10-Q 1 d631345d10q.htm 10-Q 10-Q
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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, 2018

or

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

For the transition period from _____ to _____

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

California     95-3629339

(State or other jurisdiction of

Incorporation or organization)

            

(I.R.S. Employer

Identification No.)

701 North Haven Ave., Suite 350    
Ontario, California     91764
(Address of principal executive offices)     (Zip Code)

(909) 980-4030

(Registrant’s telephone number,

including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically 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: 140,333,375 outstanding as of October 31, 2018.


Table of Contents

TABLE OF CONTENTS

 

PART I –

  FINANCIAL INFORMATION (UNAUDITED)      3  

    ITEM 1.

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

    ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      46  
  CRITICAL ACCOUNTING POLICIES      46  
  OVERVIEW      46  
  ANALYSIS OF THE RESULTS OF OPERATIONS      48  
  ANALYSIS OF FINANCIAL CONDITION      58  
  ASSET/LIABILITY AND MARKET RISK MANAGEMENT      74  

    ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      76  

    ITEM 4.

  CONTROLS AND PROCEDURES      76  

PART II –

  OTHER INFORMATION      77  

    ITEM 1.

  LEGAL PROCEEDINGS      77  

    ITEM 1A.

  RISK FACTORS      77  

    ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      78  

    ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      78  

    ITEM 4.

  MINE SAFETY DISCLOSURES      78  

    ITEM 5.

  OTHER INFORMATION      78  

    ITEM 6.

  EXHIBITS      78  

SIGNATURES

     79  

 

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PART I –   FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:

 

   

local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities;

   

our ability to attract deposits and other sources of funding or liquidity;

   

supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate;

   

a prolonged slowdown or decline in real estate construction, sales or leasing activities;

   

changes in the financial performance and/or condition of our borrowers, key vendors or counterparties;

   

changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs;

   

the costs or effects of mergers, acquisitions or dispositions we may make, including the recent merger of Community Bank with and into Citizens Business Bank, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits, including any anticipated cost savings or synergies, associated with any such mergers, acquisitions or dispositions;

   

the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, fair lending, employment, executive compensation, insurance, vendor management and information privacy and security) with which we and our subsidiaries must comply or believe we should comply, including additional legal and regulatory requirements to which we have or will become subject as a result of our total assets exceeding $10 billion, which first occurred in the third quarter of 2018 due to the closing of our merger transaction with Community Bank;

   

changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk;

   

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

   

inflation, interest rate, securities market and monetary fluctuations;

   

changes in government interest rates or monetary or tax policies;

   

changes in the amount and availability of deposit insurance;

   

political developments, uncertainties or instability;

   

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

   

our timely development and acceptance of new banking products and services and the perceived overall value of these products and services by customers and potential customers;

   

the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems and applications;

   

changes in commercial or consumer spending, borrowing and savings preferences or behaviors;

 

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technological changes and the expanding use of technology in banking (including the adoption of mobile banking, funds transfer applications and electronic marketplaces for loans and other banking products or services);

   

our ability to retain and increase market share, retain and grow customers and control expenses;

   

changes in the competitive environment among financial and bank holding companies, banks and other financial service providers;

   

competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies;

   

volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions;

   

fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;

   

the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters;

   

changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or board of directors;

   

the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as securities, bank operations, consumer or employee class action litigation and any litigation which we inherited from our recent merger with Community Bank);

   

regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;

   

our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;

   

our success at managing the risks involved in the foregoing items; and

   

all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2017, and particularly the discussion of risk factors within that document.

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

 

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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,  
    2018   2017

Assets

   

Cash and due from banks

    $ 174,083       $ 119,841  

Interest-earning balances due from Federal Reserve

    20,392       24,536  
 

 

 

 

 

 

 

 

Total cash and cash equivalents

    194,475       144,377  
 

 

 

 

 

 

 

 

Interest-earning balances due from depository institutions

    8,812       17,952  

Investment securities available-for-sale, at fair value (with amortized cost of $1,850,723 at September 30, 2018, and $2,078,131 at December 31, 2017)

    1,806,231       2,080,985  

Investment securities held-to-maturity (with fair value of $726,755 at September 30, 2018, and $819,215 at December 31, 2017)

    759,029       829,890  
 

 

 

 

 

 

 

 

Total investment securities

    2,565,260       2,910,875  
 

 

 

 

 

 

 

 

Investment in stock of Federal Home Loan Bank (FHLB)

    17,688       17,688  

Loans and lease finance receivables

    7,582,459       4,830,631  

Allowance for loan losses

    (60,007     (59,585
 

 

 

 

 

 

 

 

Net loans and lease finance receivables

    7,522,452       4,771,046  
 

 

 

 

 

 

 

 

Premises and equipment, net

    59,256       46,166  

Bank owned life insurance (BOLI)

    219,561       146,486  

Accrued interest receivable

    30,097       22,704  

Intangibles

    56,643       6,838  

Goodwill

    662,888       116,564  

Other real estate owned (OREO)

    420       4,527  

Income taxes

    75,432       40,046  

Other assets

    67,357       25,317  
 

 

 

 

 

 

 

 

Total assets

    $ 11,480,341       $ 8,270,586  
 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

   

Liabilities:

   

Deposits:

   

Noninterest-bearing

    $ 5,224,154       $ 3,846,436  

Interest-bearing

    3,885,672       2,700,417  
 

 

 

 

 

 

 

 

Total deposits

    9,109,826       6,546,853  

Customer repurchase agreements

    399,477       553,773  

Other borrowings

    30,000       -  

Deferred compensation

    19,159       18,223  

Junior subordinated debentures

    25,774       25,774  

Other liabilities

    77,525       56,697  
 

 

 

 

 

 

 

 

Total liabilities

    9,661,761       7,201,320  
 

 

 

 

 

 

 

 

Commitments and Contingencies

   

Stockholders’ Equity

   

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,334,671 at September 30, 2018, and 110,184,922 at December 31, 2017

    1,299,052       573,453  

Retained earnings

    552,343       494,361  

Accumulated other comprehensive (loss) income, net of tax

    (32,815     1,452  
 

 

 

 

 

 

 

 

Total stockholders’ equity

    1,818,580       1,069,266  
 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

    $       11,480,341       $       8,270,586  
 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

                                                                                   
     For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
     2018   2017   2018   2017

Interest income:

        

Loans and leases, including fees

     $ 79,818       $ 55,998       $ 192,382       $ 158,253  

Investment securities:

        

Investment securities available-for-sale

     11,521       12,240       35,086       37,887  

Investment securities held-to-maturity

     4,666       5,184       14,238       16,014  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment income

     16,187       17,424       49,324       53,901  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from FHLB stock

     329       318       959       1,070  

Interest-earning deposits with other institutions and federal funds sold

     304       130       1,475       683  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

     96,638       73,870       244,140       213,907  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

        

Deposits

     2,967       1,555       6,041       4,547  

Borrowings and customer repurchase agreements

     606       402       1,396       1,213  

Junior subordinated debentures

     245       174       674       492  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

     3,818       2,131       8,111       6,252  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

     92,820       71,739       236,029       207,655  

(Recapture of) provision for loan losses

     500       (1,500     (1,500     (7,000
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

     92,320       73,239       237,529       214,655  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

        

Service charges on deposit accounts

     4,295       4,085       12,431       11,794  

Trust and investment services

     2,182       2,523       6,738       7,432  

Bankcard services

     875       927       2,637       2,563  

BOLI income

     936       692       2,984       2,904  

Gain on OREO, net

     -       2       3,540       4  

Other

     1,824       1,809       4,393       4,839  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest income

     10,112       10,038       32,723       29,536  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

        

Salaries and employee benefits

     26,319       21,835       69,684       65,116  

Occupancy and equipment

     5,324       4,400       13,834       12,638  

Professional services

     1,154       1,091       4,374       4,191  

Software licenses and maintenance

     2,317       1,510       5,836       4,698  

Marketing and promotion

     1,134       1,055       3,638       3,484  

Amortization of intangible assets

     1,736       343       2,395       991  

Acquisition related expenses

     6,645       250       7,942       2,176  

Other

     4,251       4,222       11,377       12,402  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

     48,880       34,706       119,080       105,696  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

     53,552       48,571       151,172       138,495  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

     14,994       18,888       42,328       51,935  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

     $ 38,558       $ 29,683       $ 108,844       $ 86,560  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

        

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

     $ (10,387     $ 1,221       $ (49,155     $ 3,287  

Less: Reclassification adjustment for net gain on securities included in net income

     -       -       -       (402
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax

     (10,387     1,221       (49,155     2,885  

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

     3,070       (513     14,532       (1,212
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

     (7,317     708       (34,623     1,673  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

     $ 31,241       $ 30,391       $ 74,221       $ 88,233  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

     $ 0.30       $ 0.27       $ 0.94       $ 0.79  

Diluted earnings per common share

     $ 0.30       $ 0.27       $ 0.94       $ 0.79  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended September 30, 2018 and 2017

(Dollars and shares in thousands)

(Unaudited)

 

                 Accumulated    
     Common           Other    
     Shares     Common     Retained   Comprehensive    
       Outstanding     Stock     Earnings     Income (Loss)   Total

Balance, January 1, 2017

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

Cumulative adjustment upon adoption of ASU 2016-09

     -       116       (66     -       50  

Repurchase of common stock

     (45     (997     -       -       (997

Issuance of common stock for acquisition of Valley Commerce Bancorp

     1,634       37,637       -       -       37,637  

Exercise of stock options

     270       2,537       -       -       2,537  

Shares issued pursuant to stock-based compensation plan

     46       2,200       -       -       2,200  

Cash dividends declared on common stock ($0.40 per share)

     -       -       (44,058     -       (44,058

Net earnings

     -       -       86,560       -       86,560  

Other comprehensive income

     -       -       -       1,673       1,673  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

     110,157       $ 572,685       $ 491,935       $ 11,844       $ 1,076,464  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

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

Cumulative adjustment upon adoption of ASU 2018-02

     -       -       (356     356       -  

Repurchase of common stock

     (42     (988     -       -       (988

Issuance of common stock for acquisition of Community Bank

     29,842       722,767       -       -       722,767  

Exercise of stock options

     145       1,504       -       -       1,504  

Shares issued pursuant to stock-based compensation plan

     205       2,316       -       -       2,316  

Cash dividends declared on common stock ($0.42 per share)

     -       -       (50,506     -       (50,506

Net earnings

     -       -       108,844       -       108,844  

Other comprehensive income

     -       -       -       (34,623     (34,623
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

     140,335       $ 1,299,052       $     552,343       $ (32,815     $   1,818,580  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

         For the Nine Months Ended    
     September 30,
     2018   2017

Cash Flows from Operating Activities

    

Interest and dividends received

   $ 245,842     $ 223,172  

Service charges and other fees received

     26,107       26,769  

Interest paid

     (8,642     (6,279

Net cash paid to vendors, employees and others

     (110,799     (83,610

Income taxes

     (35,879     (53,278

Payments to FDIC, loss share agreement

     (65     (498
  

 

 

 

 

 

 

 

Net cash provided by operating activities

     116,564       106,276  
  

 

 

 

 

 

 

 

Cash Flows from Investing Activities

    

Proceeds from redemption of FHLB stock

     17,250       1,952  

Net change in interest-earning balances from depository institutions

     11,934       27,806  

Proceeds from sale of investment securities held-for-sale

     716,996       5,403  

Proceeds from repayment of investment securities available-for-sale

     296,922       320,599  

Proceeds from maturity of investment securities available-for-sale

     20,260       20,937  

Purchases of investment securities available-for-sale

     (98,709     (280,365

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

     67,861       96,447  

Purchases of investment securities held-to-maturity

     -       (36,166

Net increase in equity investments

     (24,054     (1,454

Net increase in loan and lease finance receivables

     (6,806     (29,713

Proceeds from BOLI death benefit

     882       2,653  

Proceeds from sale of asset held-for-sale

     -       4,012  

Purchase of premises and equipment

     (3,483     (3,129

Proceeds from sales of other real estate owned

     8,067       -  

Cash acquired from acquisition, net of cash paid

     (132,918     28,325  
  

 

 

 

 

 

 

 

Net cash provided by investing activities

     874,202       157,307  
  

 

 

 

 

 

 

 

Cash Flows from Financing Activities

    

Net increase in other deposits

     (241,934     (23,896

Net decrease in time deposits

     (65,079     (39,485

Repayment of FHLB advances

     (297,571     -  

Net (decrease) increase in other borrowings

     (136,000     10,000  

Net decrease in customer repurchase agreements

     (154,296     (147,959

Cash dividends on common stock

     (46,304     (41,626

Repurchase of common stock

     (988     (997

Proceeds from exercise of stock options

     1,504       2,537  
  

 

 

 

 

 

 

 

Net cash used in financing activities

     (940,668     (241,426
  

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

     50,098       22,157  

Cash and cash equivalents, beginning of period

     144,377       121,633  
  

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

   $ 194,475     $ 143,790  
  

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

         For the Nine Months Ended    
     September 30,
     2018   2017

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

    

  Net earnings

     $ 108,844       $ 86,560  

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

    

  Gain loss on sale of investment securities

     -       (402

  Gain on sale of other real estate owned

     (3,540     -  

  Increase in BOLI

     (3,053     (4,416

  Net amortization of premiums and discounts on investment securities

     10,661       13,585  

  Accretion of PCI discount

     (2,137     (756

  Recapture of provision for loan losses

     (1,500     (7,000

  Payments to FDIC, loss share agreement

     (65     (498

  Stock-based compensation

     2,316       2,200  

  Depreciation and amortization, net

     (582     (433

  Change in other assets and liabilities

     5,620       17,436  
  

 

 

 

 

 

 

 

    Total adjustments

     7,720       19,716  
  

 

 

 

 

 

 

 

      Net cash provided by operating activities

     $ 116,564       $ 106,276  
  

 

 

 

 

 

 

 

Supplemental Disclosure of Non-cash Investing Activities

    

  Securities purchased and not settled

     $ -       $ 1,625  

  Transfer of loans to other real estate owned

     $ 420       $ -  

  Issuance of common stock for acquisition

     $ 722,767       $ 37,637  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

BUSINESS

The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust. 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 68 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 – Business Combinations, included herein.

 

2.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification – Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity. The operating segments previously reported have been aggregated into one segment to conform to the current period’s presentation format. These reclassifications do not affect previously reported net earnings.

 

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3 — Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC (“Form 10-K”).

 

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Business Segments — We regularly assess our strategic plans, operations and reporting structures to identify our reportable segments. Changes to our reportable segments are expected to be infrequent. For the years ended December 31, 2016 through June 30, 2018, we operated as two reportable segments: Banking Centers and Dairy & Livestock and Agribusiness. As a result of the Community Bank acquisition, along with changes in personnel, reporting structure, and operations, we re-evaluated our segment reporting for the third quarter ended September 30, 2018.

As of September 30, 2018, we operated as one reportable segment. The factors considered in making this determination include the nature of products and offered services, geographic regions in which we operate, the applicable regulatory environment, and the materiality of discrete financial information reviewed by our key decision makers. Through our network of banking centers, we provide relationship-based banking products, services and solutions for small to mid-sized companies, real estate investors, non-profit organizations, professionals and other individuals. Our products include loans for commercial businesses, commercial real estate, multi-family, construction, land, dairy & livestock and agribusiness, consumer and government-guaranteed small business loans. We also provide business deposit products and treasury cash management services, as well as deposit products to the owners and employees of the businesses we serve. The decision to combine our two reportable segments was made to align the segment reporting with the changes in our operations and reporting structure, and to be consistent with the level and materiality of information reviewed by our key decision makers.

Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.

Adoption of New Accounting Standards — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. This update to the ASC requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in U.S. GAAP. In applying the revenue model to contracts within its scope, an entity should apply the following steps: (1) Identify the contract(s) with a customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. The standard applies to all contracts with customers except those that are within the scope of other topics in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date”, which deferred the effective date of ASU No. 2014-09 to January 1, 2018. The Company adopted the ASU during the first quarter of 2018, as required, using the modified retrospective approach. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, as substantially all of the Company’s revenues are excluded from the scope of the new standard. Since there was no net income impact upon adoption of this ASU, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See Note 14 – Revenue Recognition for more information.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance in this ASU among other things, (i) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio at September 30, 2018 using an exit price notion. See Note 9 – Fair Value Information.

 

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In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, and contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows, or that cannot be separated by source or use, should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company adopted this ASU retrospectively effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.

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

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

Recent Accounting Pronouncements — In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”, which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU 2018-10 are the same as the effective date and transition requirements of 2016-02.

 

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In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which creates a new optional transition method for implementing the new standard on leases, ASU No. 2016-02, and provides lessors with a practical expedient for separating lease and non-lease components. Specifically, under the amendments in ASU 2018-11: (1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02.

The Company established a project to consider the impact of Topic 842. The leasing portfolio consists of real estate leases, which are used for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. Management does not anticipate a material impact to the consolidated statement of earnings. Management estimates the ROU asset and liability to be between $15 million and $20 million. This amount is based on the present value of currently-committed cash flows from leases discounted at the Company’s incremental rate of borrowing on an arms-length basis. This liability includes the non-lease components as the Company has elected to include these components as a practical expedient.

In addition, there are a number of practical expedients that have been elected, which included electing not to adjust comparative financial statements at the effective date of the new accounting standard, with the effect of initially applying ASC 842 recognized as a cumulative-effect adjustment to retained earnings in the period of adoption.

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

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

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

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting.” The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be re-measured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2019 and is applied retrospectively. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

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In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

4.

BUSINESS COMBINATIONS

Community Bank Acquisition

On August 10, 2018, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of August 10, 2018. As the final CB tax return has not yet been completed, initial accounting for taxes was incomplete as of September 30, 2018. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in the recognition of goodwill of $546.3 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.

 

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Table of Contents

The table below summarizes the amounts recognized for the estimated fair value of assets acquired and the liabilities assumed as of the acquisition date.

 

     August 10, 2018
     (Dollars in thousands)

Merger Consideration

     

Cash paid

     $ 180,719     

CVBF common stock issued

     722,767     
  

 

 

 

  

Total merger consideration

        $ 903,486  

Identifiable net assets acquired, at fair value

     

Assets Acquired

     

Cash and cash equivalents

     47,802     

Investment securities

     716,996     

FHLB stock

     17,250     

Loans

     2,734,081     

Accrued interest receivable

     7,916     

Premises and equipment

     14,632     

BOLI

     70,904     

Core deposit intangible

     52,200     

Other assets

     58,130     
  

 

 

 

  

Total assets acquired

        3,719,911  

Liabilities assumed

     

Deposits

     2,869,986     

FHLB advances

     297,571     

Other borrowings

     166,000     

Other liabilities

     29,192     
  

 

 

 

  

Total liabilities assumed

          3,362,749  
     

 

 

 

Total fair value of identifiable net assets, at fair value

        357,162  
     

 

 

 

Goodwill

        $ 546,324  
     

 

 

 

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

For the three and nine months ended September 30, 2018, the Company incurred $6.6 million and $7.9 million, respectively, in merger related expenses associated with the CB acquisition.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the nine months ended September 30, 2018 and 2017. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented.

 

    

Unaudited Pro Forma

Nine Months Ended September 30,

     2018    2017
     (Dollars in thousands)

Total revenues (net interest income plus noninterest income)

     $ 364,846        $ 354,990  

Net Income

     $ 138,274        $ 118,419  

Earnings per share - basic

     $ 0.99        $ 0.85  

Earnings per share - diluted

     $ 0.99        $ 0.85  

 

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Valley Commerce Bancorp Acquisition

On March 10, 2017, the Company completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for Valley Business Bank (“VBB”), headquartered in the Central Valley area of California. The Company acquired all of the assets and assumed all of the liabilities of VCBP for $23.2 million in cash and $37.6 million in stock. As a result, VBB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction serves to further strengthen its presence in the Central Valley area of California. At close, VBB had four branches located in Visalia, Tulare, Fresno, and Woodlake. The systems integration of VCBP and CBB was completed in May 2017. Three of these center locations were consolidated with nearby CBB locations in the third quarter of 2017 and the Company sold the Woodlake branch in the fourth quarter of 2017.

Goodwill of $27.0 million from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

The total fair value of assets acquired approximated $405.9 million, which included $28.3 million in cash and cash equivalents net of cash paid, $2.0 million in FHLB stock, $309.7 million in loans and lease finance receivables, $5.3 million in fixed assets, $9.4 million in BOLI, $3.2 million in core deposit intangible assets acquired and $21.0 million in other assets. The total fair value of liabilities assumed was $368.3 million, which included $361.8 million in deposits, and $6.5 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of March 10, 2017. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The purchase price allocation was finalized in the third quarter of 2017.

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

For the nine months ended September 30, 2018, the Company did not incur any merger related expenses associated with the VCBP acquisition and incurred $250,000 and $2.2 million for the three and nine months ended September 30, 2017, respectively.

 

5.

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, 2018
     Amortized
Cost
   Gross
Unrealized
Holding
Gain
   Gross
Unrealized
Holding
Loss
  Fair Value    Total Percent
     (Dollars in thousands)

Investment securities available-for-sale:

             

Residential mortgage-backed securities

     $ 1,570,072        $ 1,014        $ (38,208     $   1,532,878        84.87

CMO/REMIC - residential

     229,832        152        (6,167     223,817        12.39

Municipal bonds

     50,022        308        (1,591     48,739        2.70

Other securities

     797        -        -       797        0.04
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total available-for-sale securities

     $   1,850,723        $        1,474        $    (45,966     $ 1,806,231        100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

             

Government agency/GSE

     $ 144,871        $ -        $ (5,129     $ 139,742        19.09

Residential mortgage-backed securities

     158,769        -        (5,502     153,267        20.92

CMO

     216,980        -        (13,960     203,020        28.58

Municipal bonds

     238,409        225        (7,908     230,726        31.41
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total held-to-maturity securities

     $  759,029        $       225        $   (32,499)       $ 726,755                    100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

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Table of Contents
     December 31, 2017
     Amortized
Cost
   Gross
Unrealized
Holding
Gain
   Gross
Unrealized
Holding Loss
  Fair Value    Total
Percent
     (Dollars in thousands)

Investment securities available-for-sale:

             

   Residential mortgage-backed securities

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

   CMO/REMIC-residential

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

   Municipal bonds

     54,966        774        (244     55,496        2.66

   Other securities

     751        -        -       751        0.04
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total available-for-sale securities

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

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

             

   Government agency/GSE

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

   Residential mortgage-backed securities

     176,427        667        (382     176,712        21.26

   CMO

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

   Municipal bonds

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

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

      Total held-to-maturity securities

     $ 829,890        $    4,272        $     (14,947)       $ 819,215              100.00
  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

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

 

     For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
     2018    2017    2018    2017
     (Dollars in thousands)

Investment securities available-for-sale:

           

   Taxable

     $ 11,126        $ 11,767        $ 33,861        $ 36,113  

   Tax-advantaged

     395        473        1,225        1,774  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    Total interest income from available-for-sale securities

     11,521        12,240        35,086        37,887  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Investment securities held-to-maturity:

           

   Taxable

     2,961        3,111        8,887        9,591  

   Tax-advantaged

     1,705        2,073        5,351        6,423  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    Total interest income from held-to-maturity securities

     4,666        5,184        14,238        16,014  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    Total interest income from investment securities

     $       16,187        $       17,424        $       49,324        $       53,901  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Approximately 89% of the total investment securities portfolio at September 30, 2018 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“OTTI”).

 

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Table of Contents
     September 30, 2018
     Less Than 12 Months   12 Months or Longer   Total
   Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
     (Dollars in thousands)

Investment securities available-for-sale:

               

Residential mortgage-backed securities

     $ 1,193,435        $ (24,475     $ 287,707        $ (13,733     $ 1,481,142        $ (38,208

CMO/REMIC - residential

     139,064        (3,053     60,925        (3,114     199,989        (6,167

Municipal bonds

     11,257        (389     12,987        (1,202     24,244        (1,591
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total available-for-sale securities

     $ 1,343,756        $ (27,917     $ 361,619        $ (18,049     $ 1,705,375        $ (45,966
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

               

Government agency/GSE

     $ 99,203        $ (2,326     $ 40,539        $ (2,803     $ 139,742        $ (5,129

Residential mortgage-backed securities

     101,083        (3,206     52,184        (2,296     153,267        (5,502

CMO

     -        -       203,020        (13,960     203,020        (13,960

Municipal bonds

     116,918        (2,143     67,284        (5,765     184,202        (7,908
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total held-to-maturity securities

     $ 317,204        $ (7,675     $ 363,027        $ (24,824     $ 680,231        $ (32,499
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

     December 31, 2017
     Less Than 12 Months   12 Months or Longer   Total
   Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
  Fair Value    Gross
Unrealized
Holding
Losses
     (Dollars in thousands)

Investment securities available-for-sale:

               

Residential mortgage-backed securities

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

CMO/REMIC - residential

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

Municipal bonds

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

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total available-for-sale securities

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

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Investment securities held-to-maturity:

               

Government agency/GSE

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

Residential mortgage-backed securities

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

CMO

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

Municipal bonds

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

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total held-to-maturity securities

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

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

At September 30, 2018 and December 31, 2017, investment securities having a carrying value of approximately $1.60 billion and $1.91 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at September 30, 2018, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

 

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Table of Contents
     September 30, 2018
     Available-for-sale    Held-to-maturity
     Amortized
Cost
   Fair Value    Amortized
Cost
   Fair Value
     (Dollars in thousands)

Due in one year or less

     $ 19,806        $ 19,964        $ -        $ -  

Due after one year through five years

     1,676,348        1,637,053        315,036        298,729  

Due after five years through ten years

     113,539        109,910        172,281        167,824  

Due after ten years

     41,030        39,304        271,712        260,202  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total investment securities

     $   1,850,723        $   1,806,231        $     759,029        $     726,755  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2018.

 

6.

ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2017. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans.

At September 30, 2018, the remaining discount associated with the PCI loans was zero. The loss sharing agreement for commercial loans expired October 16, 2014. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018.

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

 

       September 30, 2018        December 31, 2017  
     (Dollars in thousands)

Commercial and industrial

     $ 459        $ 934  

SBA

     1,286        1,383  

Real estate:

     

Commercial real estate

     14,979        27,431  

Construction

     -        -  

SFR mortgage

     150        162  

Dairy & livestock and agribusiness

     200        770  

Municipal lease finance receivables

     -        -  

Consumer and other loans

     186        228  
  

 

 

 

  

 

 

 

Gross PCI loans

     17,260        30,908  

Less: Purchase accounting discount

     -        (2,026
  

 

 

 

  

 

 

 

Gross PCI loans, net of discount

     17,260        28,882  

Less: Allowance for PCI loan losses

     (205      (367
  

 

 

 

  

 

 

 

Net PCI loans

     $ 17,055        $ 28,515  
  

 

 

 

  

 

 

 

 

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Table of Contents

Credit Quality Indicators

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

 

      September 30, 2018      December 31, 2017 
     (Dollars in thousands)

Pass

     $ 15,775        $ 26,439  

Special mention

     1,251        1,088  

Substandard

     234        3,381  

Doubtful & loss

     -        -  
  

 

 

 

  

 

 

 

Total gross PCI loans

     $ 17,260        $ 30,908  
  

 

 

 

  

 

 

 

 

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Table of Contents
7.

LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES

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

 

      September 30, 2018     December 31, 2017 
     (Dollars in thousands)

Commercial and industrial

     $ 1,021,906       $ 513,325  

SBA

     357,052       122,055  

Real estate:

    

Commercial real estate

     5,268,740       3,376,713  

Construction

     123,274       77,982  

SFR mortgage

     292,516       236,202  

Dairy & livestock and agribusiness

     304,598       347,289  

Municipal lease finance receivables

     67,581       70,243  

Consumer and other loans

     134,796       64,229  
  

 

 

 

 

 

 

 

Gross loans, excluding PCI loans

     7,570,463       4,808,038  

Less: Deferred loan fees, net

     (5,264     (6,289
  

 

 

 

 

 

 

 

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

     7,565,199       4,801,749  

Less: Allowance for loan losses

     (59,802     (59,218
  

 

 

 

 

 

 

 

Net loans, excluding PCI loans

     7,505,397       4,742,531  
  

 

 

 

 

 

 

 

PCI Loans

     17,260       30,908  

Discount on PCI loans

     -       (2,026

Less: Allowance for loan losses

     (205     (367
  

 

 

 

 

 

 

 

PCI loans, net

     17,055       28,515  
  

 

 

 

 

 

 

 

Total loans and lease finance receivables

     $ 7,522,452       $ 4,771,046  
  

 

 

 

 

 

 

 

As of September 30, 2018, 75.09% of the Company’s total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 69.60% of which consisted of commercial real estate loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of September 30, 2018, $219.6 million, or 4.17% of the total commercial real estate loans included loans secured by farmland, compared to $206.1 million, or 6.10%, at December 31, 2017. The loans secured by farmland included $128.8 million for loans secured by dairy & livestock land and $90.8 million for loans secured by agricultural land at September 30, 2018, compared to $118.2 million for loans secured by dairy & livestock land and $87.9 million for loans secured by agricultural land at December 31, 2017. As of September 30, 2018, dairy & livestock and agribusiness loans of $304.6 million were comprised of $251.4 million for dairy & livestock loans and $53.2 million for agribusiness loans, compared to $310.6 million for dairy & livestock loans and $36.7 million for agribusiness loans at December 31, 2017.

At September 30, 2018, the Company held approximately $3.70 billion of total fixed rate loans, including PCI loans.

At September 30, 2018 and December 31, 2017, loans totaling $5.53 billion and $3.68 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loans held-for-sale as of September 30, 2018 and December 31, 2017.

Credit Quality Indicators

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

 

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Table of Contents

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.

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

 

     September 30, 2018
     Pass    Special
Mention
   Substandard (1)    Doubtful &
Loss
   Total
     (Dollars in thousands)

Commercial and industrial

     $ 980,421        $ 33,628        $ 7,857        $ -        $ 1,021,906  

SBA

     345,126        5,469        6,457        -        357,052  

Real estate:

              

Commercial real estate

              

Owner occupied

     1,931,062        97,990        12,079        -        2,041,131  

Non-owner occupied

     3,215,070        5,582        6,957        -        3,227,609  

Construction

              

Speculative

     32,081        -        -        -        32,081  

Non-speculative

     91,193        -        -        -        91,193  

SFR mortgage

     284,852        4,047        3,617        -        292,516  

Dairy & livestock and agribusiness

     268,328        26,877        9,393        -        304,598  

Municipal lease finance receivables

     67,045        536        -        -        67,581  

Consumer and other loans

     132,637        740        1,419        -        134,796  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

     $   7,347,815        $   174,869        $ 47,779        $         -        $   7,570,463  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

  (1)

Includes $15.1 million of classified loans acquired from CB in the third quarter of 2018.

 

22


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

Commercial and industrial

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

SBA

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

Real estate:

              

Commercial real estate

              

Owner occupied

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

Non-owner occupied

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

Construction

              

Speculative

     60,042        -        -        -        60,042  

Non-speculative

     17,940        -        -        -        17,940  

SFR mortgage

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

Dairy & livestock and agribusiness

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

Municipal lease finance receivables

     69,644        599        -        -        70,243  

Consumer and other loans

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Allowance for Loan Losses (“ALLL”)

The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approves the ALLL on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2017 Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at September 30, 2018 and December 31, 2017. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

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

 

     For the Three Months Ended September 30, 2018
     Ending Balance
June 30, 2018
   Charge-offs   Recoveries    (Recapture of)
Provision for
Loan Losses
  Ending Balance
September 30,
2018
     (Dollars in thousands)

Commercial and industrial

     $ 6,970        $ -       $ 44        $ 477       $ 7,491  

SBA

     841        (257     5        369       958  

Real estate:

            

Commercial real estate

     42,597        -       -        (1,056     41,541  

Construction

     1,003        -       15        115       1,133  

SFR mortgage

     2,155        -       -        (30     2,125  

Dairy & livestock and agribusiness

     4,351        -       -        673       5,024  

Municipal lease finance receivables

     808        -       -        7       815  

Consumer and other loans

     642        (1     118        (44     715  

PCI loans

     216        -       -        (11     205  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

     $ 59,583        $ (258     $ 182        $ 500       $ 60,007  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

23


Table of Contents
         
For the Three Months Ended September 30, 2017
     Ending Balance
June 30, 2017
   Charge-offs   Recoveries    (Recapture of)
Provision for
Loan Losses
  Ending Balance
September 30,
2017
     (Dollars in thousands)

Commercial and industrial

     $ 8,060        $ (138     $ 12        $         129       $ 8,063  

SBA

     913        -       5        (54     864  

Real estate:

            

Commercial real estate

     39,927        -       -        943       40,870  

Construction

     1,059        -       2,055        (2,181     933  

SFR mortgage

     2,369        -       -        (49     2,320  

Dairy & livestock and agribusiness

     5,440        -       -        (66     5,374  

Municipal lease finance receivables

     852        -       -        54       906  

Consumer and other loans

     922        (9     5        (48     870  

PCI loans

     659        -       -        (228     431  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

     $     60,201        $ (147     $     2,077        $ (1,500     $     60,631  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

         
For the Nine Months Ended September 30, 2018
     Ending Balance
December 31,
2017
     Charge-offs   Recoveries    (Recapture of)
Provision for
Loan Losses
  Ending Balance
September 30,
2018
    

(Dollars in thousands)

Commercial and industrial

     $ 7,280        $ -       $ 81        $ 130       $ 7,491  

SBA

     869        (257     15        331       958  

Real estate:

            

Commercial real estate

     41,722        -       -        (181     41,541  

Construction

     984        -       1,945        (1,796     1,133  

SFR mortgage

     2,112        -       -        13       2,125  

Dairy & livestock and agribusiness

     4,647        -       19        358       5,024  

Municipal lease finance receivables

     851        -       -        (36     815  

Consumer and other loans

     753        (10     129        (157     715  

PCI loans

     367        -       -        (162     205  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

     $ 59,585        $ (267     $ 2,189        $ (1,500     $ 60,007  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

24


Table of Contents
         
For the Nine Months Ended September 30, 2017
     Ending Balance
December 31,
2016
   Charge-offs   Recoveries    (Recapture of)
Provision for
Loan Losses
  Ending Balance
September 30,
2017
    

(Dollars in thousands)

Commercial and industrial

     $ 8,154        $ (138     $ 106        $ (59     $ 8,063  

SBA

     871        -       47        (54     864  

Real estate:

            

Commercial real estate

     37,443        -       154            3,273           40,870  

Construction

     1,096        -           5,774        (5,937     933  

SFR mortgage

     2,287        -       64        (31     2,320  

Dairy & livestock and agribusiness

     8,541        -       19        (3,186     5,374  

Municipal lease finance receivables

     941        -       -        (35     906  

Consumer and other loans

     988        (11     76        (183     870  

PCI loans

     1,219        -       -        (788     431  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Total allowance for loan losses

     $     61,540        $ (149     $ 6,240        $ (7,000     $ 60,631  
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

The following tables present the recorded investment in loans held-for-investment and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.

 

    September 30, 2018
    Recorded Investment in Loans   Allowance for Loan Losses
    Individually
  Evaluated for  
Impairment
  Collectively
  Evaluated for  
Impairment
    Acquired with  
Deterioriated
Credit Quality
  Individually
  Evaluated for  
Impairment
  Collectively
  Evaluated for  
Impairment
    Acquired with  
Deterioriated
Credit Quality
    (Dollars in thousands)

Commercial and industrial

    $ 3,168       $ 1,018,738       $ -       $ -       $ 7,491       $ -  

SBA

    3,593       353,459       -       -       958       -  

Real estate:

           

Commercial real estate

    6,348       5,262,392       -       -       41,541       -  

Construction

    -       123,274       -       -       1,133       -  

SFR mortgage

    5,492       287,024       -       13       2,112       -  

Dairy & livestock and agribusiness

    775       303,823       -       -       5,024       -  

Municipal lease finance receivables

    -       67,581       -       -       815       -  

Consumer and other loans

    807       133,989       -       70       645       -  

PCI loans

    -       -       17,260       -       -       205  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 20,183       $ 7,550,280       $ 17,260       $ 83       $ 59,719       $ 205  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


Table of Contents
        
September 30, 2017
    Recorded Investment in Loans   Allowance for Loan Losses
    Individually
  Evaluated for  
Impairment
  Collectively
  Evaluated for  
Impairment
    Acquired with  
Deterioriated
Credit Quality
  Individually
  Evaluated for  
Impairment
  Collectively
  Evaluated for  
Impairment
    Acquired with  
Deterioriated
Credit Quality
    (Dollars in thousands)

Commercial and industrial

    $ 745       $ 527,914       $ -       $ 2       $ 8,061       $ -  

SBA

    2,273       121,818       -       3       861       -  

Real estate:

           

Commercial real estate

    8,168       3,324,349       -       -       40,870       -  

Construction

    -       74,148       -       -       933       -  

SFR mortgage

    4,550       240,112       -       -       2,320       -  

Dairy & livestock and agribusiness

    829       269,653       -       -       5,374       -  

Municipal lease finance receivables

    -       71,352       -       -       906       -  

Consumer and other loans

    743       69,672       -       83       787       -  

PCI loans

    -       -       36,548       -       -       431  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    $ 17,308       $ 4,699,018       $ 36,548       $ 88       $ 60,112       $ 431  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2017, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

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

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

 

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Table of Contents

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

 

     September 30, 2018
       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

     $ 274        $ -        $ 274        $ 3,026        $ 1,018,606        $ 1,021,906  

SBA

     -        123        123        3,005        353,924        357,052  

Real estate:

                 

Commercial real estate

                 

Owner occupied

     -        -        -        615        2,040,516        2,041,131  

Non-owner occupied

     -        -        -        5,241        3,222,368        3,227,609  

Construction

                 

Speculative (2)

     -        -        -        -        32,081        32,081  

Non-speculative

     -        -        -        -        91,193        91,193  

SFR mortgage

     -        -        -        2,961        289,555        292,516  

Dairy & livestock and agribusiness

     -        -        -        775        303,823        304,598  

Municipal lease finance receivables

     -        -        -        -        67,581        67,581  

Consumer and other loans

     98        -        98        807        133,891        134,796  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

     $ 372        $ 123        $ 495        $ 16,430        $     7,553,538        $ 7,570,463  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

  (1)

As of September 30, 2018, $2.6 million of nonaccruing loans were current, $562,000 were 30-59 days past due, $1.3 million were 60-89 days past due and $12.0 million were 90+ days past due.

  (2)

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

  (3)

Includes $8.6 million of nonaccrual loans acquired from CB in the third quarter of 2018.

 

     December 31, 2017
       30-59 Days  
Past Due
     60-89 Days  
Past Due
    Total Past Due 
and Accruing
     Nonaccrual  
(1)
       Current        Total Loans
 and Financing 
Receivables
     (Dollars in thousands)

Commercial and industrial

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

SBA

     403        -        403        906        120,746        122,055  

Real estate:

                 

Commercial real estate

                 

Owner occupied

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

Non-owner occupied

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

Construction

                 

Speculative (2)

     -        -        -        -        60,042        60,042  

Non-speculative

     -        -        -        -        17,940        17,940  

SFR mortgage

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

Dairy & livestock and agribusiness

     -        -        -        829        346,460        347,289  

Municipal lease finance receivables

     -        -        -        -        70,243        70,243  

Consumer and other loans

     1        -        1        552        63,676        64,229  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total gross loans, excluding PCI loans

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

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

  (1)

As of December 31, 2017, $3.6 million of nonaccruing loans were current, $376,000 were 60-89 days past due and $6.8 million were 90+ days past due.

  (2)

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

 

27


Table of Contents

Impaired Loans

At September 30, 2018, the Company had impaired loans, excluding PCI loans, of $20.2 million. Impaired loans included $5.9 million of nonaccrual commercial real estate loans, $3.0 million of nonaccrual commercial and industrial loans, $3.0 million of nonaccrual Small Business Administration (“SBA”) loans, $3.0 million of nonaccrual single-family residential (“SFR”) mortgage loans, $807,000 of nonaccrual consumer and other loans, and $775,000 of nonaccrual dairy & livestock and agribusiness loans. These impaired loans included $7.3 million of loans whose terms were modified in a troubled debt restructuring, of which $3.5 million were classified as nonaccrual. The remaining balance of $3.8 million consisted of 14 loans performing according to the restructured terms. The impaired loans had a specific allowance of $83,000 at September 30, 2018. At December 31, 2017, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $15.5 million with a related allowance of $75,000.

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

 

     As of and For the Nine Months Ended
September 30, 2018
     Recorded
  Investment  
   Unpaid
  Principal  
Balance
   Related
  Allowance  
   Average
Recorded
  Investment  
   Interest
Income
  Recognized  
     (Dollars in thousands)

With no related allowance recorded:

              

Commercial and industrial

     $ 3,168        $ 3,829        $ -        $ 3,439        $ 6  

SBA

     3,593        5,779        -        4,457        34  

Real estate:

              

Commercial real estate

              

Owner occupied

     615        726        -        644        -  

Non-owner occupied

     5,733        6,385        -        5,904        24  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     5,479        6,449        -        5,679        59  

Dairy & livestock and agribusiness

     775        1,091        -        808        -  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     737        1,025        -        867        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 Total

     20,100        25,284        -        21,798        123  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     -        -        -        -        -  

SBA

     -        -        -        -        -  

Real estate:

              

Commercial real estate

              

Owner occupied

     -        -        -        -        -  

Non-owner occupied

     -        -        -        -        -  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     13        13        13        13        -  

Dairy & livestock and agribusiness

     -        -        -        -        -  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     70        101        70        85        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 Total

     83        114        83        98        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total impaired loans

     $     20,183        $     25,398        $     83        $     21,896        $     123  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

28


Table of Contents
     As of and For the Nine Months Ended
September 30, 2017
     Recorded
  Investment  
   Unpaid
  Principal  
Balance
   Related
  Allowance  
   Average
Recorded
  Investment  
   Interest
Income
  Recognized  
     (Dollars in thousands)

With no related allowance recorded:

              

Commercial and industrial

     $ 726        $ 1,256        $ -        $ 870        $ 15  

SBA

     2,270        2,573        -        2,489        38  

Real estate:

              

Commercial real estate

              

Owner occupied

     4,313        4,625        -        4,361        42  

Non-owner occupied

     3,855        5,155        -        4,010        72  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     4,550        5,345        -        4,620        109  

Dairy & livestock and agribusiness

     829        1,091        -        1,035        1  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     356        571        -        381        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 Total

     16,899        20,616        -        17,766        277  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

With a related allowance recorded:

              

Commercial and industrial

     19        20        2        42        1  

SBA

     3        20        3        7        -  

Real estate:

              

Commercial real estate

              

Owner occupied

     -        -        -        -        -  

Non-owner occupied

     -        -        -        -        -  

Construction

              

Speculative

     -        -        -        -        -  

Non-speculative

     -        -        -        -        -  

SFR mortgage

     -        -        -        -        -  

Dairy & livestock and agribusiness

     -        -        -        -        -  

Municipal lease finance receivables

     -        -        -        -        -  

Consumer and other loans

     387        394        83        390        -  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 Total

     409        434        88        439        1  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total impaired loans

     $       17,308        $       21,050        $       88        $       18,205        $       278  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

29


Table of Contents
     As of December 31, 2017   

                             

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

With no related allowance recorded:

        

Commercial and industrial

     $ 440        $ 980        $ -  

SBA

     1,530        1,699        -  

Real estate:

        

Commercial real estate

        

Owner occupied

     4,365        4,763        -  

Non-owner occupied

     3,768        5,107        -  

Construction

        

Speculative

     -        -        -  

Non-speculative

     -        -        -  

SFR mortgage

     4,040        4,692        -  

Dairy & livestock and agribusiness

     829        1,091        -  

Municipal lease finance receivables

     -        -        -  

Consumer and other loans

     174        370        -  
  

 

 

 

  

 

 

 

  

 

 

 

 Total

     15,146        18,702        -  
  

 

 

 

  

 

 

 

  

 

 

 

With a related allowance recorded:

        

Commercial and industrial

     -        -        -  

SBA

     1        18        1  

Real estate:

        

Commercial real estate

        

Owner occupied

     -        -        -  

Non-owner occupied

     -        -        -  

Construction

        

Speculative

     -        -        -  

Non-speculative

     -        -        -  

SFR mortgage

     -        -        -  

Dairy & livestock and agribusiness

     -        -        -  

Municipal lease finance receivables

     -        -        -  

Consumer and other loans

     378        391        74  
  

 

 

 

  

 

 

 

  

 

 

 

 Total

     379        409        75  
  

 

 

 

  

 

 

 

  

 

 

 

Total impaired loans

     $     15,525        $     19,111        $     75  
  

 

 

 

  

 

 

 

  

 

 

 

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of September 30, 2018, December 31, 2017 and September 30, 2017 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a charge-off is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and nine months ended September 30, 2018, and 2017. As a result of the acquisition of CB, the reserve for unfunded loan commitments increased by $2.9 million in the third quarter of 2018. As of September 30, 2018 and December 31, 2017, the balance in this reserve was $9.2 million and $6.3 million, respectively, and was included in other liabilities.

 

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Troubled Debt Restructurings (“TDRs”)

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

As of September 30, 2018, there were $7.3 million of loans classified as a TDR, of which $3.5 million were nonperforming and $3.8 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At September 30, 2018, performing TDRs were comprised of 10 SFR mortgage loans of $2.5 million, one SBA loan of $588,000, one commercial real estate loan of $492,000, and two commercial and industrial loans of $142,000.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated zero and $1,000 of specific allowance to TDRs as of September 30, 2018 and December 31, 2017, respectively.

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

 

           For the Three Months Ended      
September 30,
        For the Nine Months Ended      
September 30,
     2018   2017   2018   2017
     (Dollars in thousands)

Performing TDRs:

        

Beginning balance

     $ 4,530       $ 16,574       $ 4,809       $ 19,233  

New modifications

     -       -       311       3,143  

Payoffs/payments, net and other

     (777     (10,839     (1,367     (13,826

TDRs returned to accrual status

     -       -       -       329  

TDRs placed on nonaccrual status

     -       -       -       (3,144
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

     $       3,753       $       5,735       $       3,753       $       5,735  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming TDRs:

        

Beginning balance

     $ 3,892       $ 4,391       $ 4,200       $ 1,626  

New modifications

     278       -       316       2,066  

Charge-offs

     -       -       -       -  

Payoffs/payments, net and other

     (650     (81     (996     (2,197

TDRs returned to accrual status

     -       -       -       (329

TDRs placed on nonaccrual status

     -       -       -       3,144  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

     $ 3,520       $ 4,310       $ 3,520       $ 4,310  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total TDRs

     $ 7,273       $ 10,045       $ 7,273       $ 10,045  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table summarizes loans modified as troubled debt restructurings for the period presented.

Modifications (1)

 

    For the Three Months Ended September 30, 2018
      Number of  
Loans
    Pre-Modification  
Outstanding
Recorded
Investment
    Post-Modification  
Outstanding
Recorded
Investment
  Outstanding
Recorded

Investment at
  September 30, 2018  
  Financial Effect
Resulting From
    Modifications (2)    
    (Dollars in thousands)

Commercial and industrial:

         

Interest rate reduction

    -       $ -       $ -       $ -       $ -  

Change in amortization period or maturity

    -       -       -       -       -  

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Non-owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

SFR mortgage:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Dairy & livestock and agribusiness:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Consumer:

         

Interest rate reduction

              -       -       -       -                       -  

Change in amortization period or maturity

    1       278       278       272       -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

    1       $ 278       $ 278       $ 272       $ -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
         
For the Three Months Ended September 30, 2017
       Number of  
Loans
   Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Outstanding
Recorded
Investment at
September 30, 2017
     Financial Effect
Resulting From
    Modifications (2)    
     (Dollars in thousands)

Commercial and industrial:

              

Interest rate reduction

     -        $        $        $        $ -  

Change in amortization period or maturity

     -                             -  

Real estate:

              

Commercial real estate:

              

Owner occupied

              

Interest rate reduction

     -                             -  

Change in amortization period or maturity

     -                             -  

Non-owner occupied

              

Interest rate reduction

     -                             -  

Change in amortization period or maturity

     -                             -  

SFR mortgage:

              

Interest rate reduction

     -                             -  

Change in amortization period or maturity

     -                             -  

Dairy & livestock and agribusiness:

              

Interest rate reduction

     -                             -  

Change in amortization period or maturity

     -                             -  

Consumer:

              

Interest rate reduction

               -                             -  

Change in amortization period or maturity

     -                                             -  
  

 

 

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     -        $        $        $        $ -  
  

 

 

 

  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
        
For the Nine Months Ended September 30, 2018
      Number of  
Loans
      Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification  
Outstanding
Recorded
Investment
  Outstanding
Recorded

Investment at
  September 30, 2018  
  Financial Effect
Resulting From
    Modifications (2)    
    (Dollars in thousands)

Commercial and industrial:

         

Interest rate reduction

    -     $ -     $ -     $ -     $ -  

Change in amortization period or maturity

    1       38       38       27       -  

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Non-owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

SFR mortgage:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       311       311       304       -  

Dairy & livestock and agribusiness:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Consumer:

         

Interest rate reduction

              -       -       -       -       -  

Change in amortization period or maturity

    1       278       278       272                           -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

    3       $ 627       $ 627       $ 603       $ -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    For the Nine Months Ended September 30, 2017
      Number of  
Loans
    Pre-Modification  
Outstanding
Recorded
Investment
    Post-Modification  
Outstanding
Recorded
Investment
  Outstanding
Recorded
Investment at
  September 30, 2017  
  Financial Effect
Resulting From
    Modifications (2)    
    (Dollars in thousands)

Commercial and industrial:

         

Interest rate reduction

    -       $ -       $ -       $ -       $ -  

Change in amortization period or maturity

    -       -       -       -       -  

Real estate:

         

Commercial real estate:

         

Owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       3,143       3,143       3,143       -  

Non-owner occupied

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

SFR mortgage:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    -       -       -       -       -  

Dairy & livestock and agribusiness:

         

Interest rate reduction

    -       -       -       -       -  

Change in amortization period or maturity

    1       1,984       1,984       78       -  

Consumer:

         

Interest rate reduction

                -       -       -       -       -  

Change in amortization period or maturity

    1       82       82       76                   -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

    3       $ 5,209       $ 5,209       $ 3,297       $ -  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1)

The tables above exclude modified loans that were paid off prior to the end of the period.

  (2)

Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

As of September 30, 2018, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and nine months ended September 30, 2018.

As of September 30, 2017, there was one commercial real estate loan with an outstanding balance of $3.1 million and one dairy & livestock and agribusiness loan with an outstanding balance of $78,000 that was modified as a TDR within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2017.

 

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Table of Contents
8.

EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of 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, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 56,000 and 50,000, respectively. For the three and nine months ended September 30, 2017, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 15,000 and 10,000, respectively.

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

 

                                                                                       
       For the Three Months  
Ended September 30,
     For the Nine Months Ended  
September 30,
      2018    2017    2018    2017
     (In thousands, except per share amounts)

Earnings per common share:

           

Net earnings

     $ 38,558        $ 29,683        $ 108,844        $ 86,560  

Less: Net earnings allocated to restricted stock

     96        107        298        325  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net earnings allocated to common shareholders

     $ 38,462        $ 29,576        $ 108,546        $ 86,235  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Weighted average shares outstanding

     126,574        109,754        115,533        109,280  

Basic earnings per common share

     $ 0.30        $ 0.27        $ 0.94        $ 0.79  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Diluted earnings per common share:

           

Net income allocated to common shareholders

     38,462        29,576        108,546        86,235  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Weighted average shares outstanding

     126,574        109,754        115,533        109,280  

Incremental shares from assumed exercise of outstanding options

     363        365        397        392  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Diluted weighted average shares outstanding

     126,937        110,119        115,930        109,672  

Diluted earnings per common share

     $ 0.30        $ 0.27        $ 0.94        $ 0.79  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

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Table of Contents
9.

FAIR VALUE INFORMATION

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The following disclosure provides the fair value information for financial assets and liabilities as of September 30, 2018. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

 

   

Level 1 – 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.

There were no transfers in and out of Level 1 and Level 2 during the nine months ended September 30, 2018 and 2017.

 

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Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

     Carrying Value at
  September 30, 2018  
   Quoted Prices in
  Active Markets for  
Identical Assets
(Level 1)
     Significant Other
  Observable Inputs  
(Level 2)
   Significant
  Unobservable Inputs  
(Level 3)
 
     (Dollars in thousands)

Description of assets

           

Investment securities - AFS:

           

Residential mortgage-backed securities

     $ 1,532,878        $        $ 1,532,878        $  

CMO/REMIC - residential

     223,817               223,817         

Municipal bonds

     48,739               48,739         

Other securities

     797               797         
  

 

 

 

  

 

 

    

 

 

 

  

 

 

 

Total investment securities - AFS

     1,806,231               1,806,231         

Interest rate swaps

     944               944         
  

 

 

 

  

 

 

    

 

 

 

  

 

 

 

Total assets

     $ 1,807,175        $        $ 1,807,175        $  
  

 

 

 

  

 

 

    

 

 

 

  

 

 

 

Description of liability

           

Interest rate swaps

     $ 944        $        $ 944        $  
  

 

 

 

  

 

 

    

 

 

 

  

 

 

 

Total liabilities

     $ 944        $        $ 944        $  
  

 

 

 

  

 

 

    

 

 

 

  

 

 

 
     Carrying Value at
December 31, 2017
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
     (Dollars in thousands)

Description of assets