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, 2021 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 starting in 2020 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 affected our customers and the communities we serve. We recorded a$23.5 million provision for credit losses for the year endedDecember 31, 2020 due to the forecast, at that time, of a severe economic downturn resulting from the onset of the COVID-19 pandemic. In response to the anticipated effects of the pandemic on theU.S. economy, theBoard of Governors of theFederal Reserve System ("FRB") took significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% in 2020 and established a program of purchases ofTreasury and mortgage-backed securities. A$19.5 million recapture of provision for credit losses was recorded in the first quarter of 2021, resulting from improvements in our economic forecast of certain macroeconomic variables resulting from significant monetary and fiscal stimulus, as well as the wide availability of vaccines. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included 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$1.1 billion . Greater than 99% of these loans have been granted forgiveness as ofJune 30, 2022 . In response to the COVID-19 pandemic and the CARES Act, we also implemented a short-term loan modification program in 2020 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 was 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 were not eligible for Second Draw loans. Further, maximum loan amounts were increased for accommodation and food service businesses. We originated approximately 1,900 round two loans totaling$420 million . The Paycheck Protection Program officially ended onMay 31, 2021 . As ofJune 30, 2022 , the remaining outstanding balance of PPP loans was$67.0 million , including$6.3 million for round one and$60.7 million for round two. 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 inthe 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")
•
Fair value estimates associated with Business Combinations
•
Impairment of Goodwill
•
Income Taxes
Our significant accounting policies are described in greater detail in our 2021
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, 2021 , which
are essential to understanding Management's Discussion and Analysis of Financial
Condition and Results of Operations.
37
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Recently Issued Accounting Pronouncements but Not Adopted as of June 30, 2022
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): Facilitation Reference Rate Reform on through inventoried our
of the Effects of Financial Reporting. The the instruments that reflect
Reference Rate amendments in this update 4th exposure to LIBOR,
Reform on provide temporary, optional Quarter created a framework to
Financial guidance to ease the potential 2022 manage the transition
Reporting burden in accounting for and established a
transitioning away from timeline for key
reference rates such as LIBOR. decisions and actions,
Issued March 2020 The amendments provide optional and started the
expedients and exceptions for transition from LIBOR in
applying GAAP to transactions 2021. The Company
affected by reference rate continues to assess the
reform if certain criteria are impacts of this
met. The amendments primarily transition and
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 and
classified as held-to-maturity. adjustable-rate loans
This guidance is effective that are indexed to
immediately and the amendments LIBOR. The Company
may be applied prospectively stopped originating
through December 31, 2022 . loans indexed to LIBOR
at the end of 2021,
while continuing to use
various alternative
indexes. We do not
expect this ASU to have
a material impact on the
Company's consolidated
financial statements.
ASU 2022-02, The FASB issued 2022-02 which 1st The adoption of this ASU Financial
eliminates recognition and Quarter is not expected to have
Instruments-Credit measurement guidance for TDRs 2023 a material impact on our
Losses (Topic by creditors in Subtopic consolidated financial
326): Troubled 310-40, Receivables-Troubled statements or liquidity,
Debt Debt Restructurings by although it will result
Restructurings and Creditors, while enhancing in additional disclosure
Vintage disclosure requirements for requirements related to
Disclosures certain loan refinancings and gross charge offs by
restructurings by creditors vintage year.
when a borrower is experiencing
Issued March 2022 financial difficulty, and to
require that an entity disclose
current-period gross write-offs
by year of origination (i.e.
the vintage year) for financing
receivables and net investments
in leases within the scope of
Subtopic 326-20, Financial
Instruments-Credit
Losses-Measured at Amortized
Cost. For entities that have
adopted ASU 2016-13, this ASU
is effective for interim and
reporting periods beginning
after December 15, 2022, and
should be applied
prospectively, except as
provided in the next sentence.
For the transition method
related to the recognition and
measurement of TDRs, an entity
has the option to apply a
modified retrospective
transition method, resulting in
a cumulative-effect adjustment
to retained earnings in the
period of adoption. Early
adoption is permitted.
ASU 2022-01, On March 28, 2022, the FASB 1st The adoption of this ASU
Derivatives and issued ASU 2022-01, which Quarter is not expected to have
Hedging (Topic establishes the portfolio-layer 2023 a material impact on our
815): Fair Value method, and expands an entity's consolidated financial
Hedging-Portfolio ability to achieve fair value statements.
Layer Method hedge accounting for hedges of
financial assets in a closed
portfolio. This ASU is
Issued March 2022 effective for public business
entities for interim and
reporting periods beginning
after December 15, 2022. Early
adoption is permitted on any
date on or after issuance of
this ASU for entities that have
already adopted ASU 2017-12 for
the corresponding period.
Entities may designate multiple
layer hedges only on a
prospective basis upon the
adoption of this ASU. If the
ASU is adopted in an interim
period, the cumulative-effect
adjustment of adopting the
amendments related to basis
adjustments shall be reflected
as of the beginning of the
fiscal year that includes the
interim period (that is, the
initial application date).
38
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OVERVIEW
For the second quarter of 2022, we reported net earnings of $59.1 million ,
compared with $45.6 million for the first quarter of 2022 and $51.2 million for
the second quarter of 2021. Diluted earnings per share were $0.42 for the second
quarter, compared to $0.31 for the prior quarter and $0.38 for the same period
last year. The second quarter of 2022 included $3.6 million in provision for
credit losses, compared to $2.5 million in provision for the first quarter and a
provision recapture of $2.0 million in the second quarter of 2021. Net income of
$59.1 million for the second quarter of 2022 produced an annualized return on
average equity ("ROAE") of 11.33%, an annualized return on average tangible
common equity ("ROATCE") of 18.67%, and an annualized return on average assets
("ROAA") of 1.39%. Our net interest margin, tax equivalent ("NIM"), was 3.16%
for the second quarter of 2022, while our efficiency ratio was 37.24%.
On January 7, 2022 , we completed the acquisition of Suncrest Bank ("Suncrest").
At close, Citizens Business Bank acquired loans with a fair value of $774.5
million , and assumed $512.8 million of noninterest-bearing deposits and $669.8
million of interest-bearing deposits. The second quarter of 2022 represents a
full quarter of financial results. The integration of Suncrest was completed
with the consolidation of two banking centers during the second quarter. As a
result of the Suncrest merger, we incurred $6.0 million in acquisition expenses
for the six months ended June 30, 2022 , including $375,000 during the second
quarter and $5.6 million in the first quarter of 2022.
The $15.2 million increase in the ACL from December 31, 2021 to June 30, 2022 is
comprised primarily of the $8.6 million ACL increase for the Suncrest purchased
credit deteriorated ("PCD") loans and a $6.1 million provision for credit
losses. The $6.1 million provision for credit losses, includes a provision for
credit loss of $4.9 million recorded on January 7, 2022 for the Suncrest
acquired loans that were not considered PCD. In addition, the ACL increased by
$498,000 in net recoveries during the six month period ending June 30, 2022 .
During the second quarter of 2022, we experienced credit charge-offs of $8,000
and total recoveries of $511,000 , resulting in net recoveries of $503,000 .
At June 30, 2022 , total assets of $16.76 billion increased by $876.3 million , or
5.52%, from total assets of $15.88 billion at December 31, 2021 .
Interest-earning assets of $15.28 billion at June 30, 2022 increased by $595.7
million , or 4.06%, when compared with $14.68 billion at December 31, 2021 . The
increase in interest-earning assets was primarily due to a $928.6 million
increase in investment securities and an $804.5 million increase in total loans,
partially offset by a $1.12 billion decrease in interest-earning balances due
from the Federal Reserve . The $804.5 million increase in total loans included
the $774.5 million of loans acquired at fair value from Suncrest.
Total investment securities were $6.04 billion at June 30, 2022 , an increase of
$928.6 million , or 18.17%, from $5.11 billion at December 31, 2021 . We continued
to deploy some of our excess liquidity during the second quarter into additional
investment securities by purchasing approximately $356 million in new securities
in the second quarter of 2022, with an expected average yield of approximately
3.75%. During the six month period ending June 30, 2022 , we purchased
approximately $1.5 billion of investment securities. At June 30, 2022 ,
investment securities held-to-maturity ("HTM") totaled $2.41 billion . At June
30, 2022 , investment securities available-for-sale ("AFS") totaled $3.63
billion , inclusive of a pre-tax net unrealized loss of $346.3 million . HTM
securities increased by $486.3 million , or 25.25%, and AFS securities increased
by $442.2 million , or 13.89%, from December 31, 2021 . Our tax equivalent yield
on investments was 1.93% for the quarter ended June 30, 2022 , compared to 1.70%
for the first quarter of 2022 and 1.55% for the second quarter of 2021.
Total loans and leases, at amortized cost, of $8.69 billion at June 30, 2022
increased by $804.5 million , or 10.20%, from December 31, 2021 . The increase in
total loans included $774.5 million of loans acquired at fair value from
Suncrest in the first quarter of 2022. After adjusting for acquired loans,
seasonality related to our Dairy & Livestock loans, and forgiveness of PPP loans
("core loans"), our core loans grew by $319.8 million , or approximately 8%
annualized from December 31, 2021 . The $319.8 million core loan growth included
$273.1 million in commercial real estate loans, $44.1 million in commercial and
industrial loans, $19.3 million in SFR mortgage loans, and $9.8 million in
consumer and other loans, partially offset by decreases of $18.4 million in
construction loans and $11.6 million in SBA loans. The majority of the $130.6
million decrease in dairy & livestock loans was seasonal. Our yield on loans was
4.31% for the quarter ended June 30, 2022 , compared to 4.27% for the first
quarter of 2022 and 4.46% for the second quarter of 2021. The significant
decline in interest rates from the beginning of the pandemic continued to have a
negative impact on loan yields, which after excluding discount accretion and the
impact from PPP loans, our core loan yield declined by 13 basis points when
compared to the second quarter of 2021. However, the recent increases in
interest rates, including a 125 basis point increase in the Fed Funds rate
between March 31 , and June 30, 2022 contributed to a nine basis point increase
in core loan yields from the first quarter of 2022 to the second quarter.
Interest and fee income from PPP loans was approximately $1.4 million in the
second quarter of 2022, compared to $2.9 million in the first quarter of 2022
and $8.1 million in the second quarter of 2021.
39
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Noninterest-bearing deposits were $8.88 billion at June 30, 2022 , an increase of
$777.2 million , or 9.59% when compared to $8.10 billion at December 31, 2021 and
increased $815.8 million , or 10.12%, when compared to $8.07 billion at June 30,
2021 . The increase in noninterest-bearing deposits includes the
noninterest-bearing deposits assumed from Suncrest of $512.8 million . At June
30, 2022 , noninterest-bearing deposits were 63.11% of total deposits, compared
to 62.86% at March 31, 2022 and 63.66% at June 30, 2021 .
Interest-bearing deposits were $5.19 billion at June 30, 2022 , an increase of
$318.6 million , or 6.54%, when compared to $4.87 billion at December 31, 2021
and an increase of $587.3 million , or 12.76%, when compared to $4.60 billion at
June 30, 2021 . The increase in interest-bearing deposits included the
interest-bearing deposits assumed from Suncrest of $669.8 million . Customer
repurchase agreements totaled $502.8 million at June 30, 2022 , compared to
$642.4 million at December 31, 2021 and $578.2 million at June 30, 2021 . Our
average cost of total deposits including customer repurchase agreements of 0.04%
increased from 0.03% for the first quarter of 2022 and decreased from 0.05% for
the second quarter of 2021. The one basis point increase in the cost of deposits
and customer repurchase agreements from the first quarter of 2022 was the net
result of an increase in the cost of interest-bearing deposits from 0.08% to
0.09% and a $202.3 million quarter-over-quarter increase in average
noninterest-bearing deposits. Compared to the second quarter of 2021, the one
basis point decrease was the result of a 3 basis point decline in the cost of
interest bearing deposits, as well as noninterest-bearing deposits growing on
average by $1.22 billion .
We had no borrowings at June 30, 2022 , December 31, 2021 and June 30, 2021 . Our
average cost of funds increased from 0.03% in the first quarter of 2022 to 0.04%
in the second quarter of 2022 and decreased from 0.05% in the second quarter of
2021.
The allowance for credit losses totaled $80.2 million at June 30, 2022 , compared
to $65.0 million at December 31, 2022 . At June 30, 2022 , ACL as a percentage of
total loans and leases outstanding was 0.92%. This compares to 0.82% and 0.86%
at December 31, 2021 and June 30, 2021 , respectively. When PPP loans are
excluded, the ACL as a percentage of total loans and leases outstanding was
0.93% at June 30, 2022 , compared to 0.84% at December 31, 2021 and 0.94% at June
30, 2021 .
The Company's total equity was $1.98 billion at June 30, 2022 . This represented
an overall decrease of $99.3 million from total equity of $2.08 billion at
December 31, 2021 . Increases to equity included $197.1 million for issuance of
8.6 million shares to acquire Suncrest and $104.6 million in net earnings.
Decreases included $52.2 million in cash dividends and a $242.9 million decrease
in other comprehensive income from the tax effected impact of the decline in
market value of available-for-sale securities. During 2022, we executed on a $70
million accelerated stock repurchase program and retired 2,993,551 shares of
common stock at an average price of $23.38 . We also repurchased, under our
10b5-1 stock repurchase plan, 1,682,537 shares of common stock, at an average
repurchase price of $23.37 , totaling $39.3 million . Our tangible book value per
share at June 30, 2022 was $8.51 .
Our capital ratios under the revised capital framework referred to as Basel III
remain well-above regulatory requirements. As of June 30, 2022 , the Company's
Tier 1 leverage capital ratio was 8.8%, common equity Tier 1 ratio was 13.4%,
Tier 1 risk-based capital ratio was 13.4%, and total risk-based capital ratio
was 14.2%. We did not elect to phase in the impact of CECL on regulatory
capital, as allowed under the interim final rule of the FDIC and other U.S.
banking agencies. Refer to our Analysis of Financial Condition - Capital
Resources.
40
-------------------------------------------------------------------------------- Acquisition Related OnJanuary 7, 2022 , the Company completed the acquisition of Suncrest, headquartered inVisalia, California . The Company acquired all of the assets and assumed all of the liabilities of Suncrest in a stock and cash transaction for$39.6 million in cash and$197.1 million in stock with the issuance of 8.6 million shares of the Company's common stock. As a result, Suncrest merged with and into the Bank, the principal subsidiary of CVB. At close, Suncrest had seven branch locations and two loan production offices inCalifornia's Central Valley and theSacramento metro area, which opened asCitizens Business Bank locations onJanuary 10, 2022 . At close, the total fair value of assets acquired approximated$1.38 billion in total assets, including$329.0 million of cash and cash equivalents, net of cash paid,$131.1 million of investment securities, and$765.9 million in net loans. The acquired loans were recorded at fair value, which reflected a net discount of 1.5% for the entire loan portfolio. Approximately 30% of the acquired loans are considered PCD loans. An allowance for credit loss of$8.6 million was established for these PCD loans at acquisition. In addition, the acquired PCD loans were further discounted by almost 2% to adjust them to fair value. Non-PCD loans were valued at a total premium of 0.3%, net of a credit discount of 1.5%. We recorded a loan loss provision to establish a day one allowance for credit losses of$4.9 million on the non-PCD loans. The second quarter of 2022 represents a full quarter of financial results. The integration of Suncrest, including the conversion of core systems in the first quarter of 2022, was completed with the consolidation of two banking centers during the second quarter. 41 -------------------------------------------------------------------------------- ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
Three Months Ended
June 30, March 31, Variance
2022 2022 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 121,940 $ 112,840 $ 9,100 8.06 %
(Provision for) recapture of credit (3,600 ) (2,500 ) (1,100 ) -44.00 %
losses
Noninterest income 14,670 11,264 3,406 30.24 %
Noninterest expense (50,871 ) (58,238 ) 7,367 12.65 %
Income taxes (23,081 ) (17,806 ) (5,275 ) -29.62 %
Net earnings $ 59,058 $ 45,560 $ 13,498 29.63 %
Earnings per common share:
Basic $ 0.42 $ 0.31 $ 0.11
Diluted $ 0.42 $ 0.31 $ 0.11
Return on average assets 1.39 % 1.06 % 0.33 %
Return on average shareholders' 11.33 % 8.24 % 3.09 %
equity
Efficiency ratio 37.24 % 46.93 % -9.69 %
Noninterest expense to average 1.20 % 1.36 % -0.16 %
assets
Three Months Ended
June 30, Variance
2022 2021 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 121,940 $ 105,388 $ 16,552 15.71 %
(Provision for) recapture of credit (3,600 ) 2,000 (5,600 ) -280.00 %
losses
Noninterest income 14,670 10,836 3,834 35.38 %
Noninterest expense (50,871 ) (46,545 ) (4,326 ) -9.29 %
Income taxes (23,081 ) (20,500 ) (2,581 ) -12.59 %
Net earnings $ 59,058 $ 51,179 $ 7,879 15.39 %
Earnings per common share:
Basic $ 0.42 $ 0.38 $ 0.04
Diluted $ 0.42 $ 0.38 $ 0.04
Return on average assets 1.39 % 1.35 % 0.04 %
Return on average shareholders' 11.33 % 10.02 % 1.31 %
equity
Efficiency ratio 37.24 % 40.05 % -2.81 %
Noninterest expense to average 1.20 % 1.23 % -0.03 %
assets
Six Months Ended
June 30, Variance
2022 2021 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 234,780 $ 208,856 $ 25,924 12.41 %
(Provision for) recapture of credit (6,100 ) 21,500 (27,600 ) -128.37 %
losses
Noninterest income 25,934 24,517 1,417 5.78 %
Noninterest expense (109,109 ) (93,708 ) (15,401 ) -16.44 %
Income taxes (40,887 ) (46,093 ) 5,206 11.29 %
Net earnings $ 104,618 $ 115,072 $ (10,454 ) -9.08 %
Earnings per common share:
Basic $ 0.74 $ 0.85 $ (0.11 )
Diluted $ 0.74 $ 0.85 $ (0.11 )
Return on average assets 1.23 % 1.56 % -0.33 %
Return on average shareholders' 9.74 % 11.37 % -1.63 %
equity
Efficiency ratio 41.85 % 40.15 % 1.70 %
Noninterest expense to average 1.28 % 1.27 % 0.01 %
assets
42
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Return on Average Tangible Common Equity Reconciliation (Non-GAAP)
The return on average tangible common equity is a non-GAAP disclosure. The
Company uses certain non-GAAP financial measures to provide supplemental
information regarding the Company's performance. The following is a
reconciliation of net income, adjusted for tax-effected amortization of
intangibles, to net income computed in accordance with GAAP; a reconciliation of
average tangible common equity to the Company's average stockholders' equity
computed in accordance with GAAP; as well as a calculation of return on average
tangible common equity.
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
2022 2022 2021 2022 2021
(Dollars in thousands)
Net Income $ 59,058 $ 45,560 $ 51,179 $ 104,618 $ 115,072
Add: Amortization of intangible
assets 1,998 1,998 2,167 3,996 4,334
Less: Tax effect of amortization
of intangible assets (1) (591 ) (591 ) (641 ) (1,181 ) (1,281 )
Tangible net income $ 60,465 $ 46,967 $ 52,705 $ 107,433 $ 118,125
Average stockholders' equity $ 2,091,454 $ 2,243,335 $ 2,048,956 $ 2,166,975 $ 2,040,861
Less: Average goodwill (765,822 ) (759,014 ) (663,707 ) (762,437 ) (663,707 )
Less: Average intangible assets (26,381 ) (28,190 ) (30,348 ) (27,280 ) (31,463 )
Average tangible common equity $ 1,299,251 $ 1,456,131 $ 1,354,901 $ 1,377,258 $ 1,345,691
Return on average equity,
annualized 11.33 % 8.24 % 10.02 % 9.74 % 11.37 %
Return on average tangible
common equity, annualized 18.67 % 13.08 % 15.60 % 15.73 % 17.70 %
(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 six months endedJune 30, 2022 and 2021. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability and Market Risk Management - Interest Rate Sensitivity Management included herein. 43 -------------------------------------------------------------------------------- The tables below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. Three Months Ended June 30, 2022 2021 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable$ 3,708,306 $ 16,863 1.85 %$ 2,832,787 $ 9,226 1.35 % Tax-advantaged 27,770 179 3.10 % 29,765 184 2.97 % Held-to-maturity securities: Taxable 2,078,983 9,978 1.93 % 859,175 4,007 1.87 % Tax-advantaged 288,978 1,736 2.92 % 203,667 1,123 2.67 % Investment in FHLB stock 18,012 273 6.08 % 17,688 283 6.42 % Interest-earning deposits with other institutions 804,147 1,463 0.73 % 1,738,785 479 0.11 % Loans (2) 8,634,575 92,770 4.31 % 8,249,481 91,726 4.46 % Total interest-earning assets 15,560,771 123,262 3.20 % 13,931,348 107,028 3.11 % Total noninterest-earning assets 1,446,177 1,258,796 Total assets$ 17,006,948 $ 15,190,144 INTEREST-BEARING LIABILITIES Savings deposits (3)$ 4,887,799 $ 1,136 0.09 %$ 4,231,812 $ 1,098 0.10 % Time deposits 361,463 65 0.07 % 401,291 327 0.33 % Total interest-bearing deposits 5,249,262 1,201 0.09 % 4,633,103 1,425 0.12 % FHLB advances, other borrowings, and customer repurchase agreements 581,613 121 0.08 % 607,977 215 0.14 %
Interest-bearing liabilities 5,830,875 1,322 0.09 %
5,241,080 1,640 0.13 % Noninterest-bearing deposits 8,923,043 7,698,640 Other liabilities 161,576 201,468 Stockholders' equity 2,091,454 2,048,956 Total liabilities and stockholders' equity$ 17,006,948 $ 15,190,144 Net interest income$ 121,940 $ 105,388 Net interest spread - tax equivalent 3.11 % 2.98 % Net interest margin 3.15 % 3.05 % Net interest margin - tax equivalent 3.16 % 3.06 % (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months endedJune 30, 2022 andJune 30, 2021 . The non TE rates were 1.91% and 1.52% for the three months endedJune 30, 2022 and 2021, respectively. (2) Includes loan fees of$2.1 million and$6.7 million for the three months endedJune 30, 2022 and 2021, respectively. Prepayment penalty fees of$2.4 million and$3.4 million are included in interest income for the three months endedJune 30, 2022 and 2021, respectively. (3) Includes interest-bearing demand and money market accounts. 44 --------------------------------------------------------------------------------
Six Months Ended June 30,
2022 2021
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable $ 3,613,093 $ 29,512 1.68 % $ 2,679,052 $ 18,194 1.41 %
Tax-advantaged 28,916 362 3.00 % 29,961 375 2.99 %
Held-to-maturity securities:
Taxable 2,022,005 19,082 1.90 % 720,596 6,818 1.90 %
Tax-advantaged 277,129 3,295 2.88 % 201,519 2,252 2.70 %
Investment in FHLB stock 18,470 644 7.03 % 17,688 500 5.70 %
Interest-earning deposits with
other institutions 1,232,928 2,236 0.37 % 1,701,695 892 0.11 %
Loans (2) 8,567,876 182,231 4.29 % 8,259,824 183,521 4.48 %
Total interest-earning assets 15,760,417 237,362 3.06 % 13,610,335 212,552 3.18 %
Total noninterest-earning
assets 1,433,991 1,239,953
Total assets $ 17,194,408 $ 14,850,288
INTEREST-BEARING LIABILITIES
Savings deposits (3) $ 4,984,664 $ 2,189 0.09 % $ 4,129,598 $ 2,296 0.11 %
Time deposits 371,648 139 0.08 % 404,644 941 0.47 %
Total interest-bearing
deposits 5,356,312 2,328 0.09 % 4,534,242 3,237 0.14 %
FHLB advances, other
borrowings, and customer
repurchase agreements 630,526 254 0.08 % 599,124 459 0.15 %Interest-bearing liabilities 5,986,838 2,582 0.09 %
5,133,366 3,696 0.15 % Noninterest-bearing deposits 8,822,444 7,470,832 Other liabilities 218,151 205,229 Stockholders' equity 2,166,975 2,040,861 Total liabilities and stockholders' equity$ 17,194,408 $ 14,850,288 Net interest income$ 234,780 $ 208,856 Net interest spread - tax equivalent 2.98 % 3.03 % Net interest margin 3.02 % 3.11 % Net interest margin - tax equivalent 3.03 % 3.12 % (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the six months endedJune 30, 2022 and 2021. The non TE rates were 1.79% and 1.56% for the six months endedJune 30, 2022 and 2021, respectively. (2) Includes loan fees of$5.4 million and$15.6 million for the six months endedJune 30, 2022 and 2021, respectively. Prepayment penalty fees of$4.6 million and$5.0 million are included in interest income for the six months endedJune 30, 2022 and 2021, respectively. (3) Includes interest-bearing demand and money market accounts. The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume and reflect an adjustment for the number of days as appropriate. 45 -------------------------------------------------------------------------------- Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income Comparison of Three Months Ended June 30, 2022 Compared to 2021 Increase (Decrease) Due to Rate/ Volume Rate Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities$ 3,082 $ 3,397 $ 1,158 $ 7,637 Tax-advantaged investment (12 ) 8 (1 ) (5 )
securities
Held-to-maturity securities: Taxable investment securities 5,642 130 199 5,971 Tax-advantaged investment 462 106 45 613 securities Investment in FHLB stock 5 (15 ) - (10 ) Interest-earning deposits with other institutions (257 ) 2,684 (1,443 ) 984 Loans 4,282 (3,094 ) (144 ) 1,044 Total interest income 13,204 3,216 (186 ) 16,234 Interest expense: Savings deposits 170 (114 ) (18 ) 38 Time deposits (32 ) (255 ) 25 (262 ) FHLB advances, other borrowings, and (9 ) (87 ) 2 (94 ) customer repurchase agreements Total interest expense 129 (456 ) 9 (318 ) Net interest income$ 13,075 $ 3,672 $ (195 ) $ 16,552 Comparison of Six Months Ended June 30, 2022 Compared to 2021 Increase (Decrease) Due to Rate/ Volume Rate Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities$ 13,023 $ 7,079 $ (8,784 ) $ 11,318 Tax-advantaged investment (26 ) - 13 (13 )
securities
Held-to-maturity securities: Taxable investment securities 24,727 28 (12,491 ) 12,264 Tax-advantaged investment 1,675 299 (931 ) 1,043 securities Investment in FHLB stock 45 235 (136 ) 144 Interest-earning deposits with other institutions (496 ) 4,425 (2,585 ) 1,344 Loans 13,800 (15,811 ) 721 (1,290 ) Total interest income 52,748 (3,745 ) (24,193 ) 24,810 Interest expense: Savings deposits 959 (973 ) (93 ) (107 ) Time deposits (155 ) (1,592 ) 945 (802 ) FHLB advances, other borrowings, and 48 (434 ) 181 (205 ) customer repurchase agreements Total interest expense 852 (2,999 ) 1,033 (1,114 ) Net interest income$ 51,896 $ (746 ) $ (25,226 ) $ 25,924 46
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Second Quarter of 2022 Compared to the Second Quarter of 2021
Net interest income, before provision for credit losses, of$121.9 million for the second quarter of 2022 increased$16.6 million , or 15.71%, compared to$105.4 million for the second quarter of 2021. Interest-earning assets increased on average by$1.63 billion , or 11.70%, from$13.93 billion for the second quarter of 2021 to$15.56 billion for the second quarter of 2022. Our net interest margin (TE) was 3.16% for the second quarter of 2022, compared to 3.06% for the second quarter of 2021. The increase in our net interest margin was the result of the increase in our average earning asset yield, while maintaining our very low cost of funds that declined from 5 basis points in the second quarter of 2021 to 4 basis points in the second quarter of 2022, during a period of time that theFederal Reserve increased Fed Funds by 150 basis points. Total interest income was$123.3 million for the second quarter of 2022, which was$16.2 million , or 15.17%, higher than the same period of 2021. The increase was due to a combination of growth in average interest-earning assets of$1.63 billion and expanding earning asset yield by 9 basis points, to 3.20% for the second quarter of 2022, compared to 3.11% for the second quarter of 2021. Year-over-year earning asset growth resulted from both the acquisition of Suncrest onJanuary 7, 2022 , in addition to core loan and deposit growth over the last year. The 9 basis point increase in the average interest-earning asset yield compared to the second quarter of 2021, was impacted by higher yields on investments and a change in asset mix. Excess liquidity held at theFederal Reserve was invested into higher yielding investments, which increased from 28.18% of average earning assets in the second quarter of 2021 to 39.23% in the second quarter of 2022. Throughout the first half of 2022, we deployed some of the excess liquidity on the balance sheet at the end of 2021 into additional investment securities by purchasing approximately$1.5 billion in securities. Total investment income of$28.8 million increased$14.2 million , or 97.77%, from the second quarter of 2021. Investment income growth resulted from both higher levels of investment securities and higher investment yields. Investment yields increased from 1.55% in the second quarter of 2021 to 1.93% in the second quarter of 2022. Total interest income and fees on loans for the second quarter of 2022 was$92.8 million , an increase of$1.0 million , or 1.14%, from the second quarter of 2021. The increase in interest income and fees on loans year-over-year was primarily due to a$385.1 million increase in average loans, offset by lower loan yields of 15 basis points, primarily resulting from lower loan yields on new loan originations during a time period of very low interest rates. Additionally, interest and fee income from PPP loans declined by$6.7 million from$8.1 million in the second quarter of 2021. Discount accretion on acquired loans decreased by$1.6 million compared to the second quarter of 2021. The decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion and the impact from PPP loans ("core") loan yield declined by 13 basis points compared to the second quarter of 2021. Interest income from investment securities was$28.8 million , an increase of$14.2 million , or 97.77%, from the second quarter of 2021. Investment income growth resulted from higher levels of investment securities as a result of purchases of investment securities funded by the growth in the Bank's deposits. Excess liquidity held at theFederal Reserve was invested into higher yielding investments, while our balance at theFederal Reserve averaged$797.3 million for the second quarter of 2022, compared to more than$1.7 billion in the second quarter of 2021. During the second quarter of 2022, we purchased approximately$356 million in investment securities, with expected yields of approximately 3.75%. With interest rates increasing during the second quarter of 2022, our tax-equivalent yield on investment securities increased from 1.55% in the second quarter of 2021 to 1.93% for the second quarter of 2022. Interest expense of$1.3 million for the second quarter of 2022, decreased$318,000 , or 19.39%, compared to the second quarter of 2021. Although short-term interest rates were higher during the second quarter of 2022, compared to the prior year, the average rate paid on interest-bearing liabilities decreased by 4 basis points, to 0.09% for the second quarter of 2022 from 0.13% for the second quarter of 2021. Average interest-bearing liabilities were$589.8 million higher for the second quarter of 2022 when compared to the second quarter of 2021. On average, noninterest-bearing deposits were 62.96% of our total deposits for the second quarter of 2022, compared to 62.43% for the second quarter of 2021. In comparison to the second quarter of 2021, our overall cost of funds decreased by one basis point, partially due to growth in average noninterest-bearing deposits of$1.22 billion , compared to the increase in average interest-bearing deposits of$616.2 million . 47
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Six Months of 2022 Compared to Six Months of 2021
Net interest income, before provision for credit losses, was$234.8 million for the six months endedJune 30, 2022 , an increase of$25.9 million , or 12.41%, compared to$208.9 million for the same period of 2021. Interest-earning assets increased on average by$2.15 billion , or 15.80%, from$13.61 billion for the six months endedJune 30, 2021 to$15.76 billion for the same period in the current year. Our net interest margin (TE) was 3.03% for the first six months of 2022, compared to 3.12% for the same period of 2021. Interest income for the six months endedJune 30, 2022 , was$237.4 million , which represented a$24.8 million , or 11.67%, increase when compared to the same period of 2021. Compared to the first six months of 2021, average interest-earning assets increased by$2.15 billion , while the yield on interest-earning assets decreased by 12 basis points. Year-over-year earning asset growth resulted from both the acquisition of Suncrest onJanuary 7, 2022 , in addition to core loan and deposit growth over the last year. The 12 basis point decrease in the earning asset yield over the first six months of 2021, resulted from a 19 basis point decline in loan yields from 4.48% for the first six months of 2021 to 4.29% for the same period of 2022, as well as a change in the mix of earning assets. Average loans as a percentage of earning assets declined from 60.69% for the first six months of 2021 to 54.36% for the first six months of 2022. Throughout the first half of 2022, we deployed some of our excess liquidity on our balance sheet at the end of 2021 into additional investment securities by purchasing approximately$1.5 billion in securities during the first six months of 2022. Average investments as a percentage of earning assets increased to 37.70% for the first six months of 2022 from 26.68% for the same period of 2021. The non tax-equivalent yield on investment securities was 1.79% for the six months endedJune 30, 2022 , compared to 1.56% for the same period of 2021. Total interest income and fees on loans for the first six months of 2022 of$182.2 million decreased$1.3 million , or 0.70%, when compared to the same period of 2021. Although average loans increased$308.1 million for the first six months of 2022 when compared with the same period of 2021, the decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion and the impact from PPP loans ("core") loan yield declined by 13 basis points compared to the first six months of 2021. In addition to the decrease in core loan yields, the first six months of 2022 reflected a$3.8 million decrease in discount accretion on acquired loans when compared to the first six months of 2021. Additionally, the PPP loans generated approximately$4.2 million in loan fee and interest income during the first six months of 2022, compared to$18.4 million for the same period in 2021. Interest income from investment securities of$52.3 million for the six months endedJune 30, 2022 , increased$24.6 million from$27.6 million for the first six months of 2021. This increase was the combined result of a$2.31 billion increase in average investment securities and a 23 basis point increase in the yield on securities, compared to the first six months of 2021. Interest expense of$2.6 million for the six months endedJune 30, 2022 , decreased by$1.1 million from the same period of 2021. The average rate paid on interest-bearing liabilities decreased by 6 basis points, to 0.09% for the first six months of 2022, from 0.15% for the same period of 2021. The rate on interest-bearing deposits for the first six months of 2022 decreased by 5 basis points from the same period in 2021. Average interest-bearing liabilities were$853.5 million higher for the first six months of 2022 when compared with the same period of 2021. Average interest-bearing deposits grew by$822.1 million when compared to the first six months of 2021. Average noninterest-bearing deposits represented 62.22% of our total deposits for the six months endedJune 30, 2022 , compared to 62.23% for the same period of 2021. Total cost of funds for the first six months of 2022 was 0.04%, compared with 0.06% for the same period of 2021.
Provision for (Recapture of) Credit Losses
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management's assessment of expected lifetime losses in the loan portfolio at the balance sheet date.
The allowance for credit losses on loans totaled$80.2 million atJune 30, 2022 , compared to$65.0 million atDecember 31, 2021 and$69.3 million as ofJune 30, 2021 . The second quarter of 2022 included$3.6 million in provision for credit losses, compared to a$2.5 million in provision for credit losses in the first quarter of 2022. The$2.5 million provision for credit losses in the first quarter of 2022 was the net result of the$4.9 million provision for credit losses recorded for the acquisition of the Suncrest non-PCD loans onJanuary 7, 2022 and a subsequent$2.4 million recapture of provision due to the net impact of improvements in the underlying loan characteristics of certain classified loans and the impact of changes in the economic forecast of certain macroeconomic variables. A$2.0 million recapture of provision for credit losses was recorded in the second quarter of 2021. The$3.6 million provision for credit losses in the most recent quarter was the result of core loan growth of approximately$155 million fromMarch 31, 2022 toJune 30, 2022 and an increase in projected loss rates 48 -------------------------------------------------------------------------------- from a deteriorating economic forecast that assumes very modest growth in GDP, lower commercial real estate values and an increase in unemployment for the next 18 to 24 months. The$3.6 million provision for credit losses was also impacted by net recoveries of$503,000 during the second quarter and a decline in specific loan loss reserves of approximately$900,000 . For the six months endedJune 30, 2022 , we recorded$6.1 million in provision for credit losses, and experienced credit charge-offs of$24,000 and total recoveries of$522,000 , resulting in net recoveries of$498,000 . For the six months endedJune 30, 2021 , we recaptured$21.5 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 six months endedJune 30, 2021 , we experienced credit charge-offs of$3.0 million and total recoveries of$135,000 , resulting in net charge-offs of$2.9 million . AtJune 30, 2022 , ACL as a percentage of total loans and leases outstanding, at amortized cost, was 0.92%, or 0.93% of total loans when excluding the$67.0 million in PPP loans. This compares to 0.82% and 0.84% atDecember 31, 2021 , respectively. As ofJune 30, 2022 , remaining discounts on acquired loans were$11.1 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 that the pandemic, geopolitical events inEurope , and overall supply chain issues may have on inflation, interest rates, and the overall economy and resulting impact on our 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, Bank Owned Life Insurance ("BOLI"), 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 Six Months Ended
June 30, Variance June 30, Variance
2022 2021 $ % 2022 2021 $ %
(Dollars in thousands)
Noninterest income:
Service charges on
deposit
accounts $ 5,333 $ 4,169 $ 1,164 27.92 %
2,962 3,167 (205 ) -6.47 % 5,784 5,778 6 0.10 %
Bankcard services 310 533 (223 ) -41.84 % 726 883 (157 ) -17.78 %
BOLI income 603 1,240 (637 ) -51.37 % 1,952 5,864 (3,912 ) -66.71 %
Swap fee income - - - - - 215 (215 ) -100.00 %
Gain on OREO, net - 48 (48 ) -100.00 % - 477 (477 ) -100.00 %
Other 5,462 1,679 3,783 225.31 % 7,080 3,146 3,934 125.05 %
Total noninterest
income $ 14,670 $ 10,836 $ 3,834 35.38 % $ 25,934 $ 24,517 $ 1,417 5.78 %
Second Quarter of 2022 Compared to the Second Quarter of 2021
Noninterest income was$14.7 million for the second quarter of 2022, compared with$10.8 million for the second quarter of 2021.The second quarter of 2022 included$2.7 million in net gains on the sale of properties associated with banking centers, including$2.4 million from the sale of one property. In addition, the second quarter of 2022 reflected a$1.0 million net increase in income on our CRA investments, including a$1.3 million gain from a distribution related to one of these investments. Service charges on deposit accounts increased by$1.2 million from the prior year quarter, due to increases in the volume of services provided to our business customers and the addition of customers from the Suncrest acquisition. 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) 49 -------------------------------------------------------------------------------- plans, mutual funds, insurance and other non-insured investment products. AtJune 30, 2022 , CitizensTrust had approximately$3.14 billion in assets under management and administration, including$2.32 billion in assets under management. CitizensTrust generated fees of$3.0 million for the second quarter of 2022, compared to$3.2 million for the same period of 2021. Market conditions, both equity and fixed income, have negatively impacted assets under management values and trust fee income. 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. The policies consist of general account, separate account, and hybrid policies. 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 second quarter of 2022 and 2021. Second quarter income from BOLI declined by$637,000 compared to the second quarter of 2021, due to lower returns on separate account policies that are used to fund deferred compensation liabilities. 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 9 - Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information). Generally speaking, our volume of interest rate swaps is impacted by the shape of the yield curve, with a relatively flat yield curve more conducive to a higher volume of swaps. There were no executed swap agreements related to new loan originations for the second quarter of 2022 and the second quarter of 2021.
Six Months of 2022 Compared to Six Months of 2021
The$1.4 million increase in noninterest income was primarily due to$2.4 million in net gain on the sale of one of our properties and a$1.3 million gain from a distribution related to one of our CRA investments during the first six months of 2022. Service charges on deposit accounts increased by$2.2 million from the first six months of 2021. BOLI income declined from the prior year period, as the first six months of 2021 included$3.5 million in death benefits that exceeded the asset value of certain BOLI policies.
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
2022 2021 $ % 2022 2021 $ %
(Dollars in thousands)
Noninterest expense:
Salaries and employee
benefits $ 31,553 $ 28,836 $ 2,717 9.42 % $ 64,209 $ 58,542 $ 5,667 9.68 %
Occupancy 4,483 4,256 227 5.33 % 9,031 8,363 668 7.99 %
Equipment 1,084 693 391 56.42 % 2,107 1,449 658 45.41 % Professional services 2,305 2,248 57 2.54 %
4,350 4,416 (66 ) -1.49 %
Computer software
expense 3,103 2,657 446 16.79 % 6,898 5,501 1,397 25.40 %
Marketing and
promotion 1,638 1,799 (161 ) -8.95 % 3,096 2,524 572 22.66 %
Amortization of
intangible
assets 1,998 2,167 (169 ) -7.80 % 3,996 4,334 (338 ) -7.80 % Telecommunications expense
516 526 (10 ) -1.90 % 1,070 1,078 (8 ) -0.74 %
Regulatory assessments 1,379 1,139 240 21.07 %
2,768 2,198 570 25.93 %
Insurance 494 455 39 8.57 % 982 908 74 8.15 %
Loan expense 171 311 (140 ) -45.02 % 539 549 (10 ) -1.82 %
OREO expense - 33 (33 ) -100.00 % (3 ) 42 (45 ) -107.14 %
(Recapture of)
provision for
unfunded loan
commitments - (1,000 ) 1,000 100.00 % - (1,000 ) 1,000 100.00 %
Directors' expenses 365 389 (24 ) -6.17 % 729 768 (39 ) -5.08 %
Stationery and
supplies 232 241 (9 ) -3.73 % 466 485 (19 ) -3.92 %
Acquisition related
expenses 375 375 - 6,013 - 6,013 -
Other 1,175 1,795 (620 ) -34.54 % 2,858 3,551 (693 ) -19.52 % Total noninterest expense
$ 50,871 $ 46,545 $ 4,326 9.29 %
Noninterest expense to
average
assets 1.20 % 1.23 % 1.28 % 1.27 %
Efficiency ratio (1) 37.24 % 40.05 % 41.85 % 40.15 %
50
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(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 1.20% for the second quarter of 2022, compared to 1.23% for the second quarter of 2021. The decline in this ratio for 2022 reflects the$1.82 billion growth in average assets that resulted in growth in assets that exceeded the 9% growth in expense. 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 37.24% for the second quarter of 2022, compared to 40.05% for the second quarter of 2021.
Second Quarter of 2022 Compared to the Second Quarter of 2021
Noninterest expense of$50.9 million for the second quarter of 2022 was$4.3 million , or 9.29%, higher than the second quarter of 2021. The$4.3 million increase year-over-year was primarily the result of expense growth associated with the acquisition ofSuncrest Bank , including an increase of$2.7 million in salaries and employee benefits and an increase in occupancy and equipment of$618,000 . Occupancy and equipment expense growth was primarily due to the addition of seven banking centers resulting from the acquisition of Suncrest at the beginning of 2022, two of which were consolidated at the end of the second quarter. Acquisition expense related to the merger of Suncrest was$375,000 for the second quarter of 2022. The systems integration and consolidations associated with the Suncrest's acquisition were completed by the end of the second quarter. The second quarter of 2021 included a$1.0 million recapture of provision for unfunded loan commitments. The recapture was the result of our improving economic forecast and the resulting impact from the macroeconomic variables on lower expected losses from unfunded commitments.
Six Months of 2022 Compared to Six Months of 2021
Noninterest expense of$109.1 million for the first six months of 2022 was$15.4 million higher than the prior year period. The year-over-year increase included a$5.7 million increase in salaries and employee benefits, which included additional compensation related expenses for the newly hired and former Suncrest associates. Occupancy and equipment increased by$1.3 million due to the addition of seven banking centers resulting from the acquisition of Suncrest. Acquisition expense related to the merger of Suncrest was$6.0 million for the first six months of 2022. The increase in software expense of$1.4 million , included costs associated with the continued use of Suncrest's legacy banking systems, prior to conversions, as well as continued investments in technology. The year-over-year increase also included a$1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021. The increase in marketing and promotion expense compared to the first six months of 2021 was primarily due to the impact that the COVID-19 pandemic had on marketing and promotional events in 2021. As a percentage of average assets, noninterest expense was 1.28% for the six months endedJune 30, 2022 , compared to 1.27% for the same period of 2021. If acquisition expense is excluded, noninterest expense as a percentage of average assets was 1.21% for the first six months of 2022. For the six months endedJune 30, 2022 , the efficiency ratio was 41.85%, compared to 40.15% for the same period of 2021. Excluding acquisition expense, the efficiency ratio was 39.54% for the six months endedJune 30, 2022 .
Income Taxes
The Company's effective tax rate for the three and six months endedJune 30, 2022 was 28.10%, compared to 28.60% for the three and six months endedJune 30, 2021 , respectively. Our estimated annual effective tax rate varies depending upon the level of tax-advantaged income as well as available tax credits. The Company's effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 51 -------------------------------------------------------------------------------- ANALYSIS OF FINANCIAL CONDITION Total assets of$16.76 billion atJune 30, 2022 increased by$876.3 million , or 5.52%, from total assets of$15.88 billion atDecember 31, 2021 . Interest-earning assets of$15.28 billion atJune 30, 2022 increased by$595.7 million , or 4.06%, when compared with$14.68 billion atDecember 31, 2021 . The increase in interest-earning assets was primarily due to a$928.6 million increase in investment securities and an$804.5 million increase in total loans, partially offset by a$1.12 billion decrease in interest-earning balances due from theFederal Reserve . OnJanuary 7, 2022 , we completed the acquisition of Suncrest with approximately$1.38 billion in total assets, acquired at fair value, and seven banking centers. The increase in total assets atJune 30, 2022 included$765.9 million of acquired net loans at fair value,$131.1 million of investment securities, and$9 million in bank-owned life insurance. The acquisition resulted in$102.1 million of goodwill and$3.9 million in core deposit intangibles. Net cash proceeds were used to fund the$39.6 million in cash paid to the former shareholders of Suncrest as part of the merger consideration. Total liabilities were$14.78 billion atJune 30, 2022 , an increase of$975.6 million , or 7.07%, from total liabilities of$13.80 billion atDecember 31, 2021 . Total deposits grew by$1.10 billion , or 8.44%. Total equity decreased$99.3 million , or 4.77%, to$1.98 billion atJune 30, 2022 , compared to total equity of$2.08 billion atDecember 31, 2021 . Increases to equity included$197.1 million for issuance of 8.6 million shares to acquire Suncrest and$104.6 million in net earnings. Decreases included$52.2 million in cash dividends and a$242.9 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During 2022, we executed on a$70 million accelerated stock repurchase program and retired 2,993,551 shares of common stock at an average price of$23.38 . We also repurchased, under our 10b5-1 stock repurchase plan, 1,682,537 shares of common stock, at an average repurchase price of$23.37 , totaling$39.3 million .
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. AtJune 30, 2022 , total investment securities were$6.04 billion . This represented an increase of$928.6 million , or 18.17%, from$5.11 billion atDecember 31, 2021 . The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first half of 2022. AtJune 30, 2022 , investment securities HTM totaled$2.41 billion . AtJune 30, 2022 , our AFS investment securities totaled$3.63 billion , inclusive of a pre-tax net unrealized loss of$346.3 million . The after-tax unrealized loss reported in AOCI on AFS investment securities was$243.9 million . The changes in the net unrealized holding loss resulted primarily from fluctuations in market interest rates. For the six months endedJune 30, 2022 and 2021, repayments/maturities of investment securities totaled$497.3 million and$507.9 million , respectively. We deployed some of our excess liquidity into additional securities by purchasing$1.5 billion in new investment securities, with yields on average of approximately 2.69%, and$1.55 billion for the six months endedJune 30, 2022 and 2021, respectively. During the second quarter of 2022, we purchased approximately$264.5 million of AFS securities with an average expected yield of approximately 3.49% and$91.9 million of HTM securities with an average expected yield of approximately 4.5%. The first quarter of 2022, included purchases of approximately$813.2 million in new AFS securities with an expected tax equivalent yield of 2.42% and$357.2 million in new HTM securities with an expected tax equivalent yield of approximately 1.61%. There were no investment securities sold during the second quarter of 2022 and 2021. 52 --------------------------------------------------------------------------------
The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
June 30, 2022
Gross
Gross Unrealized Unrealized
Amortized Cost Holding Gain Holding Loss Fair Value Total Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 3,386,552 $ 423 $ (278,060 ) $ 3,108,915 85.74 %
CMO/REMIC 557,723 8 (67,601 ) 490,130 13.52 %
Municipal bonds 27,139 100 (1,150 ) 26,089 0.72 %
Other securities 1,023 - - 1,023 0.02 %
Total available-for-sale
securities $ 3,972,437 $ 531 $ (346,811 ) $ 3,626,157 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 562,287 $ 359 $ (82,668 ) $ 479,978 23.31 %
Mortgage-backed securities 688,320 159 (74,344 ) 614,135 28.53 %
CMO/REMIC 799,591 - (83,786 ) 715,805 33.15 %
Municipal bonds 362,110 245 (38,090 ) 324,265 15.01 %
Total held-to-maturity
securities $ 2,412,308 $ 763 $ (278,888 ) $ 2,134,183 100.00 %
December 31, 2021
Gross Gross
Unrealized Unrealized
Amortized Cost Holding Gain Holding Loss Fair Value Total Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 2,553,246 $ 25,873 $ (15,905 ) $ 2,563,214 80.50 %
CMO/REMIC 602,555 1,586 (13,983 ) 590,158 18.53 %
Municipal bonds 28,365 1,103 - 29,468 0.93 %
Other securities 1,083 - - 1,083 0.04 %
Total available-for-sale
securities $ 3,185,249 $ 28,562 $ (29,888 ) $ 3,183,923 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 576,899 $ 5,907 $ (7,312 ) $ 575,494 29.95 %
Mortgage-backed securities 647,390 4,109 (6,106 ) 645,393 33.61 %
CMO/REMIC 490,670 596 (5,030 ) 486,236 25.48 %
Municipal bonds 211,011 4,714 (1,155 ) 214,570 10.96 %
Total held-to-maturity
securities $ 1,925,970 $ 15,326 $ (19,603 ) $ 1,921,693 100.00 %
As of June 30, 2022 , approximately $43.0 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.
53
--------------------------------------------------------------------------------
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 June 30, 2022 and
December 31, 2021 .
June 30, 2022
Less Than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Holding Holding Holding
Fair Value Losses Fair Value Losses Fair Value Losses
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 2,212,757 $ (168,634 ) $ 810,125 $ (109,426 ) $ 3,022,882 $ (278,060 )
CMO/REMIC 109,306 (8,662 ) 378,651 (58,939 ) 487,957 (67,601 )
Municipal bonds 22,793 (1,150 ) - - 22,793 (1,150 )
Total available-for-sale
securities $ 2,344,856 $ (178,446 ) $ 1,188,776 $ (168,365 ) $ 3,533,632 $ (346,811 )
Investment securities
held-to-maturity:
Government agency/GSE $ 233,979 $ (36,324 ) $ 226,224
(73,582 ) 4,209 (762 ) 557,175 (74,344 )
CMO/REMIC 715,805 (83,786 ) - - 715,805 (83,786 )
Municipal bonds 221,355 (26,968 ) 54,397 (11,122 ) 275,752 (38,090 )
Total held-to-maturity
securities $ 1,724,105 $ (220,660 ) $ 284,830 $ (58,228 ) $ 2,008,935 $ (278,888 )
December 31, 2021
Less Than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized 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 $ 1,465,647 $ (15,099 ) $ 44,244 $ (806 ) $ 1,509,891 $ (15,905 )
CMO/REMIC 450,393 (11,515 ) 53,745 (2,468 ) 504,138 (13,983 )
Municipal bonds - - - - - -
Total available-for-sale
securities $ 1,916,040 $ (26,614 ) $ 97,989 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 ofJune 30, 2022 andDecember 31, 2021 . Refer to Note 5 -Investment Securities of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio. 54 --------------------------------------------------------------------------------
Loans
Total loans and leases, at amortized cost, of$8.69 billion atJune 30, 2022 increased by$804.5 million , or 10.20%, fromDecember 31, 2021 . The increase in total loans included$774.5 million of loans acquired from Suncrest in the first quarter of 2022. After adjusting for acquired loans, seasonality and forgiveness of PPP loans, our core loans grew by$319.8 million , or 4.35%, from the end of 2021, or approximately 8% annualized. The$319.8 million core loan growth included$273.1 million in commercial real estate loans,$44.1 million in commercial and industrial loans,$19.3 million in SFR mortgage loans, and$9.8 million in consumer and other loans, partially offset by decreases of$18.4 million in construction loans and$11.6 million in SBA loans. The majority of the$130.6 million decrease in dairy & livestock loans was seasonal. The following table presents our loan portfolio by type as of the dates presented. Distribution of Loan Portfolio by Type June 30, 2022 December 31, 2021 (Dollars in thousands) Commercial real estate$ 6,643,628 $ 5,789,730 Construction 60,584 62,264 SBA 297,109 288,600 SBA - Paycheck Protection Program (PPP) 66,955
186,585
Commercial and industrial 941,595
813,063
Dairy & livestock and agribusiness 273,594
386,219
Municipal lease finance receivables 64,43745,933 SFR mortgage 260,218 240,654 Consumer and other loans 84,109 74,665 Total loans, at amortized cost 8,692,229
7,887,713
Less: Allowance for credit losses (80,222 )
(65,019 )
Total loans and lease finance receivables, net
7,822,694
As ofJune 30, 2022 ,$499.6 million , or 7.52% of the total commercial real estate loans included loans secured by farmland, compared to$364.4 million , or 6.29%, atDecember 31, 2021 . The loans secured by farmland included$132.1 million for loans secured by dairy & livestock land and$367.5 million for loans secured by agricultural land atJune 30, 2022 , compared to$134.9 million for loans secured by dairy & livestock land and$229.5 million for loans secured by agricultural land atDecember 31, 2021 . As ofJune 30, 2022 , dairy & livestock and agribusiness loans of$273.6 million included$52.4 million of agribusiness loans. This compares to$34.5 of agribusiness loans included in the$386.2 million dairy & livestock and agribusiness loans as ofDecember 31, 2021 . 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 ofJune 30, 2022 , the Company had$209.2 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 ofJune 30, 2022 , the Company had$87.9 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. 55 -------------------------------------------------------------------------------- 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$6.3 million as ofJune 30, 2022 . As ofJune 30, 2022 , we have originated approximately 1,900 PPP loans in round two with a remaining outstanding balance of$60.7 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
June 30, 2022
Commercial Real
Total Loans Estate Loans
(Dollars in thousands)
Los Angeles County $ 3,271,236 37.6 % $ 2,350,329 35.4 %
Central Valley and Sacramento 2,074,554 23.9 % 1,662,209 25.0 %
Inland Empire 1,062,439 12.2 % 697,117 10.5 %
Orange County 984,068 11.3 % 857,857 12.9 %
Central Coast 478,386 5.5 % 398,130 6.0 %
San Diego 323,512 3.7 % 298,315 4.5 %
Other California 159,515 1.9 % 94,258 1.4 %
Out of State 338,519 3.9 % 285,413 4.3 %
$ 8,692,229 100.0 % $ 6,643,628 100.0 %
The table below breaks down our commercial real estate portfolio.
June 30, 2022
Percent
Owner- Average
Loan Balance Percent Occupied (1) Loan Balance
(Dollars in thousands)
Commercial real estate:
Industrial $ 2,239,654 33.7 % 50.0 % $ 1,554
Office 1,121,196 16.9 % 24.7 % 1,654
Retail 927,862 14.0 % 10.2 % 1,605
Multi-family 740,905 11.1 % 0.8 % 1,479
Secured by farmland (2) 499,646 7.5 % 97.8 % 1,380
Medical 323,206 4.9 % 33.7 % 1,496
Other (3) 791,159 11.9 % 47.7 % 1,390
Total commercial real estate $ 6,643,628 100.0 % 37.2 % $ 1,529
(1)
Represents percentage of reported owner-occupied at origination in each real
estate loan category.
(2)
The loans secured by farmland included $132.1 million for loans secured by dairy
& livestock land and $367.5 million for loans secured by agricultural land at
June 30, 2022 .
(3)
Other loans consist of a variety of loan types, none of which exceeds 2.0% of
total commercial real estate loans at June 30, 2022 .
56
--------------------------------------------------------------------------------Nonperforming Assets
The following table provides information on nonperforming assets as of the dates
presented.
June 30, 2022 December 31, 2021
(Dollars in thousands)
Nonaccrual loans $ 12,964 $ 6,893
Loans past due 90 days or more and still accruing
interest - -
Nonperforming troubled debt restructured loans
(TDRs) - -
Total nonperforming loans 12,964 6,893
OREO, net - - Total nonperforming assets$ 12,964 $
6,893
Performing TDRs $ 5,198 $
5,293
Total nonperforming loans and performing TDRs
12,186
Percentage of nonperforming loans and performing TDRs to total loans, at amortized cost 0.21 %
0.15 %
Percentage of nonperforming assets to total loans, at amortized cost,
and OREO 0.15 % 0.09 % Percentage of nonperforming assets to total assets 0.08 %
0.04 %
Troubled Debt Restructurings ("TDRs")
Total TDRs were$5.2 million atJune 30, 2022 , compared to$5.3 million atDecember 31, 2021 . AtJune 30, 2022 , 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.
June 30, 2022
Balance Number of Loans Balance Number of Loans
(Dollars in thousands)
Performing TDRs:
Commercial real estate $ 2,318 1 $ 2,394 1
Construction - - - -
SBA - - - -
Commercial and industrial 1,878 3 1,885 3
Dairy & livestock and agribusiness - - - -
SFR mortgage 1,002 5 1,014 5
Consumer and other - - - -
Total performing TDRs $ 5,198 9 $ 5,293 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 $ 5,198 9 $ 5,293 9
57
-------------------------------------------------------------------------------- AtJune 30, 2022 andDecember 31, 2021 , 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 six months endedJune 30, 2022 and 2021.
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
June 30, March 31, December 31, September 30, June 30,
2022 2022 2021 2021 2021
(Dollars in thousands)
Nonperforming loans:
Commercial real estate $ 6,843 $ 7,055 $ 3,607 $ 4,073 $ 4,439
Construction - - - - -
SBA 1,075 1,575 1,034 1,513 1,382
SBA - PPP - 2 - - -
Commercial and
industrial 1,655 1,771 1,714 2,038 1,818
Dairy & livestock and
agribusiness 3,354 2,655 - 118 118
SFR mortgage - 167 380 399 406
Consumer and other loans 37 40 158 305 308
Total $ 12,964 $ 13,265 $ 6,893 $ 8,446 $ 8,471
% of Total loans 0.15 % 0.15 % 0.09 % 0.11 % 0.10 %
Past due 30-89 days:
Commercial real estate $ 559 $ 565 $ 438 $ - $ -
Construction - - - - -
SBA - 549 979 - -
Commercial and
industrial - 6 - 122 415
Dairy & livestock and
agribusiness - 1,099 - 1,000 -
SFR mortgage - 403 1,040 - -
Consumer and other loans - - - - -
Total $ 559 $ 2,622 $ 2,457 $ 1,122 $ 415
% of Total loans 0.01 % 0.03 % 0.03 % 0.01 % 0.01 %
OREO:
Commercial real estate $ - $ - $ - $ - $ -
SBA - - - - -
SFR mortgage - - - - -
Total $ - $ - $ - $ - $ -
Total nonperforming,
past due,
and OREO $ 13,523 $ 15,887 $ 9,350 $ 9,568 $ 8,886
% of Total loans 0.16 % 0.18 % 0.12 % 0.12 % 0.11 %
Classified Loans $ 76,170 $ 64,108 $ 56,102 $ 49,755 $ 49,044
Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and
loans past due 90 days or more and still accruing interest, were $13.0 million
at June 30, 2022 , or 0.15% of total loans. This compares to nonperforming loans
of $6.9 million , or 0.09% of total loans, at December 31, 2021 and $8.5 million ,
or 0.10% of total loans, at June 30, 2021 . Of the $13.0 million in nonperforming
loans, $4.4 million were commercial real estate loans acquired from Suncrest.
Classified loans are loans that are graded "substandard" or worse. Classified
loans of $76.2 million increased $20.1 million from December 31, 2021 . Total
classified loans at June 30, 2022 included $17.8 million of classified loans
acquired from Suncrest, of which $9.8 million were commercial real estate loans.
Excluding the $17.8 million of acquired classified Suncrest loans, classified
loans increased $2.3 million from December 31, 2021 and included a $4.8 million
increase in classified commercial real estate loans and a $2.7 million increase
in classified dairy & livestock and agribusiness loans, partially offset by a
$4.0 million decrease in classified commercial and industrial loans and a $1.0
million decrease in classified SFR loans.
At
58
--------------------------------------------------------------------------------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, 2021 . The allowance for credit losses totaled$80.2 million as ofJune 30, 2022 , compared to$65.0 million as ofDecember 31, 2021 and$69.3 million as ofJune 30, 2021 . Our allowance for credit losses atJune 30, 2022 was 0.92%, or 0.93% of total loans when excluding the$67.0 million in PPP loans. The ACL increased by$15.2 million inJune 30, 2022 compared toDecember 31, 2021 , including$8.6 million for the acquired Suncrest PCD loans and a$6.1 million provision for credit losses for the first six months of 2022. Net recoveries were$498,000 for the six months endedJune 30, 2022 , which compares to$2.9 million in net charge-offs for the same period of 2021. The allowance for credit losses as ofJune 30, 2022 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. The allowance for credit loss is sensitive to both changes in these portfolio characteristics and the forecast of 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. 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 multiple downside forecasts. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario. Our weighted forecast atJune 30, 2022 assumes GDP will increase by 0.5% in the second half of 2022, 0.8% for 2023 and then grow by 2.5% in 2024. The unemployment rate is forecasted to be 4.6% in the second half of 2022, 5.4% in 2023 and then decline to 5% in 2024. As ofDecember 31, 2021 , our weighted forecast assumed GDP would increase by 2.7% in 2022, 2.0% for 2023 and then grow by 3% in 2024. The forecast at the end of 2021 expected the unemployment rate to be 5.2% in 2022, 5.4% in 2023 and then decline to 4.8% in 2024. Management believes that the ACL was appropriate atJune 30, 2022 andDecember 31, 2021 . As there continues to be a degree of uncertainty around the epidemiological assumptions and impact of government responses to the COVID-19 pandemic that impact our economic forecast, as well as inflationary pressures and changes in monetary policies, 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. 59 -------------------------------------------------------------------------------- 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 Six Months EndedJune 30, 2022 2021 (Dollars in thousands)
Allowance for credit losses at beginning of period
93,692 Charge-offs: Commercial real estate - - Construction - - SBA - - Commercial and industrial (21 ) (2,975 ) Dairy & livestock and agribusiness - - SFR mortgage - - Consumer and other loans (3 ) (10 ) Total charge-offs (24 ) (2,985 ) Recoveries: Commercial real estate - - Construction 6 44 SBA 58 8 Commercial and industrial 456 4 Dairy & livestock and agribusiness 2 - SFR mortgage - 79 Consumer and other loans - - Total recoveries 522 135 Net (charge-offs) recoveries 498 (2,850 ) Initial ACL for PCD loans at acquisition 8,605
-
Provision recorded at acquisition 4,932
-
Provision (recapture of) for credit losses 1,168 (21,500 ) Allowance for credit losses at end of period$ 80,222 $
69,342
Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period
$ 8,000 $
9,000
(Recapture of) provision for unfunded loan commitments - (1,000 ) Reserve for unfunded loan commitments at end of period$ 8,000 $
8,000
Reserve for unfunded loan commitments to total unfunded loan commitments 0.43 %
0.45 %
Amount of total loans at end of period (1)$ 8,692,229 $
8,071,310
Average total loans outstanding (1)$ 8,567,876 $
8,259,824
Net recoveries (charge-offs) to average total loans 0.006 %
-0.035 % Net recoveries (charge-offs) to total loans at end of period
0.006 % -0.035 %
Allowance for credit losses to average total loans 0.94 % 0.84 % Allowance for credit losses to total loans at end of period
0.92 % 0.86 % Net recoveries (charge-offs) to allowance for credit losses
0.62 % -4.11 %
Net recoveries (charge-offs) to provision for
(recapture of) credit losses 8.16 % 13.26 %
(1)Net of deferred loan origination fees, costs and discounts (amortized cost).
The Bank's ACL methodology also produced an allowance of$8.0 million for our off-balance sheet credit exposures as ofJune 30, 2022 , compared with$8.0 million as ofDecember 31, 2021 andJune 30, 2021 . The second quarter of 2021 included$1.0 million in recapture of provision for unfunded loan commitments. 60 -------------------------------------------------------------------------------- While we believe that the allowance atJune 30, 2022 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, 2021 . Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were$14.07 billion atJune 30, 2022 . This represented an increase of$1.1 billion , or 8.44%, over total deposits of$12.98 billion atDecember 31, 2021 . The composition of deposits is summarized as of the dates presented in the table below. June 30, 2022 December 31, 2021 Balance Percent Balance Percent (Dollars in thousands)
Noninterest-bearing deposits
62.45 % Interest-bearing deposits Investment checking 695,054 4.94 % 655,333 5.05 % Money market 3,533,931 25.11 % 3,342,531 25.76 % Savings 611,703 4.35 % 546,840 4.21 % Time deposits 350,308 2.49 % 327,682 2.53 % Total Deposits$ 14,072,219 100.00 %$ 12,976,442 100.00 % 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$8.88 billion atJune 30, 2022 , representing an increase of$777.2 million , or 9.59%, from noninterest-bearing deposits of$8.10 billion atDecember 31, 2021 . Noninterest-bearing deposits represented 63.11% of total deposits atJune 30, 2022 , compared to 62.45% of total deposits atDecember 31, 2021 .
Savings deposits, which include savings, interest-bearing demand, and money
market accounts, totaled
Time deposits totaled
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 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 ofJune 30, 2022 andDecember 31, 2021 , total funds borrowed under these agreements were$502.8 million and$642.4 million , respectively, with a weighted average interest rate of 0.09% and 0.08%, respectively. OnJune 15, 2021 , we redeemed our junior subordinated debentures of$25.8 million , representing the amounts that are due from the Company to CVB Statutory Trust III, which had a borrowing cost of approximately 1.60%. The debentures and the Trust Preferred Securities had an original maturity date of 2036. The interest rate on these debentures were three-month LIBOR plus 1.38%. 61 --------------------------------------------------------------------------------
At
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as ofJune 30, 2022 . Maturity by Period One Year Through Four Years Less Than One Three Through Total Year Years Five Years Over Five Years (Dollars in thousands) Deposits (1)$ 14,072,219 $ 14,041,312 $ 22,472 $ 7,723 $ 712 Customer repurchase agreements (1) 502,829 502,829 - - - Deferred compensation 25,000 883 1,177 1,152 21,788 Operating leases 27,655 7,274 11,454 7,389 1,538 Affordable housing investment 6,350 1,511 4,826 13 - Total$ 14,634,053 $ 14,553,809 $ 39,929 $ 16,277 $ 24,038 (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 12 - Leases of the notes to the Company's unaudited condensed consolidated financial statements for a more detailed discussion about leases.
Off-Balance Sheet Arrangements
The following table summarizes the off-balance sheet items atJune 30, 2022 . 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$ 419,608 $ 52,017 $ 156,184 $ 163,503 $ 47,904 Construction 65,164 52,882 - - 12,282 SBA 864 339 - - 525 SBA - PPP - - - - -
Commercial and industrial 934,024 754,791 106,818
5,604 66,811
Dairy & livestock and
agribusiness (1) 260,086 146,151 113,934 1 -
SFR Mortgage 14,169 - - - 14,169
Municipal lease finance
receivables 5,224 2,500 - - 2,724
Consumer and other loans 112,350 11,668 9,976 4,307 86,399
Total commitment to extend credit 1,811,489 1,020,348 386,912 173,415 230,814 Obligations under letters of credit 45,316 7,126 38,172 - 18 Total$ 1,856,805 $ 1,027,474 $ 425,084 $ 173,415 $ 230,832 (1)
Total commitments to extend credit to agribusiness were
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As of June 30, 2022 , we had commitments to extend credit of approximately $1.81
billion , and obligations under letters of credit of $45.3 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 for the
three and six months ended June 30, 2022 , compared to a $1.0 million recapture
of provision for unfunded loan commitments for the three and six months ended
June 30, 2021 . As of June 30, 2022 and December 31, 2021 , the balance in this
reserve was $8.0 million and was included in other liabilities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
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 plan and capital stress testing. Total equity decreased$99.3 million , or 4.77%, to$2.08 billion atJune 30, 2022 , compared to total equity of$2.08 billion atDecember 31, 2021 . Increases to equity included$197.1 million for issuance of 8.6 million shares to acquire Suncrest and$104.6 million in net earnings. Decreases included$52.2 million in cash dividends and a$242.9 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the first half of 2022, we executed on a$70 million accelerated stock repurchase program and retired 2,993,551 shares of common stock at an average price of$23.38 . We also repurchased, under our 10b5-1 stock repurchase plan, 1,682,537 shares of common stock, at an average repurchase price of$23.37 , totaling$39.3 million . Our tangible book value per share atJune 30, 2022 was$8.51 . During the second quarter of 2022, the Board of Directors of CVB declared quarterly cash dividends totaling$0.19 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 declare 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. OnFebruary 1, 2022 , we announced that our Board of Directors authorized a share repurchase plan to repurchase up to 10,000,000 shares of the Company's common stock ("2022 Repurchase Program"), including by means of (i) an initial$70 million dollar Accelerated Share Repurchase, or ASR Plan, and (ii) one or more Rule 10b5-1 plans or other appropriate buyback arrangements, including open market purchases and private transactions. We completed the execution of the$70 million accelerated stock repurchase program in the second quarter of 2022, and retired a total of 2,993,551 shares of common stock at an average price of$23.38 . During the six month period we also repurchased, under our 10b5-1 stock repurchase plan, 1,682,537 shares of common stock, at an average repurchase price of$23.37 , totaling$39.3 million . As ofJune 30, 2022 , we had 5,323,912 shares of CVB common stock available for repurchase under the 2022 Repurchase Program. 63
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The Bank and the Company are required to meet risk-based capital standards under
the revised capital framework referred to as Basel III set by their respective
regulatory authorities. The risk-based capital standards require the achievement
of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital
ratio of 6.0% and a common equity Tier 1 ("CET1") capital ratio of 4.5%. In
addition, the regulatory authorities require the highest rated institutions to
maintain a minimum leverage ratio of 4.0%. To be considered "well-capitalized"
for bank regulatory purposes, the Bank and the Company are required to have a
CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital
ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to
or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%.
At June 30, 2022 , the Bank and the Company exceeded the minimum risk-based
capital ratios and leverage ratios required to be considered "well-capitalized"
for regulatory purposes. For further information about capital requirements and
our capital ratios, see "Item 1. Business - Capital Adequacy Requirements" as
described in our Annual Report on Form 10-K for the year ended December 31,
2021 .
At June 30, 2022 the Bank and the Company exceeded the minimum risk-based
capital ratios and leverage ratios, under the revised capital framework referred
to as Basel III, required to be considered "well-capitalized" for regulatory
purposes. We did not elect to phase in the impact of CECL on regulatory capital,
as allowed under the interim final rule of the FDIC and other U.S. banking
agencies.
The table below presents the Company's and the Bank's risk-based and leverage capital ratios for the periods presented.
June 30, 2022 December 31, 2021
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% 8.85% 8.56% 9.18% 8.90%
Common equity Tier
1 capital ratio 4.50% 7.00% 6.50% 13.41% 12.97% 14.86% 14.41%
Tier 1 risk-based
capital ratio 6.00% 8.50% 8.00% 13.41% 12.97% 14.86% 14.41%
Total risk-based
capital ratio 8.00% 10.50% 10.00% 14.22% 13.79% 15.63% 15.18%
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ASSET/LIABILITY AND MARKET RISK MANAGEMENTLiquidity 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$14.07 billion atJune 30, 2022 increased$1.1 billion , or 8.44%, over total deposits of$12.98 billion atDecember 31, 2021 . 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, theFederal Home Loan Bank and theFederal 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. AtJune 30, 2022 , 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. OnJune 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. 65 -------------------------------------------------------------------------------- Below is a summary of our average cash position and statement of cash flows for the six months endedJune 30, 2022 and 2021. For further details see our "Condensed Consolidated Statements of Cash Flows (Unaudited)" under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Six Months Ended
June 30,
2022 2021
(Dollars in thousands)
Average cash and cash equivalents $ 1,405,827 $ 1,821,224
Percentage of total average assets 8.18 %
12.26 %
Net cash provided by operating activities$ 128,388 $
70,699
Net cash used in investing activities (776,221 ) (689,133 ) Net cash (used in) provided by financing activities (388,006 ) 992,139 Net (decrease) increase in cash and cash equivalents$ (1,035,839 ) $ 373,705 Average cash and cash equivalents decreased by$415.4 million , or 22.81%, to$1.41 billion for the six months endedJune 30, 2022 , compared to$1.82 billion for the same period of 2021.
At
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability repricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments' respective maturities or estimated durations and is considered a longer term measure. One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company's balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest
income from all interest-earning assets and interest expense paid on all
interest-bearing liabilities reflected on our balance sheet. This sensitivity
analysis is compared to policy limits, which specify a maximum tolerance level
for net interest income exposure over a one-year horizon assuming no balance
sheet growth, given a 200 basis point upward and a 200 basis point downward
shift in interest rates
66
--------------------------------------------------------------------------------depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the 12-month and 24-month time horizon.
The following depicts the Company's net interest income sensitivity analysis for the periods presented below, when rates are ramped up 200bps or ramped down 200bps over a 12-month time horizon.
Estimated Net Interest Income Sensitivity (1)
June 30, 2022 December 31, 2021
24-month 24-month
Interest Rate Period Interest Rate 12-month Period
Scenario 12-month Period (Cumulative) Scenario Period (Cumulative)
+ 200 basis + 200 basis
points 5.46% 9.93% points 9.85% 16.84%
- 200 basis - 100 basis
points -6.07% -10.83% points (2) -4.30% -4.99%
(1)
Percentage change from base scenario.
(2)
Policy at December 31, 2021
Based on our current simulation models, we believe that the interest rate risk
profile of the balance sheet is asset sensitive over both a one-year and a
two-year horizon. The estimated sensitivity does not necessarily represent a
forecast and the results may not be indicative of actual changes to our net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, re-pricing characteristics and balance fluctuations of deposits with
indeterminate or non-contractual maturities, prepayments on loans and
securities, pricing strategies on loans and deposits, and replacement of asset
and liability cash flows. While the assumptions used are based on current
economic and local market conditions, there is no assurance as to the predictive
nature of these conditions including how customer preferences or competitor
influences might change. Our exposure in the rates down scenario is impacted by
the current low interest rate environment and the model does not assume that
rates go below zero.
We also perform valuation analysis, which incorporates all cash flows over the
estimated remaining life of all material balance sheet and derivative positions.
The valuation of the balance sheet, at a point in time, is defined as the
discounted present value of all asset cash flows and derivative cash flows minus
the discounted present value of all liability cash flows, the net of which is
referred to as EVE. The sensitivity of EVE to changes in the level of interest
rates is a measure of the longer-term re-pricing risk and options risk embedded
in the balance sheet. EVE uses instantaneous changes in rates, as shown in the
table below. Assumptions about the timing and variability of balance sheet cash
flows are critical in the EVE analysis. Particularly important are the
assumptions driving prepayments and the expected duration and pricing of the
indeterminate deposit portfolios. EVE sensitivity is reported in both upward and
downward rate shocks. At June 30, 2022 and December 31, 2021 , the EVE profile
indicates a decline in net balance sheet value due to instantaneous downward
changes in rates, compared to an increase resulting from an increase in rates.
Economic Value of Equity Sensitivity
Instantaneous Rate Change June 30, 2022 December 31, 2021
200 bp decrease in interest rates -18.9% N/A
100 bp decrease in interest rates -7.6% -14.1%
100 bp increase in interest rates 4.9% 5.3%
200 bp increase in interest rates 8.6% 11.8%
300 bp increase in interest rates 9.1% 13.6%
400 bp increase in interest rates 11.0% 16.8%
As EVE measures the discounted present value of cash flows over the estimated
lives of instruments, the change in EVE does not directly correlate to the
degree that earnings would be impacted over a shorter time horizon (i.e., the
current year). Further, EVE does not take into account factors such as future
balance sheet growth, changes in asset and liability mix, changes in yield curve
relationships, and changing product spreads that could mitigate the adverse
impact of changes in interest rates.
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