CVB FINANCIAL CORP. The following discussion provides information about the results of operations, financial condition, liquidity and capital resources ofCVB 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 endedDecember 31, 2020 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has affected our customers and the communities we serve and depending on the duration of the crisis and government actions, the adverse impact on our financial position and results of operations could be significant. In response to the effects of the pandemic on theU.S. economy, theBoard of Governors of theFederal Reserve System ("FRB") has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases ofTreasury and mortgage-backed securities. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contain 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%Small Business Administration ("SBA") guaranteed loans distributed through banks. These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. Legislation passed onApril 24, 2020 provided additional PPP funds of$310 billion . During 2020, we originated and funded approximately 4,100 loans, totaling$1.10 billion . In response to the COVID-19 pandemic and the CARES Act, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. OnJanuary 13, 2021 , the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least$25 billion has been set aside for Second Draw ("round two") PPP loans to eligible borrowers with a maximum of 10 employees or for loans of$250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, businesses with more than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses. As ofSeptember 30, 2021 , we have originated approximately 1,900 round two loans totaling$420 million in outstanding borrowings. The Paycheck Protection Program officially ended onMay 31, 2021 . As ofSeptember 30, 2021 , approximately 4,800 loans, representing approximately$1.2 billion in PPP loan balances were submitted to the SBA and granted forgiveness. The third quarter of 2021 included$4.0 million in recapture of provision for credit losses, primarily due to a modest improvement in our economic forecast. In comparison, the second quarter of 2021 included$2.0 million in recapture of provision. The Company's allowance for credit losses atSeptember 30, 2021 of$65.4 million , compares to the pre-pandemic allowance of$68.7 million atDecember 31, 2019 . We continue to monitor the impact of COVID-19 closely. The extent to which the COVID-19 pandemic will impact our operations and financial results during 2021 is uncertain, but we may experience continued volatility in the provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues. 36 --------------------------------------------------------------------------------
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 2020
Annual Report on Form 10-K in the "Critical Accounting Policies" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 3 - Summary of Significant Accounting Policies, included
in our Annual Report on Form 10-K for the year ended December 31, 2020 , which
are essential to understanding Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Recently Issued Accounting Pronouncements but Not Adopted as of September 30,
2021
Adoption Impact on Financial
Standard Description Timing Statements
ASU No. 2020-04, The FASB issued ASU 2020-04, 1st The Company established
Reference Rate Reference Rate Reform: Quarter a LIBOR Transition Task
Reform (Topic Facilitation of the Effects of 2020 Force in 2020, which has
848): Reference Rate Reform on through inventoried our
Facilitation of Financial Reporting. The the instruments that reflect
the Effects of amendments in this update 4th exposure to LIBOR,
Reference Rate provide temporary, optional Quarter created a framework to
Reform on guidance to ease the potential 2022 manage the transition
Financial burden in accounting for and established a
Reporting transitioning away from timeline for key
reference rates such as LIBOR. decisions and actions,
The amendments provide optional and started the
Issued March 2020 expedients and exceptions for transition from LIBOR in
applying GAAP to transactions 2021. Although the
affected by reference rate Company is assessing the
reform if certain criteria are impacts of this
met. The amendments primarily transition and exploring
include relief related to alternatives to use in
contract modifications and place of LIBOR for
hedging relationships, as well various financial
as providing a one-time instruments, primarily
election for the sale or related to our
transfer of debt securities variable-rate loans and
classified as held-to-maturity. our interest rate swap
This guidance is effective derivatives that are
immediately and the amendments indexed to LIBOR, we do
may be applied prospectively not expect this ASU to
through December 31, 2022. have a material impact
on the Company's
consolidated financial
statements.
ASU 2020-06, Debt The FASB issued ASU 2020-06, 1st The adoption of this ASU
- Debt with Debt - Debt with Conversion and Quarter is not expected to have
Conversion and Other Options (Subtopic 470-20) 2022 a material impact on our
Other Options and Derivatives and consolidated financial
(Subtopic 470-20) Hedging-Contracts in Entity's statements.
and Derivatives Own Equity (Subtopic 815-40):
and Accounting for Convertible
Hedging-Contracts Instruments and Contracts in an
in Entity's Own Entity's Own Equity. This ASU
Equity (Subtopic reduces the number of
815-40): accounting models for
Accounting for convertible instruments and
Convertible allows more contracts to
Instruments and qualify for equity
Contracts in an classification.
Entity's Own
Equity
Issued August
2020
37
--------------------------------------------------------------------------------
OVERVIEW
For the third quarter of 2021, we reported net earnings of $49.8 million ,
compared with $51.2 million for the quarter ended June 30, 2021 and $47.5
million for the quarter ended September 30, 2020 . Diluted earnings per share
were $0.37 for the third quarter, compared to $0.38 for the prior quarter and
$0.35 for the same period last year.
The third quarter of 2021 included $4.0 million in recapture of provision for
credit losses, primarily due to a modest improvement in our economic forecast,
compared to $2.0 million in recapture of provision in the second quarter of
2021. A $25.5 million recapture of provision for credit losses was recorded for
the nine months ended September 30, 2021 . In comparison, $23.5 million in
provision for credit losses was recorded for the nine months ended September 30,
2020 due to the severe economic forecast at that time as a result of the
pandemic. During the third quarter of 2021, we experienced credit charge-offs of
$11,000 and total recoveries of $33,000 , resulting in net recoveries of $22,000 .
Of the approximately 4,100 SBA PPP loans we originated in 2020, $52.4 million
remained outstanding at September 30, 2021 , after loan forgiveness and customer
repayment. As of September 30 2021 , the Company originated approximately 1,900
PPP loans in round two, with a loan balance, at amortized cost, of $278.6
million at September 30, 2021 . Interest and fee income from PPP loans was $7.9
million for the third quarter of 2021, compared to $8.1 million for the second
quarter of 2021.
At September 30, 2021 , total assets of $16.20 billion increased $1.78 billion ,
or 12.36%, from total assets of $14.42 billion at December 31, 2020 .
Interest-earning assets of $14.93 billion at September 30, 2021 increased $1.71
billion , or 12.92%, when compared with $13.22 billion at December 31, 2020 . The
increase in interest-earning assets was primarily due to a $1.66 billion
increase in investment securities and a $565.9 million increase in
interest-earning balances due from the Federal Reserve , partially offset by a
$499.3 million decrease in total loans which included a decrease in PPP loans of
$552 million for the nine months ended September 30, 2021 .
Total investment securities were $4.64 billion at September 30, 2021 , an
increase of $1.66 billion , or 55.70%, from $2.98 billion at December 31, 2020 .
In the third quarter of 2021, we purchased $892.5 million of investment
securities with an average investment yield of approximately 1.70%, compared to
$317.1 million of securities with an average investment yield of approximately
1.69% in the second quarter of 2021 and $1.23 billion of securities purchased in
the first quarter of 2021, with an average expected yield of approximately
1.57%. At September 30, 2021 , investment securities held-to-maturity ("HTM")
totaled $1.71 billion . At September 30, 2021 , investment securities
available-for-sale ("AFS") totaled $2.93 billion , inclusive of a net pre-tax
unrealized gain of $8.8 million , which decreased $46.0 million from December 31,
2020 . HTM securities increased by $1.13 billion , or 195.69%, and AFS securities
increased $526.1 million , or 21.93%, from December 31, 2020 . In the third
quarter of 2021, we purchased $705.1 million of HTM securities. We purchased
$545.7 million of HTM securities in the first quarter of 2021. Our tax
equivalent yield on investments was 1.54% for the quarter ended September 30,
2021 , compared to 1.55% for the quarter ended June 30, 2021 and 1.99% for the
third quarter of 2020.
Total loans and leases, at amortized cost, of $7.85 billion at September 30,
2021 decreased by $499.3 million , or 5.98%, from December 31, 2020 . The $499.3
million decrease in total loans included decreases of $552.0 million in PPP
loans, $81.6 million in dairy & livestock and agribusiness loans due to seasonal
pay downs, $42.1 million in commercial and industrial loans, $39.2 million in
SFR mortgage loans, $7.7 million in construction loans, and $13.5 million in
consumer and other loans, partially offset by an increase of $233.2 million in
commercial real estate loans and $3.6 million in SBA loans. After adjusting for
seasonality and PPP loans, our loans grew by $134.3 million or at an annualized
rate of approximately 3% from the end of the fourth quarter of 2020. Our yield
on loans was 4.43% for the quarter ended September 30, 2021 , compared to 4.46%
for the second quarter of 2021 and 4.47% for the third quarter of 2020. The
significant decline in interest rates since the start of the pandemic has had a
negative impact on loan yields, which after excluding discount accretion,
nonaccrual interest income, and the impact from PPP loans, declined by 29 basis
points for the nine months ended September 30, 2021 when compared to the same
period of 2020.
Noninterest-bearing deposits were $8.31 billion at September 30, 2021 , an
increase of $855.3 million , or 11.47%, when compared to $7.46 billion at
December 31, 2020 . At September 30, 2021 , noninterest-bearing deposits were
64.27% of total deposits, compared to 63.52% at December 31, 2020 . Our average
cost of total deposits was 0.03% for the quarter ended September 30, 2021 ,
compared to 0.05% for the quarter ended June 30, 2021 and 0.11% for the third
quarter of 2020.
Customer repurchase agreements totaled $659.6 million at September 30, 2021 ,
compared to $439.4 million at December 31, 2020 . Our average cost of total
deposits including customer repurchase agreements was 0.04% for the quarter
ended September 30, 2021 , compared to 0.05% for the quarter ended June 30, 2021
and 0.11% for the third quarter of 2020.
38
-------------------------------------------------------------------------------- We had no borrowings atSeptember 30, 2021 , compared to$5.0 million in short-term borrowings with 0% cost atDecember 31, 2020 , and$10.0 million in short-term borrowings with 0% cost atSeptember 30, 2020 . We redeemed our$25.8 million junior subordinated debentures onJune 15, 2021 . The debentures, bearing interest at three-month LIBOR plus 1.38%, had an original maturity of 2036. These debentures had a borrowing cost of 1.57% for the second quarter of 2021 and 1.69% for the third quarter of 2020. Our average cost of funds was 0.04% for the quarter endedSeptember 30, 2021 , 0.05% for the quarter endedJune 30, 2021 , and 0.11% for the third quarter of 2020. The allowance for credit losses totaled$65.4 million atSeptember 30, 2021 , compared to$93.7 million atDecember 31, 2020 . The allowance for credit losses for the first nine months of 2021 was decreased by$25.5 million , due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus, and by$2.8 million in year-to-date net charge-offs. AtSeptember 30, 2021 , ACL as a percentage of total loans and leases outstanding was 0.83%, or 0.87% when PPP loans are excluded. This compares to 1.12% atDecember 31, 2020 , or 1.25% when PPP loans are excluded. As ofSeptember 30, 2021 , total discounts on acquired loans were$20.7 million . The Company's total equity was$2.06 billion atSeptember 30, 2021 . This represented an increase of$55.9 million , or 2.79%, from total equity of$2.01 billion atDecember 31, 2020 . The increase was primarily due to net earnings of$164.8 million , partially offset by a$32.3 million decrease in other comprehensive income from the tax effected impact of the decrease in market value of available-for-sale securities and$73.4 million in cash dividends. Our tangible common equity ratio was 8.9% atSeptember 30, 2021 . During the third quarter, we repurchased 390,336 shares of common stock for$7.4 million , or an average repurchase price of$18.97 . Our tangible book value per share atSeptember 30, 2021 was$10.13 . Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As ofSeptember 30, 2021 , the Company's Tier 1 leverage capital ratio was 9.2%, common equity Tier 1 ratio was 14.9%, Tier 1 risk-based capital ratio was 14.9%, and total risk-based capital ratio was 15.7%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of theFDIC and otherU.S. banking agencies. Refer to our Analysis of Financial Condition - Capital Resources. Acquisition Related As previously announced onJuly 27, 2021 , we entered into a definitive agreement to merge Suncrest Bank with and intoCitizens Business Bank . Suncrest Bank, headquartered inVisalia, California , had approximately$1.4 billion in total assets,$821 million in gross loans and$1.2 billion in total deposits as ofSeptember 30, 2021 . Consummation of the merger is subject to customary closing conditions, including, among others, Suncrest shareholders and regulatory approval. Suncrest Bank shareholders voted in favor of the merger at a special shareholders meeting held onOctober 27, 2021 . The merger is pending regulatory approval and is anticipated to close in the fourth quarter of 2021 or first quarter of 2022. 39
--------------------------------------------------------------------------------
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
Three Months Ended Variance
September
30, June 30,
2021 2021 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 103,299 $ 105,388 $ (2,089 ) -1.98 %
Recapture of (provision for) credit 4,000 2,000 2,000 100.00 %
losses
Noninterest income 10,483 10,836 (353 ) -3.26 %
Noninterest expense (48,099 ) (46,545 ) (1,554 ) -3.34 %
Income taxes (19,930 ) (20,500 ) 570 2.78 %
Net earnings $ 49,753 $ 51,179 $ (1,426 ) -2.79 %
Earnings per common share:
Basic $ 0.37 $ 0.38 $ (0.01 )
Diluted $ 0.37 $ 0.38 $ (0.01 )
Return on average assets 1.26 % 1.35 % -0.09 %
Return on average shareholders' 9.49 % 10.02 % -0.53 %
equity
Efficiency ratio 42.27 % 40.05 % 2.22 %
Noninterest expense to average 1.22 % 1.23 % -0.01 %
assets
Three Months Ended
September 30, Variance
2021 2020 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 103,299 $ 103,325 $ (26 ) -0.03 %
Recapture of (provision for) credit 4,000 - 4,000 -
losses
Noninterest income 10,483 13,153 (2,670 ) -20.30 %
Noninterest expense (48,099 ) (49,588 ) 1,489 3.00 %
Income taxes (19,930 ) (19,398 ) (532 ) -2.74 %
Net earnings $ 49,753 $ 47,492 $ 2,261 4.76 %
Earnings per common share:
Basic $ 0.37 $ 0.35 $ 0.02
Diluted $ 0.37 $ 0.35 $ 0.02
Return on average assets 1.26 % 1.38 % -0.12 %
Return on average shareholders' 9.49 % 9.51 % -0.02 %
equity
Efficiency ratio 42.27 % 42.57 % -0.30 %
Noninterest expense to average 1.22 % 1.44 % -0.22 %
assets
Nine Months Ended
September 30, Variance
2021 2020 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 312,155 $ 310,200 $ 1,955 0.63 %
Recapture of (provision for) credit 25,500 (23,500 ) 49,000 208.51 %
losses
Noninterest income 35,000 36,945 (1,945 ) -5.26 %
Noninterest expense (141,807 ) (144,627 ) 2,820 1.95 %
Income taxes (66,023 ) (51,915 ) (14,108 ) -27.18 %
Net earnings $ 164,825 $ 127,103 $ 37,722 29.68 %
Earnings per common share:
Basic $ 1.21 $ 0.93 $ 0.28
Diluted $ 1.21 $ 0.93 $ 0.28
Return on average assets 1.46 % 1.35 % 0.11 %
Return on average shareholders' 10.73 % 8.55 % 2.18 %
equity
Efficiency ratio 40.85 % 41.66 % -0.81 %
Noninterest expense to average 1.25 % 1.54 % -0.29 %
assets
40
--------------------------------------------------------------------------------
Return on Average Tangible Common Equity Reconciliation (Non-GAAP)
The return on average tangible common equity is a non-GAAP disclosure. The
Company uses certain non-GAAP financial measures to provide supplemental
information regarding the Company's performance. The following is a
reconciliation of net income, adjusted for tax-effected amortization of
intangibles, to net income computed in accordance with GAAP; a reconciliation of
average tangible common equity to the Company's average stockholders' equity
computed in accordance with GAAP; as well as a calculation of return on average
tangible common equity.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2021 2021 2020 2021 2020
(Dollars in thousands)
Net Income $ 49,753 $ 51,179 $ 47,492 $ 164,825 $ 127,103
Add: Amortization of
intangible assets 2,014 2,167 2,292 6,348 7,182
Less: Tax effect of
amortization of intangible
assets (1) (595 ) (641 ) (678 ) (1,877 ) (2,123 )
Tangible net income $ 51,172 $ 52,705 $ 49,106 $ 169,296 $ 132,162 Average stockholders' equity
1,985,842
(663,707 ) (663,707 ) (663,707 ) (663,707 ) (663,707 ) Less: Average intangible assets
(28,240 ) (30,348 ) (37,133 ) (30,377 ) (39,376 )
Average tangible common equity
1,285,002
Return on average equity, annualized 9.49 % 10.02 % 9.51 % 10.73 % 8.55 % Return on average tangible common equity, annualized 14.62 % 15.60 % 15.20 % 16.64 % 13.76 % (1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months endedSeptember 30, 2021 and 2020. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability and Market Risk Management - Interest Rate Sensitivity Management included herein. 41
--------------------------------------------------------------------------------
The tables below present the interest rate spread, net interest margin and the
composition of average interest-earning assets and average interest-bearing
liabilities by category for the periods indicated, including the changes in
average balance, composition, and average yield/rate between these respective
periods.
Three Months Ended September 30,
2021 2020
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable $ 2,912,382 $ 9,630 1.34 % $ 1,970,636 $ 8,244 1.82 %
Tax-advantaged 29,873 183 2.95 % 36,193 203 3.26 %
Held-to-maturity securities:
Taxable 970,696 4,099 1.90 % 429,897 2,265 2.11 %
Tax-advantaged 199,196 1,089 2.64 % 164,854 1,110 3.26 %
Investment in FHLB stock 17,688 258 5.79 % 17,688 215 4.84 %
Interest-earning deposits with
other institutions 2,356,121 898 0.15 % 1,494,149 389 0.10 %
Loans (2) 7,916,443 88,390 4.43 % 8,382,257 94,200 4.47 %
Total interest-earning assets 14,402,399 104,547 2.92 % 12,495,674 106,626 3.45 %
Total noninterest-earning
assets 1,270,862 1,231,502
Total assets $ 15,673,261 $ 13,727,176
INTEREST-BEARING LIABILITIES
Savings deposits (3) $ 4,349,441 $ 967 0.09 % $ 3,735,204 $ 2,010 0.21 %
Time deposits 355,535 146 0.16 % 449,484 948 0.84 %
Total interest-bearing deposits 4,704,976 1,113 0.09 %
4,184,688 2,958 0.28 % FHLB advances, other borrowings, and customer repurchase agreements 636,397 135 0.08 % 539,833 343 0.25 % Interest-bearing liabilities 5,341,373 1,248 0.09 % 4,724,521 3,301 0.28 % Noninterest-bearing deposits 7,991,462 6,731,711 Other liabilities 260,188 285,102 Stockholders' equity 2,080,238 1,985,842 Total liabilities and stockholders' equity$ 15,673,261 $ 13,727,176 Net interest income$ 103,299 $ 103,325 Net interest spread - tax equivalent 2.83 % 3.17 % Net interest margin 2.88 % 3.33 % Net interest margin - tax equivalent 2.89 % 3.34 % (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months endedSeptember 30, 2021 and 2020. The non TE rates for tax-advantaged AFS investment securities were 2.45% and 2.24% for the three months endedSeptember 30, 2021 and 2020 respectively. The non TE rates for total AFS investment securities were 1.52% and 1.93% for the three months endedSeptember 30, 2021 and 2020, respectively. (2) Includes loan fees of$7.5 million and$7.4 million for the three months endedSeptember 30, 2021 and 2020, respectively. Prepayment penalty fees of$2.0 million and$1.8 million are included in interest income for the three months endedSeptember 30, 2021 and 2020, respectively. (3) Includes interest-bearing demand and money market accounts. 42
--------------------------------------------------------------------------------
Nine Months Ended September 30,
2021 2020
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale
securities:
Taxable $ 2,757,685 $ 27,824 1.38 % $ 1,737,723 $ 26,313 2.08 %
Tax-advantaged 29,932 558 2.98 % 36,897 632 3.30 %
Held-to-maturity securities:
Taxable 804,869 10,917 1.90 % 449,230 7,410 2.20 %
Tax-advantaged 200,744 3,341 2.68 % 177,364 3,623 3.29 %
Investment in FHLB stock 17,688 758 5.73 % 17,688 761 5.75 %
Interest-earning deposits
with other institutions 1,922,234 1,790 0.12 % 947,211 1,285 0.18 %
Loans (2) 8,144,105 271,911 4.46 % 7,972,208 281,669 4.72 %
Total interest-earning assets 13,877,257 317,099 3.09 % 11,338,321 321,693 3.82 %
Total noninterest-earning
assets 1,250,370 1,237,241
Total assets $ 15,127,627 $ 12,575,562
INTEREST-BEARING LIABILITIES
Savings deposits (3) $ 4,203,684 $ 3,263 0.10 % $ 3,396,259 $ 7,131 0.28 %
Time deposits 388,095 1,087 0.37 % 448,615 2,946 0.88 %
Total interest-bearing
deposits 4,591,779 4,350 0.13 % 3,844,874 10,077 0.35 %
FHLB advances, other
borrowings, and customer
repurchase agreements 611,684 594 0.13 % 505,710 1,416 0.37 %
Interest-bearing liabilities 5,203,463 4,944 0.13 % 4,350,584 11,493 0.35 %
Noninterest-bearing deposits 7,646,283 6,063,469
Other liabilities 223,749 175,209
Stockholders' equity 2,054,132 1,986,300
Total liabilities and
stockholders' equity $ 15,127,627 $ 12,575,562
Net interest income $ 312,155 $ 310,200
Net interest spread - tax
equivalent 2.96 % 3.47 %
Net interest margin 3.03 % 3.67 %
Net interest margin - tax
equivalent 3.04 % 3.68 %
(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of
21% in effect for the nine months ended September 30, 2021 and 2020. The non TE
rates for tax-advantaged AFS investment securities were 2.49% and 2.28% for the
nine months ended September 30, 2021 and 2020 respectively. The non TE rates for
total AFS investment securities were 1.55% and 2.16% for the nine months ended
September 30, 2021 and 2020, respectively.
(2)
Includes loan fees of $23.2 million and $15.3 million for nine months ended
September 30, 2021 and 2020, respectively. Prepayment penalty fees of $7.1
million and $5.4 million are included in interest income for the nine months
ended September 30, 2021 and 2020, respectively.
(3)
Includes interest-bearing demand and money market accounts.
The following table presents a comparison of interest income and interest
expense resulting from changes in the volumes and rates on average
interest-earning assets and average interest-bearing liabilities for the periods
indicated. Changes in interest income or expense attributable to volume changes
are calculated by multiplying the change in volume by the initial average non TE
interest rate. The change in interest income or expense attributable to changes
in interest rates is calculated by multiplying the change in non TE interest
rate by the initial volume. The changes attributable to interest rate and volume
changes are calculated by multiplying the change in rate times the change in
volume.
43
--------------------------------------------------------------------------------
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and
Net Interest Income
Comparison of Three Months Ended September 30,
2021 Compared to 2020
Increase (Decrease) Due to
Rate/
Volume Rate Volume Total
(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities $ 4,821 $ (2,173 ) $ (1,262 ) $ 1,386
Tax-advantaged investment securities (36 ) 19 (3 ) (20 )
Held-to-maturity securities: - - - -
Taxable investment securities 2,295 (229 ) (232 ) 1,834
Tax-advantaged investment securities 233 (210 ) (44 ) (21 )
Investment in FHLB stock - 43 - 43
Interest-earning deposits with other
institutions 226 180 103 509
Loans (4,838 ) (796 ) (176 ) (5,810 )
Total interest income 2,701 (3,166 ) (1,614 ) (2,079 )
Interest expense:
Savings deposits 332 (1,181 ) (194 ) (1,043 )
Time deposits (100 ) (384 ) (318 ) (802 )
FHLB advances, other borrowings, and 61 (228 ) (41 ) (208 )
customer repurchase agreements Total interest expense 293 (1,793 ) (553 ) (2,053 ) Net interest income$ 2,408 $ (1,373 ) $ (1,061 ) $ (26 ) Comparison of Nine Months Ended September 30, 2021 Compared to 2020 Increase (Decrease) Due to Rate/ Volume Rate Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities$ 15,575 $ (8,834 ) $ (5,230 ) $ 1,511 Tax-advantaged investment securities (119 ) 55 (10 ) (74 ) Held-to-maturity securities: Taxable investment securities 5,100 (889 ) (704 ) 3,507 Tax-advantaged investment securities 475 (669 ) (88 ) (282 ) Investment in FHLB stock - (3 ) - (3 ) Interest-earning deposits with other institutions 1,319 (401 ) (413 ) 505 Loans 6,231 (15,652 ) (337 ) (9,758 ) Total interest income 28,581 (26,393 ) (6,782 ) (4,594 ) Interest expense: Savings deposits 1,697 (4,496 ) (1,069 ) (3,868 ) Time deposits (398 ) (1,689 ) 228 (1,859 ) FHLB advances, other borrowings, and 297 (925 )
(194 ) (822 )
customer repurchase agreements Total interest expense 1,596 (7,110 ) (1,035 ) (6,549 ) Net interest income$ 26,985 $ (19,283 ) $ (5,747 ) $ 1,955 44
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Third Quarter of 2021 Compared to the Third Quarter of 2020
Net interest income, before recapture of provision for credit losses, of$103.3 million in the third quarter of 2021 was essentially the same as the third quarter of 2020, as the growth in interest-earning assets was offset by a decline in our net interest margin. Interest-earning assets increased on average by$1.91 billion , or 15.26%, from$12.50 billion for the third quarter of 2020 to$14.40 billion for the third quarter of 2021. Our net interest margin (TE) was 2.89% for the third quarter of 2021, compared to 3.34% for the third quarter of 2020. Interest income for the third quarter of 2021 was$104.5 million , which represented a$2.1 million , or 1.95%, decrease when compared to the same period of 2020. Average interest-earning assets increased to$14.40 billion and the average interest-earning asset yield was 2.92% for the third quarter of 2021, compared to 3.45% for the third quarter of 2020. The 53 basis point decrease in the average interest-earning asset yield compared to the third quarter of 2020, was primarily due to a combination of a 41 basis point decrease in the non-tax equivalent investment yields, a 4 basis point decrease in loan yields, and a change in mix of average earning assets, with loan balances declining to 54.97% of earning assets on average for the third quarter of 2021, compared to 67.08% for the third quarter of 2020. Average balances at theFederal Reserve grew to 16.17% of earning assets for the third quarter of 2021, compared to 11.62% for the third quarter of 2020. The increase in balances at theFederal Reserve was impacted by$1.78 billion in average deposit growth compared to the third quarter of 2020. The net interest margin for the third quarter of 2021 would have been approximately 19 basis points higher without the$876.6 million year-over-year increase in average deposits at theFederal Reserve , earning 15 basis points. Interest income and fees on loans for the third quarter of 2021 of$88.4 million decreased$5.8 million , or 6.17%, when compared to the third quarter of 2020. Average loans decreased$465.8 million for the third quarter of 2021 when compared with the same period of 2020. The decrease in average loans included a$336.7 million decrease in average PPP loans. PPP loans generated approximately$6.6 million in amortized loan fee income and$1.3 million in loan interest during the third quarter of 2021. This compares to$9.5 million in loan fee and interest income in the third quarter of 2020. Discount accretion on acquired loans decreased by$1.6 million compared to the third quarter of 2020. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding the impact from PPP loans, discount accretion and nonaccrual interest income, declined by 23 basis points from the third quarter of 2020. Interest income from investment securities was$15.0 million for the third quarter of 2021, a$3.2 million , or 26.89%, increase from$11.8 million for the third quarter of 2020. This increase was primarily the result of a$1.51 billion increase in average investment securities, when compared to the same period of 2020, as a result of purchases of investment securities funded by the growth in the Bank's deposits. Partially offsetting the increase in interest revenue from higher levels of investment securities was a 41 basis point decline in the non-tax equivalent yield on investments. The significant decline in interest rates over the past four quarters decreased yields on investment securities due to higher levels of premium amortization, as well as lower yields on investments purchased during the past four quarters. Interest expense of$1.2 million for the third quarter of 2021, decreased$2.1 million , or 62.19%, compared to the third quarter of 2020. The average rate paid on interest-bearing liabilities decreased by 19 basis points, to 0.09% for the third quarter of 2021 from 0.28% for the third quarter of 2020. Average interest-bearing liabilities were$616.9 million higher for the third quarter of 2021 when compared to the third quarter of 2020. On average, noninterest-bearing deposits were 62.94% of our total deposits for the third quarter of 2021, compared to 61.67% for the third quarter of 2020. In comparison to the third quarter of 2020, our overall cost of funds decreased by 7 basis points, partially due to growth in average noninterest-bearing deposits of$1.26 billion , compared to the increase in average interest-bearing deposits of$652.6 million . In addition, the cost of interest-bearing deposits decreased by 19 basis points for the third quarter of 2021 compared to the third quarter of 2020. 45
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Nine Months of 2021 Compared to Nine Months of 2020
Net interest income, before recapture of provision for credit losses, was$312.2 million for the nine months endedSeptember 30, 2021 , an increase of$2.0 million , or 0.63%, compared to$310.2 million for the same period of 2020. Interest-earning assets increased on average by$2.54 billion , or 22.39%, from$11.34 billion for the nine months endedSeptember 30, 2020 to$13.88 billion for the current year. Our net interest margin (TE) was 3.04% for the first nine months of 2021, compared to 3.68% for the same period of 2020. Interest income for the nine months endedSeptember 30, 2021 was$317.1 million , which represented a$4.6 million , or 1.43%, decrease when compared to the same period of 2020. Compared to the first nine months of 2020, average interest-earning assets increased by$2.54 billion , and the yield on interest-earning assets decreased by 73 basis points. The 73 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 26 basis point decrease in loan yields from 4.72% for first nine months of 2020 to 4.46% for the same period of 2021, and a 65 basis point decline in tax-equivalent investment yields, as well as a change in the mix of earning assets resulting from a$973.3 million increase in average balances at theFederal Reserve . Average loans as a percentage of earning assets declined from 70.31% for the first nine months of 2020 to 58.69% for the first nine months of 2021. Conversely, average balances at theFederal Reserve grew as a percentage of earning assets from 8.09% in the prior year to 13.62% for the first nine months of 2021. Interest income and fees on loans for the first nine months of 2021 of$271.9 million decreased$9.8 million , or 3.46%, when compared to the same period of 2020. Average loans increased$171.9 million for the first nine months of 2021 when compared with the same period of 2020, primarily due to a$147.5 million increase in average PPP loans. The PPP loans generated approximately$26.4 million in loan fee and interest income during the first nine months of 2021, compared to$18.0 million for the same period in 2020. The first nine months of 2021 reflected a$2.9 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the first nine months of 2020. Loan yields decreased by 26 basis points from the prior nine month period. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 29 basis points lower than the first nine months of 2020. The decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank's prime rate and lower yields on new loans in the low rate environment experienced for the past 12 months. Interest income from investment securities was$42.6 million for the nine months endedSeptember 30, 2021 , a$4.6 million increase from$38.0 million for the first nine months of 2020. This increase was the net result of a$1.39 billion increase in average investment securities, partially offset by a 61 basis point decline in the non tax-equivalent yield on securities, compared to the first nine months of 2020. Interest expense of$4.9 million for the nine months endedSeptember 30, 2021 , decreased by$6.5 million from the same period of 2020. The average rate paid on interest-bearing liabilities decreased by 22 basis points, to 0.13% for the first nine months of 2021, from 0.35% for the same period of 2020. The rate on interest-bearing deposits for the first nine months of 2021 decreased by 22 basis points from the same period in 2020. Average interest-bearing liabilities were$853.0 million higher for the first nine months of 2021 when compared with the same period of 2020. Average interest-bearing deposits grew by$746.9 million when compared to the first nine months of 2020. Average noninterest-bearing deposits represented 62.48% of our total deposits for the nine months endedSeptember 30, 2021 , compared to 61.20% for the same period of 2020. Total cost of funds for the first nine months of 2021 was 0.05%, compared with 0.15% for the same period of 2020. 46
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Provision for (Recapture of) Credit Losses
The provision for (recapture of) credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management's assessment of expected lifetime losses in the loan portfolio as of the balance sheet date. The allowance for credit losses on loans totaled$65.4 million atSeptember 30, 2021 , compared to$93.7 million atDecember 31, 2020 and$93.9 million as ofSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , we recaptured$25.5 million in provision for credit losses, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus. For the nine months endedSeptember 30, 2021 , we experienced credit charge-offs of$3.0 million and total recoveries of$168,000 , resulting in net charge-offs of$2.8 million . This compares to a$23.5 million credit loss provision and net charge-offs of$131,000 for the same period of 2020. The provision for credit losses during the first nine months of 2020 was primarily the result of the forecast of a significant decline in economic activity due to the impact of the COVID-19 pandemic. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as ofSeptember 30, 2021 , was 0.83%. This compares to 1.12% and 1.12%, as ofDecember 31, 2020 andSeptember 30, 2020 , respectively. When PPP loans are excluded, allowance for credit losses as a percentage of total adjusted loans and leases outstanding was 0.87% atSeptember 30, 2021 , compared to 1.25% atDecember 31, 2020 and 1.28% atSeptember 30, 2020 . As ofSeptember 30, 2021 , remaining discounts on acquired loans were$20.7 million . Refer to the discussion of "Allowance for Credit Losses" in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology. No assurance can be given that economic conditions which affect the Company's service areas or other circumstances will or will not be reflected in future changes in the level of our allowance for credit losses and the resulting provision or recapture of provision for credit losses. The process to estimate the allowance for credit losses requires considerable judgment and our economic forecasts may continue to vary due to the uncertainty of the future impact of the pandemic on our business and customers. See "Allowance for Credit Losses" under Analysis of Financial Condition herein. Noninterest Income Noninterest income includes income derived from financial services offered to our customers, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)
Noninterest income:
Service charges on
deposit
accounts $ 4,513 $ 3,970 $ 543 13.68 %
2,681 2,405 276 11.48 % 8,459 7,302 1,157 15.84 % Bankcard services
479 456 23 5.04 % 1,362 1,438 (76 ) -5.29 %
BOLI income 1,229 1,469 (240 ) -16.34 % 7,093 5,211 1,882 36.12 %
Swap fee income 167 1,591 (1,424 ) -89.50 % 382 4,149 (3,767 ) -90.79 %
Gain on OREO, net - 13 (13 ) -100.00 % 477 23 454 1973.91 %
Gain on sale of
building, net - 1,680 (1,680 ) -100.00 % 189 1,680 (1,491 ) -88.75 %
Other 1,414 1,569 (155 ) -9.88 % 4,371 4,587 (216 ) -4.71 %
Total noninterest
income $ 10,483 $ 13,153 $ (2,670 ) -20.30 % $ 35,000 $ 36,945 $ (1,945 ) -5.26 %
Third Quarter of 2021 Compared to the Third Quarter of 2020
The
The Bank enters into interest rate swap agreements with our customers to manage
our interest rate risk and enters into identical offsetting swaps with a
counterparty. The changes in the fair value of the swaps primarily offset each
other resulting in swap fee income (refer to Note 8 - Derivative Financial
Instruments of the notes to the unaudited condensed
47
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consolidated financial statements of this report for additional information).
Fees from interest rate swaps decreased $1.4 million compared to the third
quarter of 2020, due to lower volume of swap transactions. We executed swap
agreements related to new loan originations for the third quarter of 2021 with a
notional amount of $9.8 million , compared to executed swap agreements related to
new loan originations with a notional amount totaling $73.2 million for the
third quarter of 2020.
CitizensTrust consists of Wealth Management and Investment Services income. The
Wealth Management group provides a variety of services, which include asset
management, financial planning, estate planning, retirement planning, private
and corporate trustee services, and probate services. Investment Services
provides self-directed brokerage, 401(k) plans, mutual funds, insurance and
other non-insured investment products. At September 30, 2021 , CitizensTrust had
approximately $3.28 billion in assets under management and administration,
including $2.39 billion in assets under management. CitizensTrust generated fees
of $2.7 million for the third quarter of 2021, compared to $2.4 million for the
third quarter of 2020, due to the growth in assets under management and higher
investment services fees.
The Bank's investment in BOLI includes life insurance policies acquired through
acquisitions and the purchase of life insurance by the Bank on a select group of
employees. The Bank is the owner and beneficiary of these policies. BOLI is
recorded as an asset at its cash surrender value. Increases in the cash value of
these policies, as well as insurance proceeds received, are recorded in
noninterest income and are not subject to income tax, as long as they are held
for the life of the covered parties. There were no death benefits from our BOLI
policies for the third quarters of 2021 and 2020. Income from BOLI declined by
$240,000 compared to the third quarter of 2020.
Nine Months of 2021 Compared to Nine Months of 2020
The$1.9 million decrease in noninterest income was primarily due to a$3.8 million decrease in swap fee income from the first nine months of 2020 due to lower volume of swap transactions. The third quarter of 2020 also included a$1.7 million net gain on the sale of one of our bank owned buildings. Partially offsetting the overall decrease in noninterest income was a$1.9 million increase in BOLI income primarily due to$2.3 million in higher death benefits that result from life insurance proceeds exceeding the asset value of certain BOLI policies. Trust and investment services income increased$1.2 million , or 15.84%, compared with the first nine months of 2020. Growth in assets under management and higher investment services fees equally contributed to this growth in fee income. 48
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Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)
Noninterest expense:
Salaries and employee
benefits $ 29,741 $ 31,034 $ (1,293 ) -4.17 % $ 88,283 $ 90,617 $ (2,334 ) -2.58 %
Occupancy 4,292 4,290 2 0.05 % 12,655 12,171 484 3.98 %
Equipment 830 985 (155 ) -15.74 %2,279 2,972 (693 ) -23.32 % Professional services 1,626 2,019 (393 ) -19.47 %
6,042 6,643 (601 ) -9.05 %
Computer software
expense 3,020 2,837 183 6.45 % 8,521 8,407 114 1.36 %
Marketing and
promotion 857 728 129 17.72 % 3,381 3,538 (157 ) -4.44 %
Amortization of
intangible
assets 2,014 2,292 (278 ) -12.13 % 6,348 7,182 (834 ) -11.61 %
Telecommunications
expense 514 643 (129 ) -20.06 %1,592 1,929 (337 ) -17.47 % Regulatory assessments 1,226 998 228 22.85 %
3,424 1,313 2,111 160.78 %
Insurance 452 400 52 13.00 % 1,360 1,192 168 14.09 %
Loan expense 276 207 69 33.33 % 825 833 (8 ) -0.96 %
OREO expense - 830 (830 ) -100.00 % 42 1,200 (1,158 ) -96.50 %
(Recapture of)
provision for
unfunded loan
commitments - - - - (1,000 ) (1,000 ) -
Directors' expenses 388 358 30 8.38 % 1,156 1,067 89 8.34 %
Stationery and
supplies 254 227 27 11.89 % 739 894 (155 ) -17.34 %
Acquisition related
expenses 809 - 809 - 809 809 -
Other 1,800 1,740 60 3.45 % 5,351 4,669 682 14.61 % Total noninterest expense
$ 48,099 $ 49,588 $ (1,489 ) -3.00 %
Noninterest expense to average assets 1.22 % 1.44 % 1.25 % 1.54 % Efficiency ratio (1) 42.27 % 42.57 % 40.85 % 41.66 % (1)
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.22% for the third quarter of 2021, compared to 1.44% for the third quarter of 2020. The decline in this ratio for 2021 reflects the$2.55 billion growth in average assets that resulted primarily from$2.33 billion in average deposit growth. Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.27% for the third quarter of 2021, compared to 42.57% for the third quarter of 2020. For the nine months endingSeptember 30, 2021 , the efficiency ratio was 40.85%, compared to 41.66% for the same period in 2020. 49
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Third Quarter of 2021 Compared to the Third Quarter of 2020
Noninterest expense of$48.1 million for the third quarter of 2021 was$1.5 million , or 3.00%, lower than the third quarter of 2020. The year-over-year decrease of$1.5 million included a$1.3 million decrease in salaries and employee benefits, including$1.1 million in additional bonus expense for "Thank You Awards" paid to all Bank employees during the third quarter of 2020, and an$830,000 decrease in OREO expense, primarily due to a$700,000 write-down of one OREO property in the third quarter of 2020. Merger related expenses increased$809,000 in the third quarter of 2021, for the pending acquisition of Suncrest Bank that was announced in July of 2021.
Nine Months of 2021 Compared to Nine Months of 2020
Noninterest expense of$141.8 million for the first nine months of 2021 was$2.8 million lower than the prior year period. Salaries and employee benefits declined by$2.3 million from the first nine months of 2020, due to lower employee benefit expense that was partially offset by higher bonus and profit sharing expense. The year-over-year decrease also included the$1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021 and an$834,000 year-over-year decrease in amortization of CDI. An increase of$2.1 million in regulatory assessment expense was the result of the final application of assessment credits provided by theFDIC at the end of the second quarter of 2020. As a percentage of average assets, noninterest expense was 1.25% for the nine months endedSeptember 30, 2021 , compared to 1.54% for the same period of 2020. Income Taxes The Company's effective tax rate for the three and nine months endedSeptember 30, 2021 was 28.60%, compared to 29.00% for the three and nine months endedSeptember 30, 2020 , respectively. Our estimated annual effective tax rate varies depending upon the level of tax-advantaged income as well as available tax credits. The Company's effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 50
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ANALYSIS OF FINANCIAL CONDITION
Total assets of $16.20 billion at September 30, 2021 increased $1.78 billion , or
12.36%, from total assets of $14.42 billion at December 31, 2020 .
Interest-earning assets totaled $14.93 billion at September 30, 2021 increased
$1.71 billion , or 12.92%, when compared with $13.22 billion at December 31,
2020 . The increase in interest-earning assets was primarily due to a $1.66
billion increase in investment securities and a $565.9 million increase in
interest-earning balances due from the Federal Reserve , partially offset by a
$499.3 million decrease in total loans which included a decrease in PPP loans of
$552 million for the nine months ended September 30, 2021 . Excluding PPP loans,
total loans increased by $52.7 million , or 0.71%, from December 31, 2020 .
Total liabilities were $14.14 billion at September 30, 2021 , an increase of
$1.73 billion , or 13.91%, from total liabilities of $12.41 billion at December
31, 2020 . Total deposits grew by $1.19 billion , or 10.17%. Total equity
increased $55.9 million , or 2.79%, to $2.06 billion at September 30, 2021 ,
compared to total equity of $2.01 billion at December 31, 2020 . The $55.9
million increase in equity was primarily due to net earnings of $164.8 million
for the first nine months of 2021, partially offset by a $32.3 million decrease
in other comprehensive income from the tax-effected impact of the decrease in
market value of available-for-sale securities and $73.4 million in cash
dividends.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest
income and to serve as a source of liquidity for its ongoing operations. At
September 30, 2021 , total investment securities were $4.64 billion . This
represented an increase of $1.66 billion , or 55.70%, from total investment
securities of $2.98 billion at December 31, 2020 . The increase in investment
securities was primarily due to new securities purchased exceeding cash outflow
from the portfolio in the third quarter of 2021. At September 30, 2021 ,
investment securities HTM totaled $1.71 billion . At September 30, 2021 , our AFS
investment securities totaled $2.93 billion , inclusive of a pre-tax net
unrealized gain of $8.8 million . The after-tax unrealized gain reported in AOCI
on AFS investment securities was $6.2 million . The changes in the net unrealized
holding gain resulted primarily from fluctuations in market interest rates. For
the nine months ended September 30, 2021 and 2020, repayments/maturities of
investment securities totaled $712.3 million and $536.7 million , respectively.
The Company purchased additional investment securities totaling $2.44 billion
and $882.1 million for the nine months ended September 30, 2021 and 2020,
respectively. During the third quarter of 2021, we purchased approximately
$187.4 million of AFS securities with an average expected yield of approximately
1.49% and $705.1 million of HTM securities with an average expected yield of
approximately 1.75%. The second quarter included purchases of $317.1 million of
AFS securities with an average investment yield of approximately 1.69% and the
first quarter included purchases of $1.23 billion of securities purchased in the
first quarter of 2021, with an average expected yield of approximately 1.57%.
The first quarter purchases included $682.9 million in AFS securities that were
comprised of MBS with average lives of less than five years that are expected to
yield approximately 1.37% and $545.7 million in HTM securities that were
comprised of fixed rate agency and municipal bonds, with longer maturities that
on average exceed 10 years that will generate a yield of approximately 1.81% on
a non-tax equivalent basis. There were no investment securities sold during the
first nine months of 2021 and 2020.
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The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
September 30, 2021
Gross Gross
Unrealized Unrealized Total
Amortized Cost Holding Gain Holding Loss Fair Value Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 2,256,252 $ 31,251 $ (18,430 ) $ 2,269,073 77.57 %
CMO/REMIC 630,351 2,846 (8,030 ) 625,167 21.37 %
Municipal bonds 28,697 1,123 - 29,820 1.02 %
Other securities 1,000 - - 1,000 0.04 %
Total available-for-sale
securities $ 2,916,300 $ 35,220 $ (26,460 ) $ 2,925,060 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 585,022 $ 6,785 $ (8,112 ) $ 583,695 34.19 %
Mortgage-backed securities 648,613 5,450 (1,502 ) 652,561 37.91 %
CMO/REMIC 264,324 1,642 (1,118 ) 264,848 15.45 %
Municipal bonds 212,979 4,761 (1,614 ) 216,126 12.45 %
Total held-to-maturity
securities $ 1,710,938 $ 18,638 $ (12,346 ) $ 1,717,230 100.00 %
December 31, 2020
Gross Gross
Unrealized Unrealized Total
Amortized Cost Holding Gain Holding Loss Fair Value Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 1,857,030 $ 48,006 $ (101 ) $ 1,904,935 79.41 %
CMO/REMIC 457,548 5,515 (249 ) 462,814 19.29 %
Municipal bonds 28,707 1,578 - 30,285 1.26 %
Other securities 889 - - 889 0.04 %
Total available-for-sale
securities $ 2,344,174 $ 55,099 $ (350 ) $ 2,398,923 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 98,663 $ 5,877 $ - $ 104,540 17.05 %
Mortgage-backed securities 146,382 7,644 (32 ) 153,994 25.30 %
CMO/REMIC 145,309 5,202 - 150,511 25.11 %
Municipal bonds 188,272 6,980 (74 ) 195,178 32.54 %
Total held-to-maturity
securities $ 578,626 $ 25,703 $ (106 ) $ 604,223 100.00 %
As of September 30, 2021 , approximately $53.2 million in U.S. government agency
bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled
collateral. Municipal bonds, which represented approximately 6% of the total
investment portfolio, are predominately AA or higher rated securities.
The following table presents the Company's available-for-sale investment
securities, by investment category, in an unrealized loss position for which an
allowance for credit losses has not been recorded as of September 30, 2021 and
December 31, 2020 .
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September 30, 2021
Less Than 12 Months 12 Months or Longer Total
Gross Gross
Unrealized Gross Unrealized Unrealized
Fair Value Holding Losses Fair Value Holding Losses Fair Value Holding Losses
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 1,349,856 $ (18,243 ) $ 21,273 $ (187 ) $ 1,371,129 $ (18,430 )
CMO/REMIC 510,308 (7,758 ) 11,162 (272 ) 521,470 (8,030 )
Municipal bonds - - - - - -
Total available-for-sale
securities $ 1,860,164 $ (26,001 ) $ 32,435 $ (459 ) $ 1,892,599 $ (26,460 )
December 31, 2020
Less Than 12 Months 12 Months or Longer Total
Gross
Unrealized
Gross Unrealized Holding Gross Unrealized
Fair Value Holding Losses Fair Value Losses Fair Value Holding Losses
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed
securities $ 72,219 $ (101 ) $ - $ - $ 72,219 $ (101 )
CMO/REMIC 96,974 (249 ) - - 96,974 (249 )
Municipal bonds - - - - - -
Total available-for-sale
securities $ 169,193 $ (350 ) $ - $ - $ 169,193 $ (350 )
Once it is determined that a credit loss has occurred, an allowance for credit
losses is established on our available-for-sale and held-to-maturity securities.
Management determined that credit losses did not exist for securities in an
unrealized loss position as of September 30, 2021 and December 31, 2020 .
Refer to Note 4 - Investment Securities of the notes to the unaudited condensed
consolidated financial statements of this report for additional information on
our investment securities portfolio.
53
--------------------------------------------------------------------------------Loans Total loans and leases, at amortized cost, of$7.85 billion atSeptember 30, 2021 decreased by$499.3 million , or 5.98%, fromDecember 31, 2020 . The$499.3 million decrease in total loans included decreases of$552.0 million in PPP loans,$81.6 million in dairy & livestock and agribusiness loans due to seasonal pay downs,$42.1 million in commercial and industrial loans,$39.2 million in SFR mortgage loans,$7.7 million in construction loans, and$13.5 million in consumer and other loans, partially offset by an increase of$233.2 million in commercial real estate loans and$3.6 million in SBA loans. After adjusting for seasonality and PPP loans, our loans grew by$134.3 million or at an annualized rate of approximately 3% from the end of the fourth quarter of 2020. The following table presents our loan portfolio by type as of the dates presented. Distribution of Loan Portfolio by Type September 30, 2021 December 31, 2020 (Dollars in thousands) Commercial real estate $ 5,734,699 $ 5,501,509 Construction 77,398 85,145 SBA 307,533 303,896 SBA - Paycheck Protection Program (PPP) 330,960 882,986 Commercial and industrial 769,977 812,062 Dairy & livestock and agribusiness 279,584 361,146 Municipal lease finance receivables 47,30545,547 SFR mortgage 231,323 270,511 Consumer and other loans 70,741 86,006 Total loans, at amortized cost 7,849,520
8,348,808
Less: Allowance for credit losses (65,364 ) (93,692 )
Total loans and lease finance receivables, net $ 7,784,156 $ 8,255,116
As ofSeptember 30, 2021 ,$354.3 million , or 6.18% of the total commercial real estate loans included loans secured by farmland, compared to$314.4 million , or 5.72%, atDecember 31, 2020 . The loans secured by farmland included$125.1 million for loans secured by dairy & livestock land and$229.2 million for loans secured by agricultural land atSeptember 30, 2021 , compared to$132.9 million for loans secured by dairy & livestock land and$181.5 million for loans secured by agricultural land atDecember 31, 2020 . As ofSeptember 30, 2021 , dairy & livestock and agribusiness loans of$279.6 million were comprised of$242.0 million for dairy & livestock loans and$37.6 million for agribusiness loans, compared to$320.1 million for dairy & livestock loans and$41.0 million for agribusiness loans atDecember 31, 2020 . Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single 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 ofSeptember 30, 2021 , the Company had$209.7 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower's down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank's 504 loans are granted for the purpose of commercial real estate acquisition. As ofSeptember 30, 2021 , the Company had$97.8 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate. 54
-------------------------------------------------------------------------------- As an active participant in the SBA's Paycheck Protection Program, we originated approximately 4,100 PPP loans totaling$1.10 billion in round one, with a remaining outstanding balance of$52.4 million as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , we have originated approximately 1,900 PPP loans in round two with a remaining outstanding balance of$278.6 million .
Our loan portfolio is geographically disbursed throughout our marketplace. The
following is the breakdown of our total held-for-investment commercial real
estate loans, by region as of
September 30, 2021
Commercial Real
Total Loans Estate Loans
(Dollars in thousands)
Los Angeles County $ 3,272,657 41.7 % $ 2,201,389 38.4 %
Central Valley 1,389,634 17.7 % 1,088,972 19.0 %
Orange County 1,034,232 13.2 % 674,864 11.8 %
Inland Empire 1,009,682 12.9 % 855,165 14.9 %
Central Coast 457,836 5.8 % 386,436 6.7 %
San Diego 248,478 3.2 % 224,549 3.9 %
Other California 145,338 1.8 % 92,624 1.6 %
Out of State 291,663 3.7 % 210,700 3.7 %
$ 7,849,520 100.0 % $ 5,734,699 100.0 %
The table below breaks down our commercial real estate portfolio.
September 30, 2021
Percent
Owner- Average
Loan Balance Percent Occupied (1) Loan Balance
(Dollars in thousands)
Commercial real estate:
Industrial $ 1,945,809 33.9 % 50.9 % $ 1,466
Office 1,045,711 18.2 % 23.3 % 1,676
Retail 809,686 14.1 % 10.5 % 1,726
Multi-family 646,004 11.3 % 1.9 % 1,545
Secured by farmland (2) 354,341 6.2 % 96.8 % 2,229
Medical 295,580 5.2 % 37.6 % 1,699
Other (3) 637,568 11.1 % 52.3 % 1,433
Total commercial real estate $ 5,734,699 100.0 % 37.0 % 1,586
(1)
Represents percentage of reported owner-occupied at origination in each real
estate loan category.
(2)
The loans secured by farmland included $125.1 million for loans secured by dairy
& livestock land and $229.2 million for loans secured by agricultural land at
September 30, 2021 .
(3)
Other loans consist of a variety of loan types, none of which exceeds 2.0% of
total commercial real estate loans at September 30, 2021 .
55
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Nonperforming Assets
The following table provides information on nonperforming assets as of the dates
presented.
September 30, 2021 December 31, 2020
(Dollars in thousands)
Nonaccrual loans $ 8,446 $ 14,347
Loans past due 90 days or more and still accruing
interest - -
Nonperforming troubled debt restructured loans
(TDRs) - -
Total nonperforming loans 8,446 14,347
OREO, net - 3,392
Total nonperforming assets $ 8,446 $ 17,739
Performing TDRs $ 7,975 $ 2,159
Total nonperforming loans and performing TDRs $ 16,421 $ 16,506
Percentage of nonperforming loans and performing
TDRs to total loans,
at amortized cost 0.21 % 0.20 %
Percentage of nonperforming assets to total loans, at amortized cost,
and OREO 0.11 % 0.21 % Percentage of nonperforming assets to total assets 0.05 % 0.12 %
Troubled Debt Restructurings ("TDRs")
Total TDRs were$8.0 million atSeptember 30, 2021 , compared to$2.2 million atDecember 31, 2020 . AtSeptember 30, 2021 , all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms.
The following table provides a summary of TDRs as of the dates presented.
September 30, 2021 December 31, 2020
Balance Number of Loans Balance Number of Loans
(Dollars in thousands)
Performing TDRs:
Commercial real estate $ 2,632 2 $ 320 1
Construction - - - -
SBA - - - -
Commercial and industrial 4,323 3 43 1
Dairy & livestock and agribusiness - - - -
SFR mortgage 1,020 5 1,796 7
Consumer and other - - - -
Total performing TDRs $ 7,975 10 $ 2,159 9
Nonperforming TDRs:
Commercial real estate $ - - $ - -
Construction - - - -
SBA - - - -
Commercial and industrial - - - -
Dairy & livestock and agribusiness - - - -
SFR mortgage - - - -
Consumer and other - - - -
Total nonperforming TDRs $ - - $ - -
Total TDRs $ 7,975 10 $ 2,159 9
56
-------------------------------------------------------------------------------- AtSeptember 30, 2021 andDecember 31, 2020 , there was no ACL allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time the loan is considered uncollectible. There were no charge-offs on TDRs for the nine months endedSeptember 30, 2021 and 2020.
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as
of the dates presented.
September 30, June 30, March 31, December 31, September 30,
2021 2021 2020 2020 2020
(Dollars in thousands)
Nonperforming loans:
Commercial real estate $ 4,073 $ 4,439 $ 7,395 $ 7,563 $ 6,481
Construction - - - - -
SBA 1,513 1,382 2,412 2,273 1,724
Commercial and
industrial 2,038 1,818 2,967 3,129 1,822
Dairy & livestock and
agribusiness 118 118 259 785 849
SFR mortgage 399 406 424 430 675
Consumer and other loans 305 308 312 167 224
Total $ 8,446 $ 8,471 $ 13,769 $ 14,347 $ 11,775
% of Total loans 0.11 % 0.10 % 0.17 % 0.17 % 0.14 %
Past due 30-89 days:
Commercial real estate $ - $ - $ 178 $ - $ -
Construction - - - - -
SBA - - 258 1,965 66
Commercial and
industrial 122 415 952 1,101 3,627
Dairy & livestock and
agribusiness 1,000 - - - -
SFR mortgage - - 266 - -
Consumer and other loans - - 21 - 67
Total $ 1,122 $ 415 $ 1,675 $ 3,066 $ 3,760
% of Total loans 0.01 % 0.01 % 0.02 % 0.04 % 0.04 %
OREO:
Commercial real estate $ - $ - $ 1,575 $ 1,575 $ 1,575
SBA - - - - 797
SFR mortgage - - - 1,817 1,817
Total $ - $ - $ 1,575 $ 3,392 $ 4,189
Total nonperforming,
past due,
and OREO $ 9,568 $ 8,886 $ 17,019 $ 20,805 $ 19,724
% of Total loans 0.12 % 0.11 % 0.21 % 0.25 % 0.23 %
Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and
loans past due 90 days or more and still accruing interest, were $8.4 million at
September 30, 2021 , or 0.11% of total loans. This compares to nonperforming
loans of $14.3 million , or 0.17% of total loans, at December 31, 2020 and $11.8
million , or 0.14% of total loans, at September 30, 2020 . The $8.4 million in
nonperforming loans at September 30, 2021 are summarized as follows: $4.1
million in commercial real estate loans, $2.0 million in commercial and
industrial loans, $1.5 million in SBA loans, $399,000 in SFR mortgage loans,
$305,000 in consumer and other loans, and $118,000 in dairy & livestock and
agribusiness loans.
At September 30, 2021 , we had no OREO properties, compared to two OREO
properties with a carrying value of $3.4 million at December 31, 2020 and four
OREO properties with a carrying value of $4.2 million at September 30, 2020 . For
the nine months ended September 30, 2020 , we sold two OREO properties, realizing
a net gain on sale of $477,000 . There were no additions to OREO properties for
the nine months ended September 30, 2021 .
57
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Allowance for Credit Losses We adopted CECL onJanuary 1, 2020 , which replaces the "incurred loss" approach with an "expected loss" model over the life of the loan, as further described in Note 3-Summary of Significant Accounting Policies of the notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The allowance for credit losses totaled$65.4 million as ofSeptember 30, 2021 , compared to$93.7 million as ofDecember 31, 2020 and$93.9 million as ofSeptember 30, 2020 . Our allowance for credit losses atSeptember 30, 2021 was 0.83%, or 0.87% of total loans when excluding the$331.0 million in PPP loans. The allowance for credit losses for 2021 was decreased by$25.5 million , due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus, and by$2.8 million in year-to-date net charge-offs. The Company previously recorded provision for credit losses totaling$23.5 million in 2020, due to the severe decline in economic forecasts associated with the pandemic. Net charge-offs were$2.8 million for the nine months endedSeptember 30, 2021 , which compares to$131,000 in net charge-offs for the same period of 2020. The allowance for credit losses as ofSeptember 30, 2021 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools:Commercial Real Estate , Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real estate loans include OLTV, origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. TheCommercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Payment Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company's commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion ofSmall Business Administration (SBA) loans (excluding Payment Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast reflects continued improvement in key macroeconomic variables, including GDP, the commercial real estate price index and the unemployment rate. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. TheseU.S. economic forecasts include a baseline forecast, as well as upside and downside forecasts, with the largest weighting on the baseline. Our weighted forecast assumes GDP will increase by 5.7% in 2021, and then grows by more than 2% in both 2022 and 2023. The unemployment rate is forecasted to be 5.7% in 2021 and then 5.6% in 2022, before declining to 5.3% in 2023. Management believes that the ACL was appropriate atSeptember 30, 2021 andDecember 31, 2020 . As there is a high degree of uncertainty around the epidemiological assumptions and impact of government responses to the pandemic that impact our economic forecast, no assurance can be given that economic conditions that adversely affect the Company's service areas or other circumstances will not be reflected in an increased allowance for credit losses in future periods. 58
--------------------------------------------------------------------------------
The table below presents a summary of charge-offs and recoveries by type, the
provision for credit losses on loans, and the resulting allowance for credit
losses for the periods presented.
As of and For the
Nine Months Ended
September 30,
2021 2020
(Dollars in thousands)
Allowance for credit losses at beginning of period
68,660
Impact of adopting ASU 2016-13 - 1,840 Charge-offs: Commercial real estate - - Construction - - SBA - (203 ) Commercial and industrial (2,985 ) (172 ) Dairy & livestock and agribusiness - - SFR mortgage - - Consumer and other loans (11 ) (109 ) Total charge-offs (2,996 ) (484 ) Recoveries: Commercial real estate - - Construction 55 9 SBA 13 72 Commercial and industrial 10 7 Dairy & livestock and agribusiness - - SFR mortgage 79 206 Consumer and other loans 11 59 Total recoveries 168 353 Net (charge-offs) recoveries (2,828 ) (131 ) (Recapture of) provision for credit losses (25,500 )
23,500
Allowance for credit losses at end of period$ 65,364 $
93,869
Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period
$ 9,000 $
8,959
Impact of adopting ASU 2016-13 -
41
(Recapture of) provision for unfunded loan commitments (1,000 )
-
Reserve for unfunded loan commitments at end of period
9,000
Reserve for unfunded loan commitments to total unfunded loan
commitments 0.46 %
0.50 %
Amount of total loans at end of period (1)$ 7,849,520 $
8,407,872
Average total loans outstanding (1)$ 8,144,105 $
7,972,208
Net charge-offs to average total loans -0.035 % -0.002 % Net charge-offs to total loans at end of period -0.036 % -0.002 % Allowance for credit losses to average total loans 0.80 %
1.18 % Allowance for credit losses to total loans at end of period
0.83 % 1.12 %
Net charge-offs to allowance for credit losses -4.33 % -0.14 %
Net charge-offs to (recapture of) provision for credit
losses 11.09 % -0.56 %
(1)Net of deferred loan origination fees, costs and discounts (amortized cost).
The ACL/Total Loan Coverage Ratio as of
59
-------------------------------------------------------------------------------- The Bank's ACL methodology also produced an allowance of$8.0 million for our off-balance sheet credit exposures as ofSeptember 30, 2021 , compared to$9.0 million as ofDecember 31, 2020 andSeptember 30, 2020 . The year-over-year decrease included a$1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021. While we believe that the allowance atSeptember 30, 2021 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future. Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower's ability to pay or the value of our collateral. See "Risk Management - Credit Risk Management" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were$12.93 billion atSeptember 30, 2021 . This represented an increase of$1.19 billion , or 10.17%, over total deposits of$11.74 billion atDecember 31, 2020 . The composition of deposits is summarized as of the dates presented in the table below. September 30, 2021 December 31, 2020 Balance Percent Balance Percent (Dollars in thousands)
Noninterest-bearing deposits
63.52 % Interest-bearing deposits Investment checking 594,347 4.61 % 517,976 4.42 % Money market 3,129,473 24.20 % 2,869,348 24.45 % Savings 551,248 4.26 % 492,096 4.19 % Time deposits 344,439 2.66 % 401,694 3.42 % Total Deposits$ 12,930,216 100.00 %$ 11,736,501 100.00 % The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled$8.31 billion atSeptember 30, 2021 , representing an increase of$855.3 million , or 11.47%, from noninterest-bearing deposits of$7.46 billion atDecember 31, 2020 . Noninterest-bearing deposits represented 64.27% of total deposits atSeptember 30, 2021 , compared to 63.52% of total deposits atDecember 31, 2020 . Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled$4.28 billion atSeptember 30, 2021 , representing an increase of$395.6 million , or 10.20%, from savings deposits of$3.88 billion atDecember 31, 2020 .
Time deposits totaled
60
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Borrowings We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of these funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As ofSeptember 30, 2021 andDecember 31, 2020 , total funds borrowed under these agreements were$659.6 million and$439.4 million , respectively, with a weighted average interest rate of 0.08% and 0.10%, respectively. We had no other borrowings atSeptember 30, 2021 , compared to$5.0 million and$10.0 million in short-term borrowings that were interest-free advances from the FHLB atDecember 31, 2020 andSeptember 31, 2020 , respectively. OnJune 15, 2021 , we redeemed our junior subordinated debentures of$25.8 million , representing the amounts that are due from the Company to CVB Statutory Trust III, which had a borrowing cost of approximately 1.60%. The debentures and the Trust Preferred Securities had an original maturity date of 2036. The interest rate on these debentures were based on three-month LIBOR plus 1.38%. AtSeptember 30, 2021 ,$6.26 billion of loans and$2.20 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as ofSeptember 30, 2021 . Maturity by Period One Year Four Years Less Than One Through Through Over Five Total Year Three Years Five Years Years (Dollars in thousands) Deposits (1)$ 12,930,216 $ 12,902,846 $ 17,736 $ 9,019 $ 615 Customer repurchase agreements (1) 659,579 659,579 - - - Deferred compensation 20,973 675 819 621 18,858 Operating leases 22,154 6,666 8,864 4,980 1,644 Affordable housing investment 1,350 1,259 55 30 6 Total$ 13,634,272 $ 13,571,025 $ 27,474 $ 14,650 $ 21,123 (1)
Amounts exclude accrued interest.
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.
Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current and retired employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under non-cancelable operating leases. Refer to Note 11 - Leases of the notes to the Company's unaudited condensed consolidated financial statements for a more detailed discussion about leases.
61
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
The following table summarizes the off-balance sheet items atSeptember 30, 2021 . Maturity by Period One Year Through Four Years Less Than Three Through Over Five Total One Year Years Five Years Years (Dollars in thousands) Commitment to extend credit: Commercial real estate$ 315,799 $ 49,608 $ 126,713 $ 123,577 $ 15,901 Construction 90,224 38,456 51,768 - - SBA 2,247 1,570 - - 677 SBA - PPP 916,126 697,971 139,212 10,629 68,314 Commercial and industrial 209,528 76,947 132,581 - - Dairy & livestock and agribusiness (1) 17,948 - - -17,948 SFR Mortgage 3,432 - 350 - 3,082 Consumer and other loans 123,899 18,026 4,227 4,809 96,837 Total commitment to extend credit 1,679,203 882,578 454,851 139,015 202,759 Obligations under letters of credit 45,779 39,728 6,051 - - Total$ 1,724,982 $ 922,306 $ 460,902 $ 139,015 $ 202,759 (1)
Total commitments to extend credit to agribusiness were
As ofSeptember 30, 2021 , we had commitments to extend credit of approximately$1.68 billion , and obligations under letters of credit of$45.8 million . Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers' creditworthiness individually. There was no provision or recapture of provision for unfunded loan commitments recorded for the three months endedSeptember 30, 2021 and$1.0 million in recapture of provision for unfunded loan commitments was recorded for the nine months endedSeptember 30, 2021 , compared to no provision or recapture of provision for unfunded loan commitments for the three and nine months endedSeptember 30, 2020 . The Company had a reserve for unfunded loan commitments of$8.0 million as ofSeptember 30, 2021 included in other liabilitiesSeptember 30, 2021 , compared to$9.0 million as ofDecember 31, 2020 .
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
62
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Capital Resources Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital. Total equity increased$55.9 million , or 2.79%, to$2.06 billion atSeptember 30, 2021 , compared to total equity of$2.01 billion atDecember 31, 2020 . The$55.9 million increase in equity was primarily due to$164.8 million in net earnings and$4.2 million for various stock based compensation items. This was partially offset by a$32.3 million decrease in other comprehensive income from the tax effected impact of the decrease in market value of available-for-sale securities and$73.4 million in cash dividends. During the third quarter, we repurchased 390,336 shares of common stock for$7.4 million , or an average repurchase price of$18.97 . Our tangible common equity ratio was 8.85% atSeptember 30, 2021 . During the third quarter of 2021, the Board of Directors of CVB declared quarterly cash dividends totaling$0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB's ability to pay cash dividends to its shareholders is subject to restrictions under federal andCalifornia law, including restrictions imposed by theFederal Reserve , and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures. OnAugust 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. For the year endedDecember 31, 2020 , the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. The Company terminated the 10b5-1 stock buyback plan onSeptember 23, 2021 as a result of the Company's prospective issuance of common stock related to the pending acquisition of Suncrest Bank. For the three and nine months endedSeptember 30, 2021 , the Company repurchased 390,336 shares of CVB common stock outstanding under this program. As ofSeptember 30, 2021 , we had 4,194,809 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program. The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 ("CET1") capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered "well-capitalized" for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. AtSeptember 30, 2021 , the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered "well-capitalized" for regulatory purposes. For further information about capital requirements and our capital ratios, see "Item 1. Business - Capital Adequacy Requirements" as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . AtSeptember 30, 2021 the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered "well-capitalized" for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of theFDIC and otherU.S. banking agencies.
The table below presents the Company's and the Bank's risk-based and leverage capital ratios for the periods presented.
September 30, 2021 December 31, 2020
Minimum
Required Plus CVB CVB
Adequately Capital Well Financial Citizens Financial Citizens
Capitalized Conservation Capitalized Corp. Business Corp. Business
Capital Ratios Ratios Buffer Ratios Consolidated Bank Consolidated Bank
Tier 1 leverage
capital ratio 4.00% 4.00% 5.00% 9.22% 8.94% 9.90% 9.58%
Common equity Tier
1 capital ratio 4.50% 7.00% 6.50% 14.94% 14.50% 14.77% 14.57%
Tier 1 risk-based
capital ratio 6.00% 8.50% 8.00% 14.94% 14.50% 15.06% 14.57%
Total risk-based
capital ratio 8.00% 10.50% 10.00% 15.74% 15.30% 16.24% 15.75%
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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 quarterly 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 $12.93 billion at
September 30, 2021 increased $1.19 billion , or 10.17%, over total deposits of
$11.74 billion at December 31, 2020 . This deposit growth was primarily due to
our customers maintaining greater liquidity.
In general, our liquidity is managed daily by controlling the level of liquid
assets as well as the use of funds provided by the cash flow from the investment
portfolio, loan demand and deposit fluctuations. Our definition of liquid assets
includes cash and cash equivalents in excess of minimum levels needed to fulfill
normal business operations, short-term investment securities, and other
anticipated near term cash flows from investments. Our balance sheet has
significant liquidity and our assets are funded almost entirely with core
deposits. Furthermore, we have significant off-balance sheet sources of
liquidity. To meet unexpected demands, lines of credit are maintained with
correspondent banks, the Federal Home Loan Bank and the Federal Reserve ,
although availability under these lines of credit are subject to certain
conditions. The Bank has available lines of credit exceeding $4 billion , most of
which is secured by pledged loans. The sale of investment securities can also
serve as a contingent source of funds. We can obtain additional liquidity from
deposit growth by offering competitive interest rates on deposits from both our
local and national wholesale markets. At September 30, 2021 , the Bank had no
short-term borrowings.
CVB is a holding company separate and apart from the Bank that must provide for
its own liquidity and must service its own obligations. On June 15, 2021 , we
redeemed our $25.8 million in subordinated debt with an interest rate of three
month LIBOR plus 1.38% at par. Substantially all of CVB's revenues are obtained
from dividends declared and paid by the Bank to CVB. There are statutory and
regulatory provisions that could limit the ability of the Bank to pay dividends
to CVB. In addition, our regulators could limit the ability of the Bank or CVB
to pay dividends or make other distributions.
Below is a summary of our average cash position and statement of cash flows for
the nine months ended September 30, 2021 and 2020. For further details see our
"Condensed Consolidated Statements of Cash Flows (Unaudited)" under Part I, Item
1 of this report.
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