CVB FINANCIAL CORP. The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources ofCVB Financial Corp. and its wholly owned subsidiary. 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 this Annual Report on Form 10-K, and the audited consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 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. 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% and established a program of purchases ofTreasury and mortgage-backed securities. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contain substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program ("PPP"), a$349 billion program designed to aid small- and medium-sized businesses through 100%Small Business Administration ("SBA") guaranteed loans distributed through banks. These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. Legislation passed onApril 24, 2020 provided additional PPP funds of$310 billion . During 2020, we originated and funded approximately 4,100 loans, totaling$1.1 billion . Greater than 99% of these loans have been granted forgiveness as ofDecember 31, 2021 . In response to the COVID-19 pandemic and the CARES Act, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. OnJanuary 13, 2021 , the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least$25 billion 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 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses. As ofDecember 31, 2021 , we had originated approximately 1,900 round two loans totaling$420 million , with a remaining loan balance, at amortized cost, of$183.6 million atDecember 31, 2021 . The Paycheck Protection Program officially ended onMay 31, 2021 . As ofDecember 31, 2021 , approximately 4,800 loans, representing approximately$1.3 billion in PPP loan balances were submitted to the SBA and granted forgiveness. No recapture of provision for credit losses was recorded in the fourth quarter of 2021, compared to a recapture of$4.0 million of provision for credit losses in the third quarter of 2021. For the year endedDecember 31, 2021 , a$25.5 million recapture of provision for credit losses was recorded as a result of the improvements in our economic forecast of certain macroeconomic variables. In comparison, the Company recorded a provision for credit losses of$23.5 million in 2020 due to the forecast of a severe economic downturn as a result of the onset of the COVID-19 pandemic. We continue to monitor the impact of COVID-19 closely. The extent to which the COVID-19 pandemic will impact our future operations and financial results is uncertain, but we may experience increased provision for credit losses if this pandemic results in future economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues. 36 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES The preparation of these 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 most important in the estimation process. We have used the best information available 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 could change future valuations and impact the results of operations.
Adoption of New Accounting Standard
Allowance for Credit Losses ("ACL") - On January 1, 2020 , the Company adopted
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments". This ASU significantly changes how
entities will measure credit losses for most financial assets and certain other
instruments that are not measured at fair value through net income. We adopted
this ASU using a modified retrospective approach, as required, and have not
adjusted prior period comparative information and will continue to disclose
prior period financial information in accordance with the previous accounting
guidance. The adoption of ASU 2016-13, resulted in a reduction to our opening
retained earnings of approximately $1.3 million , net of tax.
This ASU replaced the current "incurred loss" approach with an "expected loss"
model. The new model, referred to as the Current Expected Credit Loss ("CECL")
model, applies to: (1) financial assets subject to credit losses and measured at
amortized cost, and (2) certain off balance sheet credit exposures. This
includes, but is not limited to, loans, held-to-maturity ("HTM") securities,
loan commitments, and financial guarantees. For loans and HTM debt securities,
this ASU requires a CECL measurement to estimate the allowance for credit losses
("ACL") for the remaining contractual term, adjusted for prepayments, of the
financial asset (including off-balance sheet credit exposures) using historical
experience, current conditions, and reasonable and supportable forecasts. This
ASU also eliminated the existing guidance for purchased credit-impaired ("PCI")
loans, but requires an allowance for purchased financial assets with more than
an insignificant deterioration of credit since origination. Purchase Credit
Deteriorated ("PCD") assets are recorded at their purchase price plus an ACL
estimated at the time of acquisition. Under this ASU, there is no provision for
credit losses recognized at acquisition; instead, there is a gross-up of the
purchase price of the financial asset for the estimate of expected credit losses
and a corresponding ACL recorded. Changes in estimates of expected credit losses
after acquisition are recognized as provision for credit losses (or reversal of
provision for credit losses) in subsequent periods. In addition, this ASU
modifies the OTTI model for available-for-sale ("AFS") debt securities to
require an allowance for credit impairment instead of a direct write-down, which
allows for reversal of credit impairments in future periods based on
improvements in credit. As a policy election, we excluded the accrued interest
receivable balance from the amortized cost basis of financing receivables and
HTM securities, as well as AFS securities, and disclose total accrued interest
receivable separately on the condensed consolidated balance sheet.
For a full discussion of our methodology of assessing the adequacy of the
allowance for credit losses, see "Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operation - Risk Management" and Note 3 -
Summary of Significant Accounting Policies and Note 5 - Loans and Lease Finance
Receivables and Allowance for Credit Losses of our consolidated financial
statements presented elsewhere in this report.
Business Combinations - The Company applies the acquisition method of accounting
for business combinations. Under the acquisition method, the acquiring entity in
a business combination recognizes the assets acquired and liabilities assumed at
their acquisition date fair values. Management utilizes prevailing valuation
techniques appropriate for the asset or liability being measured in determining
these fair values. 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. Any excess of the purchase price over
amounts allocated to assets acquired, including identifiable intangible assets,
and liabilities assumed is recorded as goodwill. Where amounts allocated to
assets acquired and liabilities assumed is greater than the purchase price, a
bargain purchase gain would be recognized. Acquisition related costs are
expensed as incurred.
37
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Valuation and Recoverability of Goodwill - Goodwill represented $663.7 million
of our $15.88 billion in total assets as of December 31, 2021 . The Company has
one reportable segment. Goodwill has an indefinite useful life and is not
amortized, but is tested for impairment at least annually, or more frequently,
if events and circumstances exist that indicate that a goodwill impairment test
should be performed. Such events and circumstances may include among others, a
significant adverse change in legal factors or in the general business climate,
significant decline in our stock price and market capitalization, unanticipated
competition, the testing for recoverability of a significant asset group within
the reporting unit, and an adverse action or assessment by a regulating body.
Any adverse change in these factors could have a significant impact on the
recoverability of goodwill and could have a material impact on our consolidated
financial statements.
Based on the results of our annual goodwill impairment test, we determined that
no goodwill impairment charges were required as our single reportable segment's
fair value exceeded its carrying amount. As of December 31, 2021 , we determined
there were no events or circumstances which would more likely than not reduce
the fair value of our reportable segment below its carrying amount. Note 3 -
Summary of Significant Accounting Policies of our consolidated financial
statements presented elsewhere in this report
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Future realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate character (for
example, ordinary income or capital gain) within the carryback or carryforward
periods available under the tax law. Based on historical and future expected
taxable earnings, the Company considers the future realization of these deferred
tax assets more likely than not.
The tax effects from an uncertain tax position are recognized in the financial
statements only if, based on its merits, the position is more likely than not to
be sustained on audit by the taxing authorities.
For complete discussion and disclosure of other accounting policies see Note 3 - Summary of Significant Accounting Policies of the Company's consolidated financial statements presented elsewhere in this report.
38
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Recently Issued Accounting Pronouncements but Not Adopted as of December 31,
2021
Adoption Impact on Financial
Standard Description Timing Statements
ASU No. 2020-04, The FASB issued ASU 1st Quarter The Company established a
Reference Rate 2020-04, Reference Rate 2020 through LIBOR Transition Task Force
Reform (Topic Reform: Facilitation of the the 4th in 2020, which has
848): Effects of Reference Rate Quarter 2022 inventoried our instruments
Facilitation of Reform on Financial that reflect exposure to the Effects of Reporting. The amendments LIBOR, created a
framework
Reference Rate in this update provide to manage the transition and
Reform on temporary, optional established a timeline for
Financial guidance to ease the key decisions and actions,
Reporting potential burden in and started the transition
accounting for from LIBOR in 2021. Although
Issued March transitioning away from the Company is assessing the
2020 reference rates such as impacts of this transition
LIBOR. The amendments and exploring alternatives
provide optional expedients to use in place of LIBOR for
and exceptions for applying various financial
GAAP to transactions instruments, primarily
affected by reference rate related to ourvariable-rate
reform if certain criteria loans and our interest rate
are met. The amendments swap derivatives that are
primarily include relief indexed to LIBOR, we do not
related to contract expect this ASU to have a
modifications and hedging material impact on the
relationships, as well as Company's consolidated
providing a one-time financial statements.
election for the sale or
transfer of debt securities
classified as
held-to-maturity. This
guidance is effective
immediately and the
amendments may be applied
prospectively through
December 31, 2022.
ASU 2020-06, Debt The FASB issued ASU 1st Quarter The adoption of this ASU is
- Debt with 2020-06, Debt - Debt with 2022 not expected to have a
Conversion and Conversion and Other material impact on our
Other Options Options (Subtopic 470-20) consolidated financial
(Subtopic 470-20) and Derivatives and statements.
and Derivatives Hedging-Contracts in
and Entity's Own Equity
Hedging-Contracts (Subtopic 815-40):
in Entity's Own Accounting for Convertible
Equity (Subtopic Instruments and Contracts
815-40): in an Entity's Own Equity.
Accounting for This ASU reduces the number
Convertible of accounting models for
Instruments and convertible instruments and
Contracts in an allows more contracts to
Entity's Own qualify for equity
Equity classification.
Issued August
2020
39
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OVERVIEW
For the year ended
The Company adopted ASU 2016-13, commonly referred to as CECL which replaced the "incurred loss" approach with an "expected loss" model over the life of the loan, effective onJanuary 1, 2020 . A$23.5 million provision for credit losses was recorded in 2020, due to the severe economic disruption and forecasted impact resulting from the initial onset of the COVID-19 pandemic. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our economic forecasts in 2021 reflected improvements in key macroeconomic variables and therefore lower projected loan losses, which resulted in a$25.5 million recapture of provision for credit losses for the year endedDecember 31, 2021 . For the year endedDecember 31, 2021 , we experienced charge-offs of$3.4 million and total recoveries of$198,000 , resulting in net charge-offs of$3.2 million for the year. Of the approximately 4,100 SBA PPP loans we originated in 2020,$1.1 billion have been forgiven. As ofDecember 31, 2021 , the Company originated approximately 1,900 PPP loans in round two, with a remaining loan balance, at amortized cost, of$183.6 million atDecember 31, 2021 . Interest and fee income from all PPP loans was approximately$30.5 million for 2021, compared to$28.5 million for 2020. AtDecember 31, 2021 , total assets of$15.88 billion increased$1.46 billion , or 10.16%, from total assets of$14.42 billion atDecember 31, 2020 . Interest-earning assets of$14.68 billion atDecember 31, 2021 increased$1.46 billion , or 11.04%, when compared with$13.22 billion atDecember 31, 2020 . The increase in interest-earning assets includes a$2.13 billion increase in investment securities, partially offset by a$461.1 million decrease in total loans and a$193.3 million decrease in interest-earning balances due from theFederal Reserve . The decrease in total loans was due to a$696.4 million decrease in PPP loans. Excluding PPP loans, total loans increased by$235.3 million , or 3.15%, fromDecember 31, 2020 . Our tax equivalent yield on interest-earning assets was 3.02% for 2021, compared to 3.71% for 2020. This decline reflects the net impact of lower loan yields, lower yields on investment securities, and a reduction in average loans as a percentage of average earning assets from 69.02% in 2020 to 57.22% in 2021. Total investment securities were$5.11 billion atDecember 31, 2021 , an increase of$2.13 billion , or 71.61%, from$2.98 billion atDecember 31, 2020 . We deployed some of our excess liquidity during 2021 by purchasing$3.16 billion of additional investment securities with a non-tax equivalent weighted average yield of approximately 1.61%. AtDecember 31, 2021 , investment securities HTM totaled$1.93 billion . AtDecember 31, 2021 , investment securities AFS totaled$3.18 billion , inclusive of a pre-tax net unrealized loss of$1.3 million , which decreased$56.1 million fromDecember 31, 2020 . HTM securities increased by$1.35 billion , or 232.85%, and AFS securities increased by$785.0 million , or 32.72%, fromDecember 31, 2020 . During the fourth quarter of 2021, we purchased approximately$452 million in new AFS securities with an average tax equivalent yield of approximately 1.61% and$259 million in new HTM securities with an expected average tax equivalent yield of approximately 1.84%. Our tax equivalent yield on investments was 1.56% for 2021, compared to 2.10% for 2020. Total loans and leases, at amortized cost, of$7.89 billion atDecember 31, 2021 , decreased by$461.1 million , or 5.52%, from$8.35 billion atDecember 31, 2020 . The decrease in total loans included a$696.4 million decline in PPP loans. The$461.1 million decrease in loans also included decreases of$29.9 million in SFR mortgage loans,$22.9 million in construction loans,$15.3 million in SBA loans, and$11.3 million in consumer and other loans. Partially offsetting these declines were increases in commercial real estate loans of$288.2 million , as well as a$25.1 million increase in dairy & livestock and agribusiness loans. Our core loans, excluding PPP loans, grew by$235.3 million , or 3.15% fromDecember 31, 2020 . Our yield on loans was 4.42% for the year endedDecember 31, 2021 , compared to 4.68% for 2020. Interest income for yield adjustments related to discount accretion on acquired loans was$12.3 million for 2021, compared to$17.4 million for 2020. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion, nonaccrual interest income and the impact from PPP loans ("core loan yield"), declined by 27 basis points for the year endedDecember 31, 2021 when compared to the same period of 2020. Noninterest-bearing deposits were$8.10 billion atDecember 31, 2021 , an increase of$648.7 million , or 8.70%, compared to$7.46 billion atDecember 31, 2020 . The deposit growth in 2021 was partly due to our customers maintaining greater liquidity in their bank accounts. AtDecember 31, 2021 , noninterest-bearing deposits were 62.45% of total deposits, compared to 63.52% atDecember 31, 2020 . Our average cost of total deposits for 2021 was 0.04%, compared to 0.12% for 2020.
Customer repurchase agreements totaled
40
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At December 31, 2021 , we had $2.3 million in overnight borrowings, compared to
$5.0 million in short short-term borrowings with 0% cost, at December 31, 2020 .
We redeemed our $25.8 million junior subordinated debentures on June 15, 2021 .
The debentures, bearing interest at three-month LIBOR plus 1.38%, had an
original maturity of 2036. These debentures had a borrowing cost of 2.10% for
the year ended December 31, 2020 . The Bank's funding is now entirely core
customer deposits and customer repurchase agreements. Our average cost of funds
was 0.05% for 2021, compared to 0.13% for 2020.
The allowance for credit losses totaled $65.0 million at December 31, 2021 ,
compared to $93.7 million at December 31, 2020 . The allowance for credit losses
was decreased by $25.5 million in 2021, due to the improved outlook in our
forecast of certain macroeconomic variables that were influenced by the economic
impact of the pandemic and government stimulus, and by $3.2 million in
year-to-date net charge-offs. At December 31, 2021 , ACL as a percentage of total
loans and leases outstanding was 0.82%, or 0.84% when PPP loans are excluded.
This compares to 1.12% at December 31, 2020 , or 1.25% when PPP loans are
excluded. As of December 31, 2021 , total discounts remaining on acquired loans
were $18.6 million .
The Company's total equity was $2.08 billion at December 31, 2021 . This
represented an increase of $73.5 million , or 3.66%, from total equity of $2.01
billion at December 31, 2020 . This increase was primarily due to net earnings of
$212.5 million , partially offset by $97.8 million in cash dividends and a $39.3
million decrease in other comprehensive income from the tax effected impact of
the decline in market value of available-for-sale securities. During the third
quarter of 2021, we repurchased 390,336 shares of common stock for $7.4 million ,
or an average repurchase price of $18.97 . Our tangible book value per share at
December 31, 2021 was $10.27 .
Our capital ratios under the revised capital framework referred to as Basel III
remain well-above regulatory requirements. As of December 31, 2021 , the
Company's Tier 1 leverage capital ratio totaled 9.18%, our common equity Tier 1
ratio totaled 14.86%, our Tier 1 risk-based capital ratio totaled 14.86%, and
our total risk-based capital ratio totaled 15.63%. 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.
Acquisition Related
OnJanuary 7, 2022 , the Company completed the previously announced merger transaction wherebySuncrest Bank ("Suncrest") merged with and into the Company's wholly-owned subsidiaryCitizens Business Bank ("Citizens"), in accordance with the terms and conditions of that certain Agreement and Plan of Reorganization and Merger ("Merger Agreement"), dated as ofJuly 27, 2021 , by and among the Company, Citizens and Suncrest, in a stock and cash transaction valued at approximately$237 million in aggregate, or$18.63 per Suncrest share based onCVB Financial Corp.'s closing stock price of$22.87 onJanuary 7, 2022 . Under the terms of the Merger Agreement, the Company issued approximately 8.6 million shares of Company common stock and approximately$39.6 million in aggregate cash consideration, including cash paid out in settlement of outstanding incentive stock option awards at Suncrest.Suncrest Bank , headquartered inVisalia, California , had approximately$1.4 billion in total assets,$0.8 billion in net loans,$1.2 billion in total deposits and$179.0 million in total equity as ofDecember 31, 2021 . Tangible book value per share was$11.16 atDecember 31, 2021 . Suncrest's seven branch locations and two loan production offices inCalifornia's Central Valley and theSacramento area opened asCitizens Business Bank locations onJanuary 10, 2022 .Citizens Business Bank will consolidate two of the former Suncrest branch locations during the second quarter of 2022. 41 -------------------------------------------------------------------------------- ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
Variance
Year Ended December 31, 2021 2020
2021 2020 2019 $ % $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 414,550 $ 416,053 $ 435,772 $ (1,503 ) -0.36 % $ (19,719 ) -4.53 %
Recapture of
(provision for) credit
losses 25,500 (23,500 ) (5,000 ) 49,000 208.51 % (18,500 ) -370.00 % Noninterest income
47,385 49,870 59,042 (2,485 ) -4.98 % (9,172 ) -15.53 %
Noninterest expense (189,787 ) (192,903 ) (198,740 ) 3,116 1.62 % 5,837 2.94 %
Income taxes (85,127 ) (72,361 ) (83,247 ) (12,766 ) -17.64 % 10,886 13.08 %
Net earnings $ 212,521 $ 177,159 $ 207,827 $ 35,362 19.96 % $ (30,668 ) -14.76 %
Earnings per common
share:
Basic $ 1.57 $ 1.30 $ 1.48 $ 0.27 $ (0.18 )
Diluted $ 1.56 $ 1.30 $ 1.48 $ 0.26 $ (0.18 )
Return on average
assets 1.38 % 1.37 % 1.84 % 0.01 % -0.47 %Return on average shareholders' equity 10.30 % 8.90 % 10.71 % 1.40 %
-1.81 %
Efficiency ratio 41.09 % 41.40 % 40.16 % -0.31 % 1.24 %
Noninterest expense to
average assets 1.24 % 1.49 % 1.76 % -0.25 % -0.27 %
Return on Average Tangible Common Equity Reconciliations (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.
Year Ended December 31,
2021 2020 2019
(Dollars in thousands)
Net Income $ 212,521 $ 177,159 $ 207,827
Add: Amortization of intangible assets 8,240 9,352 10,798
Less: Tax effect of amortization of intangible assets (1) (2,436 ) (2,765 ) (3,192 ) Tangible net income$ 218,325 $ 183,746 $ 215,433 Average stockholders' equity$ 2,063,360 $ 1,991,664 $ 1,939,961 Less: Average goodwill (663,707 ) (663,707 ) (665,026 ) Less: Average intangible assets (29,328 ) (38,203 ) (48,296 ) Average tangible common equity$ 1,370,325 $ 1,289,754
Return on average equity, annualized 10.30 % 8.90 % 10.71 % Return on average tangible common equity 15.93 % 14.25 % 17.56 % (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 years endedDecember 31, 2021 , 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in 42 -------------------------------------------------------------------------------- proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability and Market Risk Management - Interest Rate Sensitivity Management included herein. The tables below present the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. Interest-Earning Assets and Interest-Bearing Liabilities Year Ended December 31, 2021 2020 2019 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable$ 2,820,050 $ 37,532 1.36 %$ 1,854,964 $ 35,129 1.94 %$ 1,580,850 $ 38,189 2.42 % Tax-advantaged 29,855 741 2.97 % 37,110 923 3.50 % 41,991 1,141 3.76 % Held-to-maturity securities: Taxable 1,007,982 17,747 1.86 % 438,190 9,542 2.18 % 504,814 11,498 2.28 % Tax-advantaged 200,572 4,428 2.67 % 173,756 4,681 3.26 % 211,899 5,890 3.36 % Investment in FHLB stock 17,688 1,019 5.76 % 17,688 978 5.53 % 17,688 1,235 6.98 % Interest-earning deposits with other institutions 1,953,209 2,569 0.13 % 1,098,814 1,682 0.15 % 120,247 2,269 1.89 % Loans (2) 8,065,877 356,594 4.42 % 8,066,483 377,402 4.68 % 7,552,505 397,628 5.26 % Total interest-earning assets 14,095,233 420,630 3.02 % 11,687,005 430,337 3.71 % 10,029,994 457,850 4.58 % Total noninterest-earning assets 1,255,288 1,242,808 1,272,907 Total assets$ 15,350,521 $ 12,929,813 $ 11,302,901 INTEREST-BEARING LIABILITIES Savings deposits (3)$ 4,249,379 4,145 0.10 %$ 3,530,606 8,803 0.25 %$ 3,048,785 12,698 0.42 % Time deposits 375,666 1,201 0.32 % 445,962 3,799 0.85 % 487,221 4,422 0.91 % Total interest-bearing deposits 4,625,045 5,346 0.12 % 3,976,568 12,602 0.32 % 3,536,006 17,120 0.48 % FHLB advances, other borrowings, and customer repurchase agreements 624,068 734 0.12 % 511,404 1,682 0.33 % 537,964 4,958 0.91 % Interest-bearing liabilities 5,249,113 6,080 0.12 % 4,487,972 14,284 0.32 % 4,073,970 22,078 0.54 % Noninterest-bearing deposits 7,817,627 6,281,989 5,177,035 Other liabilities 220,421 168,188 111,935 Stockholders' equity 2,063,360 1,991,664 1,939,961 Total liabilities and stockholders' equity$ 15,350,521 $ 12,929,813 $ 11,302,901 Net interest income$ 414,550 $ 416,053 $ 435,772 Net interest spread - tax equivalent 2.90 % 3.39 % 4.04 % Net interest margin 2.96 % 3.57 % 4.35 % Net interest margin - tax equivalent 2.97 % 3.59 % 4.36 % (1) Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 21% in effect for the years endedDecember 31, 2021 , 2020 and 2019. The non TE rates for tax-advantaged HTM investment securities were 2.21%, 2.69% and 2.78% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The non-tax equivalent (TE) rates for total investment securities was 1.53%, 2.04% and 2.43% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2) Includes loan fees of$27.5 million ,$23.9 million and$3.1 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Prepayment penalty fees of$9.0 million ,$8.2 million and$5.4 million are included in interest income for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (3) Includes interest-bearing demand and money market accounts. 43 -------------------------------------------------------------------------------- The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average non TE interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in non TE interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume. Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income Comparison of Year Ended December 31, 2021 Compared to 2020 2020 Compared to 2019 Increase (Decrease) Due to Increase (Decrease) Due to Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities$ 18,449 $ (10,522 ) $ (5,524 ) $ 2,403 $ 5,679 $ (7,608 ) $ (1,131 ) $ (3,060 ) Tax-advantaged investment securities (180 ) (2 ) 0 (182 ) (132 ) (97 ) 11 (218 ) Held-to-maturity securities: Taxable investment securities 11,119 (1,267 ) (1,647 ) 8,205 (1,499 ) (525 ) 68 (1,956 ) Tax-advantaged investment securities 721 (844 ) (130 ) (253 ) (1,061 ) (181 ) 33 (1,209 ) Investment in FHLB stock - 41 - 41 - (257 ) - (257 ) Interest-earning deposits with
other institutions 1,308 (237 ) (184 ) 887
18,465 (2,085 ) (16,967 ) (587 ) Loans (28 ) (20,782 ) 2 (20,808 ) 27,060 (44,273 ) (3,013 ) (20,226 ) Total interest income 31,389 (33,613 ) (7,483 ) (9,707 )
48,512 (55,026 ) (20,999 ) (27,513 ) Interest expense: Savings deposits 1,792 (5,359 ) (1,091 ) (4,658 )
2,007 (5,097 ) (805 ) (3,895 ) Time deposits
(599 ) (2,373 ) 374 (2,598 ) (374 ) (272 ) 23 (623 )
FHLB advances, other
borrowings, and
customer
repurchase
agreements 372 (1,081 ) (239 ) (948 ) (245 ) (3,188 ) 157 (3,276 )
Total interest
expense 1,565 (8,813 ) (956 ) (8,204 )
1,388 (8,557 ) (625 ) (7,794 )
Net interest income
$ 47,124 $ (46,469 ) $ (20,374 ) $ (19,719 ) 2021 Compared to 2020 Net interest income of$414.6 million for 2021 decreased$1.5 million , or 0.36%, compared to$416.1 million for 2020. Interest-earning assets increased on average by$2.41 billion , or 20.61%, from$11.69 billion for 2020 to$14.10 billion for 2021. Our net interest margin (TE) was 2.97% for 2021, compared to 3.59% for 2020. Interest income for 2021 of$420.6 million declined by$9.7 million , or 2.26%, when compared to 2020, as interest income and fees on loans declined by$20.8 million , or 5.51%, year-over-year. Compared to 2020, average interest-earning assets increased by$2.41 billion and the yield on average earning assets was 3.02% for 2021, compared to 3.71% for 2020. The 69 basis point decrease in the interest-earning asset yield over 2020 resulted from a 26 basis point decrease in loan yields from 4.68% for 2020 to 4.42% for 2021, and a 51 basis point decline in the non-tax equivalent investment yields, as well as a change in mix of earning assets, resulting from an$857.5 million increase in average balances at theFederal Reserve . The decrease in earning asset yield was impacted by a change in asset mix with average loan balances declining to 57.22% of earning assets for 2021, compared to 69.02% for 2020, as well as lower loan and investment yields. Conversely the average balances at theFederal Reserve grew as a percentage of average earning assets to 13.64% for 2021, compared to 9.11% for 2020. Interest income and fees on loans for 2021 of$356.6 million decreased$20.8 million , or 5.51% when compared to 2020. The average balance of loans was essentially the same in 2021 when compared to 2020, as core loans grew on average by$85.1 million , while PPP loans on average decreased$85.7 million . Loan yields decreased by 26 basis points from 2020. PPP loans resulted in approximately$24.3 million in fee income and$6.2 million in loan interest during 2021, compared to$21.4 million in fee income and$7.1 million in loan interest during 2020. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid decreased by$5.2 million compared to 2020. The decline in interest rates since the start 44 -------------------------------------------------------------------------------- of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion, nonaccrual interest income and the impact from PPP loans, declined by 27 basis points compared to 2020. The decline in loan yields was due to lower rates on loans indexed to variable interest rates such as the Bank's prime rate and lower yields on new loans in the low rate environment experienced for much of the last two years. In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans atDecember 31, 2021 and 2020. As ofDecember 31, 2021 and 2020, we had$6.9 million and$14.3 million of nonaccrual loans, respectively. Interest income from investment securities was$60.4 million for 2021, a$10.2 million , or 20.23%, increase from$50.3 million for 2020. 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. This increase was the net result of a$1.55 billion increase in average investment securities, partially offset by a 51 basis point decline in the non TE yield on securities, compared to 2020. The significant decline in interest rates over the past two years decreased yields on investment securities due partly to higher levels of premium amortization, as well as lower yields on investments purchased during the past two years. We continued to maintain a significant amount of funds at theFederal Reserve . OurFederal Reserve balance averaged more than$1.9 billion for 2021, which was$857,000 greater than the average for 2020. Interest expense of$6.1 million for 2021 decreased$8.2 million , or 57.43%, compared to$14.3 million for 2020. The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.12% for 2021, from 0.32% for 2020. Average interest-bearing liabilities were$761.1 million higher for 2021 when compared to 2020. Noninterest-bearing deposits grew on average by$1.54 billion , or 24.45% compared to 2020, while interest-bearing deposits and customer repurchase agreements grew on average by$779.0 million for 2021. On average, noninterest-bearing deposits were 62.83% of our total deposits for 2021, compared to 61.24% for 2020. Total cost of funds was 0.05% for 2021, compared with 0.13% for 2020.
2020 Compared to 2019
Net interest income of$416.1 million for 2020 decreased$19.7 million , or 4.53%, compared to$435.8 million for 2019. Interest-earning assets increased on average by$1.66 billion , or 16.52%, from$10.03 billion for 2019 to$11.69 billion for 2020. Our net interest margin (TE) was 3.59% for 2020, compared to 4.36% for 2019. Interest income for 2020 was$430.3 million , which represented a$27.5 million , or 6.01%, decrease when compared to 2019. Average interest-earning assets increased to$11.69 billion and the average earning asset yield was 3.71% for 2020, compared to 4.58% for 2019. The 87 basis point decrease in the interest-earning asset yield over 2019 was primarily due to a combination of a 58 basis point decrease in loan yields, a 39 basis point decline in the non-tax equivalent investment yields, and a change in mix of earning assets, with average balances at theFederal Reserve growing to 9.11% of earning assets for 2020, compared to 1.14% for 2019. The increase in balances at theFederal Reserve was impacted by$1.54 billion in average deposit growth for 2020. The net interest margin for 2020 would have been about 30 basis points higher without the$950.7 million year-over-year increase in average deposits at theFederal Reserve , earning just 10 basis points. Interest income and fees on loans for 2020 of$377.4 million decreased$20.2 million , or 5.09% when compared to 2019 Average loans increased$514.0 million for 2020 when compared to 2019, primarily due to$702.1 million in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in approximately$21.4 million in fee income and$7.1 million in loan interest during 2020. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid decreased by$12.6 million compared to 2019. Loan yields decreased by 58 basis points from 2019. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding the impact from PPP loans, discount accretion and nonaccrual interest income, causing loan yields to decline by 36 basis points from 2019. There was no interest income that was accrued and not reversed on nonaccrual loans atDecember 31, 2020 and 2019. As ofDecember 31, 2020 and 2019, we had$14.3 million and$5.3 million of nonaccrual loans, respectively. Had these nonaccrual loans for which interest was no longer accruing complied with the original terms and conditions, interest income would have been approximately$843,000 and$526,000 greater for 2020 and 2019, respectively. Interest income from investment securities was$50.3 million for 2020, a$6.4 million , or 11.36%, decrease from$56.7 million for 2019. The decrease was primarily the result of a 39 basis point decline in the non-tax equivalent yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities due to higher 45 --------------------------------------------------------------------------------
levels of premium amortization, as well as lower yields on investments purchased
during 2020. Partially offsetting the decline from lower rates was a
Interest expense of$14.3 million for 2020 decreased$7.8 million , or 35.30%, compared to$22.1 million for 2019. The average rate paid on interest-bearing liabilities decreased by 22 basis points, to 0.32% for 2020, from 0.54% for 2019. The rate on interest-bearing deposits for 2020 decreased by 16 basis points from 2019. Average interest-bearing liabilities were$414.0 million higher for 2020 when compared to 2019. On average, noninterest-bearing deposits were 61.24% of our total deposits for 2020, compared to 59.42% for 2019. In comparison to 2020, our overall cost of funds decreased 11 basis points, as our average noninterest-bearing deposits grew by$1.10 billion . Average interest-bearing deposits increased by$440.6 million for 2020, while the cost of interest-bearing deposits decreased by 16 basis points.
Provision for (Recapture of) Credit Losses
The provision for (recapture of) credit losses is a charge (credit) to earnings to reflect 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. OnJanuary 1, 2020 , we adopted ASU 2016-13, commonly referred to as CECL, which replaced the "incurred loss" approach with an "expected loss" model over the life of the loan. The allowance for credit losses totaled$65.0 million atDecember 31, 2021 , compared to$93.7 million atDecember 31, 2020 . Upon adoption of CECL, a transition adjustment of$1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by$23.5 million in provision for credit losses in the first half of 2020, due to the severe economic disruption forecasted as a result of the onset of the COVID-19 pandemic. We recorded a recapture of provision for credit losses of$25.5 million in 2021, as our economic forecasts reflected continual improvements in key macroeconomic variables throughout the year, resulting in lower projected loan losses. For 2021, we experienced credit charge-offs of$3.4 million and total recoveries of$198,000 , resulting in net charge-offs of$3.2 million . This compares to a$23.5 million loan loss provision and net charge-offs of$308,000 for 2020 and a$5.0 million loan loss provision and net recoveries of$47,000 for 2019. The ratio of the allowance for credit losses to total loans and leases outstanding, at amortized cost, as ofDecember 31, 2021 , was 0.82%. This compares to 1.12% and 0.91%, as ofDecember 31, 2020 and 2019, respectively. When PPP loans are excluded, allowance for credit losses as a percentage of total adjusted loans and leases outstanding was 0.84% atDecember 31, 2021 , compared to 1.25% atDecember 31, 2020 and 0.91%, atDecember 31, 2019 , respectively. As ofDecember 31, 2021 , remaining discounts on acquired loans were$18.6 million . No assurance can be given that economic conditions which adversely affect the Company's service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions, including the impact of the COVID-19 pandemic. See "Allowance for Credit Losses" under Analysis of Financial Condition herein.
Noninterest Income
Noninterest income includes income derived from financial services offered to
our customers, such as CitizensTrust, BankCard services, international banking,
and other business services. Also included in noninterest income are service
charges and fees, primarily from deposit accounts, gains (net of losses) from
the disposition of investment securities when applicable, loans, other real
estate owned, and fixed assets, and other revenues not included as interest on
earning assets.
46
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The following table sets forth the various components of noninterest income for
the periods presented.
Variance
Year Ended December 31, 2021 2020
2021 2020 2019 $ % $ %
(Dollars in thousands)
Noninterest income:
Service charges on
deposit
accounts $ 17,152 $ 16,561 $ 20,010 $ 591 3.57 % $ (3,449 ) -17.24 %
Trust and
investment services 11,571 9,978 9,525 1,593 15.97 % 453 4.76 %
Bankcard services 1,789 1,886 3,163 (97 ) -5.14 % (1,277 ) -40.37 %
BOLI income 8,500 8,100 5,798 400 4.94 % 2,302 39.70 %
Swap fee income 382 5,025 1,806 (4,643 ) -92.40 % 3,219 178.24 %
Gain on OREO, net 1,177 388 129 789 203.35 % 259 200.78 %
Gain on sale of
building, net 189 1,680 4,776 (1,491 ) -88.75 % (3,096 ) -64.82 %
Gain on eminent
domain
condemnation, net - - 5,685 - - (5,685 ) -100.00 %
Other 6,625 6,252 8,150 373 5.97 % (1,898 ) -23.29 %
Total noninterest
income $ 47,385 $ 49,870 $ 59,042 $ (2,485 ) -4.98 % $ (9,172 ) -15.53 %
2021 Compared to 2020
The$2.5 million decrease in noninterest income was primarily due to a$4.6 million decrease in swap fee income from 2020 due to lower volume of swap transactions. Partially offsetting the overall decrease in noninterest income was a$1.6 million increase in Trust and investment services income and a$591,000 year-over-year increase in service charges on deposit accounts. Noninterest income for 2021 also included$1.2 million in net gain on the sale of three OREO properties, while 2020 included$1.7 million net gain on the sale of one of our owned buildings and a$365,000 net gain on the sale of two OREO properties. The$373,000 increase in other income in 2021 included$890,000 for recovery of an acquired loan charged off prior to a previous acquisition. 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 20 - Derivative Financial Instruments of the notes to the consolidated financial statements of this report for additional information). Swap fee income decreased$4.6 million compared to 2020, due to lower volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling$25.3 million for 2021, compared to$280.4 million for 2020. The volume of interest rate swaps can be impacted by competitive factors, as well as the current and forecasted interest rate environment. CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. AtDecember 31, 2021 , CitizensTrust had approximately$3.45 billion in assets under management and administration, including$2.50 billion in assets under management. CitizensTrust generated fees of$11.6 million for 2021, an increase of$1.6 million compared to$10.0 million for 2020, due to the growth in assets under management. The Bank's investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from our BOLI policies for 2021 included$3.9 million of death benefits that exceeded cash surrender values, compared to$2.8 million of death benefits for 2020.
2020 Compared to 2019
Noninterest income for 2019 included a$5.7 million net gain from the legal settlement of an eminent domain condemnation of one of our banking center buildings inBakersfield and$4.8 million in net gains on the sale of bank owned buildings, compared with a$1.7 million net gain on the sale of one of our owned buildings in 2020. Service charges on deposit accounts decreased by$3.4 million from 2019. This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer's noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately$1.3 million when compared to 2019, primarily due to the Durbin Amendment's cap on debit card interchange fees. The$1.9 million decrease in other income in 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to 2019. 47 -------------------------------------------------------------------------------- Swap fee income increased$3.2 million compared to 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling$280.4 million for 2020, compared to$96.4 million for 2019. AtDecember 31, 2020 , CitizensTrust had approximately$3.04 billion in assets under management and administration, including$2.18 billion in assets under management. CitizensTrust generated fees of$10.0 million for 2020, an increase of$453,000 compared to$9.5 million for 2019, due to the growth in assets under management. Income from our BOLI policies for 2020 included$2.8 million of death benefits that exceeded cash surrender values, compared to$502,000 of death benefits for 2019. Noninterest Expense The following table summarizes the various components of noninterest expense for the periods presented. Variance Year Ended December 31, 2021 2020 2021 2020 2019 $ % $ % (Dollars in thousands) Noninterest expense: Salaries and employee benefits$ 117,871 $ 119,759 $ 119,475 $ (1,888 ) -1.58 %$ 284 0.24 % Occupancy 16,765 16,677 16,565 88 0.53 % 112 0.68 % Equipment 2,991 3,945 3,892 (954 ) -24.18 % 53 1.36 % Professional services 7,967 9,460 7,752 (1,493 ) -15.78 % 1,708 22.03 % Computer software expense 11,584 11,302 10,658 282 2.50 % 644 6.04 % Marketing and promotion 4,623 4,488 5,890 135 3.01 % (1,402 ) -23.80 % Amortization of intangible assets 8,240 9,352 10,798 (1,112 ) -11.89 % (1,446 ) -13.39 % Telecommunications expense 2,105 2,566 2,785 (461 ) -17.97 % (219 ) -7.86 % Regulatory assessments 4,695 2,375 1,958 2,320 97.68 % 417 21.30 % Insurance 1,840 1,636 1,475 204 12.47 % 161 10.92 % Loan expense 1,113 1,159 1,439 (46 ) -3.97 % (280 ) -19.46 % OREO expense 49 1,247 64 (1,198 ) -96.07 % 1,183 1848.44 % Recapture of provision for unfunded loan commitments (1,000 ) - - (1,000 ) - - - Directors' expenses 1,539 1,420 1,230 119 8.38 % 190 15.45 % Stationery and supplies 962 1,172 1,179 (210 ) -17.92 % (7 ) -0.59 % Acquisition related expenses 962 - 6,447 962 - (6,447 ) -100.00 % Other 7,481 6,345 7,133 1,136 17.90 % (788 ) -11.05 % Total noninterest expense$ 189,787 $ 192,903 $ 198,740 $ (3,116 )
-1.62 %
Noninterest expense to average assets 1.24 % 1.49 % 1.76 % Efficiency ratio (1) 41.09 % 41.40 % 40.16 % (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 1.24% for 2021, compared to 1.49% for 2020 and 1.76% for 2019, respectively. The decline in this ratio for 2021 reflects the$2.42 billion growth in average assets that resulted primarily from$2.18 billion in average deposit growth. Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 41.09% for 2021, compared to 41.40% for 2020 and 40.16% for 2019.
2021 Compared to 2020
Noninterest expense of$189.8 million for the year endedDecember 31, 2021 was$3.1 million , or 1.62% lower than 2020. This year-over-year decrease included a$1.9 million decrease in salaries and employee benefits, partially due to a$1.1 million in additional bonus expense for "Thank You Awards" paid to all Bank employees during the third quarter of 2020. The year-over-year decrease also included a$1.5 million decrease in professional services expense, a$1.1 million decrease in Core Deposit Intangible ("CDI") amortization, a$1.2 million decrease in OREO expense primarily due to a$700,000 write-down of one OREO property in 2020, and a$1.0 million recapture of provision for unfunded loan commitments recorded in 48 -------------------------------------------------------------------------------- 2021, compared to no recapture of provision in 2020. These decreases were partially offset by a$2.3 million increase in regulatory assessment expense compared to the prior year, which resulted from the final application of assessment credits provided by theFDIC at the end of the second quarter of 2020. Additionally, there were$962,000 in acquisition related expenses for the year endedDecember 31, 2021 , compared to no merger related expenses for 2020.
2020 Compared to 2019
Noninterest expense of$192.9 million for the year endedDecember 31, 2020 was$5.8 million , or 2.9% lower than 2019. There were no merger related expenses related to theCommunity Bank acquisition for 2020, compared to$6.4 million for 2019 and the year-over-year decrease also included a$1.4 million decrease in CDI amortization. A decrease in marketing and promotion expense in 2020 of$1.4 million was primarily due to COVID-19 restrictions on travel and entertainment. These decreases were partially offset by a$1.7 million increase in professional services expense, related to legal, audit, and other professional services. OREO expense also increased in 2020 by$1.2 million primarily due to a$700,000 write-down of one OREO property.
Income Taxes
The Company's effective tax rate for the year endedDecember 31, 2021 was 28.60%, compared with 29.00% and 28.60% for the year endedDecember 31, 2020 and 2019, respectively. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income as well as available tax credits. Refer to Note 10 - Income Taxes of the notes to consolidated financial statements for more information.
The effective tax rates are below the nominal combined Federal and State tax rate 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.
49
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ANALYSIS OF FINANCIAL CONDITION
Total assets of $15.88 billion at December 31, 2021 increased $1.46 billion , or
10.16%, from total assets of $14.42 billion at December 31, 2020 .
Interest-earning assets totaled $14.68 billion at December 31, 2021 , an increase
of $1.46 billion , or 11.04%, when compared with $13.22 billion at December 31,
2020 . The increase in interest-earning assets includes a $2.13 billion increase
in investment securities, that was partially offset by a $461.1 million decrease
in total loans and a $193.3 million decrease in interest-earning balances due
from the Federal Reserve . The decrease in total loans was due to a $696.4
million decrease in PPP loans with a remaining outstanding balance totaling
$186.6 million as of December 31, 2021 . Excluding PPP loans, total loans
increased by $235.3 million , or 3.15%, from December 31, 2020 .
Total liabilities were $13.80 billion at December 31, 2021 , an increase of $1.39
billion , or 11.21%, from total liabilities of $12.41 billion at December 31,
2020 . Total deposits grew by $1.24 billion , or 10.56%. Deposit growth in 2021
was partly due to our customers maintaining greater liquidity in their deposit
accounts. Total equity increased $73.5 million , or 3.66%, to $2.08 billion at
December 31, 2021 , compared to total equity of $2.01 billion at December 31,
2020 . The $73.5 million increase in equity was primarily due to net earnings of
$212.5 million , partially offset by $97.8 million in cash dividends and a $39.3
million decrease in other comprehensive income from the tax effected impact of
the decline in market value of available-for-sale securities. During the third
quarter of 2021, we repurchased 390,336 shares of common stock for $7.4 million ,
or an average repurchase price of $18.97 , under our 10b5-1 stock repurchase
program.
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. AtDecember 31, 2021 , total investment securities were$5.11 billion . This represented an increase of$2.13 billion , or 71.61%, from total investment securities of$2.98 billion atDecember 31, 2020 . The increase in investment securities was primarily due to new securities purchased exceeding the cash outflow from the portfolio in 2021. AtDecember 31, 2021 , investment securities HTM totaled$1.93 billion . AtDecember 31, 2021 , our AFS investment securities totaled$3.18 billion , inclusive of a pre-tax net unrealized loss of$1.3 million . The after-tax unrealized loss reported in AOCI on AFS investment securities was$934,000 . The changes in the net unrealized holding gain (loss) resulted primarily from fluctuations in market interest rates. For the years endedDecember 31, 2021 and 2020, repayments/maturities of investment securities totaled$928.4 million and$798.7 million , respectively. The Company purchased additional investment securities totaling$3.16 billion and$1.28 billion for the years endedDecember 31, 2021 and 2020, respectively. We deployed some of our excess liquidity during 2021 by purchasing$3.16 billion of additional investment securities with a non-tax equivalent weighted average yield of approximately 1.61%. There were no investment securities sold during the years endedDecember 31, 2021 and 2020.
The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
December 31,
2021 2020
Fair Value Percent Fair Value Percent
(Dollars in thousands)
Investment securities
available-for-sale
Mortgage-backed securities $ 2,563,214 80.50 % $ 1,904,935 79.41 %
CMO/REMIC 590,158 18.53 % 462,814 19.29 %
Municipal bonds 29,468 0.93 % 30,285 1.26 %
Other securities 1,083 0.04 % 889 0.04 %
Total available-for-sale
securities $ 3,183,923 100.00 % $ 2,398,923 100.00 %
December 31,
2021 2020
Amortized Amortized
Cost Percent Cost Percent
(Dollars in thousands)
Investment securities held-to-maturity
Government agency/GSE $ 576,899 29.95 % $ 98,663 17.05 %
Mortgage-backed securities 647,390 33.61 % 146,382 25.30 %
CMO/REMIC 490,670 25.48 % 145,309 25.11 %
Municipal bonds 211,011 10.96 % 188,272 32.54 %
Total held-to-maturity securities $ 1,925,970 100.00 % $ 578,626 100.00 %
Fair Value $ 1,921,693 $ 604,223
50--------------------------------------------------------------------------------
The maturity distribution of the AFS and HTM portfolios consist of the following as of the date presented.
December 31, 2021
After One After
Year Five Years
One Year or Through Through After Ten Percent to
Less Five Years Ten Years Years Total Total
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed
securities $ 2,400 $ 1,539,600 $ 1,019,802 $ 1,412 $ 2,563,214 80.50 %
CMO/REMIC 15,590 203,493 36,947 334,128 590,158 18.54 %
Municipal bonds (1) - 1,106 17,857 10,505 29,468 0.93 %
Other securities 1,083 - - - 1,083 0.03
Total $ 19,073 $ 1,744,199 $ 1,074,606 $ 346,045 $ 3,183,923 100.00 %
Weighted average yield:
Mortgage-backed
securities 3.77 % 1.60 % 1.61 % 3.41 % 1.61 %
CMO/REMIC 1.42 % 1.76 % 1.77 % 1.42 % 1.56 %
Municipal bonds (1) - 3.93 % 2.56 % 2.49 % 2.59 %
Other securities 2.74 % - - - 2.74 %
Total 1.79 % 1.62 % 1.63 % 1.46 % 1.61 %
(1)
The weighted average yield for the portfolio is based on projected duration and
is not tax-equivalent. The tax-equivalent yield at December 31, 2021 was 3.27%.
December 31, 2021
After One After
Year Five Years
One Year or Through Through After Ten Percent to
Less Five Years Ten Years Years Total Total
(Dollars in thousands)
Investment securities
held-to-maturity:
Government agency/GSE $ - $ - $ 72,510 $ 504,389 $ 576,899 29.95 %
Mortgage-backed
securities 1,323 100,941 543,832 1,294 647,390 33.61 %
CMO/REMIC - 280,854 209,816 - 490,670 25.48 %
Municipal bonds (1) 4,263 21,007 74,920 110,821 211,011 10.96 %
Total $ 5,586 $ 402,802 $ 901,078 $ 616,504 $ 1,925,970 100.00 %
Weighted average
yield:
Government agency/GSE - - 1.37 % 1.87 % 1.81 %
Mortgage-backed
securities 0.68 % 2.24 % 1.84 % 2.75 % 1.90 %
CMO/REMIC - 1.88 % 1.68 % - 1.79 %
Municipal bonds (1) 3.37 % 2.67 % 2.53 % 1.75 % 2.15 %
Total 2.73 % 2.01 % 1.82 % 1.85 % 1.87 %
(1)
The weighted average yield for the portfolio is based on projected duration and
is not tax-equivalent. The tax equivalent yield at
The maturity of each security category is defined as the contractual maturity except for the categories of mortgage-backed securities and CMO/REMIC whose maturities are defined as the estimated average life. The final maturity of mortgage-backed securities and CMO/REMIC will differ from their contractual maturities because the underlying mortgages have the right to repay such obligations without penalty. The speed at which the underlying mortgages repay is influenced by many factors, one of which is interest rates. Mortgages tend to repay faster as interest rates fall and slower as interest rate rise. This will either shorten or extend the estimated average life. Also, the yield on mortgage-backed securities and CMO/REMIC are affected by the speed at which the underlying mortgages repay. This is caused by the change in the amount of amortization of premiums or accretion of discounts of each security as repayments increase or decrease. The Company obtains the estimated average life of each security from independent third parties. The weighted-average yield on the total investment portfolio atDecember 31, 2021 was 1.71% with a weighted-average life of 5.5 years. This compares to a weighted-average yield of 1.92% atDecember 31, 2020 with a weighted-average life of 2.9 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs. Approximately 95% of the securities in the total investment portfolio, atDecember 31, 2021 , are issued by theU.S. government orU.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As ofDecember 31, 2021 , approximately$49.6 million inU.S. government agency bonds are callable. 51 --------------------------------------------------------------------------------
The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 5% of the total investment portfolio, are predominately AA or higher rated securities.
The Company held investment securities in excess of 10% of shareholders' equity from the following issuers as of the dates presented.
December 31,
2021 2020
Book Value Market Value Book Value Market Value
(Dollars inthousands)
Major issuer: Federal National Mortgage Association$ 1,889,580 $ 1,894,361 $ 1,133,321 $ 1,166,735 Federal Home Loan Mortgage Corporation 1,459,217 1,461,769 1,058,957 1,084,494 Government National Mortgage Association 1,028,444 1,010,558 413,991 421,025 Municipal securities held by the Company are issued by various states and their various local municipalities. The following tables present municipal securities by the top holdings by state as of the dates presented. December 31, 2021 Amortized Percent of Percent of Cost Total Fair Value Total (Dollars in thousands)Municipal Securities available-for-sale: Minnesota$ 11,043 38.9 %$ 11,387 38.7 % Connecticut 5,639 19.9 % 5,816 19.7 % Massachusetts 4,144 14.6 % 4,341 14.7 % Iowa 2,341 8.2 % 2,378 8.1 % Ohio 1,775 6.3 % 1,821 6.2 % Maine 1,502 5.3 % 1,569 5.3 % All other states (2 states) 1,921 6.8 % 2,156 7.3 % Total$ 28,365 100.0 %$ 29,468 100.0 %Municipal Securities held-to-maturity: Minnesota$ 38,905 18.4 %$ 39,724 18.5 % Texas 25,160 11.9 % 25,083 11.7 % Massachusetts 20,667 9.8 % 21,508 10.0 % Ohio 17,617 8.4 % 18,105 8.4 % Washington 12,930 6.1 % 13,369 6.2 % Tennessee 11,347 5.4 % 11,217 5.2 % All other states (20 states) 84,385 40.0 % 85,564 40.0 % Total$ 211,011 100.0 %$ 214,570 100.0 % 52
--------------------------------------------------------------------------------
December 31, 2020
Amortized Percent Percent
Cost of Total Fair Value of Total
(Dollars in thousands)
Municipal Securities
available-for-sale:
Minnesota $ 11,055 38.5 % $ 11,588 38.3 %
Connecticut 5,653 19.7 % 5,910 19.5 %
Massachusetts 4,147 14.4 % 4,394 14.5 %
Iowa 2,345 8.2 % 2,430 8.0 %
Ohio 2,115 7.4 % 2,194 7.2 %
Maine 1,506 5.2 % 1,598 5.3 %
All other states (2 states) 1,886 6.6 % 2,171 7.2 %
Total $ 28,707 100.0 % $ 30,285 100.0 %
Municipal Securities
held-to-maturity:
Minnesota $ 44,820 23.8 % $ 46,243 23.7 %
Massachusetts 22,361 11.9 % 23,573 12.1 %
Ohio 17,781 9.4 % 18,502 9.5 %
Texas 17,135 9.1 % 17,706 9.1 %
Wisconsin 12,236 6.5 % 12,755 6.5 %
Connecticut 8,759 4.7 % 9,001 4.6 %
All other states (20 states) 65,180 34.6 % 67,398 34.5 %
Total $ 188,272 100.0 % $ 195,178 100.0 %
We adopted ASU 2016-13 on January 1, 2020 , on a prospective basis. Under this
guidance, once it is determined that a credit loss has occurred, an allowance
for credit losses is established on our available-for-sale and held-to-maturity
securities. Prior to adoption of this standard, when a decline in fair value of
a debt security was determined to be other than temporary, an impairment charge
for the credit component was recorded, and a new cost basis in the investment
was established. As of December 31, 2021 and 2020, management determined that
credit losses did not exist for securities in an unrealized loss position.
The following tables present 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 December 31, 2021 and
December 31, 2020 .
December 31, 2021
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 $ 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 $ (3,274 ) $ 2,014,029 $ (29,888 )
December 31, 2020
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 $ 72,219 $ (101 ) $ - $ - $ 72,219 $ (101 )
CMO/REMIC 96,974 (249 ) - - 96,974 (249 )
Municipal bonds - - - - - -
Total
available-for-sale
securities $ 169,193 $ (350 ) $ - $ - $ 169,193 $ (350 )
53-------------------------------------------------------------------------------- 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 ofDecember 31, 2021 and 2020.
Loans
Total loans and leases, at amortized cost, of$7.89 billion atDecember 31, 2021 , decreased by$461.1 million , or 5.52%, from$8.35 billion atDecember 31, 2020 . The decrease in total loans included$696.4 million in PPP loans,$29.9 million in SFR mortgage loans,$22.9 million in construction loans,$15.3 million in SBA loans, and$11.3 million in consumer and other loans. Partially offsetting these declines were increases in commercial real estate loans of$288.2 million and$25.1 million in dairy & livestock and agribusiness loans. Our core loans, excluding PPP loans, grew by$235.3 million , or 3.15%, from the end of the fourth quarter of 2020. Total loans, at amortized cost, comprised 53.72% of our total earning assets as ofDecember 31, 2021 . The following table presents our loan portfolio by type as of the dates presented. Distribution of Loan Portfolio by Type December 31, 2021 2020 2019 (1) 2018 2017 (Dollars in thousands) Commercial real estate$ 5,789,730 $ 5,501,509 $ 5,374,617 $ 5,394,229 $ 3,376,713 Construction 62,264 85,145 116,925 122,782 77,982 SBA 288,600 303,896 305,008 350,043 122,055 SBA - PPP 186,585 882,986 - - -
Commercial and industrial 813,063 812,062 935,127
1,002,209 513,325 Dairy & livestock and agribusiness 386,219 361,146 383,709 393,843 347,289 Municipal lease finance receivables 45,933 45,547 53,146 64,18670,243 SFR mortgage 240,654 270,511 283,468 296,504 236,202 Consumer and other loans 74,665 86,006 116,319 128,429 64,229 Gross loans (Non-PCI) 7,887,713 8,348,808 7,568,319 7,752,225 4,808,038 Less: Deferred loan fees, net (2) - - (3,742 ) (4,828 ) (6,289 ) Total loans, at amortized cost (Non-PCI) 7,887,713 8,348,808 7,564,577 7,747,397 4,801,749 Less: Allowance for credit losses (65,019 ) (93,692 ) (68,660 ) (63,409 ) (59,218 ) Net loans (Non-PCI)$ 7,822,694 $ 8,255,116 $ 7,495,917 7,683,988 4,742,531 PCI Loans 17,214 30,908 Discount on PCI loans - (2,026 ) Less: Allowance for credit losses (204 ) (367 ) PCI loans, net 17,010 28,515 Total loans and lease finance receivables, net$ 7,700,998 $ 4,771,046 (1) Beginning withJune 30, 2019 , PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables. (2) Beginning withMarch 31, 2020 , gross loans are presented net of deferred loan fees (at amortized cost) by respective class of financing receivables. As ofDecember 31, 2021 ,$364.4 million , or 6.29% of the total commercial real estate loans included loans secured by farmland, compared to$314.4 million , or 5.72%, atDecember 31, 2020 . The loans secured by farmland included$134.9 million for loans secured by dairy & livestock land and$229.5 million for loans secured by agricultural land atDecember 31, 2021 , compared to$132.9 million for loans secured by dairy & livestock land and$181.5 million for loans secured by agricultural land atDecember 31, 2020 . As ofDecember 31, 2021 , dairy & livestock and agribusiness loans of$386.2 million were comprised of$351.7 million for dairy & livestock loans and$34.5 million for agribusiness loans, compared to$361.1 million for dairy & livestock loans and$41.0 million for agribusiness loans atDecember 31, 2020 . Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers. 54 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , the Company had$200.6 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 ofDecember 31, 2021 , the Company had$88.0 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. As an active participant in the SBA's Paycheck Protection Program, we initially originated approximately 4,100 PPP loans totaling$1.1 billion ("round one"), with a remaining outstanding balance of$3.0 million as ofDecember 31, 2021 . We originated approximately 1,900 PPP loans in round two with a remaining outstanding balance of$183.6 million , as ofDecember 31, 2021 . As ofDecember 31, 2021 , the Company had$62.3 million in construction loans. This represents 0.79% of total gross loans held-for-investment. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects inLos Angeles County ,Orange County , and the Inland Empire region ofSouthern California . There were no nonperforming construction loans atDecember 31, 2021 .
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
December 31, 2021
Commercial Real Estate
Total Loans Loans
(Dollars in thousands)
Los Angeles County $ 3,237,514 41.1 % $ 2,249,732 38.8 %
Central Valley 1,469,141 18.6 % 1,101,841 19.0 %
Orange County 1,019,756 12.9 % 678,081 11.7 %
Inland Empire 977,683 12.4 % 833,567 14.4 %
Central Coast 451,032 5.7 % 368,527 6.4 %
San Diego 261,551 3.3 % 229,445 4.0 %
Other California 148,431 1.9 % 93,954 1.6 %
Out of State 322,605 4.1 % 234,583 4.1 %
$ 7,887,713 100.0 % $ 5,789,730 100.0 %
The table below breaks down our real estate portfolio.
December 31, 2021
Percent
Owner- Average
Loan Balance Percent Occupied (1) Loan BalanceCommercial real estate: (Dollars in thousands) Industrial$ 1,967,852 34.0 % 50.3 %$ 1,503 Office 1,034,854 17.9 % 23.8 % 1,664 Retail 820,021 14.2 % 10.2 % 1,741 Multi-family 644,484 11.1 % 1.1 % 1,534 Secured by farmland (2) 364,409 6.3 % 97.1 % 2,249 Medical 303,008 5.2 % 35.8 % 1,693 Other (3) 655,102 11.3 % 52.4 % 1,472 Total commercial real estate$ 5,789,730 100.0 % 36.8 %$ 1,605 (1) Represents percentage of reported owner-occupied at origination in each real estate loan category. (2) The loans secured by farmland included$134.9 million for loans secured by dairy & livestock land and$229.5 million for loans secured by agricultural land atDecember 31, 2021 . (3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans. 55 -------------------------------------------------------------------------------- AtDecember 31, 2021 , commercial real estate loans on retail properties comprised$820.0 million and approximately 17.9% of total commercial real estate loans; none of these loans are on deferment and$3.6 million of these loans were classified. At origination, these loans on retail properties were underwritten with loan-to-values averaging approximately 48%. Approximately 36% of these loans were originated prior to 2017. The table below provides the maturity distribution for held-for-investment total gross loans as ofDecember 31, 2021 . The loan amounts are based on contractual maturities although the borrowers have the ability to prepay the loans. Amounts are also classified according to repricing opportunities or rate sensitivity. Loan Maturities and Interest Rate Category After One Within But Within After One Year Five Years Five Years Total (Dollars in thousands) Loan Portfolio by Type: Commercial real estate$ 288,737 $ 1,429,549 $ 4,071,444 $ 5,789,730 Construction 52,214 10,050 - 62,264 SBA 17,808 22,437 248,355 288,600 SBA - PPP 2,929 183,656 - 186,585 Commercial and industrial 280,222 322,483 210,358 813,063 Dairy & livestock and agribusiness 251,591 134,126 502 386,219 Municipal lease finance receivables 538 6,708 38,68745,933 SFR mortgage 2,515 69 238,070 240,654 Consumer and other loans 6,633 12,299 55,733 74,665 Total gross loans$ 903,187 $ 2,121,377 $ 4,863,149 $ 7,887,713 Amount of Loans based upon: Fixed Rates$ 226,612 $ 1,426,808 $ 2,935,999 $ 4,589,419 Floating or adjustable rates 676,575 694,569 1,927,150 3,298,294 Total loans, at amortized cost$ 903,187 $ 2,121,377 $ 4,863,149 $ 7,887,713 As a normal practice in extending credit for commercial and industrial purposes, we may accept trust deeds on real property as collateral. In some cases, when the primary source of repayment for the loan is anticipated to come from the cash flow from normal operations of the borrower, and real property has been taken as collateral, the real property is considered a secondary source of repayment for the loan. Since we lend primarily in Southern andCentral California , our real estate loan collateral is concentrated in this region.
Nonperforming Assets
The following table provides information on nonperforming assets as of the dates
presented.
December 31,
2021 2020 2019 2018 (1) 2017 (1)
(Dollars in thousands)
Nonaccrual loans $ 6,893 $ 14,347 $ 5,033 $ 16,442 $ 6,516
Loans past due 90 days or more and
still accruing interest - - - - -
Nonperforming troubled debt
restructured loans (TDRs) - - 244 3,509 4,200
Total nonperforming loans 6,893 14,347 5,277 19,951 10,716
OREO, net - 3,392 4,889 420 4,527
Total nonperforming assets $ 6,893 $ 17,739 $ 10,166 $ 20,371 $ 15,243
Performing TDRs $ 5,293 $ 2,159 $ 3,112 $ 3,594 $ 4,809
Total nonperforming loans and
performing TDRs $ 12,186 $ 16,506 $ 8,389 Percentage of nonperforming loans and performing TDRs to total loans, at amortized cost 0.15 % 0.20 % 0.11 %
0.30 % 0.32 %
Percentage of nonperforming assets
to total loans,
at amortized cost, and OREO 0.09 % 0.21 % 0.13 % 0.26 % 0.32 %
Percentage of nonperforming assets
to total assets 0.04 % 0.12 % 0.09 % 0.18 % 0.18 %
(1)
Excludes PCI loans.
56--------------------------------------------------------------------------------
Troubled Debt Restructurings
Total TDRs were$5.3 million atDecember 31, 2021 , compared to$2.2 million atDecember 31, 2020 . AtDecember 31, 2021 , all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. In accordance with regulatory guidance, if borrowers were less than 30 days past due on their loans and entered into loan modifications offered as a result of COVID-19, their loans generally continued to be considered performing loans and continued to accrue interest during the period of the loan modification. For borrowers who were 30 days or more past due when entering into loan modifications offered as a result of COVID-19, we evaluated the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan would be accounted for as a TDR and generally would not accrue interest. For all borrowers who enrolled in these loan modification programs offered as a result of COVID-19, the delinquency status of the borrowers was frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency resumed where it had left off upon entry into the program.
The following table provides a summary of TDRs as of the dates presented.
December 31,
2021 2020
Number of Number of
Balance Loans Balance Loans
(Dollars in thousands)
Performing TDRs:
Commercial real estate $ 2,394 1 $ 320 1
Construction - - - -
SBA - - - -
Commercial and industrial 1,885 3 43 1
Dairy & livestock and agribusiness - - - -
SFR mortgage 1,014 5 1,796 7
Consumer and other - - - -
Total performing TDRs $ 5,293 9 $ 2,159 9
Nonperforming TDRs:
Commercial real estate $ - - $ - -
Construction - - - -
SBA - - - -
Commercial and industrial - - - -
Dairy & livestock and agribusiness - - - -
SFR mortgage - - - -
Consumer and other - - - -
Total nonperforming TDRs $ - - $ - -
Total TDRs $ 5,293 9 $ 2,159 9
At December 31, 2021 and 2020, there was no ACL specifically allocated to TDRs.
Impairment amounts identified are typically charged off against the allowance at
the time a probable loss is determined. There were no charge-offs on TDRs for
2021 and 2020.
57
--------------------------------------------------------------------------------Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
December 31, September 30, June 30, March 31, December 31,
2021 2021 2021 2021 2020
(Dollars in thousands)
Nonperforming loans (1):
Commercial real estate $ 3,607 $ 4,073 $ 4,439 $ 7,395 $ 7,563
Construction - - - - -
SBA 1,034 1,513 1,382 2,412 2,273
Commercial and industrial 1,714 2,038 1,818 2,967 3,129
Dairy & livestock and
agribusiness - 118 118 259 785
SFR mortgage 380 399 406 424 430
Consumer and other loans 158 305 308 312 167
Total $ 6,893 $ 8,446 $ 8,471 $ 13,769 $ 14,347
% of Total loans 0.09 % 0.11 % 0.10 % 0.17 % 0.17 %
Past due 30-89 days:
Commercial real estate $ 438 $ - - $ 178 $ -
Construction - - - - -
SBA 979 - - 258 1,965
Commercial and industrial - 122 415 952 1,101
Dairy & livestock and
agribusiness - 1,000 - - -
SFR mortgage 1,040 - - 266 -
Consumer and other loans - - - 21 -
Total $ 2,457 $ 1,122 $ 415 $ 1,675 $ 3,066
% of Total loans 0.03 % 0.01 % 0.01 % 0.02 % 0.04 %
OREO:
Commercial real estate $ - $ - $ -$ 1,575 $ 1,575 SBA - - - - - SFR mortgage - - - - 1,817 Total $ - $ - $ -$ 1,575 $ 3,392 Total nonperforming, past due, and OREO$ 9,350 $ 9,568$ 8,886 $ 17,019 $ 20,805 % of Total loans 0.12 % 0.12 % 0.11 % 0.21 % 0.25 % Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were$6.9 million atDecember 31, 2021 , or 0.09% of total loans. This compares to nonperforming loans of$14.3 million , or 0.17% of total loans, atDecember 31, 2020 . The$7.5 million decrease in nonperforming loans was primarily due to decreases of$4.0 million in nonperforming commercial real estate loans,$1.4 million in nonperforming commercial and industrial loans,$1.2 million in nonperforming SBA loans, and$785,000 in nonperforming dairy & livestock and agribusiness loans. AtDecember 31, 2021 , we had no OREO properties, compared to two OREO properties with a carrying value of$3.4 million , atDecember 31, 2020 . During the fourth quarter of 2021, we acquired an OREO property, which was sold during the fourth quarter at a net gain of approximately$700,000 . 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" included herein. 58 --------------------------------------------------------------------------------
Allowance for Credit Losses
We adopted CECL onJanuary 1, 2020 , which replaced the "incurred loss" approach with an "expected loss" model over the life of the loan, as further described in Note 3 - Summary of Significant Accounting Policies of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled$65.0 million as ofDecember 31, 2021 , compared to$93.7 million as ofDecember 31, 2020 . Our allowance for credit losses atDecember 31, 2021 was 0.82%, or 0.84% of total loans when excluding the$186.6 million in PPP loans. The allowance for credit losses for 2021 was decreased by$25.5 million , due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic: including various government responses, availability of vaccines, and fiscal and monetary stimulus, as well as$3.2 million in year-to-date net charge-offs. Upon implementation of CECL, a transition adjustment of$1.8 million was added to the beginning balance of the allowance and was increased by a$23.5 million credit loss provision for 2020 due to the forecast of severe economic disruption resulting from the initial onset of the COVID-19 pandemic. Net charge-offs were$308,000 for 2020. The allowance for credit losses as ofDecember 31, 2021 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools:Commercial Real Estate , Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. 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. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast reflects continued improvement in key macroeconomic variables, including GDP, the commercial real estate price index and the unemployment rate. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. TheseU.S. economic forecasts include a baseline forecast, as well as upside and downside forecasts. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario, with downside risks weighted heavier than the more optimistic forecasts. Our weighted forecast assumes GDP will increase by 2.7% in 2022, 2% for 2023 and then grow by 3% in 2024. The unemployment rate is forecasted to be over 5% in 2022 and 2023 and then declining to 4.8% in 2024. Management believes that the ACL was appropriate atDecember 31, 2021 and 2020. As there continues to be a degree of uncertainty around the epidemiological assumptions and impact of government responses to the pandemic that impact our economic forecast, no assurance can be given that economic conditions that adversely affect the Company's service areas or other circumstances will not be reflected in an increased allowance for credit losses in future periods. 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. Year Ended December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Allowance for credit losses at beginning of period$ 93,692 $ 68,660 $ 63,613 $ 59,585 $ 61,540 Impact of adopting ASU 2016-13 - 1,840 - - - Charge-offs: Commercial real estate - - - - - Construction - - - - - SBA (223 ) (362 ) (321 ) (257 ) - Commercial and industrial (3,019 ) (195 ) (48 ) (10 ) (138 ) Dairy & livestock and agribusiness (118 ) - (78 ) - - SFR mortgage - - - (13 ) - Consumer and other loans (11 ) (109 ) (7 ) (11 ) (13 ) Total charge-offs (3,371 ) (666 ) (454 ) (291 ) (151 ) Recoveries: Commercial real estate - - - - 154 Construction 58 11 12 2,506 6,036 SBA 23 72 9 20 78 Commercial and industrial 12 10 255 82 118 Dairy & livestock and agribusiness - - 19 1919 SFR mortgage 79 206 196 51 212 Consumer and other loans 26 59 10 141 79 Total recoveries 198 358 501 2,819 6,696 Net (charge-offs) recoveries (3,173 ) (308 ) 47 2,528 6,545 (Recapture of) provision for credit losses (25,500 ) 23,500 5,000 1,500 (8,500 ) Allowance for credit losses at end of period$ 65,019 $ 93,692 $ 68,660 $ 63,613 $ 59,585 Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period$ 9,000 $ 8,959 $ 8,959 $ 6,306 $ 6,706 Impact of adopting ASU 2016-13 41 Estimated fair value of reserve for unfunded loan commitment assumed from Community Bank - - - 2,903 - (Recapture of) provision for unfunded loan commitments (1,000 ) - - (250 ) (400 ) Reserve for unfunded loan commitments at end of period$ 8,000 $ 9,000 $ 8,959 $ 8,959 $ 6,306 Reserve for unfunded loan commitments to total unfunded loan commitments 0.49 % 0.54 % 0.56 % 0.51 % 0.66 % Amount of total loans at end of period (1)$ 7,887,713 $ 8,348,808 $ 7,564,577 $ 7,764,611 $ 4,830,631 Average total loans outstanding (1)$ 8,065,877 $ 8,066,483 $ 7,552,505 $ 5,905,674 $ 4,623,244 Net (charge-offs) recoveries to average total loans (0.04 )% (0.00 )% 0.00 % 0.04 % 0.14 % Net (charge-offs) recoveries to total loans at end of period (0.04 )% (0.00 )% 0.00 % 0.03 % 0.14 % Allowance for credit losses to average total loans 0.81 % 1.16 % 0.91 % 1.08 % 1.29 % Allowance for credit losses to total loans at end of period 0.82 % 1.12 % 0.91 % 0.82 % 1.23 % Net (charge-offs) recoveries to allowance for credit losses (4.88 )% (0.33 )% 0.07 % 3.97 % 10.98 % Net (charge-offs) recoveries to (recapture of) provision for credit losses 12.44 % (1.31 )% 0.94 % 168.53 % (77.00 )% (1)
Net of deferred loan origination fees, costs and discounts (amortized cost).
The ACL/Total Loan Coverage Ratio as of
The Bank's ACL methodology also produced an allowance of$8.0 million for our off-balance sheet credit exposures as ofDecember 31, 2021 , compared to$9.0 million as ofDecember 31, 2020 . The year-over-year decrease included a$1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021. While we believe that the allowance atDecember 31, 2021 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future. 60 -------------------------------------------------------------------------------- Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower's ability to pay or the value of our collateral. See "Risk Management - Credit Risk Management" contained herein.
The following table provides a summary of the allocation of the allowance for credit losses by loan type at the dates indicated for total loans. The allocations presented should not be interpreted as an indication that loans charged to the allowance for credit losses will occur in these amounts or proportions.
Allowance for Credit Losses by Loan Type
December 31,
2021 2020 2019 2018 2017
Loans Loans Loans Loans Loans
as % of as % of as % of as % of as % of
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)Commercial real estate$ 50,950 73.4 %$ 75,439 65.9 %$ 48,629 71.0 %$ 44,934 69.4 %$ 41,722 69.8 % Construction 765 0.8 % 1,934 1.0 % 858 1.5 % 981 1.6 % 984 1.6 % SBA 2,668 3.6 % 2,992 3.6 % 1,453 4.0 % 1,062 4.5 % 869 2.5 % SBA - PPP - 2.4 % - 10.6 % - - - - - - Commercial and industrial 6,669 10.3 % 7,142 9.7 % 8,880 12.4 % 7,520 12.9 % 7,280 10.6 % Dairy & livestock and agribusiness 3,066 4.9 % 3,949 4.4 % 5,255 5.1 % 5,215 5.1 % 4,647 7.2 % Municipal lease finance receivables 100 0.6 % 74 0.5 % 623 0.7 % 775 0.8 % 851 1.5 % SFR mortgage 188 3.1 % 367 3.2 % 2,339 3.8 % 2,196 3.8 % 2,112 4.9 % Consumer and other loans 613 0.9 % 1,795 1.1 % 623 1.5 % 726 1.7 % 753 1.3 % PCI loans - - - - - - 204 0.2 % 367 0.6 % Total$ 65,019 100.0 %$ 93,692 100.0 %$ 68,660 100.0 %$ 63,613 100.0 %$ 59,585 100.0 % Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were$12.98 billion atDecember 31, 2021 . This represented an increase of$1.24 billion , or 10.56%, over total deposits of$11.74 billion atDecember 31, 2020 . The average balance of deposits by category and the average effective interest rates paid on deposits is summarized for the periods presented in the table below. Year Ended December 31, 2021 2020 2019 Average Balance Rate Balance Rate Balance Rate (Dollars in thousands) Noninterest-bearing deposits$ 7,817,627 -$ 6,281,989 -$ 5,177,035 - Interest-bearing deposits Investment checking 599,978 0.03 % 478,458 0.08 % 452,437 0.11 % Money market 3,114,222 0.12 % 2,599,553 0.31 % 2,197,194 0.54 % Savings 535,179 0.05 % 452,595 0.09 % 399,154 0.10 % Time deposits 375,666 0.32 % 445,962 0.85 % 487,221 0.91 % Total deposits$ 12,442,672 $ 10,258,557 $ 8,713,041 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. Average noninterest-bearing deposits totaled$7.82 billion for 2021, representing an increase of$1.54 billion , or 24.45%, from average demand deposits of$6.28 billion for 2020. Average noninterest-bearing deposits represented 62.83% of total average deposits for 2021, compared to 61.24% of total average deposits for 2020. Average savings deposits, which include savings, interest-bearing demand, and money market accounts, were$4.25 billion for 2021, representing an increase of$718.8 million , or 20.36%, from average savings deposits of$3.53 billion for 2020. 61 -------------------------------------------------------------------------------- Average time deposits totaled$375.7 million for 2021, representing a decrease of$70.3 million , or 15.76%, from total average time deposits of$446.0 million for 2020. The following table provides the remaining maturities of large denomination ($250,000 or more) time deposits, including public funds, atDecember 31, 2021 . Maturity Distribution of Large Denomination Time Deposits December 31, 2021 (Dollars in thousands) 3 months or less $ 29,201 Over 3 months through 6 months 16,366 Over 6 months through 12 months 23,558 Over 12 months 12,476 Total $ 81,601
Time deposits totaled
Borrowings
The following table summarizes information about our term FHLB advances,
repurchase agreements and other borrowings outstanding for the periods
presented.
Repurchase Other
Agreements FHLB Advances Borrowings Total
(Dollars in thousands)
At December 31, 2021
Amount outstanding $ 642,388 $ - $ 2,281 $ 644,669
Weighted-average interest
rate 0.08 % - 1.45 % 0.09 %
Year ended December 31,
2021
Highest amount at
month-end $ 659,579 $ - $ 5,000 $ 664,579
Daily-average amount
outstanding $ 610,479 $ - $ 2,008 $ 612,487
Weighted-average interest
rate 0.09 % - 0.01 % 0.09 %
At December 31, 2020
Amount outstanding $ 439,406 $ - $ 5,000 $ 444,406
Weighted-average interest
rate 0.10 % - - 0.10 %
Year ended December 31,
2020
Highest amount at
month-end $ 501,881 $ - $ 10,000 $ 511,881
Daily-average amount
outstanding $ 479,956 $ - $ 5,674 $ 485,630
Weighted-average interest
rate 0.24 % - 0.04 % 0.23 %
At December 31, 2019
Amount outstanding $ 428,659 $ - $ - $ 428,659
Weighted-average interest
rate 0.44 % - - 0.44 %
Year ended December 31,
2019
Highest amount at
month-end $ 547,730 $ - $ 295,000 $ 842,730
Daily-average amount
outstanding $ 435,317 $ - $ 76,873 $ 512,190
Weighted-average interest
rate 0.47 % - 2.51 % 0.77 %
At December 31, 2021 , our borrowings included $642.4 million of repurchase
agreements and $2.3 million in overnight borrowings. At December 31, 2020 , our
borrowings included $439.4 million in repurchase agreements and $5.0 million in
other short-term borrowing at an interest rate of 0%.
We offer a repurchase agreement product to our deposit 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
which reflects the market value of the use of funds by the Bank for the period
concerned. These repurchase agreements are signed with customers who want to
invest their excess deposits, above a pre-determined balance in a demand deposit
account, in order to earn interest. As of December 31, 2021 , total funds
borrowed under these agreements were $642.4 million with a
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weighted average interest rate of 0.08%, compared to
We had
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% at the time of repayment. The debentures and the Trust Preferred Securities had an original maturity date of 2036. The interest rate on these debentures were based on three-month LIBOR plus 1.38%. Refer to Note 12 - Borrowings of the notes to the consolidated financial statements for a more detailed discussion. AtDecember 31, 2021 ,$3.96 billion of loans and$2.18 billion of investment securities, at carrying value, were pledged to secure public deposits of$718.9 , short and long-term borrowings, and for other purposes as required or permitted by law, with a remaining borrowing capacity atDecember 31, 2021 of$4.52 billion .
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as ofDecember 31, 2021 . Maturity by Period Less Than One Year Four Years Over One Through Through Five Total Year Three Years Five Years Years (Dollars in thousands) Deposits (1)$ 12,976,442 $ 12,952,767 $ 13,138 $ 10,005 $ 532 Customer repurchase agreements (1) 642,388 642,388 - - - Deferred compensation 21,111 652 767 621 19,071 Operating leases 21,908 6,515 8,742 5,213 1,438 Affordable housing investment 1,350 1,259 55 30 6 Total$ 13,663,199 $ 13,603,581 $ 22,702 $ 15,869 $ 21,047 (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 22 - Leases of the notes to the consolidated financial statements for a more detailed discussion about leases.
63
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
The following table summarizes the off-balance sheet items atDecember 31, 2021 . Maturity by Period Less Than One Year Four Years After One to Three to Five Five Total Year Years Years Years (Dollars in thousands) Commitment to extend credit: Commercial real estate$ 330,045 $ -$ 107,736
$ 145,152 $ 77,157 Construction 81,319 - 81,319 - - SBA 1,872 - 1,275 - 597 SBA - PPP - - - - -
Commercial and industrial 891,508 29,604 785,997
11,649 64,258
Dairy & livestock and
agribusiness (1) 143,236 - 143,236 - -
Municipal lease finance
receivables 17,948 - - - 17,948
SFR Mortgage 5,585 - 2,550 - 3,035
Consumer and other loans 113,204 - 18,935 3,724 90,545
Total commitment to extend credit 1,584,717 29,604 1,141,048 160,525 253,540 Obligations under letters of credit 44,914 5,753 39,161 - - Total$ 1,629,631 $ 35,357 $ 1,180,209 $ 160,525 $ 253,540 (1)
Total commitments to extend credit to agribusiness were
As ofDecember 31, 2021 , we had commitments to extend credit of approximately$1.58 billion , and obligations under letters of credit of$44.9 million . Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers' creditworthiness individually. Due to the adoption of CECL onJanuary 1, 2020 , a transition adjustment of$41,000 was added to the beginning balance of the reserve for unfunded loan commitments. As ofDecember 31, 2021 and 2020, the balance in this reserve was$8.0 million and$9.0 million , respectively, and was included in other liabilities. The year-over-year decrease included a$1.0 million recapture of provision for unfunded loan commitments in the second quarter of 2021. There was no provision or recapture of provision for unfunded commitments for the year endedDecember 31, 2020 .
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital. Total equity increased$73.5 million , or 3.66%, to$2.08 billion atDecember 31, 2021 , compared to total equity of$2.01 billion atDecember 31, 2020 . The$73.5 million increase in equity was primarily due to$212.5 million , partially offset by$97.8 million in cash dividends and a$39.3 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the third quarter of 2021, we repurchased 390,336 shares of common stock for$7.4 million , or an average repurchase price of$18.97 , under our 10b5-1 stock repurchase program. Our tangible common equity ratio was 9.16% atDecember 31, 2021 . 64 -------------------------------------------------------------------------------- During 2021, the Board of Directors of CVB declared quarterly cash dividends totaling$0.72 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB's ability to pay cash dividends to its shareholders is subject to restrictions under federal andCalifornia law, including restrictions imposed by theFederal Reserve , and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures. OnAugust 11, 2016 , our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. As ofDecember 31, 2021 , the Company had cumulatively repurchased 5,805,191 shares of CVB common stock outstanding under this program. As ofDecember 31, 2021 , we had 4,194,809 shares of CVB common stock remaining eligible for repurchase under the common stock repurchase program. OnFebruary 1, 2022 , the Company announced that our Board of Directors approved a new program (the "2022 Repurchase Program") to repurchase up to 10,000,000 shares of CVB common stock, replacing the previous 2016 repurchase plan. The 2022 Repurchase Program includes an initial accelerated share repurchase agreement involving$70 million of the Company's common stock and one or more rule 10b5-1 plans or other appropriate buy-back arrangements, including open market and private transactions. 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%. AtDecember 31, 2021 , the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered "well-capitalized" for regulatory purposes. For further information about capital requirements and our capital ratios, see "Item 1. Business-Regulation andSupervision-Capital Adequacy Requirements". AtDecember 31, 2021 , the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered "well-capitalized" for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of theFDIC and otherU.S. banking agencies.
The table below presents the Company's and the Bank's risk-based and leverage capital ratios for the periods presented.
Minimum
Required
Adequately Plus Capital Well CVB Financial Citizens CVB Financial Citizens
Capitalized Conservation Capitalized Corp. Business Corp. Business
Capital Ratios Ratios Buffer Ratios Consolidated Bank Consolidated Bank
Tier 1 leverage
capital ratio 4.00% 4.00% 5.00% 9.18% 8.90% 9.90% 9.58%
Common equity Tier 1
capital ratio 4.50% 7.00% 6.50% 14.86% 14.41% 14.77% 14.57%
Tier 1 risk-based
capital ratio 6.00% 8.50% 8.00% 14.86% 14.41% 15.06% 14.57%
Total risk-based
capital ratio 8.00% 10.50% 10.00% 15.63% 15.18% 16.24% 15.75%
RISK MANAGEMENT
All financial institutions must manage and control a variety of business risks
that can significantly affect their financial performance. Our Board of
Directors (Board) and executive management team have overall and ultimate
responsibility for management of these risks, which they carry out through
committees with specific and well-defined risk management functions. The Risk
Management Plan that we have adopted seeks to implement the proper control and
management of key risk factors inherent in the operation of the Company and the
Bank. Some of the key risks that we must manage are credit risks, interest rate
risk, liquidity risk, market risks, transaction risk, compliance risk, strategic
risk, and cybersecurity risk. These specific risk factors are not mutually
exclusive. It is recognized that any product or service offered by us may expose
the Bank to one or more of these risks. Our Risk Management Committee and Risk
Management Division monitor these risks to minimize exposure to the Company. The
Board and its committees work closely with management in overseeing risk. Each
Board committee receives reports and information regarding risk issues directly
from management.
65
--------------------------------------------------------------------------------Credit Risk Management
Loans represent the largest component of assets on our balance sheet and their
related credit risk is among the most significant risks we manage. We define
credit risk as the risk of loss associated with a borrower or counterparty
default (failure to meet obligations in accordance with agreed upon terms).
Credit risk is found in all activities where success depends on a counter party,
issuer, or borrower performance. Credit risk arises through the extension of
loans and leases, certain securities, and letters of credit.
Natural disasters, such as storms, earthquakes, drought and other weather
conditions, effects of pandemics, as well as natural disasters and problems
related to possible climate changes, may from time-to-time cause or create the
risk of damage to facilities, buildings, property or other assets of Bank
customers, borrowers or municipal debt issuers. This could in turn affect their
financial condition or results of operations and as a consequence their ability
or capacity to repay debt or fulfill other obligations to the Bank.
Credit risk in the investment portfolio and correspondent bank accounts is in
part addressed through defined limits in the Company's policy statements. In
addition, certain securities carry insurance to enhance the credit quality of
the bond. Limitations on industry concentration, aggregate customer borrowings,
geographic boundaries and standards on loan quality also are designed to reduce
loan credit risk. Senior Management, Directors' Committees, and the Board of
Directors are provided with information to appropriately identify, measure,
control and monitor the credit risk of the Company.
The Bank's loan policy is updated annually and approved by the Board of
Directors. It prescribes underwriting guidelines and procedures for all loan
categories in which the Bank participates to establish risk tolerance and
parameters that are communicated throughout the Bank to ensure consistent and
uniform lending practices. The underwriting guidelines include, among other
things, approval limitation and hierarchy, documentation standards,
loan-to-value limits, debt coverage ratio, overall credit-worthiness of the
borrower, guarantor support, etc. All loan requests considered by the Bank
should be for a clearly defined legitimate purpose with a determinable primary
source, as well as alternate sources of repayment. All loans should be supported
by appropriate documentation including, current financial statements, credit
reports, collateral information, guarantor asset verification, tax returns,
title reports, appraisals (where appropriate), and other documents of quality
that will support the credit.
The major lending categories are commercial and industrial loans, SBA loans,
owner-occupied and non owner-occupied commercial real estate loans, construction
loans, dairy & livestock and agribusiness loans, residential real estate loans,
and various consumer loan products. Loans underwritten to borrowers within these
diverse categories require underwriting and documentation suited to the unique
characteristics and inherent risks involved.
Commercial and industrial loans require credit structures that are tailored to
the specific purpose of the business loan, involving a thorough analysis of the
borrower's business, cash flow, collateral, industry risks, economic risks,
credit, character, and guarantor support. Owner-occupied real estate loans are
primarily based upon the capacity and stability of the cash flow generated by
the occupying business and the market value of the collateral, among other
things. Non owner-occupied real estate is typically underwritten to the income
produced by the subject property and many considerations unique to the various
types of property (i.e. office, retail, warehouse, shopping center, medical,
etc.), as well as, the financial support provided by sponsors in recourse
transactions. Construction loans will often depend on the specific
characteristics of the project, the market for the specific development, real
estate values, and the equity and financial strength of the sponsors. Dairy &
livestock and agribusiness loans are largely predicated on the revenue cycles
and demand for milk and crops, commodity prices, collateral values of herd,
feed, and income-producing dairies or croplands, and the financial support of
the guarantors. Underwriting of residential real estate and consumer loans are
generally driven by personal income and debt service capacity, credit history
and scores, and collateral values.
SBA loans require credit structures that conform to the various requirements of
the SBA programs specific to the type of loan request and the Bank's loan policy
as it relates to these loans. The SBA 7(a) loans are similar to the commercial
and industrial loans that are tailored to the specific purpose of the business
loan, involving a thorough analysis of the borrower's business, cash flow,
collateral, industry risks, economic risks, credit, character, and guarantor
support for both the Bank and the SBA. Once granted the SBA 7(a) loans require
the Bank to follow SBA servicing guidelines to maintain the SBA guaranty which
typically ranges from 75% to 90% depending on the type of 7(a) loan. SBA 504
loans are similar to the Bank's Owner-occupied real estate loans. As such they
are primarily based upon the capacity and stability of the cash flow generated
by the occupying business and the market value of the collateral, among other
things. When the Bank funds an SBA 504 transaction, which includes the 50% first
trust deed loan and the 40% second trust deed loan, the initial risk is centered
in completing the SBA's requirements to provide for the payoff of the second
trust deed loan from the subordinated debenture. Once the 504 second is paid
off, the remaining first trust deed loan is then managed under the same
requirements applied to the Bank's owner-occupied commercial real estate loan.
It should be noted that both the SBA 7(a) and 504
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programs provide loans for commercial real estate acquisition. However, the
terms and advances rates available under the 7(a) program are outside of the
Bank's standard loan programs and risk profile and therefore require a credit
enhancement in the form of the SBA guaranty. Additionally, the interest rates
for the 7(a) program are typically variable and can adjust as often as monthly
with quarterly adjustment the most typical. SBA 504 loan interest rates for the
first trust deed loan are at the Bank's discretion and subject to competitive
pressures from other banks.
Implicit in lending activities is the risk that losses will occur and that the
amount of such losses will vary over time. Consequently, we maintain an
allowance for credit losses by charging a provision for credit losses to
earnings. Loans determined to be losses are charged against the allowance for
credit losses. In this regard, it is important to note that the Bank's practice
with regard to these loans, including modified loans or troubled debt
restructurings that are classified as impaired, is to generally charge off any
loss amount against the ACL upon evaluating the loan at the time a probable loss
becomes recognized. As such, the Bank's specific allowance for loans, including
troubled debt restructurings, is relatively low since any known loss amount will
generally have been charged off.
Central to our credit risk management is its loan risk rating system. The
originating credit officer assigns borrowers an initial risk rating, which is
reviewed and possibly changed by credit management. The risk rating is based
primarily on an analysis of each borrower's financial capacity in conjunction
with industry and economic trends. Credit approvals are made based upon our
evaluation of the 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 may be adjusted as
necessary.
Loans are risk rated into the following categories: Pass, Special Mention, Substandard, Doubtful, and Loss. Each of these groups is assessed and appropriate amounts used in determining the adequacy of our allowance for losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount.
The Company obtains a semi-annual independent credit review by engaging an outside party to review a sample of our loans and leases. The primary purpose of this review is to evaluate our existing loan ratings.
Refer to additional discussion concerning loans, nonperforming assets, allowance for credit losses and related tables under the Analysis of Financial Condition contained herein. Transaction Risk Transaction risk is the risk to earnings or capital arising from problems in service, activity or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Company. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Company as transactions are processed. It pervades all divisions, departments and centers and is inherent in all products and services we offer. In general, transaction risk is defined as high, medium or low by the Company. The audit plan ensures that high risk areas are reviewed annually. We utilize internal auditors and independent audit firms to test key controls of operational processes and to audit information systems, compliance management programs, loan credit reviews and trust services. The key to monitoring transaction risk is in the design, documentation and implementation of well-defined procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met.
Compliance Risk Management
Compliance risk is the risk to earnings or capital arising from violations of,
or non-conformance with, laws, rules, regulations, prescribed practices, or
ethical standards. Compliance risk also arises in situations where the laws or
rules governing certain products or activities of the Bank's customers, vendors
or business partners may be ambiguous or untested. Compliance risk exposes us to
fines, civil money penalties, payment of damages, and the voiding of contracts.
Compliance risk can also lead to a diminished reputation, reduced business
value, limited business opportunities, lessened expansion potential, and lack of
contract enforceability. The Company utilizes independent compliance audits as a
means of identifying weaknesses in the compliance program.
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There is no single or primary source of compliance risk. It is inherent in every
activity. Frequently, it blends into operational risk and transaction risk. A
portion of this risk is sometimes referred to as legal risk. This is not limited
solely to risk from failure to comply with consumer protection laws; it
encompasses all laws, as well as prudent ethical standards and contractual
obligations. It also includes the exposure to litigation from all aspects of
banking, traditional and non-traditional.
Our Risk Management Policy and Program and the Code of Ethical Conduct are
cornerstones for controlling compliance risk. An integral part of controlling
this risk is the proper training of associates. The Chief Risk Officer is
responsible for developing and executing a comprehensive compliance training
program. The Chief Risk Officer, in consultation with our internal and external
legal counsel, seeks to provide our associates with adequate training
commensurate to their job functions to ensure compliance with banking laws and
regulations.
Our Risk Management Policy and Program includes a risk-based audit program aimed
at identifying internal control deficiencies and weaknesses. The Compliance
Management Program includes a monitoring process to address external and
internal risks, including regulatory change management, the evolving products
and services, and strategies of the front-line units and control functions.
Additionally, in-depth audits performed by our internal audit department under
the direction of our Chief Audit Executive and supplemented by independent
external firms. Annually, an Audit Plan for the Company is developed and
presented for approval to the Audit Committee of the Board.
The Risk Management Division conducts periodic monitoring of our compliance
efforts with a special focus on business and control functions, assessing the
inherent compliance risk of activities and the effectiveness of controls, and
identifying control weaknesses that are to be strengthened or enhanced. Any
material exceptions identified are brought forward to the appropriate department
head, and appropriate management and board committees. This reporting provides
an independent view of compliance risk across the company, support transparent
communication and management awareness of compliance risk.
We recognize that customer complaints can often identify weaknesses in our
compliance program which could expose us to risk. Therefore, we attempt to
ensure that all complaints are given prompt attention. Our Compliance Management
Policy and Program include provisions on how customer complaints are to be
addressed. The Chief Risk Officer reviews formal complaints to determine if a
significant compliance risk exists and communicates those findings to the
Compliance Management and Risk Management Committees.
Strategic Risk
Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization's goals, the resources deployed against those goals and the quality of implementation.
Strategic risks are identified as part of the strategic planning process. Strategic planning sessions, with members of the Board of Directors and Executive Leadership, are held annually. The strategic review consists of results of strategic initiatives, an assessment of the economic outlook, competitive analysis, and an industry outlook, including a legislative and regulatory review.
Cybersecurity Risk
Cybersecurity and fraud risk refers to the risk of failures, interruptions of
services, or breaches of security with respect to the Company's or the Bank's
communication, information, operations, devices, financial control, customer
internet banking, customer information, email, data processing systems, or other
bank or third party applications. The ability of the Company's customers to bank
remotely, including online and through mobile devices, requires secure
transmission of confidential information and increases the risk of data security
breaches. In addition, the Company and the Bank rely primarily on third party
providers to develop, manage, maintain and protect our systems and applications.
Any such failures, interruptions or fraud or security breaches, depending on the
scope, duration, affected system(s) or customers(s), could expose the Company
and/or the Bank to financial loss, reputation damage, litigation, or regulatory
action. We continue to invest in technologies and training to protect our
associates, our clients and our assets. While we have implemented various
detective and preventative measures which seek to protect our Company, our
customers' information and the Bank from the risk of fraud, data security
breaches or service interruptions, there can be no assurance that these measures
will be effective in preventing potential breaches or losses for us or our
customers.
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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, investment securities and loans. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of$12.98 billion atDecember 31, 2021 increased$1.24 billion , or 10.56%, over total deposits of$11.74 billion atDecember 31, 2020 . This deposit growth was partly due to our customers maintaining greater liquidity during the current pandemic induced economic cycle. 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. AtDecember 31, 2021 , the Bank had no 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. Below is a summary of our average cash position and statement of cash flows for the years endedDecember 31, 2021 and 2020. For further details, see our "Consolidated Statements of Cash Flows" under Part IV consolidated financial statements of this report.
Consolidated Summary of Cash Flows
Year Ended December 31,
2021 2020
(Dollars in thousands)
Average cash and cash equivalents $ 2,078,439 $ 1,226,262
Percentage of total average assets 13.54 % 9.48 % Net cash provided by operating activities$ 195,242 $
185,096
Net cash (used in) provided by investing activities (1,730,491 ) (1,268,758 ) Net cash provided by (used in) financing activities 1,309,637 2,856,304 Net (decrease) increase in cash and cash equivalents$ (225,612 ) $ 1,772,642 69
-------------------------------------------------------------------------------- Average cash and cash equivalents increased by$852.2 million , or 69.49%, to$2.08 billion for the year endedDecember 31, 2021 , compared to$1.23 billion for 2020.
At
Market Risk
In the normal course of its business activities, we are exposed to market risks, including price and liquidity risk. Market risk is the potential for loss from adverse changes in market rates and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility that we may not be able to satisfy current or future commitments or that we may be more reliant on alternative funding sources such as long-term debt. Financial products that expose us to market risk include securities, loans, deposits, debt, and derivative financial instruments. The table below provides the actual balances as ofDecember 31, 2021 of interest-earning assets and interest-bearing liabilities, including the average rate earned or incurred for 2021, the projected contractual maturities over the next five years, and the estimated fair value of each category determined using available market information and appropriate valuation methodologies. Maturing December 31, Average Five Years Estimated Fair 2021 Rate One Year Two Years Three Years Four Years and Beyond Value (Dollars in thousands) Interest-earning assets: Investment securities available-for-sale (1)$ 3,183,923 1.38 %$ 19,073 $ 315,386 $ 605,595 $ 234,084 $ 2,009,785 $ 3,183,923 Investment securities held-to-maturity (1) 1,925,970 1.89 % 5,586 27,336 122,168 114,251 1,656,629
1,921,693 Investment in FHLB stock 17,688 5.76 % - - - - 17,688 17,688 Interest-earning deposits due from Federal Reserve and with other institutions 1,668,535 0.13 % 1,667,795 740 - - - 1,668,535 Loans and lease finance receivables (2) 7,887,713 4.42 % 903,187
609,421 354,685 453,789 5,566,631 7,761,229
Total interest-earning assets$ 14,683,829 $ 2,595,641 $ 952,883 $ 1,082,448 $ 802,124 $ 9,250,733 $ 14,553,068 Interest-bearing liabilities: Interest-bearing deposits$ 4,872,386 0.12 %$ 4,848,711 $ 11,457 $ 1,681 $ 7,984 $ 2,553 $ 4,871,531 Borrowings 644,669 0.09 % 644,669 - - - - 586,645 Junior subordinated debentures - 1.58 % - - - - - - Total interest-bearing liabilities$ 5,517,055 $ 5,493,380 $ 11,457 $ 1,681 $ 7,984 $ 2,553 $ 5,458,176 (1) These include mortgage-backed securities which generally prepay before maturity. (2) Gross loans, at amortized cost.
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.
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--------------------------------------------------------------------------------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 100 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the 12-month and 24-month time horizon.
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 100bps over a 12-month time horizon.
Estimated Net Interest Income Sensitivity (1)
December 31, 2021 December 31, 2020
Interest Rate 24-month Period Interest Rate 24-month Period
Scenario 12-month Period (Cumulative) Scenario 12-month Period (Cumulative)
+ 200 basis + 200 basis
points 9.85 % 16.84 % points 11.10 % 19.60 %
- 100 basis - 100 basis
points -4.30 % -4.99 % points -1.20 % -2.40 %
(1)Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.
Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a one-year and a two-year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 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. AtDecember 31, 2021 andDecember 31, 2020 , 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 December 31, 2021 December 31,
2020
100 bp decrease in interest rates -14.1 % -21.0 % 100 bp increase in interest rates 5.3 % 16.1 % 200 bp increase in interest rates 11.8 % 28.4 % 300 bp increase in interest rates 13.6 % 34.4 % 400 bp increase in interest rates 16.8 %
41.6 %
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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--------------------------------------------------------------------------------Counterparty Risk
Recent developments in the financial markets have placed an increased awareness of Counterparty Risks. These risks occur when a financial institution has an indebtedness or potential for indebtedness to another financial institution. We have assessed our Counterparty Risk with the following results:
•
We do not have any investments in the preferred stock of any other company; • Most of our investment securities are either municipal securities or securities either issued or guaranteed by government, agencies, including Fannie Mae, Freddie Mac, SBA or FHLB; • All of our commercial line insurance policies are with companies with the highest AM Best ratings of A or above; • We have no significant exposure to our Cash Surrender Value of Life Insurance since the Cash Surrender Value balance is predominately supported by insurance companies that carry an AM Best rating of B+ or greater; • We have no significant Counterparty exposure related to derivatives such as interest rate swaps. Our Counterparty is a major financial institution and our agreement requires the Counterparty to post cash collateral for mark-to-market balances due to us; • • We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is generally mitigated as the loans with swaps are underwritten to take into account potential additional exposure; • As ofDecember 31, 2021 , we had$389.0 million in Fed Funds lines of credit with other majorU.S. banks. These lines of credit are available for overnight borrowings; and • AtDecember 31, 2021 , we had no FHLB short-term borrowings. Our secured borrowing capacity with the FHLB and FRB totaled$4.14 billion , of which$4.14 billion was available as ofDecember 31, 2021 .
Price and Foreign Exchange Risk
Price risk arises from changes in market factors that affect the value of traded instruments. Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange rates. Our current exposure to price risk is nominal. We do not have trading accounts. Consequently, the level of price risk within the investment portfolio is limited to the need to sell securities for reasons other than trading. We maintain limited deposit accounts with various foreign banks. OurInterbank Liability Policy seeks to limit the balance in any of these accounts to an amount that does not in our judgment present a significant risk to our earnings from changes in the value of foreign currencies. Our asset liability model seeks to calculate the market value of the Bank's equity. In addition, management prepares, on a monthly basis, a capital volatility report that compares changes in the market value of the investment portfolio. We have as our target to always be well-capitalized by regulatory standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in the market prices and
interest rates. Our market risk arises primarily from interest rate risk
inherent in our lending and deposit taking activities. We currently do not enter
into futures, forwards, or option contracts. LIBOR is expected to be completely
phased out by 2023, as such the Company continues to assess the impacts of this
transition and exploring alternatives to use in place of LIBOR for various
financial instruments, primarily related to our variable-rate loans and interest
rate swap derivatives that are indexed to LIBOR. The Bank will use multiple
alternative indices as replacements for LIBOR for new instruments originated
after 2021. For further quantitative and qualitative disclosures about market
risks in our portfolio, see "Asset/Liability Management and Interest Rate
Sensitivity Management" included in Item 7 - Management's Discussion and
Analysis of Financial Condition and the Results of Operations presented
elsewhere in this report. Our analysis of market risk and market-sensitive
financial information contain forward looking statements and is subject to the
disclosure at the beginning of Part I regarding such forward-looking
information.
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