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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2016

or

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

For the transition period from              to             

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

California				95-3629339
(State or other jurisdiction of Incorporation or organization)				(I.R.S. Employer Identification No.)
701 North Haven Ave., Suite 350 Ontario, California				91764
(Address of principal executive offices)				(Zip Code)
		(909) 980-4030
		(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Number of shares of common stock of the registrant: 107,957,513 outstanding as of July 29, 2016.

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TABLE OF CONTENTS

 

PART I –         FINANCIAL INFORMATION (UNAUDITED)					3
ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			4
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			9
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			40
		CRITICAL ACCOUNTING POLICIES			40
		OVERVIEW			40
		ANALYSIS OF THE RESULTS OF OPERATIONS			42
		RESULTS BY BUSINESS SEGMENTS			53
		ANALYSIS OF FINANCIAL CONDITION			56
		ASSET/LIABILITY AND MARKET RISK MANAGEMENT			74
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			75
ITEM 4.		CONTROLS AND PROCEDURES			75
PART II - OTHER INFORMATION					76
ITEM 1.		LEGAL PROCEEDINGS			76
ITEM 1A.		RISK FACTORS			77
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			77
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			77
ITEM 4.		MINE SAFETY DISCLOSURES			77
ITEM 5.		OTHER INFORMATION			78
ITEM 6.		EXHIBITS			78
SIGNATURES					79

 

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PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will” and variations of these words and similar expressions help to identify these forward looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities; our ability to attract deposits and other sources of funding or liquidity; supply and demand for real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend, including both residential and commercial real estate; a prolonged slowdown or decline in real estate construction, sales or leasing activities; changes in the financial performance and/or condition of our borrowers or key vendors or counterparties; changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs; the costs or effects of acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits associated with any such acquisitions or dispositions; the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, banking capital levels, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, fair lending, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply or believe we should comply; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk; inflation, interest rate, securities market and monetary fluctuations; changes in government interest rates or monetary policies; changes in the amount and availability of deposit insurance; cyber-security threats, including loss of system functionality or theft or loss of Company or customer data or money; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, drought, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services and the perceived overall value of these products and services by customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of certain of the Company’s key internal and external systems and applications; changes in commercial or consumer spending, borrowing and savings preferences or behaviors; technological changes and the expanding use of technology in banking (including the adoption of mobile banking and funds transfer applications); the ability to retain and increase market share, retain and grow customers and control expenses; changes in the competitive environment among financial and bank holding companies, banks and other financial service providers; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions; fluctuations in the price of the Company’s common stock or other securities and the resulting impact on the Company’s ability to raise capital or make acquisitions; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and/or our board of directors; the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as securities, consumer or employee class action litigation), regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2015, and particularly the discussion of risk factors within that document. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

 

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ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

		June 30,				December 31,
		2016				2015
Assets
Cash and due from banks		$	107,779			$	102,772
Interest-earning balances due from Federal Reserve and federal funds sold			591,403				3,325
Total cash and cash equivalents			699,182				106,097
Interest-earning balances due from depository institutions			91,272				32,691
Investment securities available-for-sale, at fair value (with amortized cost of $2,181,478 at June 30, 2016, and $2,337,715 at December 31, 2015)			2,248,032				2,368,646
Investment securities held-to-maturity (with fair value of $743,481 at June 30, 2016, and $853,039 at December 31, 2015)			724,357				850,989
Total investment securities			2,972,389				3,219,635
Investment in stock of Federal Home Loan Bank (FHLB)			17,688				17,588
Loans and lease finance receivables			4,237,928				4,016,937
Allowance for loan losses			(60,938)				(59,156)
Net loans and lease finance receivables			4,176,990				3,957,781
Premises and equipment, net			39,702				31,382
Bank owned life insurance			133,231				130,956
Accrued interest receivable			21,389				22,732
Intangibles			5,586				2,265
Goodwill			88,174				74,244
Income taxes			27,693				47,251
Other assets			39,011				28,578
Total assets		$	8,312,307			$	7,671,200
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing		$	3,666,206			$	3,250,174
Interest-bearing			2,919,780				2,667,086
Total deposits			6,585,986				5,917,260
Customer repurchase agreements			590,465				690,704
Other borrowings			-				46,000
Deferred compensation			11,920				11,269
Junior subordinated debentures			25,774				25,774
Payable for securities purchased			44,723				1,696
Other liabilities			61,976				55,098
Total liabilities			7,320,844				6,747,801
Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 107,946,952 at June 30, 2016, and 106,384,982 at December 31, 2015			527,452				502,571
Retained earnings			422,939				399,919
Accumulated other comprehensive income, net of tax			41,072				20,909
Total stockholders’ equity			991,463				923,399
Total liabilities and stockholders’ equity		$	8,312,307			$	7,671,200

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

		For the Three Months Ended     June 30,								For the Six Months Ended     June 30,
		2016				2015				2016				2015
Interest income:
Loans and leases, including fees		$	50,257			$	45,322			$	96,027			$	90,864
Investment securities:
Investment securities available-for-sale			12,018				17,503				24,817				35,437
Investment securities held-to-maturity			4,743				36				10,091				74
Total investment income			16,761				17,539				34,908				35,511
Dividends from FHLB stock			439				1,414				807				1,883
Federal funds sold			383				187				488				329
Interest-earning deposits with other institutions			175				53				285				108
Total interest income			68,015				64,515				132,515				128,695
Interest expense:
Deposits			1,582				1,307				3,019				2,600
Borrowings			345				342				768				2,115
Junior subordinated debentures			132				108				256				213
Total interest expense			2,059				1,757				4,043				4,928
Net interest income before recapture of provision for loan losses			65,956				62,758				128,472				123,767
Recapture of provision for loan losses			-				(2,000)				-				(2,000)
Net interest income after recapture of provision for loan losses			65,956				64,758				128,472				125,767
Noninterest income:
Service charges on deposit accounts			3,822				3,952				7,569				7,913
Trust and investment services			2,508				2,181				4,711				4,332
Bankcard services			784				842				1,339				1,575
BOLI income			752				808				1,299				1,457
Gain on sale of loans			-				-				1,101				-
Other			1,408				562				1,938				1,079
Total noninterest income			9,274				8,345				17,957				16,356
Noninterest expense:
Salaries and employee benefits			21,558				19,648				42,811				38,943
Occupancy and equipment			4,125				3,713				7,838				7,365
Professional services			1,188				1,527				2,554				2,680
Software licenses and maintenance			1,065				993				1,974				2,023
Promotion			1,192				1,201				2,619				2,528
Recapture of provision for unfunded loan commitments			-				-				-				(500)
Debt termination expense			16				-				16				13,870
Acquisition related expenses			355				-				1,204				-
Other			4,939				4,451				9,786				9,096
Total noninterest expense			34,438				31,533				68,802				76,005
Earnings before income taxes			40,792				41,570				77,627				66,118
Income taxes			15,278				14,757				28,722				23,472
Net earnings		$	25,514			$	26,813			$	48,905			$	42,646
Other comprehensive income (loss):
Unrealized gain (loss) on securities arising during the period, before tax		$	7,493			$	(32,968)			$	34,763			$	(12,698)
Less: Income tax (expense) benefit related to items of other comprehensive income			(3,147)				13,846				(14,600)				5,332
Other comprehensive income (loss), net of tax			4,346				(19,122)				20,163				(7,366)
Comprehensive income		$	29,860			$	7,691			$	69,068			$	35,280
Basic earnings per common share		$	0.23			$	0.25			$	0.46			$	0.40
Diluted earnings per common share		$	0.23			$	0.25			$	0.45			$	0.40
Cash dividends declared per common share		$	0.12			$	0.12			$	0.24			$	0.24

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended June 30, 2016 and 2015

(Dollars and shares in thousands)

(Unaudited)

 

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive
		Outstanding				Stock				Earnings				Income				Total
Balance, January 1, 2015			105,893			$	495,220			$	351,814			$	31,075			$	878,109
Repurchase of common stock			(33)				(511)				-				-				(511)
Exercise of stock options			397				4,500				-				-				4,500
Tax benefit from exercise of stock options			-				742				-				-				742
Shares issued pursuant to stock-based compensation plan			80				1,371				-				-				1,371
Cash dividends declared on common stock ($0.24 per share)			-				-				(25,500)				-				(25,500)
Net earnings			-				-				42,646				-				42,646
Other comprehensive loss			-				-				-				(7,366)				(7,366)
Balance, June 30, 2015			106,337			$	501,322			$	368,960			$	23,709			$	893,991
Balance, January 1, 2016			106,385			$	502,571			$	399,919			$	20,909			$	923,399
Repurchase of common stock			(40)				(408)				-				-				(408)
Issuance of common stock for acquisition of County Commerce Bank			1,394				21,642				-				-				21,642
Exercise of stock options			175				2,254				-				-				2,254
Tax benefit from exercise of stock options			-				86				-				-				86
Shares issued pursuant to stock-based compensation plan			33				1,307				-				-				1,307
Cash dividends declared on common stock ($0.24 per share)			-				-				(25,885)				-				(25,885)
Net earnings			-				-				48,905				-				48,905
Other comprehensive income			-				-				-				20,163				20,163
Balance, June 30, 2016			107,947			$	527,452			$	422,939			$	41,072			$	991,463

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		For the Six Months Ended
		June 30,
		2016				2015
Cash Flows from Operating Activities
Interest and dividends received		$	138,664			$	137,747
Service charges and other fees received			16,908				13,840
Interest paid			(4,030)				(5,768)
Net cash paid to vendors, employees and others			(69,730)				(68,710)
Income taxes paid			(23,000)				(27,000)
Payments to FDIC, loss share agreement			(203)				(460)
Net cash provided by operating activities			58,609				49,649
Cash Flows from Investing Activities
Proceeds from redemption of FHLB stock			1,423				7,750
Net change in interest-earning balances from depository institutions			3,755				2,740
Proceeds from repayment of investment securities available-for-sale			228,070				202,162
Proceeds from maturity of investment securities available-for-sale			56,006				54,601
Purchases of investment securities available-for-sale			(97,368)				(236,451)
Proceeds from repayment and maturity of investment securities held-to-maturity			128,497				-
Net (increase) decrease in loan and lease finance receivables			(54,623)				35,862
Proceeds from sale of loans			6,417				-
Purchase of premises and equipment			(2,045)				(485)
Proceeds from sales of other real estate owned			621				1,538
Cash used in sale of branch, net			(8,217)				-
Cash paid for County Commerce Bank (CCB) acquisition, net of cash acquired			(7,504)				-
Net cash provided by investing activities			255,032				67,717
Cash Flows from Financing Activities
Net increase in other deposits			512,784				430,912
Net decrease in time deposits			(58,754)				(41,690)
Repayment of FHLB advances			(5,000)				(200,000)
Net decrease in other borrowings			(46,000)				(46,000)
Net (decrease) increase in customer repurchase agreements			(99,818)				98,699
Cash dividends on common stock			(25,700)				(23,340)
Repurchase of common stock			(408)				(511)
Proceeds from exercise of stock options			2,254				4,500
Tax benefit related to exercise of stock options			86				742
Net cash provided by financing activities			279,444				223,312
Net increase in cash and cash equivalents			593,085				340,678
Cash and cash equivalents, beginning of period			106,097				105,768
Cash and cash equivalents, end of period		$	699,182			$	446,446

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

		For the Six Months Ended
		June 30,
		2016				2015
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings		$	48,905			$	42,646
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of loans			(1,101)				-
Gain on sale of branch			(272)				-
Gain on sale of other real estate owned			(14)				(232)
Increase in bank owned life insurance			(2,275)				(2,670)
Net amortization of premiums and discounts on investment securities			10,192				9,749
Accretion of PCI discount			(1,569)				(2,012)
Recapture of provision for loan losses			-				(2,000)
Recapture of provision for unfunded loan commitments			-				(500)
Valuation adjustment on other real estate owned			337				162
Payments to FDIC, loss share agreement			(203)				(460)
Stock-based compensation			1,307				1,371
Depreciation and amortization, net			1,685				292
Change in other assets and liabilities			1,617				3,303
Total adjustments			9,704				7,003
Net cash provided by operating activities		$	58,609			$	49,649
Supplemental Disclosure of Non-cash Investing Activities
Securities purchased and not settled		$	44,723			$	59,693
Transfer of loans to other real estate owned		$	-			$	3,666
Issuance of common stock for CCB acquistion		$	21,642			$	-

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     BUSINESS

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

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 43 Business Financial Centers, eight Commercial Banking Centers, and three trust office locations. The Company is headquartered in the city of Ontario, California.

On February 29, 2016, we completed the acquisition of County Commerce Bank (“CCB”), headquartered in Ventura County with four branch locations in Ventura County with total assets of approximately $253 million. This acquisition extends our geographic footprint northward into the central coast of California. Our condensed consolidated financial statements for 2016 include CCB operations, post-merger. See Note 4 – Business Combinations, included herein.

2.     BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification – Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3—Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC (“Form 10-K”).

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

 

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

4.     BUSINESS COMBINATIONS

County Commerce Bank Acquisition

On February 29, 2016, the Bank acquired all of the assets and assumed all of the liabilities of CCB for $20.6 million in cash and $21.6 million in stock. As a result, CCB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction serves to further expand its footprint northward into and along the central coast of California. At close, CCB had four branches located in the communities of: Ventura, Oxnard, Camarillo, and Westlake Village. The systems integration of CCB and CBB was completed in April 2016.

Goodwill of $13.9 million from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

The total fair value of assets acquired approximated $252.4 million, which included $54.8 million in cash and balances due from depository institutions, $1.5 million in FHLB stock, $168.0 million in loans and lease finance receivables, $8.6 million in fixed assets, $3.9 million in core deposit intangible assets acquired and $1.7 million in other assets. The total fair value of liabilities assumed was $230.8 million, which included $224.2 million in deposits, $5.0 million in FHLB advances and $1.6 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of February 29, 2016. The assets acquired and liabilities assumed have been accounted for under the acquisition method accounting. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

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

For the three and six months ended June 30, 2016, the Company incurred non-recurring merger related expenses associated with the CCB acquisition of $355,000 and $1.2 million, respectively.

 

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5.    INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service based upon market quotes.

 

(1) Securities held-to-maturity are presented in the condensed consolidated balance sheets at amortized cost.

During the quarter ended September 30, 2015, investment securities were transferred from the available-for-sale security portfolio to the held-to-maturity security portfolio. Transfers of securities into the held-to-maturity category from the available-for-sale category are transferred at fair value at the date of transfer. The fair value of these securities at the date of transfer was $898.6 million. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income (“AOCI”) and in the carrying value of the held-to-maturity securities. The net unrealized holding gain at the date of transfer was $3.9 million after-tax and will continue to be reported in AOCI and amortized over the remaining life of the securities as a yield adjustment. At June 30, 2016, investment securities HTM totaled $724.4 million. The after-tax unrealized gain reported in AOCI on investment securities HTM was $2.5 million at June 30, 2016.

 

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

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2016				2015				2016				2015
		(Dollars in thousands)
Investment securities available-for-sale:
Taxable		$	10,827			$	12,784			$	22,207			$	25,707
Tax-advantaged			1,191				4,719				2,610				9,730
Investment securities held-to-maturity:
Taxable			2,215				36				4,835				74
Tax-advantaged			2,528				-				5,256				-
Total interest income from investment securities		$	16,761			$	17,539			$	34,908			$	35,511

Approximately 86% of the total investment securities portfolio at June 30, 2016 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale Collateralized Mortgage Obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of June 30, 2016 and December 31, 2015. At June 30, 2016, the Bank had $1.1 million in total CMO backed by whole loans issued by private-label companies (nongovernment sponsored).

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and December 31, 2015. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.

 

 

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At June 30, 2016 and December 31, 2015, investment securities having a carrying value of approximately $2.59 billion and $2.81 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at June 30, 2016, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMO/REMIC have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMO/REMIC are included in maturity categories based upon estimated prepayment speeds.

 

		June 30, 2016
		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
Due in one year or less		$	12,202			$	12,343			$	-			$	-
Due after one year through five years			1,795,806				1,851,485				167,856				171,966
Due after five years through ten years			131,286				134,700				240,842				245,295
Due after ten years			242,184				249,504				315,659				326,220
Total investment securities		$	2,181,478			$	2,248,032			$	724,357			$	743,481

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2016.

 

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6.    ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3—Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans. The application of the purchase method of accounting resulted in an after-tax gain of $12.3 million which was included in 2009 earnings. The gain is the negative goodwill resulting from the acquired assets and liabilities recognized at fair value.

At June 30, 2016, the remaining discount associated with the PCI loans approximated $2.4 million. Based on the Company’s regular forecast of expected cash flows from these loans, approximately $1.0 million of the related discount is expected to accrete into interest income over the remaining average lives of the respective pools, which approximates 3 years. The loss sharing agreement for commercial loans expired October 16, 2014.

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

 

		June 30, 2016				December 31, 2015
			(Dollars in thousands)
Commercial and industrial		$	2,580			$	7,473
SBA			348				393
Real estate:
Commercial real estate			70,589				81,786
Construction			-				-
SFR mortgage			186				193
Dairy & livestock and agribusiness			503				1,429
Municipal lease finance receivables			-				-
Consumer and other loans			1,816				2,438
Gross PCI loans			76,022				93,712
Less: Purchase accounting discount			(2,430)				(3,872)
Gross PCI loans, net of discount			73,592				89,840
Less: Allowance for PCI loan losses			(310)				-
Net PCI loans		$	73,282			$	89,840

Credit Quality Indicators

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

 

		June 30, 2016				December 31, 2015
			(Dollars in thousands)
Pass		$	60,181			$	76,401
Special mention			10,255				11,142
Substandard			5,586				6,169
Doubtful & loss			-				-
Total gross PCI loans		$	76,022			$	93,712

Allowance for Loan Losses (“ALLL”)

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology for PCI loans. The ALLL for PCI loans is determined separately from total loans, and is based on expectations of future cash flows from the underlying pools of loans or individual loans in accordance with ASC 310-30, as more fully described in Note 3— Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015. As of June 30, 2016, the allowance for loan losses included $310,000 for PCI loans, compared to no allowance for loan losses at December 31, 2015.

 

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7.     LOANS AND LEASE FINANCE RECEIVABLES AND

ALLOWANCE FOR LOAN LOSSES

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

 

		June 30, 2016				December 31, 2015
			(Dollars in thousands)
Commercial and industrial		$	479,133			$	434,099
SBA			111,762				106,867
Real estate:
Commercial real estate			2,884,332				2,643,184
Construction			94,009				68,563
SFR mortgage			237,488				233,754
Dairy & livestock and agribusiness			213,830				305,509
Municipal lease finance receivables			71,929				74,135
Consumer and other loans			79,725				69,278
Gross loans, excluding PCI loans			4,172,208				3,935,389
Less: Deferred loan fees, net			(7,872)				(8,292)
Gross loans, excluding PCI loans, net of deferred loan fees			4,164,336				3,927,097
Less: Allowance for loan losses			(60,628)				(59,156)
Net loans, excluding PCI loans			4,103,708				3,867,941
PCI Loans			76,022				93,712
Discount on PCI loans			(2,430)				(3,872)
Less: Allowance for loan losses			(310)				-
PCI loans, net			73,282				89,840
Total loans and lease finance receivables		$	4,176,990			$	3,957,781

As of June 30, 2016, 69.13% of the total gross loan portfolio (excluding PCI loans) consisted of commercial real estate loans and 2.25% of the total loan portfolio consisted of construction loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2016, $190.5 million, or 6.60% of the total commercial real estate loans included loans secured by farmland, compared to $173.0 million, or 6.54%, at December 31, 2015. The loans secured by farmland included $135.6 million for loans secured by dairy & livestock land and $54.8 million for loans secured by agricultural land at June 30, 2016, compared to $128.4 million for loans secured by dairy & livestock land and $44.6 million for loans secured by agricultural land at December 31, 2015. As of June 30, 2016, dairy & livestock and agribusiness loans of $213.8 million were comprised of $200.2 million for dairy & livestock loans and $14.1 million for agribusiness loans, compared to $287.0 million for dairy & livestock loans and $18.5 million for agribusiness loans at December 31, 2015.

At June 30, 2016, the Company held approximately $2.04 billion of total fixed rate loans, including PCI loans.

At June 30, 2016 and December 31, 2015, loans totaling $3.13 billion and $2.91 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

 

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Credit Quality Indicators

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

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass – These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – Loans classified as substandard are inadequately protected by current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

 

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

 

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the ALLL methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at June 30, 2016 and December 31, 2015. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

 

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

 

 

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(1)

Based upon changes to our ALLL methodology, as described in Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015, beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance.

 

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The following tables present the recorded investment in loans held-for-investment and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented.

 

 

(1)

Based upon changes to our ALLL methodology, as described in Note 3 – Summary of Significant Accounting Policies of the 2015 Annual Report on Form 10-K for the year ended December 31, 2015, beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance.

 

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Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

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

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

 

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

 

 

(1)

As of June 30, 2016, $15.6 million of nonaccruing loans were current, $84,000 were 30-59 days past due, $338,000 were 60-89 days past due and $1.4 million were 90+ days past due.

(2)

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

 

 

(1)

As of December 31, 2015, $7.9 million of nonaccruing loans were current, $456,000 were 30-59 days past due, $9.1 million were 60-89 days past due and $3.5 million were 90+ days past due.

(2)

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

 

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Impaired Loans

At June 30, 2016, the Company had impaired loans, excluding PCI loans, of $37.8 million. Of this amount, there was $11.4 million of nonaccrual commercial real estate loans, $2.6 million of nonaccrual Small Business Administration (“SBA”) loans, $2.4 million of nonaccrual single-family residential (“SFR”) mortgage loans, $568,000 of nonaccrual commercial and industrial loans, and $428,000 of nonaccrual consumer and other loans. These impaired loans included $32.3 million of loans whose terms were modified in a troubled debt restructuring, of which $12.0 million were classified as nonaccrual. The remaining balance of $20.3 million consisted of 31 loans performing according to the restructured terms. The impaired loans had a specific allowance of $630,000 at June 30, 2016. At December 31, 2015, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $63.7 million with a related allowance of $669,000.

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

 

 

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		As of December 31, 2015
		Recorded     Investment				Unpaid     Principal     Balance				Related     Allowance
			(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial		$	1,017			$	1,894			$	-
SBA			3,207				3,877				-
Real estate:
Commercial real estate
Owner occupied			6,252				7,445				-
Non-owner occupied			34,041				37,177				-
Construction
Speculative			-				-				-
Non-speculative			-				-				-
SFR mortgage			5,665				6,453				-
Dairy & livestock and agribusiness			3,685				3,684				-
Municipal lease finance receivables			-				-				-
Consumer and other loans			890				1,454				-
Total			54,757				61,984				-
With a related allowance recorded:
Commercial and industrial			626				695				626
SBA			41				47				10
Real estate:
Commercial real estate
Owner occupied			-				-				-
Non-owner occupied			-				-				-
Construction
Speculative			7,651				7,651				13
Non-speculative			-				-				-
SFR mortgage			588				640				20
Dairy & livestock and agribusiness			-				-				-
Municipal lease finance receivables			-				-				-
Consumer and other loans			43				45				-
Total			8,949				9,078				669
Total impaired loans		$	63,706			$	71,062			$	669

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2016 and December 31, 2015 have already been written down to the estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

 

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Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2016, compared to zero and a $500,000 recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2015, respectively. As of June 30, 2016 and December 31, 2015, the balance in this reserve was $7.2 million and was included in other liabilities.

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed discussion regarding TDRs.

As of June 30, 2016, there were $32.3 million of loans classified as a TDR, of which $12.0 million were nonperforming and $20.3 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2016, performing TDRs were comprised of one construction loan of $7.7 million, nine commercial real estate loans of $6.5 million, 11 SFR mortgage loans of $3.3 million, six commercial and industrial loans of $879,000, two SBA loans of $861,000, one dairy & livestock and agribusiness loan of $697,000 and one consumer loan of $401,000. There were no loans removed from TDR classification during the three and six months ended June 30, 2016 and 2015.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated $609,000 and $607,000 of specific allowance to TDRs as of June 30, 2016 and December 31, 2015, respectively.

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

 

 

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The following tables summarize loans modified as troubled debt restructurings for the periods presented.

Modifications (1)

 

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(1)

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

(2)

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

As of June 30, 2016, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2016.

 

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8.     EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and six months ended June 30, 2016, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 262,000 and 267,000, respectively. For the three and six months ended June 30, 2015, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 254,000 and 228,000, respectively.

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

 

 

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9.     FAIR VALUE INFORMATION

Fair Value Hierarchy

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

The following disclosure provides the fair value information for financial assets and liabilities as of June 30, 2016. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

 

•

Level 1- includes assets and liabilities that have an active market that provides an objective quoted value for each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most objective measurement of fair value. Level 2 is less objective and Level 3 is the least objective (most subjective) in estimating fair value.

 

•

Level 2- assets and liabilities are ones where there is no active market in the same assets, but where there are parallel markets or alternative means to estimate fair value using observable information inputs such as the value placed on similar assets or liability that were recently traded.

 

•

Level 3 -fair values are based on information from the entity that reports these values in their financial statements. Such data are referred to as unobservable, in that the valuations are not based on data available to parties outside the entity.

Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy. Inputs here refer explicitly to the types of information used to obtain the fair value of the asset or liability.

Observable inputs include data sources and market prices available and visible outside of the entity. While there will continue to be judgments required when an active market price is not available, these inputs are external to the entity and observable outside the entity; they are consequently considered more objective than internal unobservable inputs used for Level 3 fair value.

Unobservable inputs are data and analyses that are developed within the entity to assess the fair value, such as management estimates of future benefits from use of assets.

There were no transfers in and out of Level 1 and Level 2 during the six months ended June 30, 2016 and 2015.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

 

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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at June 30, 2016 and December 31, 2015, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

 

		Carrying Value at June 30, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Losses For the Six Months Ended June 30, 2016
										(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial		$	95			$	-			$	-			$	95			$	14
SBA			232				-				-				232				42
Real estate:
Commercial real estate			1,000				-				-				1,000				1
Construction			7,651				-				-				7,651				31
SFR mortgage			-				-				-				-				-
Dairy & livestock and agribusiness			-				-				-				-				-
Consumer and other loans			13				-				-				13				4
Other real estate owned			1,522				-				-				1,522				337
Total assets		$	10,513			$	-			$	-			$	10,513			$	429
		Carrying Value at December 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Losses For the Year Ended December 31, 2015
											(Dollars in thousands	)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial		$	228			$	-			$	-			$	228			$	228
SBA			41				-				-				41				15
Real estate:
Commercial real estate			-				-				-				-				-
Construction			7,651				-				-				7,651				13
SFR mortgage			588				-				-				588				20
Dairy & livestock and agribusiness			-				-				-				-				-
Consumer and other loans			258				-				-				258				101
Other real estate owned			948				-				-				948				162
Total assets		$	9,714			$	-			$	-			$	9,714			$	539

 

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Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of June 30, 2016 and December 31, 2015, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2016 and December 31, 2015. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

 

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10.    BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and the Treasury Department. The Bank has 43 Business Financial Centers and eight Commercial Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and to assess performance. Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity and interest rate risk. Information related to the Company’s remaining operating segments, which include construction lending, dairy & livestock and agribusiness lending, leasing, CitizensTrust, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following tables represent the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 — Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2015. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the “Centers” category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the condensed consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

 

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The following tables present the operating results and other key financial measures for the individual operating segments for the periods presented.

 

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		For the Three Months Ended June 30, 2016
		Centers				Treasury				Other				Eliminations				Total
						(Dollars in thousands)
Interest income, including loan fees		$	38,953			$	17,779			$	11,283			$	-			$	68,015
Credit for funds provided (1)			8,820				-				14,004				(22,824	)			-
Total interest income			47,773				17,779				25,287				(22,824	)			68,015
Interest expense			1,723				203				133				-				2,059
Charge for funds used (1)			1,467				15,629				5,728				(22,824	)			-
Total interest expense			3,190				15,832				5,861				(22,824	)			2,059
Net interest income			44,583				1,947				19,426				-				65,956
Recapture of provision for loan losses			-				-				-				-				-
Net interest income after recapture of provision for loan losses			44,583				1,947				19,426				-				65,956
Noninterest income			5,326				-				3,948				-				9,274
Noninterest expense			12,891				218				21,313				-				34,422
Debt termination expense			-				16				-				-				16
Segment pre-tax profit		$	37,018			$	1,713			$	2,061			$	-			$	40,792
Segment assets as of June 30, 2016		$	6,967,395			$	3,738,321			$	943,289			$	(3,336,698	)		$	8,312,307
(1)   Credit for funds provided and charges for funds used are eliminated in the condensed consolidated presentation.
		For the Three Months Ended June 30, 2015
		Centers				Treasury				Other				Eliminations				Total
						(Dollars in thousands)
Interest income, including loan fees		$	35,813			$	19,210			$	9,492			$	-			$	64,515
Credit for funds provided (1)			8,530				-				13,024				(21,554	)			-
Total interest income			44,343				19,210				22,516				(21,554	)			64,515
Interest expense			1,628				31				98				-				1,757
Charge for funds used (1)			1,052				15,441				5,061				(21,554	)			-
Total interest expense			2,680				15,472				5,159				(21,554