052    21 
Construction
          
Speculative
   0    0    0    0    0 
Non-speculative
   0    0    0    0    0 
SFR mortgage
   3,009    3,338    0    3,059    62 
Dairy & livestock and agribusiness
   0    0    0    0    0 
Municipal lease finance receivables
   0    0    0    0    0 
Consumer and other loans
   385    516    0    401    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   8,723    10,749    0    9,186    118 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
With a related allowance recorded:
          
Commercial and industrial
   256    345    254    829    0 
SBA
   801    816    286    816    0 
Real estate:
          
Commercial real estate
          
Owner occupied
   0    0    0    0    0 
Non-owner occupied
   0    0    0    0    0 
Construction
          
Speculative
   0    0    0    0    0 
Non-speculative
   0    0    0    0    0 
SFR mortgage
   0    0    0    0    0 
Dairy & livestock and agribusiness
   0    0    0    0    0 
Municipal lease finance receivables
   0    0    0    0    0 
Consumer and other loans
   0    0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   1,057    1,161    540    1,645    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 Total impaired loans
  $9,780   $11,910   $540   $10,831   $118 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
24guaranteed portion of nonaccrual SBA loans that are in process of collection.

22

Table of Contents
   
December 31, 2019
   
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
   
(Dollars in thousands)
With no related allowance recorded:
      
Commercial and industrial
    $1,091     $1,261     $0 
SBA
   2,243    2,734    0 
Real estate:
      
Commercial real estate
      
Owner occupied
   479    613    0 
Non-owner
occupied
   642    643    0 
Construction
      
Speculative
   0    0    0 
Non-speculative
   0    0    0 
SFR mortgage
   2,979    3,310    0 
Dairy & livestock and agribusiness
   0    0    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   377    514    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   7,811    9,075    0 
  
 
 
 
  
 
 
 
  
 
 
 
With a related allowance recorded:
      
Commercial and industrial
   253    347    251 
SBA
   325    324    257 
Real estate:
      
Commercial real estate
      
Owner occupied
   0    0    0 
Non-owner
occupied
   0    0    0 
Construction
      
Speculative
   0    0    0 
Non-speculative
   0    0    0 
SFR mortgage
   0    0    0 
Dairy & livestock and agribusiness
   0    0    0 
Municipal lease finance receivables
   0    0    0 
Consumer and other loans
   0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   578    671    508 
  
 
 
 
  
 
 
 
  
 
 
 
 Total impaired loans
    $8,389     $9,746     $508 
  
 
 
 
  
 
 
 
  
 
 
 
25
Table of Contents

Collateral Dependent Loans

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the recorded investment in collateral-dependent loans by type of loans as of the datedates presented.

 

September 30, 2021

 

 

Number of Loans

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Dependent on
Collateral

 

 

(Dollars in thousands)

 

Commercial real estate

$

6,705

 

 

$

0

 

 

$

0

 

 

 

8

 

Construction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SBA

 

608

 

 

 

775

 

 

 

130

 

 

 

11

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial

 

743

 

 

 

6,088

 

 

 

132

 

 

 

19

 

Dairy & livestock and agribusiness

 

0

 

 

 

118

 

 

 

0

 

 

 

1

 

Municipal lease finance receivables

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage

 

1,143

 

 

 

0

 

 

 

0

 

 

 

6

 

Consumer and other loans

 

305

 

 

 

0

 

 

 

0

 

 

 

3

 

Total collateral-dependent loans

$

9,504

 

 

$

6,981

 

 

$

262

 

 

 

48

 

 

December 31, 2020

 

 

Number of Loans

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Dependent on
Collateral

 

 

(Dollars in thousands)

 

Commercial real estate

$

7,883

 

 

$

0

 

 

$

0

 

 

 

8

 

Construction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SBA

 

1,761

 

 

 

326

 

 

 

185

 

 

 

10

 

SBA - PPP

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial

 

470

 

 

 

5,542

 

 

 

95

 

 

 

18

 

Dairy & livestock and agribusiness

 

0

 

 

 

785

 

 

 

0

 

 

 

1

 

Municipal lease finance receivables

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage

 

430

 

 

 

0

 

 

 

0

 

 

 

2

 

Consumer and other loans

 

168

 

 

 

0

 

 

 

0

 

 

 

2

 

Total collateral-dependent loans

$

10,712

 

 

$

6,653

 

 

$

280

 

 

 

41

 

   
September 30, 2020
   
Number of
Loans
Dependent on
Collateral
 
   
Real Estate
   
Business Assets
   
Other
 
   
(Dollars in thousands)
     
Commercial and industrial
    $145     $4,703     $62    14 
SBA
   1,015    497    7    11 
SBA - PPP
   0    0    0    0 
Real estate:
        
Commercial real estate
   6,836    0    0    7 
Construction
   0    0    0    0 
SFR mortgage
   675    0    0    3 
Dairy & livestock and agribusiness
   0    849    0    1 
Municipal lease finance receivables
   0    0    0    0 
Consumer and other loans
   203    0    20    4 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total collateral-dependent loans
    $8,874     $6,049     $89    40 
  
 
 
   
 
 
   
 
 
   
 
 
 

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 atin the same timemanner as it evaluates credit risk associated with the loan and lease portfolio. As a resultThe Bank's ACL methodology produced an allowance of $8.0 million for the adoption of ASU
2016-13,
the reserve for unfunded loan commitments included a transition adjustment of $41,000off-balance sheet credit exposures as of January 1, 2020.September 30, 2021. There was 0 provision or recapture of provision for unfunded loan commitments for the three months ended September 30, 2021, compared to a $1.0 million recapture of provision for unfunded loan commitments for the three months ended June 30, 2021, and 0 provision or recapture of provision for unfunded loan commitments for the nine months ended September 30, 2020. As of September 30, 20202021 and December 31, 2019,2020, the balance in this reserve was $9.0$8.0 million and $9.0 million, respectively, and was included in other liabilities.

23

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered nonperformingimpaired 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, 20192020 for a more detailed discussion regarding TDRs.

As of September 30, 2020,2021, there were $2.2$8.0 million of loans classified as a TDR, all of

which
were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At September 30, 2020,2021, performing TDRs were comprised of seventhree commercial and industrial loans of $4.3 million, two commercial real estate loans of $2.6 million, and five SFR mortgage loans of $1.8 million, one commercial real estate loan of $354,000, and one commercial and industrial loan of $47,000.
$1.0 million.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable lossthe loan is determined.considered uncollectible. We have 0 allocated allowance to TDRs as of September 30, 20202021 and December 31, 2019.

2020.

26
Table of Contents

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

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(Dollars in thousands)

 

Performing TDRs:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

8,215

 

 

$

2,771

 

 

$

2,159

 

 

$

3,112

 

New modifications

 

0

 

 

 

0

 

 

 

7,096

 

 

 

0

 

Payoffs/payments, net and other

 

(240

)

 

 

(554

)

 

 

(1,280

)

 

 

(895

)

TDRs returned to accrual status

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

TDRs placed on nonaccrual status

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Ending balance

$

7,975

 

 

$

2,217

 

 

$

7,975

 

 

$

2,217

 

Nonperforming TDRs:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

0

 

 

$

0

 

 

$

0

 

 

$

244

 

New modifications

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Charge-offs

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Payoffs/payments, net and other

 

0

 

 

 

0

 

 

 

0

 

 

 

(244

)

TDRs returned to accrual status

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

TDRs placed on nonaccrual status

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Ending balance

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Total TDRs

$

7,975

 

 

$

2,217

 

 

$

7,975

 

 

$

2,217

 

24

The following tables summarize loans modified as TDRs for the period presented.

Modifications (1)

 

For the Three Months Ended September 30, 2021

 

 

Number of Loans

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded
Investment

 

 

Outstanding Recorded Investment at September 30, 2021

 

 

Financial Effect Resulting From Modifications (2)

 

 

(Dollars in thousands)

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Change in amortization period
   or maturity

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Change in amortization period
   or maturity

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Change in amortization period
   or maturity

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total loans

 

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

For the Nine Months Ended September 30, 2021

 

 

Number of Loans

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded
Investment

 

 

Outstanding Recorded Investment at September 30, 2021

 

 

Financial Effect Resulting From Modifications (2)

 

 

(Dollars in thousands)

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

1

 

 

$

2,453

 

 

$

2,453

 

 

$

2,446

 

 

$

0

 

Change in amortization period
   or maturity

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Change in amortization period
   or maturity

 

2

 

 

 

4,643

 

 

 

4,643

 

 

 

4,293

 

 

 

0

 

SFR mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Change in amortization period
   or maturity

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total loans

 

3

 

 

$

7,096

 

 

$

7,096

 

 

$

6,739

 

 

$

0

 

(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 current allowance for credit losses at modification date.
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
2020
  
2019
  
2020
  
2019
   
(Dollars in thousands)
Performing TDRs:
        
Beginning balance
    $2,771     $3,219     $3,112     $3,594 
New modifications
   0    0    0    0 
Payoffs/payments, net and other
   (554)    (51)    (895)    (426) 
TDRs returned to accrual status
   0    0    0    0 
TDRs placed on nonaccrual status
   0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Ending balance
  $2,217   $3,168   $2,217   $3,168 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Nonperforming TDRs:
        
Beginning balance
    $0     $263     $244     $3,509 
New modifications
   0    0    0    0 
Charge-offs
   0    0    0    (78) 
Transfer to OREO
   0    0    0    (2,275) 
Payoffs/payments, net and other
   0    (14)    (244)    (907) 
TDRs returned to accrual status
   0    0    0    0 
TDRs placed on nonaccrual status
   0    0    0    0 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Ending balance
    $0     $249     $0     $249 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total TDRs
    $2,217     $3,417     $2,217     $3,417 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 

As of September 30, 20202021 and 2019,2020, there were no0 loans that were modified as TDRs during the nine months ended September 30, 2020 and 2019, respectively.

There were 0 loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2021 and 2020, and 2019.respectively.

25

In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and enter into short-term loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. As of October 9, 2020, we have loans with temporary payment deferments of interest or of principal and interest for 90 days in the amount of $68.6 million, or less than 1% of our total loan portfolio, at September 30, 2020.
27
Table of Contents
6.
EARNINGS PER SHARE RECONCILIATION

6. 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 and nine months ended September 30, 2021, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 321,000 and 114,000, respectively. For the three and nine months ended September 30, 2020, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 517,000 and 361,000, respectively. For the three and nine months ended September 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 240,000 and 184,000, respectively.

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(In thousands, except per share amounts)

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

49,753

 

 

$

47,492

 

 

$

164,825

 

 

$

127,103

 

Less: Net earnings allocated to restricted stock

 

 

227

 

 

 

175

 

 

 

773

 

 

 

407

 

Net earnings allocated to common shareholders

 

$

49,526

 

 

$

47,317

 

 

$

164,052

 

 

$

126,696

 

Weighted average shares outstanding

 

 

135,200

 

 

 

135,017

 

 

 

135,226

 

 

 

136,369

 

Basic earnings per common share

 

$

0.37

 

 

$

0.35

 

 

$

1.21

 

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

$

49,526

 

 

$

47,317

 

 

$

164,052

 

 

$

126,696

 

Weighted average shares outstanding

 

 

135,200

 

 

 

135,017

 

 

 

135,226

 

 

 

136,369

 

Incremental shares from assumed exercise of
   outstanding options

 

 

184

 

 

 

167

 

 

 

215

 

 

 

167

 

Diluted weighted average shares outstanding

 

 

135,384

 

 

 

135,184

 

 

 

135,441

 

 

 

136,536

 

Diluted earnings per common share

 

$

0.37

 

 

$

0.35

 

 

$

1.21

 

 

$

0.93

 

26

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
   
2020
  
2019
  
2020
  
2019
   
(In thousands, except per share amounts)
Earnings per common share:
        
Net earnings
    $47,492     $50,423     $127,103     $156,546 
  Less: Net earnings allocated to restricted stock
   175    116    407    390 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net earnings allocated to common shareholders
    $47,317     $50,307     $126,696     $156,156 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Weighted average shares outstanding
   135,017    139,824    136,369    139,730 
Basic earnings per common share
    $0.35     $0.36     $0.93     $1.12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Diluted earnings per common share:
        
Net income allocated to common shareholders
    $47,317     $50,307     $126,696     $156,156 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  Weighted average shares outstanding
   135,017    139,824    136,369    139,730 
  Incremental shares from assumed exercise of outstanding options
   167    151    167    217 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Diluted weighted average shares outstanding
   135,184    139,975    136,536    139,947 
Diluted earnings per common share
    $0.35     $0.36     $0.93     $1.12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
7.
FAIR VALUE INFORMATION

7. 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 informationvaluation methodologies for financial assets and liabilities as of September 30, 2020. Themeasured at fair value hierarchy prioritizeson a recurring and non-recurring basis are described in Note 19 — Fair Value Information, included in our Annual Report on Form 10-K for the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

·
Level
 1
— Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.
·
Level
 2
— Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model-derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.
·
Level
 3
— Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.
28
Table of Contents
year ended December 31, 2020.

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 as of the dates presented.

 

 

Carrying Value at
September 30, 2021

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

2,269,073

 

 

$

0

 

 

$

2,269,073

 

 

$

0

 

CMO/REMIC

 

 

625,167

 

 

 

0

 

 

 

625,167

 

 

 

0

 

Municipal bonds

 

 

29,820

 

 

 

0

 

 

 

29,820

 

 

 

0

 

Other securities

 

 

1,000

 

 

 

0

 

 

 

1,000

 

 

 

0

 

Total investment securities - AFS

 

 

2,925,060

 

 

 

0

 

 

 

2,925,060

 

 

 

0

 

Interest rate swaps

 

 

16,176

 

 

 

0

 

 

 

16,176

 

 

 

0

 

Total assets

 

$

2,941,236

 

 

$

0

 

 

$

2,941,236

 

 

$

0

 

Description of liability

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

16,176

 

 

$

0

 

 

$

16,176

 

 

$

0

 

Total liabilities

 

$

16,176

 

 

$

0

 

 

$

16,176

 

 

$

0

 

 

 

Carrying Value at
December 31, 2020

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

1,904,935

 

 

$

0

 

 

$

1,904,935

 

 

$

0

 

CMO/REMIC

 

 

462,814

 

 

 

0

 

 

 

462,814

 

 

 

0

 

Municipal bonds

 

 

30,285

 

 

 

0

 

 

 

30,285

 

 

 

0

 

Other securities

 

 

889

 

 

 

0

 

 

 

889

 

 

 

0

 

Total investment securities - AFS

 

 

2,398,923

 

 

 

0

 

 

 

2,398,923

 

 

 

0

 

Interest rate swaps

 

 

30,181

 

 

 

0

 

 

 

30,181

 

 

 

0

 

Total assets

 

$

2,429,104

 

 

$

0

 

 

$

2,429,104

 

 

$

0

 

Description of liability

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

30,181

 

 

$

0

 

 

$

30,181

 

 

$

0

 

Total liabilities

 

$

30,181

 

 

$

0

 

 

$

30,181

 

 

$

0

 

  
  Carrying Value at  
September 30, 2020
 
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:
    
Mortgage-backed securities
   $1,756,871    $0     $1,756,871    $0  
CMO/REMIC
  411,494   0    411,494   0  
Municipal bonds
  36,468   0    36,468   0  
Other securities
  813   0    813   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  2,205,646   0    2,205,646   0  
Interest rate swaps
  37,255   0    37,255   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total assets
   $2,242,901    $0     $2,242,901    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $37,255    $0     $37,255    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $37,255    $0     $37,255    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
Carrying Value at
December 31, 2019
 
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:
    
Mortgage-backed securities
   $1,206,313    $0     $1,206,313    $0  
CMO/REMIC
  493,710   0    493,710   0  
Municipal bonds
  39,354   0    39,354   0  
Other securities
  880   0    880   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  1,740,257   0    1,740,257   0  
Interest rate swaps
  11,502   0    11,502   0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total assets
   $1,751,759    $0     $1,751,759    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $11,502    $0     $11,502    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $11,502    $0     $11,502    $0  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
29

27

Table of Contents

Assets and Liabilities Measured at Fair Value on a

Non-Recurring
Basis

We may be required to measure certain assets at fair value on a

non-recurring
basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or impairment write-downs of individual assets.

For assets measured at fair value on a

non-recurring
basis that were held on the balance sheet at September 30, 20202021 and December 31, 2019,2020, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.
  
Carrying Value at
September 30, 2020
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Losses

For the Nine

Months Ended
September 30, 2020
  
(Dollars in thousands)
Description of assets
     
Loans:
     
Commercial and industrial
   $3,273    $0     $0     $3,273    $2,034 
SBA
  712   0    0    712   203 
Real estate:
     
Commercial real estate
  1,715   0    0    1,715   1,295 
Construction
  0    0    0    0    0  
SFR mortgage
  0    0    0    0    0  
Dairy & livestock and agribusiness
  0    0    0    0    0  
Consumer and other loans
  0    0    0    0    0  
Other real estate owned
  2,275   0    0    2,275   700 
Asset
held-for-sale
  0    0    0    0    0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $7,975    $0     $0     $7,975    $4,232 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value at
December 31, 2019
 
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, 2019
  
(Dollars in thousands)
Description of assets
     
Impaired loans:
     
Commercial and industrial
   $253    $0     $0     $253    $251 
SBA
  359   0    0    359   513 
Real estate:
     
Commercial real estate
  0    0    0    0    0  
Construction
  0    0    0    0    0  
SFR mortgage
  0    0    0    0    0  
Dairy & livestock and agribusiness
  0    0    0    0    0  
Consumer and other loans
  0    0    0    0    0  
Other real estate owned
  444   0    0    444   64 
Asset
held-for-sale
  0    0    0    0    0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $1,056    $0     $0     $1,056    $828 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30
Table These losses on collateral dependent loans represent the amount of Contentthe allowance for credit losses and/or charge-offs during the period applicable to loans held at period-end. The amount of the allowance is included in the ACL. s

 

 

Carrying
Value at
September 30, 2021

 

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

Total Losses
For the
Nine Months Ended
September 30, 2021

 

 

 

(Dollars in thousands)

 

Description of assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Construction

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SBA

 

 

678

 

 

 

0

 

 

 

0

 

 

 

678

 

 

 

150

 

Commercial and industrial

 

 

43

 

 

 

0

 

 

 

0

 

 

 

43

 

 

 

3,020

 

Dairy & livestock and
   agribusiness

 

 

119

 

 

 

0

 

 

 

0

 

 

 

119

 

 

 

60

 

Municipal lease finance
   receivables

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Consumer and other loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

11

 

Other real estate owned

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Asset held-for-sale

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total assets

 

$

840

 

 

$

0

 

 

$

0

 

 

$

840

 

 

$

3,241

 

 

 

Carrying
Value at
December 31,
2020

 

 

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, 2020

 

 

 

(Dollars in thousands)

 

Description of assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Construction

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SBA

 

 

76

 

 

 

0

 

 

 

0

 

 

 

76

 

 

 

24

 

Commercial and industrial

 

 

4,266

 

 

 

0

 

 

 

0

 

 

 

4,266

 

 

 

2,316

 

Dairy & livestock and
   agribusiness

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Municipal lease finance
   receivables

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

SFR mortgage

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Consumer and other loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Other real estate owned

 

 

2,275

 

 

 

0

 

 

 

0

 

 

 

2,275

 

 

 

700

 

Asset held-for-sale

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total assets

 

$

6,617

 

 

$

0

 

 

$

0

 

 

$

6,617

 

 

$

3,040

 

28

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of September 30, 20202021 and December 31, 2019,2020, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

September 30, 2021

 

 

Carrying

 

 

Estimated Fair Value

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

$

2,561,363

 

 

$

2,561,363

 

 

$

0

 

 

$

0

 

 

$

2,561,363

 

Interest-earning balances due from
   depository institutions

 

27,260

 

 

 

0

 

 

 

27,260

 

 

 

0

 

 

 

27,260

 

Investment securities available-for-sale

 

2,925,060

 

 

 

0

 

 

 

2,925,060

 

 

 

0

 

 

 

2,925,060

 

Investment securities held-to-maturity

 

1,710,938

 

 

 

0

 

 

 

1,717,230

 

 

 

0

 

 

 

1,717,230

 

Total loans, net of allowance for credit
   losses

 

7,784,156

 

 

 

0

 

 

 

0

 

 

 

7,739,732

 

 

 

7,739,732

 

Swaps

 

16,176

 

 

 

0

 

 

 

16,176

 

 

 

0

 

 

 

16,176

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing

$

4,619,507

 

 

$

0

 

 

$

4,619,178

 

 

$

0

 

 

$

4,619,178

 

Borrowings

 

659,579

 

 

 

0

 

 

 

609,580

 

 

 

0

 

 

 

609,580

 

Junior subordinated debentures

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Swaps

 

16,176

 

 

 

0

 

 

 

16,176

 

 

 

0

 

 

 

16,176

 

 

December 31, 2020

 

 

Carrying

 

 

Estimated Fair Value

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

$

1,958,160

 

 

$

1,958,160

 

 

$

0

 

 

$

0

 

 

$

1,958,160

 

Interest-earning balances due from
   depository institutions

 

43,563

 

 

 

0

 

 

 

43,600

 

 

 

0

 

 

 

43,600

 

Investment securities available-for-sale

 

2,398,923

 

 

 

0

 

 

 

2,398,923

 

 

 

0

 

 

 

2,398,923

 

Investment securities held-to-maturity

 

578,626

 

 

 

0

 

 

 

604,223

 

 

 

0

 

 

 

604,223

 

Total loans, net of allowance for credit
   losses

 

8,255,116

 

 

 

0

 

 

 

0

 

 

 

8,256,178

 

 

 

8,256,178

 

Swaps

 

30,181

 

 

 

0

 

 

 

30,181

 

 

 

0

 

 

 

30,181

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing

$

4,281,114

 

 

$

0

 

 

$

4,281,952

 

 

$

0

 

 

$

4,281,952

 

Borrowings

 

444,406

 

 

 

0

 

 

 

444,349

 

 

 

0

 

 

 

444,349

 

Junior subordinated debentures

 

25,774

 

 

 

0

 

 

 

0

 

 

 

19,431

 

 

 

19,431

 

Swaps

 

30,181

 

 

 

0

 

 

 

30,181

 

 

 

0

 

 

 

30,181

 

                                                                                          
  
September 30, 2020
  
Carrying
Amount
 
Estimated Fair Value
  
Level 1
 
Level 2
 
Level 3
 
Total
  
(Dollars in thousands)
Assets
     
Total cash and cash equivalents
   $1,484,953    $1,484,953    $0    $0    $1,484,953 
Interest-earning balances due from depository
institutions
  44,367   0   44,414   0   44,414 
Investment securities
available-for-sale
  2,205,646   0   2,205,646   0   2,205,646 
Investment securities
held-to-maturity
  577,694   0   603,522   0   603,522 
Total loans, net of allowance for credit losses
  8,314,003   0   0   8,326,796   8,326,796 
Swaps
  37,255   0   37,255   0   37,255 
Liabilities
     
Deposits:
     
Interest-bearing
   $4,249,411    $0    $4,250,728    $0    $4,250,728 
Borrowings
  493,420   0   493,344   0   493,344 
Junior subordinated debentures
  25,774   0   0   18,917   18,917 
Swaps
  37,255   0   37,255   0   37,255 
                                                                                          
  
December 31, 2019
  
Carrying
Amount
 
Estimated Fair Value
  
Level 1
 
Level 2
 
Level 3
 
Total
  
(Dollars in thousands)
Assets
     
Total cash and cash equivalents
   $185,518    $185,518    $0    $0    $185,518 
Interest-earning balances due from depository
institutions
  2,931   0   2,938   0   2,938 
Investment securities
available-for-sale
  1,740,257   0   1,740,257   0   1,740,257 
Investment securities
held-to-maturity
  674,452   0   678,948   0   678,948 
Total loans, net of allowance for loan losses
  7,495,917   0   0   7,343,167   7,343,167 
Swaps
  11,502   0   11,502   0   11,502 
Liabilities
     
Deposits:
     
Interest-bearing
   $3,459,411    $0    $3,457,922    $0    $3,457,922 
Borrowings
  428,659   0   428,330   0   428,330 
Junior subordinated debentures
  25,774   0   0   20,669   20,669 
Swaps
  11,502   0   11,502   0   11,502 

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 20202021 and December 31, 2019.2020. 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.

29

31
Table of Contents
8.
DERIVATIVE FINANCIAL INSTRUMENTS

8. 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 September 30, 2020,2021, the Bank has entered into 133 144interest-rate swap agreements with customers with a notional amount totaling $455.2$502.4 million. The Bank then entered into identical offsetting swaps with a counterparty. 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. 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. As a result of the Bank exceeding $10 billion in assets, federal regulations required the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. NaNneNaN of our derivative assets and liabilities are offset in the Company’s condensed consolidated 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.

30

Balance Sheet Classification of Derivative Financial Instruments

As of September 30, 20202021 and December 31, 2019,2020, the total notional amount of the Company’s swaps was $455.2$502.4 million, and $260.0$503.8 million, respectively. The location of the asset and liability, and their respective fair values, are summarized in the tables below.

 

 

September 30, 2021

 

 

 

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

 

$

16,176

 

 

Other liabilities

 

$

16,176

 

Total derivatives

 

 

 

$

16,176

 

 

 

 

$

16,176

 

 

 

December 31, 2020

 

 

 

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

 

$

30,181

 

 

Other liabilities

 

$

30,181

 

Total derivatives

 

 

 

$

30,181

 

 

 

 

$

30,181

 

                                                                        
  
September 30, 2020
  
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    $37,255   Other liabilities    $37,255 
  
 
 
 
  
 
 
 
Total derivatives
    $37,255     $37,255 
  
 
 
 
  
 
 
 
                                                                        
  
December 31, 2019
  
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    $11,502   Other liabilities    $11,502 
  
 
 
 
  
 
 
 
Total derivatives
    $11,502     $11,502 
  
 
 
 
  
 
 
 
32
Table of Contents

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

The following table summarizes the effect of derivative financial instruments on the condensed consolidated statementstatements 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

 

 

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

(Dollars in thousands)

 

Interest rate swaps

 

Other income

 

$

167

 

 

$

1,591

 

 

$

382

 

 

$

4,149

 

Total

 

 

 

$

167

 

 

$

1,591

 

 

$

382

 

 

$

4,149

 

31

9. OTHER COMPREHENSIVE INCOME

Derivatives Not Designated
as Hedging Instruments
  
Location of Gain Recognized in
  Income on Derivative Instruments  
   
Amount of Gain Recognized in Income
on Derivative Instruments
       
    Three Months Ended    
September 30,
  
    Nine Months Ended    
September 30,
       
2020
  
2019
  
2020
  
2019
       
(Dollars in thousands)
Interest rate swaps
   Other income     $1,591     $378     $4,149     $1,135 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
      $1,591     $378     $4,149     $1,135 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
9.
OTHER COMPREHENSIVE INCOME

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

 

 

Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

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

 

$

(14,515

)

 

$

4,291

 

 

$

(10,224

)

 

$

(1,974

)

 

$

584

 

 

$

(1,390

)

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

 

 

72

 

 

 

(21

)

 

 

51

 

 

 

(30

)

 

 

9

 

 

 

(21

)

Net change

 

$

(14,443

)

 

$

4,270

 

 

$

(10,173

)

 

$

(2,004

)

 

$

593

 

 

$

(1,411

)

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

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

 

$

(45,989

)

 

$

13,596

 

 

$

(32,393

)

 

$

33,382

 

 

$

(9,869

)

 

$

23,513

 

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

 

 

173

 

 

 

(51

)

 

 

122

 

 

 

(48

)

 

 

14

 

 

 

(34

)

Net change

 

$

(45,816

)

 

$

13,545

 

 

$

(32,271

)

 

$

33,334

 

 

$

(9,855

)

 

$

23,479

 

32

                                                                                                                        
   
Three Months Ended September 30,
   
2020
 
2019
   
Before-tax
 
Tax effect
  
After-tax
 
Before-tax
 
Tax effect
 
After-tax
   
(Dollars in thousands)
Investment securities:
        
Net change in fair value recorded in accumulated OCI
    $(1,974)    $584     $(1,390)    $5,672    $(1,677)    $3,995 
Amortization of net unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity
   (30)   9    (21)   (249)   74   (175) 
Net realized gain reclassified into earnings (1)
   0   0    0   (5)   1   (4) 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change
    $(2,004)    $593     $(1,411)    $5,418    $(1,602)    $3,816 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                        
   
Nine Months Ended September 30,
   
2020
 
2019
   
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
    $33,382    $(9,869)    $23,513    $44,586    $(13,181)    $31,405 
Amortization of net unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity
   (48)   14   (34)   (1,450)   429   (1,021) 
Net realized gain reclassified into earnings (1)
   0   0   0   (5)   1   (4) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change
    $33,334    $(9,855)    $23,479    $43,131    $(12,751)    $30,380 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Included in other noninterest income.
33
Table of Contents
10.
BALANCE SHEET OFFSETTING

10. 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 master netting arrangements. 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 counterparties 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 Company’s condensed consolidated balances.

 

Gross Amounts Recognized in the Condensed

 

 

Gross Amounts Offset in the Condensed

 

 

Net Amounts 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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as
   hedging instruments

$

16,176

 

 

$

0

 

 

$

0

 

 

$

16,176

 

 

$

0

 

 

$

16,176

 

Total

$

16,176

 

 

$

0

 

 

$

0

 

 

$

16,176

 

 

$

0

 

 

$

16,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as
   hedging instruments

$

24,451

 

 

$

(8,275

)

 

$

16,176

 

 

$

8,275

 

 

$

(39,063

)

 

$

(14,612

)

Repurchase agreements

 

659,579

 

 

 

0

 

 

 

659,579

 

 

 

0

 

 

 

(697,207

)

 

 

(37,628

)

Total

$

684,030

 

 

$

(8,275

)

 

$

675,755

 

 

$

8,275

 

 

$

(736,270

)

 

$

(52,240

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as
   hedging instruments

$

30,181

 

 

$

0

 

 

$

0

 

 

$

30,181

 

 

$

0

 

 

$

30,181

 

Total

$

30,181

 

 

$

0

 

 

$

0

 

 

$

30,181

 

 

$

0

 

 

$

30,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as
   hedging instruments

$

30,434

 

 

$

(253

)

 

$

30,181

 

 

$

253

 

 

$

(63,730

)

 

$

(33,296

)

Repurchase agreements

 

439,406

 

 

 

0

 

 

 

439,406

 

 

 

0

 

 

 

(483,603

)

 

 

(44,197

)

Total

$

469,840

 

 

$

(253

)

 

$

469,587

 

 

$

253

 

 

$

(547,333

)

 

$

(77,493

)

33

                                                                                                
   
Gross Amounts
Recognized in
the Condensed
Consolidated
Balance Sheets
  
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net Amounts
Presented in the
Condensed
Consolidated
Balance Sheets
  
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
 
    Net Amount    
   
Financial
Instruments
  
Collateral
Pledged
   
(Dollars in thousands)
September 30, 2020
          
Financial assets:
          
Derivatives not designated as
hedging instruments
    $37,255     $-    $-     $37,255     $-    $37,255 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $37,255     $-    $-     $37,255     $-    $37,255 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
Financial liabilities:
          
Derivatives not designated as
hedging instruments
    $37,255     $-    $37,255     $-     $(66,946)    $(29,691) 
Repurchase agreements
   483,420    -   483,420    -    (498,535)   (15,115) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $520,675     $-    $520,675     $-     $(565,481)    $(44,806) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
December 31, 2019
          
Financial assets:
          
Derivatives not designated as
hedging instruments
    $11,502     $-    $-     $11,502     $-    $11,502 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $11,502     $-    $-     $11,502     $-    $11,502 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
          
Financial liabilities:
          
Derivatives not designated as
hedging instruments
    $11,619     $(117)    $11,502     $117     $(23,312)    $(11,693) 
Repurchase agreements
   428,659    -   428,659    -    (510,138)   (81,479) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
Total
    $440,278     $(117)    $440,161     $117     $(533,450)    $(93,172) 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
34
Table of Contents
11.
LEASES

11. LEASES

The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings.

Right-of-use
(“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s condensed consolidated balance sheet.

While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.

The tables below present the components of lease costs and supplemental information related to leases as of and for the periods presented.

 

 

 

 

 

 

September 30,
2021

 

 

December 31,
2020

 

 

 

 

 

 

 

(Dollars in thousands)

 

Lease Assets and Liabilities

 

 

 

 

 

 

 

 

 

 

ROU assets

 

 

 

 

 

$

19,403

 

 

$

19,112

 

Total lease liabilities

 

 

 

 

 

 

21,073

 

 

 

21,164

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Lease Cost

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease expense (1)

 

$

1,634

 

 

$

1,654

 

 

$

4,977

 

 

$

4,900

 

Sublease income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total lease expense

 

$

1,634

 

 

$

1,654

 

 

$

4,977

 

 

$

4,900

 

(1)
Includes short-term leases and variable lease costs, which are immaterial.

34

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the
   measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash outflows from operating
   leases, net

 

$

1,700

 

 

$

1,826

 

 

$

5,364

 

 

$

5,630

 

 

 

 

 

 

 

September 30,
2021

 

 

December 31,
2020

 

Lease Term and Discount Rate

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term
   (years)

 

 

 

 

 

 

4.33

 

 

 

4.16

 

Weighted average discount rate

 

 

 

 

 

 

2.47

%

 

 

2.80

%

                                                    
  
September 30,
2020
 
December 31,
2019
  
(Dollars in thousands)
Lease Assets and Liabilities
  
ROU assets
   $19,771    $18,522 
Total lease liabilities
  21,939   21,392 
                                                                        
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2020
 
2019
 
2020
 
2019
  
(Dollars in thousands)
Lease Cost
 
    
Operating lease expense (1)
   $1,654    $1,628    $4,900    $5,634 
Sublease income
  0   0   -   0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total lease expense
   $1,654    $1,628    $4,900    $5,634 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)   Includes short-term leases and variable lease costs, which are immaterial.
 
    
Other Information
    
Cash paid for amounts included in the measurement of lease liabilities:
    
Operating cash outflows from operating leases, net
   $1,826    $1,640    $5,630    $6,499 
                                                    
Lease Term and Discount Rate
 
September 30,
2020
 
December 31,
2019
Weighted average remaining lease term (years)
  4.29   4.18 
Weighted average discount rate
  2.86%   3.34% 
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The Company’s lease arrangements that have not yet commenced as of September 30, 20202021 and the Company’s short-term lease costs and variable lease costs, for the nine months ended September 30, 2021 and 2020 are not material to the consolidated financial statements. The future lease payments required for leases that have initial or remaining

non-cancelable
lease terms in excess of one year as of September 30, 2020,2021, excluding property taxes and insurance, are as follows:

 

 

September 30,
2021

 

 

 

(Dollars in thousands)

 

Year:

 

 

 

2021 (excluding the nine months ended September 30, 2021)

 

$

1,713

 

2022

 

 

6,392

 

2023

 

 

4,660

 

2024

 

 

3,498

 

2025

 

 

2,806

 

Thereafter

 

 

3,085

 

Total future lease payments

 

 

22,154

 

Less: Imputed interest

 

 

(1,081

)

Present value of lease liabilities

 

$

21,073

 

   
      September 30, 2020      
 
   
(Dollars in thousands)
 
Year:
  
2020 (excluding the nine months ended September 30, 2020)
    $1,781 
2021
                           6,656 
2022
   5,475 
2023
   3,615 
2024
   2,428 
Thereafter
   3,461 
  
 
 
 
Total future lease payments
   23,416 
Less: Imputed interest
   (1,477) 
  
 
 
 
Present value of lease liabilities
    $21,939 
  
 
 
 

12. REVENUE RECOGNITION

12.
REVENUE RECOGNITION
On January 1, 2018, the Company adopted

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASU

No. 2014-09
“Revenue “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. , for the periods indicated.

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

In-scope of Topic 606:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

4,513

 

 

$

3,970

 

 

$

12,667

 

 

$

12,555

 

Trust and investment services

 

 

2,681

 

 

 

2,405

 

 

 

8,459

 

 

 

7,302

 

Bankcard services

 

 

479

 

 

 

456

 

 

 

1,362

 

 

 

1,438

 

Gain on OREO, net

 

 

0

 

 

 

13

 

 

 

477

 

 

 

23

 

Other

 

 

1,581

 

 

 

3,160

 

 

 

4,753

 

 

 

8,736

 

Noninterest Income (in-scope of Topic 606)

 

 

9,254

 

 

 

10,004

 

 

 

27,718

 

 

 

30,054

 

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

 

 

1,229

 

 

 

3,149

 

 

 

7,282

 

 

 

6,891

 

Total noninterest income

 

$

10,483

 

 

$

13,153

 

 

$

35,000

 

 

$

36,945

 

Refer to Note 3 –

Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition,
of
included in our
 2019 Annual Report on Form
10-K
for the year ended December 31, 20192020 for a more detailed discussion about noninterest revenue streams that are
in-scope
of Topic 606.

The following presents noninterest income, segregated by revenue streams
in-scope
and
out-of-scope
of Topic 606, for the periods indicated.
                                                                        
  
Three Months Ended
 
Nine Months Ended
  
September 30,
 
September 30,
  
2020
 
2019
 
2020
 
2019
  
(Dollars in thousands)
Noninterest income:
    
In-scope
of Topic 606:
    
Service charges on deposit accounts
   $3,970    $4,833    $12,555    $15,039 
Trust and investment services
  2,405   2,330   7,302   6,964 
Bankcard services
  456   637   1,438   2,614 
Gain on OREO, net
  13   0   23   129 
Other
  3,160   2,292   8,736   6,939 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest Income
(in-scope
of Topic 606)
  10,004   10,092   30,054   31,685 
Noninterest Income
(out-of-scope
of Topic 606)
  3,149   1,802   6,891   14,717 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total noninterest income
   $13,153    $11,894    $36,945    $46,402 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form

10-K
for the year ended December 31, 2019,2020 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

IMPACT OF

COVID-19

The spread of

COVID-19
has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis and government actions, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (“FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It containscontain substantial tax and spending provisions intended to address the impact of the

COVID-19
pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and
medium-sized
businesses through 100% SBASmall Business Administration (“SBA”) guaranteed loans distributed through banks. These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. The SBA exhausted the initial funding for this program on April 15, 2020, but legislationLegislation passed on April 24, 2020 to provideprovided additional PPP funds of $310 billion. WeDuring 2020, we originated and funded aboutapproximately 4,100 loans, totaling approximately $1.10 billion, as of September 30, 2020.billion. In response to the
COVID-19
pandemic and the CARES Act, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allowsOn January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a deferralloan through the initial PPP phase. At least $25 billion has been set aside for Second Draw (“round two”) PPP loans to eligible borrowers with a maximum of payments10 employees or for 90 days. The deferred payments alongloans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, businesses with interest accrued during the deferral periodmore than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are duenot eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and payable on the maturity date of the existing loan.food service businesses. As of October 9, 2020,September 30, 2021, we have remaining temporary payment defermentsoriginated approximately 1,900 round two loans totaling $420 million in outstanding borrowings. The Paycheck Protection Program officially ended on May 31, 2021. As of principal, interest or of principal and interestSeptember 30, 2021, approximately 4,800 loans, representing approximately $1.2 billion in responsePPP loan balances were submitted to the CARES Act for 33 loans totaling $68.6 million. These deferments were primarily for 90 days, with 89% of these loans being pass rated. Of these loans, 27 have received a second defermentSBA and the remaining six loans are first deferments.
granted forgiveness.

The third quarter of 2020 did not include a2021 included $4.0 million in recapture of provision for credit losses, as theprimarily due to a modest improvement in our economic outlook is generally consistent with the forecast from the prior quarter end.forecast. In comparison, the Company recorded a provisionsecond quarter of 2021 included $2.0 million in recapture of provision. The Company’s allowance for credit losses at September 30, 2021 of $23.5$65.4 million, incompares to the first halfpre-pandemic allowance of 2020, including $11.5$68.7 million in the second quarter.at December 31, 2019. We continue to monitor the impact of

COVID-19
closely, as well as any effects that may result from the CARES Act. closely. The extent to which the
COVID-19
pandemic will impact our operations and financial results during the fourth quarter of 20202021 is highly uncertain, but we may experience increasedcontinued volatility in the provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.
37

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Table of Contents

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.

·
Allowance for Credit Losses (“ACL”)
·
Business Combinations
·
Valuation and Recoverability of Goodwill
·
Income Taxes
Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Adoption of Allowance for Credit Losses
(“ACL”)
We adopted ASU
2016-13,Business Combinations
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life
Valuation and Recoverability of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU
2016-13,
resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements.
Goodwill
38
Table of Contents
Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020
Standard
Description
Adoption Timing
Impact on Financial Statements
ASU
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Issued March 2020
The FASB issued ASU
2020-04,
Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a
one-time
election for the sale or transfer of debt securities classified as
held-to-maturity.
This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.
1st Quarter 2020 through the 4th Quarter 2022
Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s consolidated financial statements.
ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
Issued January 2020
The FASB issued ASU
2020-01,
Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.
1st Quarter 2021
The adoption of this ASU will not have an impact on our consolidated financial statements.
ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
Issued August 2020
The FASB issued ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.
1st Quarter 2022
The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
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Table of Contents
OVERVIEW
For the third quarter of 2020, we reported net earnings of $47.5 million, compared with $41.6 million for the second quarter of 2020 and $50.4 million for the third quarter of 2019. Diluted earnings per share were $0.35 for the third quarter, compared to $0.31 for the prior quarter and $0.36 for the same period last year.
No provision for credit losses was recorded for the third quarter of 2020. The Company’s economic forecast of macro-economic variables was generally consistent with the forecast at the end of the second quarter. A $23.5 million provision for credit losses was recorded in the first half of 2020, due to the economic disruption and forecasted impact resulting from
COVID-19.
In comparison to the prior year, a $1.5 million loan loss provision was incurred for the third quarter of 2019. During the third quarter of 2020, we experienced minimal credit charge-offs of $231,000 and total recoveries of $117,000, resulting in net charge-offs of $114,000. During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at September 30, 2020. Interest and fee income from PPP loans increased from approximately $8.5 million in the second quarter of 2020, to $9.5 million in the third quarter of 2020.
At September 30, 2020, total assets of $13.82 billion increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $12.59 billion at September 30, 2020 increased $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.31 billion increase in interest-earning balances due from the Federal Reserve, an $843.3 million increase in total loans, and a $368.6 million increase in investment securities. Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.
Total investment securities were $2.78 billion at September 30, 2020, an increase of $368.6 million, or 15.27%, from $2.41 billion at December 31, 2019. At September 30, 2020, investment securities
held-to-maturity
(“HTM”) totaled $577.7 million. At September 30, 2020, investment securities
available-for-sale
(“AFS”) totaled $2.21 billion, inclusive of a net
pre-tax
unrealized gain of $55.3 million, an increase of $33.4 million from December 31, 2019. HTM securities declined by $96.8 million, or 14.35%, and AFS securities increased by $465.4 million, or 26.74%, from December 31, 2019. Our tax equivalent yield on investments was 1.99% for the quarter ended September 30, 2020, compared to 2.22% for the second quarter of 2020 and 2.47% for the third quarter of 2019.
Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%. The $126.9 million decrease in loans included decreases of $118.1 million in commercial and industrial loans, $27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million. Our yield on loans was 4.47% for the quarter ended September 30, 2020, compared to 4.77% for the second quarter of 2020 and 5.23% for the third quarter of 2019. This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans. Interest income for yield adjustments related to discount accretion on acquired loans was $4.2 million for the quarter ended September 30, 2020, compared to $4.1 million for the second quarter of 2020 and $7.2 million for the third quarter of 2019.
Noninterest-bearing deposits were $6.92 billion at September 30, 2020, an increase of $1.67 billion, or 31.91%, when compared to December 31, 2019. The significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. At September 30, 2020, noninterest-bearing deposits were 61.95% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.21% for the third quarter of 2019.
Customer repurchase agreements totaled $483.4 million at September 30, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.22% for the third quarter of 2019.
At September 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and September 30, 2019. At September 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.11% for the quarter ended September 30, 2020, 0.13% for the second quarter of 2020, and 0.23% for the third quarter of 2019.
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Table of Contents
The allowance for credit losses totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted to result from the
COVID-19
pandemic. At September 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of September 30, 2020, total discounts on acquired loans were $35.2 million.
The Company’s total equity was $1.98 billion at September 30, 2020. This represented a decrease of $12.1 million, or 0.61%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our
10b5-1
stock repurchase program, and $73.3 million in cash dividends, offset by net earnings of $127.1 million and a $23.5 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our
available-for-sale
investment securities portfolio. Our tangible common equity ratio was 9.8% at September 30, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of September 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 9.88%, our common equity Tier 1 ratio totaled 14.60%, our Tier 1 risk-based capital ratio totaled 14.89%, and our total risk-based capital ratio totaled 16.08%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our
Analysis of Financial Condition – Capital Resources
.
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Table of Contents
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
   
Three Months Ended
 
Variance
 
   
September 30,
 
June 30,
   
   
2020
 
2020
 
$
   
%
   
(Dollars in thousands, except per share amounts)
Net interest income
    $    103,325    $104,569    $(1,244)     -1.19% 
Provision for credit losses
   -         (11,500)   11,500      100.00% 
Noninterest income
   13,153   12,152   1,001      8.24% 
Noninterest expense
   (49,588)   (46,398)   (3,190)     -6.88% 
Income taxes
   (19,398)   (17,192)   (2,206)     -12.83% 
  
 
 
 
 
 
 
 
 
 
 
   
Net earnings
    $47,492    $41,631    $5,861      14.08% 
  
 
 
 
 
 
 
 
 
 
 
   
Earnings per common share:
      
Basic
    $0.35    $0.31    $0.04     
Diluted
    $0.35    $0.31    $0.04     
Return on average assets
   1.38%   1.33%   0.05%     
Return on average shareholders’ equity
   9.51%   8.51%   1.00%     
Efficiency ratio
   42.57%   39.75%   2.82%     
Noninterest expense to average assets
   1.44%   1.48%   -0.04%     
  
Three Months Ended
     
Nine Months Ended
   
  
September 30,
  
Variance
  
September 30,
  
Variance
  
2020
 
2019
  
$
 
%
  
2020
  
2019
  
$
 
%
  
(Dollars in thousands, except per share amounts)
Net interest income
   $103,325    $108,159       $(4,834)    -4.47%       $310,200       $328,752       $(18,552)    -5.64% 
Provision for credit losses
  -         (1,500)     1,500     100.00%      (23,500)     (5,000)     (18,500)    -370.00% 
Noninterest income
  13,153   11,894      1,259     10.59%      36,945      46,402      (9,457)    -20.38% 
Noninterest expense
  (49,588)   (47,535)     (2,053)    -4.32%      (144,627)     (149,667)     5,040     3.37% 
Income taxes
  (19,398)   (20,595)     1,197     5.81%      (51,915)     (63,941)     12,026     18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Net earnings
   $47,492    $50,423       $(2,931)    -5.81%       $127,103       $156,546       $(29,443)    -18.81% 
 
 
 
 
 
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
Earnings per common share:
               
Basic
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Diluted
   $0.35    $0.36       $(0.01)       $0.93       $1.12       $(0.19)   
Return on average assets
  1.38%   1.78%      -0.40%       1.35%      1.86%      -0.51%    
Return on average shareholders’ equity
  9.51%   10.18%      -0.67%       8.55%      10.89%      -2.34%    
Efficiency ratio
  42.57%   39.60%      2.97%       41.66%      39.89%      1.77%    
Noninterest expense to average assets
  1.44%   1.68%      -0.24%       1.54%      1.77%      -0.23%    
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Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
   
Three Months Ended
  
Nine Months Ended
 
   
September 30,
  
June 30,
  
September 30,
  
September 30,
  
September 30,
 
   
2020
  
2020
  
2019
  
2020
  
2019
 
   
(Dollars in thousands)
 
Net Income
    $47,492      $41,631      $50,423      $127,103      $156,546   
Add: Amortization of intangible assets
   2,292     2,445     2,648     7,182     8,338   
Less: Tax effect of amortization of intangible assets (1)
   (678)    (723)    (783)    (2,123)    (2,465)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Tangible net income
    $49,106      $43,353      $52,288      $132,162      $162,419   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average stockholders’ equity
    $1,985,842    $1,966,600      $1,965,427      $1,986,300      $1,921,981   
Less: Average goodwill
   (663,707)    (663,707)    (663,707)    (663,707)    (665,470)  
Less: Average intangible assets
   (37,133)    (39,287)    (46,720)    (39,376)    (49,682)  
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Average tangible common equity
    $1,285,002      $1,263,606      $1,255,000      $1,283,217      $1,206,829   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Return on average equity, annualized
   9.51%   8.51%   10.18%   8.55%   10.89% 
Return on average tangible common equity, annualized
   15.20%   13.80%   16.53%   13.76%   17.99% 
(1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended September 30, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
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Table of Contents
The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
   
Three Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,970,636     $8,244    1.82%     $1,505,087     $8,949    2.38% 
Tax-advantaged
   36,193    203    3.26%    40,189    273    3.75% 
Held-to-maturity
securities:
            
Taxable
   429,897    2,265    2.11%    506,203    2,883    2.28% 
Tax-advantaged
   164,854    1,110    3.26%    205,996    1,415    3.32% 
Investment in FHLB stock
   17,688    215    4.84%    17,688    301    6.75% 
Interest-earning deposits with other institutions
   1,494,149    389    0.10%    174,119    946    2.16% 
Loans (2)
   8,382,257    94,200    4.47%    7,495,289    98,796    5.23% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   12,495,674    106,626    3.45%    9,944,571    113,563    4.55% 
Total noninterest-earning assets
   1,231,502        1,269,845     
  
 
 
       
 
 
     
Total assets
    $13,727,176         $11,214,416     
  
 
 
       
 
 
     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
    $3,735,204    2,010    0.21%     $2,991,330    3,501    0.46% 
Time deposits
   449,484    948    0.84%    473,347    1,088    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   4,184,688    2,958    0.28%    3,464,677    4,589    0.53% 
FHLB advances, other borrowings, and customer repurchase agreements
   539,833    343    0.25%    446,087    815    0.72% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,724,521    3,301    0.28%    3,910,764    5,404    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,731,711        5,227,595     
Other liabilities
   285,102        110,630     
Stockholders’ equity
   1,985,842        1,965,427     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  13,727,176         $  11,214,416     
  
 
 
       
 
 
     
Net interest income
      $    103,325         $108,159   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.17%        4.00% 
Net interest margin
       3.33%        4.32% 
Net interest margin - tax equivalent
       3.34%        4.34% 
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 2020 and 2019. The non TE rates were 1.93% and 2.40% for the three months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of $7.4 million and $782,000 for the three months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of $1.8 million and $1.0 million are included in interest income for the three months ended September 30, 2020 and 2019, respectively.
(3)
Includes interest-bearing demand and money market accounts.
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Table of Contents
   
Nine Months Ended September 30,
 
   
2020
   
2019
 
   
Average
       
Yield/
   
Average
       
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
   
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
            
Investment securities (1)
            
Available-for-sale
securities:
            
Taxable
    $1,737,723     $26,313    2.08%     $1,582,902     $29,079    2.45% 
Tax-advantaged
   36,897    632    3.30%    42,746    906    3.87% 
Held-to-maturity
securities:
            
Taxable
   449,230    7,410    2.20%    509,247    8,725    2.29% 
Tax-advantaged
   177,364    3,623    3.29%    216,343    4,524    3.37% 
Investment in FHLB stock
   17,688    761    5.75%    17,688    931    7.04% 
Interest-earning deposits with other institutions
   947,211    1,285    0.18%    70,848    1,140    2.15% 
Loans (2)
   7,972,208    281,669    4.72%    7,571,502    300,326    5.30% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-earning assets
   11,338,321    321,693    3.82%    10,011,276    345,631    4.63% 
            
Total noninterest-earning assets
   1,237,241        1,269,160     
  
 
 
       
 
 
     
Total assets
    $12,575,562         $11,280,436     
INTEREST-BEARING LIABILITIES
            
Savings deposits (3)
  $3,396,259    7,131    0.28%   $3,047,444    9,159    0.40% 
Time deposits
   448,615    2,946    0.88%    497,370    3,394    0.91% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total interest-bearing deposits
   3,844,874    10,077    0.35%    3,544,814    12,553    0.47% 
FHLB advances, other borrowings, and customer repurchase agreements
   505,710    1,416    0.37%    573,633    4,326    1.00% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Interest-bearing liabilities
   4,350,584    11,493    0.35%    4,118,447    16,879    0.55% 
  
 
 
   
 
 
     
 
 
   
 
 
   
Noninterest-bearing deposits
   6,063,469        5,136,233     
Other liabilities
   175,209        103,775     
Stockholders’ equity
   1,986,300        1,921,981     
  
 
 
       
 
 
     
Total liabilities and stockholders’ equity
    $  12,575,562         $  11,280,436     
  
 
 
       
 
 
     
Net interest income
      $    310,200         $328,752   
    
 
 
       
 
 
   
Net interest spread - tax equivalent
       3.47%        4.08% 
Net interest margin
       3.67%        4.39% 
Net interest margin - tax equivalent
       3.68%        4.41% 
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 2020 and 2019. The non TE rates were 2.16% and 2.45% for the nine months ended September 30, 2020 and 2019, respectively.
(2)
Includes loan fees of $15.3 million and $2.3 million for the nine months ended September 30, 2020 and 2019, respectively. Prepayment penalty fees of $5.4 million and $3.4 million are included in interest income for the nine months ended September 30, 2020 and 2019, respectively.
(3)
Includes interest-bearing demand and money market accounts.
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Table of Contents
The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
   
Comparison of Three Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,835    $(2,108)    $(432)    $(705) 
Tax-advantaged
investment securities
   (24)   (42)   (4)   (70) 
Held-to-maturity
securities:
     
Taxable investment securities
   (395)   (194)   (29)   (618) 
Tax-advantaged
investment securities
   (273)   (27)   (5)   (305) 
Investment in FHLB stock
   -   (86)   -   (86) 
Interest-earning deposits with other institutions
   7,184   (902)   (6,839)   (557) 
Loans
   12,369   (15,170)   (1,795)   (4,596) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   20,696   (18,529)   (9,104)   (6,937) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   874   (1,894)   (471)   (1,491) 
Time deposits
   (53)   (83)   (4)   (140) 
FHLB advances, other borrowings, and customer repurchase agreements
   172   (532)   (112)   (472) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   993   (2,509)   (587)   (2,103) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $19,703    $(16,020)    $(8,517)    $(4,834) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Comparision of Nine Months Ended September 30,
 
 
   
2020 Compared to 2019
 
 
   
Increase (Decrease) Due to
 
   
    Volume    
  
Rate
  
Rate/
    Volume    
  
    Total    
 
      
(Dollars in thousands)
    
Interest income:
     
Available-for-sale
securities:
     
Taxable investment securities
    $1,861    $(4,349)    $(278)    $(2,766) 
Tax-advantaged
investment securities
   (124)   (174)   24   (274) 
Held-to-maturity
securities:
     
Taxable investment securities
   (1,015)   (339)   39   (1,315) 
Tax-advantaged
investment securities
   (815)   (105)   19   (901) 
Investment in FHLB stock
   -   (170)   -   (170) 
Interest-earning deposits with other institutions
   14,238   (1,054)   (13,039)   145 
Loans
   15,682   (32,613)   (1,726)   (18,657) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest income
   29,827   (38,804)   (14,961)   (23,938) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense:
     
Savings deposits
   1,045   (2,758)   (315)   (2,028) 
Time deposits
   (331)   (130)   13   (448) 
FHLB advances, other borrowings, and customer repurchase agreements
   (513)   (2,719)   322   (2,910) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total interest expense
   201   (5,607)   20   (5,386) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net interest income
    $29,626    $(33,197)    $(14,981)    $(18,552) 
  
 
 
  
 
 
  
 
 
  
 
 
 
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Table of Contents
Third Quarter of 2020 Compared to the Third Quarter of 2019
Net interest income, before provision for credit losses, of $103.3 million for the third quarter of 2020 decreased $4.8 million, or 4.47%, compared to $108.2 million for the third quarter of 2019. Interest-earning assets increased on average by $2.55 billion, or 25.65%, from $9.94 billion for the third quarter of 2019 to $12.50 billion for the third quarter of 2020. Our net interest margin (TE) was 3.34% for the third quarter of 2020, compared to 4.34% for the third quarter of 2019.
Interest income for the third quarter of 2020 was $106.6 million, which represented a $6.9 million, or 6.11%, decrease when compared to the same period of 2019. Average interest-earning assets increased to $12.50 billion and the average interest-earning asset yield of 3.45%, compared to 4.55% for the third quarter of 2019. The 110 basis point decrease in the interest-earning asset yield over the third quarter of 2019 was primarily due to a combination of a 76 basis point decrease in loan yields, a 48 basis point decrease in investment yields and a change in mix of earning assets with average balances at the Federal Reserve growing to 11.62% of earning assets for the third quarter of 2020, compared to 1.69% for the third quarter of 2019. The increase in balances at the Federal Reserve resulted from $2.22 billion in average deposit growth during the third quarter of 2020.
Interest income and fees on loans for the third quarter of 2020 of $94.2 million decreased $4.6 million, or 4.65%, when compared to the third quarter of 2019. Average loans increased $887.0 million for the third quarter of 2020 when compared with the same period of 2019, primarily due to $1.10 billion in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in the recognition of approximately $9.5 million in loan interest and fee income in the third quarter of 2020. Discount accretion on acquired loans decreased by $2.9 million compared to the third quarter of 2019. The Federal Reserve lowered short-term interest rates by 175 basis points when compared to the end of the third quarter of 2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 44 basis points from the third quarter of 2019.
Interest income from investment securities was $11.8 million for the third quarter of 2020, a $1.7 million, or 12.56%, decrease from $13.5 million for the third quarter of 2019. This decrease was primarily the result of a 47 basis point decline in the non
tax-equivalent
yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities. Partially offsetting the decline from lower rates was a $344.1 million increase in average investment securities for the third quarter of 2020, compared to the same period of 2019.
Interest expense of $3.3 million for the third quarter of 2020, decreased $2.1 million, or 38.92%, compared to the third quarter of 2019. The average rate paid on interest-bearing liabilities declined to 0.28% for the third quarter of 2020 from 0.55% for the third quarter of 2019. On average, noninterest-bearing deposits were 61.67% of our total deposits for the third quarter of 2020, compared to 60.14% for the third quarter of 2019. In comparison to the third quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.50 billion. Average interest-bearing deposits increased by $720.0 million compared to the third quarter of 2019, while the cost of interest-bearing deposits decreased by 25 basis points.    
Nine Months of 2020 Compared to the Nine Months of 2019
Net interest income, before provision for credit losses, was $310.2 million for the nine months ended September 30, 2020, a decrease of $18.6 million, or 5.64%, compared to $328.8 million for the same period of 2019. Interest-earning assets increased on average by $1.33 billion, or 13.26%, from $10.01 billion for the nine months ended September 30, 2019 to $11.34 billion for the current year. Our net interest margin (TE) was 3.68% during the first nine months of 2020, compared to 4.41% for the same period of 2019.
Interest income for the nine months ended September 30, 2020 was $321.7 million, which represented a $23.9 million, or 6.93%, decrease when compared to the same period of 2019. Compared to the first nine months of 2019, average interest-earning assets increased by $1.33 billion primarily due to PPP loans, and the yield on interest-earning assets decreased by 81 basis points. The 81 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 58 basis point decrease in loan yields from 5.30% for first nine months of 2019 to 4.72% for the same period of 2020, and a 31 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from an $852.6 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 75.63% for the first nine months of 2019 to 70.31% for the first nine months of 2020. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.64% in the prior year to 8.09% for the first nine months of 2020.
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Table of Contents
Interest income and fees on loans for the first nine months of 2020 of $281.7 million decreased $18.7 million, or 6.21%, when compared to the same period of 2019. Average loans increased $400.7 million for the first nine months of 2020 when compared with the same period of 2019, primarily due to $591.4 million in average PPP loans. The PPP loans we originated resulted in approximately $13.5 million in fee income and $4.5 million in loan interest during the first nine months of 2020. The first nine months of 2020 reflected a $9.3 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019. Loan yields decreased by 58 basis points from the prior nine month period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 33 basis points lower than the first nine months of 2019. This decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.
Interest income from investment securities was $38.0 million for the nine months ended September 30, 2020, a $5.3 million decrease from $43.2 million for the first nine months of 2019. This decrease was the net result of a 29 basis point decline in the non
tax-equivalent
yield on securities, compared to the first nine months of 2019, partially offset by a $50.0 million increase in the average investment securities for the first nine months of 2020.
Interest expense of $11.5 million for the nine months ended September 30, 2020, decreased by $5.4 million from the same period of 2019. The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.35% for the first nine months of 2020, from 0.55% for the same period of 2019. The rate on interest-bearing deposits for the first nine months of 2020 decreased by 12 basis points from the same period in 2019. Average interest-bearing liabilities were $232.1 million higher for the first nine months of 2020 when compared with the same period of 2019. Average interest-bearing deposits grew by $300.1 million when compared to the first nine months of 2019. Average noninterest-bearing deposits represented 61.20% of our total deposits for the nine months ended September 30, 2020, compared to 59.17% for the same period of 2019. Total cost of funds for the first nine months of 2020 was 0.15%, compared with 0.24% for the same period of 2019.
Provision for Credit Losses
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU
2016-13,
commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan.
The allowance for credit losses on loans totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019 and $68.7 million as of September 30, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted as a result of the
COVID-19
pandemic. For the nine months ended September 30, 2020, we experienced minimal credit charge-offs of $484,000 and total recoveries of $353,000, resulting in net charge-offs of $131,000. This compares to a $5.0 million loan loss provision and net recoveries of $59,000 for the same period of 2019. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2020, was 1.12%, or 1.28% when PPP loans are excluded. This compares to 0.91% and 0.92%, as of December 31, 2019 and September 30, 2019, respectively. As of September 30, 2020, remaining discounts on acquired loans were $35.2 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the
COVID-19
pandemic. See “Allowance for Credit Losses” under
Analysis of Financial Condition
herein.
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Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
  
Three Months Ended
September 30,
  
Variance
  
Nine Months Ended
September 30,
  
Variance
 
  
2020
  
2019
  
$
  
%
  
2020
  
2019
  
$
  
%
 
           
(Dollars in thousands)
          
Noninterest income:
        
Service charges on deposit accounts
   $3,970    $4,833    $(863)   -17.86%    $12,555    $15,039    $(2,484)   -16.52% 
Trust and investment services
  2,405   2,330   75   3.22%   7,302   6,964   338   4.85% 
Bankcard services
  456   637   (181)   -28.41%   1,438   2,614   (1,176)   -44.99% 
BOLI income
  1,469   1,797   (328)   -18.25%   5,211   4,482   729   16.27% 
Swap fee income
  1,591   378   1,213   320.90%   4,149   1,135   3,014   265.55% 
Gain on OREO, net
  13   -   13   -   23   129   (106)   -82.17% 
Gain on sale of building, net
  1,680   -   1,680   -   1,680   4,545   (2,865)   -63.04% 
Gain on eminent domain condemnation, net
  -   -   -   -   -   5,685   (5,685)   -100.00% 
Other
  1,569   1,919   (350)   -18.24%   4,587   5,809   (1,222)   -21.04% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total noninterest income
   $13,153    $11,894    $1,259         10.59%    $36,945    $46,402    $(9,457)         -20.38% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Third Quarter of 2020 Compared to the Third Quarter of 2019
The $1.3 million increase in noninterest income was primarily due to a $1.7 million net gain on the sale of one of our bank owned buildings, related to a banking center that was closed in September in the third quarter of 2020.
The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 –
Derivative Financial Instruments
of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The third quarter of 2020 included higher swap fee income of $1.2 million compared to the third quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020, compared to $19.0 million for the third quarter of 2019.
Service charges on deposit accounts decreased by $863,000 from the third quarter of 2019. This decrease was primarily due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At September 30, 2020, CitizensTrust had approximately $2.91 billion in assets under management and administration, including $2.08 billion in assets under management. CitizensTrust generated fees of $2.4 million for the third quarter of 2020, compared to $2.3 million for the third quarter of 2019.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from BOLI declined by $328,000 compared to the third quarter of 2019.
49
Table of Contents
Nine Months of 2020 Compared to the Nine Months of 2019
The $9.5 million decrease in noninterest income for the nine months ended September 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield during the first nine month of 2019. In addition, there was a $2.9 million decrease in net gains on sale of bank owned buildings between the first nine months of 2020 and the first nine months of 2019. Service charges on deposit accounts decreased by $2.5 million from the first nine months of 2019. This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately $1.2 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. Swap fee income increased $3.0 million compared to the third quarter of 2019, due to higher volume of swap transactions. The $729,000 increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first nine months of 2020. The $1.2 million decrease in other income in the first nine months of 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the same period of 2019.
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
   
  Three Months Ended  
           
  Nine Months Ended  
         
   
September 30,
   
Variance
   
September 30,
   
Variance
 
   
2020
   
2019
   
$
   
%
   
2020
   
2019
   
$
   
%
 
               
(Dollars in thousands)
             
Noninterest expense:
                
Salaries and employee benefits
    $31,034     $30,122     $912    3.03%     $90,617     $88,286     $2,331    2.64%  
Occupancy
   4,290    3,976    314    7.90%    12,171    12,771    (600)    -4.70%  
Equipment
   985    903    82    9.08%    2,972    2,959    13    0.44%  
Professional services
   2,019    1,688    331    19.61%    6,643    5,653    990    17.51%  
Computer software expense
   2,837    2,663    174    6.53%    8,407    8,032    375    4.67%  
Marketing and promotion
   728    1,517    (789)    -52.01%    3,538    4,149    (611)    -14.73%  
Amortization of intangible assets
   2,292    2,648    (356)    -13.44%    7,182    8,338    (1,156)    -13.86%  
Telecommunications expense
   643    656    (13)    -1.98%    1,929    2,126    (197)    -9.27%  
Regulatory assessments
   998    147    851    578.91%    1,313    1,805    (492)    -27.26%  
Insurance
   400    430    (30)    -6.98%    1,192    1,368    (176)    -12.87%  
Loan expense
   207    308    (101)    -32.79%    833    1,115    (282)    -25.29%  
OREO expense
   830    -    830    -    1,200    37    1,163    3143.24%  
Directors’ expenses
   358    350    8    2.29%    1,067    1,029    38    3.69%  
Stationery and supplies
   227    259    (32)    -12.36%    894    867    27    3.11%  
Acquisition related expenses
   -    244    (244)    -100.00%    -    6,005    (6,005)    -100.00%  
Other
   1,740    1,624    116    7.14%    4,669    5,127    (458)    -8.93%  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total noninterest expense
    $49,588     $47,535     $2,053    4.32%     $144,627     $149,667     $(5,040)    -3.37%  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Noninterest expense to average assets
   1.44%    1.68%        1.54%    1.77%     
Efficiency ratio (1)
   42.57%    39.60%        41.66%    39.89%     
(1)
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.
Third Quarter of 2020 Compared to the Third Quarter of 2019
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.44% for the third quarter of 2020, compared to 1.68% for the third quarter of 2019. This decline mostly reflects the $2.51 billion growth in average assets that resulted primarily from $2.22 billion in average deposit growth.
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.57% for the third quarter of 2020, compared to 39.60% for the third quarter of 2019.
50
Table of Contents
Noninterest expense of $49.6 million for the third quarter of 2020 was $2.1 million, or 4.32%, higher than the third quarter of 2019. There were no merger related expenses related to the Community Bank (“CB”) acquisition for the third quarter of 2020, compared to $244,000 for the third quarter of 2019. The $912,000 increase in salary expense from the prior year was primarily due to $1.1 million in additional bonus expense for “Thank You Awards” paid to all Bank employees during the third quarter of 2020. The third quarter of 2020 also reflected an $833,000 increase in regulatory assessments resulting from final application of assessment credits provided by the FDIC at the end of the second quarter of 2020 and a $700,000 write-down of one OREO property. These increases were partially offset by a $789,000 decrease in marketing and promotion expense.
Nine Months of 2020 Compared to the Nine Months of 2019
Noninterest expense of $144.6 million for the first nine months of 2020 was $5.0 million lower than the prior year period. The decrease was primarily due to $6.0 million in merger related expenses for the nine months ended September 30, 2019, compared to no merger related expense for the same period of 2020. The year-over-year decrease also included a $1.2 million decrease in amortization of CDI. These decreases were partially offset by a $2.3 million increase in salaries and benefit costs. Salary and benefit expense would have increased by $3.9 million, or approximately 4%, when a $1.6 million increase in net deferred loan costs, primarily related to the origination of PPP loans, is excluded for the nine months ended September 30, 2020. This $3.9 million increase was primarily due to $3.0 million, or 3.93%, in higher salaries, payroll taxes and benefits when compared to the prior year period. As a percentage of average assets, noninterest expense was 1.54% for the nine months ended September 30, 2020, compared to 1.77% for the same period of 2019. For the nine months ended September 30, 2020, the efficiency ratio was 41.66%, compared to 39.89% for the same period of 2019.
Income Taxes

Our significant accounting policies are described in greater detail in our 2020 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2020, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2021

Standard

Description

Adoption Timing

Impact on Financial Statements

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting


Issued March 2020

The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.

1st Quarter 2020 through the
4th Quarter 2022

The Company established a LIBOR Transition Task Force in 2020, which has inventoried our instruments that reflect exposure to LIBOR, created a framework to manage the transition and established a timeline for key decisions and actions, and started the transition from LIBOR in 2021. Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans and our interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company's consolidated financial statements.

ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

The FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.

1st Quarter 2022

The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

Issued August 2020

37

OVERVIEW

For the third quarter of 2021, we reported net earnings of $49.8 million, compared with $51.2 million for the quarter ended June 30, 2021 and $47.5 million for the quarter ended September 30, 2020. Diluted earnings per share were $0.37 for the third quarter, compared to $0.38 for the prior quarter and $0.35 for the same period last year.

The third quarter of 2021 included $4.0 million in recapture of provision for credit losses, primarily due to a modest improvement in our economic forecast, compared to $2.0 million in recapture of provision in the second quarter of 2021. A $25.5 million recapture of provision for credit losses was recorded for the nine months ended September 30, 2021. In comparison, $23.5 million in provision for credit losses was recorded for the nine months ended September 30, 2020 due to the severe economic forecast at that time as a result of the pandemic. During the third quarter of 2021, we experienced credit charge-offs of $11,000 and total recoveries of $33,000, resulting in net recoveries of $22,000. Of the approximately 4,100 SBA PPP loans we originated in 2020, $52.4 million remained outstanding at September 30, 2021, after loan forgiveness and customer repayment. As of September 30 2021, the Company originated approximately 1,900 PPP loans in round two, with a loan balance, at amortized cost, of $278.6 million at September 30, 2021. Interest and fee income from PPP loans was $7.9 million for the third quarter of 2021, compared to $8.1 million for the second quarter of 2021.

At September 30, 2021, total assets of $16.20 billion increased $1.78 billion, or 12.36%, from total assets of $14.42 billion at December 31, 2020. Interest-earning assets of $14.93 billion at September 30, 2021 increased $1.71 billion, or 12.92%, when compared with $13.22 billion at December 31, 2020. The increase in interest-earning assets was primarily due to a $1.66 billion increase in investment securities and a $565.9 million increase in interest-earning balances due from the Federal Reserve, partially offset by a $499.3 million decrease in total loans which included a decrease in PPP loans of $552 million for the nine months ended September 30, 2021.

Total investment securities were $4.64 billion at September 30, 2021, an increase of $1.66 billion, or 55.70%, from $2.98 billion at December 31, 2020. In the third quarter of 2021, we purchased $892.5 million of investment securities with an average investment yield of approximately 1.70%, compared to $317.1 million of securities with an average investment yield of approximately 1.69% in the second quarter of 2021 and $1.23 billion of securities purchased in the first quarter of 2021, with an average expected yield of approximately 1.57%. At September 30, 2021, investment securities held-to-maturity (“HTM”) totaled $1.71 billion. At September 30, 2021, investment securities available-for-sale (“AFS") totaled $2.93 billion, inclusive of a net pre-tax unrealized gain of $8.8 million, which decreased $46.0 million from December 31, 2020. HTM securities increased by $1.13 billion, or 195.69%, and AFS securities increased $526.1 million, or 21.93%, from December 31, 2020. In the third quarter of 2021, we purchased $705.1 million of HTM securities. We purchased $545.7 million of HTM securities in the first quarter of 2021. Our tax equivalent yield on investments was 1.54% for the quarter ended September 30, 2021, compared to 1.55% for the quarter ended June 30, 2021 and 1.99% for the third quarter of 2020.

Total loans and leases, at amortized cost, of $7.85 billion at September 30, 2021 decreased by $499.3 million, or 5.98%, from December 31, 2020. The $499.3 million decrease in total loans included decreases of $552.0 million in PPP loans, $81.6 million in dairy & livestock and agribusiness loans due to seasonal pay downs, $42.1 million in commercial and industrial loans, $39.2 million in SFR mortgage loans, $7.7 million in construction loans, and $13.5 million in consumer and other loans, partially offset by an increase of $233.2 million in commercial real estate loans and $3.6 million in SBA loans. After adjusting for seasonality and PPP loans, our loans grew by $134.3 million or at an annualized rate of approximately 3% from the end of the fourth quarter of 2020. Our yield on loans was 4.43% for the quarter ended September 30, 2021, compared to 4.46% for the second quarter of 2021 and 4.47% for the third quarter of 2020. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 29 basis points for the nine months ended September 30, 2021 when compared to the same period of 2020.

Noninterest-bearing deposits were $8.31 billion at September 30, 2021, an increase of $855.3 million, or 11.47%, when compared to $7.46 billion at December 31, 2020. At September 30, 2021, noninterest-bearing deposits were 64.27% of total deposits, compared to 63.52% at December 31, 2020. Our average cost of total deposits was 0.03% for the quarter ended September 30, 2021, compared to 0.05% for the quarter ended June 30, 2021 and 0.11% for the third quarter of 2020.

Customer repurchase agreements totaled $659.6 million at September 30, 2021, compared to $439.4 million at December 31, 2020. Our average cost of total deposits including customer repurchase agreements was 0.04% for the quarter ended September 30, 2021, compared to 0.05% for the quarter ended June 30, 2021 and 0.11% for the third quarter of 2020.

38

We had no borrowings at September 30, 2021, compared to $5.0 million in short-term borrowings with 0% cost at December 31, 2020, and $10.0 million in short-term borrowings with 0% cost at September 30, 2020. We redeemed our $25.8 million junior subordinated debentures on June 15, 2021. The debentures, bearing interest at three-month LIBOR plus 1.38%, had an original maturity of 2036. These debentures had a borrowing cost of 1.57% for the second quarter of 2021 and 1.69% for the third quarter of 2020.Our average cost of funds was 0.04% for the quarter ended September 30, 2021, 0.05% for the quarter ended June 30, 2021, and 0.11% for the third quarter of 2020.

The allowance for credit losses totaled $65.4 million at September 30, 2021, compared to $93.7 million at December 31, 2020. The allowance for credit losses for the first nine months of 2021 was decreased by $25.5 million, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus, and by $2.8 million in year-to-date net charge-offs. At September 30, 2021, ACL as a percentage of total loans and leases outstanding was 0.83%, or 0.87% when PPP loans are excluded. This compares to 1.12% at December 31, 2020, or 1.25% when PPP loans are excluded. As of September 30, 2021, total discounts on acquired loans were $20.7 million.

The Company’s total equity was $2.06 billion at September 30, 2021. This represented an increase of $55.9 million, or 2.79%, from total equity of $2.01 billion at December 31, 2020. The increase was primarily due to net earnings of $164.8 million, partially offset by a $32.3 million decrease in other comprehensive income from the tax effected impact of the decrease in market value of available-for-sale securities and $73.4 million in cash dividends. Our tangible common equity ratio was 8.9% at September 30, 2021. During the third quarter, we repurchased 390,336 shares of common stock for $7.4 million, or an average repurchase price of $18.97. Our tangible book value per share at September 30, 2021 was $10.13.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of September 30, 2021, the Company’s Tier 1 leverage capital ratio was 9.2%, common equity Tier 1 ratio was 14.9%, Tier 1 risk-based capital ratio was 14.9%, and total risk-based capital ratio was 15.7%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our Analysis of Financial Condition – Capital Resources.

Acquisition Related

As previously announced on July 27, 2021, we entered into a definitive agreement to merge Suncrest Bank with and into Citizens Business Bank. Suncrest Bank, headquartered in Visalia, California, had approximately $1.4 billion in total assets, $821 million in gross loans and $1.2 billion in total deposits as of September 30, 2021. Consummation of the merger is subject to customary closing conditions, including, among others, Suncrest shareholders and regulatory approval. Suncrest Bank shareholders voted in favor of the merger at a special shareholders meeting held on October 27, 2021. The merger is pending regulatory approval andis anticipated to close in the fourth quarter of 2021 or first quarter of 2022.

39

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

 

Three Months Ended

 

 

Variance

 

 

September 30,

 

 

June 30,

 

 

 

 

 

 

 

 

2021

 

 

2021

 

 

$

 

 

%

 

 

(Dollars in thousands, except per share amounts)

 

Net interest income

$

103,299

 

 

$

105,388

 

 

$

(2,089

)

 

 

-1.98

%

Recapture of (provision for) credit losses

 

4,000

 

 

 

2,000

 

 

 

2,000

 

 

 

100.00

%

Noninterest income

 

10,483

 

 

 

10,836

 

 

 

(353

)

 

 

-3.26

%

Noninterest expense

 

(48,099

)

 

 

(46,545

)

 

 

(1,554

)

 

 

-3.34

%

Income taxes

 

(19,930

)

 

 

(20,500

)

 

 

570

 

 

 

2.78

%

     Net earnings

$

49,753

 

 

$

51,179

 

 

$

(1,426

)

 

 

-2.79

%

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

     Basic

$

0.37

 

 

$

0.38

 

 

$

(0.01

)

 

 

 

     Diluted

$

0.37

 

 

$

0.38

 

 

$

(0.01

)

 

 

 

Return on average assets

 

1.26

%

 

 

1.35

%

 

 

-0.09

%

 

 

 

Return on average shareholders' equity

 

9.49

%

 

 

10.02

%

 

 

-0.53

%

 

 

 

Efficiency ratio

 

42.27

%

 

 

40.05

%

 

 

2.22

%

 

 

 

Noninterest expense to average assets

 

1.22

%

 

 

1.23

%

 

 

-0.01

%

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

Variance

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

(Dollars in thousands, except per share amounts)

 

Net interest income

$

103,299

 

 

$

103,325

 

 

$

(26

)

 

 

-0.03

%

Recapture of (provision for) credit losses

 

4,000

 

 

 

-

 

 

 

4,000

 

 

-

 

Noninterest income

 

10,483

 

 

 

13,153

 

 

 

(2,670

)

 

 

-20.30

%

Noninterest expense

 

(48,099

)

 

 

(49,588

)

 

 

1,489

 

 

 

3.00

%

Income taxes

 

(19,930

)

 

 

(19,398

)

 

 

(532

)

 

 

-2.74

%

     Net earnings

$

49,753

 

 

$

47,492

 

 

$

2,261

 

 

 

4.76

%

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

     Basic

$

0.37

 

 

$

0.35

 

 

$

0.02

 

 

 

 

     Diluted

$

0.37

 

 

$

0.35

 

 

$

0.02

 

 

 

 

Return on average assets

 

1.26

%

 

 

1.38

%

 

 

-0.12

%

 

 

 

Return on average shareholders' equity

 

9.49

%

 

 

9.51

%

 

 

-0.02

%

 

 

 

Efficiency ratio

 

42.27

%

 

 

42.57

%

 

 

-0.30

%

 

 

 

Noninterest expense to average assets

 

1.22

%

 

 

1.44

%

 

 

-0.22

%

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

Variance

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

(Dollars in thousands, except per share amounts)

 

Net interest income

$

312,155

 

 

$

310,200

 

 

$

1,955

 

 

 

0.63

%

Recapture of (provision for) credit losses

 

25,500

 

 

 

(23,500

)

 

 

49,000

 

 

 

208.51

%

Noninterest income

 

35,000

 

 

 

36,945

 

 

 

(1,945

)

 

 

-5.26

%

Noninterest expense

 

(141,807

)

 

 

(144,627

)

 

 

2,820

 

 

 

1.95

%

Income taxes

 

(66,023

)

 

 

(51,915

)

 

 

(14,108

)

 

 

-27.18

%

     Net earnings

$

164,825

 

 

$

127,103

 

 

$

37,722

 

 

 

29.68

%

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

     Basic

$

1.21

 

 

$

0.93

 

 

$

0.28

 

 

 

 

     Diluted

$

1.21

 

 

$

0.93

 

 

$

0.28

 

 

 

 

Return on average assets

 

1.46

%

 

 

1.35

%

 

 

0.11

%

 

 

 

Return on average shareholders' equity

 

10.73

%

 

 

8.55

%

 

 

2.18

%

 

 

 

Efficiency ratio

 

40.85

%

 

 

41.66

%

 

 

-0.81

%

 

 

 

Noninterest expense to average assets

 

1.25

%

 

 

1.54

%

 

 

-0.29

%

 

 

 

40

Return on Average Tangible Common Equity Reconciliation (Non-GAAP)

The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company's performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company's average stockholders' equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Net Income

 

$

49,753

 

 

$

51,179

 

 

$

47,492

 

 

$

164,825

 

 

$

127,103

 

Add: Amortization of intangible assets

 

 

2,014

 

 

 

2,167

 

 

 

2,292

 

 

 

6,348

 

 

 

7,182

 

Less: Tax effect of amortization of intangible assets (1)

 

 

(595

)

 

 

(641

)

 

 

(678

)

 

 

(1,877

)

 

 

(2,123

)

Tangible net income

 

$

51,172

 

 

$

52,705

 

 

$

49,106

 

 

$

169,296

 

 

$

132,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average stockholders' equity

 

$

2,080,238

 

 

$

2,048,956

 

 

$

1,985,842

 

 

$

2,054,132

 

 

$

1,986,300

 

Less: Average goodwill

 

 

(663,707

)

 

 

(663,707

)

 

 

(663,707

)

 

 

(663,707

)

 

 

(663,707

)

Less: Average intangible assets

 

 

(28,240

)

 

 

(30,348

)

 

 

(37,133

)

 

 

(30,377

)

 

 

(39,376

)

Average tangible common equity

 

$

1,388,291

 

 

$

1,354,901

 

 

$

1,285,002

 

 

$

1,360,048

 

 

$

1,283,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity, annualized

 

 

9.49

%

 

 

10.02

%

 

 

9.51

%

 

 

10.73

%

 

 

8.55

%

Return on average tangible common equity, annualized

 

 

14.62

%

 

 

15.60

%

 

 

15.20

%

 

 

16.64

%

 

 

13.76

%

(1)
Tax effected at respective statutory rates.

Net Interest Income

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended September 30, 2021 and 2020. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein.

41

The tables below present the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.

 

Three Months Ended September 30,

 

 

2021

 

 

2020

 

 

Average

 

 

 

 

 

Yield/

 

 

Average

 

 

 

 

 

Yield/

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

 

(Dollars in thousands)

 

INTEREST-EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

$

2,912,382

 

 

$

9,630

 

 

 

1.34

%

 

$

1,970,636

 

 

$

8,244

 

 

 

1.82

%

Tax-advantaged

 

29,873

 

 

 

183

 

 

 

2.95

%

 

 

36,193

 

 

 

203

 

 

 

3.26

%

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

970,696

 

 

 

4,099

 

 

 

1.90

%

 

 

429,897

 

 

 

2,265

 

 

 

2.11

%

Tax-advantaged

 

199,196

 

 

 

1,089

 

 

 

2.64

%

 

 

164,854

 

 

 

1,110

 

 

 

3.26

%

Investment in FHLB stock

 

17,688

 

 

 

258

 

 

 

5.79

%

 

 

17,688

 

 

 

215

 

 

 

4.84

%

Interest-earning deposits with other institutions

 

2,356,121

 

 

 

898

 

 

 

0.15

%

 

 

1,494,149

 

 

 

389

 

 

 

0.10

%

Loans (2)

 

7,916,443

 

 

 

88,390

 

 

 

4.43

%

 

 

8,382,257

 

 

 

94,200

 

 

 

4.47

%

Total interest-earning assets

 

14,402,399

 

 

 

104,547

 

 

 

2.92

%

 

 

12,495,674

 

 

 

106,626

 

 

 

3.45

%

Total noninterest-earning assets

 

1,270,862

 

 

 

 

 

 

 

 

 

1,231,502

 

 

 

 

 

 

 

Total assets

$

15,673,261

 

 

 

 

 

 

 

 

$

13,727,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits (3)

$

4,349,441

 

 

$

967

 

 

 

0.09

%

 

$

3,735,204

 

 

$

2,010

 

 

 

0.21

%

Time deposits

 

355,535

 

 

 

146

 

 

 

0.16

%

 

 

449,484

 

 

 

948

 

 

 

0.84

%

Total interest-bearing deposits

 

4,704,976

 

 

 

1,113

 

 

 

0.09

%

 

 

4,184,688

 

 

 

2,958

 

 

 

0.28

%

FHLB advances, other borrowings, and customer
   repurchase agreements

 

636,397

 

 

 

135

 

 

 

0.08

%

 

 

539,833

 

 

 

343

 

 

 

0.25

%

Interest-bearing liabilities

 

5,341,373

 

 

 

1,248

 

 

 

0.09

%

 

 

4,724,521

 

 

 

3,301

 

 

 

0.28

%

Noninterest-bearing deposits

 

7,991,462

 

 

 

 

 

 

 

 

 

6,731,711

 

 

 

 

 

 

 

Other liabilities

 

260,188

 

 

 

 

 

 

 

 

 

285,102

 

 

 

 

 

 

 

Stockholders' equity

 

2,080,238

 

 

 

 

 

 

 

 

 

1,985,842

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

15,673,261

 

 

 

 

 

 

 

 

$

13,727,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

103,299

 

 

 

 

 

 

 

 

$

103,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Net interest spread - tax equivalent

 

 

 

 

 

 

 

2.83

%

 

 

 

 

 

 

 

 

3.17

%

        Net interest margin

 

 

 

 

 

 

 

2.88

%

 

 

 

 

 

 

 

 

3.33

%

        Net interest margin - tax equivalent

 

 

 

 

 

 

 

2.89

%

 

 

 

 

 

 

 

 

3.34

%

(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 2021 and 2020. The non TE rates for tax-advantaged AFS investment securities were 2.45% and 2.24% for the three months ended September 30, 2021 and 2020 respectively. The non TE rates for total AFS investment securities were 1.52% and 1.93% for the three months ended September 30, 2021 and 2020, respectively.
(2)
Includes loan fees of $7.5 million and $7.4 million for the three months ended September 30, 2021 and 2020, respectively. Prepayment penalty fees of $2.0 million and $1.8 million are included in interest income for the three months ended September 30, 2021 and 2020, respectively.
(3)
Includes interest-bearing demand and money market accounts.

42

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

Average

 

 

 

 

 

Yield/

 

 

Average

 

 

 

 

 

Yield/

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

 

(Dollars in thousands)

 

INTEREST-EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

$

2,757,685

 

 

$

27,824

 

 

 

1.38

%

 

$

1,737,723

 

 

$

26,313

 

 

 

2.08

%

Tax-advantaged

 

29,932

 

 

 

558

 

 

 

2.98

%

 

 

36,897

 

 

 

632

 

 

 

3.30

%

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

804,869

 

 

 

10,917

 

 

 

1.90

%

 

 

449,230

 

 

 

7,410

 

 

 

2.20

%

Tax-advantaged

 

200,744

 

 

 

3,341

 

 

 

2.68

%

 

 

177,364

 

 

 

3,623

 

 

 

3.29

%

Investment in FHLB stock

 

17,688

 

 

 

758

 

 

 

5.73

%

 

 

17,688

 

 

 

761

 

 

 

5.75

%

Interest-earning deposits with other institutions

 

1,922,234

 

 

 

1,790

 

 

 

0.12

%

 

 

947,211

 

 

 

1,285

 

 

 

0.18

%

Loans (2)

 

8,144,105

 

 

 

271,911

 

 

 

4.46

%

 

 

7,972,208

 

 

 

281,669

 

 

 

4.72

%

Total interest-earning assets

 

13,877,257

 

 

 

317,099

 

 

 

3.09

%

 

 

11,338,321

 

 

 

321,693

 

 

 

3.82

%

Total noninterest-earning assets

 

1,250,370

 

 

 

 

 

 

 

 

 

1,237,241

 

 

 

 

 

 

 

Total assets

$

15,127,627

 

 

 

 

 

 

 

 

$

12,575,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits (3)

$

4,203,684

 

 

$

3,263

 

 

 

0.10

%

 

$

3,396,259

 

 

$

7,131

 

 

 

0.28

%

Time deposits

 

388,095

 

 

 

1,087

 

 

 

0.37

%

 

 

448,615

 

 

 

2,946

 

 

 

0.88

%

Total interest-bearing deposits

 

4,591,779

 

 

 

4,350

 

 

 

0.13

%

 

 

3,844,874

 

 

 

10,077

 

 

 

0.35

%

FHLB advances, other borrowings, and customer
   repurchase agreements

 

611,684

 

 

 

594

 

 

 

0.13

%

 

 

505,710

 

 

 

1,416

 

 

 

0.37

%

Interest-bearing liabilities

 

5,203,463

 

 

 

4,944

 

 

 

0.13

%

 

 

4,350,584

 

 

 

11,493

 

 

 

0.35

%

Noninterest-bearing deposits

 

7,646,283

 

 

 

 

 

 

 

 

 

6,063,469

 

 

 

 

 

 

 

Other liabilities

 

223,749

 

 

 

 

 

 

 

 

 

175,209

 

 

 

 

 

 

 

Stockholders' equity

 

2,054,132

 

 

 

 

 

 

 

 

 

1,986,300

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

15,127,627

 

 

 

 

 

 

 

 

$

12,575,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

312,155

 

 

 

 

 

 

 

 

$

310,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Net interest spread - tax equivalent

 

 

 

 

 

 

 

2.96

%

 

 

 

 

 

 

 

 

3.47

%

        Net interest margin

 

 

 

 

 

 

 

3.03

%

 

 

 

 

 

 

 

 

3.67

%

        Net interest margin - tax equivalent

 

 

 

 

 

 

 

3.04

%

 

 

 

 

 

 

 

 

3.68

%

(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 2021 and 2020. The non TE rates for tax-advantaged AFS investment securities were 2.49% and 2.28% for the nine months ended September 30, 2021 and 2020 respectively. The non TE rates for total AFS investment securities were 1.55% and 2.16% for the nine months ended September 30, 2021 and 2020, respectively.
(2)
Includes loan fees of $23.2 million and $15.3 million for nine months ended September 30, 2021 and 2020, respectively. Prepayment penalty fees of $7.1 million and $5.4 million are included in interest income for the nine months ended September 30, 2021 and 2020, respectively.
(3)
Includes interest-bearing demand and money market accounts.

The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average non TE interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in non TE interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.

43

Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

 

Comparison of Three Months Ended September 30,

 

 

2021 Compared to 2020

 

 

Increase (Decrease) Due to

 

 

 

 

 

 

 

 

Rate/

 

 

 

 

 

Volume

 

 

Rate

 

 

Volume

 

 

Total

 

 

(Dollars in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

$

4,821

 

 

$

(2,173

)

 

$

(1,262

)

 

$

1,386

 

Tax-advantaged investment securities

 

(36

)

 

 

19

 

 

 

(3

)

 

 

(20

)

Held-to-maturity securities:

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Taxable investment securities

 

2,295

 

 

 

(229

)

 

 

(232

)

 

 

1,834

 

Tax-advantaged investment securities

 

233

 

 

 

(210

)

 

 

(44

)

 

 

(21

)

Investment in FHLB stock

 

-

 

 

 

43

 

 

 

-

 

 

 

43

 

Interest-earning deposits with other institutions

 

226

 

 

 

180

 

 

 

103

 

 

 

509

 

Loans

 

(4,838

)

 

 

(796

)

 

 

(176

)

 

 

(5,810

)

Total interest income

 

2,701

 

 

 

(3,166

)

 

 

(1,614

)

 

 

(2,079

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

332

 

 

 

(1,181

)

 

 

(194

)

 

 

(1,043

)

Time deposits

 

(100

)

 

 

(384

)

 

 

(318

)

 

 

(802

)

FHLB advances, other borrowings, and
   customer repurchase agreements

 

61

 

 

 

(228

)

 

 

(41

)

 

 

(208

)

Total interest expense

 

293

 

 

 

(1,793

)

 

 

(553

)

 

 

(2,053

)

Net interest income

$

2,408

 

 

$

(1,373

)

 

$

(1,061

)

 

$

(26

)

 

Comparison of Nine Months Ended September 30,

 

 

2021 Compared to 2020

 

 

Increase (Decrease) Due to

 

 

 

 

 

 

 

 

Rate/

 

 

 

 

 

Volume

 

 

Rate

 

 

Volume

 

 

Total

 

 

(Dollars in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

$

15,575

 

 

$

(8,834

)

 

$

(5,230

)

 

$

1,511

 

Tax-advantaged investment securities

 

(119

)

 

 

55

 

 

 

(10

)

 

 

(74

)

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

5,100

 

 

 

(889

)

 

 

(704

)

 

 

3,507

 

Tax-advantaged investment securities

 

475

 

 

 

(669

)

 

 

(88

)

 

 

(282

)

Investment in FHLB stock

 

-

 

 

 

(3

)

 

 

-

 

 

 

(3

)

Interest-earning deposits with other institutions

 

1,319

 

 

 

(401

)

 

 

(413

)

 

 

505

 

Loans

 

6,231

 

 

 

(15,652

)

 

 

(337

)

 

 

(9,758

)

Total interest income

 

28,581

 

 

 

(26,393

)

 

 

(6,782

)

 

 

(4,594

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

1,697

 

 

 

(4,496

)

 

 

(1,069

)

 

 

(3,868

)

Time deposits

 

(398

)

 

 

(1,689

)

 

 

228

 

 

 

(1,859

)

FHLB advances, other borrowings, and
   customer repurchase agreements

 

297

 

 

 

(925

)

 

 

(194

)

 

 

(822

)

Total interest expense

 

1,596

 

 

 

(7,110

)

 

 

(1,035

)

 

 

(6,549

)

Net interest income

$

26,985

 

 

$

(19,283

)

 

$

(5,747

)

 

$

1,955

 

44

Third Quarter of 2021 Compared to the Third Quarter of 2020

Net interest income, before recapture of provision for credit losses, of $103.3 million in the third quarter of 2021 was essentially the same as the third quarter of 2020, as the growth in interest-earning assets was offset by a decline in our net interest margin. Interest-earning assets increased on average by $1.91 billion, or 15.26%, from $12.50 billion for the third quarter of 2020 to $14.40 billion for the third quarter of 2021. Our net interest margin (TE) was 2.89% for the third quarter of 2021, compared to 3.34% for the third quarter of 2020.

Interest income for the third quarter of 2021 was $104.5 million, which represented a $2.1 million, or 1.95%, decrease when compared to the same period of 2020. Average interest-earning assets increased to $14.40 billion and the average interest-earning asset yield was 2.92% for the third quarter of 2021, compared to 3.45% for the third quarter of 2020. The 53 basis point decrease in the average interest-earning asset yield compared to the third quarter of 2020, was primarily due to a combination of a 41 basis point decrease in the non-tax equivalent investment yields, a 4 basis point decrease in loan yields, and a change in mix of average earning assets, with loan balances declining to 54.97% of earning assets on average for the third quarter of 2021, compared to 67.08% for the third quarter of 2020. Average balances at the Federal Reserve grew to 16.17% of earning assets for the third quarter of 2021, compared to 11.62% for the third quarter of 2020. The increase in balances at the Federal Reserve was impacted by $1.78 billion in average deposit growth compared to the third quarter of 2020. The net interest margin for the third quarter of 2021 would have been approximately 19 basis points higher without the $876.6 million year-over-year increase in average deposits at the Federal Reserve, earning 15 basis points.

Interest income and fees on loans for the third quarter of 2021 of $88.4 million decreased $5.8 million, or 6.17%, when compared to the third quarter of 2020. Average loans decreased $465.8 million for the third quarter of 2021 when compared with the same period of 2020. The decrease in average loans included a $336.7 milliondecrease in average PPP loans. PPP loans generated approximately $6.6 million in amortized loan fee income and $1.3 million in loan interest during the third quarter of 2021. This compares to $9.5 million in loan fee and interest income in the third quarter of 2020. Discount accretion on acquired loans decreased by $1.6 million compared to the third quarter of 2020. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding the impact from PPP loans, discount accretion and nonaccrual interest income, declined by 23 basis points from the third quarter of 2020.

Interest income from investment securities was $15.0 million for the third quarter of 2021, a $3.2 million, or 26.89%, increase from $11.8 million for the third quarter of 2020. This increase was primarily the result of a $1.51 billion increase in average investment securities, when compared to the same period of 2020, as a result of purchases of investment securities funded by the growth in the Bank's deposits. Partially offsetting the increase in interest revenue from higher levels of investment securities was a 41 basis point decline in the non-tax equivalent yield on investments. The significant decline in interest rates over the past four quarters decreased yields on investment securities due to higher levels of premium amortization, as well as lower yields on investments purchased during the past four quarters.

Interest expense of $1.2 million for the third quarter of 2021, decreased $2.1 million, or 62.19%, compared to the third quarter of 2020. The average rate paid on interest-bearing liabilities decreased by 19 basis points, to 0.09% for the third quarter of 2021 from 0.28% for the third quarter of 2020. Average interest-bearing liabilities were $616.9 million higher for the third quarter of 2021 when compared to the third quarter of 2020. On average, noninterest-bearing deposits were 62.94% of our total deposits for the third quarter of 2021, compared to 61.67% for the third quarter of 2020. In comparison to the third quarter of 2020, our overall cost of funds decreased by 7 basis points, partially due to growth in average noninterest-bearing deposits of $1.26 billion, compared to the increase in average interest-bearing deposits of $652.6 million. In addition, the cost of interest-bearing deposits decreased by 19 basis points for the third quarter of 2021 compared to the third quarter of 2020.

45

Nine Months of 2021 Compared to Nine Months of 2020

Net interest income, before recapture of provision for credit losses, was $312.2 million for the nine months ended September 30, 2021, an increase of $2.0 million, or 0.63%, compared to $310.2 million for the same period of 2020. Interest-earning assets increased on average by $2.54 billion, or 22.39%, from $11.34 billion for the nine months ended September 30, 2020 to $13.88 billion for the current year. Our net interest margin (TE) was 3.04% for the first nine months of 2021, compared to 3.68% for the same period of 2020.

Interest income for the nine months ended September 30, 2021 was $317.1 million, which represented a $4.6 million, or 1.43%, decrease when compared to the same period of 2020. Compared to the first nine months of 2020, average interest-earning assets increased by $2.54 billion,and the yield on interest-earning assets decreased by 73 basis points. The 73 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 26 basis point decrease in loan yields from 4.72% for first nine months of 2020 to 4.46% for the same period of 2021, and a 65 basis point decline in tax-equivalent investment yields, as well as a change in the mix of earning assets resulting from a $973.3 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 70.31% for the first nine months of 2020 to 58.69% for the first nine months of 2021. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 8.09% in the prior year to 13.62% for the first nine months of 2021.

Interest income and fees on loans for the first nine months of 2021 of $271.9 million decreased $9.8 million, or 3.46%, when compared to the same period of 2020. Average loans increased $171.9 million for the first nine months of 2021 when compared with the same period of 2020, primarily due to a $147.5 million increase in average PPP loans. The PPP loans generated approximately $26.4 million in loan fee and interest income during the first nine months of 2021, compared to $18.0 million for the same period in 2020. The first nine months of 2021 reflected a $2.9 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the first nine months of 2020. Loan yields decreased by 26 basis points from the prior nine month period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 29 basis points lower than the first nine months of 2020. The decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate and lower yields on new loans in the low rate environment experienced for the past 12 months.

Interest income from investment securities was $42.6 million for the nine months ended September 30, 2021, a $4.6 million increase from $38.0 million for the first nine months of 2020. This increase was the net result of a $1.39 billion increase in average investment securities, partially offset by a 61 basis point decline in the non tax-equivalent yield on securities, compared to the first nine months of 2020.

Interest expense of $4.9 million for the nine months ended September 30, 2021, decreased by $6.5 million from the same period of 2020. The average rate paid on interest-bearing liabilities decreased by 22 basis points, to 0.13% for the first nine months of 2021, from 0.35% for the same period of 2020. The rate on interest-bearing deposits for the first nine months of 2021 decreased by 22 basis points from the same period in 2020. Average interest-bearing liabilities were $853.0 million higher for the first nine months of 2021 when compared with the same period of 2020. Average interest-bearing deposits grew by $746.9 million when compared to the first nine months of 2020. Average noninterest-bearing deposits represented 62.48% of our total deposits for the nine months ended September 30, 2021, compared to 61.20% for the same period of 2020. Total cost of funds for the first nine months of 2021 was 0.05%, compared with 0.15% for the same period of 2020.

46

Provision for (Recapture of) Credit Losses

The provision for (recapture of) credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio as of the balance sheet date.

The allowance for credit losses on loans totaled $65.4 million at September 30, 2021, compared to $93.7 million at December 31, 2020 and $93.9 million as of September 30, 2020. For the nine months ended September 30, 2021, we recaptured $25.5 million in provision for credit losses, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus. For the nine months ended September 30, 2021, we experienced credit charge-offs of $3.0 million and total recoveries of $168,000, resulting in net charge-offs of $2.8 million. This compares to a $23.5 million credit loss provision and net charge-offs of $131,000 for the same period of 2020. The provision for credit losses during the first nine months of 2020 was primarily the result of the forecast of a significant decline in economic activity due to the impact of the COVID-19 pandemic. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2021, was 0.83%. This compares to 1.12% and 1.12%, as of December 31, 2020 and September 30, 2020, respectively. When PPP loans are excluded, allowance for credit losses as a percentage of total adjusted loans and leases outstanding was 0.87% at September 30, 2021, compared to 1.25% at December 31, 2020 and 1.28% at September 30, 2020. As of September 30, 2021, remaining discounts on acquired loans were $20.7 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.

No assurance can be given that economic conditions which affect the Company’s service areas or other circumstances will or will not be reflected in future changes in the level of our allowance for credit losses and the resulting provision or recapture of provision for credit losses. The process to estimate the allowance for credit losses requires considerable judgment and our economic forecasts may continue to vary due to the uncertainty of the future impact of the pandemic on our business and customers. See “Allowance for Credit Losses” under Analysis of Financial Condition herein.

Noninterest Income

Noninterest income includes income derived from financial services offered to our customers, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.

The following table sets forth the various components of noninterest income for the periods presented.

 

Three Months Ended

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

Variance

 

 

September 30,

 

 

Variance

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

(Dollars in thousands)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit
 accounts

$

4,513

 

 

$

3,970

 

 

$

543

 

 

 

13.68

%

 

$

12,667

 

 

$

12,555

 

 

$

112

 

 

 

0.89

%

Trust and investment services

 

2,681

 

 

 

2,405

 

 

 

276

 

 

 

11.48

%

 

 

8,459

 

 

 

7,302

 

 

 

1,157

 

 

 

15.84

%

Bankcard services

 

479

 

 

 

456

 

 

 

23

 

 

 

5.04

%

 

 

1,362

 

 

 

1,438

 

 

 

(76

)

 

 

-5.29

%

BOLI income

 

1,229

 

 

 

1,469

 

 

 

(240

)

 

 

-16.34

%

 

 

7,093

 

 

 

5,211

 

 

 

1,882

 

 

 

36.12

%

Swap fee income

 

167

 

 

 

1,591

 

 

 

(1,424

)

 

 

-89.50

%

 

 

382

 

 

 

4,149

 

 

 

(3,767

)

 

 

-90.79

%

Gain on OREO, net

 

-

 

 

 

13

 

 

 

(13

)

 

 

-100.00

%

 

 

477

 

 

 

23

 

 

 

454

 

 

 

1973.91

%

Gain on sale of building, net

 

-

 

 

 

1,680

 

 

 

(1,680

)

 

 

-100.00

%

 

 

189

 

 

 

1,680

 

 

 

(1,491

)

 

 

-88.75

%

Other

 

1,414

 

 

 

1,569

 

 

 

(155

)

 

 

-9.88

%

 

 

4,371

 

 

 

4,587

 

 

 

(216

)

 

 

-4.71

%

Total noninterest income

$

10,483

 

 

$

13,153

 

 

$

(2,670

)

 

 

-20.30

%

 

$

35,000

 

 

$

36,945

 

 

$

(1,945

)

 

 

-5.26

%

Third Quarter of 2021 Compared to the Third Quarter of 2020

The $2.7 million decrease in noninterest income was primarily due to a $1.7 million gain on sale of a bank owned building during the third quarter of 2020 and a $1.4 million decrease in swap fee income. Partially offsetting those decreases was a $543,000 increase in service charges on deposit accounts.

The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 – Derivative Financial Instruments of the notes to the unaudited condensed

47

consolidated financial statements of this report for additional information). Fees from interest rate swaps decreased $1.4 million compared to the third quarter of 2020, due to lower volume of swap transactions. We executed swap agreements related to new loan originations for the third quarter of 2021 with a notional amount of $9.8 million, compared to executed swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020.

CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At September 30, 2021, CitizensTrust had approximately $3.28 billion in assets under management and administration, including $2.39 billion in assets under management. CitizensTrust generated fees of $2.7 million for the third quarter of 2021, compared to $2.4 million for the third quarter of 2020, due to the growth in assets under management and higher investment services fees.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. There were no death benefits from our BOLI policies for the third quarters of 2021 and 2020. Income from BOLI declined by $240,000 compared to the third quarter of 2020.

Nine Months of 2021 Compared to Nine Months of 2020

The $1.9 million decrease in noninterest income was primarily due to a $3.8 million decrease in swap fee income from the first nine months of 2020 due to lower volume of swap transactions. The third quarter of 2020 also included a $1.7 million net gain on the sale of one of our bank owned buildings. Partially offsetting the overall decrease in noninterest income was a $1.9 million increase in BOLI income primarily due to $2.3 million in higher death benefits that result from life insurance proceeds exceeding the asset value of certain BOLI policies. Trust and investment services income increased $1.2 million, or 15.84%, compared with the first nine months of 2020. Growth in assets under management and higher investment services fees equally contributed to this growth in fee income.

48

Noninterest Expense

The following table summarizes the various components of noninterest expense for the periods presented.

 

Three Months Ended

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

Variance

 

 

September 30,

 

 

Variance

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

(Dollars in thousands)

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

29,741

 

 

$

31,034

 

 

$

(1,293

)

 

 

-4.17

%

 

$

88,283

 

 

$

90,617

 

 

$

(2,334

)

 

 

-2.58

%

Occupancy

 

4,292

 

 

 

4,290

 

 

 

2

 

 

 

0.05

%

 

 

12,655

 

 

 

12,171

 

 

 

484

 

 

 

3.98

%

Equipment

 

830

 

 

 

985

 

 

 

(155

)

 

 

-15.74

%

 

 

2,279

 

 

 

2,972

 

 

 

(693

)

 

 

-23.32

%

Professional services

 

1,626

 

 

 

2,019

 

 

 

(393

)

 

 

-19.47

%

 

 

6,042

 

 

 

6,643

 

 

 

(601

)

 

 

-9.05

%

Computer software expense

 

3,020

 

 

 

2,837

 

 

 

183

 

 

 

6.45

%

 

 

8,521

 

 

 

8,407

 

 

 

114

 

 

 

1.36

%

Marketing and promotion

 

857

 

 

 

728

 

 

 

129

 

 

 

17.72

%

 

 

3,381

 

 

 

3,538

 

 

 

(157

)

 

 

-4.44

%

Amortization of intangible
   assets

 

2,014

 

 

 

2,292

 

 

 

(278

)

 

 

-12.13

%

 

 

6,348

 

 

 

7,182

 

 

 

(834

)

 

 

-11.61

%

Telecommunications expense

 

514

 

 

 

643

 

 

 

(129

)

 

 

-20.06

%

 

 

1,592

 

 

 

1,929

 

 

 

(337

)

 

 

-17.47

%

Regulatory assessments

 

1,226

 

 

 

998

 

 

 

228

 

 

 

22.85

%

 

 

3,424

 

 

 

1,313

 

 

 

2,111

 

 

 

160.78

%

Insurance

 

452

 

 

 

400

 

 

 

52

 

 

 

13.00

%

 

 

1,360

 

 

 

1,192

 

 

 

168

 

 

 

14.09

%

Loan expense

 

276

 

 

 

207

 

 

 

69

 

 

 

33.33

%

 

 

825

 

 

 

833

 

 

 

(8

)

 

 

-0.96

%

OREO expense

 

-

 

 

 

830

 

 

 

(830

)

 

 

-100.00

%

 

 

42

 

 

 

1,200

 

 

 

(1,158

)

 

 

-96.50

%

(Recapture of) provision for
   unfunded loan commitments

 

-

 

 

 

-

 

 

 

-

 

 

-

 

 

 

(1,000

)

 

 

 

 

 

(1,000

)

 

-

 

Directors' expenses

 

388

 

 

 

358

 

 

 

30

 

 

 

8.38

%

 

 

1,156

 

 

 

1,067

 

 

 

89

 

 

 

8.34

%

Stationery and supplies

 

254

 

 

 

227

 

 

 

27

 

 

 

11.89

%

 

 

739

 

 

 

894

 

 

 

(155

)

 

 

-17.34

%

Acquisition related expenses

 

809

 

 

 

-

 

 

 

809

 

 

-

 

 

 

809

 

 

 

 

 

 

809

 

 

-

 

Other

 

1,800

 

 

 

1,740

 

 

 

60

 

 

 

3.45

%

 

 

5,351

 

 

 

4,669

 

 

 

682

 

 

 

14.61

%

Total noninterest expense

$

48,099

 

 

$

49,588

 

 

$

(1,489

)

 

 

-3.00

%

 

$

141,807

 

 

$

144,627

 

 

$

(2,820

)

 

 

-1.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense to average
   assets

 

1.22

%

 

 

1.44

%

 

 

 

 

 

 

 

 

1.25

%

 

 

1.54

%

 

 

 

 

 

 

Efficiency ratio (1)

 

42.27

%

 

 

42.57

%

 

 

 

 

 

 

 

 

40.85

%

 

 

41.66

%

 

 

 

 

 

 

(1)
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.

Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.22% for the third quarter of 2021, compared to 1.44% for the third quarter of 2020. The decline in this ratio for 2021 reflects the $2.55 billion growth in average assets that resulted primarily from $2.33 billion in average deposit growth.

Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.27% for the third quarter of 2021, compared to 42.57% for the third quarter of 2020. For the nine months ending September 30, 2021, the efficiency ratio was 40.85%, compared to 41.66% for the same period in 2020.

49

Third Quarter of 2021 Compared to the Third Quarter of 2020

Noninterest expense of $48.1 million for the third quarter of 2021 was $1.5 million, or 3.00%, lower than the third quarter of 2020. The year-over-year decrease of $1.5 million included a $1.3 million decrease in salaries and employee benefits, including $1.1 million in additional bonus expense for “Thank You Awards” paid to all Bank employees during the third quarter of 2020, and an $830,000 decrease in OREO expense, primarily due to a $700,000 write-down of one OREO property in the third quarter of 2020. Merger related expenses increased $809,000 in the third quarter of 2021, for the pending acquisition of Suncrest Bank that was announced in July of 2021.

Nine Months of 2021 Compared to Nine Months of 2020

Noninterest expense of $141.8 million for the first nine months of 2021 was $2.8 million lower than the prior year period. Salaries and employee benefits declined by $2.3 million from the first nine months of 2020, due to lower employee benefit expense that was partially offset by higher bonus and profit sharing expense. The year-over-year decrease also included the $1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021 and an $834,000 year-over-year decrease in amortization of CDI. An increase of $2.1 million in regulatory assessment expense was the result of the final application of assessment credits provided by the FDIC at the end of the second quarter of 2020. As a percentage of average assets, noninterest expense was 1.25% for the nine months ended September 30, 2021, compared to 1.54% for the same period of 2020.

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 20202021 was 29.00%28.60%, compared to 29.00% for the same periods of 2019.three and nine months ended September 30, 2020, respectively. Our estimated annual effective tax rate varies depending upon the level of

tax-advantaged
income as well as available tax credits.

The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of

tax-advantaged
income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.
51

50

Table of Contents

ANALYSIS OF FINANCIAL CONDITION

Total assets of $13.82$16.20 billion at September 30, 20202021 increased $2.54$1.78 billion, or 22.48%12.36%, from total assets of $11.28$14.42 billion at December 31, 2019.2020. Interest-earning assets totaled $12.59$14.93 billion at September 30, 2020, an increase of $2.572021 increased $1.71 billion, or 25.59%12.92%, when compared with $10.03$13.22 billion at December 31, 2019.2020. The increase in interest-earning assets was primarily due to a $1.31$1.66 billion increase in investment securities and a $565.9 million increase in interest-earning balances due from the Federal Reserve, an $843.3partially offset by a $499.3 million increasedecrease in total loans andwhich included a $368.6 million increasedecrease in investment securities. The increase in total loans was due to the origination of approximately 4,100 PPP loans totaling $1.10 billion atof $552 million for the nine months ended September 30, 2020.2021. Excluding PPP loans, total loans declinedincreased by $257.8$52.7 million, or 0.71%, from December 31, 2019.

2020.

Total liabilities were $11.84$14.14 billion at September 30, 2020,2021, an increase of $2.55$1.73 billion, or 27.44%13.91%, from total liabilities of $9.29$12.41 billion at December 31, 2019.2020. Total deposits grew by $2.46$1.19 billion, or 28.30%10.17%. This significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity. Total equity decreased $12.1increased $55.9 million, or 0.61%2.79%, to $1.98$2.06 billion at September 30, 2020,2021, compared to total equity of $1.99$2.01 billion at December 31, 2019.2020. The $12.1$55.9 million decreaseincrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our

10b5-1
stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the Company’s outlook due to the uncertainty of the
COVID-19
pandemic. We had $127.1 million in net earnings duringof $164.8 million for the first nine months of 2020,2021, partially offset by $73.3a $32.3 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $23.5 million as a result of an increasedecrease in other comprehensive income from the increasetax-effected impact of the decrease in our tax adjusted market value of our
available-for-sale
investment securities.
securities and $73.4 million in cash dividends.

Investment Securities

The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At September 30, 2020,2021, total investment securities were $2.78$4.64 billion. This represented an increase of $368.6 million,$1.66 billion, or 15.27%55.70%, from total investment securities of $2.41$2.98 billion at December 31, 2019.2020. The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first nine monthsthird quarter of 2020.2021. At September 30, 2020,2021, investment securities HTM totaled $577.7 million.$1.71 billion. At September 30, 2020,2021, our AFS investment securities totaled $2.21$2.93 billion, inclusive of a

pre-tax
net unrealized gain of $55.3$8.8 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $38.9$6.2 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the nine months ended September 30, 20202021 and 2019,2020, repayments/maturities of investment securities totaled $536.7$712.3 million and $355.8$536.7 million, respectively. The Company purchased additional investment securities totaling $882.1 million$2.44 billion and $268.3$882.1 million for the nine months ended September 30, 2021 and 2020, respectively. During the third quarter of 2021, we purchased approximately $187.4 million of AFS securities with an average expected yield of approximately 1.49% and 2019, respectively.$705.1 million of HTM securities with an average expected yield of approximately 1.75%. The second quarter included purchases of $317.1 million of AFS securities with an average investment yield of approximately 1.69% and the first quarter included purchases of $1.23 billion of securities purchased in the first quarter of 2021, with an average expected yield of approximately 1.57%. The first quarter purchases included $682.9 million in AFS securities that were comprised of MBS with average lives of less than five years that are expected to yield approximately 1.37% and $545.7 million in HTM securities that were comprised of fixed rate agency and municipal bonds, with longer maturities that on average exceed 10 years that will generate a yield of approximately 1.81% on a non-tax equivalent basis. There were no investment securities sold during the first nine months of 2021 and 2020. During the first nine months of 2019, we sold 14 investment securities at book value of approximately $152.6 million. The average duration of our investment securities portfolio was approximately 2.7 years at September 30, 2020.
52

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Table of Contents

The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.

   
September 30, 2020
   
  Amortized  
Cost
  
Gross
  Unrealized  
Holding
Gain
  
Gross

  Unrealized  
Holding

Loss
  
  Fair Value  
  
 Total Percent 
   
(Dollars in thousands)
Investment securities
available-for-sale:
          
Mortgage-backed securities
    $1,710,160     $46,713     $(2)     $1,756,871    79.65% 
CMO/REMIC
   404,380    7,326    (212)    411,494    18.66% 
Municipal bonds
   35,011    1,457    -     36,468    1.65% 
Other securities
   813    -    -     813    0.04% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $2,150,364     $55,496     $(214)     $2,205,646    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
    $103,317     $6,627     $-      $109,944    17.88% 
Mortgage-backed securities
   152,285    7,837    -     160,122    26.36% 
CMO/REMIC
   159,676    5,315    -     164,991    27.64% 
Municipal bonds
   162,416    6,387    (338)    168,465    28.12% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
held-to-maturity
securities
    $577,694     $26,166     $(338)     $603,522    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
   
December 31, 2019
   
  Amortized  
Cost
  
Gross
  Unrealized  
Holding

Gain
  
Gross
  Unrealized  
Holding

Loss
  
  Fair Value  
  
 Total Percent 
   
(Dollars in thousands)
Investment securities
available-for-sale:
          
Mortgage-backed securities
    $1,185,757     $21,306     $(750)     $1,206,313    69.32% 
CMO/REMIC
   493,214    1,392    (896)    493,710    28.37% 
Municipal bonds
   38,506    850    (2)    39,354    2.26% 
Other securities
   880    -    -     880    0.05% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
available-for-sale
securities
    $  1,718,357     $23,548     $(1,648)     $1,740,257    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Investment securities
held-to-maturity:
          
Government agency/GSE
    $117,366     $2,280     $(657)     $118,989    17.40% 
Mortgage-backed securities
   168,479    2,083    (54)    170,508    24.98% 
CMO/REMIC
   192,548    -    (2,458)    190,090    28.55% 
Municipal bonds
   196,059    3,867    (565)    199,361    29.07% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
held-to-maturity
securities
    $674,452     $8,230     $(3,734)     $678,948    100.00% 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 

 

September 30, 2021

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gain

 

 

Gross Unrealized Holding Loss

 

 

Fair Value

 

 

Total Percent

 

 

(Dollars in thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

2,256,252

 

 

$

31,251

 

 

$

(18,430

)

 

$

2,269,073

 

 

 

77.57

%

CMO/REMIC

 

630,351

 

 

 

2,846

 

 

 

(8,030

)

 

 

625,167

 

 

 

21.37

%

Municipal bonds

 

28,697

 

 

 

1,123

 

 

 

-

 

 

 

29,820

 

 

 

1.02

%

Other securities

 

1,000

 

 

 

-

 

 

 

-

 

 

 

1,000

 

 

 

0.04

%

Total available-for-sale securities

$

2,916,300

 

 

$

35,220

 

 

$

(26,460

)

 

$

2,925,060

 

 

 

100.00

%

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency/GSE

$

585,022

 

 

$

6,785

 

 

$

(8,112

)

 

$

583,695

 

 

 

34.19

%

Mortgage-backed securities

 

648,613

 

 

 

5,450

 

 

 

(1,502

)

 

 

652,561

 

 

 

37.91

%

CMO/REMIC

 

264,324

 

 

 

1,642

 

 

 

(1,118

)

 

 

264,848

 

 

 

15.45

%

Municipal bonds

 

212,979

 

 

 

4,761

 

 

 

(1,614

)

 

 

216,126

 

 

 

12.45

%

Total held-to-maturity securities

$

1,710,938

 

 

$

18,638

 

 

$

(12,346

)

 

$

1,717,230

 

 

 

100.00

%

 

December 31, 2020

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gain

 

 

Gross Unrealized Holding Loss

 

 

Fair Value

 

 

Total Percent

 

 

(Dollars in thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

1,857,030

 

 

$

48,006

 

 

$

(101

)

 

$

1,904,935

 

 

 

79.41

%

CMO/REMIC

 

457,548

 

 

 

5,515

 

 

 

(249

)

 

 

462,814

 

 

 

19.29

%

Municipal bonds

 

28,707

 

 

 

1,578

 

 

 

-

 

 

 

30,285

 

 

 

1.26

%

Other securities

 

889

 

 

 

-

 

 

 

-

 

 

 

889

 

 

 

0.04

%

Total available-for-sale securities

$

2,344,174

 

 

$

55,099

 

 

$

(350

)

 

$

2,398,923

 

 

 

100.00

%

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency/GSE

$

98,663

 

 

$

5,877

 

 

$

-

 

 

$

104,540

 

 

 

17.05

%

Mortgage-backed securities

 

146,382

 

 

 

7,644

 

 

 

(32

)

 

 

153,994

 

 

 

25.30

%

CMO/REMIC

 

145,309

 

 

 

5,202

 

 

 

-

 

 

 

150,511

 

 

 

25.11

%

Municipal bonds

 

188,272

 

 

 

6,980

 

 

 

(74

)

 

 

195,178

 

 

 

32.54

%

Total held-to-maturity securities

$

578,626

 

 

$

25,703

 

 

$

(106

)

 

$

604,223

 

 

 

100.00

%

As of September 30, 2020,2021, approximately $66.7$53.2 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 7%6% of the total investment portfolio, are predominately AA or higher rated securities.

We adopted ASU
2016-13
on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
and
held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the third quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.
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Table of Contents

The following table presents the Company’s

available-for-sale
investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2021 and December 31, 2020.
  
September 30, 2020
  
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:
      
Mortgage-backed securities
   $30,851    $(2)    $-    $    -    $30,851    $(2) 
CMO/REMIC
  71,781   (212)   -   -   71,781   (212) 
Municipal bonds
  -   -   -   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
available-for-sale
securities
   $102,632    $(214)    $    -    $-    $102,632    $(214) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The table below presents the Company’s investment securities’ gross unrealized

52

 

September 30, 2021

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

1,349,856

 

 

$

(18,243

)

 

$

21,273

 

 

$

(187

)

 

$

1,371,129

 

 

$

(18,430

)

CMO/REMIC

 

510,308

 

 

 

(7,758

)

 

 

11,162

 

 

 

(272

)

 

 

521,470

 

 

 

(8,030

)

Municipal bonds

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total available-for-sale securities

$

1,860,164

 

 

$

(26,001

)

 

$

32,435

 

 

$

(459

)

 

$

1,892,599

 

 

$

(26,460

)

 

December 31, 2020

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

$

72,219

 

 

$

(101

)

 

$

-

 

 

$

-

 

 

$

72,219

 

 

$

(101

)

CMO/REMIC

 

96,974

 

 

 

(249

)

 

 

-

 

 

 

-

 

 

 

96,974

 

 

 

(249

)

Municipal bonds

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total available-for-sale securities

$

169,193

 

 

$

(350

)

 

$

-

 

 

$

-

 

 

$

169,193

 

 

$

(350

)

Once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and fair value by investment category and length of timeheld-to-maturity securities. Management determined that individualcredit losses did not exist for securities have been in a continuousan unrealized loss position atas of September 30, 2021 and December 31, 2019, prior to adoption of ASU

2016-13.
Management previously 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 interest 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.
  
December 31, 2019
 
  
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:
      
Mortgage-backed securities
   $20,289    $(6)    $97,964    $(744)    $118,253    $(750) 
CMO/REMIC
  177,517   (705)   34,565   (191)   212,082   (896) 
Municipal bonds
  -   -   563   (2)   563   (2) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
available-for-sale
securities
   $197,806    $(711)    $133,092    $(937)    $330,898    $(1,648) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment securities
held-to-maturity:
      
Government agency/GSE
   $28,359    $(252)    $19,405    $(405)    $47,764    $(657) 
Mortgage-backed securities
  10,411   (54)   -   -   10,411   (54) 
CMO/REMIC
  23,897   (104)   166,193   (2,354)   190,090   (2,458) 
Municipal bonds
  7,583   (32)   29,981   (533)   37,564   (565) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
held-to-maturity
securities
   $70,250    $(442)    $215,579    $(3,292)    $285,829    $(3,734) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
2020.

Refer to Note 4 –

Investment Securities
of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio.
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Loans

Total loans and leases, netat amortized cost, of deferred fees and discounts, of $8.41$7.85 billion at September 30, 2020 increased2021 decreased by $843.3$499.3 million, or 11.15%5.98%, from $7.56 billion at December 31, 2019.2020. The increase$499.3 million decrease in total loans included $1.10 billiondecreases of $552.0 million in PPP loans, and a $130.9$81.6 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%. The $126.9 million decrease in loans included decreases of $118.1$42.1 million in commercial and industrial loans, $27.3$39.2 million in SFR mortgage loans, $7.7 million in construction loans, and $13.5 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans. Partially offsetting these declines waspartially offset by an increase of $233.2 million in commercial real estate loans and $3.6 million in SBA loans. After adjusting for seasonality and PPP loans, our loans grew by $134.3 million or at an annualized rate of $53.6 million.

approximately 3% from the end of the fourth quarter of 2020.

The following table presents our loan portfolio by type as of the dates presented.

Distribution of Loan Portfolio by Type

   
  September 30, 2020  
   
  December 31, 2019  
 
   
(Dollars in thousands)
 
Commercial and industrial
    $817,056     $935,127 
SBA
   304,987    305,008 
SBA - Paycheck Protection Program (PPP)
   1,101,142    - 
Real estate:
    
Commercial real estate
   5,428,223    5,374,617 
Construction
   101,903    116,925 
SFR mortgage
   274,731    283,468 
Dairy & livestock and agribusiness
   252,802    383,709 
Municipal lease finance receivables
   38,040    53,146 
Consumer and other loans
   88,988    116,319 
  
 
 
   
 
 
 
Total loans
   8,407,872    7,568,319 
Less: Deferred loan fees, net (1)
   -    (3,742) 
  
 
 
   
 
 
 
Total loans, net of deferred loan fees
   8,407,872    7,564,577 
Less: Allowance for credit losses
   (93,869)    (68,660) 
  
 
 
   
 
 
 
Total loans and lease finance receivables, net
    $8,314,003     $7,495,917 
  
 
 
   
 
 
 
(1)
Beginning with March 31, 2020, total loans are presented net of deferred loan fees by respective class of financing receivables.

 

September 30, 2021

 

 

December 31, 2020

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Commercial real estate

$

5,734,699

 

 

$

5,501,509

 

Construction

 

77,398

 

 

 

85,145

 

SBA

 

307,533

 

 

 

303,896

 

SBA - Paycheck Protection Program (PPP)

 

330,960

 

 

 

882,986

 

Commercial and industrial

 

769,977

 

 

 

812,062

 

Dairy & livestock and agribusiness

 

279,584

 

 

 

361,146

 

Municipal lease finance receivables

 

47,305

 

 

 

45,547

 

SFR mortgage

 

231,323

 

 

 

270,511

 

Consumer and other loans

 

70,741

 

 

 

86,006

 

Total loans, at amortized cost

 

7,849,520

 

 

 

8,348,808

 

Less: Allowance for credit losses

 

(65,364

)

 

 

(93,692

)

 Total loans and lease finance receivables, net

$

7,784,156

 

 

$

8,255,116

 

As of September 30, 2020, 69.04% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 64.56% of total loans. As of September 30, 2020, $271.22021, $354.3 million, or 5.00%6.18% of the total commercial real estate loans included loans secured by farmland, compared to $241.8$314.4 million, or 4.50%5.72%, at December 31, 2019.2020. The loans secured by farmland included $121.1$125.1 million for loans secured by dairy & livestock land and $150.2$229.2 million for loans secured by agricultural land at September 30, 2020,2021, compared to $125.9$132.9 million for loans secured by dairy & livestock land and $115.9$181.5 million for loans secured by agricultural land at December 31, 2019.2020. As of September 30, 2020,2021, dairy & livestock and agribusiness loans of $252.8$279.6 million were comprised of $210.4$242.0 million for dairy & livestock loans and $42.4$37.6 million for agribusiness loans, compared to $323.5$320.1 million for dairy & livestock loans and $60.2$41.0 million for agribusiness loans at December 31, 2019.

2020.

Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-familysingle family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.

As of September 30, 2020,2021, the Company had $185.5$209.7 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of September 30, 2020,2021, the Company had $119.5$97.8 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.

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Table of Contents

As an active participant in the SBA’s Paycheck Protection Program, we have originated approximately 4,100 PPP loans totaling $1.10 billion in round one, with a remaining outstanding balance of $52.4 million as of September 30, 2020.

2021. As of September 30, 2020, the Company had $101.9 million2021, we have originated approximately 1,900 PPP loans in construction loans. This represents 1.21%round two with a remaining outstanding balance of total loans
held-for-investment.
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at September 30, 2020.
$278.6 million.

Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total

held-for-investment
commercial real estate loans, by region as of September 30, 2020.
   
September 30, 2020
   
Total Loans
 
Commercial Real Estate
Loans
   
(Dollars in thousands)
Los Angeles County
    $3,609,538    42.9%    $2,219,742    40.9% 
Central Valley
   1,316,422    15.7%   941,699    17.3% 
Orange County
   1,119,311    13.3%   666,886    12.3% 
Inland Empire
   1,183,026    14.1%   829,791    15.3% 
Central Coast
   523,297    6.2%   368,346    6.8% 
San Diego
   234,903    2.8%   144,973    2.7% 
Other California
   127,669    1.5%   83,544    1.5% 
Out of State
   293,706    3.5%   173,242    3.2% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
    $      8,407,872          100.0%    $      5,428,223        100.0% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
2021.

 

September 30, 2021

 

 

Total Loans

 

 

Commercial Real
Estate Loans

 

 

(Dollars in thousands)

 

Los Angeles County

$

3,272,657

 

 

 

41.7

%

 

$

2,201,389

 

 

 

38.4

%

Central Valley

 

1,389,634

 

 

 

17.7

%

 

 

1,088,972

 

 

 

19.0

%

Orange County

 

1,034,232

 

 

 

13.2

%

 

 

674,864

 

 

 

11.8

%

Inland Empire

 

1,009,682

 

 

 

12.9

%

 

 

855,165

 

 

 

14.9

%

Central Coast

 

457,836

 

 

 

5.8

%

 

 

386,436

 

 

 

6.7

%

San Diego

 

248,478

 

 

 

3.2

%

 

 

224,549

 

 

 

3.9

%

Other California

 

145,338

 

 

 

1.8

%

 

 

92,624

 

 

 

1.6

%

Out of State

 

291,663

 

 

 

3.7

%

 

 

210,700

 

 

 

3.7

%

 

$

7,849,520

 

 

 

100.0

%

 

$

5,734,699

 

 

 

100.0

%

The table below breaks down our commercial real estate portfolio.

 

September 30, 2021

 

 

Loan Balance

 

 

Percent

 

 

Percent
Owner-
Occupied (1)

 

 

Average
Loan Balance

 

 

(Dollars in thousands)

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Industrial

$

1,945,809

 

 

 

33.9

%

 

 

50.9

%

 

$

1,466

 

Office

 

1,045,711

 

 

 

18.2

%

 

 

23.3

%

 

 

1,676

 

Retail

 

809,686

 

 

 

14.1

%

 

 

10.5

%

 

 

1,726

 

Multi-family

 

646,004

 

 

 

11.3

%

 

 

1.9

%

 

 

1,545

 

Secured by farmland (2)

 

354,341

 

 

 

6.2

%

 

 

96.8

%

 

 

2,229

 

Medical

 

295,580

 

 

 

5.2

%

 

 

37.6

%

 

 

1,699

 

Other (3)

 

637,568

 

 

 

11.1

%

 

 

52.3

%

 

 

1,433

 

Total commercial real estate

$

5,734,699

 

 

 

100.0

%

 

 

37.0

%

 

 

1,586

 

(1)
Represents percentage of reported owner-occupied at origination in each real estate loan category.
(2)
The loans secured by farmland included $125.1 million for loans secured by dairy & livestock land and $229.2 million for loans secured by agricultural land at September 30, 2021.
   
September 30, 2020
 
   
  Loan Balance  
   
  Percent  
   
Percent

Owner-
    Occupied (1)    
   
Average
    Loan Balance    
 
   
(Dollars in thousands)
 
Commercial real estate:
        
Industrial
    $1,842,412    33.9%    54.4%   $1,390 
Office
   992,216    18.3%    25.1%    1,603 
Retail
   771,125    14.2%    13.3%    1,673 
Multi-family
   608,374    11.2%    2.1%    1,662 
Medical
   300,867    5.6%    47.7%    1,791 
Secured by farmland (2)
   271,242    5.0%    97.4%    1,858 
Other (3)
   641,987    11.8%    54.7%    1,417 
  
 
 
   
 
 
     
Total commercial real estate
    $    5,428,223    100.0%    39.2%   $1,534 
  
 
 
   
 
 
     
(1)
Represents percentage of reported owner-occupied at origination in each real estate loan category.
(2)
The loans secured by farmland included $121.1 million for loans secured by dairy & livestock land and $150.2 million for loans secured by agricultural land at September 30, 2020.
(3)
(3)
Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans at September 30, 2020.
56
Table of Contents
The pandemic has had a greater impact on certain industries, such a retail, hospitality, and entertainment.
At September 30, 2020, commercial real estate loans on retail properties comprised $771.1 million and approximately 9% of total loans; 1% of these loans are on deferment and $7 million of these loans are classified. At origination, these loans on retail properties were underwritten with
loan-to-values
averaging approximately 53%. Approximately 53% of these loans were originated prior to 2017. We also have $66.6 million of commercial real estate loans for hospitality properties, which is less than 1% of total loans; none of these loans are classified, but 16% of these loans are on deferment.
Atat September 30, 2020, commercial and industrial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $96 million in loans, or approximately 1% of total loans; $1.6 million of these loans are classified and $1.4 million are on deferment.2021.

55

Nonperforming Assets

The following table provides information on nonperforming assets as of the dates presented.

   
    September 30, 2020    
   
  December 31, 2019  
 
   
(Dollars in thousands)
 
Nonaccrual loans
    $11,775       $5,033   
Loans past due 90 days or more and still accruing interest
   -      -   
Nonperforming troubled debt restructured loans (TDRs)
   -      244   
  
 
 
   
 
 
 
Total nonperforming loans
   11,775      5,277   
OREO, net
   4,189      4,889   
  
 
 
   
 
 
 
Total nonperforming assets
    $15,964       $10,166   
  
 
 
   
 
 
 
Performing TDRs
    $2,217       $3,112   
  
 
 
   
 
 
 
Total nonperforming loans and performing TDRs
    $13,992       $8,389   
Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees
   0.17%    0.11% 
Percentage of nonperforming assets to total loans, net of deferred fees, and OREO
   0.19%    0.13% 
Percentage of nonperforming assets to total assets
   0.12%    0.09% 

 

September 30, 2021

 

 

December 31, 2020

 

 

(Dollars in thousands)

 

Nonaccrual loans

$

8,446

 

 

$

14,347

 

Loans past due 90 days or more and still accruing interest

 

-

 

 

 

-

 

Nonperforming troubled debt restructured loans (TDRs)

 

-

 

 

 

-

 

   Total nonperforming loans

 

8,446

 

 

 

14,347

 

OREO, net

 

-

 

 

 

3,392

 

Total nonperforming assets

$

8,446

 

 

$

17,739

 

Performing TDRs

$

7,975

 

 

$

2,159

 

 

 

 

 

 

 

Total nonperforming loans and performing TDRs

$

16,421

 

 

$

16,506

 

 

 

 

 

 

 

Percentage of nonperforming loans and performing TDRs to total loans,
   at amortized cost

 

0.21

%

 

 

0.20

%

 

 

 

 

 

 

Percentage of nonperforming assets to total loans, at amortized cost,
   and OREO

 

0.11

%

 

 

0.21

%

Percentage of nonperforming assets to total assets

 

0.05

%

 

 

0.12

%

Troubled Debt Restructurings (“TDRs”)

Total TDRs were $2.2$8.0 million at September 30, 2020,2021, compared to $3.4$2.2 million at December 31, 2019.2020. At September 30, 2020,2021, all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms.

In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans and enter into loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. As of October 9, 2020, we have temporary payment deferments of principal, interest or of principal and interest on 33 loans in the amount of $68.6 million, or less than 1% of our total loan portfolio, at September 30, 2020. These deferments were primarily for 90 days, with 89% of these loans being pass rated; 27 of these loans have received a second deferment and the remaining six loans are first deferments. The majority of the loans with payment deferments were commercial real estate loans, which represented approximately $65.9 million of the $68.6 million.
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Table of Contents

The following table provides a summary of TDRs as of the dates presented.

   
September 30, 2020
  
December 31, 2019
   
Balance
  
Number of
Loans
  
Balance
  
Number of
Loans
   
(Dollars in thousands)
Performing TDRs:
        
Commercial and industrial
    $47    1     $78    2 
SBA
   -    -    536    1 
Real Estate:
        
Commercial real estate
   354    1    397    1 
Construction
   -    -    -    - 
SFR mortgage
   1,816    7    2,101    8 
Dairy & livestock and agribusiness
   -    -    -    - 
Consumer and other
   -    -    -    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total performing TDRs
    $2,217    9     $3,112    12 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Nonperforming TDRs:
        
Commercial and industrial
    $-    -     $-    - 
SBA
   -    -    -    - 
Real Estate:
        
Commercial real estate
   -    -    -    - 
Construction
   -    -    -    - 
SFR mortgage
   -    -    -    - 
Dairy & livestock and agribusiness
   -    -    -    - 
Consumer and other
   -    -    244    1 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total nonperforming TDRs
    $-    -     $244    1 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total TDRs
    $2,217    9     $3,356    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 

 

September 30, 2021

 

 

December 31, 2020

 

 

Balance

 

 

Number of Loans

 

 

Balance

 

 

Number of Loans

 

 

(Dollars in thousands)

 

Performing TDRs:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

2,632

 

 

 

2

 

 

$

320

 

 

 

1

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SBA

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

4,323

 

 

 

3

 

 

 

43

 

 

 

1

 

Dairy & livestock and agribusiness

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SFR mortgage

 

1,020

 

 

 

5

 

 

 

1,796

 

 

 

7

 

Consumer and other

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total performing TDRs

$

7,975

 

 

 

10

 

 

$

2,159

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming TDRs:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

-

 

 

 

-

 

 

$

-

 

 

 

-

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SBA

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Dairy & livestock and agribusiness

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SFR mortgage

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer and other

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total nonperforming TDRs

$

-

 

 

 

-

 

 

$

-

 

 

 

-

 

Total TDRs

$

7,975

 

 

 

10

 

 

$

2,159

 

 

 

9

 

56

At September 30, 2021 and December 31, 2020, there was no ACL allocated to TDRs. At December 31, 2019, there was no allowance for loan losses specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable lossthe loan is determined.considered uncollectible. There were no charge-offs on TDRs for the nine months ended September 30, 2020, compared to $78,000 for the nine months ended September 30, 2019.

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Table of Contents
2021 and 2020.

Nonperforming Assets and Delinquencies

The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.

                        
                        
                        
                        
                        
  
September 30,
2020
 
June 30,

2020
 
March 31,
2020
 
December 31,
2019
 
September 30,
2019
  
(Dollars in thousands)
Nonperforming loans (1):
     
Commercial and industrial
   $1,822    $1,222    $1,703    $1,266    $1,550 
SBA
  1,724   1,598   2,748   2,032   2,706 
Real estate:
     
Commercial real estate
  6,481   2,628   947   724   1,083 
Construction
  -   -   -   -   - 
SFR mortgage
  675   1,080   864   878   888 
Dairy & livestock and agribusiness
  849   -   -   -   - 
Consumer and other loans
  224   289   166   377   385 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
11,775
 
 
  $
6,817
 
 
  $
6,428
 
 
  $
5,277
 
 
  $
6,612
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.14%
 
 
 
0.08%
 
 
 
0.09%
 
 
 
0.07%
 
 
 
0.09%
 
Past due
30-89
days:
     
Commercial and industrial
   $3,627    $630    $665    $2    $756 
SBA
  66   214   3,086   1,402   303 
Real estate:
     
Commercial real estate
  -   4   210   -   368 
Construction
  -   -   -   -   - 
SFR mortgage
  -   446   233   249   - 
Dairy & livestock and agribusiness
  -   882   166   -   - 
Consumer and other loans
  67   413   -   -   - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
3,760
 
 
  $
2,589
 
 
  $
4,360
 
 
  $
1,653
 
 
  $
1,427
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.04%
 
 
 
0.03%
 
 
 
0.06%
 
 
 
0.02%
 
 
 
0.02%
 
OREO:
     
SBA
   $797    $797    $797    $797    $444 
Real estate:
     
Commercial real estate
  1,575   2,275   2,275   2,275   2,275 
SFR mortgage
  1,817   1,817   1,817   1,817   6,731 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
  $
4,189
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
4,889
 
 
  $
9,450
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total nonperforming, past due, and OREO
 
  $
19,724
 
 
  $
14,295
 
 
  $
15,677
 
 
  $
11,819
 
 
  $
17,489
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of Total loans
 
 
0.23%
 
 
 
0.17%
 
 
 
0.21%
 
 
 
0.16%
 
 
 
0.23%
 
(1)
As of June 30, 2020, nonperforming loans included $25,000 of commercial and industrial loans past due 90 days or more and still accruing interest.

 

 

September 30,

 

 

June 30,

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

 

2021

 

 

2021

 

 

2020

 

 

2020

 

 

2020

 

 

 

(Dollars in thousands)

 

Nonperforming loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

4,073

 

 

$

4,439

 

 

$

7,395

 

 

$

7,563

 

 

$

6,481

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SBA

 

 

1,513

 

 

 

1,382

 

 

 

2,412

 

 

 

2,273

 

 

 

1,724

 

Commercial and industrial

 

 

2,038

 

 

 

1,818

 

 

 

2,967

 

 

 

3,129

 

 

 

1,822

 

Dairy & livestock and agribusiness

 

 

118

 

 

 

118

 

 

 

259

 

 

 

785

 

 

 

849

 

SFR mortgage

 

 

399

 

 

 

406

 

 

 

424

 

 

 

430

 

 

 

675

 

Consumer and other loans

 

 

305

 

 

 

308

 

 

 

312

 

 

 

167

 

 

 

224

 

Total

 

$

8,446

 

 

$

8,471

 

 

$

13,769

 

 

$

14,347

 

 

$

11,775

 

% of Total loans

 

 

0.11

%

 

 

0.10

%

 

 

0.17

%

 

 

0.17

%

 

 

0.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past due 30-89 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

-

 

 

$

-

 

 

$

178

 

 

$

-

 

 

$

-

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SBA

 

 

-

 

 

 

-

 

 

 

258

 

 

 

1,965

 

 

 

66

 

Commercial and industrial

 

 

122

 

 

 

415

 

 

 

952

 

 

 

1,101

 

 

 

3,627

 

Dairy & livestock and agribusiness

 

 

1,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

SFR mortgage

 

 

-

 

 

 

-

 

 

 

266

 

 

 

-

 

 

 

-

 

Consumer and other loans

 

 

-

 

 

 

-

 

 

 

21

 

 

 

-

 

 

 

67

 

Total

 

$

1,122

 

 

$

415

 

 

$

1,675

 

 

$

3,066

 

 

$

3,760

 

% of Total loans

 

 

0.01

%

 

 

0.01

%

 

 

0.02

%

 

 

0.04

%

 

 

0.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

-

 

 

$

-

 

 

$

1,575

 

 

$

1,575

 

 

$

1,575

 

SBA

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

797

 

SFR mortgage

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,817

 

 

 

1,817

 

Total

 

$

-

 

 

$

-

 

 

$

1,575

 

 

$

3,392

 

 

$

4,189

 

Total nonperforming, past due,
   and OREO

 

$

9,568

 

 

$

8,886

 

 

$

17,019

 

 

$

20,805

 

 

$

19,724

 

% of Total loans

 

 

0.12

%

 

 

0.11

%

 

 

0.21

%

 

 

0.25

%

 

 

0.23

%

Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $11.8$8.4 million at September 30, 2020,2021, or 0.14%0.11% of total loans. Total nonperforming loans at September 30, 2020 included $9.3 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $5.3$14.3 million, or 0.07%0.17% of total loans, at December 31, 20192020 and $6.6$11.8 million, or 0.09%0.14% of total loans, at September 30, 2019.2020. The $5.0$8.4 million quarter-over-quarter increase in nonperforming loans was primarily due to increases of $3.9at September 30, 2021 are summarized as follows: $4.1 million in nonperforming commercial real estate loans, $849,000$2.0 million in nonperformingcommercial and industrial loans, $1.5 million in SBA loans, $399,000 in SFR mortgage loans, $305,000 in consumer and other loans, and $118,000 in dairy & livestock and agribusiness loans, $600,000 in nonperforming commercial and industrial loans, and $126,000 in nonperforming SBA loans. This was partially offset by a $405,000 decrease in nonperforming SFR mortgage loans and a $65,000 decrease in nonperforming consumer and other loans.

In response to the
COVID-19
pandemic, we have implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.    
59
Table of Contents

At September 30, 2020,2021, we had no OREO properties, compared to two OREO properties with a carrying value of $3.4 million at December 31, 2020 and four OREO properties with a carrying value of $4.2 million compared to four OREO properties with a carrying value of $4.9 million at December 31, 2019 and three OREO properties with a carrying value of $9.5 million at September 30, 2019. We reflected2020. For the nine months ended September 30, 2020, we sold two OREO properties, realizing a $700,000 write-downnet gain on sale of one OREO property in the third quarter of 2020.$477,000. There were no additions to or sales of OREO properties for the nine months ended September 30, 2021.

57

Allowance for Credit Losses

We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3—Summary of Significant Accounting Policies of the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020. The allowance for credit losses totaled $65.4 million as of September 30, 2021, compared to $93.7 million as of December 31, 2020 and $93.9 million as of September 30, 2020. Our allowance for credit losses at September 30, 2021 was 0.83%, or 0.87% of total loans when excluding the $331.0 million in PPP loans. The allowance for credit losses for 2021 was decreased by $25.5 million, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus, and by $2.8 million in year-to-date net charge-offs. The Company previously recorded provision for credit losses totaling $23.5 million in 2020, due to the severe decline in economic forecasts associated with the pandemic. Net charge-offs were $2.8 million for the nine months ended September 30, 2021, which compares to $131,000 in net charge-offs for the same period of 2020.

The allowance for credit losses as of September 30, 2021 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools: Commercial Real Estate, Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real estate loans include OLTV, origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Payment Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of Small Business Administration (SBA) loans (excluding Payment Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes.

Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast reflects continued improvement in key macroeconomic variables, including GDP, the commercial real estate price index and the unemployment rate. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. These U.S. economic forecasts include a baseline forecast, as well as upside and downside forecasts, with the largest weighting on the baseline. Our weighted forecast assumes GDP will increase by 5.7% in 2021, and then grows by more than 2% in both 2022 and 2023. The unemployment rate is forecasted to be 5.7% in 2021 and then 5.6% in 2022, before declining to 5.3% in 2023. Management believes that the ACL was appropriate at September 30, 2021 and December 31, 2020. As there is a high degree of uncertainty around the epidemiological assumptions and impact of government responses to the pandemic that impact our economic forecast, no assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in an increased allowance for credit losses in future periods.

58

The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.

 

As of and For the

 

 

Nine Months Ended

 

 

September 30,

 

 

2021

 

 

2020

 

 

(Dollars in thousands)

 

Allowance for credit losses at beginning of period

$

93,692

 

 

$

68,660

 

Impact of adopting ASU 2016-13

 

-

 

 

 

1,840

 

Charge-offs:

 

 

 

 

 

Commercial real estate

 

-

 

 

 

-

 

Construction

 

-

 

 

 

-

 

SBA

 

-

 

 

 

(203

)

Commercial and industrial

 

(2,985

)

 

 

(172

)

Dairy & livestock and agribusiness

 

-

 

 

 

-

 

SFR mortgage

 

-

 

 

 

-

 

Consumer and other loans

 

(11

)

 

 

(109

)

Total charge-offs

 

(2,996

)

 

 

(484

)

Recoveries:

 

 

 

 

 

Commercial real estate

 

-

 

 

 

-

 

Construction

 

55

 

 

 

9

 

SBA

 

13

 

 

 

72

 

Commercial and industrial

 

10

 

 

 

7

 

Dairy & livestock and agribusiness

 

-

 

 

 

-

 

SFR mortgage

 

79

 

 

 

206

 

Consumer and other loans

 

11

 

 

 

59

 

Total recoveries

 

168

 

 

 

353

 

Net (charge-offs) recoveries

 

(2,828

)

 

 

(131

)

(Recapture of) provision for credit losses

 

(25,500

)

 

 

23,500

 

Allowance for credit losses at end of period

$

65,364

 

 

$

93,869

 

 

 

 

 

 

 

Summary of reserve for unfunded loan commitments:

 

 

 

 

 

Reserve for unfunded loan commitments at beginning of period

$

9,000

 

 

$

8,959

 

Impact of adopting ASU 2016-13

 

-

 

 

 

41

 

(Recapture of) provision for unfunded loan commitments

 

(1,000

)

 

 

-

 

Reserve for unfunded loan commitments at end of period

$

8,000

 

 

$

9,000

 

 

 

 

 

 

 

Reserve for unfunded loan commitments to total unfunded loan
    commitments

 

0.46

%

 

 

0.50

%

 

 

 

 

 

 

Amount of total loans at end of period (1)

$

7,849,520

 

 

$

8,407,872

 

Average total loans outstanding (1)

$

8,144,105

 

 

$

7,972,208

 

 

 

 

 

 

 

Net charge-offs to average total loans

 

-0.035

%

 

 

-0.002

%

Net charge-offs to total loans at end of period

 

-0.036

%

 

 

-0.002

%

Allowance for credit losses to average total loans

 

0.80

%

 

 

1.18

%

Allowance for credit losses to total loans at end of period

 

0.83

%

 

 

1.12

%

Net charge-offs to allowance for credit losses

 

-4.33

%

 

 

-0.14

%

Net charge-offs to (recapture of) provision for credit losses

 

11.09

%

 

 

-0.56

%

(1)
Net of deferred loan origination fees, costs and discounts (amortized cost).

The ACL/Total Loan Coverage Ratio as of September 30, 2021 decreased to 0.83%, compared to 1.12% as of September 30, 2020 due to the forecasted impact of improved economic conditions on future life of loan loss rates.

59

The Bank’s ACL methodology also produced an allowance of $8.0 million for our off-balance sheet credit exposures as of September 30, 2021, compared to $9.0 million as of December 31, 2020 and September 30, 2020. The year-over-year decrease included a $1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021.

While we believe that the allowance at September 30, 2021 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.

Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “

Risk Management – Credit Risk Management
” contained in our Annual Report on Form
10-K
for the year ended December 31, 2019.
Allowance for Credit Losses
We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3 –
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled $93.9 million as of September 30, 2020, compared to $68.7 million as of December 31, 2019 and $68.7 million as of September 30, 2019. Our allowance for credit losses at September 30, 2020 was 1.12%, or 1.28% of total loans when excluding the $1.10 billion in PPP loans. Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by a $23.5 million credit loss provision in the first nine months of 2020 due to the severe economic disruption resulting from the
COVID-19
pandemic. Net charge-offs were $131,000 for the nine months ended September 30, 2020. This compares to a $5.0 million loan loss provision and $59,000 in net recoveries for the same period of 2019.
Our modeling processes incorporate a lifetime historical loss rate methodology by different asset classes. These models use key loan attributes by asset class and macroeconomic variables. Macroeconomic variables include GDP, and unemployment rate, among others. Our economic forecast incorporates a weighting of multiple forecasts. The forecast includes a reasonable and supportable forecast period of two to three years for the macroeconomic variables, which revert to a historical mean based on an input reversion approach. We consider publicly published economic forecasts from multiple sources, including Moody’s. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. Moody’s baseline forecast continues to represent more than a 50% weighting in our multi-weighted forecast scenario. This U.S. baseline forecast assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5% in 2021 and 5% in 2022. The unemployment rate in this baseline forecast is forecasted to be 8.9% in the third quarter of 2021, stay at an elevated level over 8% through 2021, before declining to 6.4% percent in 2022. With California slowly
re-opening
its economy and currently having an unemployment rate greater than 11% percent, our forecast includes a partial weighting of downside economic forecast scenarios from Moody’s. If the economic forecast deteriorates further due to the
COVID-19
pandemic, or the economic impact on our borrowers is more severe than we have forecasted, we may experience increases in the allowance for credit losses in future periods.
60
Table of Contents
The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.
   
As of and For the

Nine Months Ended

September 30,
 
   
2020
   
2019
 
   
(Dollars in thousands)
 
Allowance for credit losses at beginning of period
    $        68,660       $        63,613   
Impact of adopting ASU 2016-13
   1,840      -      
Charge-offs:
    
Commercial and industrial
   (172)     (48)  
SBA
   (203)     (295)  
Commercial real estate
   -         -      
Construction
   -         -      
SFR mortgage
   -         -      
Dairy & livestock and agribusiness
   -         (78)  
Consumer and other loans
   (109)     (7)  
  
 
 
   
 
 
 
Total charge-offs
   (484)     (428)  
  
 
 
   
 
 
 
Recoveries:
    
Commercial and industrial
   7      253   
SBA
   72      9   
Commercial real estate
   -         -      
Construction
   9      9   
SFR mortgage
   206      191   
Dairy & livestock and agribusiness
   -         19   
Consumer and other loans
   59      6   
  
 
 
   
 
 
 
Total recoveries
   353      487   
  
 
 
   
 
 
 
Net (charge-offs) recoveries
   (131)     59   
Provision for credit losses
   23,500      5,000   
  
 
 
   
 
 
 
Allowance for credit losses at end of period
    $93,869       $68,672   
  
 
 
   
 
 
 
Summary of reserve for unfunded loan commitments:
    
Reserve for unfunded loan commitments at beginning of period
    $8,959       $8,959   
Impact of adopting ASU 2016-13
   41      -      
Provision for unfunded loan commitments
   -         -      
  
 
 
   
 
 
 
Reserve for unfunded loan commitments at end of period
    $9,000       $8,959   
  
 
 
   
 
 
 
Reserve for unfunded loan commitments to total unfunded loan commitments
   0.50%     0.55%  
Amount of total loans at end of period (1)
    $8,407,872       $7,494,451   
Average total loans outstanding (1)
    $7,972,208       $7,571,502   
Net recoveries to average total loans
   -0.002%     0.001%  
Net recoveries to total loans at end of period
   -0.002%     0.001%  
Allowance for credit losses to average total loans
   1.18%     0.91%  
Allowance for credit losses to total loans at end of period
   1.12%     0.92%  
Net (charge-offs) recoveries to allowance for credit losses
   -0.14%     0.09%  
Net (charge-offs) recoveries to provision for credit losses
   -0.56%     1.18%  
(1)
Net of deferred loan origination fees, costs and discounts.
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Table of Contents
The ACL/Total Loan Coverage Ratio as of September 30, 2020 increased to 1.12%, compared to 0.93% as of January 1, 2020 due to the forecasted impact on the economy from the
COVID-19
crisis.
At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our
off-balance
sheet credit exposures. The Bank’s ACL methodology also produced an allowance of $9.0 million for our
off-balance
sheet credit exposures, which was unchanged from the allowance at January 1, 2020.
While we believe that the allowance at September 30, 2020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.

Deposits

The primary source of funds to support earning assets (loans and investments) is the generation of deposits.

Total deposits were $11.17$12.93 billion at September 30, 2020.2021. This represented an increase of $2.46$1.19 billion, or 28.30%10.17%, over total deposits of $8.70$11.74 billion at December 31, 2019.2020. The composition of deposits is summarized as of the dates presented in the table below.

   
September 30, 2020
 
December 31, 2019
  
 
 
 
 
 
 
 
   
Balance
  
Percent
 
Balance
  
Percent
  
 
 
 
 
 
 
 
   
(Dollars in thousands)
Noninterest-bearing deposits
    $6,919,423    61.95%    $5,245,517    60.26% 
Interest-bearing deposits
       
Investment checking
   447,910    4.01%   454,565    5.22% 
Money market
   2,878,457    25.77%   2,158,161    24.79% 
Savings
   477,896    4.28%   400,377    4.60% 
Time deposits
   445,148    3.99%   446,308    5.13% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
Total deposits
    $    11,168,834        100.00%    $    8,704,928        100.00% 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 

 

September 30, 2021

 

 

December 31, 2020

 

 

Balance

 

 

Percent

 

 

Balance

 

 

Percent

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

$

8,310,709

 

 

 

64.27

%

 

$

7,455,387

 

 

 

63.52

%

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

Investment checking

 

594,347

 

 

 

4.61

%

 

 

517,976

 

 

 

4.42

%

Money market

 

3,129,473

 

 

 

24.20

%

 

 

2,869,348

 

 

 

24.45

%

Savings

 

551,248

 

 

 

4.26

%

 

 

492,096

 

 

 

4.19

%

Time deposits

 

344,439

 

 

 

2.66

%

 

 

401,694

 

 

 

3.42

%

Total Deposits

$

12,930,216

 

 

 

100.00

%

 

$

11,736,501

 

 

 

100.00

%

The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $6.92$8.31 billion at September 30, 2020,2021, representing an increase of $1.67 billion,$855.3 million, or 31.91%11.47%, from noninterest-bearing deposits of $5.25$7.46 billion at December 31, 2019.2020. Noninterest-bearing deposits represented 61.95%64.27% of total deposits forat September 30, 2020,2021, compared to 60.26%63.52% of total deposits forat December 31, 2019.

2020.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $3.80$4.28 billion at September 30, 2020,2021, representing an increase of $791.2$395.6 million, or 26.26%10.20%, from savings deposits of $3.01$3.88 billion at December 31, 2019.

2020.

Time deposits totaled $445.1$344.4 million at September 30, 2020,2021, representing a decrease of $1.2$57.3 million, or 0.26%14.25%, from total time deposits of $446.3$401.7 million for December 31, 2019.

62
2020.

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Table of Contents

Borrowings

We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of these funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a

pre-determined
balance in a demand deposit account, in order to earn interest. As of September 30, 20202021 and December 31, 2019,2020, total funds borrowed under these agreements were $483.4$659.6 million and $428.7$439.4 million, respectively, with a weighted average interest rate of 0.14%0.08% and 0.44%0.10%, respectively.
At

We had no other borrowings at September 30, 2020, we had2021, compared to $5.0 million and $10.0 million in short-term borrowings that were interest-free advances from the FHLB. We had no short-term borrowingsFHLB at December 31, 2019.

2020 and September 31, 2020, respectively.

On June 15, 2021, we redeemed our junior subordinated debentures of $25.8 million, representing the amounts that are due from the Company to CVB Statutory Trust III, which had a borrowing cost of approximately 1.60%. The debentures and the Trust Preferred Securities had an original maturity date of 2036. The interest rate on these debentures were based on three-month LIBOR plus 1.38%.

At September 30, 2020, $6.002021, $6.26 billion of loans and $1.86$2.20 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of September 30, 2020.2021.

 

 

 

 

Maturity by Period

 

 

Total

 

 

Less Than One Year

 

 

One Year Through
Three Years

 

 

Four Years Through
Five Years

 

 

Over Five Years

 

 

(Dollars in thousands)

 

Deposits (1)

$

12,930,216

 

 

$

12,902,846

 

 

$

17,736

 

 

$

9,019

 

 

$

615

 

Customer repurchase agreements (1)

 

659,579

 

 

 

659,579

 

 

 

-

 

 

 

-

 

 

 

-

 

Deferred compensation

 

20,973

 

 

 

675

 

 

 

819

 

 

 

621

 

 

 

18,858

 

Operating leases

 

22,154

 

 

 

6,666

 

 

 

8,864

 

 

 

4,980

 

 

 

1,644

 

Affordable housing investment

 

1,350

 

 

 

1,259

 

 

 

55

 

 

 

30

 

 

 

6

 

    Total

$

13,634,272

 

 

$

13,571,025

 

 

$

27,474

 

 

$

14,650

 

 

$

21,123

 

(1)
Amounts exclude accrued interest.
      
Maturity by Period
   
Total
  
Less Than One

Year
  
One Year
Through
Three Years
  
Four Years
Through
Five Years
  
Over
Five
Years
   
(Dollars in thousands)
Deposits (1)
    $    11,168,834     $    11,126,422     $    32,422     $9,394     $596 
Customer repurchase agreements (1)
   483,420    483,420    -    -    - 
Junior subordinated debentures (1)
   25,774    -    -    -    25,774 
Deferred compensation
   21,864    681    1,172    619    19,392 
Operating leases
   23,416    6,880    9,921    4,476    2,139 
Affordable housing investment
   3,159    2,285    814    47    13 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $11,726,467     $11,619,688     $44,329     $14,536     $47,914 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
Amounts exclude accrued interest.

Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.

Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.

At September 30, 2020, we had $10.0 million in FHLB short-term borrowings with a cost of 0.0%, compared to zero at December 31, 2019 and September 30, 2019.
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current and retired employees under our deferred compensation plans.

Operating leases represent the total minimum lease payments due under

non-cancelable
operating leases. Refer to Note 11 –
Leases
of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.
63

61

Table of Contents

Off-Balance

Sheet Arrangements

The following table summarizes the

off-balance
sheet items at September 30, 2020.
2021.

 

 

 

 

Maturity by Period

 

 

Total

 

 

Less Than One Year

 

 

One Year Through
Three Years

 

 

Four Years Through
Five Years

 

 

Over Five Years

 

 

(Dollars in thousands)

 

Commitment to extend credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

315,799

 

 

$

49,608

 

 

$

126,713

 

 

$

123,577

 

 

$

15,901

 

Construction

 

90,224

 

 

 

38,456

 

 

 

51,768

 

 

 

-

 

 

 

-

 

SBA

 

2,247

 

 

 

1,570

 

 

 

-

 

 

 

-

 

 

 

677

 

SBA - PPP

 

916,126

 

 

 

697,971

 

 

 

139,212

 

 

 

10,629

 

 

 

68,314

 

Commercial and industrial

 

209,528

 

 

 

76,947

 

 

 

132,581

 

 

 

-

 

 

 

-

 

Dairy & livestock and agribusiness (1)

 

17,948

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,948

 

SFR Mortgage

 

3,432

 

 

 

-

 

 

 

350

 

 

 

-

 

 

 

3,082

 

Consumer and other loans

 

123,899

 

 

 

18,026

 

 

 

4,227

 

 

 

4,809

 

 

 

96,837

 

  Total commitment to extend credit

 

1,679,203

 

 

 

882,578

 

 

 

454,851

 

 

 

139,015

 

 

 

202,759

 

Obligations under letters of credit

 

45,779

 

 

 

39,728

 

 

 

6,051

 

 

 

-

 

 

 

-

 

    Total

$

1,724,982

 

 

$

922,306

 

 

$

460,902

 

 

$

139,015

 

 

$

202,759

 

(1)
Total commitments to extend credit to agribusiness were $20.9 million at September 30, 2021.
      
Maturity by Period
   
Total
  
Less Than
One

Year
  
One Year to
Three
Years
  
Four Years
to Five
Years
  
After Five
Years
   
(Dollars in thousands)
Commitment to extend credit:
          
Commercial and industrial
    $989,178     $672,740     $197,626     $5,295     $113,517 
SBA
   591    185    -    -    406 
SBA - PPP
   -    -    -    -    - 
Real estate:
          
Commercial real estate
   310,666    49,450    91,984    126,299    42,933 
Construction
   78,623    63,329    15,294    -    - 
SFR Mortgage
   1,706    -    -    -    1,706 
Dairy & livestock and agribusiness (1)
   232,870    188,380    43,873    130    487 
Consumer and other loans
   131,693    10,354    12,069    3,952    105,318 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total commitment to extend credit
   1,745,327    984,438    360,846    135,676    264,367 
Obligations under letters of credit
   48,776    46,337    2,391    48    - 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
    $    1,794,103     $    1,030,775     $    363,237     $    135,724     $    264,367 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
(1)
Total commitments to extend credit to agribusiness were $17.2 million at September 30, 2020.

As of September 30, 2020,2021, we had commitments to extend credit of approximately $1.75$1.68 billion, and obligations under letters of credit of $48.8$45.8 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for

on-balance
sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000There was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments recorded for the three months ended September 30, 2021 and $1.0 million in recapture of provision for unfunded loan commitments was recorded for the nine months ended September 30, 2021, compared to no provision or recapture of provision for unfunded loan commitmentsfor the three and nine months ended September 30, 2020 and 2019.2020. The Company had a reserve for unfunded loan commitments of $9.0$8.0 million as of September 30, 2020 and December 31, 20192021 included in other liabilities.
liabilities September 30, 2021, compared to $9.0 million as of December 31, 2020.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.

62

Capital Resources

Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital.

Total equity decreased $12.1increased $55.9 million, or 0.61%2.79%, to $1.98$2.06 billion at September 30, 2020,2021, compared to total equity of $1.99$2.01 billion at December 31, 2019.2020. The $12.1$55.9 million decreaseincrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our

10b5-1
stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. We had $127.1$164.8 million in net earnings during the first nine months of 2020,and $4.2 million for various stock based compensation items. This was partially offset by $73.3a $32.3 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $23.5 million as a result of an increasedecrease in other comprehensive income from the increasetax effected impact of the decrease in our tax adjusted market value of our
available-for-sale
investment securities. securities and $73.4 million in cash dividends. During the third quarter, we repurchased 390,336 shares of common stock for $7.4 million, or an average repurchase price of $18.97. Our tangible common equity ratio was 9.78% 8.85%at September 30, 2020.
64
Table of Contents
2021.

During the third quarter of 2020,2021, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.

On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares were available for repurchase under the Company’s current

10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. On March 31, 2020, the Company announced that it suspended its
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. For the nine monthsyear ended September 30,December 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. The Company terminated the 10b5-1 stock buyback plan on September 23, 2021 as a result of the Company’s prospective issuance of common stock related to the pending acquisition of Suncrest Bank. For the three and nine months ended September 30, 2021, the Company repurchased 390,336 shares of CVB common stock outstanding under this program. As of September 30, 2020,2021, we have 4,585,145had 4,194,809 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.

The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At September 30, 2020,2021, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.

Business – Capital Adequacy Requirements
” as described in our Annual Report on Form
10-K
for the year ended December 31, 2019.
2021.

At September 30, 2020,2021 the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies.

The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.

           
September 30, 2020
  
December 31, 2019
 
Capital Ratios
 
Adequately
Capitalized
Ratios
  
Minimum Required
Plus Capital
Conservation Buffer
  
Well
Capitalized
Ratios
  
CVB Financial
Corp.
Consolidated
  
Citizens

Business

Bank
  
CVB Financial
Corp.
Consolidated
  
Citizens

Business

Bank
 
Tier 1 leverage capital ratio
  4.00%   4.00%   5.00%   9.88%   9.71%   12.33%   12.19% 
Common equity Tier 1 capital ratio
  4.50%   7.00%   6.50%   14.60%   14.64%   14.83%   14.94% 
Tier 1 risk-based capital ratio
  6.00%   8.50%   8.00%   14.89%   14.64%   15.11%   14.94% 
Total risk-based capital ratio
  8.00%   10.50%   10.00%   16.08%   15.83%   16.00%   15.83% 
65

 

 

 

 

 

 

 

 

September 30, 2021

 

December 31, 2020

Capital Ratios

 

Adequately Capitalized Ratios

 

Minimum Required Plus Capital Conservation Buffer

 

Well Capitalized Ratios

 

CVB Financial Corp. Consolidated

 

Citizens Business Bank

 

CVB Financial Corp. Consolidated

 

Citizens Business Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital ratio

 

4.00%

 

4.00%

 

5.00%

 

9.22%

 

8.94%

 

9.90%

 

9.58%

Common equity Tier 1 capital ratio

 

4.50%

 

7.00%

 

6.50%

 

14.94%

 

14.50%

 

14.77%

 

14.57%

Tier 1 risk-based capital ratio

 

6.00%

 

8.50%

 

8.00%

 

14.94%

 

14.50%

 

15.06%

 

14.57%

Total risk-based capital ratio

 

8.00%

 

10.50%

 

10.00%

 

15.74%

 

15.30%

 

16.24%

 

15.75%

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Table of Contents

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

Liquidity and Cash Flow

The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.

We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthlyquarterly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.

Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from

period-to-period
due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $11.17$12.93 billion at September 30, 20202021 increased $2.46$1.19 billion, or 28.30%10.17%, over total deposits of $8.70$11.74 billion at December 31, 2019.2020. This significant deposit growth was primarily due to our customers maintaining greater liquidity.

In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities, and other anticipated near term cash flows from investments. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant off-balance sheet sources of liquidity. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.

At September 30, 2020, we2021, the Bank had $25.8 million in subordinated debt and $10.0 million in FHLBno short-term borrowings at 0% cost. The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant
off-balance
sheet sources of liquidity.
borrowings.

CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. On June 15, 2021, we redeemed our $25.8 million in subordinated debt with an interest rate of three month LIBOR plus 1.38% at par. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.

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Table of Contents

Below is a summary of our average cash position and statement of cash flows for the nine months ended September 30, 20202021 and 2019.2020. For further details see our “

Condensed Consolidated Statements of Cash Flows
(Unaudited)” under Part I, Item 1 of this report.

64

Consolidated Summary of Cash Flows

   
Nine Months Ended September 30,
 
   
2020
   
2019
 
   
(Dollars in thousands)
 
Average cash and cash equivalents
    $1,071,392       $237,244   
Percentage of total average assets
   8.52%      2.10%   
Net cash provided by operating activities
    $138,019       $147,410   
Net cash (used in) provided by investing activities
   (1,200,664)      538,256   
Net cash provided by (used in) financing activities
   2,362,080      (412,066)   
  
 
 
   
 
 
 
Net increase in cash and cash equivalents
    $1,299,435       $273,600   
  
 
 
   
 
 
 

 

Nine Months Ended
September 30,

 

 

2021

 

 

2020

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Average cash and cash equivalents

$

2,045,021

 

 

$

1,071,392

 

Percentage of total average assets

 

13.52

%

 

 

8.52

%

 

 

 

 

 

 

Net cash provided by operating activities

$

136,580

 

 

$

138,019

 

Net cash used in investing activities

 

(835,890

)

 

 

(1,200,664

)

Net cash provided by financing activities

 

1,302,513

 

 

 

2,362,080

 

Net increase in cash and cash equivalents

$

603,203

 

 

$

1,299,435

 

Average cash and cash equivalents increased by $834.1$973.6 million, or 351.60%90.88%, to $1.07$2.05 billion for the nine months ended September 30, 2020,2021, compared to $237.2 million$1.07 billion for the same period of 2019.

2020.

At September 30, 2020,2021, cash and cash equivalents totaled $1.48$2.56 billion. This represented an increase of $1.05$1.08 billion, or 239.38%72.49%, from $437.5 million$1.48 billion at September 30, 2019.

2020.

Interest Rate Sensitivity Management

During periods of changing interest rates, the ability to

re-price
interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability re pricingrepricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure.

One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the

re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, and prepayment of loans and securities.

Our interest rate risk policy measures the sensitivity of our net interest income over both a

one-year
and
two-year
cumulative time horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a

one-year
horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the
12-month
and
24-month
time horizon.
67

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Table of Contents

The following depicts the Company’s net interest income sensitivity analysis as offor the periods presented below.below, when rates are ramped up 200bps or ramped down 100bps over a 12-month time horizon.

 

 

Estimated Net Interest Income Sensitivity (1)

 

 

September 30, 2021

 

 

 

December 31, 2020

Interest Rate Scenario

 

12-month Period

 

24-month Period (Cumulative)

 

Interest Rate Scenario

 

12-month Period

 

24-month Period (Cumulative)

 

 

 

 

 

 

 

 

 

 

 

+ 200 basis points

 

12.66%

 

21.28%

 

+ 200 basis points

 

11.10%

 

19.60%

- 100 basis points

 

-5.05%

 

-6.11%

 

- 100 basis points

 

-1.20%

 

-2.40%

(1)
Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.
                    Estimated Net Interest Income Sensitivity (1)
  
September 30, 2020
   
December 31, 2019
    
24-month Period
     
24-month Period
    Interest Rate Scenario        
 
12-month Period
 
(Cumulative)
 
Interest Rate Scenario
 
12-month Period
 
(Cumulative)
+ 200 basis points
 9.30% 18.30% + 200 basis points 5.20% 10.00%
- 100 basis points
 -0.60% -1.40% - 100 basis points -2.10% -4.60%
(1)
Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.

Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a

one-year
and a
two-year
horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape,
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.01%.
zero.

We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term

re-pricing
risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the
EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At September 30, 20202021 and December 31, 2019,2020, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.

Economic Value of Equity Sensitivity

Instantaneous Rate Change
  
    September 30, 2020    
 
 
  
    December 31, 2019    
 
100 bp decrease in interest rates
  -21.6%    -17.5% 
100 bp increase in interest rates
  15.2%    14.2% 
200 bp increase in interest rates
  26.5%    25.5% 
300 bp increase in interest rates
  30.7%    30.0% 
400 bp increase in interest rates
  36.3%    36.2% 

Instantaneous Rate Change

 

September 30, 2021

 

December 31, 2020

 

 

 

 

 

100 bp decrease in interest rates

 

-14.0%

 

-21.0%

100 bp increase in interest rates

 

8.2%

 

16.1%

200 bp increase in interest rates

 

17.0%

 

28.4%

300 bp increase in interest rates

 

22.5%

 

34.4%

400 bp increase in interest rates

 

28.4%

 

41.6%

As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

68

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

LIBOR is expected to be completely phased out after 2021,by 2023, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “

Asset/Liability Management and Interest Rate Sensitivity Management
” included in Item 2 “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019.2020. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

During the fiscal quarter ended September 30, 2020,2021, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

69

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Table of Contents

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and

non-ordinary
course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, mergers and acquisitions litigation, employment matters, wage-hour and labor law claims, consumer claims, regulatory compliance claims, data privacy or security claims, check and wire fraud claims, lender liability claims and negligence claims, some of which may be styled as “class action”action,” "derivative action" or other representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.

For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws and regulations applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.

Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.

We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.

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Table of Contents

ITEM 1A. RISK FACTORS

Except as discussed below there have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form

10-K
for the year ended December 31, 2019.2020. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form
10-K
and any subsequent Form
10-Q
or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” in this Quarterly Report on Form
10-Q.

Risks relating to the COVID-19 Pandemic

The

COVID-19
pandemic has significantly impacted the banking industry and our business. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact of the pandemic on the economy, our customers, our employees and our business partners, the safety and effectiveness, distribution and acceptance of vaccines developed to mitigate the pandemic, and actions taken by governmental authorities in response to the pandemic
.
pandemic.

The

COVID-19
pandemic has negatively impacted the global, U.S., California and local economies, disrupted supply chains, selectively lowered equity market valuations, created significant volatility and disruption in financial markets, and sharplyresulted in increased unemployment levels. In addition,While the pandemic hasinitially resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including in

68

California and the principal counties and cities in which our banking centers are located.located, these measures have been lifted in many of the locations and jurisdictions where we have offices. Our operations, like those of other financial institutions that operate in our markets, are significantly influenced by economic conditions in California, including the strength of the real estate market and business conditions in the industries to which we lend or from which we gather deposits. The

on-going COVID-19
pandemic has resulted in a substantialsignificant decline in the revenues of manycertain business sectors as well as inimpacts to commercial and residential property sales and construction activities. As a result, while the demand for our products and services has been, and may continuerecovered to be, significantly impacted.
Furthermore,an extent as the pandemic could further influencehas receded, the recognition of credit losses in our loan portfolios and further increase our allowance for credit losses, particularly as many businesses remain closed or partially open. Our customers could be expected to draw further on their lines of credit or to seek deferments of scheduled loan payments to help mitigate the effects of lost revenues. As previously noted, we have already increased our allowance for expected credit losses by $23.5 million for the nine months ended September 30, 2020, due to the continuing anticipatedongoing impact of
COVID-19-related
economic distress the coronavirus and other aftereffects of the pandemic are still present for a number of our customers and in a number of locations that we serve. Such ongoing impact could have a material adverse effect on our loan portfolios, coupled with the implementationbusiness, financial condition and results of operations.

We implemented CECL, for determining our overall provision for credit losses, inat the beginning of the first quarter of 2020. In addition, as also noted above, through October 9, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 33 loans, with a gross balance of $68.6 million, or less than 1% of our total loan portfolio atFor the nine months that ended September 30, 2020.2020, our allowance for credit losses increased by $23.5 million in provision for credit losses, primarily due to the forecasted impact of COVID-19 on certain economic variables that may cause distress to our loan portfolios. During the first nine months of 2021, forecasted improvements in macroeconomic variables, because of the wide availability of vaccines and government economic stimulus, resulted in a $25.5 million recapture of provision for credit losses. Depending on the scope and duration of the

COVID-19
pandemic, we believeincluding the impact of new variants of the coronavirus, there is a reasonable possibility that additional loan payment deferments and increased provisions for expected credit losses could prove necessary forin the final calendar quarter in 2020.
Similarly, because of changing economic and market conditions affecting bond issuers, we may be required to recognize credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant or critical portions of our workforce or managers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, and to comply with or follow various government recommendations or mandates, we have also suspended certain real property foreclosure actions and sales, and in certain instances, we are providing fee waivers, payment deferrals, and other expanded assistance for our business and mortgage customers. The extent to which the
COVID-19
pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
future.

Our bank has elected to participate as a lender in the Small Business Administration’s Paycheck Protection Program (PPP) and to register as an Eligible Lender under the Federal Reserve’s Main Street Lending Program (MSLP), and has accordingly become subject to a number of significant risks applicable to lenders under the PPP and MSLP, respectively.

PPP.

As one set of responses to the

COVID-19
pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress that was initially caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate. One such program is the Paycheck Protection Program (PPP)PPP enacted under the federal CARES Act.Act and subsequently extended under the federal Consolidated Appropriations Act, 2021. This program iswas designed, among other things, to provide employee payroll maintenance support for small and
medium-sized
businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA). Because the Company is an authorized SBA lender and our primary customer base consists of small and
medium-sized
businesses, the Company has actively participated in the PPP.PPP through its extended expiration date of May 31, 2021. Including the second round of funding, after Legislationlegislation passed on April 24, 2020, we have originated and funded approximately 4,100 PPP loans from our customers and, through two separate roundstotaling approximately $1.10 billion, of authorized funding forwhich $52.4 million was outstanding at September 30, 2021. On January 13, 2021, the SBA reopened the PPP totaling $1.10 billion asfor Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase.As of September 30, 2020.    
71
Table2021, we originated approximately 1,900 round two loans totaling $420 million in customer borrowings, of Contents
which $278.6 million was outstanding at September 30, 2021.

Under interim final regulations promulgated by the SBA, PPP lenders are entitled to rely on borrower certifications with respect to issues such as program eligibility and eligible loan amounts, and PPP loans are designed to be subsequently forgivable, in whole or part, if certain additional criteria are met by the borrower with respect to employee payroll maintenance. However, in view of the fact that the PPP was by design intended to support economically distressed businesses, the SBA’s guarantee of PPP loan amounts to participating lenders is a critical feature of the program. In this regard, because the PPP was quickly implemented into operation and the SBA’s interim regulations have been repeatedly revised and are continuing to evolve, thereThere are significant risks to the Company’s participation in the PPP, including whether certain borrowers will ultimately be found to have been eligible for PPP loans, whether eligible PPP loan amounts for certain borrowers were correctly calculated, whether certain PPP loans will ultimately be determined to be forgivable, and if not, whether the SBA’s guarantee will continue to apply to any unforgiven PPP loan amounts. As of November 5, 2020, 69September 30, 2021, approximately 4,800 loans, representing approximately $43 million,$1.2 billion in PPP loan balances were submitted to the SBA and granted forgiveness. To date, our customers who have had their forgiveness requests reviewed by the SBA have received nearlyalmost 100% loan forgiveness.

Another program enacted pursuant

Our pending acquisition of Suncrest Bank could adversely affect our business while the merger is pending or if the merger is consummated.

We have entered into an agreement to acquire Suncrest Bank. This merger is subject to our applications for approval filed with our principal federal and state regulatory oversight agencies under the federal CARESBank Merger Act, and designed to help provide support to small and

medium-sized
business and their employees throughoutas well as the U.S., including California, is the Federal Reserve’s Main Street Lending Program (MSLP). The Company has elected to participate as an Eligible Lender under at least three
sub-facilities
affirmative vote of a majority of the MSLP, including the Main Street New Loan Facility, the Main Street Priority Loan Facilityshareholders of Suncrest, and the Nonprofit Organization New Loan Facility. Each of these lending facilities offers different terms and conditions, including with respect to borrower eligibility criteria, maximum loan amounts, whether loan proceedsthere can be utilized to refinance borrower indebtedness to other lenders, contractual priority,
non-subordination
and collateralization requirements, etc. Eligible Lenders may extend new MSLP loans to eligible borrowers and sell a 95% participation in each MSLP loan to a special purpose vehicle established by the Federal Reserve Bank of Boston (Main Street SPV), subject to numerous borrower and lender certifications and covenants and the terms of a Loan Participation Agreement and a Servicing Agreement.
In contrast to the PPP, loans under the MSLP are not forgivable, carry an adjustable rate of interest at LIBOR (one or three month) plus 300 basis points, require the payment of specified fees, and must be repaid in full at the end of a five year maturity period, with principal repayment commencing after a deferment period consisting of the first two years following loan origination. In addition, eligible lenders must retain five percent of each MSLP loan and continue to service such loan until it matures or the Main Street SPV sells all of its 95% participation interest. In this regard, because the MSLP is a newly constituted program without any established operating history, there are significant risks to the Company’s participation in the MSLP, including whether certain borrowersno assurance that these regulatory approvals will ultimately be foundobtained or the timetable for such approvals.

69

In addition, while the merger is pending, our management may need to have been eligible for MSLPfocus their time and energies on matters related to the merger that otherwise would be directed to their other areas of responsibilities. In addition, the success of the merger will depend, in part, on our ability to successfully combine the businesses of Citizens and Suncrest upon the completion of the merger. It is possible that the integration process could result in:

the loss of key employees,
the disruption of our ongoing business,
credit or other losses in connection with loans whetherand portfolio products being acquired from Suncrest, or
inconsistencies in standards, controls, procedures and policies that adversely affect the numerous required lendercombined company’s ability to maintain relationships with clients, customers, depositors and borrower certifications willemployees or to achieve the anticipated benefits of the merger.

Furthermore, combining the two companies may be found to have been mademore difficult, time-consuming or costly than expected. If the merger is completed, but the combined company does not fully realize our anticipated cost savings from the merger, or the anticipated business synergies from the acquisition of Suncrest customers, loans and deposits in good faith, whether the borrower will remain in complianceconnection with the terms and conditionsmerger, our business, financial condition or results of its MSLP loan throughout its applicable term, whether any given lender or MSLP loan willoperations could be found to have been in compliance with the terms of the Main Street SPV’s Loan Participation Agreement and/or Servicing Agreement, and whether any individual MSLP loan will be repaid by the borrower on schedule, and, if not, whether the Main Street SPV will seek recourse against the originating lender.    

adversely affected.




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions.transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. On March 31, 2020,The Company terminated the Company announced that it suspended its

10b5-1
stock repurchase program.buyback plan on September 23, 2021 as a result of the Company’s prospective issuance of common stock related to the pending acquisition of Suncrest Bank. During the three months ended September 30, 2020,2021, the Company did not repurchase anyrepurchased 390,336 shares of CVB common stock outstanding under this program. As of September 30, 2020,2021, we have 4,585,145had 4,194,809 shares of CVB common stock available for repurchase under the common stock repurchase program.

Period

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Average Price
Paid Per Share

 

 

Maximum Number of Shares Available for Repurchase Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

July 1 - 31, 2021

 

 

26,865

 

 

$

19.02

 

 

 

4,558,280

 

August 1 - 31, 2021

 

 

43,500

 

 

$

19.01

 

 

 

4,514,780

 

September 1 - 30, 2021

 

 

319,971

 

 

$

18.96

 

 

 

4,194,809

 

Total

 

 

390,336

 

 

$

18.97

 

 

 

4,194,809

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

72
Table of Contents

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

None

70

ITEM 6. EXHIBITS

Exhibit No.

Description of Exhibits

  31.1

2.1

Agreement and Plan of Reorganization and Merger, dated July 27, 2021, by and among CVB Financial Corp, Citizens Business Bank and Suncrest Bank (1)

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002*

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002*

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*2002**

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*2002**

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline

XBRL Taxonomy Extension Schema Document

101.CAL

Inline

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline

XBRL Taxonomy Extension Presentation Linkbase Document

104

The cover page from the Company’s Quarterly Report on Form

10-Q
for the quarter ended September 30, 2020,2021, has been formatted in Inline XBRL.

*

  *

Filed herewith

  **

Furnished herewith

  (1)

Incorporated herein by reference to Exhibit 2.1 to our Form 8-K filed with the SEC on July 28, 2021.

**
Furnished herewith
73

71

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CVB FINANCIAL CORP.
(Registrant)
Date: November 6, 2020
/s/ E. Allen Nicholson
E. Allen Nicholson
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
74

CVB FINANCIAL CORP.

(Registrant)

Date: November 9, 2021

/s/ E. Allen Nicholson

E. Allen Nicholson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

72