CVB FINANCIAL CORP. The following discussion provides information about the results of operations, financial condition, liquidity and capital resources ofCVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB" and on a consolidated basis as "we," "our" or the "Company") and its wholly owned bank subsidiary,Citizens Business Bank (the "Bank" or "CBB"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2021 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 starting in 2020 created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic affected our customers and the communities we serve. We recorded a$23.5 million provision for credit losses for the year endedDecember 31, 2020 due to the forecast, at that time, of a severe economic downturn resulting from the onset of the COVID-19 pandemic. In response to the anticipated effects of the pandemic on theU.S. economy, theBoard of Governors of theFederal Reserve System ("FRB") took significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% in 2020 and established a program of purchases ofTreasury and mortgage-backed securities. A$19.5 million recapture of provision for credit losses was recorded in the first quarter of 2021, resulting from improvements in our economic forecast of certain macroeconomic variables resulting from significant monetary and fiscal stimulus, as well as the wide availability of vaccines. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It 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 ofMarch 31, 2022 . 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 were not eligible for Second Draw loans. Further, maximum loan amounts were increased for accommodation and food service businesses. We originated approximately 1,900 round two loans totaling$420 million . The Paycheck Protection Program officially ended onMay 31, 2021 . As ofMarch 31, 2022 , the remaining outstanding balance of PPP loans was$121.2 million , including$8.9 million for round one and$112.3 million for round two. 34 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's unaudited condensed consolidated financial statements are based upon the Company's unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
•
Allowance for Credit Losses ("ACL")
•
Business Combinations
•
Valuation and Recoverability of Goodwill
•
Income Taxes
Our significant accounting policies are described in greater detail in our 2021
Annual Report on Form 10-K in the "Critical Accounting Policies" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 3 - Summary of Significant Accounting Policies, included
in our Annual Report on Form 10-K for the year ended December 31, 2021 , which
are essential to understanding Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2022
Adoption Impact on Financial
Standard Description Timing Statements
ASU No. The FASB issued ASU 2020-04, 1st The Company established
2020-04, Reference Rate Reform: Quarter a LIBOR Transition Task
Reference Facilitation of the Effects of 2020 Force in 2020, which has
Rate Reform Reference Rate Reform on through inventoried our
(Topic 848): Financial Reporting. The the instruments that reflect
Facilitation amendments in this update 4th exposure to LIBOR,
of the provide temporary, optional Quarter created a framework to
Effects of guidance to ease the potential 2022 manage the transition
Reference burden in accounting for and established a
Rate Reform transitioning away from timeline for key
on Financial reference rates such as LIBOR. decisions and actions,
Reporting The amendments provide optional and started the
expedients and exceptions for transition from LIBOR in
applying GAAP to transactions 2021. The Company
Issued March affected by reference rate continues to assess the
2020 reform if certain criteria are impacts of this
met. The amendments primarily transition and
include relief related to alternatives to use in
contract modifications and place of LIBOR for
hedging relationships, as well various financial
as providing a one-time instruments, primarily
election for the sale or related to our
transfer of debt securities variable-rate and
classified as held-to-maturity. adjustable-rate loans
This guidance is effective that are indexed to
immediately and the amendments LIBOR. The Company
may be applied prospectively stopped originating
through December 31, 2022 . loans indexed to LIBOR
at the end of 2021,
while continuing to use
various alternative
indexes. We do not
expect this ASU to have
a material impact on the
Company's consolidated
financial statements.
35
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OVERVIEW
For the first quarter of 2022, we reported net earnings of $45.6 million ,
compared with $47.7 million for the fourth quarter of 2021 and $63.9 million for
the first quarter of 2021. Diluted earnings per share were $0.31 for the first
quarter, compared to $0.35 for the prior quarter and $0.47 for the same period
last year. The first quarter of 2022 included $2.5 million in provision for
credit losses, compared to $19.5 million of provision recaptured in the first
quarter of 2021. The fourth quarter of 2021 did not include a recapture of or
provision for credit losses. Net income of $45.6 million for the first quarter
of 2022 produced an annualized return on average equity ("ROAE") of 8.24%, an
annualized return on average tangible common equity ("ROATCE") of 13.08%, and an
annualized return on average assets ("ROAA") of 1.06%. Our net interest margin,
tax equivalent ("NIM"), was 2.90% for the first quarter of 2022, while our
efficiency ratio was 46.93%, or 42.38% when $5.6 million of acquisition expenses
are excluded.
On January 7, 2022 , we completed the acquisition of Suncrest Bank ("Suncrest").
Our financial statements for the first quarter included 83 days of Suncrest
operations, post-merger. At close, Citizens Business Bank acquired loans with a
fair value of $774.5 million , assumed $512.8 million of noninterest-bearing
deposits, and $669.8 million of interest-bearing deposits. We incurred $5.6
million in acquisition expense during the first quarter of 2022, as a result of
the Suncrest merger.
As a result of the acquisition of Suncrest, we recorded a provision for credit
loss of $4.9 million on January 7, 2022 for the acquired loans that were not
considered purchased credit deteriorated ("PCD"). The $2.5 million provision for
credit losses for the first quarter of 2022 was the net result of the January 7,
2022 provision for credit losses recorded for the acquisition of the Suncrest
non-PCD loans and a $2.4 million recapture of provision due to the net impact of
improvements in the underlying loan characteristics of certain classified loans
and the impact of changes in the economic forecast of certain macroeconomic
variables compared to the end of 2021. During the first quarter of 2022, we
experienced credit charge-offs of $16,000 and total recoveries of $11,000 ,
resulting in net charge-offs of $5,000 .
At March 31, 2022 , total assets of $17.54 billion increased by $1.66 billion , or
10.42%, from total assets of $15.88 billion at December 31, 2021 .
Interest-earning assets of $16.1 billion at March 31, 2022 increased by $1.42
billion , or 9.70%, when compared with $14.68 billion at December 31, 2021 . The
increase in interest-earning assets was primarily due to a $900.2 million
increase in investment securities and a $704.0 million increase in total loans,
partially offset by a $160.5 million decrease in interest-earning balances due
from the Federal Reserve . The $704.0 million increase in total loans includes
the $774.5 million of loans acquired at fair value from Suncrest.
Total investment securities were $6.01 billion at March 31, 2022 , an increase of
$900.2 million , or 17.62%, from $5.11 billion at December 31, 2021 . We deployed
some of our excess liquidity into additional investment securities by purchasing
approximately $1.17 billion in securities during the first quarter of 2022, with
an expected average yield of approximately 2.37%. At March 31, 2022 , investment
securities held-to-maturity ("HTM") totaled $2.36 billion . At March 31, 2022 ,
investment securities available-for-sale ("AFS") totaled $3.65 billion ,
inclusive of a pre-tax net unrealized loss of $203.4 million . HTM securities
increased by $436.8 million , or 22.68% and AFS securities increased by $463.4
million , or 14.55%, from December 31, 2021 . During the first quarter of 2022, we
purchased $813 million of AFS securities with an average expected yield of
approximately 2.4%. We purchased $357 million of HTM securities in the first
quarter of 2022 with an average yield of approximately 2.2%. Our tax equivalent
yield on investments was 1.70% for the quarter ended March 31, 2022 , compared to
1.52% for the fourth quarter of 2021 and 1.65% for the first quarter of 2021.
Total loans and leases, at amortized cost, of $8.59 billion at March 31, 2022
increased by $704.0 million , or 8.92%, from December 31, 2021 . The increase in
total loans included $774.5 million of loans acquired from Suncrest in the first
quarter of 2022. After adjusting for acquired loans, seasonality related to our
Dairy & Livestock loans, and forgiveness of PPP loans ("core loans"), our core
loans grew by $144.5 million , or 1.97%, from the end of the fourth quarter of
2021, or approximately 8% annualized. The $144.5 million core loan growth
included $100.3 million in commercial real estate loans, $27.3 million in
commercial and industrial loans, $14.2 million in SFR mortgage loans, $2.5
million in SBA loans, and $5.7 million in other loans, partially offset by a
decrease of $5.5 million in construction loans. The majority of the $110.1
million decrease in dairy & livestock loans was seasonal. Our yield on loans was
4.27% for the quarter ended March 31, 2022 , compared to 4.29% for the fourth
quarter of 2021 and 4.50% for the first quarter of 2021. The significant decline
in interest rates since the start of the pandemic continued to have a negative
impact on loan yields, which after excluding discount accretion, nonaccrual
interest income, and the impact from PPP loans, declined by 3 basis points and
12 basis points when compared to the fourth quarter and first quarter of 2021,
respectively. Interest and fee income from PPP loans was approximately $2.9
million in the first quarter of 2022, compared to $4.2 million in the fourth
quarter of 2021.
Noninterest-bearing deposits were $9.11 billion at March 31, 2022 , an increase
of $1.0 billion , or 12.38%, when compared to $8.10 billion at December 31, 2021
and an increase of $1.53 million , or 20.18%, when compared to $7.58
36
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billion at March 31, 2021 . The increase in noninterest-bearing deposits includes
the noninterest-bearing deposits assumed from Suncrest of $512.8 million . At
March 31, 2022 , noninterest-bearing deposits were 62.86% of total deposits,
compared to 62.45% at December 31, 2021 and 62.74% at March 31, 2021 .
Interest-bearing deposits were $5.38 billion at March 31, 2022 , an increase of
$508.1 million , or 10.43%, when compared to $4.87 billion at December 31, 2021
and an increase of $879.7 million , or 19.54%, when compared to $4.50 billion at
March 31, 2021 . The increase in interest-bearing deposits included the
interest-bearing deposits assumed from Suncrest of $669.8 million . Customer
repurchase agreements totaled $598.9 million at March 31, 2022 , compared to
$642.4 million at December 31, 2021 and $506.3 million at March 31, 2021 . Our
average cost of total deposits including customer repurchase agreements was
0.03% for the quarter ended March 31, 2022 , unchanged from the prior quarter and
0.03% lower than the first quarter of 2021.
We had no borrowings at March 31, 2022 . At March 31, 2021 we had $25.8 million
in junior subordinated debentures, bearing interest at three-month LIBOR plus
1.38%, resulting in a borrowing cost of 1.60% for the first quarter of 2021.
These debentures, with an original maturity in 2036, were redeemed on June 15,
2021 . Our average cost of funds of 0.03% for the first quarter of 2022 was
unchanged from the fourth quarter of 2021 and decreased from 0.07% for the first
quarter of 2021.
The allowance for credit losses totaled $76.1 million at March 31, 2022 ,
compared to $65.0 million at December 31, 2021 . The ACL was increased by $11.1
million in 2022, including $8.6 million for the acquired Suncrest PCD loans and
a $2.5 million provision for credit losses. At March 31, 2022 , ACL as a
percentage of total loans and leases outstanding was 0.89%. This compares to
0.82% and 0.87% at December 31, 2021 and March 31, 2021 , respectively. When PPP
loans are excluded, the ACL as a percentage of total loans and leases
outstanding was 0.90% at March 31, 2022 , compared to 0.84% at December 31, 2021
and 0.97% at March 31, 2021 .
The Company's total equity was $2.08 billion at March 31, 2022 . This represented
an overall decrease of $6.5 million from total equity of $2.08 billion at
December 31, 2021 . Increases to equity included $197.1 million for the issuance
of 8.6 million shares to acquire Suncrest and $45.6 million in net earnings.
Decreases included $25.5 million in cash dividends and a $142.3 million decrease
in other comprehensive income from the tax effected impact of the decline in
market value of available-for-sale securities. On February 1, 2022 , we announced
that our Board of Directors authorized a share repurchase plan to repurchase up
to 10 million shares of the Company's common stock. Equity decreased by $82.5
million during the first quarter of 2022, as a result of share repurchases under
this share repurchase plan, including the execution of a $70 million accelerated
stock repurchase program ("ASR") that retired 2,544,298 shares of common stock,
or approximately 80% of the estimated shares repurchased under the ASR. We also
repurchased, under our 10b5-1 stock repurchase plan, 536,010 shares of common
stock, at an average repurchase price of $23.40 , totaling $12.5 million . Our
tangible book value per share at March 31, 2022 was $9.05 .
Our capital ratios under the revised capital framework referred to as Basel III
remain well-above regulatory requirements. As of March 31, 2022 , the Company's
Tier 1 leverage capital ratio was 8.7%, common equity Tier 1 ratio was 13.6%,
Tier 1 risk-based capital ratio was 13.6%, and total risk-based capital ratio
was 14.4%. 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 acquisition of Suncrest, headquartered inVisalia, California . The Company acquired all of the assets and assumed all of the liabilities of Suncrest in a stock and cash transaction for$39.6 million in cash and$197.1 million in stock with the issuance of 8.6 million shares of the Company's common stock. As a result, Suncrest merged with and into the Bank, the principal subsidiary of CVB. At close, Suncrest had seven branch locations and two loan production offices inCalifornia's Central Valley and theSacramento metro area, which opened asCitizens Business Bank locations onJanuary 10, 2022 . At close, the total fair value of assets acquired approximated$1.38 billion in total assets, including$329.0 million of cash and cash equivalents, net of cash paid,$131.1 million of investment securities, and$765.9 million in net loans. The acquired loans were recorded at fair value, which was reduced by a net discount of 1.5% for the entire loan portfolio. Approximately 30% of the acquired loans are considered PCD loans. An allowance for credit loss of$8.6 million was established for these PCD loans at acquisition. In addition, the acquired PCD loans were further discounted by almost 2% to adjust them to fair value. Non-PCD loans were valued at a total premium of 0.3%, net of a credit discount of 1.5%. We recorded a loan loss provision to establish a day one allowance for credit losses of$4.9 million on the non-PCD loans.
Our consolidated financial statements for the first quarter of 2022 included 83 days of Suncrest operations, post-merger.
37
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ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance
Three Months Ended
March 31, Variance
2022 2021 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 112,840 $ 103,468 $ 9,372 9.06 %
(Provision for) recapture of credit (2,500 ) 19,500 (22,000 ) -112.82 %
losses
Noninterest income 11,264 13,681 (2,417 ) -17.67 %
Noninterest expense (58,238 ) (47,163 ) (11,075 ) -23.48 %
Income taxes (17,806 ) (25,593 ) 7,787 30.43 %
Net earnings $ 45,560 $ 63,893 $ (18,333 ) -28.69 %
Earnings per common share:
Basic $ 0.31 $ 0.47 $ (0.16 )
Diluted $ 0.31 $ 0.47 $ (0.16 )
Return on average assets 1.06 % 1.79 % -0.73 %
Return on average shareholders' 8.24 % 12.75 % -4.51 %
equity
Efficiency ratio 46.93 % 40.26 % 6.67 %
Noninterest expense to average 1.36 % 1.32 % 0.04 %
assets
Three Months Ended Variance
March 31, December 31,
2022 2021 $ %
(Dollars in thousands, except per share amounts)
Net interest income $ 112,840 $ 102,395 $ 10,445 10.20 %
(Provision for) recapture of credit (2,500 ) - (2,500 ) -
losses
Noninterest income 11,264 12,385 (1,121 ) -9.05 %
Noninterest expense (58,238 ) (47,980 ) (10,258 ) -21.38 %
Income taxes (17,806 ) (19,104 ) 1,298 6.79 %
Net earnings $ 45,560 $ 47,696 $ (2,136 ) -4.48 %
Earnings per common share:
Basic $ 0.31 $ 0.35 $ (0.04 )
Diluted $ 0.31 $ 0.35 $ (0.04 )
Return on average assets 1.06 % 1.18 % -0.12 %
Return on average shareholders' 8.24 % 9.05 % -0.81 %
equity
Efficiency ratio 46.93 % 41.80 % 5.13 %
Noninterest expense to average 1.36 % 1.19 % 0.17 %
assets
38
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Return on Average Tangible Common Equity Reconciliation (Non-GAAP)
The return on average tangible common equity is a non-GAAP disclosure. The
Company uses certain non-GAAP financial measures to provide supplemental
information regarding the Company's performance. The following is a
reconciliation of net income, adjusted for tax-effected amortization of
intangibles, to net income computed in accordance with GAAP; a reconciliation of
average tangible common equity to the Company's average stockholders' equity
computed in accordance with GAAP; as well as a calculation of return on average
tangible common equity.
Three Months Ended
March 31, December 31, March 31,
2022 2021 2021
(Dollars in thousands)
Net Income $ 45,560 47,696 $ 63,893
Add: Amortization of intangible assets 1,998 1,892 2,167
Less: Tax effect of amortization of intangible assets (1) (591 ) (559 ) (641 ) Tangible net income$ 46,967 $ 49,029 $ 65,419 Average stockholders' equity$ 2,243,335 $ 2,090,746 $ 2,032,676 Less: Average goodwill (759,014 ) (663,707 ) (663,707 ) Less: Average intangible assets (28,190 ) (26,216 ) (32,590 ) Average tangible common equity$ 1,456,131 $ 1,400,823
Return on average equity, annualized 8.24 % 9.05 % 12.75 % Return on average tangible common equity, annualized 13.08 % 13.89 % 19.85 % (1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three months endedMarch 31, 2022 and 2021. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability and Market Risk Management - Interest Rate Sensitivity Management included herein. 39 -------------------------------------------------------------------------------- The tables below present the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. Three Months Ended March 31, 2022 2021 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable$ 3,516,886 $ 12,649 1.50 %$ 2,523,609 $ 8,968 1.47 % Tax-advantaged 30,071 183 2.91 % 30,158 191 3.02 % Held-to-maturity securities: Taxable 1,963,835 9,105 1.88 % 580,478 2,811 1.95 % Tax-advantaged 265,648 1,558 2.85 % 199,348 1,129 2.74 % Investment in FHLB stock 18,933 371 7.95 % 17,688 217 4.98 % Interest-earning deposits with other institutions 1,666,473 773 0.19 % 1,664,193 413 0.10 % Loans (2) 8,500,436 89,461 4.27 % 8,270,282 91,795 4.50 % Total interest-earning assets 15,962,282 114,100 2.93 % 13,285,756 105,524 3.24 % Total noninterest-earning assets 1,421,668 1,220,899 Total assets$ 17,383,950 $ 14,506,655 INTEREST-BEARING LIABILITIES Savings deposits (3)$ 5,082,605 $ 1,052 0.08 %$ 4,026,248 $ 1,198 0.12 % Time deposits 381,947 75 0.08 % 408,034 614 0.61 % Total interest-bearing deposits 5,464,552 1,127 0.08 % 4,434,282 1,812 0.17 % FHLB advances, other borrowings, and customer repurchase agreements 679,982 133 0.08 % 590,170 244 0.17 %
Interest-bearing liabilities 6,144,534 1,260 0.08 %
5,024,452 2,056 0.17 % Noninterest-bearing deposits 8,720,728 7,240,494 Other liabilities 275,353 209,033 Stockholders' equity 2,243,335 2,032,676 Total liabilities and stockholders' equity$ 17,383,950 $ 14,506,655 Net interest income$ 112,840 $ 103,468 Net interest spread - tax equivalent 2.85 % 3.07 % Net interest margin 2.89 % 3.17 % Net interest margin - tax equivalent 2.90 % 3.18 % (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended the three months endedMarch 31, 2022 andMarch 31, 2021 . The non TE rates for total investment securities were 1.67% and 1.62% for the three months endedMarch 31, 2022 and 2021, respectively. The non TE rates for tax-advantaged AFS investment securities were 2.43% and 2.53% for the three months endedMarch 31, 2022 andMarch 31, 2021 respectively. (2) Includes loan fees of$3.3 million and$8.9 million for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. Prepayment penalty fees of$2.1 million and$1.6 million are included in interest income for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. (3) Includes interest-bearing demand and money market accounts. The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average 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. 40
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Rate and Volume Analysis for Changes in Interest Income, Interest Expense and
Net Interest Income
Comparison of Three Months Ended March 31,
2022 Compared to 2021
Increase (Decrease) Due to
Rate/
Volume Rate Volume Total
(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities $ 3,444 $ 171 $ 66 $ 3,681
Tax-advantaged investment (1 ) (7 ) - (8 )
securities
Held-to-maturity securities: - - - - Taxable investment securities 6,646 (105 ) (247 ) 6,294 Tax-advantaged investment 372 42 15 429 securities Investment in FHLB stock 15 130 9 154 Interest-earning deposits with other institutions 1 359 - 360 Loans 2,553 (4,755 ) (132 ) (2,334 ) Total interest income 13,030 (4,165 ) (289 ) 8,576 Interest expense: Savings deposits 314 (365 ) (95 ) (146 ) Time deposits (30 ) (405 ) (104 ) (539 ) FHLB advances, other borrowings, and 37 (128 ) (20 ) (111 ) customer repurchase agreements Total interest expense 321 (898 ) (219 ) (796 ) Net interest income$ 12,709 $ (3,267 ) $ (70 ) $ 9,372
First Quarter of 2022 Compared to the First Quarter of 2021
Net interest income, before provision for credit losses, of$112.8 million for the first quarter of 2022 increased by$9.4 million , or 9.06%, from the first quarter of 2021. Interest-earning assets increased on average by$2.68 billion , or 20.15%, from$13.29 billion for the first quarter of 2021 to$15.96 billion for the first quarter of 2022. Our net interest margin (TE) was 2.90% for the first quarter of 2022, compared to 3.18% for the first quarter of 2021. Total interest income was$114.1 million for the first quarter of 2022, which was$8.6 million , or 8.13%, higher than the same period of 2021. The increase was the net effect of growth in average interest-earning assets of$2.68 billion and the decrease in the average interest-earning asset yield, which was 2.93% for the first quarter of 2022, compared to 3.24% for the first quarter of 2021. The 32 basis point decrease in the average interest-earning asset yield compared to the first quarter of 2022, was impacted by a change in asset mix with loan balances declining to 53.25% of earning assets on average for the first quarter of 2022, compared to 62.25% for the first quarter of 2021, as well as lower loan yields. Loan yields decreased from 4.50% on average in the first quarter of 2021 to 4.27% in the first quarter of 2022. Total loan interest income for the first quarter of 2022 declined by$2.3 million in comparison to the year ago quarter. Total investment income of$23.5 million increased$10.4 million , or 79.36%, from the first quarter of 2021. Investment income growth resulted from both higher levels of investment securities and higher investment yields. Total interest income and fees on loans for the first quarter of 2022 was$89.5 million , a decrease of$2.3 million , or 2.54%, from the first quarter of 2021. The decline in interest income and fees on loans year-over-year was primarily due to lower loan yields of 23 basis points, resulting from the low interest rate environment in 2021. Additionally, interest and fee income from PPP loans declined by$7.5 million from$10.4 million in the first quarter of 2021. Discount accretion on acquired loans decreased by$2.2 million compared to the first quarter of 2021. The decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion, nonaccrual interest income and the impact from PPP loans ("core") loan yield declined by 12 basis points compared to the first quarter of 2021. Interest income from investment securities was$23.5 million , an increase of$10.4 million , or 79.36%, from the first quarter of 2021. Investment income growth resulted from higher levels of investment securities as a result of purchases of investment securities funded by the growth in the Bank's deposits. We deployed some of our excess liquidity during the first quarter of 2022 into additional investment securities by purchasing approximately$1.17 billion in securities, with expected yields of approximately 2.37%. The tax-equivalent yield on investment securities increased from 1.65% in the first quarter of 41 -------------------------------------------------------------------------------- 2021 to 1.70% for the first quarter of 2022. We continued to maintain a significant amount of funds at theFederal Reserve during the first quarter of 2022, which earned less than 0.20% on average for the quarter, with an average balance of more than$1.65 billion . Interest expense of$1.3 million for the first quarter of 2022, decreased$796,000 , or 38.72%, compared to the first quarter of 2021. The average rate paid on interest-bearing liabilities decreased by 9 basis points, to 0.08% for the first quarter of 2022 from 0.17% for the first quarter of 2021. Average interest-bearing liabilities were$1.12 billion higher for the first quarter of 2022 when compared to the first quarter of 2021. On average, noninterest-bearing deposits were 61.48% of our total deposits for the first quarter of 2022, compared to 62.02% for the first quarter of 2021. In comparison to the first quarter of 2021, our overall cost of funds decreased by 4 basis points, partially due to growth in average noninterest-bearing deposits of$1.48 billion , compared to the increase in average interest-bearing deposits of$1.03 billion .
Provision for (Recapture of) Credit Losses
The provision for (recapture of) credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management's assessment of expected lifetime losses in the loan portfolio as of the balance sheet date. The allowance for credit losses on loans totaled$76.1 million atMarch 31, 2022 , compared to$65.0 million atDecember 31, 2021 and$71.8 million atMarch 31, 2021 . The first quarter of 2022 included$2.5 million in provision for credit losses. The$2.5 million provision for credit losses was the net result of the$4.9 million provision for credit losses recorded for the acquisition of the Suncrest non-PCD loans onJanuary 7, 2022 and a subsequent$2.4 million recapture of provision due to the net impact of improvements in the underlying loan characteristics of certain classified loans and the impact of changes in the economic forecast of certain macroeconomic variables compared to the end of 2021. A$19.5 million recapture of provision for credit losses was recorded in the first quarter of 2021, resulting from improvements in our economic forecast of certain macroeconomic variables after reflecting$23.5 million in provision for credit losses for the year endedDecember 31, 2020 . due to the initially forecasted impact on the economy of the COVID-19 pandemic. Refer to the discussion of "Allowance for Credit Losses" in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology. No assurance can be given that economic conditions which affect the Company's service areas or other circumstances will or will not be reflected in future changes in the level of our allowance for credit losses and the resulting provision or recapture of provision for credit losses. The process to estimate the allowance for credit losses requires considerable judgment and our economic forecasts may continue to vary due to the uncertainty of the future impact that the pandemic, geopolitical events inEurope , and overall supply chain issues may have on our business and customers. See "Allowance for Credit Losses" under Analysis of Financial Condition herein. 42 --------------------------------------------------------------------------------
Noninterest Income
Noninterest income includes income derived from financial services offered to
our customers, such as CitizensTrust, BankCard services, international banking,
and other business services. Also included in noninterest income are service
charges and fees, primarily from deposit accounts, gains (net of losses) from
the disposition of investment securities, loans, other real estate owned, and
fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for
the periods presented.
Three Months Ended
March 31, Variance
2022 2021 $ %
(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts $ 5,059 $ 3,985 $ 1,074 26.95 %
Trust and investment services 2,822 2,611 211 8.08 %
Bankcard services 416 350 66 18.86 %
BOLI income 1,349 4,624 (3,275 ) -70.83 %
Swap fee income - 215 (215 ) -100.00 %
Gain on OREO, net - 429 (429 ) -100.00 %
Other 1,618 1,467 151 10.29 %
Total noninterest income $ 11,264 $ 13,681 $ (2,417 ) -17.67 %
First Quarter of 2022 Compared to the First Quarter of 2021
Noninterest income was$11.3 million for the first quarter of 2022, compared with$13.7 million for the first quarter of 2021. The first quarter of 2021 benefited from$3.5 million of insurance proceeds from death benefits that exceeded the cash surrender value on bank owned life insurance. The first quarter of 2021 also included a$399,000 gain on the sale of one OREO property. We did not enter into any new interest rate swap contracts during the first quarter of 2022, but generated fee income of$215,000 from swap transaction in the first quarter of 2021. Partially offsetting those decreases in noninterest income was a$1.1 million , or 26.95%, increase in service charges on deposit accounts for the first quarter of 2022. The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 9 - Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information). Generally speaking, our volume of interest rate swaps is impacted by the shape of the yield curve, with a relatively flat yield curve more conducive to a higher volume of swaps. We executed on swap agreements related to new loan originations with a notional amount totaling$15.4 million for the first quarter of 2021. 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. AtMarch 31, 2022 , CitizensTrust had approximately$3.34 billion in assets under management and administration, including$2.49 billion in assets under management. CitizensTrust generated fees of$2.8 million for the first quarter of 2022, compared to$2.6 million for the same period of 2021, due to the growth in assets under management and higher investment services fees. The Bank's investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. The first quarter of 2022 included$508,000 in death benefits that exceeded the asset value of certain BOLI policies, compared to$3.5 million in death benefits for the first quarter of 2021. Excluding death benefits, income from BOLI declined by$288,000 compared to the first quarter of 2021 due to lower returns on separate account policies that are used to fund deferred compensation liabilities. 43
--------------------------------------------------------------------------------
Noninterest Expense
The following table summarizes the various components of noninterest expense for
the periods presented.
Three Months Ended
March 31, Variance
2022 2021 $ %
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits $ 32,656 $ 29,706 $ 2,950 9.93 %
Occupancy 4,548 4,107 441 10.74 %
Equipment 1,023 756 267 35.32 %
Professional services 2,045 2,168 (123 ) -5.67 %
Computer software expense 3,795 2,844 951 33.44 %
Marketing and promotion 1,458 725 733 101.10 %
Amortization of intangible
assets 1,998 2,167 (169 ) -7.80 %
Telecommunications expense 554 552 2 0.36 %
Regulatory assessments 1,389 1,059 330 31.16 %
Insurance 488 453 35 7.73 %
Loan expense 368 238 130 54.62 %
Directors' expenses 364 379 (15 ) -3.96 %
Stationery and supplies 234 244 (10 ) -4.10 %
Acquisition related expenses 5,638 - 5,638 -
Other 1,680 1,765 (85 ) -4.82 %
Total noninterest expense $ 58,238 $ 47,163 $ 11,075 23.48 %
Noninterest expense to average
assets 1.36 % 1.32 % Efficiency ratio (1) 46.93 % 40.26 % (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 1.36% for the first quarter of 2022, compared to 1.32% for the first quarter of 2021. The increase in this ratio from the first quarter of 2021 includes the impact of$5.6 million of acquisition related expenses . If acquisition expense is excluded, noninterest expense as a percentage of average assets was 1.23%f or the first quarter of 2022. Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio for the first quarter of 2022 was 46.93%, compared to 40.26% for the first quarter of 2021. If acquisition expense is excluded, the efficiency ratio was 42.38% for the first quarter of 2022.
First Quarter of 2022 Compared to the First Quarter of 2021
Noninterest expense of$58.2 million for the first quarter of 2022 increased$11.1 million , or 23.48%, compared to the first quarter of 2021. The year-over-year increase included a$3.0 million increase in salaries and employee benefits, which included additional compensation related expenses for the newly hired and former Suncrest associates. Occupancy and equipment increased by$708,000 due to the addition of seven banking centers resulting from the acquisition of Suncrest. Acquisition expense related to the merger of Suncrest was$5.6 million for the first quarter of 2022. The systems conversion from Suncrest's legacy banking systems was completed in February, which comprised a meaningful percentage of the$5.6 million in acquisition expense for the first quarter of 2022. The increase in software expense of$951,000 , includes costs associated with the continued use of Suncrest's legacy banking systems, prior to conversion. We will consolidate two banking centers in the second quarter of 2022 and by the end of the second quarter, we expect to have completed the integration and consolidations related to Suncrest. The increase in marketing and promotion expense compared to the first quarter of 2021 is primarily due to the impact that the COVID-19 pandemic had on marketing and promotional events in 2021. 44 --------------------------------------------------------------------------------
Income Taxes
The Company's effective tax rate for the three months endedMarch 31, 2022 was 28.10%, compared to 28.60% for the three months endedMarch 31, 2021 , respectively. Our estimated annual effective tax rate varies depending upon the level of tax-advantaged income as well as available tax credits. The Company's effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 45 -------------------------------------------------------------------------------- ANALYSIS OF FINANCIAL CONDITION Total assets of$17.54 billion atMarch 31, 2022 increased by$1.66 billion , or 10.42%, from total assets of$15.88 billion atDecember 31, 2021 . Interest-earning assets of$16.11 billion atMarch 31, 2022 increased by$1.42 billion , or 9.70%, when compared with$14.68 billion atDecember 31, 2021 . The increase in interest-earning assets was primarily due to a$900.2 million increase in investment securities and a$704.0 million increase in total loans, partially offset by a$160.5 million decrease in interest-earning balances due from theFederal Reserve . OnJanuary 7, 2022 , we completed the acquisition of Suncrest with approximately$1.38 billion in total assets, acquired at fair value, and seven banking centers. The increase in total assets atMarch 31, 2022 included$765.9 million of acquired net loans at fair value,$131.1 million of investment securities, and$9 million in bank-owned life insurance. The acquisition resulted in$102.1 million of goodwill and$3.9 million in core deposit intangibles. Net cash proceeds were used to fund the$39.6 million in cash paid to the former shareholders of Suncrest as part of the merger consideration. Total liabilities were$15.46 billion atMarch 31, 2022 , an increase of$1.66 billion , or 12.04%, from total liabilities of$13.80 billion atDecember 31, 2021 . Total deposits grew by$1.51 billion , or 11.65%. Total equity decreased$6.5 million , or 0.31%, to$2.08 billion atMarch 31, 2022 , compared to total equity of$2.08 billion atDecember 31, 2021 . Increases to equity included$197.1 million for issuance of 8.6 million shares to acquire Suncrest and$45.6 million in net earnings. Decreases included$25.5 million in cash dividends and a$142.3 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the first quarter of 2022, we executed on a$70 million accelerated stock repurchase program and retired 2,544,298 shares of common stock, or approximately 80% of the estimated shares repurchased under the program. We also repurchased, under our 10b5-1 stock repurchase plan, 536,010 shares of common stock, at an average repurchase price of$23.40 , totaling$12.5 million .
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. AtMarch 31, 2022 , total investment securities were$6.01 billion , including$131.1 million in securities acquired from Suncrest. This represented an increase of$900.2 million , or 17.62%, from$5.11 billion atDecember 31, 2021 . The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first quarter of 2022. AtMarch 31, 2022 , investment securities HTM totaled$2.36 billion . AtMarch 31, 2022 , our AFS investment securities totaled$3.65 billion , inclusive of a pre-tax net unrealized loss of$203.4 million . The after-tax unrealized loss reported in AOCI on AFS investment securities was$143.3 million . The changes in the net unrealized holding loss resulted primarily from fluctuations in market interest rates. For the three months endedMarch 31, 2022 and 2021, repayments/maturities of investment securities totaled$319.9 million and$259.9 million , respectively. We deployed some of our excess liquidity during the first quarter into additional securities by purchasing$1.17 billion in new investment securities, with yields on average of approximately 2.37% and$1.23 billion for the three months endedMarch 31, 2022 and 2021, respectively. During the first quarter of 2022, we purchased approximately$813.2 million of AFS securities with an average expected yield of approximately 2.42% and$357.2 million of HTM securities with an average expected yield of approximately 2.24%. The fourth quarter of 2021, included purchases of approximately$452 million in new AFS securities with an expected tax equivalent yield of 1.61% and$259 million in new HTM securities with an expected tax equivalent yield of approximately 1.84%. There were no investment securities sold during the first quarter of 2022 and 2021. 46
--------------------------------------------------------------------------------
The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
March 31, 2022
Gross Gross
Unrealized Unrealized Total
Amortized Cost Holding Gain Holding Loss Fair Value Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 3,243,037 $ 3,973 $ (166,018 ) $ 3,080,992 84.47 %
CMO/REMIC 578,213 65 (41,281 ) 536,997 14.72 %
Municipal bonds 28,364 218 (351 ) 28,231 0.77 %
Other securities 1,110 - - 1,110 0.04 %
Total available-for-sale
securities $ 3,850,724 $ 4,256 $ (207,650 ) $ 3,647,330 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 570,332 $ 722 $ (52,738 ) $ 518,316 24.14 %
Mortgage-backed securities 632,012 227 (43,928 ) 588,311 26.75 %
CMO/REMIC 818,279 - (44,778 ) 773,501 34.63 %
Municipal bonds 342,118 758 (19,860 ) 323,016 14.48 %
Total held-to-maturity
securities $ 2,362,741 $ 1,707 $ (161,304 ) $ 2,203,144 100.00 %
December 31, 2021
Gross Gross
Unrealized Unrealized Total
Amortized Cost Holding Gain
Holding Loss Fair Value Percent
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 2,553,246 $ 25,873 $ (15,905 ) $ 2,563,214 80.50 %
CMO/REMIC 602,555 1,586 (13,983 ) 590,158 18.53 %
Municipal bonds 28,365 1,103 - 29,468 0.93 %
Other securities 1,083 - - 1,083 0.04 %
Total available-for-sale
securities $ 3,185,249 $ 28,562 $ (29,888 ) $ 3,183,923 100.00 %
Investment securities
held-to-maturity:
Government agency/GSE $ 576,899 $ 5,907 $ (7,312 ) $ 575,494 29.95 %
Mortgage-backed securities 647,390 4,109 (6,106 ) 645,393 33.61 %
CMO/REMIC 490,670 596 (5,030 ) 486,236 25.48 %
Municipal bonds 211,011 4,714 (1,155 ) 214,570 10.96 %
Total held-to-maturity
securities $ 1,925,970 $ 15,326 $ (19,603 ) $ 1,921,693 100.00 %
As of March 31, 2022 , approximately $46.1 million in U.S. government agency
bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled
collateral. Municipal bonds, which represented approximately 6% of the total
investment portfolio, are predominately AA or higher rated securities.
The following table presents the Company's available-for-sale investment
securities, by investment category, in an unrealized loss position for which an
allowance for credit losses has not been recorded as of
47
--------------------------------------------------------------------------------
March 31, 2022
Less Than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Holding Holding Holding
Fair Value Losses Fair Value Losses Fair Value Losses
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 1,551,620 $ (92,654 ) $ 851,349 $ (73,364 ) $ 2,402,969 $ (166,018 )
CMO/REMIC 192,973 (10,983 ) 331,988 (30,298 ) 524,961 (41,281 )
Municipal bonds 14,990 (351 ) - - 14,990 (351 )
Total available-for-sale
securities $ 1,759,583 $ (103,988 ) $ 1,183,337 $ (103,662 ) $ 2,942,920 $ (207,650 )
Investment securities
held-to-maturity:
Government agency/GSE $ 242,300 $ (21,492 ) $ 242,589
(43,438 ) 4,518 (490 ) 565,270 (43,928 )
CMO/REMIC 773,501 (44,778 ) - - 773,501 (44,778 )
Municipal bonds 178,881 (12,670 ) 58,587 (7,190 ) 237,468 (19,860 )
Total held-to-maturity
securities $ 1,755,434 $ (122,378 ) $ 305,694 $ (38,926 ) $ 2,061,128 $ (161,304 )
December 31, 2021
Less Than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Holding Losses Fair Value Holding Losses Fair Value Holding Losses
(Dollars in thousands)
Investment securities
available-for-sale:
Mortgage-backed securities $ 1,465,647 $ (15,099 ) $ 44,244 $ (806 ) $ 1,509,891 $ (15,905 )
CMO/REMIC 450,393 (11,515 ) 53,745 (2,468 ) 504,138 (13,983 )
Municipal bonds - - - - - -
Total available-for-sale
securities $ 1,916,040 $ (26,614 ) $ 97,989 $ (3,274 ) $ 2,014,029 $ (29,888 )
Once it is determined that a credit loss has occurred, an allowance for credit
losses is established on our available-for-sale and held-to-maturity securities.
Management determined that credit losses did not exist for securities in an
unrealized loss position as of March 31, 2022 and December 31, 2021 .
Refer to Note 5 - Investment Securities of the notes to the unaudited condensed
consolidated financial statements of this report for additional information on
our investment securities portfolio.
48
--------------------------------------------------------------------------------Loans
Total loans and leases, at amortized cost, of$8.59 billion atMarch 31, 2022 increased by$704.0 million , or 8.92%, fromDecember 31, 2021 . The increase in total loans included$774.5 million of loans acquired from Suncrest in the first quarter of 2022. After adjusting for acquired loans, seasonality and forgiveness of PPP loans, our core loans grew by$144.5 million , or 1.97%, from the end of the fourth quarter, or approximately 8% annualized. The$144.5 million core loan growth included$100.3 million in commercial real estate loans,$27.3 million in commercial and industrial loans,$14.2 million in SFR mortgage loans,$2.5 million in SBA loans, and$5.7 million in other loans, partially offset by a decrease of$5.5 million in construction loans. The majority of the$110.1 million decrease in dairy & livestock loans was seasonal. The following table presents our loan portfolio by type as of the dates presented. Distribution of Loan Portfolio by Type March 31, 2022 December 31, 2021 (Dollars in thousands) Commercial real estate$ 6,470,841 $ 5,789,730 Construction 73,478 62,264 SBA 311,238 288,600 SBA - Paycheck Protection Program (PPP) 121,189
186,585
Commercial and industrial 924,780
813,063
Dairy & livestock and agribusiness 292,784
386,219
Municipal lease finance receivables 65,54345,933 SFR mortgage 255,136 240,654 Consumer and other loans 76,695 74,665 Total loans, at amortized cost 8,591,684
7,887,713
Less: Allowance for credit losses (76,119 )
(65,019 )
Total loans and lease finance receivables, net
7,822,694
As ofMarch 31, 2022 ,$504.5 million , or 7.80% of the total commercial real estate loans included loans secured by farmland, compared to$364.4 million , or 6.29%, atDecember 31, 2021 . The loans secured by farmland included$134.5 million for loans secured by dairy & livestock land and$370.0 million for loans secured by agricultural land atMarch 31, 2022 , compared to$134.9 million for loans secured by dairy & livestock land and$229.5 million for loans secured by agricultural land atDecember 31, 2021 . As ofMarch 31, 2022 , dairy & livestock and agribusiness loans of$292.8 million were comprised of$241.7 million for dairy & livestock loans and$51.1 million for agribusiness loans, compared to$386.2 million were comprised of$351.7 million for dairy & livestock loans and$34.5 million for agribusiness loans atDecember 31, 2021 . Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers. As ofMarch 31, 2022 , the Company had$219.7 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower's down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank's 504 loans are granted for the purpose of commercial real estate acquisition. As ofMarch 31, 2022 , the Company had$91.5 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. 49 -------------------------------------------------------------------------------- As an active participant in the SBA's Paycheck Protection Program, we originated approximately 4,100 PPP loans totaling$1.10 billion in round one, with a remaining outstanding balance of$8.9 million as ofMarch 31, 2022 . As ofMarch 31, 2022 , we have originated approximately 1,900 PPP loans in round two with a remaining outstanding balance of$112.3 million .
Our loan portfolio is geographically disbursed throughout our marketplace. The
following is the breakdown of our total held-for-investment commercial real
estate loans, by region as of
March 31, 2022
Commercial Real
Total Loans Estate Loans
(Dollars in thousands)
Los Angeles County $ 3,245,794 37.8 % $ 2,296,779 35.5 %
Central Valley and Sacramento 2,089,216 24.3 % 1,638,893 25.3 %
Orange County 1,061,468 12.4 % 676,261 10.5 %
Inland Empire 965,023 11.2 % 831,040 12.8 %
Central Coast 448,851 5.2 % 381,572 5.9 %
San Diego 306,686 3.6 % 276,652 4.3 %
Other California 140,853 1.6 % 88,982 1.4 %
Out of State 333,793 3.9 % 280,662 4.3 %
$ 8,591,684 100.0 % $ 6,470,841 100.0 %
The table below breaks down our commercial real estate portfolio.
March 31, 2022
Percent
Owner- Average
Loan Balance Percent Occupied (1) Loan Balance
(Dollars in thousands)
Commercial real estate:
Industrial $ 2,131,392 32.9 % 50.1 % $ 1,485
Office 1,097,173 17.0 % 23.1 % 1,606
Retail 923,893 14.3 % 9.2 % 1,607
Multi-family 711,581 11.0 % 0.9 % 1,461
Secured by farmland (2) 504,516 7.8 % 97.8 % 1,353
Medical 320,159 4.9 % 35.1 % 1,469
Other (3) 782,127 12.1 % 48.1 % 1,370
Total commercial real estate $ 6,470,841 100.0 % 37.0 % $ 1,490
(1)
Represents percentage of reported owner-occupied at origination in each real
estate loan category.
(2)
The loans secured by farmland included $134.5 million for loans secured by dairy
& livestock land and $370.0 million for loans secured by agricultural land at
March 31, 2022 .
(3)
Other loans consist of a variety of loan types, none of which exceeded 2.5% of
total commercial real estate loans at March 31, 2022 .
50
--------------------------------------------------------------------------------Nonperforming Assets
The following table provides information on nonperforming assets as of the dates
presented.
March 31, 2022 December 31, 2021
(Dollars in thousands)
Nonaccrual loans $ 13,265 $ 6,893
Loans past due 90 days or more and still accruing
interest - -
Nonperforming troubled debt restructured loans
(TDRs) - -
Total nonperforming loans 13,265 6,893
OREO, net - - Total nonperforming assets$ 13,265 $
6,893
Performing TDRs $ 5,259 $
5,293
Total nonperforming loans and performing TDRs
12,186
Percentage of nonperforming loans and performing TDRs to total loans, at amortized cost 0.22 %
0.15 %
Percentage of nonperforming assets to total loans, at amortized cost,
and OREO 0.15 % 0.09 % Percentage of nonperforming assets to total assets 0.08 %
0.04 %
Troubled Debt Restructurings ("TDRs")
Total TDRs were$5.3 million atMarch 31, 2022 , compared to$5.3 million atDecember 31, 2021 . AtMarch 31, 2022 , all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms.
The following table provides a summary of TDRs as of the dates presented.
March 31, 2022 December 31, 2021
Balance Number of Loans Balance Number of Loans
(Dollars in thousands)
Performing TDRs:
Commercial real estate $ 2,368 1 $ 2,394 1
Construction - - - -
SBA - - - -
Commercial and industrial 1,882 3 1,885 3
Dairy & livestock and agribusiness - - - -
SFR mortgage 1,009 5 1,014 5
Consumer and other - - - -
Total performing TDRs $ 5,259 9 $ 5,293 9
Nonperforming TDRs:
Commercial real estate $ - - $ - -
Construction - - - -
SBA - - - -
Commercial and industrial - - - -
Dairy & livestock and agribusiness - - - -
SFR mortgage - - - -
Consumer and other - - - -
Total nonperforming TDRs $ - - - -
Total TDRs $ 5,259 9 $ 5,293 9
51
-------------------------------------------------------------------------------- AtMarch 31, 2022 andDecember 31, 2021 , there was no ACL allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time the loan is considered uncollectible. There were no charge-offs on TDRs for the three months endedMarch 31, 2022 and 2021.
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
March 31, December 31, September 30, June 30, March 31,
2022 2021 2021 2021 2021
(Dollars in thousands)
Nonperforming loans:
Commercial real estate $ 7,055 $ 3,607 $ 4,073 $ 4,439 $ 7,395
Construction - - - - -
SBA 1,575 1,034 1,513 1,382 2,412
SBA - PPP 2 - - - -
Commercial and
industrial 1,771 1,714 2,038 1,818 2,967
Dairy & livestock and
agribusiness 2,655 - 118 118 259
SFR mortgage 167 380 399 406 424
Consumer and other loans 40 158 305 308 312
Total $ 13,265 $ 6,893 $ 8,446 $ 8,471 $ 13,769
% of Total loans 0.15 % 0.09 % 0.11 % 0.10 % 0.17 %
Past due 30-89 days:
Commercial real estate $ 565 $ 438 $ - $ - $ 178
Construction - - - - -
SBA 549 979 - - 258
Commercial and
industrial 6 - 122 415 952
Dairy & livestock and
agribusiness 1,099 - 1,000 - -
SFR mortgage 403 1,040 - - 266
Consumer and other loans - - - - 21
Total $ 2,622 $ 2,457 $ 1,122 $ 415 $ 1,675
% of Total loans 0.03 % 0.03 % 0.01 % 0.01 % 0.02 %
OREO:
Commercial real estate $ - $ - $ - $ - $ 1,575
SBA - - - - -
SFR mortgage - - - - -
Total $ - $ - $ - $ - $ 1,575
Total nonperforming,
past due,
and OREO $ 15,887 $ 9,350 $ 9,568 $ 8,886 $ 17,019
% of Total loans 0.18 % 0.12 % 0.12 % 0.11 % 0.21 %
Classified Loans $ 64,108 $ 56,102 $ 49,755 $ 49,044 $ 69,710
Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and
loans past due 90 days or more and still accruing interest, were $13.3 million
at March 31, 2022 , or 0.15% of total loans. This compares to nonperforming loans
of $6.9 million , or 0.09% of total loans, at December 31, 2021 and $13.8
million , or 0.17% of total loans, at March 31, 2021 . Of the $13.3 million in
nonperforming loans, $4.0 million were commercial real estate loans acquired
from Suncrest. Classified loans are loans that are graded "substandard" or
worse. Classified loans of $64.1 million increased $8.0 million from December
31, 2021 . Total classified loans at March 31, 2022 included $17.5 million of
classified loans acquired from Suncrest, of which $10.9 million were commercial
real estate loans. Excluding the $17.5 million of acquired classified Suncrest
loans, classified loans decreased $9.5 million quarter-over-quarter and included
a $10.5 million decrease in classified commercial real estate loans and a $1.6
million decrease in classified commercial and industrial loans, partially offset
by a $2.8 million increase in classified dairy & livestock and agribusiness
loans.
At March 31, 2022 and December 31, 2021 , we had no OREO properties, compared
with one OREO property with a carrying value of $1.6 million at March 31, 2021 .
There were no additions to OREO properties for the three months ended March 31,
2022 .
52
--------------------------------------------------------------------------------
Allowance for Credit Losses
We adopted CECL onJanuary 1, 2020 , which replaces the "incurred loss" approach with an "expected loss" model over the life of the loan, as further described in Note 3-Summary of Significant Accounting Policies of the notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The allowance for credit losses totaled$76.1 million as ofMarch 31, 2022 , compared to$65.0 million as ofDecember 31, 2021 and$71.8 million as ofMarch 31, 2021 . Our allowance for credit losses atMarch 31, 2022 was 0.89%, or 0.90% of total loans when excluding the$121.2 million in PPP loans. AtMarch 31, 2021 , the ACL was 0.97% of total loans, when PPP loans are excluded. The ACL was increased by$11.1 million in 2022, including$8.6 million for the acquired Suncrest PCD loans and a$2.5 million provision for credit losses. The$2.5 million provision for credit losses for the first quarter of 2022 was the net result of theJanuary 7, 2022 provision for credit losses recorded for the acquisition of the Suncrest non-PCD loans and a$2.4 million recapture of provision due to the net impact of improvements in the underlying loan characteristics of certain classified loans and the impact of changes in the economic forecast of certain macroeconomic variables compared to the end of 2021. Net charge-offs were$5,000 for the three months endedMarch 31, 2022 , which compares to$2.4 million in net charge-offs for the same period of 2021. The allowance for credit losses as ofMarch 31, 2022 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools:Commercial Real Estate , Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. The allowance for credit loss is sensitive to both changes in these portfolio characteristics and the forecast of macroeconomic variables. Risk attributes for commercial real estate loans include OLTV, origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. TheCommercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Payment Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company's commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion ofSmall Business Administration (SBA) loans (excluding Payment Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. TheU.S. economic forecasts included in our forecast comprise a baseline forecast, as well as multiple downside forecasts. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario. Our weighted forecast atMarch 31, 2022 assumes GDP will increase by 2.6% in 2022, 1.3% for 2023 and then grow by 3% in 2024. The unemployment rate is forecasted to be 4.3% in 2022, 5.2% in 2023 and then decline to 4.7% in 2024. As ofDecember 31, 2021 , our weighted forecast assumed GDP would increase by 2.7% in 2022, 2.0% for 2023 and then grow by 3% in 2024. The forecast at the end of 2021 expected the unemployment rate to be 5.2% in 2022, 5.4% in 2023 and then decline to 4.8% in 2024. Management believes that the ACL was appropriate atMarch 31, 2022 andDecember 31, 2021 . As there continues to be a degree of uncertainty around the epidemiological assumptions and impact of government responses to the COVID-19 pandemic that impact our economic forecast, as well as inflationary pressures and changes in monetary policies, no assurance can be given that economic conditions that adversely affect the Company's service areas or other circumstances will not be reflected in an increased allowance for credit losses in future periods. 53
--------------------------------------------------------------------------------
The table below presents a summary of charge-offs and recoveries by type, the
provision for credit losses on loans, and the resulting allowance for credit
losses for the periods presented.
As of and For the
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Allowance for credit losses at beginning of period $ 65,019 $ 93,692
Charge-offs:
Commercial real estate - -
Construction - -
SBA - -
Commercial and industrial (15 ) (2,475 )
Dairy & livestock and agribusiness - -
SFR mortgage - -
Consumer and other loans (1 ) -
Total charge-offs (16 ) (2,475 )
Recoveries:
Commercial real estate - -
Construction 3 3
SBA 5 4
Commercial and industrial 3 2
Dairy & livestock and agribusiness - -
SFR mortgage - 79
Consumer and other loans - -
Total recoveries 11 88
Net (charge-offs) recoveries (5 ) (2,387 )
Initial ACL for PCD loans at acquisition 8,605 -
Provision recorded at acquisition 4,932
-
(Recapture of) provision for credit losses (2,432 )
(19,500 )
Allowance for credit losses at end of period
Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period
$ 8,000 $
9,000
(Recapture of) provision for unfunded loan commitments -
-
Reserve for unfunded loan commitments at end of period$ 8,000 $
9,000
Reserve for unfunded loan commitments to total unfunded loan commitments 0.44 %
0.48 %
Amount of total loans at end of period (1)$ 8,591,684 $
8,293,057
Average total loans outstanding (1)$ 8,500,436 $
8,270,282
Net charge-offs to average total loans 0.000 % -0.029 % Net charge-offs to total loans at end of period 0.000 % -0.029 % Allowance for credit losses to average total loans 0.90 %
0.87 % Allowance for credit losses to total loans at end of period
0.89 % 0.87 %
Net charge-offs to allowance for credit losses -0.01 % -3.32 %
Net charge-offs to (recapture of) provision for
credit losses 0.20 % 12.24 %
(1)Net of deferred loan origination fees, costs and discounts (amortized cost).
The Bank's ACL methodology also produced an allowance of
54
--------------------------------------------------------------------------------
While we believe that the allowance at March 31, 2022 was appropriate to absorb
losses from known or inherent risks in the portfolio, no assurance can be given
that economic conditions, interest rate fluctuations, conditions of our
borrowers (including fraudulent activity), or natural disasters, which adversely
affect our service areas or other circumstances or conditions, including those
defined above, will not be reflected in increased provisions for credit losses
in the future.
Changes in economic and business conditions have had an impact on our market
area and on our loan portfolio. We continually monitor these conditions in
determining our estimates of needed reserves. However, we cannot predict the
extent to which the deterioration in general economic conditions, real estate
values, changes in general rates of interest and changes in the financial
conditions or business of a borrower may adversely affect a specific borrower's
ability to pay or the value of our collateral. See "Risk Management - Credit
Risk Management" contained in our Annual Report on Form 10-K for the year ended
December 31, 2021 .
Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were$14.49 billion atMarch 31, 2022 . This represented an increase of$1.51 billion , or 11.65%, over total deposits of$12.98 billion atDecember 31, 2021 . The composition of deposits is summarized as of the dates presented in the table below. March 31, 2022 December 31, 2021 Balance Percent Balance Percent (Dollars in thousands)
Noninterest-bearing deposits
62.45 % Interest-bearing deposits Investment checking 714,567 4.93 % 655,333 5.05 % Money market 3,670,572 25.34 % 3,342,531 25.76 % Savings 618,978 4.27 % 546,840 4.21 % Time deposits 376,357 2.60 % 327,682 2.53 % Total Deposits$ 14,487,778 100.00 %$ 12,976,442 100.00 % The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled$9.11 billion atMarch 31, 2022 , representing an increase of$1.0 billion , or 12.38%, from noninterest-bearing deposits of$8.10 billion atDecember 31, 2021 . Noninterest-bearing deposits represented 62.86% of total deposits atMarch 31, 2022 , compared to 62.45% of total deposits atDecember 31, 2021 .
Savings deposits, which include savings, interest-bearing demand, and money
market accounts, totaled
Time deposits totaled
55
--------------------------------------------------------------------------------Borrowings
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of these funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As ofMarch 31, 2022 andDecember 31, 2021 , total funds borrowed under these agreements were$598.9 million and$642.4 million , respectively, with a weighted average interest rate of 0.08% and 0.08%, respectively. OnJune 15, 2021 , we redeemed our junior subordinated debentures of$25.8 million , representing the amounts that are due from the Company to CVB Statutory Trust III, which had a borrowing cost of approximately 1.60% at the time of repayment. The debentures and the Trust Preferred Securities had an original maturity date of 2036. The interest rate on these debentures were based on three-month LIBOR plus 1.38%.
At
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as ofMarch 31, 2022 . Maturity by Period One Year Four Years Less Than One Through Through Over Five Total Year Three Years Five Years Years (Dollars in thousands) Deposits (1)$ 14,487,778 $ 14,455,114 $ 24,999 $ 6,997 $ 668 Customer repurchase agreements (1) 598,909 598,909 - - - Deferred compensation 24,927 883 1,177 1,152 21,715 Operating leases 24,620 7,068 10,013 5,575 1,964 Affordable housing investment 1,350 1,290 47 13 - Total$ 15,137,584 $ 15,063,264 $ 36,236 $ 13,737 $ 24,347 (1)
Amounts exclude accrued interest.
Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.
Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.
Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current and retired employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under non-cancelable operating leases. Refer to Note 12 - Leases of the notes to the Company's unaudited condensed consolidated financial statements for a more detailed discussion about leases.
56
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
The following table summarizes the off-balance sheet items atMarch 31, 2022 . Maturity by Period One Year Through Four Years Less Than Three Through After Five Total One Year Years Five Years Years (Dollars in thousands) Commitment to extend credit: Commercial real estate$ 365,195 $ 54,533 $ 153,231 $ 126,283 $ 31,147 Construction 104,386 89,839 1,839 - 12,708 SBA 122 450 - - (328 ) SBA - PPP - - - - -
Commercial and industrial 934,973 748,199 116,841
4,730 65,202
Dairy & livestock and
agribusiness (1) 237,161 114,993 122,167 1 -
Municipal lease finance
receivables 12,489 - - - 12,490
SFR Mortgage 5,466 50 2,500 - 2,916
Consumer and other loans 112,626 16,357 5,136 5,189 85,944
Total commitment to extend credit 1,772,418 1,024,421 401,714 136,203 210,079 Obligations under letters of credit 44,094 4,132 39,962 - - Total$ 1,816,512 $ 1,028,553 $ 441,676 $ 136,203 $ 210,079 (1)
Total commitments to extend credit to agribusiness were
As ofMarch 31, 2022 , we had commitments to extend credit of approximately$1.77 billion , and obligations under letters of credit of$44.1 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. As ofMarch 31, 2022 and 2021, the balance in this reserve was$8.0 million and$9.0 million , respectively, and was included in other liabilities. There was no provision or recapture of provision for unfunded loan commitments recorded for the three months endedMarch 31, 2022 and 2021.
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.
57
--------------------------------------------------------------------------------Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital plan and capital stress testing. Total equity decreased$6.5 million , or 0.31%, to$2.08 billion atMarch 31, 2022 , from total equity of$2.08 billion atDecember 31, 2021 . Increases to equity included$197.1 million for issuance of 8.6 million shares to acquire Suncrest and$45.6 million in net earnings. Decreases included$25.5 million in cash dividends and a$142.3 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the first quarter of 2022, we executed on a$70 million accelerated stock repurchase program and retired 2,544,298 shares of common stock, or approximately 80% of the estimated shares repurchased under the program. We also repurchased, under our 10b5-1 stock repurchase plan, 536,010 shares of common stock, at an average repurchase price of$23.40 , totaling$12.5 million . Our tangible book value per share atMarch 31, 2022 was$9.05 . During the first quarter of 2022, the Board of Directors of CVB declared quarterly cash dividends totaling$0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB's ability to pay cash dividends to its shareholders is subject to restrictions under federal andCalifornia law, including restrictions imposed by theFederal Reserve , and covenants set forth in various agreements we are a party to. OnFebruary 1, 2022 , we announced that our Board of Directors authorized a share repurchase plan to repurchase up to 10,000,000 shares of the Company's common stock ("2022 Repurchase Program"), including by means of (i) an initial$70 million dollar Accelerated Share Repurchase, or ASR Plan, and (ii) one or more Rule 10b5-1 plans or other appropriate buy-back arrangements, including open market purchases and private transactions. During the first quarter of 2022, we executed on the$70 million accelerated stock repurchase program and retired 2,544,298 shares of common stock, or approximately 80% of the estimated shares repurchased under the program. We also repurchased, under our 10b5-1 stock repurchase plan, 536,010 shares of common stock, at an average repurchase price of$23.40 , totaling$12.5 million . As ofMarch 31, 2022 , we had 6,919,692 shares of CVB common stock available for repurchase under the 2022 Repurchase Program. The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 ("CET1") capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered "well-capitalized" for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. AtMarch 31, 2022 , the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered "well-capitalized" for regulatory purposes. For further information about capital requirements and our capital ratios, see "Item 1. Business - Capital Adequacy Requirements" as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . AtMarch 31, 2022 the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered "well-capitalized" for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of theFDIC and otherU.S. banking agencies. 58 --------------------------------------------------------------------------------
The table below presents the Company's and the Bank's risk-based and leverage capital ratios for the periods presented.
March 31, 2022 December 31, 2021
Minimum
Required Plus CVB CVB
Adequately Capital Well Financial Citizens Financial Citizens
Capitalized Conservation Capitalized Corp. Business Corp. Business
Capital Ratios Ratios Buffer Ratios Consolidated Bank Consolidated Bank
Tier 1 leverage
capital ratio 4.00% 4.00% 5.00% 8.67% 8.43% 9.18% 8.90%
Common equity Tier
1 capital ratio 4.50% 7.00% 6.50% 13.56% 13.19% 14.86% 14.41%
Tier 1 risk-based
capital ratio 6.00% 8.50% 8.00% 13.56% 13.19% 14.86% 14.41%
Total risk-based
capital ratio 8.00% 10.50% 10.00% 14.36% 13.99% 15.63% 15.18%
59
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ASSET/LIABILITY AND MARKET RISK MANAGEMENTLiquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs. We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets quarterly to review the Company's balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of$14.49 billion atMarch 31, 2022 increased$1.51 billion , or 11.65%, over total deposits of$12.98 billion atDecember 31, 2021 . This deposit growth was primarily due to our customers maintaining greater liquidity. In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities, and other anticipated near term cash flows from investments. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant off-balance sheet sources of liquidity. To meet unexpected demands, lines of credit are maintained with correspondent banks, theFederal Home Loan Bank and theFederal Reserve , although availability under these lines of credit are subject to certain conditions. The Bank has available lines of credit exceeding$4 billion , most of which is secured by pledged loans. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets. AtMarch 31, 2022 , the Bank had no short-term borrowings. CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. OnJune 15, 2021 , we redeemed our$25.8 million in subordinated debt with an interest rate of three month LIBOR plus 1.38% at par. Substantially all of CVB's revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. 60 -------------------------------------------------------------------------------- Below is a summary of our average cash position and statement of cash flows for the three months endedMarch 31, 2022 and 2021. For further details see our "Condensed Consolidated Statements of Cash Flows (Unaudited)" under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Average cash and cash equivalents
10.59 % 12.22 %
Net cash provided by operating activities
Average cash and cash equivalents increased by$67.8 million , or 3.82%, to$1.84 billion for the three months endedMarch 31, 2022 , compared to$1.77 billion for the same period of 2021.
At
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability repricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments' respective maturities or estimated durations and is considered a longer term measure. One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company's balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest
income from all interest-earning assets and interest expense paid on all
interest-bearing liabilities reflected on our balance sheet. This sensitivity
analysis is compared to policy limits, which specify a maximum tolerance level
for net interest income exposure over a one-year horizon assuming no balance
sheet growth, given a 200 basis point upward and a 100 basis point downward
shift in interest rates
61
--------------------------------------------------------------------------------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)
March 31, 2022 December 31, 2021
24-month 24-month
Interest Rate Period Interest Rate Period
Scenario 12-month Period (Cumulative) Scenario 12-month Period (Cumulative)
+ 200 basis
points 7.62% 13.27% 9.85% 16.84%
- 100 basis
points -2.66% -4.63% -4.30% -4.99%
(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. AtMarch 31, 2022 andDecember 31, 2021 , the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.
Economic Value of Equity Sensitivity
Instantaneous Rate Change March 31, 2022 December 31, 2021
100 bp decrease in interest rates -12.3% -14.1%
100 bp increase in interest rates 0.7% 5.3%
200 bp increase in interest rates 5.2% 11.8%
300 bp increase in interest rates 6.1% 13.6%
400 bp increase in interest rates 8.2% 16.8%
As EVE measures the discounted present value of cash flows over the estimated
lives of instruments, the change in EVE does not directly correlate to the
degree that earnings would be impacted over a shorter time horizon (i.e., the
current year). Further, EVE does not take into account factors such as future
balance sheet growth, changes in asset and liability mix, changes in yield curve
relationships, and changing product spreads that could mitigate the adverse
impact of changes in interest rates.
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