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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number:
000-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
     
California
 
95-3629339
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
701 North Haven Ave., Suite 350
 
Ontario, California
 
91764
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(909)
980-4030
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, No Par Value
 
CVBF
 
The Nasdaq Stock Market, LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
    No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒
    No
☐
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,
non-accelerated
filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
 
 
 
 
 
 
               
  Large accelerated filer
 
☒
 
  
Accelerated filer
 
☐
  
Non-accelerated
filer
  
☐
 
  
Smaller reporting company    
  
☐
  Emerging growth company    
  
☐
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
 
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Yes
☐
 
 
 No ☒
Number of shares of common stock of the registrant: 135,510,811
outstanding as of April 30, 2020.
Table of Contents
TABLE OF CONTENTS
             
PART I –
 
 
 
3
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
10
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
36
 
 
 
 
 
 
 
 
 
 
 
37
 
 
 
 
 
 
 
 
 
 
 
38
 
 
 
 
 
 
 
 
 
 
 
40
 
 
 
 
 
 
 
 
 
 
 
47
 
 
 
 
 
 
 
 
 
 
 
62
 
 
 
 
 
 
 
 
ITEM 3.
 
 
 
64
 
 
 
 
 
 
 
 
ITEM 4.
 
 
 
65
 
 
 
 
 
 
 
 
PART II –
 
 
 
66
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
66
 
 
 
 
 
 
 
 
ITEM 1A.
 
 
 
66
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
68
 
 
 
 
 
 
 
 
ITEM 3.
 
 
 
68
 
 
 
 
 
 
 
 
ITEM 4.
 
 
 
68
 
 
 
 
 
 
 
 
ITEM 5.
 
 
 
68
 
 
 
 
 
 
 
 
ITEM 6.
 
 
 
68
 
 
 
 
 
 
 
 
 
 
 
69
 
2
Table of Contents
PART I – FINANCIAL INFORMATION (UNAUDITED)
GENERAL
Cautionary Note Regarding Forward-Looking Statements
Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:
 
•
local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;
 
 
 
 
 
 
 
•
our ability to attract deposits and other sources of funding or liquidity;
 
 
 
 
 
 
 
•
supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;
 
 
 
 
 
 
 
•
a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;
 
 
 
 
 
 
 
•
changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;
 
 
 
 
 
 
 
•
changes in our levels of delinquent loans, nonperforming assets, allowance for credit losses and charge-offs;
 
 
 
 
 
 
 
•
the costs or effects of mergers, acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits or cost savings associated with any such mergers, acquisitions or dispositions;
 
 
 
 
 
 
 
•
the effects of new laws, regulations and/or government programs, including those laws, regulations and programs enacted by federal, state or local governments in the geographic jurisdictions in which we do business in response to the recent national emergency declared in connection with the COVID-19 pandemic;
 
 
 
 
 
 
 
•
the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;
 
 
 
 
 
 
 
•
the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for credit losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;
 
 
 
 
 
 
 
•
changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;
 
 
 
 
 
 
 
•
the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments or currently expected credit losses or delinquencies;
 
 
 
 
 
 
 
•
the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for credit losses;
 
 
 
 
 
 
 
•
inflation, changes in market interest rates, securities market and monetary fluctuations;
 
 
 
 
 
 
 
•
changes in government-established interest rates, reference rates or monetary policies, including the possible imposition of negative interest rates on bank reserves;
 
 
 
 
 
 
 
•
the impact of the anticipated phase-out of the London Interbank Offered Rate (LIBOR) on interest rate indexes specified in certain of our customer loan agreements and our interest rate swap arrangements, including any economic and compliance effects related to the expected change from LIBOR to an alternative reference rate;
 
 
 
 
 
 
 
•
changes in the amount, cost and availability of deposit insurance;
 
 
 
 
 
 
 
•
disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communication facilities; cyber incidents or theft or loss of Company or customer data or money; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes, extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3
Table of Contents
 
•
our timely development and implementation of new banking products and services and the perceived overall value of these products and services by customers and potential customers;
 
 
 
 
 
 
 
•
the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s
key internal and external systems, applications and controls;
 
 
 
 
 
 
 
•
changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
 
 
 
 
 
 
 
•
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);
 
 
 
 
 
 
 
•
our ability to retain and increase market share, retain and grow customers and control expenses;
 
 
 
 
 
 
 
•
changes in the competitive environment among banks and other financial services and technology providers;
 
 
 
 
 
 
 
•
competition and innovation with respect to financial products and services by banks, financial institutions and
non-traditional
providers including retail businesses and technology companies;
 
 
 
 
 
 
 
•
volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s assets, liabilities, or customers;
 
 
 
 
 
 
 
•
fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;
 
 
 
 
 
 
 
•
the effect of changes in accounting policies and practices, as may be adopted from
time-to-time
by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
 
 
 
 
 
 
 
•
changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or our board of directors;
 
 
 
 
 
 
 
•
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
 
 
 
 
 
 
 
•
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, lender liability, bank operations, financial product, consumer or employee class action litigation);
 
 
 
 
 
 
 
•
regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
 
 
 
 
 
 
 
•
our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;
 
 
 
 
 
 
 
•
our success at managing the risks involved in the foregoing items; and
 
 
 
 
 
 
 
•
all other factors set forth in the Company’s public reports, including its Annual Report on Form
10-K
for the year ended December
 31, 2019, and particularly the discussion of risk factors within that document.
 
 
 
 
 
 
Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the Company’s business prospects. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact on the economy, our customers and our business partners, and actions taken by governmental authorities in response to the pandemic.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.
4
Table of Contents
ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
                 
 
      
 
March 31,    
 
   
2020
 
  December 31,  
2019
 
Assets
   
     
 
Cash and due from banks
    $
138,615
      $
158,310
 
Interest-earning balances due from Federal Reserve
   
567,124
     
27,208
 
                 
Total cash and cash equivalents
   
705,739
     
185,518
 
                 
Interest-earning balances due from depository institutions
   
23,799
     
2,931
 
Investment securities
available-for-sale,
at fair value (with amortized cost of $1,621,236 at
March 31, 2020, and $1,718,357 at December 31, 2019)
    
1,679,755
     
1,740,257
 
Investment securities
held-to-maturity
(with fair value of $657,819 at March 31, 2020,
and $678,948 at December 31, 2019)
    
642,255
     
674,452
 
                 
Total investment securities
   
2,322,010
     
2,414,709
 
                 
Investment in stock of Federal Home Loan Bank (FHLB)
   
17,688
     
17,688
 
Loans and lease finance receivables
   
7,466,152
     
7,564,577
 
Allowance for credit losses
   
(82,641
 )    
(68,660
 )
                 
Net loans and lease finance receivables
    
7,383,511
     
7,495,917
 
                 
Premises and equipment, net
   
52,867
     
53,978
 
Bank owned life insurance (BOLI)
   
225,455
     
226,281
 
Accrued interest receivable
   
26,855
     
28,122
 
Intangibles
   
40,541
     
42,986
 
Goodwill
   
663,707
     
663,707
 
Other real estate owned (OREO)
   
4,889
     
4,889
 
Income taxes
   
10,473
     
35,587
 
Other assets
   
129,354
     
110,137
 
                 
Total assets
    $
11,606,888
      $
11,282,450
 
                 
                 
Liabilities and Stockholders’ Equity
 
 
 
  
 
 
Liabilities:
   
     
 
Deposits:
   
     
 
Noninterest-bearing
    $
5,572,649
      $
5,245,517
 
Interest-bearing
   
3,540,955
     
3,459,411
 
                 
Total deposits
   
9,113,604
     
8,704,928
 
Customer repurchase agreements
   
368,915
     
428,659
 
Other borrowings
   
-
     
-
 
Deferred compensation
   
22,454
     
22,666
 
Junior subordinated debentures
   
25,774
     
25,774
 
Other liabilities
   
134,755
     
106,325
 
                 
Total liabilities
   
9,665,502
     
9,288,352
 
                 
                 
Commitments and Contingencies
   
     
 
Stockholders’ Equity
   
     
 
Common stock, authorized, 225,000,000 shares without par; issued and outstanding
135,510,960 at March 31, 2020, and 140,102,480 at December 31, 2019
   
1,208,049
     
1,298,792
 
Retained earnings
   
694,931
     
682,692
 
Accumulated other comprehensive income, net of tax
   
38,406
     
12,614
 
                 
Total stockholders’ equity
   
1,941,386
     
1,994,098
 
                 
Total liabilities and stockholders’ equity
    $
11,606,888
      $
11,282,450
 
                 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
  
 
   
 Three Months Ended 
   
March 31,
 
2020
 
2019
 
Interest income:
   
     
 
Loans and leases, including fees
    $
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
92,117
      $
 
 
 
 
     
 
 
 
 
 
 
 
     
99,687
 
Investment securities:
   
     
 
Investment securities
available-for-sale
   
10,049
     
10,645
 
Investment securities
held-to-maturity
   
3,998
     
4,525
 
                 
Total investment income
    
14,047
     
15,170
 
                 
Dividends from FHLB stock
   
332
     
332
 
Interest-earning deposits with other institutions
   
613
     
94
 
                 
Total interest income
    
107,109
     
115,283
 
                 
Interest expense:
   
     
 
Deposits
   
4,124
     
3,871
 
Borrowings and customer repurchase agreements
   
479
     
1,610
 
Junior subordinated debentures
   
200
     
266
 
                 
Total interest expense
    
4,803
     
5,747
 
                 
Net interest income before provision for credit losses
   
102,306
     
109,536
 
Provision for credit losses
   
12,000
     
1,500
 
                 
Net interest income after provision for credit losses
   
90,306
     
108,036
 
                 
Noninterest income:
   
     
 
Service charges on deposit accounts
   
4,776
     
5,141
 
Trust and investment services
   
2,420
     
2,182
 
Bankcard services
   
577
     
950
 
BOLI income
   
2,059
     
1,336
 
Gain on OREO, net
   
10
      
105
  
Gain on sale of building, net
   
-
      
4,545
  
Other
   
1,798
     
2,044
 
                 
Total noninterest income
    
11,640
     
16,303
 
                 
Noninterest expense:
   
     
 
Salaries and employee benefits
   
30,877
     
29,302
 
Occupancy and equipment
   
4,837
     
5,424
 
Professional services
   
2,256
     
1,925
 
Software licenses and maintenance
   
2,816
     
2,613
 
Marketing and promotion
   
1,555
     
1,394
 
Amortization of intangible assets
   
2,445
     
2,857
 
Acquisition related expenses
   
-
     
3,149
 
Other
   
3,855
     
4,940
 
                 
Total noninterest expense
    
48,641
     
51,604
 
                 
Earnings before income taxes
   
53,305
     
72,735
 
Income taxes
   
15,325
     
21,093
 
                 
Net earnings
    $
37,980
      $
51,642
 
                 
                 
Other comprehensive income:
   
     
 
Unrealized gain on securities arising during the period, before tax
    $
36,618
      $
18,227
 
Less: Income tax benefit related to items of other comprehensive income
   
(10,826
 )    
(5,388
 )
                 
Other comprehensive income, net of tax
   
25,792
     
12,839
 
                 
Comprehensive income
    $
63,772
      $
64,481
 
                 
                 
Basic earnings per common share
    $
0.27
      $
0.37
 
Diluted earnings per common share
    $
0.27
      $
0.37
 
 
 
 
 
 
 
 
 
 
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
(Dollars and shares in thousands)
(Unaudited)
Three Months Ended March 31, 2020
 and 2019
                                         
 
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Balance, January 1, 20
20
    
140,102
      $
1,298,792
      $
682,692
      $
12,614
       $
1,994,098
 
Cumulative adjustment upon adoption of ASU 2016-13
   
-
      
-
      
(1,325
)
    
-
     
(1,325
)
Repurchase of common stock
   
(4,988
)
    
(92,402
)
    
-
     
-
     
(92,402
)
Exercise of stock options
   
4
     
42
     
-
     
-
     
42
 
Shares issued pursuant to stock-based compensation plan
   
393
      
1,617
      
-
      
-
     
1,617
  
Cash dividends declared on common stock ($0.18 per share)
   
-
     
-
     
(24,416
)
    
-
     
(24,416
)
Net earnings
   
-
     
-
     
37,980
      
-
     
37,980
 
Other comprehensive income
 
 
-
  
 
 
-
  
 
 
-
  
 
 
25,792
  
 
 
25,792
  
                                         
Balance, March 31, 20
20
    
135,511
      $
1,208,049
      $
694,931
       $
38,406
       $
1,941,386
 
                                         
                                         
Balance, January 1, 20
19
    
140,000
       $
1,293,669
       $
575,805
       $
(18,284
)
     $
1,851,190
  
Repurchase of common stock
   
(33
)
    
(735
)
    
-
      
-
     
(735
)
Exercise of stock options
   
9
      
140
      
-
     
-
     
140
  
Shares issued pursuant to stock-based compensation plan
   
33
      
1,019
      
-
     
-
     
1,019
 
Cash dividends declared on common stock ($0.18 per share)
   
-
     
-
     
(25,168
)
    
-
     
(25,168
)
Net earnings
   
-
     
-
     
51,642
      
-
     
51,642
  
Other comprehensive income
   
-
     
-
     
-
     
12,839
      
12,839
 
                                         
Balance, March 31, 20
19
    
140,009
      $
 
 
 
1,294,093
      $
 
 
 
 
 
 
 
 
602,279
      $
(5,445
)
     $
 
 
 
1,890,927
 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents 
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
  
    Three Months Ended    
March 31,
 
 
2020
 
  
2019
 
Cash Flows from Operating Activities
   
     
 
Interest and dividends received
    $
105,673
      $
109,857
 
Service charges and other fees received
   
9,644
     
10,247
 
Interest paid
   
(4,589
 )    
(5,336
 )
Net cash paid to vendors, employees and others
   
(35,201
 )    
(60,281
 )
                 
Net cash provided by operating activities
   
75,527
     
54,487
 
                 
Cash Flows from Investing Activities
   
     
 
Net change in interest-earning balances from depository institutions
   
(20,868
 )    
250
 
Proceeds from repayment of investment securities
available-for-sale
   
92,519
     
77,303
 
Proceeds from maturity of investment securities
available-for-sale
   
2,390
     
565
 
Proceeds from repayment and maturity of investment securities
held-to-maturity
   
33,297
     
29,598
 
Purchases of investment securities
held-to-maturity
   
(1,509
 )    
(19,844
 )
Net increase in equity investments
   
(2,985
 )    
(2,314
 )
Net decrease in loan and lease finance receivables
   
103,890
     
163,588
 
Proceeds from sale of building, net
   
-
      
5,487
  
Purchase of premises and equipment
   
(882
 )    
(1,490
 )
Proceeds from BOLI death benefit
   
138
     
175
 
Proceeds from sales of other real estate owned
   
-
     
523
 
                 
Net cash provided by investing activities
   
205,990
     
253,841
 
                 
Cash Flows from Financing Activities
   
     
 
Net increase (decrease) in other deposits
   
403,546
     
(156,745
 )
Net increase (decrease) in time deposits
   
5,130
     
(16,625
 )
Net decrease in other borrowings
   
-
     
(127,000
 )
Net (decrease) increase in customer repurchase agreements
   
(59,744
 )    
20,519
 
Cash dividends on common stock
   
(25,252
 )    
(19,616
 )
Repurchase of common stock
   
(85,018
 )    
(735
 )
Proceeds from exercise of stock options
   
42
     
140
 
                 
Net cash provided by (used in) financing activities
   
238,704
     
(300,062
 )
                 
Net increase in cash and cash equivalents
   
520,221
     
8,266
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of period
   
185,518
     
163,948
 
                 
Cash and cash equivalents, end of period
    $
705,739
      $
172,214
 
                 
 
 
 
 
 
 
 
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)
  
    Three Months Ended    
March 31,
 
 
2020
 
  
2019
 
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
 
 
 
  
 
 
   Net earnings
    $
37,980
       $
51,642
  
                 
   Adjustments to reconcile net earnings to net cash provided by operating activities:
   
     
 
                 
  Gain on sale of building, net
   
-
      
(4,545
 )
  Gain on sale of other real estate owned
    -      
(105
 )
I
ncrease in BOLI
   
(1,344
 )     
(1,427
 )
  Net amortization of premiums and discounts on investment securities
   
2,620
      
2,498
  
  Accretion of discount for acquired loans, net
   
(4,776
 )    
(7,200
 )
  
Provision for
 
credit
 losses
   
12,000
      
1,500
  
  Stock-based compensation
   
1,617
      
1,019
  
  Depreciation and amortization, net
   
5,176
      
5,669
  
  Change in other assets and liabilities
   
22,254
      
5,436
  
                 
     Total adjustments
   
37,547
      
2,845
  
                 
    Net cash provided by operating activities
    $
75,527
       $
54,487
  
                 
                 
Supplemental Disclosure of
Non-cash
Investing Activities
 
 
 
  
 
 
   Transfer of loans to other real estate owned
    $
-
       $
2,275
  
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BUSINESS
 
 
 
 
 
 
The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.
The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to
mid-sized
businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 58 banking centers, one loan production office in Modesto, California and three trust office locations. The Company is headquartered in the city of Ontario, California.
2.
BASIS OF PRESENTATION
 
 
 
 
 
 
The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form
10-Q
and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Reclassification
— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
 
 
Except as discussed below, our accounting policies are described in Note 3 –
Summary of Significant Accounting Policies
, of our audited consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2019 as filed with the SEC (“Form
 10-K”).
Use of Estimates in the Preparation of Financial Statements
— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for
credit
losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.
10
Table of Contents
Adoption of New Accounting Standard
Provision and Allowance for Credit Losses
— On January 1, 2020, the Company adopted ASU No.
 2016-13,
“Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU replaces the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off balance sheet credit exposures. This includes, but is not limited to, loans,
held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to
available-for-sale
(“AFS”) debt securities. For AFS debt securities with unrealized losses, we will measure credit impairment in a manner similar to the approach used prior to the adoption of CECL, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, we will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as required prior to the adoption of CECL. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM
securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet. If accrued interest is not received, it is reversed against interest income, which was zero for the first quarter of 2020.
The Company adopted this ASU using the modified retrospective method for all financial assets measured at amortized cost and
off-balance
sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to beginning retained earnings of $1.3 million, net of tax as of January 1, 2020 for the cumulative adjustment upon adoption of ASC 326. The transition adjustment of
 
$1.8 million was added to the beginning balance of the allowance for credit losses (“ACL”) for loans and $41,000 was added to the beginning balance of reserve for unfunded loan commitments.
Upon adoption of CECL there was no impact on the accounting for AFS or HTM investment securities.
The Company developed a CECL allowance model that calculates reserves over the life of the loan and is largely driven by portfolio characteristics, risk grading, macroeconomic variables and the associated economic outlook, as well as other key methodology assumptions. The allowance is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, the ASU indicates management has the opportunity to layer on current conditions and forecast adjustments to ensure that the life of loan loss rate reflects both the current state of the portfolio, and expectations for macroeconomic changes in the near future. We utilized a single economic forecast that is based on probability weighted scenarios to incorporate macroeconomic uncertainty over a 2 or
3-year
forecast horizon. After the initial 2 to 3 year forecast horizon, we use an input reversion methodology in the model structure to complete a reasonable and supportable forecast period for the life of the loan.
During the second half of March 2020, the broader economy experienced a significant deterioration in the economic environment driven by the COVID-19 pandemic resulting in
adverse changes to the forecasted macroeconomic variables utilized in our modeling processes. This expected economic deterioration, coupled with the implementation of the expected loss methodology for determining our provision for credit losses, have contributed to an increased provision for credit losses of
$12
 
million for
the first quarter of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act. The extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain, but we may experience increased provision for credit losses if the
COVID-19
pandemic results in additional economic stress on our borrowers and loan portfolios.
11
Table of Contents
 
4.
INVESTMENT SECURITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
  
March 31, 2020
 
   Amortized   
Cost
 
 
Gross
  
 
 
 
 
 Unrealized
 
 
 
 
 
 
 
Holding
Gain
 
 
Gross
 
 
 
 
 
Unrealized  
 
 

Holding
Loss
 
  
 
 
 
 
Fair Value  
 
 
 
 
 
 
 
Total Percent
 
 
  
(Dollars in thousands)
Investment securities
available-for-sale:
   
     
     
     
     
Mortgage-backed securities
    $
1,118,385
      $
43,546
      $
-
      $
1,161,931
     
69.18%
CMO/REMIC
   
466,033
     
14,060
     
-
     
480,093
     
28.58%
Municipal bonds
   
36,119
     
913
     
-
     
37,032
     
2.20%
Other securities
   
699
     
-
     
-
     
699
     
0.04%
                                       
Total
available-for-sale
securities
     $
1,621,236
      $
58,519
      $
-
      $
1,679,755
     
100.00%
                                       
Investment securities
held-to-maturity:
   
     
     
     
     
Government agency/GSE
    $
111,452
      $
3,468
      $
(207)
      $
114,713
     
17.35%
Mortgage-backed securities
   
161,983
     
8,182
     
-
     
170,165
     
25.22%
CMO/REMIC
   
184,316
     
591
     
(98)
     
184,809
     
28.70%
Municipal bonds
   
184,504
     
4,054
     
(426)
     
188,132
     
28.73%
                                       
Total
held-to-maturity
securities
     $
642,255
      $
16,295
      $
(731)
      $
657,819
     
100.00%
                                       
     
 
December 31, 2019
 
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
Total Percent
 
  
(Dollars in thousands)
Investment securities
available-for-sale:
   
     
     
     
     
Mortgage-backed securities
    $
1,185,757
      $
21,306
      $
(750)
      $
1,206,313
     
69.32%
CMO/REMIC
   
493,214
     
1,392
     
(896)
     
493,710
     
28.37%
Municipal bonds
   
38,506
     
850
     
(2)
     
39,354
     
2.26%
Other securities
   
880
     
-
     
-
     
880
     
0.05%
                                       
Total
available-for-sale
securities
     $
1,718,357
      $
23,548
      $
(1,648)
      $
1,740,257
     
100.00%
                                       
Investment securities
held-to-maturity:
   
     
     
     
     
Government agency/GSE
    $
117,366
      $
2,280
      $
(657)
      $
118,989
     
17.40%
Mortgage-backed securities
   
168,479
     
2,083
     
(54)
     
170,508
     
24.98%
CMO/REMIC
   
192,548
     
-
     
(2,458)
     
190,090
     
28.55%
Municipal bonds
   
196,059
     
3,867
     
(565)
     
199,361
     
29.07%
                                       
Total
held-to-maturity
securities
     $
674,452
      $
8,230
      $
(3,734)
      $
678,948
     
100.00%
                                       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
Table of Contents
The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.
  
    Three Months Ended    
March 31,
 
 
2020
 
  
2019
 
 
  
(Dollars in thousands)
Investment securities
available-for-sale:
   
     
 
Taxable
    $
9,825
      $
10,309
 
Tax-advantaged
   
224
     
336
 
                 
Total interest income from
available-for-sale
securities
    
10,049
     
10,645
 
                 
Investment securities
held-to-maturity:
   
     
 
Taxable
   
2,698
     
2,910
 
Tax-advantaged
   
1,300
     
1,615
 
                 
Total interest income from
held-to-maturity
securities
    
3,998
     
4,525
 
                 
Total interest income from investment securities
    $
14,047
      $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,170
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
The adoption of CECL did not have a material impact on the accounting for investment securities, as approximately
90%
of the total investment securities portfolio at March 31, 2020 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. The remaining securities are predominately AA- or better general-obligation municipal bonds. The allowance for credit losses for
held-to-maturity
investment securities under the new CECL model was zero at March 31, 2020.
 
We adopted ASU
2016-13
on January 1, 2020, on a
prospective
basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
and
held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the first quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position. As of March 31, 2020, there were no AFS investment securities with an unrealized loss position.
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
December 31, 2019, prior to adoption of ASU 2016-13. Management
previously
 reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired
.
 
  
December
 31, 2019
 
    Less Than 12 Months    
  
    12 Months or Longer    
  
    Total    
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
  
 
(Dollars in thousands)
Investment securities
available-for-sale:
   
     
     
     
     
     
 
Mortgage-backed securities
    $
 
 
20,289
      $
(6
 )      $
97,964
      $
(744
)      $
118,253
      $
(750
) 
CMO/REMIC
   
177,517
     
(705
 )     
34,565
     
(191
)     
212,082
     
(896
) 
Municipal bonds
   
-
     
-
      
563
     
(2
)     
563
     
(2
) 
                                                 
Total
available-for-sale
securities
     $
 
 
 
197,806
      $
(711
 )      $
 
 
 
133,092
      $
(937
)      $
 
 
 
 
330,898
      $
(1,648
) 
                                                 
Investment securities
held-to-maturity:
   
     
     
     
     
     
 
Government agency/GSE
    $
28,359
      $
(252
 )      $
19,405
      $
(405
)      $
47,764
      $
(657
) 
Mortgage-backed securities
   
10,411
     
(54
 )     
-
     
-
     
10,411
     
(54
) 
CMO/REMIC
   
23,897
     
(104
 )     
166,193
     
(2,354
)     
190,090
     
(2,458
) 
Municipal bonds
   
7,583
     
(32
 )     
29,981
     
(533
)     
37,564
     
(565
) 
                                                 
Total
held-to-maturity
securities
     $
70,250
      $
 
 
 
 
 
 
 
 
(442
)      $
215,579
      $
 
 
 
 
 
 
(3,292
)      $
285,829
      $
 
 
 
 
 
 
 
 
 
(3,734
) 
                                                 
 
 
 
 
 
 
 
 
 
13
Table of Contents
 
At March 31, 2020 and December 31, 2019, investment securities having a carrying value of approximately $1.63 billion and $1.64 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at March 31, 2020, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2058, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives
,
which incorporate estimated prepayment speeds.
                                 
 
March 31, 2020
 
 
Available-for-sale
   
Held-to-maturity
 
 
  Amortized  
Cost
 
  
  Fair Value  
 
  
  Amortized  
Cost
 
  
  Fair Value  
 
 
 
(Dollars in thousands)
  
Due in one year or less
    $
13,043
      $
13,160
      $
768
      $
788
 
Due after one year through five years
   
1,376,413
     
1,427,373
     
358,973
     
367,734
 
Due after five years through ten years
   
176,690
     
182,573
     
103,004
     
104,787
 
Due after ten years
   
55,090
     
56,649
     
179,510
     
184,510
 
                                 
Total investment securities
    $
 
 
 
 
1,621,236
      $
 
 
 
 
 
 
 
 
 
1,679,755
      $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
642,255
      $
 
 
 
 
 
 
 
 
657,819
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 2020.
14
Table of Contents
5.
LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following table provides a summary of total loans and lease finance receivables by type.
                                                                         
 
 
 
 
 
 
March 31, 2020
 
 
 
 
 
 
  
 
 
December 31, 2019
 
 
 
(Dollars in thousands)
  
Commercial and industrial
    $
960,761
      $
935,127
 
SBA
   
313,071
     
305,008
 
Real estate:
   
     
 
Commercial real estate
   
5,347,925
     
5,374,617
 
Construction
   
128,045
     
116,925
 
SFR mortgage
   
278,743
     
283,468
 
Dairy & livestock and agribusiness
   
272,114
     
383,709
 
Municipal lease finance receivables
   
51,287
     
53,146
 
Consumer and other loans
   
114,206
     
116,319
 
                 
Gross loans
   
7,466,152
     
7,568,319
 
Less: Deferred loan fees, net (1)
   
-
     
(3,742
 )
                 
Gross loans, net of deferred loan fees
   
7,466,152
     
7,564,577
 
Less: Allowance for
credit
losses
   
(82,641
 )    
(68,660
 )
                 
Total loans and lease finance receivables
    $
7,383,511
      $
7,495,917
 
                 
 
 
 
 
 
 
 
 
  (1) Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables.
 
 
 
 
 
 
As of March 31, 2020, 77.08% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 71.63% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of March 31, 2020, $248.2 million, or 4.64% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of March 31, 2020, dairy & livestock and agribusiness loans of $272.1 million were comprised of $218.0 million for dairy & livestock loans and $54.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.
At March 31, 2020 and December 31, 2019, loans totaling $6.06 billion and $6.03 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no outstanding loans
held-for-sale
as of March 31, 2020 and December 31, 2019.
1
5
Table of Contents
Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel on an ongoing basis for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
1
6
Table of Contents
The following table summarizes loans by type and origination year, according to our internal risk ratings as of the date presented.
 
                                                                         
 
Origination Year
   
Revolving
loans
amortized
cost basis
 
  
Revolving
loans
converted to
term loans
 
  
 
March 31, 2020
 
2020
 
  
2019
 
  
2018
 
  
2017
 
  
2016
 
  
Prior
 
Total
 
 
(Dollars in thousands)
  
Commercial and industrial loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
35,101
       $
160,551
       $
79,808
       $
74,291
       $
48,698
       $
85,803
       $
423,186
       $
8,849
       $
916,287
  
Special Mention
   
1,066
      
257
      
7,405
      
1,694
      
539
      
3,524
      
12,598
      
2,442
      
29,525
  
Substandard
   
-
      
143
      
796
      
855
      
637
      
37
      
11,256
      
1,225
      
14,949
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                         
Total Commercial and industrial loans:
    $
36,167
       $
160,951
       $
88,009
       $
76,840
       $
49,874
       $
89,364
       $
447,040
       $
12,516
       $
960,761
  
                                                                         
SBA:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
26,599
       $
18,009
       $
48,416
       $
77,219
       $
27,922
       $
93,865
      $
-
       $
-
      $
292,030
  
Special Mention
   
-
      
-
      
-
      
1,177
      
1,277
      
7,809
     
-
      
-
     
10,263
  
Substandard
   
-
      
-
      
1,424
      
3,835
      
1,604
      
3,915
     
-
      
-
     
10,778
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
     
-
      
-
     
-
  
                                                                         
Total SBA:
    $
26,599
       $
18,009
       $
49,840
       $
82,231
       $
30,803
       $
105,589
      $
-
       $
-
      $
313,071
  
                                                                         
Commercial real estate loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
153,366
       $
726,268
       $
743,909
       $
732,319
       $
626,561
       $
2,021,759
       $
197,335
       $
18,747
       $
5,220,264
  
Special Mention
   
-
      
5,343
      
9,106
      
16,484
      
7,211
      
52,995
      
3,457
      
-
      
94,596
  
Substandard
   
-
      
-
      
5,155
      
5,813
      
1,315
      
18,819
      
250
      
1,713
      
33,065
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                         
Total Commercial real estate loans:
    $
153,366
       $
731,611
       $
758,170
       $
754,616
       $
635,087
       $
2,093,573
       $
201,042
       $
20,460
       $
5,347,925
  
                                                                         
Construction loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
550
       $
13,414
       $
13,300
       $
35,130
       $
10,592
       $
5
       $
49,591
       $
5,463
       $
128,045
  
Special Mention
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Substandard
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                         
Total Construction loans:
    $
550
       $
13,414
       $
13,300
       $
35,130
       $
10,592
       $
5
       $
49,591
       $
5,463
       $
128,045
  
                                                                         
SFR mortgage loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
10,473
       $
66,680
       $
38,192
      $
26,819
      $
35,992
       $
96,795
       $
-
       $
-
       $
274,951
 
Special Mention
   
-
      
-
      
-
     
-
     
-
      
1,942
      
-
      
-
      
1,942
 
Substandard
   
-
      
-
      
-
     
379
     
-
      
1,025
      
-
      
446
      
1,850
 
Doubtful & Loss
   
-
      
-
      
-
     
-
     
-
      
-
      
-
      
-
      
-
 
                                                                         
Total SFR mortgage loans:
    $
10,473
       $
66,680
       $
38,192
      $
27,198
      $
35,992
       $
99,762
       $
-
       $
446
       $
278,743
 
                                                                         
 
1
7
Table of Contents
                                                                         
 
Origination Year
   
Revolving
loans
amortized
cost basis
 
  
Revolving
loans
converted to
term loans
 
  
 
March 31, 2020
 
2020
 
  
2019
 
  
2018
 
  
2017
 
  
2016
 
  
Prior
 
Total
 
 
(Dollars in thousands)
  
Dairy & livestock and agribusiness loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
78
       $
2,945
       $
1,940
       $
8,109
       $
2,831
       $
14,655
       $
192,649
       $
-
       $
223,207
  
Special Mention
   
-
      
-
      
166
      
722
      
-
      
-
      
22,150
     
3,686
      
26,724
 
Substandard
   
-
      
-
      
882
      
-
      
4,016
      
-
      
4,625
     
12,660
      
22,183
 
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
     
-
      
-
 
                                                                         
Total Dairy & livestock and agribusiness loans:
    $
78
       $
2,945
       $
2,988
       $
8,831
       $
6,847
       $
14,655
       $
219,424
      $
16,346
       $
272,114
 
                                                                         
Municipal lease finance receivables loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
147
       $
-
       $
3,081
       $
10,961
       $
7,912
       $
28,739
       $
-
       $
-
       $
50,840
  
Special Mention
   
-
      
-
      
-
      
-
      
-
      
447
      
-
      
-
      
447
  
Substandard
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                         
Total Municipal lease finance receivables loans:
    $
147
       $
-
       $
3,081
       $
10,961
       $
7,912
       $
29,186
       $
-
       $
-
       $
51,287
  
                                                                         
Consumer and other loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
1,647
       $
3,197
       $
1,160
       $
1,372
       $
2,094
       $
2,612
       $
98,953
       $
1,582
       $
112,617
  
Special Mention
   
-
      
-
      
-
      
-
      
80
      
148
      
609
      
-
      
837
  
Substandard
   
-
      
-
      
5
      
-
      
-
      
179
      
148
      
420
      
752
  
Doubtful & Loss
   
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
                                                                         
Total Consumer and other loans:
    $
1,647
       $
3,197
       $
1,165
       $
1,372
       $
2,174
       $
2,939
       $
99,710
       $
2,002
       $
114,206
  
                                                                         
Gross loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Risk Rating:
   
     
     
     
     
     
     
     
     
 
Pass
    $
227,961
      $
991,064
       $
929,806
       $
966,220
      $
762,602
       $
2,344,233
      $
961,714
      $
34,641
      $
7,218,241
 
Special Mention
   
1,066
     
5,600
      
16,677
      
20,077
     
9,107
      
66,865
     
38,814
     
6,128
     
164,334
 
Substandard
   
-
     
143
      
8,262
      
10,882
     
7,572
      
23,975
     
16,279
     
16,464
     
83,577
 
Doubtful & Loss
   
-
     
-
      
-
      
-
     
-
      
-
     
-
     
-
     
-
 
                                                                         
Total Gross loans:
    $
229,027
      $
996,807
       $
954,745
       $
997,179
      $
779,281
       $
2,435,073
      $
1,016,807
      $
57,233
      $
7,466,152
 
                                                                         
 
 
 
1
8
Table of Contents
The following table summarizes lo
an
s by type, according to our internal risk ratings as of the date presented.
                                         
 
December 31, 2019
 
    Pass    
 
Special
 
 
Mention  
 
Substandard 
 
Doubtful &
Loss
 
    Total    
 
 
  
(Dollars in thousands)
Commercial and industrial
    $
895,234
       $
35,473
       $
4,420
       $
-
       $
935,127
  
SBA
   
283,430
      
11,032
      
10,546
      
-
      
305,008
  
Real estate:
   
     
     
     
     
 
Commercial real estate
   
     
     
     
     
 
Owner occupied
   
1,977,007
      
78,208
      
28,435
      
-
      
2,083,650
  
Non-owner
occupied
    
3,280,580
      
10,005
      
382
      
-
      
3,290,967
  
Construction
   
     
     
     
     
 
Speculative
   
106,895
      
-
      
-
      
-
      
106,895
  
Non-speculative
   
10,030
      
-
      
-
      
-
      
10,030
  
SFR mortgage
   
280,010
      
1,957
      
1,501
      
-
      
283,468
  
Dairy & livestock and agribusiness
   
320,670
      
35,920
      
27,119
      
-
      
383,709
  
Municipal lease finance receivables
   
52,676
      
470
      
-
      
-
      
53,146
  
Consumer and other loans
   
114,870
      
421
      
1,028
      
-
      
116,319
  
                                         
Total gross loans
   $
     
 
    
7,321,402
       $
    
 
 
 
 
     
173,486
      
$
   
 
    
73,431
      
$
       
 
-
       $
        
7,568,319
  
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses
The allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and Industrial, Commercial Real Estate, and Consumer Retail. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
contained herein for a more detailed discussion concerning the allowance for credit losses.
During the second half of March 2020, the broader economy experienced a significant deterioration in the economic environment driven by the
 
COVID-19
 
pandemic resulting in adverse changes to the forecasted macroeconomic
variables utilized in our modeling processes. For the quarter ended March 31, 2020, the Bank’s CECL methodology produced an ACL of $82.6 million, resulting in a provision for credit losses of $12.0 million. The ACL/Total Loan Coverage Ratio as of March 31, 2020 increased to 1.11%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resulted from the
COVID-19
crisis.
 
Our economic forecast is a blend of multiple forecasts produced by Moody’s. The resulting forecast assumes a decline in GDP for the second quarter of almost 20% and unemployment rising to more than 9% in the second quarter of 2020. GDP is forecasted to rebound to growth of approximately 10% in the third quarter of 2020, but unemployment continues to be inflated at more than 6% through the remainder of 2020.
Management believes that the ACL was appropriate at March 31, 2020 and December 31, 2019. No assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.
 
19
Table of Contents
The following tables present the balance and activity related to the allowance for credit losses for
held-for-investment
loans by type for the periods presented.
                                                 
 
  
Three Months Ended March 31, 2020
 
  
Ending Balance,
  prior to adoption of  
ASU 2016-13
December 31, 2019
 
Impact of
adopting ASU
2016-13
 
Provision for
    (Recapture of)    
Credit Losses
Expense
 
Charge-offs
 
    Recoveries    
 
Ending Balance
March 31, 2020
 
 
(Dollars
i
in thousands)
  
Commercial and industrial
    $
8,880
       $
(2,442
 )     $
2,947
       $
-
       $
2
       $
9,387
  
SBA
   
1,453
      
1,818
      
675
      
-
      
-
      
3,946
  
Real estate:
   
     
     
     
     
     
 
Commercial real estate
   
48,629
      
3,547
      
6,251
      
-
      
-
      
58,427
  
Construction
   
858
      
655
      
3,116
      
-
      
3
      
4,632
  
SFR mortgage
   
2,339
      
(2,043
 )    
(221
 )    
-
      
206
      
281
  
Dairy & livestock and agribusiness
   
5,255
      
(186
 )    
(803
 )    
-
      
-
      
4,266
  
Municipal lease finance receivables
   
623
      
(416
 )    
70
      
-
      
-
      
277
  
Consumer and other loans
   
623
      
907
      
(35
 )    
(86
 )    
16
      
1,425
  
                                                 
Total allowance for credit losses
    $
68,660
       $
1,840
       $
12,000
       $
(86
 )     $
227
       $
82,641
  
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                         
 
Three Months Ended March 31, 2019
 
 
     Ending Balance     

December 31,
2018
 
  
    Charge-offs    
 
  
    Recoveries    
 
  
Provision for

    (Recapture of)    

Loan Losses
 
  
  Ending Balance  

March 31, 2019
 
 
(Dollars in thousands)
  
Commercial and industrial
    $
7,520
       $
-
       $
110
       $
(31
 )     $
7,599
  
SBA
   
1,062
      
(20
 )    
5
      
232
      
1,279
  
Real estate:
   
     
-
      
-
      
     
 
Commercial real estate
   
44,934
      
-
      
-
      
1,144
      
46,078
  
Construction
   
981
      
-
      
3
      
(120
 )    
864
  
SFR mortgage
   
2,196
      
-
      
68
      
(76
 )    
2,188
  
Dairy & livestock and agribusiness
   
5,215
      
(78
 )    
-
      
562
      
5,699
  
Municipal lease finance receivabl
es
    
775
      
-
      
-
      
(37
 )    
738
  
Consumer and other loans
   
726
      
(1
 )    
1
      
(150
 )    
576
  
PCI loans
   
204
      
-
      
-
      
(24
 )    
180
  
                                         
Total allowance for loan losses
    $
63,613
       $
(99
 )     $
187
       $
1,500
       $
65,201
  
                                         
 
 
 
 
 
 
 
 
The following table presents the recorded investment in loans
held-for-investment
and the related
ACL
by loan type, based on the Company’s methodology for determining the
ACL
for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.
                                                 
 
March 31, 2019
 
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
    $
8,512
       $
948,614
       $
-
       $
117
      $
7,482
       $
-
  
SBA
   
4,661
      
333,296
      
-
      
317
      
962
      
-
  
Real estate:
   
     
     
     
     
     
 
Commercial real estate
   
1,589
      
5,387,277
      
-
      
-
      
46,078
      
-
  
Construction
   
-
      
121,912
      
-
      
-
      
864
      
-
  
SFR mortgage
   
5,051
      
280,736
      
-
      
-
      
2,188
      
-
  
Dairy & livestock and agribusiness
   
-
      
322,321
      
-
      
-
      
5,699
      
-
  
Municipal lease finance receivables
   
-
      
61,249
      
-
      
-
      
738
      
-
  
Consumer and other loans
   
477
      
120,291
      
-
      
1
      
575
      
-
  
PCI loans
   
-
      
-
      
15,356
      
-
      
-
      
180
  
                                                 
Total
    $
20,290
       $
7,575,696
       $
15,356
       $
435
       $
64,586
       $
180
  
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20
Table of Contents
Past Due and Nonperforming Loans
We seek to manage asset
quality
and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the ACL, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note
 
3 – Summary of Significant Accounting Policies, included in our Annual Report on Form
 10-
K for the year ended December 31, 2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
The following table presents the recorded investment in, and the ag
in
g of, past due loans (including nonaccrual loans), by type of loans as of the date pres
ent
ed.
                                                 
 
March 31, 2020
 
  
30-59
 Days
Past Due
 
60-89
 Days
Past Due
 
 Greater 
than 89 Days
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total Loans
 
 
 
 and Financing  
Receivables
 
 
(Dollars in thousands)
Commercial and industrial
    $
347
       $
362
       $
1,487
       $
2,196
       $
958,565
       $
960,761
  
SBA
   
3,086
      
954
      
1,669
      
5,709
      
307,362
      
313,071
  
Real estate:
   
     
     
     
     
     
 
 Commercial real estate
   
     
     
     
     
     
 
  Owner occupied
   
154
      
310
      
250
      
714
      
2,069,646
      
2,070,360
  
  
Non-owner
occupied
    
210
      
-
      
-
      
210
      
3,277,355
      
3,277,565
  
 Construction
   
     
     
     
     
     
 
  Speculative (1)
   
-
      
-
      
-
      
-
      
116,143
      
116,143
  
  
Non-speculative
   
-
      
-
      
-
      
-
      
11,902
      
11,902
  
 SFR mortgage
   
233
      
-
      
486
      
719
      
278,024
      
278,743
  
Dairy & livestock and agribusiness
   
166
      
-
      
-
      
166
      
271,948
      
272,114
  
Municipal lease finance receivables
   
-
      
-
      
-
      
-
      
51,287
      
51,287
  
Consumer and other loans
   
-
      
-
      
93
      
93
      
114,113
      
114,206
  
                                                 
  Total gross loans
    $
4,196
       $
1,626
       $
3,985
       $
9,807
       $
7,456,345
       $
7,466,152
  
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (1) Speculative construction loans are generally for properties where there is no identified buyer or renter.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance, are presented as of March 31, 2020 by type of loan.
                         
 
March 31, 2020
 
 
Nonaccrual
with No
Allowance for
Credit Losses
 
  
Total
Nonaccrual
(1) (3) 
 
  
Loans Past Due
Over 89 Days
Still Accruing
 
 
(Dollars in thousands)
 
Commercial and industrial
    $
549
       $
1,703
       $
-
  
SBA
   
2,110
      
2,748
      
-
  
Real estate:
   
     
     
 
 Commercial real estate
   
     
     
 
  Owner occupied
   
715
      
715
      
-
  
  
Non-owner
occupied
    
232
      
232
      
-
  
 Construction
   
     
     
 
  Speculative (2)
   
-
      
-
      
-
  
  
Non-speculative
   
-
      
-
      
-
  
 SFR mortgage
   
864
      
864
      
-
  
Dairy & livestock and agribusiness
   
-
      
-
      
-
  
Municipal lease finance receivables
   
-
      
-
      
-
  
Consumer and other loans
   
166
      
166
      
-
  
                         
  Total gross loans
    $
4,636
       $
6,428
       $
-
  
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (1) As of March 31, 2020, $982,000 of nonaccruing loans were current, $154,000 were
30-59
days past due, $1.3 million were
60-89
days past due, and $4.0 million were 90+ days past due.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (
3
)		 Excludes $1.7 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
Table of Contents
The following table presents the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans as of the date presented.
                                                 
 
December 31, 2019
 
 
30-59
 Days
Past Due
 
  
60-89 Days
Past Due
 
  
Total Past Due
and Accruing
 
  
Nonaccrual
(1) (3)
 
  
Current
 
  
Total Loans
and Financing
Receivables
 
 
 
  
 
  
(Dollars in thousands)
    
 
  
 
Commercial and industrial
    $
2
       $
-
       $
2
       $
1,266
       $
933,859
       $
935,127
  
SBA
   
870
      
532
      
1,402
      
2,032
      
301,574
      
305,008
  
Real estate:
   
     
     
     
     
     
 
 Commercial real estate
   
     
     
     
     
     
 
  Owner occupied
   
-
      
-
      
-
      
479
      
2,083,171
      
2,083,650
  
  Non-owner occupied
   
-
      
-
      
-
      
245
      
3,290,722
      
3,290,967
  
 Construction
   
     
     
     
     
     
 
  Speculative (2)
   
-
      
-
      
-
      
-
      
106,895
      
106,895
  
  Non-speculative
   
-
      
-
      
-
      
-
      
10,030
      
10,030
  
 SFR mortgage
   
6
      
243
      
249
      
878
      
282,341
      
283,468
  
Dairy & livestock and agribusiness
   
-
      
-
      
-
      
-
      
383,709
      
383,709
  
Municipal lease finance receivables
   
-
      
-
      
-
      
-
      
53,146
      
53,146
  
Consumer and other loans
   
-
      
-
      
-
      
377
      
115,942
      
116,319
  
                                                 
  Total gross loans
    $
            
878
       $
            
775
       $
            
1,653
       $
            
5,277
       $
 
 
 
 
 
 
 
7,561,389
       $
7,568,319
  
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (1) As of December 31, 2019, $1.2 million of nonaccruing loans were current, $59,000 were
30-59
days past due, $1.1 million were
60-89
days past due and $2.9 million were 90+ days past due.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (2) Speculative construction loans are generally for properties where
there
is no identifi
ed
buyer or renter.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  (
3
)		 Excludes $2.0 million of guaranteed porti
on
of nonaccrual SBA loans that are in process of collection.
 
 
 
 
 
 
 
 
 
22
Table of Contents
Impaired Loans (prior to adoption of CECL)
Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. As a result of the change, the following tables present information about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of March 31, 2019 and December 31, 2019, prior to the date of adoption of the amendments to the credit loss standard.
                                         
 
Three Months Ended
 
March 31, 2019
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Commercial and industrial
    $
8,208
       $
12,317
       $
-
      $
8,230
       $
2
  
SBA
   
3,400
      
5,779
      
-
     
3,511
      
11
  
Real estate:
   
     
     
     
     
 
Commercial real estate
   
     
     
     
     
 
Owner occupied
   
519
      
618
      
-
     
521
      
-
 
Non-owner
occupied
    
1,070
      
1,231
      
-
     
1,084
      
7
  
Construction
   
     
     
     
     
 
Speculative
   
-
     
-
     
-
     
-
     
-
 
Non-speculative
   
-
     
-
     
-
     
-
     
-
 
SFR mortgage
   
5,051
      
5,865
      
-
     
5,082
      
21
  
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
     
-
 
Municipal lease finance receivables
   
-
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
476
      
625
      
-
     
482
      
-
 
                                         
Total
   
18,724
      
26,435
      
-
     
18,910
      
41
  
                                         
With a related allowance recorded:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Commercial and industrial
   
304
      
309
      
117
      
323
      
-
 
SBA
   
1,261
      
1,236
      
317
      
1,261
      
-
 
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
   
1
      
1
      
1
      
1
      
-
 
                                         
Total
   
1,566
      
1,546
      
435
      
1,585
      
-
 
                                         
 Total impaired loans
    $
20,290
       $
     
27,981
       $
435
       $
20,495
       $
41
  
                                         
 
 
 
2
3
Table of Contents
  
December 31, 2019
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
  
 
 
  
 
 
Commercial and industrial
    $
1,091
       $
1,261
       $
-
 
SBA
   
2,243
      
2,734
      
-
 
Real estate:
   
     
     
 
Commercial real estate
   
     
     
 
Owner occupied
   
479
      
613
      
-
 
Non-owner
occupied
    
642
      
643
      
-
 
Construction
   
     
     
 
Speculative
   
-
     
-
     
-
 
Non-speculative
   
-
     
-
     
-
 
SFR mortgage
   
2,979
      
3,310
      
-
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
 
Municipal lease finance receivables
   
-
     
-
     
-
 
Consumer and other loans
   
377
      
514
      
-
 
                         
Total
   
7,811
      
9,075
      
-
 
                         
With a related allowance recorded:
 
 
 
  
 
 
  
 
 
Commercial and industrial
   
253
      
347
      
251
  
SBA
   
325
      
324
      
257
  
Real estate:
   
     
     
 
Commercial real estate
   
     
     
 
Owner occupied
   
-
     
-
     
-
 
Non-owner
occup
ied
    
-
     
-
     
-
 
Construction
   
     
     
 
Speculative
   
-
     
-
     
-
 
Non-speculative
   
-
     
-
     
-
 
SFR mortgage
   
-
     
-
     
-
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
 
Municipal lease finance receivables
   
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
 
                         
Total
   
578
      
671
      
508
  
                         
 Total impaired loans
    $
           
8,389
       $
           
9,746
       $
             
508
  
                         
 
 
 
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Table of Contents
Collateral Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
 
The following table presents the recorded investment in collateral-dependent loans by type of loans as of the date presented.
  
March 31, 2020
   
Number of
Loans

Dependent on
Collateral
 
  
Real Estate
 
  
Business Assets
  
Other
 
  
(Dollars in thousands)
    
 
Commercial and industrial
    $
112
       $
1,652
       $
8
      
12
  
SBA
   
1,852
      
2,524
      
8
      
19
  
Real estate:
   
     
     
     
 
Commercial real estate
   
1,324
      
-
      
-
      
5
  
Construction
   
-
      
-
      
-
      
-
  
SFR mortgage
   
864
      
-
      
-
      
3
  
Dairy & livestock and agribusiness
   
-
      
-
      
-
      
-
  
Municipal lease finance receivables
   
-
      
-
      
-
      
-
  
Consumer and other loans
   
84
      
-
      
22
      
4
  
                                 
 Total collateral-dependent loans
    $
       
4,236
       $
       
4,176
       $
               
38
      
          
43
  
                                 
Reserve for Unfunded Loan Commitments
The allowance for
off-balance
sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the
off-balance
sheet loan commitments at the same time as it evaluates credit risk associated with the loan and lease portfolio. As a result of the adoption of ASU
2016-13,
the reserve for unfunded loan commitments
included a transition adjustment of
$41,000
as
of
 January 1,
2020. There was no provision or recapture of provision for unfunded commitments for the three months ended March 31, 2020. As of March 31, 2020 and December 31, 2019, the balance in this reserve was $9.0 million and was included in other liabilities.
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered
nonperforming
and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3
 – 
Summary of Significant Accounting Policies,
included in our Annual Report on Form
10-K
for the year ended December 31, 2019 for a more detailed discussion regarding TDRs.
As of March 31, 2020, there were $2.8 million of loans classified as a TDR, of which $2.8 million were performing and none were nonperforming. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At March 31, 2020, performing TDRs were comprised of seven SFR mortgage loans of $1.8 million, one SBA loan of $524,000, one commercial real estate loan of $377,000, and two commercial and industrial loans of $68,000.
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
no
allocated allowance to TDRs as of March 31, 2020 and December 31, 2019
.
25
Table of Contents
The following table provides a summary of the activity related to TDRs for the periods presented.
 
Three Months Ended
March 31,
 
2020
 
2019
 
  
(Dollars in thousands)
Performing TDRs:
 
 
 
  
 
 
Beginning balance
    $
3,112
       $
3,594
  
New modifications
   
-
      
-
  
Payoffs/payments, net and other
   
(299
 )    
(295
 )
TDRs returned to accrual status
   
-
      
-
  
TDRs placed on nonaccrual status
   
-
      
-
  
                 
Ending balance
    $
2,813
       $
3,299
  
                 
Nonperforming TDRs:
 
 
 
  
 
 
Beginning balance
    $
244
       $
3,509
  
New modifications
   
-
      
-
  
Charge-offs
   
-
      
(78
 )
Transfer to OREO
   
-
      
(2,275
 )
Payoffs/payments, net and other
   
(244
 )    
(879
 )
TDRs returned to accrual status
   
-
      
-
  
TDRs placed on nonaccrual status
   
-
      
-
  
                 
Ending balance
    $
-
       $
277
  
                 
Total TDRs
    $
2,813
       $
3,576
  
                 
As of March 31, 2020 and 2019, there were no loans that were modified as TDRs dur
ing
 the three months ended March 31, 2020 and 2019, respectively.
There were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2020 and 2019.
In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and enter into short-term loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. Through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest for 90 days on 620 loans in the amount of $940 million, or approximately 13% of our total loan portfolio at March 31, 2020.
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Table of Contents
6.
EARNINGS PER SHARE RECONCILIATION
 
 
 
 
 
 
Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three months ended March 31, 2020 and 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 269,000 and 396,000, respectively.
The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.
                 
 
Three Months Ended
March 31,
 
2020
 
2019
 
 
(In thousands, except per share amounts)
Earnings per common share:
 
 
 
  
 
 
Net earnings
    $
     
37,980
       $
     
51,642
  
  Less: Net earnings allocated to restricted stock
   
83
      
141
  
                 
Net earnings allocated to common shareholders
    $
37,897
       $
51,501
  
                 
Weighted average shares outstanding
   
139,107
      
139,615
  
Basic earnings per common share
    $
0.27
       $
0.37
  
                 
                 
Diluted earnings per common share:
 
 
 
  
 
 
Net income allocated to common shareholders
   
37,897
      
51,501
  
                 
  Weighted average shares outstanding
   
139,107
      
139,615
  
  Incremental shares from assumed exercise of outstanding options
   
209
      
216
  
                 
Diluted weighted average shares outstanding
   
139,316
      
139,831
  
Diluted earnings per common share
    $
0.27
       $
0.37
  
                 
 
 
 
 
 
2
7
Table of Contents
7.
FAIR VALUE INFORMATION
 
 
 
 
 
 
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The following disclosure provides the fair value information for financial assets and liabilities as of March 31, 2020. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).
  •
Level 1
– Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.
 
 
 
 
 
 
  •
Level 2
– Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model-derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.
  •
Level 3
– Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.
 
 
 
 
 
 
There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2020 and 2019.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of the dates presented.
                                 
 
  Carrying Value at  
March 31, 2020
 
Quoted Prices in
  Active Markets for  
Identical Assets
(Level 1)
 
  
Significant Other
  Observable Inputs  
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
 
(Dollars in thousands)
Description of assets
 
 
 
  
 
 
  
 
 
  
 
 
Investment securities - AFS:
   
     
     
     
 
Mortgage-backed securities
    $
1,161,931
      $
-
      $
1,161,931
      $
-
 
CMO/REMIC
   
480,093
     
-
     
480,093
     
-
 
Municipal bonds
   
37,032
     
-
     
37,032
     
-
 
Other securities
   
699
     
-
     
699
     
-
 
                                 
  Total investment securities - AFS
   
1,679,755
     
-
     
1,679,755
     
-
 
Interest rate swaps
   
33,255
     
-
     
33,255
     
-
 
                                 
Total assets
    $
1,713,010
      $
-
      $
1,713,010
      $
-
 
                                 
Description of liability
 
 
 
  
 
 
  
 
 
  
 
 
Interest rate swaps
    $
33,255
      $
-
      $
33,255
      $
-
 
                                 
Total liabilities
    $
33,255
      $
-
      $
33,255
      $
-
 
                                 
                     
 
Carrying Value at
December 31, 2019
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
  
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
 
(Dollars in thousands)
Description of assets
 
 
 
  
 
 
  
 
 
  
 
 
Investment securities - AFS:
   
     
     
     
 
Mortgage-backed securities
    $
1,206,313
      $
-
      $
1,206,313
      $
-
 
CMO/REMIC
   
493,710
     
-
     
493,710
     
-
 
Municipal bonds
   
39,354
     
-
     
39,354
     
-
 
Other securities
   
880
     
-
     
880
     
-
 
                                 
  Total investment securities - AFS
   
1,740,257
     
-
     
1,740,257
     
-
 
Interest rate swaps
   
11,502
     
-
     
11,502
     
-
 
                                 
Total assets
    $
1,751,759
      $
-
      $
1,751,759
      $
-
 
                                 
Description of liability
 
 
 
  
 
 
  
 
 
  
 
 
Interest rate swaps
    $
11,502
      $
-
      $
11,502
      $
-
 
                                 
Total liabilities
    $
11,502
      $
-
      $
11,502
      $
-
 
                                 
 
 
 
 
 
 
2
8
Table of Contents
Assets and Liabilities Measured at Fair Value on a
Non-Recurring
Basis
We may be required to measure certain assets at fair value on a
non-recurring
basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or impairment write-downs of individual assets.
For assets measured at fair value on a
non-recurring
basis that were held on the balance sheet at March 31, 2020 and December 31, 2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.
                                         
 
Carrying Value at
March 31, 2020
 
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
  
Significant Other
Observable Inputs
(Level 2)
 
  
Significant
Unobservable Inputs
(Level 3)
 
  
Total Losses
For the Three
Months Ended
March 31, 2020
 
 
(Dollars in thousands)
  
Description of assets
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Loans:
   
     
     
     
     
 
Commercial and industrial
    $
903
      $
-
      $
-
      $
903
      $
9024
 
SBA
   
1,000
     
-
     
-
     
1,000
     
36
 
Real estate:
   
     
     
     
     
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
 
SFR mortgage
   
-
     
-
     
-
     
-
     
-
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
     
-
     
-
 
Other real estate owned
   
-
     
-
     
-
     
-
     
-
 
Asset
held-for-sale
   
-
     
-
     
-
     
-
     
-
 
                                         
  Total assets
    $
1,903
      $
-
      $
-
      $
1,903
      $
938
 
                                         
                               
 
Carrying Value at
December 31,
2019
 
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
  
Significant Other
Observable Inputs
(Level 2)
 
  
Significant
Unobservable Inputs
(Level 3)
 
  
Total Losses
 
For the Year
 
Ended
December 31, 2019
 
 
(Dollars in thousands)
  
Description of assets
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Impaired loans:
   
     
     
     
     
 
Commercial and industrial
    $
253
      $
-
      $
-
      $
253
      $
251
 
SBA
   
359
     
-
     
-
     
359
     
513
 
Real estate:
   
     
     
     
     
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
 
SFR mortgage
   
-
     
-
     
-
     
-
     
-
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
     
-
     
-
 
Other real estate owned
   
444
     
-
     
-
     
444
     
64
 
Asset
held-for-sale
   
-
     
-
     
-
     
-
     
-
 
                                         
  Total assets
    $
1,056
      $
-
      $
-
      $
1,056
      $
828
 
                                         
 
 
 
 
 
 
29
Table of Contents
Fair Value of Financial Instruments
The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2020 and December 31, 2019, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
March 31, 2020
 
       Carrying       
 
Estimated Fair Value
 
Amount
 
       Level 1       
 
       Level 2       
 
       Level 3       
 
       Total       
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
$
705,739
 
 
 
 
$
705,739
 
 
 
 
$
-
 
 
 
 
$
-
 
 
 
 
$
705,739
 
Interest-earning balances due from depository institutions
 
 
23,799
 
 
 
-
 
 
 
23,840
 
 
 
-
 
 
 
23,840
 
Investment securities
available-for-sale
 
 
1,679,755
 
 
 
-
 
 
 
1,679,755
 
 
 
-
 
 
 
1,679,755
 
Investment securities
held-to-maturity
 
 
642,255
 
 
 
-
 
 
 
657,819
 
 
 
-
 
 
 
657,819
 
Total loans, net of allowance for credit losses
 
 
7,383,511
 
 
 
-
 
 
 
-
 
 
 
7,338,946
 
 
 
7,338,946
 
Swaps
 
 
33,255
 
 
 
-
 
 
 
33,255
 
 
 
-
 
 
 
33,255
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing
 
$
3,540,955
 
 
 
 
$
-
 
 
 
 
$
3,540,407
 
 
 
 
$
-
 
 
 
 
$
3,540,407
 
Borrowings
 
 
368,915
 
 
 
-
 
 
 
368,654
 
 
 
-
 
 
 
368,654
 
Junior subordinated debentures
 
 
25,774
 
 
 
-
 
 
 
-
 
 
 
13,619
 
 
 
13,619
 
Swaps
 
 
33,255
 
 
 
-
 
 
 
33,255
 
 
 
-
 
 
 
33,255
 
 
 
 
 
December 31, 2019
 
Carrying
 
Estimated Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
 
 
$
185,518
 
 
 
 
$
185,518
 
 
 
 
$
-
 
 
 
 
$
-
 
 
$
185,518
 
Interest-earning balances due from depository institutions
 
 
2,931
 
 
 
-
 
 
 
2,938
 
 
 
-
 
 
 
2,938
 
Investment securities
available-for-sale
 
 
1,740,257
 
 
 
-
 
 
 
1,740,257
 
 
 
-
 
 
 
1,740,257
 
Investment securities
held-to-maturity
 
 
674,452
 
 
 
-
 
 
 
678,948
 
 
 
-
 
 
 
678,948
 
Total loans, net of allowance for loan losses
 
 
7,495,917
 
 
 
-
 
 
 
-
 
 
 
7,343,167
 
 
 
7,343,167
 
Swaps
 
 
11,502
 
 
 
-
 
 
 
11,502
 
 
 
-
 
 
 
11,502
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing
 
 
 
$
3,459,411
 
 
 
 
$
-
 
 
 
 
$
3,457,922
 
 
 
 
$
-
 
 
$
3,457,922
 
Borrowings
 
 
428,659
 
 
 
-
 
 
 
428,330
 
 
 
-
 
 
 
428,330
 
Junior subordinated debentures
 
 
25,774
 
 
 
-
 
 
 
-
 
 
 
20,669
 
 
 
20,669
 
Swaps
 
 
11,502
 
 
 
-
 
 
 
11,502
 
 
 
-
 
 
 
11,502
 
 
 
 
 
 
 
 
 
The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2020 and December 31, 2019. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
3
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8.
DERIVATIVE FINANCIAL INSTRUMENTS
 
 
 
 
 
 
 
 
 
 
The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of March 31, 2020, the Bank has entered into 91 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.
The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. As a result of the Bank exceeding $10 billion in assets, federal regulations require the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. None of our derivative assets and liabilities are offset in the Company’s condensed consolidated balance sheet.
We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.
Balance Sheet Classification of Derivative Financial Instruments
As of March 31, 2020 and December 31, 2019, the total notional amount of the Company’s swaps was $269.8 million, and $260.0 million, respectively. The location of the asset and liability, and their respective fair values, are summarized in the tables below.
                                 
 
March 31, 2020
 
 
Asset Derivatives
   
Liability Derivatives
 
 
        Balance Sheet        
Location
 
  
Fair
       Value       
 
  
        Balance Sheet        
Location
 
  
Fair
        Value        
 
 
(Dollars in thousands)
  
Derivatives not designated as hedging instruments:
   
     
     
     
 
Interest rate swaps
   
Other assets
      $
33,255
     
Other liabilities
      $
33,255
 
                                 
Total derivatives
   
      $
33,255
     
      $
33,255
 
                                 
       
 
December 31, 2019
 
 
Asset Derivatives
   
Liability Derivatives
 
 
    Balance Sheet    
Location
 
  
Fair
    Value    
 
  
    Balance Sheet    
Location
 
  
Fair
    Value    
 
 
(Dollars in thousands)
  
Derivatives not designated as hedging instruments:
   
     
     
     
 
Interest rate swaps
   
Other assets
      $
11,502
     
Other liabilities
      $
11,502
 
                                 
Total derivatives
   
      $
11,502
     
      $
11,502
 
                                 
 
 
 
 
 
 
 
 
3
1
Table of Contents
The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings
The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.
                         
Derivatives Not Designated as
Hedging Instruments
 
Location of Gain Recognized in
  Income on Derivative Instruments  
 
  
  Amount of Gain Recognized in Income on
Derivative Instruments
 
 
 
  
Three Months Ended March 31,
 
 
 
  
2020
 
  
2019
 
 
 
  
(Dollars in thousands)
  
Interest rate swaps
   
Other income
      $
373
      $
384
 
                         
Total
   
      $
373
      $
384
 
                         
 
 
 
 
 
 
9.
OTHER COMPREHENSIVE INCOME
The table below provides a summary of the components of other comprehensive inc
om
e (“OCI”) for the periods presented. 
                                                 
 
Three Months Ended March 31,
 
2020
 
2019
 
 
Before-tax
 
 
 Tax effect 
 
 
After-tax
 
 
 
Before-tax
 
 
 Tax effect 
 
 
After-tax
 
 
 
(Dollars in thousands)
Investment securities:
   
     
     
     
     
     
 
Net change in fair value recorded in accumulated OCI
    $
36,619
      $
(10,826
 )     $
25,793
      $
19,350
      $
(5,720
 )     $
13,630
 
Amortization of net unrealized losses on securities
 
transferred from
available-for-sale
to
held-to-maturity
   
(1
 )    
-
     
(1
 )    
(1,123
 )    
332
     
(791
 )
                                                 
    Net change
    $
36,618
      $
(10,826
 )     $
25,792
      $
18,227
      $
(5,388
 )     $
 
 
 
 
 
12,839
 
                                                 
 
 
 
 
 
 
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10.
BALANCE SHEET OFFSETTING
 
 
 
 
 
 
 
 
Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject to master netting arrangements. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to counterparties continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the Company’s conden
se
d consolidated balances.
                                                 
 
Gross Amounts
Recognized in
the Condensed
 
Gross Amounts
Offset in the
Con
densed
 
Net Amounts
Presented
 in the
Condensed
 
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheets
 
 
 
Consolidated
Balance Sheets
 
Consolidated
Balance Sheets
 
Consolidated
Balance Sheets
 
Financial
Instruments
 
Collateral
Pledged
 
Net Amount
 
 
(Dollars in thousands)
March 31, 2020
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Financial assets:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Derivatives not designated as hedging instruments
    $
33,255
      $
-
      $
-
      $
33,255
      $
-
      $
33,255
 
                                                 
Total
    $
33,255
      $
-
      $
-
      $
33,255
      $
-
      $
33,255
 
                                                 
                                                 
Financial liabilities:
   
     
     
     
     
     
 
Derivatives not designated as hedging instruments
    $
33,255
      $
-
      $
33,255
      $
-
      $
(52,171
 )     $
(18,916
 )
Repurchase agreements
   
368,915
     
-
     
368,915
     
-
     
(417,665
 )    
(48,750
 )
                                                 
Total
    $
402,170
      $
-
      $
402,170
      $
-
      $
(469,836
 )     $
(67,666
 )
                                                 
                                                 
December 31, 2019
   
     
     
     
     
     
 
Financial assets:
   
     
     
     
     
     
 
Derivatives not designated as hedging instruments
    $
11,502
      $
-
      $
-
      $
11,502
      $
-
      $
11,502
 
                                                 
Total
    $
11,502
      $
-
      $
-
      $
11,502
      $
-
      $
11,502
 
                                                 
                                                 
Financial liabilities:
   
     
     
     
     
     
 
Derivatives not designated as hedging instruments
    $
11,619
      $
(117
 )     $
11,502
      $
117
      $
(23,312
 )     $
(11,693
 )
Repurchase agreements
   
428,659
     
-
     
428,659
     
-
     
(510,138
 )    
(81,479
 )
                                                 
Total
    $
440,278
      $
(117
 )     $
440,161
      $
117
      $
(533,450
 )     $
(93,172
 )
                                                 
 
 
 
 
 
 
3
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11.
LEASES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings. ROU assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s condensed consolidated balance sheet.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The tables below present the components of lease costs and supplemental information related to leases as of and for the periods presented.
                 
 
        March 31, 2020        
 
  
        December 31, 2019        
 
 
(Dollars in thousands)
  
Lease Assets and Liabilities
 
 
 
  
 
 
ROU assets
    $
16,917
      $
18,522
 
Total lease liabilities
    $
19,484
      $
21,392
 
       
 
Three Months Ended March 31,
 
 
2020
 
  
2019
 
 
(Dollars in thousands)
  
Lease Cost
 
 
 
  
 
 
Operating lease expense (1)
    $
1,623
      $
2,100
 
Sublease income
   
-
      
-
 
                 
Total lease expense
    $
1,623
      $
2,100
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Includes short-term leases and variable lease costs, which are immaterial.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                 
Other Information
 
 
 
  
 
 
Cash paid for amounts included in the measurement of lease liabilities:
   
     
 
Operating cash outflows from operating leases, net
    $
1,935
       $
2,746
  
             
 
 
 
March 31, 2020
 
 
  
December 31, 2019
 
Lease Term and Discount Rate
 
 
 
  
 
 
Weighted average remaining lease term (years)
   
3.99
     
4.18
 
Weighted average discount rate
   
3.34
 %    
3.34
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company’s lease arrangements that have not yet commenced as of March 31, 2020 and the Company’s short-term lease costs and variable lease costs, for the three months ended March 31, 2020 are not material to the consolidated financial statements. The future lease payments required for leases that have initial or remaining
non-cancelable
lease terms in excess of one year as of March 31, 2020, excluding property taxes and insurance, are as follows:
         
 
March 31, 2020
 
 
(Dollars in thousands)
 
Year:
  
 
 
2020 (excluding the three months ended March 31, 2020)
    $
5,179
  
2021
   
5,509
  
2022
   
4,322
  
2023
   
2,540
  
2024
   
1,495
  
Thereafter
   
1,781
 
         
Total future lease payments
   
20,826
 
Less: Imputed interest
   
(1,342
 )
         
Present value of lease liabilities
    $
19,484
 
         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
4
Table of Contents
12.
REVENUE RECOGNITION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
On January 1, 2018, the
Company
adopted ASU No.
 2014-09
“Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3
 – 
Summary of Significant Accounting Policies
and Note 24
 – 
Revenue Recognition
of the 2019 Annual Report on Form
10-K
for the year ended December 31, 2019 for a more detailed discussion about noninterest revenue streams that are
in-scope
of Topic 606.
The following presents noninterest income, segregated by revenue streams
in-scope
and
out-of-scope
of Topic 606, for the periods indicated.
                 
 
 Three Months Ended 
March 31,
 
2020
 
2019
 
 
  
(Dollars in thousands)
Noninterest income:
 
 
 
  
 
 
In-scope
of Topic 606:
   
     
 
Service charges on deposit accounts
    $
4,776
      $
5,141
 
Trust and investment services
   
2,420
     
2,182
 
Bankcard services
   
577
     
950
 
Gain on OREO, net
   
10
     
105
 
Other
   
1,798
     
2,044
 
                 
Noninterest Income
(in-scope
of Topic 606)
    
9,581
     
10,422
 
Noninterest Income
(out-of-scope
of Topic 606)
    
2,059
     
5,881
 
                 
Total noninterest income
    $
11,640
      $
16,303
 
                 
 
 
 
 
 
 
 
 
 
 
3
5
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
IMPACT OF
COVID-19
The spread of
COVID-19
has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (the “FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to
-0-
to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the
COVID-19
pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and
medium-sized
businesses through 100% SBA guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. The SBA exhausted the initial funding for this program on April 15, 2020, but legislation passed on April 24, 2020 to provide additional PPP funds of $310 billion. We obtained approvals for about 3,800 loans, totaling approximately $1.25 billion through May 3, 2020. In response to the
COVID-19
pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest for 620 loans in the amount of $940 million, or approximately 13% of our total loan portfolio, at March 31, 2020.
As significant uncertainties as to future economic conditions exist, we have taken deliberate actions in response, including the termination of our stock repurchases under our
10b5-1
repurchase plan. Additionally, the expected economic deterioration, coupled with the implementation of the expected loss methodology for determining our provision for credit losses, better known as CECL, have contributed to an increased provision for credit losses of $12 million for the first quarter of 2020. We continue to monitor the impact of
COVID-19
closely, as well as any effects that may result from the CARES Act. The extent to which the
COVID-19
pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain, but we may experience increased provision for credit losses if the COVID-19 pandemic results in additional economic stress on our borrowers and loan portfolios.
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Table of Contents
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
  • Allowance for Credit Losses (“ACL”)
  • Business Combinations
  • Valuation and Recoverability of Goodwill
  • Income Taxes
Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Adoption of Allowance for Credit Losses
We adopted ASU
2016-13,
commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU 2016-13, resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3—
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2020
             
Standard
 
Description
 
Adoption Timing
 
Impact on Financial Statements
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
  
The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.
 
  
1st Quarter 2020 through the 4th Quarter 2022
 
Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company's consolidated financial statements.
Issued March 2020
 
  
 
 
 
 
 
             
ASU 2020-01 "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
 
The FASB issued ASU 2020-01 "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.
 
1st Quarter 2021
 
The adoption of this ASU will not have an impact on our consolidated financial statements.
Issued January 2020
37
Table of Contents
OVERVIEW
For the first quarter of 2020, we reported net earnings of $38.0 million, compared with $51.3 million for the fourth quarter of 2019 and $51.6 million for the first quarter of 2019. Diluted earnings per share were $0.27 for the first quarter, compared to $0.37 for the prior quarter and $0.37 for the same period last year.
The implementation of CECL resulted in a beginning balance transition adjustment to our allowance for credit losses (“ACL”) of $1.8 million with a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax. A $12.0 million credit loss provision was recorded for the first quarter of 2020, due primarily to the forecasted economic disruption resulting from
COVID-19.
During the quarter, we experienced minimal credit charge-offs of $86,000 and total recoveries of $227,000, resulting in net recoveries of $141,000.
At March 31, 2020, total assets of $11.61 billion increased $324.4 million, or 2.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $10.40 billion at March 31, 2020 increased $369.7 million, or 3.69%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $539.9 million increase in interest-earning balances due from the Federal Reserve, partially offset by a $98.4 million decrease in total loans and a $92.7 million decrease in investment securities.
Total investment securities were $2.32 billion at March 31, 2020, a decrease of $92.7 million, or 3.84%, from $2.41 billion at December 31, 2019. At March 31, 2020, investment securities
held-to-maturity
(“HTM”) totaled $642.3 million. At March 31, 2020, investment securities
available-for-sale
(“AFS”) totaled $1.68 billion, inclusive of a
pre-tax
unrealized gain of $58.5 million, an increase of $36.6 million from December 31, 2019. HTM securities declined by $32.2 million, or 4.77%, and AFS securities declined by $60.5 million, or 3.48%, from December 31, 2019. Our tax equivalent yield on investments was 2.45% for the quarter ended March 31, 2020, compared to 2.43% for the fourth quarter of 2019 and 2.57% for the first quarter of 2019.
Total loans and leases, net of deferred fees and discounts, of $7.47 billion at March 31, 2020 decreased by $98.4 million, or 1.30%, from December 31, 2019. The decrease in total loans included a $111.6 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The $13.2 million increase in loans included increases of $25.6 million in commercial and industrial loans, $11.1 million in construction loans, and $8.1 million in SBA loans, partially offset by a $26.7 million decrease in commercial real estate loans and collectively a $4.9 million decline in other loan segments. Our yield on loans was 4.95% for the quarter ended March 31, 2020, compared to 5.15% for the fourth quarter of 2019 and 5.27% for the first quarter of 2019. Interest income for yield adjustments related to discount accretion on acquired loans was $4.8 million for the quarter ended March 31, 2020, compared to $6.5 million for the fourth quarter of 2019 and $7.2 million for the first quarter of 2019.
Noninterest-bearing deposits were $5.57 billion at March 31, 2020, an increase of $327.1 million, or 6.24%, when compared to December 31, 2019. At March 31, 2020, noninterest-bearing deposits were 61.15% of total deposits, compared to 60.26% at December 31, 2019. Given what is typically a seasonally low quarter for us, deposit growth for the first quarter of 2020 was strong, although some of this growth was inflated by approximately $100 million of short-term noninterest-bearing deposits at the end of the first quarter. Our average cost of total deposits was 0.19% for the quarter ended March 31, 2020, compared to 0.21% for the fourth quarter of 2019 and 0.18% for the first quarter of 2019.
Customer repurchase agreements totaled $368.9 million at March 31, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.20% for the quarter ended March 31, 2020, 0.21% for the fourth quarter of 2019, and 0.20% for the first quarter of 2019.
At March 31, 2020 and December 31, 2019, we had no short-term borrowings, compared to $153.0 million at March 31, 2019. At March 31, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.21% for the quarter ended March 31, 2020, 0.22% for the fourth quarter of 2019, and 0.25% for the first quarter of 2019.
The allowance for credit losses totaled $82.6 million at March 31, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $12.0 million in provision for credit losses in the first quarter of 2020 due to the severe economic disruption forecasted to result from the coronavirus pandemic. The allowance for credit losses was 1.11% and 0.91% of total loans and leases outstanding, at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, total discounts on acquired loans were $43.4 million.
38
Table of Contents
The Company’s total equity was $1.94 billion at March 31, 2020. This represented a decrease of $52.7 million, or 2.64%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our 10b5-1 stock repurchase program, that was offset by a $25.8 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio. Equity also increased by $13.6 million in retained earnings for the quarter after $24.4 million in cash dividends were declared by the Company for the first quarter of 2020. Our tangible common equity ratio was 11.3% at March 31, 2020.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of March 31, 2020, the Company’s Tier 1 leverage capital ratio totaled 11.60%, our common equity Tier 1 ratio totaled 14.13%, our Tier 1 risk-based capital ratio totaled 14.42%, and our total risk-based capital ratio totaled 15.49%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our
Analysis of Financial Condition – Capital Resources
.
39
Table of Contents
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
                                                                                                               
 
For the Three Months Ended
March 31,
 
Variance
 
2020
 
2019
 
$
 
%
 
 
(Dollars in thousands, except per share amounts)
                                 
Net interest income
    $
     102,306
      $
109,536
      $
  (7,230) 
      
-6.60%
 
Provision for credit losses
   
(12,000
 )    
(1,500
 )    
(10,500) 
      
-700.00%
 
Noninterest income
   
11,640
     
16,303
     
(4,663) 
      
-28.60%
 
Noninterest expense
   
(48,641
 )    
(51,604
 )    
2,963  
      
5.74%
 
Income taxes
   
(15,325
 )    
(21,093
 )    
5,768  
      
27.35%
 
                                 
Net earnings
    $
37,980
      $
51,642
      $
(13,662) 
      
-26.46%
 
                                 
Earnings per common share:
   
     
     
     
 
Basic
    $
0.27
      $
0.37
      $
(0.10) 
      
 
Diluted
    $
0.27
      $
0.37
      $
(0.10) 
      
 
Return on average assets
   
1.34%
     
1.84%
     
-0.50%  
      
 
Return on average shareholders’ equity
   
7.61%
     
11.14%
     
-3.53%  
      
 
Efficiency ratio
   
42.69%
     
41.01%
     
1.68%  
      
 
Noninterest expense to average assets
   
1.72%
     
1.83%
     
-0.11%  
      
 
 
 
                                                                                                               
 
For the Three Months Ended
 
Variance
 
March 31,
2020
 
December 31,
2019
 
$
 
%
 
 
(Dollars in thousands, except per share amounts)
                                 
Net interest income
    $
     102,306
      $
107,020
      $
(4,714) 
      
-4.40%
 
Provision for credit losses
   
(12,000
 )    
-
     
(12,000) 
      
-
 
Noninterest income
   
11,640
     
12,640
     
(1,000) 
      
-7.91%
 
Noninterest expense
   
(48,641
 )    
(49,073
 )    
432  
      
0.88%
 
Income taxes
   
(15,325
 )    
(19,306
 )    
3,981  
      
20.62%
 
                                 
Net earnings
    $
37,980
      $
51,281
      $
  (13,301) 
      
-25.94%
 
                                 
Earnings per common share:
   
     
     
     
 
Basic
    $
0.27
      $
0.37
      $
(0.10) 
      
 
Diluted
    $
0.27
      $
0.37
      $
(0.10) 
      
 
Return on average assets
   
1.34%
     
1.79%
     
-0.45%  
      
 
Return on average shareholders’ equity
   
7.61%
     
10.21%
     
-2.60%  
      
 
Efficiency ratio
   
42.69%
     
41.01%
     
1.68%  
      
 
Noninterest expense to average assets
   
1.72%
     
1.71%
     
0.01%  
      
 
 
 
 
 
 
 
40
Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
                         
 
Three Months Ended
 
 
March 31,
2020
 
  
December 31,
2019
 
  
March 31,
2019
 
 
(Dollars in thousands)
 
Net Income
    $
37,980  
       $
51,281  
       $
51,642  
  
Add: Amortization of intangible assets
   
2,445  
      
2,460  
      
2,857  
  
Less: Tax effect of amortization of intangible assets (1)
   
(723) 
      
(727) 
      
(845) 
  
                         
Tangible net income
    $
39,702  
       $
53,014  
       $
53,654  
  
                         
                         
Average stockholders’ equity
    $
2,006,464  
       $
1,993,315  
       $
1,879,685  
  
Less: Average goodwill
   
(663,707) 
      
(663,707) 
      
(666,539) 
  
Less: Average intangible assets
   
(41,732) 
      
(44,185) 
      
(52,777) 
  
                         
Average tangible common equity
    $
1,301,025  
       $
1,285,423  
       $
1,160,369  
  
                         
                         
Return on average equity, annualized
   
7.61
 %    
10.21
 %    
11.14
 %
Return on average tangible common equity, annualized
   
12.27
 %    
16.36
 %    
18.75
 %
 
 
 
  (1) Tax effected at respective statutory rates.
 
 
 
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three months ended March 31, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
41
Table of Contents
The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
                                                 
 
For the Three Months Ended March 31,
 
 
2020
   
2019
 
 
      Average      
Balance
 
  
    Interest    
 
  
    Yield/    
Rate
 
  
      Average      
Balance
 
  
    Interest    
 
  
    Yield/    
Rate
 
 
(Dollars in thousands)
 
INTEREST-EARNING ASSETS
   
     
     
     
     
     
 
Investment securities (1)
   
     
     
     
     
     
 
Available-for-sale
securities:
    
     
     
     
     
     
 
Taxable
    $
1,659,394
      $
9,825
     
2.37%
      $
1,654,324
      $
10,309
     
2.49%
 
Tax-advantaged
   
38,086
     
224
     
3.36%
     
44,380
     
336
     
4.07%
 
Held-to-maturity
securities:
    
     
     
     
     
     
 
Taxable
   
469,394
     
2,698
     
2.30%
     
509,608
     
2,910
     
2.30%
 
Tax-advantaged
   
189,522
     
1,300
     
3.32%
     
227,908
     
1,615
     
3.43%
 
Investment in FHLB stock
   
17,688
     
332
     
7.55%
     
17,688
     
332
     
7.61%
 
Interest-earning deposits with other institutions
   
261,041
     
613
     
0.94%
     
18,695
     
94
     
2.04%
 
Loans (2)
   
7,482,805
     
92,117
     
4.95%
     
7,662,573
     
99,687
     
5.27%
 
                                                 
Total interest-earning assets
   
10,117,930
     
107,109
     
4.27%
     
10,135,176
     
115,283
     
4.62%
 
Total noninterest-earning assets
   
1,257,870
     
     
     
1,273,078
     
     
 
                                                 
Total assets
    $
11,375,800
     
     
      $
11,408,254
     
     
 
                                                 
                                                 
INTEREST-BEARING LIABILITIES
   
     
     
     
     
     
 
Savings deposits (3)
    $
3,056,743
     
3,111
     
0.41%
      $
3,127,839
     
2,685
     
0.35%
 
Time deposits
   
445,431
     
1,013
     
0.91%
     
524,822
     
1,186
     
0.92%
 
                                                 
Total interest-bearing deposits
   
3,502,174
     
4,124
     
0.47%
     
3,652,661
     
3,871
     
0.43%
 
FHLB advances, other borrowings, and customer repurchase agreements
   
504,585
     
679
     
0.54%
     
691,965
     
1,876
     
1.09%
 
                                                 
Interest-bearing liabilities
   
4,006,759
     
4,803
     
0.48%
     
4,344,626
     
5,747
     
0.54%
 
                                                 
Noninterest-bearing deposits
   
5,247,025
     
     
     
5,085,764
     
     
 
Other liabilities
   
115,552
     
     
     
98,179
     
     
 
Stockholders’ equity
   
2,006,464
     
     
     
1,879,685
     
     
 
                                                 
Total liabilities and stockholders’ equity
    $
   11,375,800
     
     
      $
   11,408,254
     
     
 
                                                 
                                                 
Net interest income
   
      $
     102,306
     
     
      $
109,536
     
 
                                                 
                                                 
Net interest spread - tax equivalent
   
     
     
3.79%
     
     
     
4.08%
 
Net interest margin
   
     
     
4.06%
     
     
     
4.37%
 
Net interest margin - tax equivalent
   
     
     
4.08%
     
     
     
4.39%
 
 
 
 
 
  (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended March 31, 2020 and 2019. The non TE rates were 2.38% and 2.49% for the three months ended March 31, 2020 and 2019, respectively.
 
 
 
  (2) Includes loan fees of $548,000 and $827,000 for the three months ended March 31, 2020 and 2019, respectively. Prepayment penalty fees of $1.5 million and $1.0 million are included in interest income for the three months ended March 31, 2020 and 2019, respectively.
 
 
 
  (3) Includes interest-bearing demand and money market accounts.
 
 
 
42
Table of Contents
The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
                                                                                                   
 
Comparision of Three Months Ended March 31,
 
2020 Compared to 2019
 
Increase (Decrease) Due to
 
 
    Volume    
 
  
Rate
 
  
Rate/
    Volume    
 
  
    Total    
 
 
 
  
(Dollars in thousands)
   
 
Interest income:
   
     
     
     
 
Available-for-sale
securities:
    
     
     
     
 
Taxable investment securities
    $
31
      $
(514
 )     $
(1
 )     $
(484
 )
Tax-advantaged
investment securities
    
(40
 )    
(63
 )    
(9
 )    
(112
 )
Held-to-maturity
securities:
    
     
     
     
 
Taxable investment securities
   
(214
 )    
2
     
-
     
(212
 )
Tax-advantaged
investment securities
    
(258
 )    
(49
 )    
(8
 )    
(315
 )
Investment in FHLB stock
   
-
     
-
     
-
     
-
 
Interest-earning deposits with other institutions
   
1,231
     
(51
 )    
(661
 )    
519
 
Loans
   
(2,060
 )    
(5,384
 )    
(126
 )    
(7,570
 )
                                 
Total interest income
   
(1,310
 )    
(6,059
 )    
(805
 )    
(8,174
 )
                                 
                                 
Interest expense:
   
     
     
     
 
Savings deposits
   
(65
 )    
503
     
(12
 )    
426
 
Time deposits
   
(171
 )    
(2
 )    
-
     
(173
 )
FHLB advances, other borrowings, and customer repurchase agreements
   
(354
 )    
(663
 )    
(180
 )    
(1,197
 )
                                 
Total interest expense
   
(590
 )    
(162
 )    
(192
 )    
(944
 )
                                 
Net interest income
    $
(720
 )     $
(5,897
 )     $
(613
 )     $
(7,230
 )
                                 
 
 
 
First Quarter of 2020 Compared to the First Quarter of 2019
Net interest income, before provision for credit losses, of $102.3 million for the first quarter of 2020 decreased $7.2 million, or 6.60%, compared to $109.5 million for the first quarter of 2019. Interest-earning assets decreased on average by $17.2 million, or 0.17%, from $10.14 billion for the first quarter of 2019 to $10.12 billion for the first quarter of 2020. Our net interest margin (TE) was 4.08% for the first quarter of 2020, compared to 4.39% for the first quarter of 2019.
Interest income for the first quarter of 2020 was $107.1 million, which represented an $8.2 million, or 7.09%, decrease when compared to the same period of 2019. Average interest-earning assets decreased by $17.2 million and the average interest-earning asset yield of 4.27%, compared to 4.62% for the first quarter of 2019. The 35 basis point decrease in the interest-earning asset yield over the first quarter of 2019 was primarily due to a 32 basis point decrease in loan yields.
Interest income and fees on loans for the first quarter of 2020 of $92.1 million decreased $7.6 million, or 7.59%, when compared to the first quarter of 2019. Average loans decreased $179.8 million for the first quarter of 2020 when compared with the same period of 2019. Discount accretion on acquired loans was $4.8 million for the first quarter of 2020, compared to $7.2 million for the first quarter of 2019. The significant decline in interest rates over the past three quarters had a negative impact on loans yields, which after excluding discount accretion, declined by 18 basis points compared to the prior year. The Federal Reserve lowered short-term interest rates by 150 basis points in the first quarter of 2020, after having lowered them by 75 basis points in the second half of 2019.
Interest income from investment securities was $14.0 million for the first quarter of 2020, a $1.1 million, or 7.40%, decrease from $15.2 million for the first quarter of 2019. This decrease was primarily the result of a $79.8 million decline in average investment securities for the first quarter of 2020, compared to the same period of 2019. The non tax-equivalent yield on investments decreased by 11 basis points compared to the first quarter of 2019.
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Table of Contents
Interest expense of $4.8 million for the first quarter of 2020, decreased $944,000, or 16.43%, compared to the first quarter of 2019. Total cost of funds declined to 0.21% for the first quarter of 2020 from 0.25% for the first quarter of 2019. On average, noninterest-bearing deposits were 59.97% of our total deposits for the first quarter of 2020, compared to 58.20% for the first quarter of 2019. In comparison to the first quarter of 2019, our overall cost of funds decreased by four basis points, as noninterest-bearing deposits grew by $161.3 million and overnight borrowings decreased by $159.0 million. Interest-bearing deposits declined by $150.5 million compared to the first quarter of 2019, while the cost of interest-bearing deposits increased by four basis points.
Provision for Credit Losses
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU
2016-13,
commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan.
The allowance for credit losses on loans totaled $82.6 million at March 31, 2020, compared to $68.7 million at December 31, 2019 and $65.2 million as of March 31, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $12.0 million in provision for credit losses in the first quarter of 2020 due to the severe economic disruption forecasted as a result of the coronavirus pandemic. During the first quarter of 2020, we experienced minimal credit charge-offs of $86,000 and total recoveries of $227,000, resulting in net recoveries of $141,000. This compares to a $1.5 million loan loss provision and net recoveries of $88,000 for the same period of 2019. We believe the allowance is appropriate at March 31, 2020. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of March 31, 2020, December 31, 2019 and March 31, 2019 was 1.11%, 0.91% and 0.86%, respectively. As of March 31, 2020, remaining discounts on acquired loans were $43.4 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment.
We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the COVID-19 epidemic. See “Allowance for Credit Losses” under
 
Analysis of Financial Condition
 
herein.
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Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
                                                                                                                           
 
For the Three Months Ended
March 31,
   
Variance
 
 
2020
 
  
2019
 
  
$
 
  
%
 
 
(Dollars in thousands)
 
Noninterest income:
   
     
     
     
 
Service charges on deposit accounts
  $
4,776
    $
5,141
    $
(365
 )    
-7.10
 %
Trust and investment services
   
2,420
     
2,182
     
238
     
10.91
 %
Bankcard services
   
577
     
950
     
(373
 )    
-39.26
 %
BOLI income
   
2,059
     
1,336
     
723
     
54.12
 %
Gain on OREO, net
   
10
     
105
     
(95
 )    
-90.48
 %
Gain on sale of building, net
   
-
     
4,545
     
(4,545
 )    
-100.00
 %
Other
   
1,798
     
2,044
     
(246
 )    
-12.04
 %
                                 
Total noninterest income
  $
   11,640
    $
   16,303
    $
   (4,663
 )    
-28.60
 %
                                 
 
 
 
First Quarter of 2020 Compared to the First Quarter of 2019
The $4.7 million decrease in noninterest income was primarily due to a $4.5 million net gain on the sale of one of our bank owned buildings in the first quarter of 2019. Service charges on deposit accounts decreased by $365,000 from the first quarter of 2019. The Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $300,000 when compared to the first quarter of 2019.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At March 31, 2020, CitizensTrust had approximately $2.70 billion in assets under management and administration, including $1.95 billion in assets under management. CitizensTrust generated fees of $2.4 million for the first quarter of 2020, an increase of $238,000 compared to the first quarter of 2019, due to the growth in assets under management.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $715,000 were included in our BOLI policies for the first quarter of 2020.
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Table of Contents
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
                                                                                                               
 
For the Three Months Ended
March 31,
   
Variance
 
 
2020
 
  
2019
 
  
$
 
  
%
 
 
(Dollars in thousands)
 
Noninterest expense:
   
     
     
     
 
Salaries and employee benefits
  $
30,877
    $
29,302
    $
1,575
     
5.38%
 
Occupancy
   
3,803
     
4,407
     
(604
 )    
-13.71%
 
Equipment
   
1,034
     
1,017
     
17
     
1.67%
 
Professional services
   
2,256
     
1,925
     
331
     
17.19%
 
Computer software expense
   
2,816
     
2,613
     
203
     
7.77%
 
Marketing and promotion
   
1,555
     
1,394
     
161
     
11.55%
 
Amortization of intangible assets
   
2,445
     
2,857
     
(412
 )    
-14.42%
 
Telecommunications expense
   
636
     
758
     
(122
 )    
-16.09%
 
Regulatory assessments
   
148
     
924
     
(776
 )    
-83.98%
 
Insurance
   
406
     
469
     
(63
 )    
-13.43%
 
Loan expense
   
257
     
316
     
(59
 )    
-18.67%
 
Directors’ expenses
   
315
     
287
     
28
     
9.76%
 
Stationery and supplies
   
285
     
292
     
(7
 )    
-2.40%
 
Acquisition related expenses
   
-
     
3,149
     
(3,149
 )    
-100.00%
 
Other
   
1,808
     
1,894
     
(86
 )    
-4.54%
 
                                 
Total noninterest expense
  $
   48,641
    $
   51,604
    $
(2,963
 )    
-5.74%
 
                                 
                                 
Noninterest expense to average assets
   
1.72%
     
1.83%
     
     
 
                                 
Efficiency ratio (1)
   
42.69%
     
41.01%
     
     
 
 
 
 
  (1) Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.
 
 
 
First Quarter of 2020 Compared to the First Quarter of 2019
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.72% for the first quarter of 2020, compared to 1.83% for the first quarter of 2019.
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.69% for the first quarter of 2020, compared to 41.01% for the first quarter of 2019.
Noninterest expense of $48.6 million for the first quarter of 2020 was $3.0 million, or 5.74%, lower than the first quarter of 2020. There were no merger related expenses related to the Community Bank acquisition for the first quarter of 2020, compared to $3.1 million for the first quarter of 2019. The year-over-year decrease also included a $776,000 decrease in regulatory assessments, a $587,000 decrease in occupancy and equipment expense primarily due to the consolidation of banking centers, and a $412,000 decrease in Core Deposit Intangible (“CDI”) amortization. These decreases were partially offset by a $1.6 million increase in salaries and employee benefit costs.
Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2020 was 28.75%, compared to 29.00% for the same periods of 2019. Our estimated annual effective tax rate also varies depending upon the level of
tax-advantaged
income as well as available tax credits.
The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of
tax-advantaged
income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.
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Table of Contents
ANALYSIS OF FINANCIAL CONDITION
Total assets of $11.61 billion at March 31, 2020 increased $324.4 million, or 2.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $10.40 billion at March 31, 2020, an increase of $369.7 million, or 3.69%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $539.9 million increase in interest-earning balances due from the Federal Reserve. Partially offsetting these increases was a $98.4 million decrease in total loans and a $92.7 million decrease in investment securities. The decrease in total loans included a $111.6 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The Company is well positioned to use the excess liquidity
built-up
during the quarter to fund customer loan requests under the SBA’s Paycheck Protection Program. The SBA exhausted the funding for these loans on April 15, 2020, but through that date we processed 911 loans, totaling $558 million.
Total liabilities were $9.67 billion at March 31, 2020, an increase of $377.2 million, or 4.06%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $408.7 million, or 4.69%. Total equity decreased $52.7 million, or 2.67%, to $1.94 billion at March 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $52.7 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. We had $38.0 million in net earnings during the quarter, offset by $24.4 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $25.8 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our
available-for-sale
investment securities.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At March 31, 2020, we reported total investment securities of $2.32 billion. This represented a decrease of $92.7 million, or 3.84%, from total investment securities of $2.41 billion at December 31, 2019. The decrease in investment securities was due to cash outflow from the portfolio exceeding new securities purchased in the first quarter of 2020, partially offset by an increase in the fair value of AFS investment securities as a result of declining interest rates. At March 31, 2020, investment securities HTM totaled $642.3 million. At March 31, 2020, our AFS investment securities totaled $1.68 billion, inclusive of a
pre-tax
net unrealized gain of $58.5 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $41.2 million.
As of March 31, 2020, the Company had a
pre-tax
net unrealized holding gain on AFS investment securities of $58.5 million, compared to a
pre-tax
net unrealized holding gain of $21.9 million at December 31, 2019. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the three months ended March 31, 2020 and 2019, repayments/maturities of investment securities totaled $128.2 million and $107.5 million, respectively. The Company purchased additional investment securities totaling $1.5 million and $19.8 million for the first three months ended March 31, 2020 and 2019, respectively. No investment securities were sold during the first three months of 2020 and 2019.
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Table of Contents
The tables below set forth investment securities AFS and HTM as of the dates presented.
                                         
 
March 31, 2020
 
 
  Amortized  
Cost
 
  
Gross
  Unrealized  
Holding
Gain
 
  
Gross
  Unrealized  
Holding
Loss
 
  
Fair Value
 
  
Total Percent
 
 
(Dollars in thousands)
 
Investment securities
available-for-sale:
   
     
     
     
     
 
Mortgage-backed securities
    $
  1,118,385
      $
  43,546
      $
- 
       $
1,161,931
     
69.18%
 
CMO/REMIC
   
466,033
     
14,060
     
- 
      
480,093
     
28.58%
 
Municipal bonds
   
36,119
     
913
     
- 
      
37,032
     
2.20%
 
Other securities
   
699
     
-
     
- 
      
699
     
0.04%
 
                                         
Total
available-for-sale
securities
     $
   1,621,236
      $
58,519
      $
- 
       $
1,679,755
     
100.00%
 
                                         
Investment securities
held-to-maturity:
   
     
     
     
     
 
Government agency/GSE
    $
111,452
      $
3,468
      $
(207)
      $
114,713
     
17.35%
 
Mortgage-backed securities
   
161,983
     
8,182
     
- 
      
170,165
     
25.22%
 
CMO/REMIC
   
184,316
     
591
     
(98)
     
184,809
     
28.70%
 
Municipal bonds
   
184,504
     
4,054
     
(426)
     
188,132
     
28.73%
 
                                         
Total
held-to-maturity
securities
     $
642,255
      $
         16,295
      $
(731)
      $
657,819
     
100.00%
 
                                         
 
 
 
                                         
 
December 31, 2019
 
 
  Amortized  
Cost
 
  
Gross
  Unrealized  
Holding
Gain
 
  
Gross
  Unrealized  
Holding
Loss
 
  
  Fair Value  
 
  
 Total Percent 
 
 
(Dollars in thousands)
 
Investment securities
available-for-sale:
   
     
     
     
     
 
Mortgage-backed securities
    $
  1,185,757
      $
  21,306
      $
(750)
      $
1,206,313
     
69.32%
 
CMO/REMIC
   
493,214
     
1,392
     
(896)
     
493,710
     
28.37%
 
Municipal bonds
   
38,506
     
850
     
(2)
     
39,354
     
2.26%
 
Other securities
   
880
     
-
     
- 
      
880
     
0.05%
 
                                         
Total
available-for-sale
securities
     $
1,718,357
      $
23,548
      $
(1,648)
      $
1,740,257
     
100.00%
 
                                         
Investment securities
held-to-maturity:
   
     
     
     
     
 
Government agency/GSE
    $
117,366
      $
2,280
      $
(657)
      $
118,989
     
17.40%
 
Mortgage-backed securities
   
168,479
     
2,083
     
(54)
     
170,508
     
24.98%
 
CMO/REMIC
   
192,548
     
-
     
(2,458)
     
190,090
     
28.55%
 
Municipal bonds
   
196,059
     
3,867
     
(565)
     
199,361
     
29.07%
 
                                         
Total
held-to-maturity
securities
     $
674,452
      $
8,230
      $
(3,734)
      $
678,948
     
100.00%
 
                                         
 
 
 
The weighted-average yield (TE) on the total investment portfolio at March 31, 2020 was 2.53% with a weighted-average life of 2.9 years. This compares to a weighted-average yield of 2.54% at December 31, 2019 with a weighted-average life of 3.6 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
pay-downs.
Approximately 90% of the securities in the total investment portfolio, at March 31, 2020, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of March 31, 2020, approximately $71.8 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 10% of the total investment portfolio, are predominately AA or higher rated securities. The allowance for credit losses for
held-to-maturity
investment securities under the new CECL model was zero at March 31, 2020.
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Table of Contents
We adopted ASU
2016-13
on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our
available-for-sale
and
held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the first quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position. As of March 31, 2020, there were no AFS investment securities with an unrealized loss position.
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 December 31, 2019, prior to adoption of ASU
2016-13.
Management previously reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired.
                                                                                                                                   
 
December 31, 2019
 
 
Less Than 12 Months
   
12 Months or Longer
   
Total
 
 
  Fair Value  
 
  
Gross
  Unrealized  
Holding
Losses
 
  
  Fair Value  
 
  
Gross
  Unrealized  
Holding
Losses
 
  
  Fair Value  
 
  
Gross
  Unrealized  
Holding
Losses
 
 
(Dollars in thousands)
 
Investment securities
 available-for-sale:
   
     
     
     
     
     
 
Mortgage-backed securities
    $
20,289
      $
(6)
      $
97,964
      $
(744)
      $
118,253
      $
(750)
 
CMO/REMIC
   
177,517
     
(705)
     
34,565
     
(191)
     
212,082
     
(896)
 
Municipal bonds
   
-
     
-
     
563
     
(2)
     
563
     
(2)
 
                                                 
Total
available-for-sale
securities
     $
197,806
      $
(711)
      $
133,092
      $
(937)
      $
330,898
      $
(1,648)
 
                                                 
Investment securities
held-to-maturity:
   
     
     
     
     
     
 
Government agency/GSE
    $
28,359
      $
(252)
      $
19,405
      $
(405)
      $
47,764
      $
(657)
 
Mortgage-backed securities
   
10,411
     
(54)
     
-
     
-
     
10,411
     
(54)
 
CMO/REMIC
   
23,897
     
(104)
     
166,193
     
(2,354)
     
190,090
     
(2,458)
 
Municipal bonds
   
7,583
     
(32)
     
29,981
     
(533)
     
37,564
     
(565)
 
                                                 
Total
held-to-maturity
securities
     $
70,250
      $
(442)
      $
215,579
      $
(3,292)
      $
285,829
      $
(3,734)
 
                                                 
 
 
 
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Loans
Total loans and leases, net of deferred fees and discounts, of $7.47 billion at March 31, 2020 decreased by $98.4 million, or 1.30%, from $7.56 billion at December 31, 2019. The decrease in total loans included a $111.6 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The $13.2 million increase in loans included increases of $25.6 million in commercial and industrial loans, $11.1 million in construction loans, and $8.1 million in SBA loans, partially offset by a $26.7 million decrease in commercial real estate loans and collectively a $4.9 million decline in other loan segments.
The following table presents our loan portfolio by type as of the dates presented.
Distribution of Loan Portfolio by Type
                                                       
 
    March 31, 2020    
 
  December 31, 2019  
 
 
(Dollars in thousands)
Commercial and industrial
    $
960,761
      $
935,127
 
SBA
   
313,071
     
305,008
 
Real estate:
   
     
 
Commercial real estate
   
5,347,925
     
5,374,617
 
Construction
   
128,045
     
116,925
 
SFR mortgage
   
278,743
     
283,468
 
Dairy & livestock and agribusiness
   
272,114
     
383,709
 
Municipal lease finance receivables
   
51,287
     
53,146
 
Consumer and other loans
   
114,206
     
116,319
 
                 
Gross loans
   
7,466,152
     
7,568,319
 
Less: Deferred loan fees, net (1)
   
-
     
(3,742
 )
                 
Gross loans, net of deferred loan fees
   
7,466,152
     
7,564,577
 
Less: Allowance for credit losses
   
(82,641
 )    
(68,660
 )
                 
Total loans and lease finance receivables
    $
7,383,511
      $
     7,495,917
 
                 
 
 
 
  (1) Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables.
 
 
 
As of March 31, 2020, $248.2 million, or 4.64% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of March 31, 2020, dairy & livestock and agribusiness loans of $272.1 million were comprised of $218.0 million for dairy & livestock loans and $54.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.
Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.
As of March 31, 2020, the Company had $189.5 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of March 31, 2020, the Company had $123.6 million of total SBA 7(a) loans that include a guarantee of payment form the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
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Table of Contents
We have been an active participant in the SBA’s Paycheck Protection Program. Including the second round of funding after Legislation passed on April 24, 2020, we obtained approvals for about 3,800 loans, totaling approximately
$1.25 billion as of May 3, 2020.
As of March 31, 2020, the Company had $128.0 million in construction loans. This represents 1.72% of total gross loans
held-for-investment.
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at March 31, 2020.
Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total
held-for-investment
commercial real estate loans, by region as of March 31, 2020.
                                                                                                                           
 
March 31, 2020
 
 
Total Loans
   
Commercial Real Estate
Loans
 
 
(Dollars in thousands)
 
Los Angeles County
    $
3,297,399
     
44.2%
      $
2,214,541
     
41.4%
 
Central Valley
   
1,120,563
     
15.0%
     
899,197
     
16.8%
 
Orange County
   
968,575
     
13.0%
     
654,593
     
12.2%
 
Inland Empire
   
987,534
     
13.2%
     
845,578
     
15.8%
 
Central Coast
   
457,225
     
6.1%
     
361,910
     
6.8%
 
San Diego
   
210,065
     
2.8%
     
128,828
     
2.4%
 
Other California
   
139,860
     
1.9%
     
78,833
     
1.5%
 
Out of State
   
284,931
     
3.8%
     
164,445
     
3.1%
 
                                 
    $
       7,466,152
     
      100.0%
      $
       5,347,925
     
    100.0%
 
                                 
 
 
 
The table below breaks down our commercial real estate portfolio.
                                                                                                                           
 
March 31, 2020
 
 
  Loan Balance  
 
  
  Percent  
 
  
Percent
Owner-
    Occupied (1)    
 
  
Average
Loan Balance
 
 
(Dollars in thousands)
 
Commercial real estate:
   
     
     
     
 
Industrial
    $
1,848,941
     
34.6%
     
54.0%
      $
1,377
 
Office
   
940,513
     
17.6%
     
25.3%
     
1,512
 
Retail
   
783,047
     
14.6%
     
11.8%
     
1,635
 
Multi-family
   
586,221
     
11.0%
     
0.5%
     
1,642
 
Medical
   
279,466
     
5.2%
     
45.7%
     
1,791
 
Secured by farmland (2)
   
248,172
     
4.6%
     
100.0%
     
2,034
 
                                 
Other (3)
   
661,565
     
12.4%
     
54.8%
     
1,402
 
                                 
Total commercial real estate
    $
         5,347,925
     
    100.0%
     
38.7%
    $
1,506
 
                                 
 
 
 
  (1) Represents percentage of reported owner-occupied at origination in each real estate loan category.
 
 
 
  (2) The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020.
 
 
 
  (3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans.
 
 
 
At March 31, 2020, loans to customers in the hotel, restaurant, entertainment, or recreation industries represented approximately 3% of our loan portfolio and loans to customers in educational services were only 1% of the overall portfolio. Other retail related loans, primarily loans collateralized by commercial real estate, comprised approximately 12% of the loan portfolio at March 31, 2020. At origination, these loans were underwritten with
loan-to-values
averaging approximately 53%.
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Table of Contents
Nonperforming Assets
The following table provides information on nonperforming assets as of the dates presented.
                                                                                                                   
 
    March 31, 2020    
 
  
  December 31, 2019  
 
 
(Dollars in thousands)
 
Nonaccrual loans
    $
6,428  
     $
5,033  
  
Troubled debt restructured loans (nonperforming)
   
-  
      
244  
  
OREO, net
   
4,889  
      
4,889  
  
                 
Total nonperforming assets
    $
11,317  
       $
10,166  
  
                 
Troubled debt restructured performing loans
    $
2,813  
       $
3,112  
  
                 
Percentage of nonperforming assets to total loans outstanding,
net of deferred fees, and OREO
   
0.15%
     
0.13%
 
Percentage of nonperforming assets to total assets
   
0.10%
     
0.09%
 
At March 31, 2020, nonaccrual loans and performing TDR loans totaled $9.2 million, or 0.12% of total gross loans, compared to $8.4 million, or 0.11% of total loans at December 31, 2019. At March 31, 2020, total nonaccrual loans and performing TDR loans resulting from troubled debt restructures represented $2.8 million, all of which were performing.
Of the $9.2 million total nonaccrual loans and performing TDR loans as of March 31, 2020, $8.5 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year).
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Table of Contents
Troubled Debt Restructurings (“TDRs”)
Total TDRs were $2.8 million at March 31, 2020, compared to $3.4 million at December 31, 2019. At March 31, 2020, we had zero in nonperforming TDRs and $2.8 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms.
In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans and enter into loan modifications offered as a result of
COVID-19,
their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of
COVID-19,
we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. Through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest for 90 days on 620 loans in the amount of $940 million, or approximately 13% of our total loan portfolio, at March 31, 2020.
The following table provides a summary of TDRs as of the dates presented.
                                                                                                                           
 
March 31, 2020
 
December 31, 2019
 
Balance
 
Number of
Loans
 
Balance
 
Number of
Loans
 
 
(Dollars in thousands)
Performing TDRs:
   
     
     
     
 
Commercial and industrial
    $
68
     
2
      $
78
     
2
 
SBA
   
524
     
1
     
536
     
1
 
Real Estate:
   
     
     
     
 
Commercial real estate
   
377
     
1
     
397
     
1
 
Construction
   
-
     
-
     
-
     
-
 
SFR mortgage
   
1,844
     
7
     
2,101
     
8
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
 
Consumer and other
   
-
     
-
     
-
     
-
 
                                 
Total performing TDRs
    $
     2,813
     
        11
      $
     3,112
     
        12
 
                                 
                                 
Nonperforming TDRs:
   
     
     
     
 
Commercial and industrial
    $
-
     
-
      $
-
     
-
 
SBA
   
-
     
-
     
-
     
-
 
Real Estate:
   
     
     
     
 
Commercial real estate
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
 
SFR mortgage
   
-
     
-
     
-
     
-
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
 
Consumer and other
   
-
     
-
     
244
     
1
 
                                 
Total nonperforming TDRs
    $
-
     
-
      $
244
     
1
 
                                 
Total TDRs
    $
2,813
     
11
      $
3,356
     
13
 
                                 
 
 
At March 31, 2020, there was no allowance for credit losses allocated to TDRs. At December 31, 2019, there was no allowance for credit losses specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. There were no charge-offs on TDRs for the three months ended March 31, 2020 and 2019.
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Table of Contents
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
                                         
 
March 31,
2020
 
  
December 31,
2019
 
  
September 30,
2019
 
  
June 30,
2019
 
  
March 31,
2019
 
 
(Dollars in thousands)
 
Nonperforming loans:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Commercial and industrial
    $
1,703
      $
1,266
      $
1,550
      $
1,993
      $
8,388
 
SBA
   
2,748
     
2,032
     
2,706
     
5,082
     
4,098
 
Real estate:
   
     
     
     
     
 
Commercial real estate
   
947
     
724
     
1,083
     
1,095
     
1,134
 
Construction
   
-
     
-
     
-
     
-
     
-
 
SFR mortgage
   
864
     
878
     
888
     
2,720
     
2,894
 
Dairy & livestock and agribusiness
   
-
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
166
     
377
     
385
     
397
     
477
 
                                         
Total
 
  $
6,428
 
  
  $
5,277
 
  
  $
6,612
 
  
  $
11,287
 
  
  $
16,991
 
                                         
% of Total gross loans
 
 
0.09%
 
  
 
0.07%
 
  
 
0.09%
 
  
 
0.15%
 
  
 
0.22%
 
                                         
Past due
30-89
days:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Commercial and industrial
    $
665
      $
2
      $
756
      $
310
      $
369
 
SBA
   
3,086
     
1,402
     
303
     
-
     
601
 
Real estate:
   
     
     
     
     
 
Commercial real estate
   
210
     
-
     
368
     
-
     
124
 
Construction
   
-
     
-
     
-
     
-
     
-
 
SFR mortgage
   
233
     
249
     
-
     
-
     
-
 
Dairy & livestock and agribusiness
   
166
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
     
22
     
101
 
                                         
Total
 
  $
4,360
 
  
  $
1,653
 
  
  $
1,427
 
  
  $
332
 
  
  $
1,195
 
                                         
% of Total gross loans
 
 
0.06%
 
  
 
0.02%
 
  
 
0.02%
 
  
 
0.004%
 
  
 
0.02%
 
                                         
OREO:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
SBA
    $
797
      $
797
      $
444
      $
-
      $
-
 
Real estate:
   
     
     
     
     
 
Commercial real estate
   
2,275
     
2,275
     
2,275
     
2,275
     
2,275
 
SFR mortgage
   
1,817
     
1,817
     
6,731
     
-
     
-
 
                                         
Total
 
  $
4,889
 
  
  $
4,889
 
  
  $
9,450
 
  
  $
2,275
 
  
  $
2,275
 
                                         
Total nonperforming, past due, and OREO
 
  $
15,677
 
  
  $
       11,819
 
  
  $
       17,489
 
  
  $
13,894
 
  
  $
20,461
 
                                         
% of Total gross loans
 
 
0.21%
 
  
 
0.16%
 
  
 
0.23%
 
  
 
0.18%
 
  
 
0.27%
 
 
 
Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $6.4 million at March 31, 2020, or 0.09% of total loans. Total nonperforming loans at March 31, 2020 included $4.7 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $5.3 million, or 0.07% of total loans, at December 31, 2019 and $17.0 million, or 0.22% of total loans, at March 31, 2019. The $1.2 million quarter-over-quarter increase in nonperforming loans was primarily due to $716,000 in nonperforming SBA loans, $437,000 in nonperforming commercial and industrial loans, and $223,000 in nonperforming commercial real estate loans. This was partially offset by a $211,000 decrease in nonperforming consumer and other loans.
In response to the
COVID-19
pandemic, we have implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.
At March 31, 2020 and December 31, 2019, we had four OREO properties with a carrying value of $4.9 million, compared to one OREO property with a carrying value of $2.3 million at March 31, 2019. There were no additions to or sales of OREO properties during the first quarter of 2020.
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Table of Contents
Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “
Risk Management – Credit Risk Management
” contained in our Annual Report on Form
10-K
for the year ended December 31, 2019.
Allowance for Credit Losses
We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3—
Summary of Significant Accounting Policies
of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled $82.6 million as of March 31, 2020, compared to $68.7 million as of December 31, 2019 and $65.2 million as of March 31, 2019. Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by a $12.0 million credit loss provision in the first quarter of 2020 due to the severe forecasted economic disruption forecasted as a result of the coronavirus pandemic. Net recoveries were $141,000 for the three months ended March 31, 2020. This compares to a $1.5 million loan loss provision and $88,000 in net recoveries for the same period of 2019.
Our modeling processes incorporate a lifetime historical loss rate methodology by different asset classes. These models use key loan attributes by asset class and macroeconomic variables. Macroeconomic variables include GDP, and unemployment rate, among others. Our economic forecast incorporates a weighting of multiple forecasts. The forecast includes a reasonable and supportable forecast period of two to three years for the macroeconomic variables, which revert to an historical mean based on an input reversion approach. We consider publicly published economic forecasts from multiple sources, including the Moody’s forecast from March 27, 2020 that reflected the most recent available information and forecast of evolving impacts on macroeconomic variables from the
COVID-19
pandemic. This stressed economic forecast included a significant contraction in GDP approaching 20% in the second quarter of 2020 and the unemployment rate rising to more than 9% in the second quarter and sustaining at an elevated level through 2020 and into
2021. If the economic forecast deteriorates further due to the COVID-19 epidemic, we may experience increases in the allowance for credit losses in future periods.
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Table of Contents
The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.
                                                             
 
As of and For the
Three Months Ended
March 31,
 
 
2020
 
  
2019
 
 
(Dollars in thousands)
 
Allowance for credit losses at beginning of period
    $
         68,660  
       $
         63,613  
  
Impact of adopting ASU
2016-13
   
1,840 
      
-     
  
Charge-offs:
   
     
 
Commercial and industrial
   
-     
      
-     
  
SBA
   
-     
      
(20
 )
Commercial real estate
   
-     
      
-     
  
Construction
   
-     
      
-     
  
SFR mortgage
   
-     
      
-     
  
Dairy & livestock and agribusiness
   
-     
      
(78 
 )
Consumer and other loans
   
(86 
 )    
(1 
 )
                 
Total charge-offs
   
(86 
 )    
(99 
 )
                 
Recoveries:
   
     
 
Commercial and industrial
   
2  
      
110  
  
SBA
   
-     
      
5  
  
Commercial real estate
   
-     
      
-     
  
Construction
   
3  
      
3  
  
SFR mortgage
   
206  
      
68  
  
Dairy & livestock and agribusiness
   
-     
      
-     
  
Consumer and other loans
   
16  
      
1  
  
                 
Total recoveries
   
227  
      
187  
  
                 
Net recoveries
   
141  
      
88  
  
Provision for credit losses
   
12,000  
      
1,500  
  
                 
Allowance for credit losses at end of period
    $
         82,641  
       $
         65,201  
  
                 
Summary of reserve for unfunded loan commitments:
   
     
 
Reserve for unfunded loan commitments at beginning of period
    $
           8,959  
       $
           8,959  
  
Impact of adopting ASU
2016-13
   
41
     
-     
  
Provision for unfunded loan commitments
   
-     
      
-     
  
                 
Reserve for unfunded loan commitments at end of period
    $
           9,000  
       $
           8,959  
  
                 
Reserve for unfunded loan commitments to total unfunded loan commitments
   
0.56% 
      
0.54% 
  
                 
Amount of total loans at end of period (1)
    $
    7,466,152  
       $
    7,606,863  
  
Average total loans outstanding (1)
    $
    7,482,805  
       $
    7,662,573  
  
                 
Net recoveries to average total loans
   
0.002% 
      
0.001% 
  
Net recoveries to total loans at end of period
   
0.002% 
      
0.001% 
  
Allowance for credit losses to average total loans
   
1.10% 
      
0.85% 
  
Allowance for credit losses to total loans at end of period
   
1.11% 
      
0.86% 
  
Net recoveries to allowance for credit losses
   
0.17% 
      
0.13% 
  
Net recoveries to provision for credit losses
   
1.18% 
      
5.87% 
  
 
 
 
  (1) Includes PCI loans and is net of deferred loan origination fees, costs and discounts.
 
 
 
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Table of Contents
The ACL/Total Loan Coverage Ratio as of March 31, 2020 increased to 1.11%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resulted from the
COVID-19
crisis.
At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our
off-balance
sheet credit exposures. The Bank’s CECL methodology also produced an allowance of $9.0 million for our
off-balance
sheet credit exposures, which was unchanged from the allowance at January 1, 2020.
While we believe that the allowance at March 31, 2020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.
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Table of Contents
Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were $9.11 billion at March 31, 2020. This represented an increase of $408.7 million, or 4.69%, over total deposits of $8.70 billion at December 31, 2019. The composition of deposits is summarized as of the dates presented in the table below.
                                 
 
March 31, 2020
   
December 31, 2019
 
 
Balance
 
  
Percent
 
  
Balance
 
  
Percent
 
 
(Dollars in thousands)
 
Noninterest-bearing deposits
    $
5,572,649
     
61.15%
      $
5,245,517
     
60.26%
 
Interest-bearing deposits
   
     
     
     
 
Investment checking
   
454,153
     
4.98%
     
454,565
     
5.22%
 
Money market
   
2,217,656
     
24.34%
     
2,158,161
     
24.79%
 
Savings
   
417,708
     
4.58%
     
400,377
     
4.60%
 
Time deposits
   
451,438
     
4.95%
     
446,308
     
5.13%
 
                                 
Total deposits
    $
     9,113,604
     
    100.00%
      $
     8,704,928
     
    100.00%
 
                                 
 
 
 
The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $5.57 billion at March 31, 2020, representing an increase of $327.1 million, or 6.24%, from noninterest-bearing deposits of $5.25 billion at December 31, 2019. Noninterest-bearing deposits represented 61.15% of total deposits for March 31, 2020, compared to 60.26% of total deposits for December 31, 2019.
Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $3.09 billion at March 31, 2020, representing an increase of $76.4 million, or 2.54%, from savings deposits of $3.01 billion at December 31, 2019.
Time deposits totaled $451.4 million at March 31, 2020, representing an increase of $5.1 million, or 1.15%, from total time deposits of $446.3 million for December 31, 2019.
Borrowings
In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was 5.19% for the first quarter of 2020, compared to 7.08% for the same period of 2019.
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a
pre-determined
balance in a demand deposit account, in order to earn interest. As of March 31, 2020 and December 31, 2019, total funds borrowed under these agreements were $368.9 million and $428.7 million, respectively, with a weighted average interest rate of 0.26% and 0.44%, respectively.
We had no short-term borrowings at March 31, 2020 and December 31, 2019.
At March 31, 2020, $6.06 billion of loans and $1.63 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
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Table of Contents
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of March 31, 2020.
                                         
 
 
  
Maturity by Period
 
 
Total
 
  
Less Than One
Year
 
  
One Year
Through
  Three Years  
 
  
Four Years
Through Five
Years
 
  
Over Five
Years
 
 
(Dollars in thousands)
 
Deposits (1)
    $
9,113,604
      $
9,036,138
      $
66,253
      $
10,626
      $
587
 
Customer repurchase agreements (1)
   
          368,915
     
          368,915
     
-
     
-
     
-
 
Junior subordinated debentures (1)
   
25,774
     
-
     
-
     
-
     
           25,774
 
Deferred compensation
   
23,233
     
763
     
1,305
     
636
     
20,529
 
Operating leases
   
20,826
      
6,706
      
9,109
      
           3,423
      
1,588
 
Affordable housing investment
   
3,159
     
2,285
     
814
     
47
     
13
 
                                         
Total
    $
9,555,511
       $
9,414,807
       $
77,481
       $
14,732
       $
48,491
 
                                         
 
 
 
  (1) Amounts exclude accrued interest.
 
 
 
Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.
Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.
At March 31, 2020, we had no short-term borrowings, compared to zero at December 31, 2019, and $153.0 million at March 31, 2019.
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.
Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under
non-cancelable
operating leases. Refer to Note 11 –
Leases
of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.
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Table of Contents
Off-Balance
Sheet Arrangements
The following table summarizes the
off-balance
sheet items at March 31, 2020.
                                                                                                                                           
 
 
  
Maturity by Period
 
 
Total
 
  
Less Than
One
Year
 
  
One Year
to Three
Years
 
  
Four Years
to Five
Years
 
  
After
Five
Years
 
 
(Dollars in thousands)
 
Commitment to extend credit:
   
     
     
     
     
 
Commercial and industrial
  $
917,055
    $
614,928
    $
168,309
    $
5,196
    $
128,622
 
SBA
   
396
     
362
     
4
     
-
     
30
 
Real estate:
   
     
     
     
     
 
Commercial real estate/
   
247,308
     
42,254
     
74,850
     
121,004
     
9,200
 
Construction
   
52,545
     
35,972
     
13,373
     
-
     
3,200
 
SFR Mortgage
   
5,540
     
3,500
     
-
     
-
     
2,040
 
Dairy & livestock and agribusiness (1)
   
208,932
     
113,190
     
94,949
     
393
     
400
 
Consumer and other loans
   
123,928
     
14,114
     
6,985
     
5,018
     
97,811
 
                                         
Total commitment to extend credit
   
1,555,704
     
824,320
     
358,470
     
131,611
     
241,303
 
Obligations under letters of credit
   
50,159
     
45,415
     
4,496
     
248
     
-
 
                                         
Total
  $
1,605,863
    $
869,735
    $
362,966
    $
131,859
    $
241,303
 
                                         
 
 
  (1) Total commitments to extend credit to agribusiness were $19.5 million at March 31, 2020.
 
 
 
 
As of March 31, 2020, we had commitments to extend credit of approximately $1.56 billion, and obligations under letters of credit of $50.2 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for
on-balance
sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000 was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments for three months ended March 31, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of March 31, 2020 and December 31, 2019 included in other liabilities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
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Table of Contents
Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of capital.
Total equity decreased $52.7 million, or 2.67%, to $1.94 billion at March 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $52.7 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. We previously announced that we suspended this
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. We had $38.0 million in net earnings during the quarter, offset by $24.4 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $25.8 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our
available-for-sale
investment securities. Our tangible common equity ratio was 11.3% at March 31, 2020.
During the first quarter of 2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current
10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. On March 31, 2020, the Company announced that it suspended its
10b5-1
stock repurchase program due to the uncertainty of the
COVID-19
pandemic. For the three months ended March 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of March 31, 2020, we have 4,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.
The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At March 31, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.
Business – Capital Adequacy Requirements
” as described in our Annual Report on Form
10-K
for the year ended December 31, 2019.
At March 31, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies.
The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.
                                                         
 
 
  
 
  
 
  
March 31, 2020
   
December 31, 2019
 
Capital Ratios
 
  Adequately  
Capitalized
Ratios
 
  
  Minimum Required  
Plus Capital
Conservation Buffer
 
  
Well
Capitalized
Ratios
 
  
CVB Financial
Corp.
Consolidated
 
  
Citizens
  Business  
Bank
 
  
CVB Financial
Corp.
Consolidated
 
  
Citizens
  Business  
Bank
 
                                                         
Tier 1 leverage capital ratio
   
4.00%
     
4.00%
     
5.00%
     
11.60%
     
11.44%
     
12.33%
     
12.19%
 
Common equity Tier 1 capital ratio
   
4.50%
     
7.00%
     
6.50%
     
14.13%
     
14.23%
     
14.83%
     
14.94%
 
Tier 1 risk-based capital ratio
   
6.00%
     
8.50%
     
8.00%
     
14.42%
     
14.23%
     
15.11%
     
14.94%
 
Total risk-based capital ratio
   
8.00%
     
10.50%
     
10.00%
     
15.49%
     
15.30%
     
16.00%
     
15.83%
 
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Table of Contents
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Liquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.
Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from
period-to-period
due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $9.11 billion at March 31, 2020 increased $408.7 million, or 4.69%, over total deposits of $8.70 billion at December 31, 2019.
In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.
At quarter end, we had only $25.8 million in subordinated debt and no other borrowings. The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans. We are well positioned with a balance sheet that is highly liquid, funded almost entirely with core deposits and the availability of significant
off-balance
sheet sources of liquidity.
CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.
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Table of Contents
Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2020 and 2019. For further details see our “
Condensed Consolidated Statements of Cash Flows
(Unaudited)” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
                                                                                                             
 
For the Three Months Ended 
March 31,
 
 
2020
 
  
2019
 
 
(Dollars in thousands)
 
                 
Average cash and cash equivalents
    $
409,885
      $
186,473
 
Percentage of total average assets
   
3.60%
     
1.63%
 
                 
Net cash provided by operating activities
    $
 75,527
       $
54,487
 
Net cash provided by investing activities
   
205,990
      
253,841
 
Net cash provided by (used in) financing activities
   
238,704
      
(300,062
 )
                 
Net increase in cash and cash equivalents
    $
520,221
      $
8,266
 
                 
 
 
 
Average cash and cash equivalents increased by $223.4 million, or 119.81%, to $409.9 million for the three months ended March 31, 2020, compared to $186.5 million for the same period of 2019.
At March 31, 2020, cash and cash equivalents totaled $705.7 million. This represented an increase of $533.5 million, or 309.80%, from $172.2 million at March 31, 2019.
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to
re-price
interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability re pricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure.
One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a
one-year
and
two-year
cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a
one-year
horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the
12-month
and
24-month
time horizon.
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Table of Contents
The following depicts the Company’s net interest income sensitivity analysis as of the periods presented below.
                                         
                    Estimated Net Interest Income Sensitivity (1)
 
 
March 31, 2020
   
 
  
December 31, 2019
 
    Interest Rate Scenario        
  
12-month
 Period
 
  
24-month
 Period
(Cumulative)
 
  
Interest Rate Scenario
 
  
12-month
 Period
 
  
24-month
 Period
(Cumulative)
 
+ 200 basis points
   
5.20%
     
10.01%
     
+ 200 basis points
     
5.20%
     
10.00%
 
- 100 basis points
   
-0.50%
     
-1.60%
     
- 100 basis points
     
-2.10%
     
-4.60%
 
 
 
 
 
  (1) Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.
 
 
 
 
Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a
one-year
and a
two-year
horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape,
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.25%.
We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term
re-pricing
risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the
EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At March 31, 2020 and December 31, 2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.
Economic Value of Equity Sensitivity
                         
Instantaneous Rate Change
 
    March 31, 2020    
 
  
 
  
    December 31, 2019    
 
                         
100 bp decrease in interest rates
   
-28.3%
     
     
-17.5%
 
100 bp increase in interest rates
   
19.5%
     
     
14.2%
 
200 bp increase in interest rates
   
34.5%
     
     
25.5%
 
300 bp increase in interest rates
   
39.7%
     
     
30.0%
 
400 bp increase in interest rates
   
46.8%
     
     
36.2%
 
 
 
 
 
As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “
Asset/Liability Management and Interest Rate Sensitivity Management
” included in Item 2 “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.
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ITEM 4.   CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the fiscal quarter ended March 31, 2020, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and
non-ordinary
course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer claims, regulatory compliance claims, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.
For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws and regulations applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.
Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.
We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A.   RISK FACTORS
Except as discussed below there have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form
10-K
for the year ended December 31, 2019. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form
10-K
and any subsequent Form
10-Q
or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” in this Quarterly Report on Form
10-Q.
The
COVID-19
pandemic has significantly impacted the banking industry and our business. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The
COVID-19
pandemic has negatively impacted the global, U.S., California and local economies, disrupted supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and sharply increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including in California and the principal counties in which our banking centers are located. Our operations, like those of other financial institutions that operate in our markets, are significantly influenced by economic conditions in California, including the strength of the real estate market and business conditions in the industries to which we lend or from which we gather deposits. The
COVID-19
pandemic has resulted in a substantial decline in the revenues of many business sectors as well as in commercial and residential property sales and construction activities. As a result, the demand for our products and services has been, and may continue to be, significantly impacted.
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Furthermore, the pandemic could further influence the recognition of credit losses in our loan portfolios and further increase our allowance for credit losses, particularly as businesses remain closed and as more of our customers are expected to draw on their lines of credit or seek deferments of scheduled loan payments to help mitigate the effects of lost revenues. As previously noted, we have already increased our allowance for expected credit losses by $12 million for the first quarter of 2020, due to the anticipated impact of COVID-19-related economic distress on our loan portfolios, coupled with the implementation of CECL for determining our overall provision for credit losses. In addition, as also noted above, through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 620 loans, in an aggregate amount of $940 million, or approximately 13% of our total loan portfolio at March 31, 2020. Depending on the scope and duration of the COVID-19 pandemic, we believe there is a significant likelihood that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for future calendar quarters in 2020.
Similarly, because of changing economic and market conditions affecting bond issuers, we may be required to recognize credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant or critical portions of our workforce or managers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, and to comply with or follow various government recommendations or mandates, we have also suspended certain real property foreclosure actions and sales, and in certain instances, we are providing fee waivers, payment deferrals, and other expanded assistance for our business and mortgage customers. The extent to which the
COVID-19
pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Our bank has elected to participate as a lender in the Federal Paycheck Protection Program (PPP) and has accordingly become subject to a number of significant risks applicable to lenders under the PPP.
As one set of responses to the COVID-19 pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate. One such program is the Paycheck Protection Program (PPP) enacted under the federal CARES Act. This program is designed, among other things, to provide employee payroll maintenance support for small and medium-sized businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA). Because the Company is an authorized SBA lender and our primary customer base consists of small and medium-sized businesses, the Company has actively participated in the PPP. Including the second round of funding after Legislation passed on April 24, 2020, we have received approximately 4,200 applications for PPP loans from our customers and, through two separate rounds of authorized funding for the PPP, we have obtained about 3,800 PPP loan approvals from the SBA, for a total potential dollar amount of PPP loans of approximately $1.25 billion as of May 3, 2020.
Under interim final regulations promulgated by the SBA, PPP lenders are entitled to rely on borrower certifications with respect to issues such as program eligibility and eligible loan amounts, and PPP loans are designed to be subsequently forgivable, in whole or part, if certain additional criteria are met by the borrower with respect to employee payroll maintenance. However, in view of the fact that the PPP was by design intended to support economically distressed businesses, the SBA’s guarantee of PPP loan amounts to participating lenders is a critical feature of the program. In this regard, because the PPP was quickly implemented into operation and the SBA’s interim regulations have been repeatedly revised and are continuing to evolve, there are significant risks to the Company’s participation in the PPP, including whether certain borrowers will ultimately be found to have been eligible for PPP loans, whether eligible PPP loan amounts for certain borrowers were correctly calculated, whether certain PPP loans will ultimately be determined to be forgivable, and if not, whether the SBA’s guarantee will continue to apply to any unforgiven PPP loan amounts.
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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions. There is no expiration date for this repurchase program. On March 31, 2020, the Company announced that it suspended its
10b5-1
stock repurchase program. During the three months ended March 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of March 31, 2020, we have 4,585,145 shares of CVB common stock available for repurchase under the common stock repurchase program.
                                         
Period
 
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
 
  
  
 
  
    Average Price    
    Paid Per Share    
 
  
  
 
  
Maximum Number of Shares
Available for Repurchase Under
the Plans or Programs
 
                                         
January 1 - 31, 2020
   
-  
      
    $
-
     
     
9,529,435
 
February 1 - 29, 2020
   
351,100  
      
    $
19.59
     
     
9,178,335
 
March 1 - 31, 2020
   
4,593,190  
      
    $
18.46
     
     
4,585,145
 
                                         
Total
   
                        4,944,290  
      
    $
18.54
     
     
4,585,145
 
                                         
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.   MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5.   OTHER INFORMATION
None
ITEM 6.   EXHIBITS
         
Exhibit No.
 
  
Description of Exhibits
 
    3.1
    
 
  10.1
    
 
  31.1
   
 
  31.2
   
 
  32.1
   
 
  32.2
   
 
101.INS
   
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
101.SCH
   
XBRL Taxonomy Extension Schema Document
 
101.CAL
   
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
   
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
   
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
   
XBRL Taxonomy Extension Presentation Linkbase Document
 
    104
   
The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020, has been formatted in Inline XBRL.
 
* Filed herewith
** Furnished herewith
† Indicates a management contract or compensation plan.
(1) Incorporated herein by reference to Exhibits 3.1 to our Form 8-K filed with the SEC on January 23, 2020.
(2) Incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on February 20, 2020.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
 
CVB FINANCIAL CORP.
 
 
(Registrant)
Date: May 11, 2020
 
 
         
 
 
/s/ E. Allen Nicholson
 
 
E. Allen Nicholson
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
69
EX-31.1

Exhibit 31.1

CERTIFICATION

I, David A. Brager, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 11, 2020     By:  

/s/ David A. Brager

      David A. Brager
      Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATION

I, E. Allen Nicholson, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 11, 2020     By:  

/s/ E. Allen Nicholson

      E. Allen Nicholson
      Chief Financial Officer
EX-32.1

Exhibit 32.1

CERTIFICATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CVB Financial Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Brager, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

 

  (1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 11, 2020     By:  

/s/ David A. Brager

      David A. Brager
      Chief Executive Officer

 

EX-32.2

Exhibit 32.2

CERTIFICATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CVB Financial Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, E. Allen Nicholson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

 

  (1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 11, 2020     By:  

/s/ E. Allen Nicholson

      E. Allen Nicholson
      Chief Financial Officer