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CVBF CVB Financial

Filed: 6 Nov 20, 1:45pm
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
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., Suite 350
Ontario, California
 
91764
(Address of principal executive offices) (Zip 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  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 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: 135,505,605 outstanding as of October 30, 2020.
 

TABLE OF CONTENTS
 
PART I –
  
  
 
3
 
   
    ITEM 1.
  
  
 
5
 
   
 
  
  
 
10
 
   
    ITEM 2.
  
  
 
37
 
   
 
  
  
 
38
 
   
 
  
  
 
40
 
   
 
  
  
 
42
 
   
 
  
  
 
52
 
   
 
  
  
 
66
 
   
    ITEM 3.
  
  
 
69
 
   
    ITEM 4.
  
  
 
69
 
   
PART II –
  
  
 
70
 
   
    ITEM 1.
  
  
 
70
 
   
    ITEM 1A.
  
  
 
71
 
   
    ITEM 2.
  
  
 
72
 
   
    ITEM 3.
  
  
 
72
 
   
    ITEM 4.
  
  
 
73
 
   
    ITEM 5.
  
  
 
73
 
   
    ITEM 6.
  
  
 
73
 
  
  
 
74
 
 
2

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 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

 
 
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.
Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the Company’s business prospects. 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 on the economy, our customers and our business partners, 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

 
 
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 
  
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
5

 
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 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
6

 
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
(Unaudited)
Three Months Ended September 30, 2020 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 
 
 
 
 
 
 
 
 
��
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2020 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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
7

 
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 
  
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
8
 
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 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
9

 
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
BUSINESS
The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has 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 57 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
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 nine months ended September 30, 2020 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, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Reclassification
— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as discussed below, our accounting policies are described in Note 3 –
Summary of Significant Accounting Policies
, of our audited consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2019 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

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

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, 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

 
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
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 have a material impact on the accounting for investment securities, as approximately 93% of the total investment securities portfolio at September 30, 2020 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 at September 30, 2020.
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.
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 losses 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.
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

  
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, 2020 and December 31, 2019, investment securities having a carrying value of approximately $1.86 billion and $1.64 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, 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 years, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty
.
Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives, which incorporate estimated prepayment speeds.
 
  
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 of September 30, 2020.
 
14

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, 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% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 64.56% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of September 30, 2020, $271.2 million, or 5.00% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. 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, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of September 30, 2020, dairy & livestock and agribusiness loans of $252.8 million were comprised of $210.4 million for dairy & livestock loans and $42.4 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.
At September 30, 2020 and December 31, 2019, loans totaling $6.00 billion and $6.03 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, 2020 and December 31, 2019.
 
15

Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Loans 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): 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.
 
16

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

                
                
                
                
                
                
                
                
                
   
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

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 allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. 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, 2020 was $93.9 million or 1.12% of total loans. 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 half of 2020 resulting from the forecasted changes in macroeconomic variables related to the
COVID
-19
pandemic. 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 forec
as
t
 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 o
f
 downside economic forecast scenarios from Moody’s.    
Management believes that the ACL was appropriate at September 30, 2020 and December 31, 2019. There is a high degree of uncertainty around the epidemiological assumptions and 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

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

  
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 presents the recorded investment in loans
held-for-investment
and the related ACL by loan type, based on the Company’s methodology for determining the ACL for the periods presented.
 
  
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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the 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 loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
 
21

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

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

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 date of adoption 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 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
24

   
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

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 date presented.
 
   
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 at the same time as it evaluates credit risk associated with the loan and lease portfolio. As a result of the adoption of ASU
2016-13,
the reserve for unfunded loan commitments included a transition adjustment of $41,000 as of January 1, 2020. There was 0 provision or recapture of provision for unfunded commitments for the nine months ended September 30, 2020. As of September 30, 2020 and December 31, 2019, the balance in this reserve was $9.0 million and was included in other liabilities.
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered nonperforming 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, 2019 for a more detailed discussion regarding TDRs.
As of September 30, 2020, there were $2.2 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, performing TDRs were comprised of seven SFR mortgage loans of $1.8 million, one commercial real estate loan of $354,000, and one commercial and industrial loan of $47,000.
The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have 0 allocated allowance to TDRs as of September 30, 2020 and December 31, 2019.
 
26

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,
   
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, 2020 and 2019, there were no 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, 2020 and 2019.
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

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, 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,
   
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
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The following disclosure provides the fair value information for financial assets and liabilities as of September 30, 2020. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).
 
 · 
Level
 1
— 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

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, 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    $    $1,756,871    $ 
CMO/REMIC
  411,494      411,494    
Municipal bonds
  36,468      36,468    
Other securities
  813      813    
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  2,205,646      2,205,646    
Interest rate swaps
  37,255      37,255    
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total assets
   $2,242,901    $    $2,242,901    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $37,255    $    $37,255    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $37,255    $    $37,255    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
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    $    $1,206,313    $ 
CMO/REMIC
  493,710      493,710    
Municipal bonds
  39,354      39,354    
Other securities
  880      880    
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  Total investment securities - AFS
  1,740,257      1,740,257    
Interest rate swaps
  11,502      11,502    
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total assets
   $1,751,759    $    $1,751,759    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Description of liability
    
Interest rate swaps
   $11,502    $    $11,502    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total liabilities
   $11,502    $    $11,502    $ 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
29

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, 2020 and December 31, 2019, 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    $    $    $3,273    $2,034 
SBA
  712         712   203 
Real estate:
     
Commercial real estate
  1,715         1,715   1,295 
Construction
               
SFR mortgage
               
Dairy & livestock and agribusiness
               
Consumer and other loans
               
Other real estate owned
  2,275         2,275   700 
Asset
held-for-sale
               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $7,975    $    $    $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    $    $    $253    $251 
SBA
  359         359   513 
Real estate:
     
Commercial real estate
               
Construction
               
SFR mortgage
               
Dairy & livestock and agribusiness
               
Consumer and other loans
               
Other real estate owned
  444         444   64 
Asset
held-for-sale
               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $1,056    $    $    $1,056    $828 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30

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, 2020 and December 31, 2019, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
                                                                                          
  
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, 2020 and December 31, 2019. 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.
 
31

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, the Bank has entered into 133 interest-rate swap agreements with customers with a notional amount totaling $455.2 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. NaNne 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.
Balance Sheet Classification of Derivative Financial Instruments
As of September 30, 2020 and December 31, 2019, the total notional amount of the Company’s swaps was $455.2 million, and $260.0 million, respectively. The location of the asset and liability, and their respective fair values, are summarized in the tables below.
 
                                                                        
  
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

The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings
The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.
 
Derivatives Not Designated
as Hedging Instruments
  
Location of Gain Recognized in
  Income on Derivative Instruments  
   
Amount of Gain Recognized in Income
on Derivative Instruments
       
    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,
   
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

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
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

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,
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
 
35

The Company’s lease arrangements that have not yet commenced as of September 30, 2020 and the Company’s short-term lease costs and variable lease costs, for the nine months ended September 30, 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, excluding property taxes and insurance, are as follows:
 
   
      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
On January 1, 2018, the Company adopted ASU
No. 2014-09
“Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –
Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition
of
our
 2019 Annual Report on Form
10-K
for the year ended December 31, 2019 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


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, 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, 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 contains 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% 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 legislation passed on April 24, 2020 to provide additional PPP funds of $310 billion. We originated and funded about 4,100 loans, totaling approximately $1.10 billion, as of September 30, 2020. In response to the
COVID-19
pandemic, 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 allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of October 9, 2020, we have remaining temporary payment deferments of principal, interest or of principal and interest in response 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 deferment and the remaining six loans are first deferments.
The third quarter of 2020 did not include a provision for credit losses, as the economic outlook is generally consistent with the forecast from the prior quarter end. In comparison, the Company recorded a provision for credit losses of $23.5 million in the first half of 2020, including $11.5 million in the second quarter. We continue to monitor the impact of
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 fourth quarter of 2020 is highly uncertain, but we may experience increased 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

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
We adopted ASU
2016-13,
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life 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.
 
38

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.
 
39

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.
 
40

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
.
 
41

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%    
 
42

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.
 
43

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.
 
44

   
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.
 
45

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
  
 
 
  
 
 
  
 
 
  
 
 
 
 
46

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.
 
47

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.
 
48

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%