0000354647 cvbf:DairyLivestockAndAgribusinessMember 2018-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM

10-Q

(Mark One)

☒

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

For the quarterly period ended ~~March 31,~~September 30, 2019

☐

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

For the transition period from _____ to _____

Commission File Number:

000-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


California		95-3629339
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

701 North Haven Ave., Suite 350
Ontario, California		91764
(Address of principal executive offices)		(Zip Code)

(909)

980-4030

(Registrant’s telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	CVBF	The Nasdaq Stock Market, LLC

Indicate

by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past

90 days. Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T (§

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,

non-accelerated

filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act. (Check one):


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act).

Yes

☐

☒

~~Securities registered pursuant to Section 12(b) of the Act:~~


~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, No Par Value~~	~~CVBF~~	~~NASDAQ~~

Number of shares of common stock of the registrant: ~~140,012,038~~140,106,948 outstanding as of ~~April 30,~~October 31, 2019.

Table of Contents

TABLE OF CONTENTS


PART I –	FINANCIAL INFORMATION (UNAUDITED)	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	5


~~ITEM 1.~~	~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~	5

	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED)~~	10

~~ITEM 2.~~
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	39 41

	CRITICAL ACCOUNTING POLICIES	41

	~~CRITICAL ACCOUNTING POLICIES~~OVERVIEW	39 41


	~~OVERVIEW~~	39

	ANALYSIS OF THE RESULTS OF OPERATIONS	41 43

	ANALYSIS OF FINANCIAL CONDITION	53

	~~ANALYSIS OF FINANCIAL CONDITION~~	51

	ASSET/LIABILITY AND MARKET RISK MANAGEMENT	68 69

~~ITEM 3.~~
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70 71

~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~	70

~~PART II –~~	~~OTHER INFORMATION~~	71

ITEM 1. 4.	~~LEGAL PROCEEDINGS~~CONTROLS AND PROCEDURES	71

~~ITEM 1A.~~	~~RISK FACTORS~~	72

~~ITEM 2.~~ PART II –	OTHER INFORMATION	72

ITEM 1.	LEGAL PROCEEDINGS	72

ITEM 1A.	RISK FACTORS	72

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	72 73

~~ITEM 3.~~
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	72 73

~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~	72

~~ITEM 5.~~	~~OTHER INFORMATION~~	72

ITEM 6. 4.	~~EXHIBITS~~MINE SAFETY DISCLOSURES	72 73

ITEM 5.	OTHER INFORMATION	73

ITEM 6.	EXHIBITS	73

SIGNATURES		73 74

Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:

•

~~local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;~~

•

~~our ability to attract deposits and other sources of funding or liquidity;~~

•

~~supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;~~

•

~~a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;~~

•

~~changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;~~

•

~~changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs;~~

•

the costs or effects of mergers, acquisitions or dispositions we may make, including the 2018 merger of Community Bank with and into Citizens Business Bank, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits or cost savings associated with any such mergers, acquisitions or dispositions;

•

the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for loan losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;

•

the effects of additional legal and regulatory requirements to which we have or will become subject as a result of our total assets exceeding $10 billion, which first occurred in the third quarter of 2018 due to the closing of our merger transaction with Community Bank;

•

changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;

•

the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments, the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for loan losses;

•

~~inflation, changes in market interest rates, securities market and monetary fluctuations;~~

•

~~changes in government-established interest rates, reference rates (including the anticipatedphase-out~~ ~~of LIBOR) or monetary policies;~~

•

~~changes in the amount, cost and availability of deposit insurance;~~

•

disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access, and/or communication facilities; cyber incidents or theft or loss of Company or customer data or money; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, extreme weather events, that affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that affect our employees or third parties with whom we conduct business;

•

~~our timely development and acceptance of new banking products and services and the perceived overall value of these products and services by customers and potential customers;~~

•

~~the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;~~

•

~~changes in commercial or consumer spending, borrowing and savings preferences or behaviors;~~

•

technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);

•

~~our ability to retain and increase market share, retain and grow customers and control expenses;~~

•

~~changes in the competitive environment among banks and other financial services and technology providers;~~

•

~~competition and innovation with respect to financial products and services by banks, financial institutions andnon-traditional~~ ~~providers including retail businesses and technology companies;~~

•

~~volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s customers;~~

•

~~fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;~~

•

~~the effect of changes in accounting policies and practices, as may be adopted fromtime-to-time~~ ~~by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;~~

•

~~changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or our board of directors;~~

•

the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, bank operations, consumer or employee class action litigation and any litigation which we inherited from our 2018 merger with Community Bank);

•

~~regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;~~

•

~~our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;~~

•

~~our success at managing the risks involved in the foregoing items; and~~

•

~~all other factors set forth in the Company’s public reports including its Annual Report on Form10-K~~ ~~for the year ended December 31, 2018, and particularly the discussion of risk factors within that document.~~

local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;

our ability to attract deposits and other sources of funding or liquidity;

supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;

a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;

changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;

changes in our levels of delinquent loans, nonperforming assets, allowance for loan losses and charge-offs;

the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments or currently expected credit losses or delinquencies;

the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for loan losses;

inflation, changes in market interest rates, securities market and monetary fluctuations;

changes in government-established interest rates, reference rates (including the anticipated phase-out of LIBOR) or monetary policies;

changes in the amount, cost and availability of deposit insurance;

disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communication facilities; cyber incidents or theft or loss of Company or customer data or money; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate changes, extreme weather events, that may affect electrical, environmental, computer servers, and communications or other services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;

our timely development and implementation of new banking products and services and the perceived overall value of these products and services by customers and potential customers;

the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;

Table of Contents

changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, blockchain technology and other banking products, systems or services);
our ability to retain and increase market share, retain and grow customers and control expenses;
changes in the competitive environment among banks and other financial services and technology providers;
competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies;
volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s assets, liabilities, or customers;
fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;
the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team and/or our board of directors;
our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;
the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, bank operations, consumer or employee class action litigation);
regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;
our success at managing the risks involved in the foregoing items; and
all other factors set forth in the Company’s public reports, including its Annual Report on Form 10-K for the year ended December 31, 2018, and particularly the discussion of risk factors within that document.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

Table of Contents

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

         March 31,
2019   December 31,
2018
Assets

Cash and due from banks
     $ 168,877   $ 144,008
Interest-earning balances due from Federal Reserve
   3,337 19,940


Total cash and cash equivalents
   172,214 163,948


Interest-earning balances due from depository institutions
   7,420 7,670
Investment securitiesavailable-for-sale, at fair value (with amortized cost of $1,677,732 at March 31, 2019, and $1,757,666 at December 31, 2018)
   1,673,501 1,734,085
Investment securitiesheld-to-maturity (with fair value of $720,651 at March 31, 2019, and $721,537 at December 31, 2018)
   733,464 744,440


Total investment securities
   2,406,965 2,478,525


Investment in stock of Federal Home Loan Bank (FHLB)
   17,688 17,688
Loans and lease finance receivables
   7,606,863 7,764,611
Allowance for loan losses
   (65,201 ) (63,613 )


Net loans and lease finance receivables
   7,541,662 7,700,998


Premises and equipment, net
   55,833 58,193
Bank owned life insurance (BOLI)
   222,010 220,758
Accrued interest receivable
   30,557 30,649
Intangibles
   50,927 53,784
Goodwill
   666,539 666,539
Other real estate owned (OREO)
   2,275 420
Income taxes
   35,833 62,174
Other assets
   95,034 67,807


Total assets
     $ 11,304,957   $ 11,529,153


Liabilities and Stockholders’ Equity

Liabilities:

Deposits:

Noninterest-bearing
     $ 5,098,822   $ 5,204,787
Interest-bearing
   3,555,298 3,622,703


Total deposits
   8,654,120 8,827,490
Customer repurchase agreements
   462,774 442,255
Other borrowings
   153,000 280,000
Deferred compensation
   20,860 20,033
Junior subordinated debentures
   25,774 25,774
Other liabilities
   97,502 82,411


Total liabilities
   9,414,030 9,677,963


Commitments and Contingencies

Stockholders’ Equity

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,009,185 at March 31, 2019, and 140,000,017 at December 31, 2018
   1,294,093 1,293,669
Retained earnings
   602,279 575,805
Accumulated other comprehensive loss, net of tax
   (5,445 ) (18,284 )


Total stockholders’ equity
   1,890,927 1,851,190


Total liabilities and stockholders’ equity
     $ 11,304,957   $ 11,529,153

September 30,
2019

  December 31,
2018

Assets

Cash and due from banks
  $
222,248
  $
144,008

Interest-earning balances due from Federal Reserve

215,300

19,940

Total cash and cash equivalents

437,548

163,948

Interest-earning balances due from depository institutions

5,673

7,670

Investment securities
available-for-sale,
at fair value (with amortized cost of $1,549,406 at September

30,
2019, and $1,757,666 at December 31, 2018)

1,570,406

1,734,085

Investment securities
held-to-maturity
(with fair value of $711,891
at September 30, 2019, and
$721,537 at December 31, 2018)

703,953

744,440

Total investment securities

2,274,359

2,478,525

Investment in stock of Federal Home Loan Bank (FHLB)

17,688

17,688

Loans and lease finance receivables

7,494,451

7,764,611

Allowance for loan losses

(68,672
)
(63,613
)
Net loans and lease finance receivables

7,425,779

7,700,998

Premises and equipment, net

53,256

58,193

Bank owned life insurance (BOLI)

224,841

220,758

Accrued interest receivable

27,244

30,649

Intangibles

45,446

53,784

Goodwill

663,707

666,539

Other real estate owned (OREO)

9,450

420

Income taxes

44,630

62,174

Other assets

103,141

67,807

Total assets
  $
11,332,762
  $
11,529,153

Liabilities and Stockholders’ Equity

Liabilities:

Deposits:

Noninterest-bearing
  $
5,385,104
  $
5,204,787

Interest-bearing

3,409,226

3,622,703

Total deposits

8,794,330

8,827,490

Customer repurchase agreements

407,850

442,255

Other borrowings

4,914

280,000

Deferred compensation

22,334

20,033

Junior subordinated debentures

25,774

25,774

Other liabilities

110,667

82,411

Total liabilities

9,365,869

9,677,963

Commitments and Contingencies

Stockholders’ Equity

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,157,063 at September 30, 2019, and 140,000,017 at December 31, 2018

1,298,138

1,293,669

Retained earnings

656,659

575,805

Accumulated other comprehensive income (loss), net of tax

12,096

(18,284
)
Total stockholders’ equity

1,966,893

1,851,190

Total liabilities and stockholders’ equity
  $
11,332,762
  $
11,529,153

See accompanying notes to the unaudited condensed consolidated financial statements.
5

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

       For the Three Months Ended
March 31,
   2019 2018
Interest income:

Loans and leases, including fees
     $ 99,687   $ 55,196
Investment securities:

Investment securitiesavailable-for-sale
   10,645 11,868
Investment securitiesheld-to-maturity
   4,525 4,765


Total investment income
   15,170 16,633


Dividends from FHLB stock
   332 332
Interest-earning deposits with other institutions
   94 536


Total interest income
   115,283 72,697


Interest expense:

Deposits
   3,871 1,525
Borrowings and customer repurchase agreements
   1,610 453
Junior subordinated debentures
   266 198


Total interest expense
   5,747 2,176


Net interest income before provision for (recapture of) loan losses
   109,536 70,521
Provision for (recapture of) loan losses
   1,500 (1,000 )


Net interest income after provision for (recapture of) loan losses
   108,036 71,521


Noninterest income:

Service charges on deposit accounts
   5,141 4,045
Trust and investment services
   2,182 2,157
Bankcard services
   950 804
BOLI income
   1,336 979
Gain on OREO, net
   105 3,540
Gain on sale of building, net
   4,545 -
Other
   2,044 1,391


Total noninterest income
   16,303 12,916


Noninterest expense:

Salaries and employee benefits
   29,302 22,314
Occupancy and equipment
   5,615 4,192
Professional services
   1,925 1,530
Software licenses and maintenance
   2,422 1,760
Marketing and promotion
   1,394 1,356
Amortization of intangible assets
   2,857 331
Acquisition related expenses
   3,149 803
Other
   4,940 3,660


Total noninterest expense
   51,604 35,946


Earnings before income taxes
   72,735 48,491


Income taxes
   21,093 13,578


Net earnings
     $ 51,642   $ 34,913


Other comprehensive income (loss):

Unrealized gain (loss) on securities arising during the period, before tax
     $ 18,227   $ (32,170 )
Less: Income tax (expense) benefit related to items of other comprehensive income
   (5,388 ) 9,511


Other comprehensive income (loss), net of tax
   12,839 (22,659 )


Comprehensive income
     $ 64,481   $ 12,254


Basic earnings per common share
     $ 0.37   $ 0.32
Diluted earnings per common share
     $ 0.37   $ 0.32

    For the Three Months Ended
September 30,

    For the Nine Months Ended
September 30,

2019

2018

2019

2018

Interest income:

Loans and leases, including fees
  $
98,796
  $
79,818
  $
300,326
  $
192,382

Investment securities:

Investment securities
available-for-sale

9,222

11,521

29,985

35,086

Investment securities
held-to-maturity

4,298

4,666

13,249

14,238

Total investment income

13,520

16,187

43,234

49,324

Dividends from FHLB stock

301

329

931

959

Interest-earning deposits with other institutions

946

304

1,140

1,475

Total interest income

113,563

96,638

345,631

244,140

Interest expense:

Deposits

4,589

2,967

12,553

6,041

Borrowings and customer repurchase agreements

568

606

3,555

1,396

Junior subordinated debentures

247

245

771

674

Total interest expense

5,404

3,818

16,879

8,111

Net interest income before provision for (recapture of) loan losses

108,159

92,820

328,752

236,029

Provision for (recapture of) loan losses

1,500

500

5,000

(1,500
)

Net interest income after provision for (recapture of) loan losses

106,659

92,320

323,752

237,529

Noninterest income:

Service charges on deposit accounts

4,833

4,295

15,039

12,431

Trust and investment services

2,330

2,182

6,964

6,738

Bankcard services

637

875

2,614

2,637

BOLI income

1,797

936

4,482

2,984

Gain on OREO, net

-

-

129

3,540

Gain on sale of building, net

-

-

4,545

-

Gain on eminent domain condemnation, net

-

-

5,685

-

Other

2,297

1,824

6,944

4,393

Total noninterest income

11,894

10,112

46,402

32,723

Noninterest expense:

Salaries and employee benefits

30,122

26,319

88,286

69,684

Occupancy and equipment

5,092

5,324

16,348

13,834

Professional services

1,688

1,154

5,653

4,374

Software licenses and maintenance

2,450

2,317

7,414

5,836

Marketing and promotion

1,517

1,134

4,149

3,638

Amortization of intangible assets

2,648

1,736

8,338

2,395

Acquisition related expenses

244

6,645

6,005

7,942

Other

3,774

4,251

13,474

11,377

Total noninterest expense

47,535

48,880

149,667

119,080

Earnings before income taxes

71,018

53,552

220,487

151,172

Income taxes

20,595

14,994

63,941

42,328

Net earnings
  $
50,423
  $
38,558
  $
156,546
  $
108,844

Other comprehensive income (loss):

Unrealized gain (loss) on securities arising during the period, before tax
  $
5,423
  $
(10,387
)   $
43,136
  $
(49,155
)
Less: Reclassification adjustment for net gain on securities included in net income

(5
)

-

(5
)

-

Other comprehensive income (loss), before tax

5,418

(10,387
)

43,131

(49,155
)
Less: Income tax (expense) benefit related to items of other comprehensive income

(1,602
)
3,070

(12,751
)
14,532

Other comprehensive income (loss),
net
of
tax

3,816

(7,317
)
30,380

(34,623
)

Comprehensive income
  $
54,239
  $
31,241
  $
186,926
  $
74,221

Basic earnings per common share
  $
0.36
  $
0.30
  $
1.12
  $
0.94

Diluted earnings per common share
  $
0.36
  $
0.30
  $
1.12
  $
0.94

See accompanying notes to the unaudited condensed consolidated financial statements.
6

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
~~Three months ended March 31, 2019 and 2018~~

(Dollars and shares in thousands)

(Unaudited)

Common
Shares
Outstanding Common
Stock Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total
Balance, January 1, 2018
110,185   $ 573,453   $ 494,361   $ 1,452   $ 1,069,266
Cumulative adjustment upon adoption of ASU2018-02
- - (356 ) 356 -
Repurchase of common stock
(34 ) (792 ) - - (792 )
Exercise of stock options
87 828 - - 828
Shares issued pursuant to stock-based compensation plan
21 736 - - 736
Cash dividends declared on common stock ($0.14 per share)
- - (15,434 ) - (15,434 )
Net earnings
- - 34,913 - 34,913
Other comprehensive loss
- - - (22,659 ) (22,659 )

Balance, March 31, 2018
110,259   $ 574,225   $ 513,484   $ (20,851 )   $ 1,066,858

Balance, January 1, 2019
140,000   $ 1,293,669   $ 575,805   $ (18,284 )   $ 1,851,190
Repurchase of common stock
(33 ) (735 ) - - (735 )
Exercise of stock options
9 140 - - 140
Shares issued pursuant to stock-based compensation plan
33 1,019 - - 1,019
Cash dividends declared on common stock ($0.18 per share)
- - (25,168 ) - (25,168 )
Net earnings
- - 51,642 - 51,642
Other comprehensive income
- - - 12,839 12,839

Balance, March 31, 2019
140,009   $ 1,294,093   $ 602,279   $ (5,445 )   $ 1,890,927

For the Three Months Ended September 30, 2019

Common
Shares
Outstanding

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income
(Loss)

Total

Balance, July 1, 2018

110,302
  $
575,502
  $
533,413
  $
(25,498
)   $
1,083,417

Repurchase of common stock

(6
)
(151
)
-

-

(151
)
Issuance of common stock for acquisition of Community

Bank

29,842

722,767

-

-

722,767

Exercise of stock options

7

87

-

-

87

Shares issued pursuant to stock-based compensation plan

190

847

-

-

847

Cash dividends declared on common stock ($0.14 per

share)

-

-

(19,628
)
-

(19,628
)
Net earnings

-

-

38,558

-

38,558

Other comprehensive
loss

-

-

-

(7,317
)
(7,317
)

Balance, September 30, 2018

140,335
  $
1,299,052
  $

552,343
  $
(32,815
)   $
1,818,580

Balance, July 1, 2019

140,142
  $
1,296,885
  $
631,512
  $
8,280
  $
1,936,677

Repurchase of common stock

(34
)
(723
)
-

-

(723
)
Exercise of stock options

15

155

-

-

155

Shares issued pursuant to stock-based compensation plan

34

1,821

-

-

1,821

Cash dividends declared on common stock ($0.18 per

share)

-

-

(25,276
)
-

(25,276
)
Net earnings

-

-

50,423

-

50,423

Other comprehensive
income

-

-

-

3,816

3,816

Balance, September 30, 2019

140,157
  $

1,298,138
  $



656,659
  $

12,096
  $



1,966,893

For the Nine Months Ended September 30, 2019

Common
Shares
Outstanding

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income
(Loss)

Total

Balance, January 1, 2018

110,185
  $
573,453
  $
494,361
  $
1,452
  $
1,069,266

Cumulative adjustment upon adoption of ASU
2018-02

-

-

(356
)
356

-

Repurchase of common stock

(42
)
(988
)
-

-

(988
)
Issuance of common stock for acquisition of Community Bank

29,842

722,767

-

-

722,767

Exercise of stock options

145

1,504

-

-

1,504

Shares issued pursuant to stock-based compensation plan

205

2,316

-

-

2,316

Cash dividends declared on common stock ($0.42 per

share)

-

-

(50,506
)
-

(50,506
)
Net earnings

-

-

108,844

-

108,844

Other comprehensive
lo
s
s

-

-

-

(34,623
)
(34,623
)

Balance, September 30, 2018

140,335
  $
1,299,052
  $

552,343
  $
(32,815
)   $
1,818,580

Balance, January 1, 2019

140,000
  $
1,293,669
  $
575,805
  $
(18,284
)   $
1,851,190

Repurchase of common stock

(70
)
(1,535
)
-

-

(1,535
)
Exercise of stock options

160

2,212

-

-

2,212

Shares issued pursuant to stock-based compensation plan

67

3,792

-

-

3,792

Cash dividends declared on common stock ($0.54 per

share)

-

-

(75,692
)
-

(75,692
)
Net earnings

-

-

156,546

-

156,546

Other comprehensive income

-

-

-

30,380

30,380

Balance, September 30, 2019

140,157
  $

1,298,138
  $


656,659
  $

12,096
  $


1,966,893

See accompanying notes to the unaudited condensed consolidated financial statements.
7

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

    For the Three Months Ended
March 31,
2019 2018
Cash Flows from Operating Activities

Interest and dividends received
  $ 109,857   $ 75,103
Service charges and other fees received
10,247 8,414
Interest paid
(5,336 ) (2,172 )
Net cash paid to vendors, employees and others
(60,281 ) (35,932 )
Income taxes
- 622
Payments to FDIC, loss share agreement
- (39 )

Net cash provided by operating activities
54,487 45,996

Cash Flows from Investing Activities

Net change in interest-earning balances from depository institutions
250 7,852
Proceeds from repayment of investment securitiesavailable-for-sale
77,303 95,018
Proceeds from maturity of investment securitiesavailable-for-sale
565 9,945
Proceeds from repayment and maturity of investment securitiesheld-to-maturity
29,598 30,273
Purchases of investment securitiesheld-to-maturity
(19,844 ) -
Net increase in equity investments
(2,314 ) (5,577 )
Net decrease in loan and lease finance receivables
163,588 39,424
Proceeds from BOLI death benefit
175 882
Proceeds from sale of building, net
5,487 -
Purchase of premises and equipment
(1,490 ) (716 )
Proceeds from sales of other real estate owned
523 8,067

Net cash provided by investing activities
253,841 185,168

Cash Flows from Financing Activities

Net (decrease) increase in other deposits
(156,745 ) 175,839
Net decrease in time deposits
(16,625 ) (13,257 )
Net decrease in other borrowings
(127,000 ) -
Net increase (decrease) in customer repurchase agreements
20,519 (66,496 )
Cash dividends on common stock
(19,616 ) (15,425 )
Repurchase of common stock
(735 ) (792 )
Proceeds from exercise of stock options
140 828

Net cash (used in) provided by financing activities
(300,062 ) 80,697

Net increase in cash and cash equivalents
8,266 311,861
Cash and cash equivalents, beginning of period
163,948 144,377

Cash and cash equivalents, end of period
  $ 172,214   $ 456,238

For the Nine Months Ended
September 30,

2019

2018

Cash Flows from Operating Activities

Interest and dividends received
  $
331,953

$
245,842

Service charges and other fees received

31,441

26,107

Interest paid

(16,155
)
(8,642
)
Net cash paid to vendors, employees and others

(140,482
)
(110,799
)
Income taxes

(59,347
)
(35,879
)
Payments to FDIC, loss share agreement

-

(65
)

Net cash provided by operating activities

147,410

116,564

Cash Flows from Investing Activities

Proceeds from redemption of FHLB stock

-

17,250

Net change in interest-earning balances from depository institutions

1,997

11,934

Proceeds from sale of investment securities held-for-sale

152,644

716,996

Proceeds from repayment of investment securities available-for-sale

268,766

296,922

Proceeds from maturity of investment securities available-for-sale

6,059

20,260

Purchases of investment securities available-for-sale

(225,416
)
(98,709
)
Proceeds from repayment and maturity of investment securities held-to-maturity

81,001

67,861

Purchases of investment securities held-to-maturity

(42,917
)
-

Net increase in equity investments

(3,511
)
(24,054
)
Net decrease (increase) in loan and lease finance receivables

289,490

(6,806
)
Proceeds on eminent domain condemnation, net

5,685

-

Proceeds from sale of building, net

5,487

-

Purchase of premises and equipment

(3,061
)
(3,483
)
Proceeds from BOLI death benefit

1,509

882

Proceeds from sales of other real estate owned

523

8,067

Cash acquired from acquisition, net of cash paid

-

(132,918
)

Net cash provided by investing activities

538,256

874,202

Cash Flows from Financing Activities

Net increase (decrease) in other deposits

37,061

(241,934
)
Net decrease in time deposits

(70,221
)
(65,079
)
Repayment of FHLB advances

-

(297,571
)
Net decrease in other borrowings

(275,086
)
(136,000
)
Net decrease in customer repurchase agreements

(34,405
)
(154,296
)
Cash dividends on common stock

(70,092
)
(46,304
)
Repurchase of common stock

(1,535
)
(988
)
Proceeds from exercise of stock options

2,212

1,504

Net cash used in financing activities

(412,066
)
(940,668
)

Net increase in cash and cash equivalents

273,600

50,098

Cash and cash equivalents, beginning of period

163,948

144,377

Cash and cash equivalents, end of period
  $

437,548
  $

194,475

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

    For the Three Months Ended
March 31,
2019 2018
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

   Net earnings
  $ 51,642   $ 34,913
   Adjustments to reconcile net earnings to net cash provided by operating activities:

  Gain on sale of building, net
(4,545 ) -
  Gain on sale of other real estate owned
(105 ) (3,540 )
  Increase in BOLI
(1,427 ) (1,098 )
  Net amortization of premiums and discounts on investment securities
2,498 3,839
  Accretion of discount for acquired loans, net
(7,200 ) (1,012 )
  Provision for (recapture of) loan losses
1,500 (1,000 )
  Payments to FDIC, loss share agreement
- (39 )
  Stock-based compensation
1,019 736
  Depreciation and amortization, net
5,669 257
  Change in other assets and liabilities
5,436 12,940

     Total adjustments
2,845 11,083

    Net cash provided by operating activities
  $ 54,487   $ 45,996

Supplemental Disclosure ofNon-cash Investing Activities

   Transfer of loans to other real estate owned
  $ 2,275   $ -
   Issuance of common stock for acquisition
  $ -   $ -

For the Nine Months Ended

September 30,

2019

2018

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

   Net earnings

$

156,546

  $
108,844


   Adjustments to reconcile net earnings to net cash provided by operating activities:

  Gain on sale of investment securities, net

(5
)

-

  Gain on eminent domain condemnation, net

(5,685
)
-

  Gain on sale of building, net

(4,545
)
-

  Gain on sale of other real estate owned

(105
)
(3,540
)
  Increase in BOLI

(5,592
)
(3,053
)
  Net amortization of premiums and discounts on investment securities

7,593

10,661

  Accretion of discount for acquired loans, net

(22,369
)
(6,889
)
  Provision for (recapture of) loan losses

5,000

(1,500
)
  Payments to FDIC, loss share agreement

-

(65
)
  Stock-based compensation

3,792

2,316

  Depreciation and amortization, net

16,993

4,146

  Change in other assets and liabilities

(4,213
)
5,644

     Total adjustments

(9,136
)
7,720

    Net cash provided by operating activities
$
147,410

$
116,564

Supplemental Disclosure of
Non-cash
Investing Activities

   Transfer of loans to other real estate owned
  $
9,450
  $
420

   Issuance of common stock for acquisition
  $
-
  $
722,767

See accompanying notes to the unaudited condensed consolidated financial statements.
9

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BUSINESS

The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has ~~one~~1 inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust. The Bank’s customers consist primarily of small to
mid-sized
businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 6258 banking centers and ~~three~~3 trust office locations. The Company is headquartered in the city of Ontario, California.

On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 –
Business Combinations
, included herein.

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form
10-Q
and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and nine months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2018, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification –

— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity. The operating segments previously reported have been aggregated into one segment to conform to the current period’s presentation format. These reclassifications do not affect previously reported net earnings.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3 —
Summary of Significant Accounting Policies
, of our audited consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2018 as filed with the SEC (“Form~~10-K”~~
10
-K”).

Use of Estimates in the Preparation of Financial Statements

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

Table of Contents

Adoption of New Accounting Standards
— In August 2017, the FASB issued ASUNo.
2017-12, ~~“Derivatives~~
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU
2017-12
changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both
non-financial
and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASUNo.
2017-12
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASUNo.
2018-07, ~~“Compensation~~
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Accounting.” The intention of ASU
2018-07
is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be ~~remeasured~~
re-measured
through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU
2018-07
is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASUNo.
2016-02, ~~“Leases~~
“Leases (Topic 842)
.
”. ASU
2016-02
establishes a
right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU
2018-10, ~~“Codification~~
“Codification Improvements to Topic 842, ~~Leases”~~Leases
,
” which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU
2018-10
are the same as the effective date and transition requirements of
2016-02.
In July 2018, the FASB issued ASUNo.
2018-11, ~~“Leases~~
“Leases (Topic 842): Targeted ~~Improvements”~~Improvements
,
” which creates a new optional transition method for implementing the new standard on leases, ASUNo.
2016-02,
and provides lessors with a practical expedient for separating lease and
non-lease
components. Specifically, under the amendments in ASU
2018-11:
(1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and
non-lease
components when certain conditions are met. The amendments have the same effective date as ASU
2016-02.
Practical Expedients
to Topic 842, Leases
—The Company elected several practical expedients made available by the FASB. The Company elected not to restate comparative financial statements upon adoption of the new accounting standard. In addition, the Company elected the package of practical expedients whereby the Company did not reassess (i) whether existing contracts are, or contain, leases. and (ii) lease classification for existing leases. Lastly, the Company elected not to separate lease and
non-lease
components in determining the consideration in the lease agreement.
The Company’s leasing portfolio consists of real estate leases, which are used primarily for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The adoption of this ASU during the first quarter of 2019 did not have a material impact on the Company’s consolidated financial statements. At adoption, the Company recognized a lease liability and a corresponding ROU asset of approximately $20 million on the consolidated balance sheet related to its future lease payments as a lessee under operating leases. See Note ~~13—~~13
—
Leases
for more information.
Operating lease ROU assets and lease liabilities are included in
other assets
and
other liabilities
, respectively, on the
Company’s
consolidated balance sheet. The Company uses its incremental borrowing rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset, at adoption of this ASU, was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.

1
1

Table of Contents

Recent Accounting Pronouncements

— In June 2016, the FASB issued ASUNo.
2016-13, ~~“Financial~~
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain
off-balance
sheet credit exposures. This includes, but is not limited to, loans, leases,
held-to-maturity
securities, loan commitments, and financial guarantees. The CECL model does not apply to AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit impairment in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASUNo.
2016-13
is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements. ~~A cross-functional team, consisting of finance, credit management, and information technology is currently developing the allowance~~
We have determined a
methodology ~~models~~
and ~~assumptions that will be used under the new life of loan methodology. In determining the appropriate methodology, the Company has reviewed~~
portfolio segmentation,
based on
data quality and availability. The Company ~~will continue~~continues to ~~review~~ update
and ~~update~~ validate its
assumptions and models, as appropriate.

In January 2017, the FASB issued ASUNo.
2017-04, ~~“Intangibles~~
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU
2017-04
eliminates the second step in the goodwill impairment test ~~which~~
that
requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASUNo.
2018-13, ~~“Fair~~
“Fair Value Measurement (Topic 820): Disclosure Framework
-
Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASUNo.
2018-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

1
2

Table of Contents
4.
BUSINESS COMBINATIONS
Community Bank Acquisition
On August 10, 2018, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas. The systems integration of CB and CBB was completed in November 2018. ~~During~~The consolidation of banking centers was completed during the ~~first~~second quarter of 2019, ~~six of the former CB banking centers were consolidated into CBB~~in which 4
additional banking centers that were in close proximity
were consolidated. For the first six months of 2019, a total of 10 banking centers were consolidated, including 9 former CB centers.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 10, 2018 acquisition date. ~~These fair values are estimates and are subject to adjustment for up to one year after~~
The purchase price allocation was finalized in the ~~acquisition date or when additional information relative to~~second quarter of 2019.
The change in goodwill resulted from finalizing the ~~closing date fair values becomes available and such information is considered final, whichever is earlier. As the initial estimate of~~ fair value of impaired ~~loans was incomplete as of March 31, 2019, the fair value reflected in the financial statements has been determined provisionally.~~loans. The application of the acquisition method of accounting resulted in the recognition of goodwill of ~~$550.0~~$547.1 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.
The table below summarizes the amounts recognized for the estimated fair value of assets acquired and the liabilities assumed as of the acquisition date.
August 10, 2018
(Dollars in thousands)
Merger Consideration

  Cash paid
  $
180,719
  CVBF common stock issued
722,767

~~August 10, 2018~~
~~(Dollars in thousands)~~
~~Merger Consideration~~
  ~~Cash paid~~
  $ ~~180,719~~
  ~~CVBF common stock issued~~
~~722,767~~
  Total merger consideration
  $
903,486

Identifiable net assets acquired, at fair value

  ~~Assets Acquired~~
  ~~Cash and cash equivalents~~
~~47,802~~
  ~~Investment securities~~
~~716,996~~
  ~~FHLB stock~~
~~17,250~~
  ~~Loans~~
~~2,734,081~~
  ~~Accrued interest receivable~~
~~7,916~~
  ~~Premises and equipment~~
~~14,632~~
  ~~BOLI~~
~~70,904~~
  ~~Core deposit intangible~~
~~52,200~~
  ~~Other assets~~
~~54,479~~
  ~~Total assets acquired~~
~~3,716,260~~
  ~~Liabilities assumed~~
  Assets Acquired

  ~~Deposits~~
~~2,869,986~~
  ~~FHLB advances~~
~~297,571~~
  ~~Other borrowings~~
~~166,000~~
  ~~Other liabilities~~
~~29,192~~
  ~~Total liabilities assumed~~
~~3,362,749~~
  Cash and cash equivalents
47,802
  Investment securities
716,996
  FHLB stock
17,250
  Loans
2,738,100
  Accrued interest receivable
7,916
  Premises and equipment
14,632
  BOLI
70,904
  Core deposit intangible
52,200
  Other assets
53,291

  Total assets acquired

3,719,091
  Liabilities assumed

  Deposits
2,869,986
  FHLB advances
297,571
  Other borrowings
166,000
  Other liabilities
29,192
  Total liabilities assumed
3,362,749
  Total fair value of identifiable net assets, at fair value
~~353,511~~
356,342

Goodwill
  $
547,144

~~Goodwill~~
  $ ~~549,975~~

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3

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At the date of acquisition, the gross contractual loan amounts receivable, inclusive of all principal and interest, was approximately $3 billion. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected at the date of acquisition was approximately $4.5 million.

We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.
~~For the three months ended March 31, 2019 and 2018, the~~

The Company incurred merger related expenses associated with the CB acquisition of ~~$3.1~~$244,000 and $6.0 million for the three and nine months ended September 30, 2019, respectively, and $6.6 million and ~~$803,000,~~$7.9 million for the three and nine months ended September 30, 2018, respectively.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and nine months ended ~~March 31,~~September 30, 2018. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value,

cost savings, or business synergies.

As a result, actual amounts would have differed from the unaudited pro forma information presented.
~~Unaudited Pro Forma~~
  ~~Three Months Ended March 31,~~
~~2018~~
~~(Dollars in thousands,~~
~~except per share amounts)~~
~~Total revenues (net interest income plus noninterest income)~~
  $ ~~122,973~~
~~Net income~~
  $ ~~45,991~~
~~Earnings per share - basic~~
  $ ~~0.33~~
~~Earnings per share - diluted~~
  $ ~~0.33~~

Unaudited Pro Forma

  Three Months Ended

Nine Months Ended

September 30, 2018

(Dollars in thousands, except per share amounts)

Total revenues (net interest income plus noninterest income)
  $
120,467
  $
364,846

Net income
  $
44,623
  $
138,274

Earnings per share - basic
  $
0.32
  $
0.99

Earnings per share - diluted
  $
0.32
  $
0.99

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Table of Contents
5.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are
available-for-sale
securities with fair value based on quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. Estimated fair values were obtained from an independent pricing service based upon market quotes.

March 31, 2019
   Amortized
Cost Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss
   Fair Value      Total Percent
(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
  $ 1,424,937   $ 6,107 $ (8,540)   $ 1,422,504 85.00%
CMO/REMIC - residential
206,956 470 (2,301) 205,125 12.26%
Municipal bonds
45,052 421 (388) 45,085 2.69%
Other securities
787 - - 787 0.05%

Totalavailable-for-sale securities
  $ 1,677,732   $ 6,998 $ (11,229)   $ 1,673,501 100.00%

Investment securitiesheld-to-maturity:

Government agency/GSE
$ 133,557   $ 564 $ (2,077)   $ 132,044 18.21%
Residential mortgage-backed securities
169,367 737 (999) 169,105 23.09%
CMO
213,145 - (9,998) 203,147 29.06%
Municipal bonds
217,395 1,819 (2,859) 216,355 29.64%

Totalheld-to-maturity securities
$ 733,464   $ 3,120 $ (15,933)   $ 720,651 100.00%

December 31, 2018
   Amortized
Cost Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss
   Fair Value      Total Percent
(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
  $ 1,494,106   $ 1,348 $ (20,946)   $ 1,474,508 85.03%
CMO/REMIC - residential
217,223 353 (3,525) 214,051 12.34%
Municipal bonds
45,621 332 (1,143) 44,810 2.59%
Other securities
716 - - 716 0.04%

Totalavailable-for-sale securities
  $ 1,757,666   $ 2,033 $ (25,614)   $ 1,734,085 100.00%

Investment securitiesheld-to-maturity:

Government agency/GSE
  $ 138,274   $ 572   $ (2,622)   $ 136,224 18.57%
Residential mortgage-backed securities
153,874 - (3,140) 150,734 20.67%
CMO
215,336 - (12,081) 203,255 28.93%
Municipal bonds
236,956 556 (6,188) 231,324 31.83%

Totalheld-to-maturity securities
  $ 744,440   $ 1,128   $ (24,031)   $ 721,537 100.00%

September 30, 2019

   Amortized
Cost

Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss

   Fair Value

  Total Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,127,395
  $
20,105
  $
(1,341
)   $
1,146,159

72.99
%
CMO/REMIC - residential

381,615

1,649

(336
)
382,928

24.38
%
Municipal bonds

39,564

924

(1
)
40,487

2.58
%
Other securities

832

-

-

832

0.05
%

Total
available-for-sale
securities
  $
1,549,406
  $
22,678
  $
(1,678
)

  $
1,570,406

100.00
%

Investment securities
held-to-maturity:

Government agency/GSE
  $
123,917
  $
3,238
  $
(170
)   $
126,985

17.60
%
Residential mortgage-backed securities

172,919

2,624

(3
)
175,540

24.56
%
CMO

204,263

76

(1,467
)
202,872

29.02
%
Municipal bonds

202,854

4,198

(558
)
206,494

28.82
%

Total
held-to-maturity
securities
  $
703,953
  $
10,136
  $
(2,198
)   $
711,891

100.00
%

December 31, 2018

   Amortized
Cost

Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss

   Fair Value

T
otal Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,494,106
  $
1,348
  $
(20,946
)   $
1,474,508

85.03
%
CMO/REMIC - residential

217,223

353

(3,525
)
214,051

12.34
%
Municipal bonds

45,621

332

(1,143
)
44,810

2.59
%
Other securities

716

-

-

716

0.04
%

Total
available-for-sale
securities
  $
1,757,666
  $
2,033
  $
(25,614
)   $
1,734,085

100.00
%

Investment securities
held-to-maturity:

Government agency/GSE
  $
138,274
  $
572
  $
(2,622
)   $
136,224

18.57
%
Residential mortgage-backed securities

153,874

-

(3,140
)
150,734

20.67
%
CMO

215,336

-

(12,081
)
203,255

28.93
%
Municipal bonds

236,956

556

(6,188
)
231,324

31.83
%

Total
held-to-maturity
securities
  $
744,440
  $
1,128
  $
(24,031
)   $
721,537

100.00
%
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5

Table of Contents

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

    For the Three Months Ended
March 31,
         2019                   2018

(Dollars in thousands)
Investment securitiesavailable-for-sale:

Taxable
  $ 10,309   $ 11,445
Tax-advantaged
336 423

Total interest income fromavailable-for-sale securities
10,645 11,868

Investment securitiesheld-to-maturity:

Taxable
2,910 2,878
Tax-advantaged
1,615 1,887

Total interest income fromheld-to-maturity securities
4,525 4,765

Total interest income from investment securities
  $ 15,170   $ 16,633

    For the Three Months Ended
September 30,

    For the Nine Months Ended
September 30,

         2019

         2018

         2019

         2018

(Dollars in thousands)
Investment securities
available-for-sale:

Taxable
  $
8,949
  $
11,126
  $
29,079
  $
33,861

Tax-advantaged

273

395

906

1,225

Total interest income from
available-for-sale
securities

9,222

11,521

29,985

35,086

Investment securities
held-to-maturity:

Taxable

2,883

2,961

8,725

8,887

Tax-advantaged

1,415

1,705

4,524

5,351

Total interest income from
held-to-maturity
securities

4,298

4,666

13,249

14,238

Total interest income from investment securities
  $
13,520
  $
16,187
  $
43,234
  $
49,324

Approximately ~~89%~~
89
% of the total investment securities portfolio at ~~March 31,~~September 30, 2019 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at ~~March 31,~~September 30, 2019 and December 31, 2018. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market
interest
rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be ~~other-than-temporarily-Impaired~~other-than-temporarily-
i
mpaired (“OTTI”).

March 31, 2019
    Less Than 12 Months         12 Months or Longer         Total
Fair Value Gross
Unrealized
Holding Losses Fair Value

Gross
Unrealized
Holding Losses
Fair Value Gross
Unrealized
Holding
Losses

(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
  $ -   $ -   $ 703,134   $ (8,540)   $ 703,134   $ (8,540)
CMO/REMIC - residential
66 - 160,926 (2,301) 160,992 (2,301)
Municipal bonds
- - 16,689 (388) 16,689 (388)

Totalavailable-for-sale securities
  $ 66   $ -   $ 880,749   $ (11,229)   $ 880,815   $ (11,229)

Investment securitiesheld-to-maturity:

Government agency/GSE
  $ 26,291   $ (122)   $ 60,153   $ (1,955)   $ 86,444   $ (2,077)
Residential mortgage-backed securities
- - 86,568 (999) 86,568 (999)
CMO
- - 203,148 (9,998) 203,148 (9,998)
Municipal bonds
- - 64,790 (2,859) 64,790 (2,859)

Totalheld-to-maturity securities
  $ 26,291   $ (122)   $ 414,659   $ (15,811)   $     440,950   $     (15,933)

September 30, 2019

    Less Than 12 Months

    12 Months or Longer

    Total

Fair Value

Gross
Unrealized
Holding

Losses

Fair Value

Gross
Unrealized
Holding

Losses

Fair Value

Gross
Unrealized
Holding
Losses

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
  2
  $
  -
  $
  127,904
  $

  (1,341
)   $
  127,906
  $
  (1,341
)
CMO/REMIC - residential

122,595

(156
)
39,498

(180
)
162,093

(336
)
Municipal bonds

-

-

564

(1
)
564

(1
)

Total
available-for-sale
securities
  $
122,597
  $
(156
)   $
167,966
  $
(1,522
)   $
290,563
  $
(1,678
)
Investment securities
held-to-maturity:

Government agency/GSE
  $
-
  $
-
  $
19,923
  $
(170
)   $
19,923
  $
(170
)
Residential mortgage-backed securities

5,021

(3
)
-

-

5,021

(3
)
CMO

-

-

178,297

(1,467
)
178,297

(1,467
)
Municipal bonds

3,037

(5
)
32,217

(553
)
35,254

(558
)

Total
held-to-maturity
securities
  $
8,058
  $
(8
)   $
230,437
  $
(2,190
)   $

238,495
  $

(2,198
)

December 31, 2018
    Less Than 12 Months         12 Months or Longer         Total
Fair Value Gross
Unrealized
Holding Losses Fair Value

Gross
Unrealized
Holding Losses
Fair Value Gross
Unrealized
Holding
Losses

(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
  $ 692,311   $ (4,864)   $ 593,367   $ (16,082)   $ 1,285,678   $ (20,946)
CMO/REMIC - residential
36,582 (365) 135,062 (3,160) 171,644 (3,525)
Municipal bonds
9,568 (188) 14,181 (955) 23,749 (1,143)

Totalavailable-for-sale securities
  $ 738,461   $ (5,417)   $ 742,610   $ (20,197)   $ 1,481,071   $ (25,614)

Investment securitiesheld-to-maturity:

Government agency/GSE
  $ 7,479   $ (15)   $ 54,944   $ (2,607)   $ 62,423   $ (2,622)
Residential mortgage-backed securities
59,871 (484) 90,863 (2,656) 150,734 (3,140)
CMO
- - 203,254 (12,081) 203,254 (12,081)
Municipal bonds
70,989 (778) 77,723 (5,410) 148,712 (6,188)

Totalheld-to-maturity securities
  $ 138,339   $ (1,277)   $ 426,784   $ (22,754)   $ 565,123   $     (24,031)

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6

Table of Contents

December 31, 2018

    Less Than 12 Months

    12 Months or Longer

    Total

Fair Value


Gross
Unrealized
Holding
Losses


Fair Value


Gross
Unrealized
Holding
Losses


Fair Value

Gross
Unrealized
Holding
Losses

(Dollars in thousands)

Investment securities
available-for-sale:

Residential mortgage-backed securities

  $

692,311

  $
(4,864
)

  $
593,367

  $
(16,082
)


  $

1,285,678


  $
(20,946
)

CMO/REMIC - residential

36,582

(365
)

135,062

(3,160
)

171,644

(3,525
)
Municipal bonds

9,568

(188
)

14,181

(955
)

23,749

(1,143
)

Total
available-for-sale
securities

  $
738,461

  $
(5,417
)

  $
742,610

  $
(20,197
)

  $
1,481,071
  $
(25,614
)

Investment securities
held-to-maturity:

Government agency/GSE
  $
7,479

  $
(15
)

  $
54,944

  $
(2,607
)

  $
62,423
  $
(2,622
)
Residential mortgage-backed securities

59,871

(484
)

90,863

(2,656
)

150,734

(3,140
)
CMO

-

-

203,254

(12,081
)

203,254

(12,081
)
Municipal bonds

70,989

(778
)

77,723

(5,410
)

148,712

(6,188
)

Total
held-to-maturity
securities
  $
138,339

  $
(1,277
)

  $
426,784

  $
(22,754
)

  $
565,123
  $
     (24,031
)

At ~~March 31,~~September 30, 2019 and December 31, 2018, investment securities having a carrying value of approximately ~~$1.53~~$1.46 billion and $1.66 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at ~~March 31,~~September 30, 2019, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through ~~2057,~~205
8
, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

March 31, 2019
Available-for-sale Held-to-maturity
  Amortized
Cost   Fair Value

  Amortized
Cost
  Fair Value

(Dollars in thousands)
Due in one year or less
  $ 11,947   $ 12,113   $ 500   $ 506
Due after one year through five years
1,481,462 1,479,161 264,136 254,886
Due after five years through ten years
157,640 155,816 232,213 231,964
Due after ten years
26,683 26,411 236,615 233,295

Total investment securities
  $ 1,677,732   $ 1,673,501   $ 733,464   $ 720,651

September 30, 2019

Available-for-sale

Held-to-maturity

Amortized
Cost

Fair Value

Amortized

Cost

Fair Value

(Dollars in thousands)
Due in one year or less
  $

12,278
  $

12,426
  $

500
  $
500

Due after one year through five years

1,345,036

1,364,026

327,802

328,561

Due after five years through ten years

171,657

173,033

161,463

163,676

Due after ten years

20,435

20,921

214,188

219,154

Total investment securities
  $

1,549,406
  $

1,570,406
  $

  703,953
  $
  711,891

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No
NaN
impairment losses have been recorded through ~~March 31,~~September 30, 2019.
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7

Table of Contents

6.	~~ACQUIRED SJB ASSETS~~LOANS AND ~~FDIC LOSS SHARING ASSET~~ LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES

~~FDIC Assisted Acquisition~~

Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (SJB”) on October 16, 2009, ~~the Bank acquired San Joaquin Bank (“SJB”)~~ and ~~entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”~~loans and lease finance receivables excluding PCI loans
(“Non-PCI
loans”) ~~that~~. The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018. ~~The acquisition has been accounted for under the purchase method of accounting. The assets~~At September 30, 2019 and ~~liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans.~~
~~At March~~December 31, ~~2019,~~2018, the remaining discount associated with the PCI loans was ~~zero. The loss sharing agreement~~zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at September 30, 2019 and December 31, 2018.
Beginning with June
30, 2019, PCI loans were accounted for ~~commercial~~ and combined with
Non-PCI
loans ~~expired October 16, 2014. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018.~~

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

March 31, 2019 December 31, 2018
(Dollars in thousands)
Commercial and industrial
  $ 616   $ 519
SBA
1,235 1,258
Real estate:

Commercial real estate
13,183 14,407
Construction
- -
SFR mortgage
141 145
Dairy & livestock and agribusiness
- 700
Municipal lease finance receivables
- -
Consumer and other loans
181 185

Gross PCI loans
15,356 17,214
Less: Purchase accounting discount
- -

Gross PCI loans, net of discount
15,356 17,214
Less: Allowance for PCI loan losses
(180 ) (204 )

Net PCI loans
  $ 15,176   $ 17,010

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

March 31, 2019 December 31, 2018
(Dollars in thousands)
Pass
  $ 13,993   $ 15,816
Special mention
1,152 1,174
Substandard
211 224
Doubtful & loss
- -

Total gross PCI loans
  $ 15,356   $ 17,214

receivables.

7.	~~LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES~~

The following table provides a summary of the Company’s total loans and lease finance receivables ~~excluding PCI loans,~~ by type.

March 31, 2019 December 31, 2018
(Dollars in thousands)
Commercial and industrial
  $ 957,126   $ 1,002,209
SBA
337,957 350,043
Real estate:

Commercial real estate
5,388,866 5,394,229
Construction
121,912 122,782
SFR mortgage
285,787 296,504
Dairy & livestock and agribusiness
322,321 393,843
Municipal lease finance receivables
61,249 64,186
Consumer and other loans
120,768 128,429

Gross loans, excluding PCI loans
7,595,986 7,752,225
Less: Deferred loan fees, net
(4,479 ) (4,828 )

Gross loans, excluding PCI loans, net of deferred loan fees
7,591,507 7,747,397
Less: Allowance for loan losses
(65,021 ) (63,409 )

Net loans, excluding PCI loans
7,526,486 7,683,988

PCI Loans
15,356 17,214
Discount on PCI loans
- -
Less: Allowance for loan losses
(180 ) (204 )

PCI loans, net
15,176 17,010

Total loans and lease finance receivables
  $ 7,541,662   $ 7,700,998

September 30, 2019

December 31, 2018

Total Loans
and Leases

Non-PCI
Loans
and Leases

PCI Loans

Total Loans
and Leases

(Dollars in thousands)

Commercial and industrial
$
921,678
  $
1,002,209
  $
519

$

1,002,728

SBA

319,571

350,043

1,258

351,301

Real estate:

Commercial real estate

5,375,668

5,394,229

14,407

5,408,636

Construction

119,931

122,782

-

122,782

SFR mortgage

278,644

296,504

145

296,649

Dairy & livestock and agribusiness

311,229

393,843

700

394,543

Municipal lease finance receivables

54,468

64,186

-

64,186

Consumer and other loans

117,128

128,429

185

128,614

Gross loans

7,498,317

7,752,225

17,214

7,769,439

Less: Deferred loan fees, net

(3,866
)

(4,828
)

-

(4,828
)

Gross loans, net of deferred loan fees

7,494,451

7,747,397

17,214

7,764,611

Less: Allowance for loan losses

(68,672
)
(63,409
)

(204
)

(63,613
)

Total loans and lease finance receivables
$
7,425,779
  $
7,683,988
  $
17,010
$

7,700,998

As of ~~March 31,~~September 30, 2019, ~~76.31%~~77.01% of the Company’s total gross loan portfolio ~~(excluding PCI loans)~~ consisted of real estate loans, ~~70.94% of which consisted of~~
with commercial real estate ~~loans.~~loans representing
71.69% of
total loans
. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of ~~March 31,~~September 30, 2019, ~~$231.1~~$245.6 million, or ~~4.29%~~4.57% of the total commercial real estate loans included loans secured by farmland, compared to ~~$229.8~~$231.0 million, or ~~4.26%~~4.27%, at December 31, 2018. The loans secured by farmland included ~~$124.2~~$130.4 million for loans secured by dairy & livestock land and ~~$106.9~~$115.1 million for loans secured by agricultural land at ~~March 31,~~September 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and ~~$102.9~~$104.1 million for loans secured by agricultural land at December 31, 2018. As of ~~March 31,~~September 30, 2019, dairy & livestock and agribusiness loans of ~~$322.3~~$311.2 million were comprised of ~~$264.8~~$251.3 million for dairy & livestock loans and ~~$57.6~~$60.0 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and ~~$53.3~~$54.0 million for agribusiness loans at December 31, 2018.
At ~~March 31,~~September 30, 2019, the Company held approximately ~~$3.79~~$3.83 billion of total fixed rate ~~loans, including PCI~~ loans.
At ~~March 31,~~September 30, 2019 and December 31, 2018, loans totaling ~~$6.18~~$5.91 billion and $5.71 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no0 outstanding loans
held-for-sale
as of ~~March 31,~~September 30, 2019 and December 31, 2018.
1
8

Table of Contents
Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
The following table summarizes loans by type, ~~excluding PCI loans,~~ according to our internal risk ratings ~~for~~
as of
the ~~periods~~
dates
presented.

March 31, 2019
Pass Special
Mention Substandard (1) Doubtful &
Loss Total
(Dollars in thousands)
Commercial and industrial
  $ 913,059   $ 32,685   $ 11,382   $ -   $ 957,126
SBA
322,393 7,704 7,860 - 337,957
Real estate:

Commercial real estate

Owner occupied
1,986,030 96,262 16,849 - 2,099,141
Non-owner occupied
3,279,696 9,290 739 - 3,289,725
Construction

Speculative
120,801 - - - 120,801
Non-speculative
1,111 - - - 1,111
SFR mortgage
278,962 3,287 3,538 - 285,787
Dairy & livestock and agribusiness
261,438 50,451 10,432 - 322,321
Municipal lease finance receivables
60,745 504 - - 61,249
Consumer and other loans
118,596 1,215 957 - 120,768

Total gross loans, excluding PCI loans
  $ 7,342,831   $ 201,398   $ 51,757   $ -   $ 7,595,986



September 30, 2019

Pass

Special
Mention

Substandard (1)

Doubtful &

Loss

Total

(Dollars in thousands)
Commercial and industrial
  $
892,865
  $
24,456
  $
4,357
  $
-
  $
921,678

SBA

296,127

13,764

9,680

-

319,571

Real estate:

Commercial real estate

Owner occupied

1,987,168

83,305

22,618

-

2,093,091

Non-owner
occupied

3,269,174

12,663

740

-

3,282,577

Construction

Speculative

105,636

-

-

-

105,636

Non-speculative

14,295

-

-

-

14,295

SFR mortgage

275,069

2,053

1,522

-

278,644

Dairy & livestock and agribusiness

247,554

43,585

20,090

-

311,229

Municipal lease finance receivables

53,998

470

-

-

54,468

Consumer and other loans

115,242

845

1,041

-

117,128

Total gross loans
  $
7,257,128
  $
181,141
  $
60,048
  $
-
  $
7,498,317

(1)
Includes ~~$19.9~~$18.0 million of classified loans acquired from CB in the third quarter of 2018.

December 31, 2018
Pass Special
Mention Substandard (1) Doubtful &
Loss Total
(Dollars in thousands)
Commercial and industrial
  $ 961,909   $ 29,358 $ 10,942 $ -   $ 1,002,209
SBA
336,033 7,375 6,635 - 350,043
Real estate:

Commercial real estate

Owner occupied
2,008,169 95,841 13,980 - 2,117,990
Non-owner occupied
3,260,822 9,938 5,479 - 3,276,239
Construction

Speculative
118,233 - - - 118,233
Non-speculative
4,549 - - - 4,549
SFR mortgage
289,607 3,310 3,587 - 296,504
Dairy & livestock and agribusiness
350,044 34,586 9,213 - 393,843
Municipal lease finance receivables
63,650 536 - - 64,186
Consumer and other loans
126,085 1,263 1,081 - 128,429

Total gross loans, excluding PCI loans
  $ 7,519,101   $ 182,207 $ 50,917 $ -   $ 7,752,225

1
9

Table of Contents

December 31, 2018 (1)

Pass

Special
Mention

Substandard (2)

Doubtful &
Loss

Total

(Dollars in thousands)
Commercial and industrial
  $
961,909

$

29,358

$
  10,942
$

-

$

1,002,209

SBA

336,033

7,375

6,635

-

350,043

Real estate:

Commercial real estate

Owner occupied

2,008,169

95,841

13,980

-

2,117,990

Non-owner
occupied

3,260,822

9,938

5,479

-

3,276,239

Construction

Speculative

118,233

-

-

-

118,233

Non-speculative

4,549

-

-

-

4,549

SFR mortgage

289,607

3,310

3,587

-

296,504

Dairy & livestock and agribusiness

350,044

34,586

9,213

-

393,843

Municipal lease finance receivables

63,650

536

-

-

64,186

Consumer and other loans

126,085

1,263

1,081

-

128,429

Total gross loans
  $
7,519,101
  $
182,207

$
50,917
$
-
$
7,752,225

(1)
Excludes PCI loans of $17.2 million as of December 31, 2018, of which $15.8 million were rated pass, $1.2 million were rated special mention, $224,000 were rated substandard, and 0 were rated doubtful & loss.
(2) Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018.
Allowance for Loan Losses (“ALLL”)
The Bank’s Audit and Director Loan Committees provide Board oversight of the ~~ALLL~~ ALL
L
process and approve the ALLL methodology on a quarterly basis.
Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
of the 2018 Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion concerning the allowance for loan losses.
Management believes that the ALLL was appropriate at ~~March 31,~~September 30, 2019 and December 31, 2018. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.
The following tables present the balance and activity related to the allowance for loan losses for
held-for-investment
loans by type for the periods presented.

For the Three Months Ended March 31, 2019
Ending Balance
December 31,
2018 Charge-offs Recoveries Provision for
(Recapture of)
Loan Losses Ending Balance
March 31, 2019
(Dollars in thousands)
Commercial and industrial
  $ 7,520   $ -       $ 110   $ (31 )   $ 7,599
SBA
1,062 (20 ) 5 232 1,279
Real estate:
-     -
Commercial real estate
44,934 -     -     1,144 46,078
Construction
981 -     3 (120 ) 864
SFR mortgage
2,196 -     68 (76 ) 2,188
Dairy & livestock and agribusiness
5,215 (78 ) -     562 5,699
Municipal lease finance receivables
775 -     -     (37 ) 738
Consumer and other loans
726 (1 ) 1 (150 ) 576
PCI loans
204 -     -     (24 ) 180

  Total allowance for loan losses
  $ 63,613   $ (99 )   $ 187   $ 1,500   $ 65,201


For the Three Months Ended March 31, 2018
Ending Balance
December 31,
2017 Charge-offs Recoveries (Recapture of)
Provision for
Loan Losses Ending Balance
March 31, 2018
(Dollars in thousands)
Commercial and industrial
  $ 7,280   $ -       $ 10   $ 209   $ 7,499
SBA
869 -     5 10 884
Real estate:
-     -
Commercial real estate
41,722 -     -     141 41,863
Construction
984 -     1,334 (1,331 ) 987
SFR mortgage
2,112 -     -     90 2,202
Dairy & livestock and agribusiness
4,647 -     -     19 4,666
Municipal lease finance receivables
851 -     -     (17 ) 834
Consumer and other loans
753 (7 ) 8 (66 ) 688
PCI loans
367 -     -     (55 ) 312

Total allowance for loan losses
  $ 59,585   $ (7 )   $ 1,357   $ (1,000 )   $ 59,935

For the Three Months Ended September 30, 2019

Ending Balance
June 30,
2019

Charge-offs

Recoveries

Provision for

(Recapture of)
Loan Losses

Ending Balance
September 30,

2019

(Dollars in thousands)

Commercial and industrial
  $

7,857
     $

  -

  $

  94
  $

  287

$

  8,238

SBA

1,119

(65
)
-


412

1,466

Real estate:

Commercial real estate

48,287

-


-


624

48,911

Construction

871

-


3

55

929

SFR mortgage

2,323

-


8

44

2,375

Dairy & livestock and agribusiness

5,341

-


-


88

5,429

Municipal lease finance receivables

726

-


-


(64
)
662

Consumer and other loans

608

(3
)
3

54

662

  Total allowance for loan losses
  $
67,132
  $
(68
)   $
108
  $
1,500
  $
68,672

Table of Contents

For the Three Months Ended September 30, 2018

Ending Balance

June 30,
2018

Charge-offs

Recoveries

Provision for

(Recapture of)
Loan Losses

Ending Balance

September 30,
2018

(Dollars in thousands)

Commercial and industrial

$
6,970
  $
-
  $
44
  $
477
  $
7,491

SBA

841

(257
)
5

369

958

Real estate:

Commercial real estate

42,597

-

-

(1,056
)
41,541

Construction

1,003

-

15

115

1,133

SFR mortgage

2,155

-

-

(30
)
2,125

Dairy & livestock and

agribusiness

4,351

-

-

673

5,024

Municipal lease finance

receivables

808

-

-

7

815

Consumer and other loans

642

(1
)
118

(44
)
715

PCI loans

216

-

-

(11
)
205

Total allowance for loan

losses
  $

59,583
  $
(258
)   $
182
  $
500
  $
60,007

For the Nine Months Ended September 30, 2019

Ending Balance
December 31,
2018

Charge-offs

Recoveries

Provision for

(Recapture of)

Loan Losses

Ending Balance
September 30,

2019

(Dollars in thousands)

Commercial and industrial
  $

7,528
  $
(48
)   $
253
  $

505
  $

8,238

SBA

1,078

(295
)
9

674

1,466

Real estate:

Commercial real estate

45,097

-


-

3,814

48,911

Construction

981

-

9

(61
)

929

SFR mortgage

2,197

-

191

(13
)

2,375

Dairy & livestock and

agribusiness

5,225

(78
)
19

263

5,429

Municipal lease finance receivables

775

-

-

(113
)
662

Consumer and other loans

732

(7
)
6

(69
)
662

Total allowance for loan

losses
  $
63,613
  $
(428
)   $
487
  $
5,000
  $
68,672

For the Nine Months Ended September 30, 2018

Ending Balance
December 31,
2017

Charge-offs

Recoveries

(Recapture of)
Provision for
Loan Losses

Ending Balance
September 30,

2018

(Dollars in thousands)
Commercial and industrial
  $
7,280
  $
-
  $
81
  $
130
  $
7,491

SBA

869

(257
)
15

331

958

Real estate:

Commercial real estate

41,722

-

-

(181
)

41,541

Construction

984

-

1,945

(1,796
)

1,133

SFR mortgage

2,112

-

-

13

2,125

Dairy & livestock and

agribusiness

4,647

-

19

358

5,024

Municipal lease finance receivables

851

-

-

(36
)
815

Consumer and other loans

753

(10
)
129

(157
)

715

PCI loans

367

-

-

(162
)

205

Total allowance for loan losses
  $
59,585
  $
(267
)   $
2,189
  $
(1,500
)
  $
60,007

2
1

Table of Contents

The following tables present the recorded investment in loans
held-for-investment
and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the ~~allowance~~allowance for loan losses for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.

March 31, 2019
Recorded Investment in Loans Allowance for Loan Losses
Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Acquired with
Deterioriated
Credit Quality Individually
  Evaluated for
Impairment Collectively
  Evaluated for
Impairment Acquired with
Deterioriated
Credit Quality
(Dollars in thousands)
Commercial and industrial
  $ 8,512   $ 948,614   $ -   $ 117   $ 7,482   $ -
SBA
4,661 333,296 - 317 962 -
Real estate:

  Commercial real estate
1,589 5,387,277 - - 46,078 -
  Construction
- 121,912 - - 864 -
  SFR mortgage
5,051 280,736 - - 2,188 -
Dairy & livestock and agribusiness
- 322,321 - - 5,699 -
Municipal lease finance receivables
- 61,249 - - 738 -
Consumer and other loans
477 120,291 - 1 575 -
PCI loans
- - 15,356 - - 180

  Total
  $ 20,290   $ 7,575,696   $ 15,356   $ 435   $ 64,586   $ 180

March 31, 2018
Recorded Investment in Loans Allowance for Loan Losses
Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Acquired with
Deterioriated
Credit Quality Individually
  Evaluated for
Impairment Collectively
  Evaluated for
Impairment Acquired with
Deterioriated
Credit Quality
(Dollars in thousands)
Commercial and industrial
  $ 432   $ 513,797   $ -   $ -   $ 7,499   $ -
SBA
1,201 122,231 - - 884 -
Real estate:

  Commercial real estate
7,992 3,403,224 - - 41,863 -
  Construction
- 79,898 - - 987 -
  SFR mortgage
3,576 234,042 - - 2,202 -
Dairy & livestock and agribusiness
818 275,561 - - 4,666 -
Municipal lease finance receivables
- 67,892 - - 834 -
Consumer and other loans
438 63,721 - - 688 -
PCI loans
- - 25,861 - - 312

  Total
  $ 14,457   $ 4,760,366   $ 25,861   $ -   $ 59,623   $ 312

September 30, 2019

Recorded Investment in Loans

Allowance for Loan Losses

Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Individually
  Evaluated for
Impairment

Collectively
  Evaluated for
Impairment

(Dollars in thousands)

Commercial and industrial
  $
1,638
  $
920,040
  $
254
  $
7,984

SBA

3,248

316,323

286

1,180

Real estate:

  Commercial real estate

1,500

5,374,168

-

48,911

  Construction

-

119,931

-

929

  SFR mortgage

3,009

275,635

-

2,375

Dairy & livestock and agribusiness

-

311,229

-

5,429

Municipal lease finance receivables

-

54,468

-

662

Consumer and other loans

385

116,743

-

662

  Total
  $
9,780
  $
7,488,537
  $
540
  $
68,132

September 30, 2018

Recorded Investment in Loans

Allowance for Loan Losses

Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Acquired with
Deterioriated
Credit Quality

Individually
  Evaluated for
Impairment

Collectively
  Evaluated for
Impairment

Acquired with
Deterioriated
Credit Quality

(Dollars in thousands)
Commercial and industrial
  $
3,168
  $
1,018,738
  $
-
  $
-
  $
7,491
  $
-

SBA

3,593

353,459

-

-

958

-

Real estate:

  Commercial real estate

6,348

5,262,392

-

-

41,541

-

  Construction

-

123,274

-

-

1,133

-

  SFR mortgage

5,492

287,024

-

13

2,112

-

Dairy & livestock and agribusiness

775

303,823

-

-

5,024

-

Municipal lease finance receivables

-

67,581

-

-

815

-

Consumer and other loans

807

133,989

-

70

645

-

PCI loans

-

-

17,260

-

-

205

  Total
  $
20,183
  $
7,550,280
  $
17,260
  $
83
  $
59,719
  $
205

Table of Contents

Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
A loan is reported as a TDR when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of one or more of these concessions, restructured loans are classified as impaired. Impairment reserves on
non-collateral
dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the carrying value of the loan. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.
When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.
The following tables present the recorded investment in, and the aging of, past due and nonaccrual loans ~~excluding PCI loans,~~ by type of loans ~~for~~
as of
the ~~periods~~
date
s presented.

   March 31, 2019
   30-59 Days
Past Due    60-89 Days
Past Due    Total Past Due
and Accruing    Nonaccrual
(1) (3)    Current    Total Loans
  and Financing
Receivables
   (Dollars in thousands)
Commercial and industrial
     $ 339      $ 30      $ 369      $ 8,388      $ 948,369      $ 957,126
SBA
   601    -    601    4,098    333,258    337,957
Real estate:

Commercial real estate

  Owner occupied
   -    -    -    519    2,098,622    2,099,141
  Non-owner occupied
   124    -    124    615    3,288,986    3,289,725
Construction

  Speculative (2)
   -    -    -    -    120,801    120,801
  Non-speculative
   -    -    -    -    1,111    1,111
SFR mortgage
   -    -    -    2,894    282,893    285,787
Dairy & livestock and agribusiness
   -    -    -    -    322,321    322,321
Municipal lease finance receivables
   -    -    -    -    61,249    61,249
Consumer and other loans
   98    3    101    477    120,190    120,768












Total gross loans, excluding PCI loans
     $         1,162      $         33      $ 1,195      $       16,991      $     7,577,800      $ 7,595,986












September 30, 2019

30-59
Days
Past Due

60-89
Days
Past Due

Total Past Due

and Accruing

Nonaccrual
(1) (3)
(4)

Current

Total Loans
  and Financing
Receivables

(Dollars in thousands)
Commercial and industrial
  $

  756
  $

  -
  $
  756
  $

   1,550
  $

  919,372
  $

  921,678

SBA

-

303

303

2,706

316,562

319,571

Real estate:

Commercial real estate

  Owner occupied

-

-

-

494

2,092,597

2,093,091


Non-owner
occupied

368

-

368

589

3,281,620

3,282,577

Construction

  Speculative (2)

-

-

-

-

105,636

105,636


Non-speculative

-

-

-

-

14,295

14,295

SFR mortgage

-

-

-

888

277,756

278,644

Dairy & livestock and

agribusiness

-

-

-

-

311,229

311,229

Municipal lease finance

receivables

-

-

-

-

54,468

54,468

Consumer and other loans

-

-

-

385

116,743

117,128

Total gross loans
  $

1,124
  $
         303
  $
         1,427
  $
         6,612
  $

7,490,278
  $
   7,498,317

(1)
As of ~~March 31,~~
September
30, 2019, ~~$1.4~~$1.0 million of nonaccruing loans were current, ~~$2.1 million~~$661,000 were
30-59
days past due, ~~zero~~$1.7 million were
60-89
days past due
,
and ~~$13.5~~$3.3 million were 90+ days past due.
(2)
Speculative construction loans are generally for properties where there is no identified buyer or renter.
(3)
Includes ~~$13.7~~$4.5 million of nonaccrual loans acquired from CB in the third quarter of 2018.

   December 31, 2018
   30-59 Days
Past Due    60-89 Days
Past Due    Total Past Due
and Accruing    Nonaccrual
(1) (3)    Current    Total Loans
  and Financing
Receivables
   (Dollars in thousands)
Commercial and industrial
     $ 820      $ 89      $ 909      $ 7,490      $ 993,810      $ 1,002,209
SBA
   1,172    135    1,307    2,892    345,844    350,043
Real estate:

Commercial real estate

  Owner occupied
   2,439    350    2,789    589    2,114,612    2,117,990
  Non-owner occupied
   -    -    -    5,479    3,270,760    3,276,239
Construction

  Speculative (2)
   -    -    -    -    118,233    118,233
  Non-speculative
   -    -    -    -    4,549    4,549
SFR mortgage
   -    285    285    2,937    293,282    296,504
Dairy & livestock and agribusiness
   -    -    -    78    393,765    393,843
Municipal lease finance receivables
   -    -    -    -    64,186    64,186
Consumer and other loans
   -    -    -    486    127,943    128,429












  Total gross loans, excluding PCI loans
     $         4,431      $         859      $ 5,290      $       19,951      $     7,726,984    $ 7,752,225












(4) Excludes $1.6 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.
2
3

Table of Contents

December 31, 2018 (1)

30-59
Days
Past Due

60-89
Days
Past Due

Total Past Due
and Accruing

Nonaccrual
(2) (4)

Current

Total Loans
  and Financing
Receivables

(Dollars in thousands)
Commercial and industrial
  $
820
  $
89
  $
909
  $
7,490
  $
993,810
  $
1,002,209

SBA

1,172

135

1,307

2,892

345,844

350,043

Real estate:

Commercial real estate

  Owner occupied

2,439

350

2,789

589

2,114,612

2,117,990


Non-owner
occupied

-

-

-

5,479

3,270,760

3,276,239

Construction

  Speculative (3)

-

-

-

-

118,233

118,233


Non-speculative

-

-

-

-

4,549

4,549

SFR mortgage

-

285

285

2,937

293,282

296,504

Dairy & livestock and agribusiness

-

-

-

78

393,765

393,843

Municipal lease finance receivables

-

-

-

-

64,186

64,186

Consumer and other loans

-

-

-

486

127,943

128,429

Total gross loans
  $
         4,431
  $
         859
  $
5,290
  $
       19,951
  $

    7,726,984
  $
7,752,225

(1)

Excludes PCI loans.

(2)

As of December 31, 2018, $2.3 million of nonaccruing loans were current, $33,000 were

30-59

days past due, $57,000 were

60-89

days past due and $17.6 million were 90+ days past due.

~~(2)~~(3)

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

~~(3)~~(4)

Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018.

Impaired Loans

At ~~March 31,~~September 30, 2019, the Company had impaired loans ~~excluding PCI loans,~~ of ~~$20.3~~$9.8 million. Impaired loans included ~~$8.4 million of nonaccrual commercial and industrial loans, $2.9 million of nonaccrual single-family residential (“SFR”) mortgage loans, $4.1~~$2.7 million of nonaccrual Small Business Administration (“SBA”) loans, $1.6 million of nonaccrual commercial and industrial loans, $1.1 million of nonaccrual commercial real estate loans,

$888,000 of nonaccrual single-family residential (“SFR”) mortgage loans,

and ~~$477,000~~$385,000 of nonaccrual consumer and other loans. These impaired loans included ~~$3.6~~$3.4 million of loans whose terms were modified in a troubled debt restructuring, of which ~~$277,000~~$249,000 were classified as nonaccrual. The remaining balance of ~~$3.3~~$3.2 million consisted of 12 loans performing according to the restructured terms. The impaired loans had a specific allowance of ~~$435,000~~$540,000 at ~~March 31,~~September 30, 2019. At December 31, 2018, the Company had classified as impaired, loans ~~excluding PCI loans,~~ with a balance of $23.5 million with a related allowance of $561,000.

2
4

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

   As of and For the Three Months Ended
March 31, 2019
   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance    Average
Recorded
Investment    Interest
Income
Recognized
   (Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
     $ 8,208      $ 12,317      $ -          $ 8,230      $ 2
SBA
   3,400    5,779    -        3,511    11
Real estate:

Commercial real estate

Owner occupied
   519    618    -        521    -
Non-owner occupied
   1,070    1,231    -        1,084    7
Construction

Speculative
   -        -        -        -        -
Non-speculative
   -        -        -        -        -
SFR mortgage
   5,051    5,865    -        5,082    21
Dairy & livestock and agribusiness
   -        -        -        -    -
Municipal lease finance receivables
   -        -        -        -    -
Consumer and other loans
   476    625    -        482    -










Total
   18,724    26,435    -        18,910    41










With a related allowance recorded:

Commercial and industrial
   304    309    117    323    -
SBA
   1,261    1,236    317    1,261    -
Real estate:

Commercial real estate

Owner occupied
   -        -        -        -        -
Non-owner occupied
   -        -        -        -        -
Construction

Speculative
   -        -        -        -        -
Non-speculative
   -        -        -        -        -
SFR mortgage
   -        -        -        -        -
Dairy & livestock and agribusiness
   -        -        -        -        -
Municipal lease finance receivables
   -        -        -        -        -
Consumer and other loans
   1    1    1    1    -










Total
   1,566    1,546    435    1,585    -










Total impaired loans
     $ 20,290      $ 27,981      $ 435      $ 20,495      $ 41











   As of and For the Three Months Ended
March 31, 2018
   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance    Average
Recorded
Investment    Interest
Income
Recognized
   (Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
     $ 432      $ 986      $ -          $ 461      $ 2
SBA
   1,201    1,327    -        1,220    12
Real estate:

Commercial real estate

Owner occupied
   4,332    4,755    -        4,348    -
Non-owner occupied
   3,660    5,033    -        3,715    22
Construction

Speculative
   -        -        -        -        -
Non-speculative
   -        -        -        -        -
SFR mortgage
   3,576    4,236    -        3,599    25
Dairy & livestock and agribusiness
   818    1,091    -        826    -
Municipal lease finance receivables
   -        -        -        -        -
Consumer and other loans
   438    640    -        519    -










Total
   14,457    18,068    -        14,688    61










With a related allowance recorded:

Commercial and industrial
   -        -        -        -        -
SBA
   -        -        -        -        -
Real estate:

Commercial real estate

Owner occupied
   -        -        -        -        -
Non-owner occupied
   -        -        -        -        -
Construction

Speculative
   -        -        -        -        -
Non-speculative
   -        -        -        -        -
SFR mortgage
   -        -        -        -        -
Dairy & livestock and agribusiness
   -        -        -        -        -
Municipal lease finance receivables
   -        -        -        -        -
Consumer and other loans
   -        -        -        -        -










Total
   -        -        -        -        -










Total impaired loans
     $ 14,457      $ 18,068      $ -          $ 14,688      $ 61











   As of December 31, 2018
   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance
   (Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
     $ 7,436      $ 11,457      $ -
SBA
   3,467    5,746    -
Real estate:

Commercial real estate

Owner occupied
   589    705    -
Non-owner occupied
   2,808    4,324    -
Construction

Speculative
   -        -        -
Non-speculative
   -        -        -
SFR mortgage
   5,349    6,270    -
Dairy & livestock and agribusiness
   -        -        -
Municipal lease finance receivables
   -        -        -
Consumer and other loans
   418    526    -






Total
   20,067    29,028    -






With a related allowance recorded:

Commercial and industrial
   189    191    3
SBA
   -        -        -
Real estate:

Commercial real estate

Owner occupied
   -        -        -
Non-owner occupied
   3,143    3,144    478
Construction

Speculative
   -        -        -
Non-speculative
   -        -        -
SFR mortgage
   -        -        -
Dairy & livestock and agribusiness
   78    78    12
Municipal lease finance receivables
   -        -        -
Consumer and other loans
   68    100    68






Total
   3,478    3,513    561






Total impaired loans
     $ 23,545      $ 32,541      $ 561








As of and For the Nine Months Ended
September 30, 2019

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
  $
1,382
  $
1,537
  $
-

  $
1,560
  $
4

SBA

2,447

3,554

-

2,606

31

Real estate:



Commercial real estate



Owner occupied

494

614

-

508

-

Non-owner
occupied

1,006

1,190

-

1,052

21

Construction





Speculative

-

-

-

-

-

Non-speculative

-

-

-

-

-

SFR mortgage

3,009

3,338

-

3,059

62

Dairy & livestock and agribusiness

-

-

-

-

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

385

516

-

401

-

Total

8,723

10,749

-

9,186

118

With a related allowance recorded:



Commercial and industrial

256

345

254

829

-

SBA

801

816

286

816

-

Real estate:





Commercial real estate







Owner occupied

-

-

-

-

-

Non-owner
occupied

-

-

-

-

-

Construction









Speculative

-

-

-

-

-

Non-speculative

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

-

-

-

-

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

-

-

-

-

-

Total

1,057

1,161

540

1,645

-

Total impaired loans
  $
9,780
  $
11,910
  $
540
  $
10,831
  $
118

25

Table of Contents

As of and For the Nine Months Ended
September
30, 2018 (1)

Recorded

Investment

Unpaid
Principal

Balance

Related

Allowance

Average
Recorded

Investment

Interest
Income

Recognized

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial

  $
3,168

  $
3,829

  $
-


  $
3,439

  $
6

SBA

3,593

5,779

-

4,457

34

Real estate:

Commercial real estate

Owner occupied

615

726

-

644

-

Non-owner
occupied

5,733

6,385

-

5,904

24

Construction

Speculative

-

-

-

-

-

Non-speculative

-

-

-

-

-

SFR mortgage

5,479

6,449

-

5,679

59

Dairy & livestock and agribusiness

775

1,091

-

808

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

737

1,025

-

867

-

Total

20,100

25,284

-

21,798

123

With a related allowance recorded:

Commercial and industrial

-

-

-

-

-

SBA

-

-

-

-

-

Real estate:

Commercial real estate

Owner occupied

-

-

-

-

-

Non-owner
occupied

-

-

-

-

-

Construction

Speculative

-

-

-

-

-

Non-speculative

-

-

-

-

-

SFR mortgage

13

13

13

13

-

Dairy & livestock and agribusiness

-

-

-

-

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

70

101

70

85

-

Total

83

114

83

98

-

Total impaired loans

  $
20,183

  $
25,398

  $
83

  $
21,896

  $
123

(1)

Excludes PCI loans.

2
6

Table of Contents

As of December 31, 2018 (1)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
  $



7,436
  $



11,457
  $





-


SBA

3,467

5,746

-

Real estate:

Commercial real estate

Owner occupied

589

705

-

Non-owner
occupied

2,808

4,324

-

Construction

Speculative

-

-

-

Non-speculative

-

-

-

SFR mortgage

5,349

6,270

-

Dairy & livestock and agribusiness

-

-

-

Municipal lease finance receivables

-

-

-

Consumer and other loans

418

526

-

Total

20,067

29,028

-

With a related allowance recorded:

Commercial and industrial

189

191

3

SBA

-

-

-

Real estate:

Commercial real estate

Owner occupied

-

-

-

Non-owner
occupied

3,143

3,144

478

Construction

Speculative

-

-

-

Non-speculative

-

-

-

SFR mortgage

-

-

-

Dairy & livestock and agribusiness

78

78

12

Municipal lease finance receivables

-

-

-

Consumer and other loans

68

100

68

Total

3,478

3,513

561

Total impaired loans
  $
23,545
  $
32,541
  $
561

(1) Excludes PCI loans.
The Company recognizes the
charge-off
of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of ~~March 31,~~September 30, 2019, December 31, 2018 and ~~March 31,~~September 30, 2018 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a
charge-off
is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance
non-collateral
dependent loans.
Reserve for Unfunded Loan Commitments
The allowance for
off-balance
sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the
off-balance
sheet loan commitments at the same time it
as i
t evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and nine months ended ~~March 31,~~September 30, 2019, and 2018. As of ~~March 31,~~September 30, 2019 and December 31, 2018, the balance in this reserve was $9.0 million and was included in other liabilities.
2
7

Table of Contents

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion regarding TDRs.

As of ~~March 31,~~September 30, 2019, there were ~~$3.6~~$3.4 million of loans classified as a TDR, of which ~~$3.3~~$3.2 million were performing and ~~$277,000~~$249,000 were nonperforming. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At ~~March 31,~~September 30, 2019, performing TDRs were comprised of ~~eight~~8 SFR mortgage loans of ~~$2.2~~$2.1 million, ~~one~~1 SBA loan of ~~$563,000, one~~$542,000, 1 commercial real estate loan of ~~$455,000,~~$417,000, and ~~two~~2 commercial and industrial loans of ~~$124,000.~~
$88,000.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated ~~zero~~0 and $490,000 of specific allowance to TDRs as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

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

   For the Three Months Ended
   March 31,
   2019    2018
   (Dollars in thousands)
Performing TDRs:

Beginning balance
   $ 3,594      $ 4,809
New modifications
   -    -
Payoffs/payments, net and other
   (295 )    (524 )
TDRs returned to accrual status
   -    -
TDRs placed on nonaccrual status
   -    -




Ending balance
     $ 3,299      $ 4,285




Nonperforming TDRs:

Beginning balance
     $ 3,509      $ 4,200
New modifications
   -    -
Charge-offs
   (78 )    -
Transfer to OREO
   (2,275 )    -
Payoffs/payments, net and other
   (879 )    (291 )
TDRs returned to accrual status
   -    -
TDRs placed on nonaccrual status
   -    -




Ending balance
     $ 277      $ 3,909




Total TDRs
     $ 3,576      $ 8,194




presented
.

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2019

2018 (1)

2019

2018 (1)

(Dollars in thousands)

(Dollars in thousands)
Performing TDRs:

Beginning balance
  $
3,219
  $
4,530
  $
3,594

  $

4,809

New modifications

-

-

-

311

Payoffs/payments, net and other

(51
)
(777
)
(426
)
(1,367
)
TDRs returned to accrual status

-

-

-

-

TDRs placed on nonaccrual status

-

-

-

-

Ending balance
  $
3,168
  $
3,753
  $
3,168
  $
3,753

Nonperforming TDRs:

Beginning balance
  $
263
  $
3,892
  $
3,509
  $
4,200

New modifications

-

278

-

316

Charge-offs

-

-

(78
)
-

Transfer to OREO

-

-

(2,275
)
-

Payoffs/payments, net and other

(14
)
(650
)
(907
)
(996
)
TDRs returned to accrual status

-

-

-

-

TDRs placed on nonaccrual status

-

-

-

-

Ending balance
  $

249
  $
3,520
  $

249
  $
3,520

Total TDRs
  $
3,417

  $

7,273

  $

3,417

  $

7,273

(1) Excludes PCI loans.
2
8

Table of Contents
There were no loans that were modified as TDRs ~~during~~
for
the three and nine months ended ~~March 31, 2019 and 2018.~~
AsSeptember 30, 2019.
The following tables summarize loans modified as TDRs for the periods presented.
Modifications (1)

For the Three Months Ended September 30, 201
8
(2)

Number of

Loans

Pre-Modification

Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

Outstanding
Recorded
Investment at
September 30,
2018

Financial Effect
Resulting From
Modifications (3)

(Dollars in thousands)

Commercial and industrial:

Interest rate reduction

-

   $
-

$
-

$
-

$
-

Change in amortization period

or maturity

-

-

-

-

-

Real estate:

Commercial real estate:

Owner occupied

Interest rate reduction

-

-

-

-

-

Change in amortization period

or maturity

-

-

-

-

-

Non-owner
occupied

Interest rate reduction

-

-

-

-

-

Change in amortization period

or maturity

-

-

-

-

-

SFR mortgage:

Interest rate reduction

-

-

-

-

-

Change in amortization period

or maturity

-

-

-

-

-

Consumer:

Interest rate reduction

        -

-

-

-

        -

Change in amortization period

or maturity

1

278

278

272

-

Total loans

1

  $
278

  $
278

  $
  272

  $
-

2
9

Table of ~~March 31, 2019 and 2018, there~~Contents

For the Nine Months Ended September 30, 2018 (2)

Number of
Loans


Pre-Modification

Outstanding
Recorded
Investment


Post-Modification

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment at
September 30,
2018

Financial Effect
Resulting From
  Modifications (3)

(Dollars in thousands)

Commercial and industrial:



   Interest rate reduction

-
  $
-
  $
-
  $
-
  $
-

   Change in amortization period or maturity

1

38

38

27

-

Real estate:





Commercial real estate:









Owner occupied











   Interest rate reduction

-

-

-

-

-

   Change in amortization period or maturity

-

-

-

-

-

Non-owner
occupied











   Interest rate reduction

-

-

-

-

-

   Change in amortization period or maturity

-

-

-

-

-

SFR mortgage:









   Interest rate reduction

-

-

-

-

-

   Change in amortization period or maturity

1

311

311

304

-

Consumer:





   Interest rate reduction

-

-

-

-

-

   Change in amortization period or maturity

1

278

278

272

-

  Total loans

3
  $
627
  $
627
  $
603
  $
-

(1) The tables above exclude modified loans that were paid off prior to the end of the period.
(2) Excludes PCI loans.
(3) Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.
There were no
0
loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and nine months ended ~~March 31,~~September 30, 2019 and ~~2018, respectively.~~
2018.
30

Table of Contents
8.7.
EARNINGS PER SHARE RECONCILIATION
Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and nine months ended ~~March 31,~~September 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 240,000 and 184,000, respectively. For the three and nine months ended September 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were ~~396,000~~56,000 and ~~16,000,~~50,000, respectively.
The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.

   For the Three Months
Ended March 31,
   2019    2018
   (In thousands, except per share amounts)
Earnings per common share:

Net earnings
     $ 51,642      $ 34,913
  Less: Net earnings allocated to restricted stock
   141    108




Net earnings allocated to common shareholders
     $ 51,501      $ 34,805




Weighted average shares outstanding
   139,615    109,859
Basic earnings per common share
     $ 0.37      $ 0.32




Diluted earnings per common share:

Net income allocated to common shareholders
   51,501    34,805




  Weighted average shares outstanding
   139,615    109,859
  Incremental shares from assumed exercise of outstanding options
   216    364




Diluted weighted average shares outstanding
   139,831    110,223
Diluted earnings per common share
     $ 0.37      $ 0.32




  For the Three Months
Ended

S
eptember
30,

  For the
Nine
Months
Ended

September
30,



2019



2018





2019





2018

(In thousands, except per share amounts)
Earnings per common share:

Net earnings
  $

50,423
  $

38,558
  $

156,546
  $

108,844

Less: Net earnings allocated to restricted stock

116

96

390

298

Net earnings allocated to common shareholders
  $
50,307
  $
38,462
  $
156,156
  $
108,546

Weighted average shares outstanding

139,824

126,574

139,730

115,533

Basic earnings per common share
  $
0.36
  $
0.30
  $
1.12
  $
0.94

Diluted earnings per common share:

Net income allocated to common shareholders

50,307

38,462

156,156

108,546

Weighted average shares outstanding

139,824

126,574

139,730

115,533

Incremental shares from assumed exercise of outstanding options

151

363

217

397

Diluted weighted average shares outstanding

139,975

126,937

139,947

115,930

Diluted earnings per common share
  $
0.36
  $
0.30
  $
1.12
  $
0.94

3
1

Table of Contents

8.	FAIR VALUE INFORMATION

Fair Value Hierarchy

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

The following disclosure provides the fair value information for financial assets and liabilities as of ~~March 31,~~September 30, 2019. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).
·
~~Level~~ 1~~– Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.~~
·
~~Level~~ 2– Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.
·
~~Level~~ 3– Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.

Level 1

– Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.

Level 2

– Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model
-
derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3

– Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.

There were no0 transfers in and out of Level 1 and Level 2 during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018.

3
2

Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis ~~for~~
as of
the ~~periods~~
dates
presented.

  Carrying Value at
March 31, 2019 Quoted Prices in
  Active Markets for
Identical Assets
(Level 1) Significant Other
  Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3)
(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $ 1,422,504   $ -   $ 1,422,504   $ -
CMO/REMIC - residential
205,125 - 205,125 -
Municipal bonds
45,085 - 45,085 -
Other securities
787 - 787 -

  Total investment securities - AFS
1,673,501 - 1,673,501 -
Interest rate swaps
4,418 - 4,418 -

Total assets
  $ 1,677,919   $ -   $ 1,677,919   $ -

Description of liability

Interest rate swaps
  $ 4,418   $ -   $ 4,418   $ -

Total liabilities
  $ 4,418   $ -   $ 4,418   $ -

Carrying Value at
December 31, 2018 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3)
(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $ 1,474,508   $ -   $ 1,474,508   $ -
CMO/REMIC - residential
214,051 - 214,051 -
Municipal bonds
44,810 - 44,810 -
Other securities
716 - 716 -

  Total investment securities - AFS
1,734,085 - 1,734,085 -
Interest rate swaps
1,938 - 1,938 -

Total assets
  $ 1,736,023   $ -   $ 1,736,023   $ -

Description of liability

Interest rate swaps
  $ 1,938   $ -   $ 1,938   $ -

Total liabilities
  $ 1,938   $ -   $ 1,938   $ -

  Carrying Value at

September 30, 2019

Quoted Prices in
  Active Markets for
Identical Assets
(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3)

(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $
1,146,159

  $
-

  $
1,146,159

  $
-

CMO/REMIC - residential

382,928

-

382,928

-

Municipal bonds

40,487

-

40,487

-

Other securities

832

-

832

-

Total investment securities - AFS

1,570,406

-

1,570,406

-

Interest rate swaps

16,180

-

16,180

-

Total assets
  $
1,586,586

  $

-

  $

1,586,586

  $

-

Description of liability

Interest rate swaps
  $
16,180

  $
-
  $
16,180
  $
-

Total liabilities
  $

16,180

  $
-
  $
16,180
  $
-

Carrying Value at
December 31, 2018

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $
  1,474,508
  $
-
  $
  1,474,508
  $
-

CMO/REMIC - residential

214,051

-

214,051

-

Municipal bonds

44,810

-

44,810

-

Other securities

716

-

716

-

  Total investment securities - AFS

1,734,085

-

1,734,085

-

Interest rate swaps

1,938

-

1,938

-

Total assets
  $
1,736,023
  $
-
  $
1,736,023
  $
-

Description of liability

Interest rate swaps
  $
1,938
  $
-
  $
1,938
  $
-

Total liabilities
  $
1,938
  $
-
  $
1,938
  $
-

3
3

Table of Contents

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

We may be required to measure certain assets at fair value on a
non-recurring
basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or impairment write-downs of individual assets.

For assets measured at fair value on a
non-recurring
basis that were held on the balance sheet at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

Carrying Value at
March 31, 2019 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) Total Losses
For the Three
Months Ended
March 31, 2019
(Dollars in thousands)
Description of assets

Impaired loans, excluding PCI loans:

Commercial and industrial
  $ 116   $ -   $ -   $ 116   $ 114
SBA
1,377 - - 1,377 338
Real estate:

Commercial real estate
- - - - -
Construction
- - - - -
SFR mortgage
- - - - -
Dairy & livestock and agribusiness
- - - - -
Consumer and other loans
- - - - -
Other real estate owned
- - - - -
Assetheld-for-sale
- - - - -

  Total assets
  $ 1,493   $ -   $ -   $ 1,493   $ 452

Carrying Value at
December 31, 2018 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) Total Losses For
the Year Ended
December 31, 2018
(Dollars in thousands)
Description of assets

Impaired loans, excluding PCI loans:

Commercial and industrial
  $ 189   $ -   $ -   $ 189   $ 3
SBA
- - - - -
Real estate:

Commercial real estate
3,143 - - 3,143 478
Construction
- - - - -
SFR mortgage
- - - - -
Dairy & livestock and agribusiness
78 - - 78 12
Consumer and other loans
68 - - 68 68
Other real estate owned
- - - - -
Assetheld-for-sale
- - - - -

  Total assets
  $ 3,478   $ -   $ -   $ 3,478   $ 561

Carrying Value at
September 30, 2019

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total Losses
For the Nine

Months Ended
September 30, 2019

(Dollars in thousands)

Description of assets

Impaired loans, excluding

PCI
loans:

Commercial and industrial
  $
256
  $
-
  $
-
  $
256
  $
254

SBA

938

-

-

938

516

Real estate:

Commercial real estate

-

-

-

-

-

Construction

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

-

-

-

-

-

Consumer and other loans

-

-

-

-

-

Other real estate owned

444

-

-

444

64

Asset
held-for-sale

-

-

-

-

-

  Total assets
  $
1,638
  $
-
  $
-
  $
1,638
  $
834

Carrying Value at
December 31, 2018

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total Losses For
the Year Ended
December 31, 2018

(Dollars in thousands)

Description of assets

Impaired loans, excluding

PCI
loans:

Commercial and industrial
  $
189

$
-
  $
-
  $
189
  $
3

SBA

-

-

-

-

-

Real estate:

Commercial real estate

3,143

-

-

3,143

478

Construction

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

78

-

-

78

12

Consumer and other loans

68

-

-

68

68

Other real estate owned

-

-

-

-

-

Asset
held-for-sale

-

-

-

-

-

  Total assets
  $
3,478
  $
-
  $
-
  $
3,478
  $
561

3
4

Table of Contents
Fair Value of Financial Instruments
The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate ~~valuation~~valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

March 31, 2019
Estimated Fair Value
Carrying
Amount Level 1 Level 2 Level 3 Total
(Dollars in thousands)
Assets

Total cash and cash equivalents
  $ 172,214 $ 172,214   $ -   $ -   $ 172,214
Interest-earning balances due from depository
institutions
7,420 - 7,228 - 7,228
Investment securitiesavailable-for-sale
1,673,501 - 1,673,501 - 1,673,501
Investment securitiesheld-to-maturity
733,464 - 720,651 - 720,651
Total loans, net of allowance for loan losses
7,541,662 - - 7,506,350 7,506,350
Swaps
4,418 - 4,418 - 4,418
Liabilities

Deposits:

Interest-bearing
  $ 3,555,298   $ -   $ 3,549,970   $ -   $ 3,549,970
Borrowings
615,774 - 615,186 - 615,186
Junior subordinated debentures
25,774 - - 21,016 21,016
Swaps
4,418 - 4,418 - 4,418
December 31, 2018
Estimated Fair Value
Carrying
Amount Level 1 Level 2 Level 3 Total
(Dollars in thousands)
Assets

Total cash and due from banks
  $ 163,948   $ 163,948   $ -   $ -   $ 163,948
Interest-earning balances due from depository
institutions
7,670 - 7,339 - 7,339
Investment securitiesavailable-for-sale
1,734,085 - 1,734,085 - 1,734,085
Investment securitiesheld-to-maturity
744,440 - 721,537 - 721,537
Total loans, net of allowance for loan losses
7,700,998 - - 7,514,964 7,514,964
Swaps
1,938 - 1,938 - 1,938
Liabilities

Deposits:

Interest-bearing
  $ 3,622,703   $ -   $ 3,614,682   $ -   $ 3,614,682
Borrowings
722,255 - 721,601 - 721,601
Junior subordinated debentures
25,774 - - 21,176 21,176
Swaps
1,938 - 1,938 - 1,938

September 30, 2019

Estimated Fair Value

Carrying
Amount

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Assets

Total cash and cash equivalents

  $
437,548

  $
437,548

  $
-

  $
-

  $
437,548

Interest-earning balances due from depository institutions

5,673

-

5,793

-

5,793

Investment securities
available-for-sale

1,570,406

-

1,570,406

-

1,570,406

Investment securities
held-to-maturity

703,953

-

711,891

-

711,891

Total loans, net of allowance for loan losses

7,425,779

-

-

7,385,760

7,385,760

Swaps

16,180

-

16,180

-

16,180

Liabilities

��

Deposits:

Interest-bearing

  $
3,409,226

  $
-

  $
3,407,573

  $
-

  $
3,407,573

Borrowings

412,764

-

412,372

-

412,372

Junior subordinated debentures

25,774

-

-

20,266

20,266

Swaps

16,180

-

16,180

-

16,180

December 31, 2018

Estimated Fair Value

Carrying
Amount

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Assets

Total cash and cash equivalents

  $
163,948

  $
163,948

  $
-

  $
-

  $
163,948

Interest-earning balances due from depository institutions

7,670

-

7,339

-

7,339

Investment securities
available-for-sale

1,734,085

-

1,734,085

-

1,734,085

Investment securities
held-to-maturity

744,440

-

721,537

-

721,537

Total loans, net of allowance for loan losses

7,700,998

-

-

7,514,964

7,514,964

Swaps

1,938

-

1,938

-

1,938

Liabilities

Deposits:

Interest-bearing

  $
3,622,703

  $
-

  $
3,614,682

  $
-

  $
3,614,682

Borrowings

722,255

-

721,601

-

721,601

Junior subordinated debentures

25,774

-

-

21,176

21,176

Swaps

1,938

-

1,938

-

1,938

The fair value estimates presented herein are based on pertinent information available to management as of ~~March 31,~~September 30, 2019 and December 31, 2018. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
3
5

~~10.~~

Table of Contents

9.	DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of ~~March 31,~~September 30, 2019, the Bank has entered into 7782 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. As a result of the Bank exceeding $10 billion in assets, federal regulations require the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. ~~None~~NaN of our derivative assets and liabilities are offset in the

Company’s condensed consolidated balance sheet.

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of ~~March 31,~~September 30, 2019 and December 31, 2018, the total notional amount of the Company’s swaps was ~~$213.5~~$227.2 million, and $195.4 million, respectively. The location of the asset and liability, and their respective fair values
,
are summarized in the tables below.

   March 31, 2019
   Asset Derivatives    Liability Derivatives
       Balance Sheet
Location    Fair
    Value            Balance Sheet
Location    Fair
    Value
   (Dollars in thousands)
Derivatives not designated as hedging instruments:

Interest rate swaps
   Other assets      $ 4,418      Other liabilities      $ 4,418




Total derivatives
        $ 4,418           $ 4,418




   December 31, 2018
   Asset Derivatives    Liability Derivatives
       Balance Sheet
Location    Fair
    Value            Balance Sheet
Location    Fair
    Value
   (Dollars in thousands)
Derivatives not designated as hedging instruments:

Interest rate swaps
   Other assets      $ 1,938      Other liabilities      $ 1,938




Total derivatives
        $ 1,938           $ 1,938

September 30, 2019

Asset Derivatives

Liability Derivatives

    Balance Sheet
Location

Fair
    Value

    Balance Sheet
Location

Fair
    Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets
  $
16,180

Other liabilities
  $
16,180

Total derivatives
  $
16,180

  $
16,180

December 31, 2018

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets
  $
1,938

Other liabilities
  $
1,938

Total derivatives
  $
1,938

  $
1,938

Table of Contents
The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings
The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.

Derivatives Not Designated as
Hedging Instruments
   Location of Gain Recognized in
  Income on Derivative Instruments        Amount of Gain Recognized in Income on
Derivative Instruments
      For the Three Months Ended
March 31,
      2019    2018
      (Dollars in thousands)
Interest rate swaps
   Other income      $ 384        $ 116




Total
        $ 384        $ 116




Derivatives Not
Designated as
Hedging
Instruments

  Location of Gain Recognized

in

Income on Derivative
Instruments

Amount of Gain Recognized in Income on
Derivative Instruments

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2019

2018

2019

2018

(Dollars in thousands)

Interest rate swaps

Other income
     $

378

  $

  73
  $

1,135

  $
  340


Total
  $
378
  $
73
  $
1,135
  $
340

~~11.~~10.
OTHER COMPREHENSIVE INCOME
The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.

For the Three Months Ended March 31,
2019 2018
Before-tax Tax effect After-tax Before-tax Tax effect After-tax
(Dollars in thousands)
Investment securities:

Net change in fair value recorded in accumulated OCI
  $ 19,350   $ (5,720 )   $ 13,630   $ (31,338 )   $ 9,265   $ (22,073 )
Amortization of unrealized losses on securities transferred fromavailable-for-sale toheld-to-maturity
(1,123 ) 332 (791 ) (832 ) 246 (586 )

    Net change
  $ 18,227   $ (5,388 )   $ 12,839   $ (32,170 )   $ 9,511   $   (22,659 )

For the Three Months Ended September 30,

2019

2018

Before-tax

Tax effect

After-tax

Before-tax

Tax effect

After-tax

(Dollars in thousands)
Investment securities:

Net change in fair value recorded in
accumulated OCI
$

5,672

$

(1,677
) $

3,995
$
  (10,235
) $
3,025
$
(7,210
)
Net realized gain reclassified into earnings (1)

(5)

1

(4
)

-

-

-

Amortization of unrealized losses on securities
transferred from

available-for-sale
to
held-to-maturity

(249
)
74

(175
)
(152)

45

(107
)

Net change
  $

5,418
  $

(1,602
)   $

3,816
  $

(10,387)
  $

3,070
  $

(7,317
)

For the Nine Months Ended September 30,

2019

2018

Before-tax

Tax effect

After-tax

Before-tax

Tax effect

After-tax

(Dollars in thousands)
Investment securities:

Net change in fair value recorded in
accumulated OCI
  $

44,586
  $
(13,181
)   $
31,405
  $
(47,346
)   $
  13,997
  $

  (33,349
)
Net realized gain reclassified into earnings (1)

(5
)
1

(4
)
-

-

-

Amortization of unrealized losses on securities
transferred from

available-for-sale
to
held-to-maturity

(1,450
)
429

(1,021
)
(1,809
)
535

(1,274
)

Net change
  $

43,131
  $

(12,751
)   $

30,380
  $

(49,155
)   $
14,532
  $
(34,623
)

~~12.~~

(1)

Included in other noninterest income.

Table of Contents

11.	BALANCE SHEET OFFSETTING

Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject tot
o
master netting arrangements. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to counterparties continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in
the
Company’s condensed consolidated balances.

Gross Amounts
Recognized in Gross Amounts
Offset in the Net Amounts of
Assets Presented Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
the Condensed
Consolidated
Balance Sheets Condensed
Consolidated
Balance Sheets in the Condensed
Consolidated
Balance Sheets Financial
Instruments Collateral
Pledged Net Amount
(Dollars in thousands)
March 31, 2019

Financial assets:

Derivatives not designated as hedging instruments
  $ 4,418   $ -   $ -   $ 4,418   $ -   $ 4,418

Total
  $ 4,418   $ -   $ -   $ 4,418   $ -   $ 4,418

Financial liabilities:

Derivatives not designated as hedging instruments
  $ 5,221   $ (803 )   $ 4,418   $ 803   $ (7,520 )   $ (2,299 )
Repurchase agreements
462,774 - 462,774 - (489,984 ) (27,210 )

Total
  $ 467,995   $ (803 )   $ 467,192   $ 803   $ (497,504 )   $ (29,509 )

December 31, 2018

Financial assets:

Derivatives not designated as hedging instruments
  $ 1,938   $ -   $ -   $ 1,938   $ -   $ 1,938

Total
  $ 1,938   $ -   $ -   $ 1,938   $ -   $ 1,938

Financial liabilities:

Derivatives not designated as hedging instruments
  $ 4,203   $ (2,265 )   $ 1,938   $ 2,265   $ -   $ 4,203
Repurchase agreements
442,255 - 442,255 - (487,607 ) (45,352 )

Total
  $ 446,458   $ (2,265 )   $ 444,193   $ 2,265   $ (487,607 )   $         (41,149 )

Gross Amounts
Recognized in
the Condensed
Consolidated
Balance Sheets

Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets

Net Amounts
Presented
in the

Condensed
Consolidated
Balance Sheets

Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets

Net Amount

Financial

Instruments

Collateral
Pledged

(Dollars in thousands)
September 30,

2019

Financial assets:

Derivatives not designated as
hedging instruments
  $
16,180
  $
-
  $
-
  $

16,180
$
-
  $
16,180

Total
  $
16,180
  $
-
  $
-
  $
16,180
$
-
  $
16,180

Financial liabilities:

Derivatives not designated as
hedging instruments
  $
16,182
  $
(2
)   $
16,180
  $
2
$
(22,335
)   $
(6,153
)
Repurchase agreements

407,850

-

407,850

-

(419,465
)
(11,615
)

Total
  $
424,032
  $
(2
)   $
424,030
  $
2
$
(441,800
)   $

(17,768
)

December 31, 2018

Financial assets:

Derivatives not designated as
hedging instruments
  $
1,938
  $
-
  $
-
  $
1,938
$
-
  $
1,938

Total
  $
1,938
  $
-
  $
-
  $
  1,938
$
-
  $
1,938

Financial liabilities:

Derivatives not designated as
hedging instruments
  $
4,203
  $
  (2,265
)   $
1,938
  $
2,265
$
-
  $
4,203

Repurchase agreements

442,255

-

442,255

-

(487,607
)
(45,352
)

Total
  $
  446,458
  $
  (2,265
)   $

  444,193
  $

2,265
$


(487,607
)   $
  (41,149
)

~~13.   LEASES~~

Table of Contents
12.
LEASES
The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The following presents the components of lease costs and supplemental information related to leases as of September 30, 2019 and for the three and nine months ended ~~March 31,~~September 30, 2019.
As of September 30, 2019
(Dollars in thousands)
Lease Assets and Liabilities
~~As of and For the~~
  ~~Three Months Ended~~
~~March 31, 2019~~
ROU assets
  $
17,340

~~(Dollars in thousands)~~
~~Lease Assets and Liabilities~~
~~ROU assets~~
  $ ~~19,809~~
Total lease liabilities
  $ ~~21,450~~
~~Lease Cost~~
~~Operating lease expense (1)~~
  $ ~~2,100~~
~~Sublease income~~
-
~~Total lease expense~~
  $ ~~2,100~~
~~Other Information~~
~~Cash paid for amounts included in the measurement of lease liabilities:~~
~~Operating cash outflows from operating leases~~
  $ ~~2,746~~
20,558

~~(1)~~
~~Includes short-term leases and variable lease costs, which are immaterial.~~
~~Lease Term and Discount Rate~~
~~As of March 31, 2019~~
~~Weighted average remaining lease term (years)~~
~~4.09~~
~~Weighted average discount rate~~
~~3.55%~~

For the
  Three Months Ended

For the
  Nine Months Ended

September 30, 2019

(Dollars in thousands)

Lease Cost

Operating lease expense (1)
  $
1,628
  $
5,634

Total lease expense
  $
1,628
  $
5,634

(1)
Includes short-term leases and variable lease costs, which are immaterial.

Other Information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflows from operating leases, net
  $
1,640
  $
6,499

Lease Term and Discount Rate

As of September 30, 2019

Weighted average remaining lease term (years)

4.26

Weighted average discount rate

3.46%

The Company’s lease arrangements that have not yet commenced as of ~~March 31,~~September 30, 2019 and the Company’s short-term lease costs and variable lease costs, for the three and nine months ended ~~March 31,~~September 30, 2019 are not material to the consolidated financial statements.
The future lease payments required for leases that have initial or remaining
non-cancelable
lease terms in excess of one year as of ~~March 31,~~September 30, 2019, excluding property taxes and insurance, are as follows:

   As of March 31, 2019
   (Dollars in thousands)
Year:

2019 (excluding the three months ended March 31, 2019)
     $ 6,083
2020
   6,109
2021
   4,360
2022
   3,091
2023
   1,488
Thereafter
   1,938


Total future lease payments
   23,069
Less: Imputed interest
   (1,619)


Present value of lease liabilities
     $ 21,450


~~14.   REVENUE RECOGNITION~~

As of September 30, 2019

(Dollars in thousands)

Year:

2019 (excluding the
nine
months ended
September
30, 2019)

  $

1,973

2020

6,941

2021

5,178

2022

4,005

2023

2,336

Thereafter

3,100

Total future lease payments

23,533

Less: Imputed interest

(2,975
)

Present value of lease liabilities
  $
20,558

39

Table of Contents
13.
REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASUNo.
2014-09 ~~“Revenue~~
“Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –
Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition
of the 2018 Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion about noninterest revenue streams that are ~~in scope~~
in-scope
of Topic 606.
The following presents noninterest income, segregated by revenue streams
in-scope
and
out-of-scope
of Topic 606, for the periods indicated.

   For the Three Months Ended
March 31,
   2019    2018
   (Dollars in thousands)
Noninterest income:

In-scope of Topic 606:

Service charges on deposit accounts
     $ 5,141      $ 4,045
Trust and investment services
   2,182    2,157
Bankcard services
   950    804
Gain on OREO, net
   105    3,540
Other
   2,044    1,391




Noninterest Income(in-scope of Topic 606)
   10,422    11,937
Noninterest Income(out-of-scope of Topic 606)
   5,881    979




Total noninterest income
     $ 16,303      $ 12,916




For the Three Months Ended
September 30,

For the Nine Months Months Ended
September 30,

2019

2018

2019

2018

(Dollars in thousands)

Noninterest income:

In-scope
of Topic 606:

Service charges on deposit accounts
  $
4,833
  $
4,295
  $
15,039
  $
12,431

Trust and investment services

2,330

2,182

6,964

6,738

Bankcard services

637

875

2,614

2,637

Gain on OREO, net

-

-

129

3,540

Other

2,292

1,824

6,939

4,393

Noninterest Income
(in-scope
of Topic 606)

10,092

9,176

31,685

29,739

Noninterest Income
(out-of-scope
of Topic 606)

1,802

936

14,717

2,984

Total noninterest income
  $
11,894
  $
10,112
  $
46,402
  $
32,723

40

Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned 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 ended December 31, 2018, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon ~~its~~the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
●
~~Allowance for Loan Losses (“ALLL”)~~
●
~~Business Combinations~~
●
~~Valuation and Recoverability of Goodwill~~
●
~~Income Taxes~~
Allowance for Loan Losses (“ALLL”)
Business Combinations
Valuation and Recoverability of Goodwill
Income Taxes
Our significant accounting policies are described in greater detail in our 2018 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, 2018, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
For the ~~first~~third quarter of 2019, we reported net earnings of ~~$51.6~~$50.4 million, compared with ~~$43.2~~$54.5 million for the ~~fourth~~second quarter of ~~2018~~2019 and ~~$34.9~~$38.6 million for the ~~first~~third quarter of 2018. Diluted earnings per share were ~~$0.37~~$0.36 for the ~~first~~third quarter, compared to ~~$0.31~~$0.39 for the prior quarter and ~~$0.32~~$0.30 for the same period last year. ~~Earnings for the first quarter of 2019 included $3.1 million in acquisition expense, compared to $8.5 million in the fourth quarter of 2018 and $803,000 in the first quarter of 2018.~~
At ~~March 31,~~September 30, 2019, total assets of ~~$11.30~~$11.33 billion decreased ~~$224.2~~$196.4 million, or ~~1.94%~~1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of ~~$10.04~~$10.01 billion at ~~March 31,~~September 30, 2019 decreased ~~$246.2~~$281.0 million, or ~~2.39%~~2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a ~~$157.7~~$270.2 million decrease in total loans and a ~~$71.6~~$204.2 million decrease in investment ~~securities.~~securities, partially offset by a $195.4 million increase in interest-earning balances due from the Federal Reserve. Our tax equivalent yield on interest-earnings assets was ~~4.62%~~4.55% for the quarter ended ~~March 31,~~September 30, 2019, compared to ~~4.58%~~4.72% for the ~~fourth~~second quarter of ~~2018~~2019 and ~~3.80%~~4.23% for the ~~first~~third quarter of 2018.
Total investment securities were ~~$2.41~~$2.27 billion at ~~March 31,~~September 30, 2019, a decrease of ~~$71.6~~$204.2 million, or ~~2.89%~~8.24%, from $2.48 billion at December 31, 2018. At ~~March 31,~~September 30, 2019, investment securities
held-to-maturity
(“HTM”) totaled ~~$733.5~~$704.0 million. At ~~March 31,~~September 30, 2019, investment securities
available-for-sale
(“AFS”) totaled ~~$1.67~~$1.57 billion, inclusive of a
pre-tax
unrealized ~~loss~~gain of ~~$4.2~~$21.0 million. HTM securities declined by ~~$11.0~~$40.5 million, or ~~1.47%~~5.44%, and AFS securities declined by ~~$60.6~~$163.7 million, or ~~3.49%~~9.44%, from December 31, 2018. Our tax equivalent yield on investments was ~~2.57%~~2.47% for the quarter ended ~~March 31,~~September 30, 2019, compared to ~~2.55%~~2.53% for the ~~fourth~~second quarter of ~~2018~~2019 and ~~2.41%~~2.49% for the ~~first~~third quarter of 2018.
41
Table of Contents
Total loans and leases, net of deferred fees and discounts, of ~~$7.61~~$7.49 billion at ~~March 31,~~September 30, 2019 decreased by ~~$157.7~~$270.2 million, or ~~2.03%~~3.48%, from December 31, 2018. The decrease in total loans included ~~a $75.7~~an $89.2 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy & livestock loans, total loans declined by ~~$82.0~~$181.9 million, or ~~1.11%~~2.45%. The decrease in total loans included declines of ~~$45.0~~$81.1 million in commercial and industrial loans, ~~and $12.1~~$33.0 million in ~~Small Business Administration (“SBA”)~~commercial real estate loans, $31.7 million in SBA loans, $18.0 million in SFR mortgage loans, and $11.5 million in consumer and other loans. Our yield on loans was ~~5.27%~~5.23% for the quarter ended ~~March 31,~~September 30, 2019, compared to ~~5.22%~~5.40% for the ~~fourth~~second quarter of ~~2018~~2019 and ~~4.67%~~4.99% for the ~~first~~third quarter of 2018. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was ~~$7.2~~$7.3 million for the quarter ended ~~March 31,~~September 30, 2019, compared to ~~$8.5~~$9.4 million for the ~~fourth~~second quarter of ~~2018~~2019 and ~~$2.3~~$4.9 million for the ~~first~~third quarter of 2018.
Noninterest-bearing deposits were ~~$5.10~~$5.39 billion at ~~March 31,~~September 30, 2019, ~~a decrease~~an increase of ~~$106.0~~$180.3 million, or ~~2.04%~~3.46%, when compared to December 31, 2018. At ~~March 31,~~September 30, 2019, noninterest-bearing deposits were ~~58.92%~~61.23% of total deposits, compared to 58.96% at December 31, 2018. Our average cost of total deposits was ~~0.18%~~0.21% for the quarter ended ~~March 31,~~September 30, 2019, compared to ~~0.16%~~0.19% for the ~~fourth~~second quarter of ~~2018~~2019 and ~~0.09%~~0.15% for the ~~first~~third quarter of 2018.
Customer repurchase agreements totaled ~~$462.8~~$407.9 million at ~~March 31,~~September 30, 2019, compared to $442.3 million at December 31, 2018. Our average cost of total deposits including customer repurchase agreements was ~~0.20%~~0.22% for the quarter ended ~~March 31,~~September 30, 2019, ~~compared to 0.17%~~0.20% for the ~~fourth~~second quarter of ~~2018~~2019, and ~~0.11%~~0.15% for the ~~first~~third quarter of 2018.
At ~~March 31,~~September 30, 2019, we had ~~$153.0~~$4.9 million in ~~short-term~~other borrowings compared to $280.0 million at December 31, 2018. At ~~March 31,~~September 30, 2019, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2018. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Our average cost of funds was ~~0.25%~~0.23% for the quarter ended ~~March 31,~~September 30, 2019, ~~compared to 0.19%~~0.25% for the ~~fourth~~second quarter of ~~2018~~2019, and ~~0.12%~~0.18% for the ~~first~~third quarter of 2018.
The allowance for loan losses totaled ~~$65.2~~$68.7 million at ~~March 31,~~September 30, 2019, compared to $63.6 million at December 31, 2018. The allowance for loan losses for the first ~~quarter~~nine months of 2019 was increased by ~~$1.5~~$5.0 million in provision for loan losses and ~~$88,000~~$59,000 in net recoveries. The allowance for loan losses was ~~0.86%~~0.92% and 0.82% of total loans and leases outstanding, at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. ~~The ratio as~~As of ~~the most recent three quarters was impacted by the $2.73 billion in~~September 30, 2019, credit related discounts on acquired loans ~~acquired from Community Bank (“CB”) that are recorded at fair market value, without a corresponding loan loss allowance.~~
were $37.0 million.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of ~~March 31,~~September 30, 2019, the Company’s Tier 1 leverage capital ratio totaled ~~11.38%~~12.23%, our common equity Tier 1 ratio totaled ~~13.76%~~14.64%, our Tier 1 risk-based capital ratio totaled ~~14.05%~~14.93%, and our total risk-based capital ratio totaled ~~14.90%~~15.83%. Refer to our
Analysis of Financial Condition – Capital Resources
.
Recent Acquisition
On August 10, 2018, we completed the acquisition of CB with approximately $4.09 billion in total assets and 16 banking centers. The total assets acquired from CB included ~~$2.73~~$2.74 billion of acquired loans, net of an ~~$86.7~~$82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately ~~$550.0~~$547.1 million of goodwill and $52.2 million in core deposit premium. At the close of the merger, the entire CB security portfolio was liquidated at fair market value, as was $297.6 million of FHLB term advances and $166.0 million of overnight borrowings assumed from CB. ~~These fair values are estimates~~The assets acquired and ~~are subject to adjustment~~liabilities assumed have been accounted for ~~up to one year after~~under the acquisition ~~date or when additional information relative to~~method of accounting. The change in goodwill resulted from finalizing the ~~closing date fair values becomes available and such information is considered final, whichever is earlier. As the initial estimate of~~ fair value of impaired ~~loans~~loans. The purchase price allocation was ~~incomplete as of March 31, 2019, the fair value reflected~~finalized in the ~~financial statements has been determined provisionally.~~
second quarter of 2019. The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers were consolidated into CBB banking centers.
We have included the financial results of the business combination in the consolidated statement of earnings and comprehensive income beginning on the acquisition date.
42

Table of Contents
ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance

   For the Three Months Ended
March 31,    Variance
   2019    2018    $    %
   (Dollars in thousands, except per share amounts)
Net interest income
     $     109,536      $ 70,521      $ 39,015      55.32%
(Provision for) recapture of provision for loan losses
   (1,500 )    1,000    (2,500)    -250.00%
Noninterest income
   16,303    12,916    3,387      26.22%
Noninterest expense
   (51,604 )    (35,946 )    (15,658)    -43.56%
Income taxes
   (21,093 )    (13,578 )    (7,515)    -55.35%







Net earnings
     $ 51,642      $ 34,913      $ 16,729      47.92%







Earnings per common share:

Basic
     $ 0.37      $ 0.32      $ 0.05
Diluted
     $ 0.37      $ 0.32      $ 0.05
Return on average assets
   1.84%    1.71%    0.13%
Return on average shareholders’ equity
   11.14%    13.02%    -1.88%
Efficiency ratio
   41.01%    43.08%    -2.07%
Noninterest expense to average assets
   1.83%    1.77%    0.06%
   For the Three Months Ended    Variance
   March 31,
2019    December 31,
2018    $    %
   (Dollars in thousands, except per share amounts)
Net interest income
     $ 109,536      $ 113,016      $ (3,480)    -3.08%
Provision for loan losses
   (1,500 )    (3,000 )    1,500      50.00%
Noninterest income
   16,303    10,758    5,545      51.54%
Noninterest expense
   (51,604 )    (60,831 )    9,227      15.17%
Income taxes
   (21,093 )    (16,784 )    (4,309)    -25.67%







Net earnings
     $ 51,642      $ 43,159      $ 8,483      19.66%







Earnings per common share:

Basic
     $ 0.37      $ 0.31      $ 0.06
Diluted
     $ 0.37      $ 0.31      $ 0.06
Return on average assets
   1.84%    1.49%    0.35%
Return on average shareholders’ equity
   11.14%    9.29%    1.85%
Efficiency ratio
   41.01%    49.15%    -8.14%
Noninterest expense to average assets
   1.83%    2.10%    -0.27%

For the Three Months Ended

Variance

September 30,
2019

June 30,
2019

$

%

(Dollars in thousands, except per share amounts)

Net interest income
  $
     108,159
  $
111,057
  $
(2,898)

-2.61%

Provision for loan losses

(1,500
)
(2,000
)
500

25.00%

Noninterest income

11,894

18,205

(6,311)

-34.67%

Noninterest expense

(47,535
)
(50,528
)
2,993

5.92%

Income taxes

(20,595
)
(22,253
)
1,658

7.45%

Net earnings
  $
50,423
  $
54,481
  $
(4,058)

-7.45%

Earnings per common share:

Basic
  $
0.36
  $
0.39
  $
(0.03)

Diluted
  $
0.36
  $
0.39
  $
(0.03)

Return on average assets

1.78%

1.95%

-0.17%

Return on average shareholders’ equity

10.18%

11.38%

-1.20%

Efficiency ratio

39.60%

39.09%

0.51%

Noninterest expense to average assets

1.68%

1.81%

-0.13%

~~Reconciliations~~

For the Three Months Ended

For the Nine Months Ended

September 30,

Variance

September 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands, except per share amounts)

Net interest income
  $
108,159
  $
92,820
  $
15,339

16.53%
  $
328,752
  $
236,029
  $
92,723

39.28%

(Provision for) recapture of provision for loan losses

(1,500)

(500)

(1,000)

-200.00%

(5,000)

1,500

(6,500)

-433.33%

Noninterest income

11,894

10,112

1,782

17.62%

46,402

32,723

13,679

41.80%

Noninterest expense

(47,535)

(48,880)

1,345

2.75%

(149,667)

(119,080)

(30,587)

-25.69%

Income taxes

(20,595)

(14,994)

(5,601)

-37.35%

(63,941)

(42,328)

(21,613)

-51.06%

Net earnings
  $
50,423
  $
38,558
  $
11,865

30.77%
  $
156,546
  $
108,844
  $
47,702

43.83%

Earnings per common share:

Basic
  $
0.36
  $
0.30
  $
0.06
  $
1.12
  $
0.94
  $
0.18

Diluted
  $
0.36
  $
0.30
  $
0.06
  $
1.12
  $
0.94
  $
0.18

Return on average assets

1.78%

1.52%

0.26%

1.86%

1.65%

0.21%

Return on average shareholders’ equity

10.18%

10.17%

0.01%

10.89%

11.86%

-0.97%

Efficiency ratio

39.60%

47.49%

-7.89%

39.89%

44.31%

-4.42%

Noninterest expense to average assets

1.68%

1.93%

-0.25%

1.77%

1.80%

-0.03%

43

Table of ~~Adjusted Efficiency Ratio and Noninterest Expense to Average Assets Ratio(Non-GAAP)~~
~~We use certainnon-GAAP~~ financial measures to provide supplemental information regarding our performance. Noninterest expense for the three months ended March 31, 2019 and 2018 included acquisition related expenses of $3.1 million and $803,000, respectively. We believe that presenting the efficiency ratio and noninterest expense to average assets ratio, excluding acquisition expenses, provides additional clarity to the users of financial statements regarding core net income.

   For the Three Months Ended
March 31,
   2019 2018
   (Dollars in thousands)
Total noninterest expense
     $ 51,604   $ 35,946
Acquisition related expenses
   (3,149 ) (803 )


Adjusted total noninterest expense, excluding acquisition expenses
     $ 48,455   $ 35,143


Net interest income before provision for (recapture of) loan losses
     $ 109,536   $ 70,521
Total noninterest income
   16,303 12,916
Average total assets
   11,408,254 8,256,380
Efficiency ratio (1)
   41.01% 43.08%
Adjusted efficiency ratio, excluding acquisition expenses
   38.51% 42.12%
Noninterest expense to average assets, annualized
   1.83% 1.77%
Adjusted noninterest expense to average assets, excluding acquisition expenses, annualized
   1.72% 1.73%
~~(1)~~
~~Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.~~
Contents
~~Reconciliations of Adjusted Yield on Average Loans, Yield on Average Earning Assets and Net Interest Margin(Non-GAAP)~~
~~We use certainnon-GAAP~~ financial measures to provide supplemental information regarding our performance. Net interest income for the three months ended March 31, 2019 and 2018 included a yield adjustment of $7.2 million and $2.3 million, respectively. These yield adjustments relate to discount accretion on acquired loans and nonrecurring nonaccrual interest paid, which are included in the Company’s net interest margin. We believe that presenting net interest income and the net interest margin excluding these yield adjustments provides additional clarity to the users of financial statements regarding core net interest income and net interest margin.

   For the Three Months Ended
March 31,
   2019    2018
   (Dollars in thousands)
Yield on Average Loans

Loan interest income
     $ 99,687        $ 55,196
Less: Discount accretion on acquired loans
   (7,200)    (1,523)
Less: Nonrecurring nonaccrual interest paid
   -          (762)




Adjusted loan interest income
     $ 92,487        $ 52,911




Average loans and lease finance receivables, net of discount on acquired loans
     $ 7,662,573        $ 4,789,943
Add: Average discount on acquired loans
   77,625      9,168




Average gross loans and lease finance receivables
     $ 7,740,198        $ 4,799,111




Yield on average loans
   5.27%    4.67%
Adjusted yield on average loans
   4.84%    4.47%
Yield on Average Earning Assets (TE)

Total interest income (TE)
     $ 115,738        $ 73,228
Less: Discount accretion on acquired loans
   (7,200)    (1,523)
Less: Nonrecurring nonaccrual interest paid
   -          (762)




Adjusted total interest income (TE)
     $ 108,538        $ 70,943




Average total interest-earning assets
       $ 10,135,176        $ 7,792,552
Add: Average discount on acquired loans
   77,625      9,168




Adjusted average total interest-earning assets
     $ 10,212,801        $ 7,801,720




Yield on average earning assets (TE)
   4.62%    3.80%
Adjusted yield on average earning assets (TE)
   4.30%    3.67%
Net Interest Margin (TE)

Net interest income (TE)
     $ 109,991        $ 71,052
Less: Discount accretion on acquired loans
   (7,200)    (1,523)
Less: Nonrecurring nonaccrual interest paid
   -          (762)




Adjusted net interest income (TE)
     $ 102,791        $ 68,767




Average total interest-earning assets
     $ 10,135,176        $ 7,792,552
Add: Average discount on acquired loans
   77,625      9,168




Adjusted average total interest-earning assets
     $ 10,212,801        $ 7,801,720




Net interest margin (TE)
   4.39%    3.68%
Adjusted net interest margin (TE)
   4.07%    3.56%
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.

   For the Three Months Ended
March 31,
   2019    2018
   (Dollars in thousands)
Net Income
     $ 51,642        $ 34,913
Add: Amortization of intangible assets
   2,857      331
Less: Tax effect of amortization of intangible assets (1)
   (845)    (98)




Tangible net income
   53,654      35,146




Average stockholders’ equity
     $ 1,879,685        $ 1,087,273
Less: Average goodwill
   (666,539)    (116,564)
Less: Average intangible assets
   (52,777)    (6,722)




Average tangible common equity
     $ 1,160,369        $ 963,987




Return on average equity, annualized
   11.14%    13.02%
Return on average tangible common equity, annualized
   18.75%    14.79%

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

(Dollars in thousands)

Net Income
  $
50,423
  $
38,558
  $
156,546
  $
108,844

Add: Amortization of intangible assets

2,648

1,736

8,338

2,395

Less: Tax effect of amortization of intangible assets (1)

(783)

(513)

(2,465)

(708)

Tangible net income
  $
52,288
  $
39,781
  $
162,419
  $
110,531

Average stockholders’ equity
  $
1,965,427
  $
1,503,643
  $
1,921,981
  $
1,226,848

Less: Average goodwill

(663,707)

(419,418)

(665,470)

(218,625)

Less: Average intangible assets

(46,720)

(34,811)

(49,682)

(16,078)

Average tangible common equity
  $
1,255,000
  $
1,049,414
  $
1,206,829
  $
992,145

Return on average equity, annualized

10.18
%
10.17
%
10.89
%
11.86
%
Return on average tangible common equity, annualized

16.53
%
15.04
%
17.99
%
14.89
%
(1)
Tax effected at respective statutory rates.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018. 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.
44
Table of Contents
The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.

   For the Three Months Ended March 31,
   2019    2018
   Average
Balance    Interest    Yield/
Rate    Average
Balance    Interest    Yield/
Rate
   (Dollars in thousands)
INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale securities:

Taxable
     $ 1,654,324      $ 10,309    2.49%      $ 1,979,056      $ 11,445    2.31%
Tax-advantaged
   44,380    336    4.07%    55,135    423    4.06%
Held-to-maturity securities:

Taxable
   509,608    2,910    2.30%    554,774    2,878    2.08%
Tax-advantaged
   227,908    1,615    3.43%    257,180    1,887    3.55%
Investment in FHLB stock
   17,688    332    7.61%    17,688    332    7.61%
Interest-earning deposits with other institutions
   18,695    94    2.04%    138,776    536    1.54%
Loans (2)
   7,662,573    99,687    5.27%    4,789,943    55,196    4.67%









Total interest-earning assets
   10,135,176    115,283    4.62%    7,792,552    72,697    3.80%
Total noninterest-earning assets
   1,273,078          463,828





Total assets
     $ 11,408,254            $ 8,256,380





INTEREST-BEARING LIABILITIES

Savings deposits (3)
     $ 3,127,839    2,685    0.35%      $ 2,291,208    1,273    0.23%
Time deposits
   524,822    1,186    0.92%    377,352    252    0.27%









Total interest-bearing deposits
   3,652,661    3,871    0.43%    2,668,560    1,525    0.23%
FHLB advances, other borrowings, and customer repurchase agreements
   691,965    1,876    1.09%    583,260    651    0.45%









Interest-bearing liabilities
   4,344,626    5,747    0.54%    3,251,820    2,176    0.27%









Noninterest-bearing deposits
   5,085,764          3,856,254
Other liabilities
   98,179          61,033
Stockholders’ equity
   1,879,685          1,087,273





Total liabilities and stockholders’ equity
     $   11,408,254            $   8,256,380





Net interest income
        $     109,536            $ 70,521





Net interest spread - tax equivalent
         4.08%          3.53%
Net interest margin
         4.37%          3.66%
Net interest margin - tax equivalent
         4.39%          3.68%

For the Three Months Ended September 30,

2019

2018

Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate

(Dollars in thousands)
INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale
securities:

Taxable
  $
1,505,087
  $
8,949

2.38%
  $
1,863,399
  $
11,126

2.39%

Tax-advantaged

40,189

273

3.75%

55,020

395

3.86%

Held-to-maturity
securities:

Taxable

506,203

2,883

2.28%

527,688

2,961

2.24%

Tax-advantaged

205,996

1,415

3.32%

237,933

1,705

3.47%

Investment in FHLB stock

17,688

301

6.75%

24,645

329

5.30%

Interest-earning deposits with other institutions

174,119

946

2.16%

63,572

304

1.90%

Loans (2)

7,495,289

98,796

5.23%

6,350,240

79,818

4.99%

Total interest-earning assets

9,944,571

113,563

4.55%

9,122,497

96,638

4.23%

Total noninterest-earning assets

1,269,845

935,028

Total assets
  $
11,214,416
  $
10,057,525

INTEREST-BEARING LIABILITIES

Savings deposits (3)
  $
2,991,330

3,501

0.46%
  $
2,850,169

2,101

0.29%

Time deposits

473,347

1,088

0.91%

503,649

866

0.68%

Total interest-bearing deposits

3,464,677

4,589

0.53%

3,353,818

2,967

0.35%

FHLB advances, other borrowings, and customer repurchase agreements

446,087

815

0.72%

478,538

851

0.70%

Interest-bearing liabilities

3,910,764

5,404

0.55%

3,832,356

3,818

0.39%

Noninterest-bearing deposits

5,227,595

4,651,127

Other liabilities

110,630

70,399

Stockholders’ equity

1,965,427

1,503,643

Total liabilities and stockholders’ equity
  $
   11,214,416
  $
   10,057,525

Net interest income
  $
     108,159
  $
92,820

Net interest spread - tax equivalent

4.00%

3.84%

Net interest margin

4.32%

4.04%

Net interest margin - tax equivalent

4.34%

4.06%

(1)
Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended ~~March 31,~~September 30, 2019 and 2018. The non TE rates were ~~2.49%~~2.40% and ~~2.34%~~2.41% for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively.
(2)
Includes loan fees of ~~$827,000~~$782,000 and ~~$896,000~~$865,000 for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively. Prepayment penalty fees of $1.0 million and ~~$534,000~~$674,000 are included in interest income for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively.
(3)
Includes interest-bearing demand and money market accounts.
45
Table of Contents

For the Nine Months Ended September 30,

2019

2018

Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate

(Dollars in thousands)
INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale
securities:

Taxable
  $
1,582,902
  $
29,079

2.45%
  $
1,920,942
  $
33,861

2.36%

Tax-advantaged

42,746

906

3.87%

54,517

1,225

3.99%

Held-to-maturity
securities:

Taxable

509,247

8,725

2.29%

540,952

8,887

2.19%

Tax-advantaged

216,343

4,524

3.37%

246,270

5,351

3.50%

Investment in FHLB stock

17,688

931

7.04%

20,032

959

6.40%

Interest-earning deposits with other institutions

70,848

1,140

2.15%

115,200

1,475

1.71%

Loans (2)

7,571,502

300,326

5.30%

5,312,557

192,382

4.84%

Total interest-earning assets

10,011,276

345,631

4.63%

8,210,470

244,140

4.00%

Total noninterest-earning assets

1,269,160

626,966

Total assets
  $
11,280,436
  $
8,837,436

INTEREST-BEARING LIABILITIES

Savings deposits (3)
  $
3,047,444

9,159

0.40%
  $
2,460,390

4,667

0.25%

Time deposits

497,370

3,394

0.91%

416,754

1,374

0.44%

Total interest-bearing deposits

3,544,814

12,553

0.47%

2,877,144

6,041

0.28%

FHLB advances, other borrowings, and customer repurchase agreements

573,633

4,326

1.00%

507,755

2,070

0.54%

Interest-bearing liabilities

4,118,447

16,879

0.55%

3,384,899

8,111

0.32%

Noninterest-bearing deposits

5,136,233

4,158,365

Other liabilities

103,775

67,324

Stockholders’ equity

1,921,981

1,226,848

Total liabilities and stockholders’ equity
  $
   11,280,436
  $
   8,837,436

Net interest income
  $
     328,752
  $
236,029

Net interest spread - tax equivalent

4.08%

3.68%

Net interest margin

4.39%

3.84%

Net interest margin - tax equivalent

4.41%

3.87%

(1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 2019 and 2018. The non TE rates were 2.45% and 2.38% for the nine months ended September 30, 2019 and 2018, respectively.
(2) Includes loan fees of $2.3 million and $2.6 million for the nine months ended September 30, 2019 and 2018, respectively. Prepayment penalty fees of $3.4 million and $2.1 million are included in interest income for the nine months ended September 30, 2019 and 2018, respectively.
(3) Includes interest-bearing demand and money market accounts.
46
Table of Contents
The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

   Comparison of Three Months Ended March 31,

2019 Compared to 2018

Increase (Decrease) Due to
       Volume     Rate Rate/
    Volume         Total
   (Dollars in thousands)
Interest income:

Available-for-sale securities:

Taxable investment securities
     $ (1,877 )   $ 887   $ (146 )   $ (1,136 )
Tax-advantaged investment securities
   (81 ) (5 ) (1 ) (87 )
Held-to-maturity securities:

Taxable investment securities
   (249 ) 308 (27 ) 32
Tax-advantaged investment securities
   (204 ) (61 ) (7 ) (272 )
Investment in FHLB stock
   - - - -
Interest-earning deposits with other institutions
   (465 ) 172 (149 ) (442 )
Loans
   33,085 7,130 4,276 44,491


Total interest income
   30,209 �� 8,431 3,946 42,586


Interest expense:

Savings deposits
   465 694 253 1,412
Time deposits
   98 601 235 934
FHLB advances, other borrowings, and customer repurchase agreements
   123 929 173 1,225


Total interest expense
   686 2,224 661 3,571


Net interest income
     $ 29,523   $ 6,207   $ 3,285   $ 39,015


~~First~~


Comparision of Three Months Ended September 30,

2019 Compared to 2018

Increase (Decrease) Due to

    Volume

Rate

Rate/
    Volume

    Total

(Dollars in thousands)

Interest income:

Available-for-sale
securities:

Taxable investment securities
  $
(2,122
)   $
(46
)   $
(9
)   $
(2,177
)
Tax-advantaged
investment securities

(98
)
(19
)
(5
)
(122
)
Held-to-maturity
securities:

Taxable investment securities

(120
)
44

(2
)
(78
)
Tax-advantaged
investment securities

(215
)
(66
)
(9
)
(290
)
Investment in FHLB stock

(93
)
91

(26
)
(28
)
Interest-earning deposits with other institutions

529

41

72

642

Loans

14,389

3,888

701

18,978

Total interest income

12,270

3,933

722

16,925

Interest expense:

Savings deposits

104

1,235

61

1,400

Time deposits

(52
)
292

(18
)
222

FHLB advances, other borrowings, and customer repurchase agreements

(56
)
21

(1
)
(36
)

Total interest expense

(4
)
1,548

42

1,586

Net interest income
  $
12,274
  $
2,385
  $
680
  $
15,339

Comparision of Nine Months Ended September��30,

2019 Compared to 2018

Increase (Decrease) Due to

    Volume

    Rate

Rate/
    Volume

    Total

(Dollars in thousands)

Interest income:

Available-for-sale
securities:

Taxable investment securities
  $
(5,894
)   $
1,346
  $
(234
)   $
(4,782
)
Tax-advantaged
investment securities

(264
)
(70
)
15

(319
)
Held-to-maturity
securities:

Taxable investment securities

(583
)
447

(26
)
(162
)
Tax-advantaged
investment securities

(651
)
(201
)
25

(827
)
Investment in FHLB stock

(114
)
97

(11
)
(28
)
Interest-earning deposits with other institutions

(567
)
378

(146
)
(335
)
Loans

81,793

18,349

7,802

107,944

Total interest income

73,720

20,346

7,425

101,491

Interest expense:

Savings deposits

1,113

2,728

651

4,492

Time deposits

266

1,470

284

2,020

FHLB advances, other borrowings, and customer repurchase agreements

271

1,757

228

2,256

Total interest expense

1,650

5,955

1,163

8,768

Net interest income
  $
72,070
  $
14,391
  $
6,262
  $
92,723

47

Table of Contents
Third Quarter of 2019 Compared to the ~~First~~Third Quarter of 2018
Net interest income, before provision ~~(recapture of)~~ for loan losses, of ~~$109.5~~$108.2 million for the ~~first~~third quarter of 2019 increased ~~$39.0~~$15.3 million, or ~~55.32%~~16.53%, compared to ~~$70.5~~$92.8 million for the ~~first~~third quarter of 2018. Interest-earning assets increased on average by ~~$2.34 billion,~~$822.1 million, or ~~30.06%~~9%, from ~~$7.79~~$9.12 billion for the ~~first~~third quarter of 2018 to ~~$10.14~~$9.94 billion for the ~~first~~third quarter of 2019. The growth in interest-earning assets was primarily the result of loan growth from the acquisition of CB. Our net interest margin (TE) was ~~4.39%~~4.34% for the ~~first~~third quarter of 2019, compared to ~~3.68%~~4.06% for the first quarter of 2018. The net interest margin for the first quarter of 2019 grew by 71 basis points over the first quarter of 2018. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.2 million for the first quarter of 2019, which was $4.9 million greater than the first quarter of 2018. Our adjusted net interest margin (TE) for the first quarter grew by 51 basis points over the firstthird quarter of 2018. The increase in our ~~adjusted~~ net interest margin was primarily due to a 6332 basis point increase in our ~~adjusted~~ average yield on interest-earning assets (TE), which resulted from a 3824 basis point increase in our ~~adjusted~~ loan yield and an increase in loans as a percentage of our average ~~earnings.~~
earning assets. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.3 million for the third quarter of 2019, compared to $4.9 million for the third quarter of 2018.
Interest income for the ~~first~~third quarter of 2019 was ~~$115.3~~$113.6 million, which represented a ~~$42.6~~$16.9 million, or ~~58.58%~~17.51%, increase when compared to the same period of 2018. Average interest-earning assets increased by ~~$2.34 billion~~$822.1 million and the average interest-earning asset yield of ~~4.62%~~4.55%, ~~increased by 82 basis points~~ compared to 4.23% for the ~~first~~third quarter of 2018. The 8232 basis point increase in the interest-earning asset yield over the ~~first~~third quarter of 2018 resulted from the combination of a 6024 basis point increase in loan ~~yields, a 16 basis point increase in investment~~ yields and the change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets from ~~61.5%~~69.6% in the ~~first~~third quarter of 2018 to ~~75.6%~~75.4% in the ~~first~~third quarter of 2019. Conversely, average investment securities declined as a percentage of earning assets from ~~36.5%~~29.4% in the prior year to ~~24.0%~~22.7% in the ~~first~~third quarter of 2019.
Interest income and fees on loans for the ~~first~~third quarter of 2019 of ~~$99.7~~$98.8 million increased ~~$44.5~~$19.0 million, or ~~80.61%~~23.78%, when compared to the ~~first~~third quarter of 2018 primarily due to loans acquired from CB. Average loans increased ~~$2.87~~$1.15 billion for the ~~first~~third quarter of 2019 when compared with the same period of 2018. As a result of higher levels of discount accretion on acquired CB loans and nonaccrual interest paid, ~~first~~third quarter interest income increased by ~~$4.9~~$2.5 million in comparison to the ~~first~~third quarter of 2018. Also contributing to the 6024 basis point increase in loan yield were increases in the rate on loans indexed to variable interest rates, such as the Bank’s ~~Prime~~prime rate, which increased by ~~0.75%~~0.25% when compared to the end of ~~first~~third quarter of 2018. ~~Excluding discount accretion on acquired loans and nonaccrual interest paid, our loan yields grew by 38 basis points over the prior year.~~
Interest income from investment securities was ~~$15.2~~$13.5 million for the ~~first~~third quarter of 2019, a ~~$1.5~~$2.7 million, or ~~8.80%~~16.48%, decrease from ~~$16.6~~$16.2 million for the ~~first~~third quarter of 2018. This decrease was primarily the result of a ~~$409.9~~$426.6 million ~~decrease~~decline in ~~the~~ average investment securities for the ~~first~~third quarter of 2019, compared to the same period of 2018. The yield on investments ~~increased~~decreased by 16two basis points compared to the ~~first~~third quarter of ~~2018,~~
2018.
Interest expense of ~~$5.7~~$5.4 million for the ~~first~~third quarter of 2019, increased ~~$3.6~~$1.6 million, or ~~164.11%~~41.54%, compared to the ~~first~~third quarter of 2018, as our average interest-bearing liabilities increased by ~~$1.09 billion. The increase in interest-bearing liabilities was primarily due to growth in~~$110.9 million and our cost of interest-bearing deposits ~~assumed from CB.~~increased 17 basis points. Our total cost of funds for the ~~first~~third quarter of 2019 was ~~0.25%~~0.23%, compared to ~~0.12%~~0.18% for the ~~first~~third quarter of 2018. ~~Compared to the first quarter of 2018, the increase in~~The overall cost of funds ~~was~~increased by only five basis points due to the continued strength and growth of noninterest-bearing deposits, during a ~~27 basis point increase in the average rate paid on interest-bearing liabilities. This increase was the result~~period of ~~a nine basis point increase in cost of deposits and customer repurchases and $146.0 million of growth in average overnight borrowings.~~higher short-term interest rates. Average interest-bearing deposits and customer repurchase agreements increased by ~~$946.8~~$130.7 million, as we assumed $1.61 billion interest-bearing deposits from CB during the third quarter of 2018. Average noninterest-bearing deposits represented ~~58.20%~~60.14% of our total deposits for the ~~first~~third quarter of 2019, compared to ~~59.10%~~58.10% for the third quarter of 2018.
Nine Months of 2019 Compared to the Nine Months of 2018
Net interest income, before recapture of provision for (recapture of) loan losses, was $328.8 million for the nine months ended September 30, 2019, an increase of $92.7 million, or 39.28%, compared to $236.0 million for the same period of 2018. Interest-earning assets increased on average by $1.80 billion, or 21.93%, from $8.21 billion for the nine months ended September 30, 2018 to $10.01 billion for the current year. Our net interest margin (TE) was 4.41% during the first nine months of 2019, compared to 3.87% for the same period of 2018.
Interest income for the nine months ended September 30, 2019 was $345.6 million, which represented a $101.5 million, or 41.57%, increase when compared to the same period of 2018. Compared to the first nine months of 2018, average interest-earning assets increased by $1.80 billion primarily due to loans acquired from CB, and the yield on interest-earning assets increased by 63 basis points. The 63 basis points increase in the earning asset yield over the first nine months of 2019, resulted from a 46 basis point increase in loan yields and a change in the mix of earning assets. Average loans as a percentage of earning assets grew from 64.7% for the first ~~quarter~~nine months of 2018 to 75.6% for the first nine months of 2019. Conversely, average investment securities declined as a percentage of earning assets from 33.7% in the prior year to 23.5% for the first nine months of 2019.
48
Table of Contents
Interest income and fees on loans for the first nine months of 2019 of $300.3 million increased $107.9 million, or 56.11%, when compared to the same period of 2018.
Average loans increased $2.26 billion for the first nine months of 2019 when compared with the same period of 2018, primarily due to loans acquired from CB. The first nine months of 2019 reflected a $15.5 million increase in discount accretion on acquired loans and nonaccrual interest paid when compared to the same period of 2018. In addition, loan yields increased by 23 basis points from the prior nine month period, primarily due to higher rates on loans indexed to variable interest rates such as the Bank’s prime rate.
Interest income from investment securities was $43.2 million for the nine months ended September 30, 2019, a $6.1 million decrease from $49.3 million for the first nine months of 2018. This decrease was the net result of a $411.4 million decrease in the average investment securities for the first nine months of 2019, compared to the same period of 2018, partially offset by a seven basis points increase in the non
tax-equivalent
yield on securities.
Interest expense of $16.9 million for the nine months ended September 30, 2019, increased by $8.8 million from the same period of 2018. The average rate paid on interest-bearing liabilities increased by 23 basis points, to 0.55% for the first nine months of 2019, from 0.32% for the same period of 2018. The rate on interest-bearing deposits for the first nine months of 2019 increased by 19 basis points from the same period in 2018, as a result of higher rates on deposits acquired from CB and competition from higher interest rates offered by our competitors. Average interest-bearing liabilities were $733.5 million higher during the first nine months of 2019 when compared with the same period of 2018, primarily due to deposits assumed from CB. Average interest-bearing deposit growth of $667.7 million was partially offset by an $8.0 million decline in customer repurchase agreements. Average noninterest-bearing deposits represented 59.17% of our total deposits for the nine months ended September 30 2019, compared to 59.11% for the same period of 2018. Total cost of funds for the first nine months of 2019 was 0.24%, compared with 0.14% for the same period of 2018.
Provision for Loan Losses
The allowance for loan losses is increased by the provision for loan losses and recoveries of prior losses, and is decreased by recapture of provisions and by charge-offs taken when management believes the uncollectability of any loan is confirmed. The provision for loan losses is determined by management as the amount to be added to (subtracted from) the allowance for loan losses after net charge-offs have been deducted to bring the allowance to an appropriate level which, in management’s best estimate, is necessary to absorb probable loan losses within the existing loan portfolio.
The allowance for loan losses totaled ~~$65.2~~$68.7 million at ~~March 31,~~September 30, 2019, compared to $63.6 million at December 31, 2018 and ~~$59.9~~$60.0 million as of ~~March 31,~~September 30, 2018. The allowance for loan losses was increased by ~~$1.5~~$5.0 million in loan loss provision and ~~$88,000~~$59,000 in net recoveries for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. This compares to a ~~$1.0~~$1.5 million loan loss provision recapture and net recoveries of ~~$1.4~~$1.9 million for the same period of 2018. The increase in provision for loan losses was primarily due to lower levels of net recoveries and additional provision due to loan growth in~~non-acquired~~ ~~loans. We believe~~during the ~~allowance is appropriate at March 31, 2019.~~period experienced within the commercial and industrial and commercial real estate segments of the
non-acquired
loan portfolio. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. In addition to the growth in the
non-acquired
loan portfolio, the provision was the result of the net effect of modest increases in certain qualitative loss factors and reduced reserve requirements for moderate reductions in historical loss rates across the portfolio. We believe the allowance is appropriate at September 30, 2019. The ratio of the allowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of ~~March 31,~~September 30, 2019, December 31, 2018 and ~~March 31,~~September, 2018 was ~~0.86%~~0.92%, 0.82% and ~~1.25%~~0.79%, respectively. ~~The ratio as~~As of ~~the most recent three quarters was impacted by the $2.73 billion in~~September 30, 2019, remaining credit related discounts on acquired loans ~~acquired from CB that are recorded at fair market value, without a corresponding loan loss allowance.~~were $37.0 million. Refer to the discussion of “Allowance for Loan 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 adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for loan losses in the future, as the nature of this process requires considerable judgment. See “Allowance for Loan Losses” under
Analysis of Financial Condition
herein.
49

Table of Contents
Noninterest Income
Noninterest income includes income derived from financial services offered, 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.

       For the Three Months Ended
March 31,    Variance
   2019    2018    $ %
      (Dollars in thousands)
Noninterest income:

Service charges on deposit accounts
     $ 5,141      $ 4,045      $ 1,096 27.10%
Trust and investment services
   2,182    2,157    25 1.16%
Bankcard services
   950    804    146 18.16%
BOLI income
   1,336    979    357 36.47%
Gain on OREO, net
   105    3,540    (3,435 ) -97.03%
Gain on sale of building, net
   4,545    -    4,545 -
Other
   2,044    1,391    653 46.94%






Total noninterest income
     $ 16,303      $ 12,916      $     3,387       26.22%






~~First~~

For the Three Months Ended
September 30,

Variance

For the Nine Months Ended
September 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts
$
4,833
$
4,295
$
538

12.53
% $
15,039
$
12,431
$
2,608

20.98
%
Trust and investment services

2,330

2,182

148

6.78
%
6,964

6,738

226

3.35
%
Bankcard services

637

875

(238
)
-27.20
%
2,614

2,637

(23
)
-0.87
%
BOLI income

1,797

936

861

91.99
%
4,482

2,984

1,498

50.20
%
Gain on OREO, net

-

-

-

-

129

3,540

(3,411
)
-96.36
%
Gain on sale of building, net

-

-

-

4,545

-

4,545

-

Gain on eminent domain condemnation, net

-

-

-

5,685

-

5,685

-

Other

2,297

1,824

473

25.93%

6,944

4,393

2,551

58.07%

Total noninterest income
$
   11,894
$
   10,112
$
   1,782

17.62
% $
   46,402
$
   32,723
$
   13,679

41.80
%

Third Quarter of 2019 Compared to the ~~First~~Third Quarter of 2018
The ~~first quarter of 2019 included $4.5~~$1.8 million of net gain on the sale of one of our bank owned buildings. The first quarter of 2019 also included $105,000 of net gain on the sale of one OREO, compared to $3.5 million of net gain on the sale of one OREOgrowth in ~~the first quarter of 2018. Excluding net gains on sale,~~ noninterest income ~~for the first quarter~~included an increase of ~~2019 increased by $2.3 million, or 24.29%, compared to the first quarter of 2018.~~$861,000 in BOLI income. The ~~$1.1 million~~$538,000 increase in service charges on deposit accounts from the ~~first~~third quarter of 2018 was primarily due to growth in service charges on deposits assumed in the acquisition of CB.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At ~~March 31,~~September 30, 2019, CitizensTrust had approximately ~~$2.72~~$2.83 billion in assets under management and administration, including ~~$1.92~~$1.96 billion in assets under ~~management.~~management compared with $1.79 billion in assets under management at September 30, 2018. CitizensTrust generated fees of ~~$2.2~~$2.3 million for the ~~first~~third quarter of 2019, an increase of $148,000 compared to ~~$2.2 million for~~ the ~~first~~third quarter of ~~2018.~~
2018, due to the growth in assets under management.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $468,000 were included in our BOLI policies for the third quarter of 2019. The ~~$357,000~~$473,000 increase in other income included a $305,000 increase in swap fee income and a $272,000 increase in international banking fee income. For the third quarter of 2019, the Durbin Amendment’s cap on interchange fees became effective for the Company, which reduced our fee income for bankcard services by approximately $400,000 when compared to the third quarter of 2018.
Nine Months of 2019 Compared to the Nine Months of 2018
The $13.7 million increase in noninterest income for the nine months ended September 30, 2019, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings, compared with a $3.5 million net gain on the sale of one OREO during the first nine months of 2018. Service charges on deposit accounts increased by $2.6 million from the first nine months of 2018, primarily due to the acquisition of CB. The $1.5 million increase in BOLI income included ~~$503,000~~$1.2 million in ~~BOLI~~ income from $70.9 million in BOLI policies acquired from CB in the third quarter of ~~2018.~~
2018 and $468,000 of death benefits included in our BOLI policies for the first nine months of 2019. The $2.6 million increase in other income included increases of approximately $800,000 in both international banking fees and swap fee income. In addition, SBA servicing income and dividend income from various equity investments increased from the prior nine month period.
50

Table of Contents
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.

     For the Three Months Ended
March 31,    Variance
   2019    2018    $    %
      (Dollars in thousands)
Noninterest expense:

Salaries and employee benefits
     $ 29,302      $ 22,314      $ 6,988    31.32%
Occupancy
   4,407    3,332    1,075    32.26%
Equipment
   1,208    860    348    40.47%
Professional services
   1,925    1,530    395    25.82%
Software licenses and maintenance
   2,422    1,760    662    37.61%
Stationery and supplies
   292    237    55    23.21%
Telecommunications expense
   758    528    230    43.56%
Marketing and promotion
   1,394    1,356    38    2.80%
Amortization of intangible assets
   2,857    331    2,526    763.14%
Regulatory assessments
   924    714    210    29.41%
Insurance
   469    423    46    10.87%
Loan expense
   316    255    61    23.92%
Directors’ expenses
   287    240    47    19.58%
Acquisition related expenses
   3,149    803    2,346        292.15%
Other
   1,894    1,263    631    49.96%








Total noninterest expense
     $       51,604      $       35,946      $     15,658    43.56%








Noninterest expense to average assets
   1.83%    1.77%
Noninterest expense to average assets, excluding acquisition related expenses
   1.72%    1.73%
Efficiency ratio (1)
   41.01%    43.08%
Efficiency ratio, excluding acquisition related expenses (1)
   38.51%    42.12%

  For the Three Months Ended
September 30,

Variance

  For the Nine Months Ended
September 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits
$
30,122
$
26,319
$
3,803

14.45%
$
88,286
$
69,684
$
18,602

26.69%

Occupancy

3,976

4,168

(192
)
-4.61%

12,771

10,924

1,847

16.91%

Equipment

1,116

1,156

(40
)
-3.46%

3,577

2,910

667

22.92%

Professional services

1,688

1,154

534

46.27%

5,653

4,374

1,279

29.24%

Software licenses and maintenance

2,450

2,317

133

5.74%

7,414

5,836

1,578

27.04%

Marketing and promotion

1,517

1,134

383

33.77%

4,149

3,638

511

14.05%

Amortization of intangible assets

2,648

1,736

912

52.53%

8,338

2,395

5,943

248.14%

Telecommunications expense

656

622

34

5.47%

2,126

1,711

415

24.25%

Regulatory assessments

147

896

(749
)
-83.59%

1,805

2,276

(471
)
-20.69%

Insurance

430

432

(2
)
-0.46%

1,368

1,278

90

7.04%

Loan expense

308

274

34

12.41%

1,115

678

437

64.45%

Directors’ expenses

314

275

39

14.18%

921

785

136

17.32%

Stationery and supplies

259

251

8

3.19%

867

795

72

9.06%

Acquisition related expenses

244

6,645

(6,401
)
-96.33%

6,005

7,942

(1,937
)
-24.39%

Other

1,660

1,501

159

10.59%

5,272

3,854

1,418

36.79%

Total noninterest expense
$
   47,535
$
   48,880
$
(1,345
)
-2.75%
$
   149,667
$
   119,080
$
   30,587

25.69%

Noninterest expense to average assets

1.68%

1.93%

1.77%

1.80%

Efficiency ratio (1)

39.60%

47.49%

39.89%

44.31%

(1)
Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.
~~First~~
Third Quarter of 2019 Compared to the ~~First~~Third Quarter of 2018
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. ~~Excluding acquisition related expenses, noninterest~~Noninterest expense as a percentage of average assets was ~~1.72%~~1.68% for the ~~first~~third quarter of 2019, compared to ~~1.73%~~1.93% for the ~~first~~third quarter of 2018.
The decrease is primarily the result of lower acquisition expense of $6.4 million.
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for loan losses plus noninterest income) iscan be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. ~~Excluding acquisition related expenses, the~~The efficiency ratio was ~~38.51%~~39.60% for the ~~first~~third quarter of 2019, compared to ~~42.12%~~47.49% for the ~~first~~third quarter of 2018.
The ~~$15.7~~$1.3 million, or ~~43.56%~~2.75%, ~~increase~~decrease in noninterest expense for the ~~first~~third quarter of 2019 ~~included a $7.0~~reflects both the impact of merger related expense in the third quarter of 2018, which was $6.4 million higher than the current quarter, and year-over-year increase in ~~salary~~salaries and benefit costs of $3.8 million. Higher expense ~~principally~~for accelerated vesting of stock grants and bonus compensation of approximately $1 million, related to the amended employment agreement and consulting agreement for the Company’s retiring Chief Executive Officer contributed to the increase in compensation costs. Year-over-year growth of approximately $2 million was primarily due to additional compensation related expenses for the former CB employees ~~that~~who were retained ~~post-merger. Amortization of core deposit intangible (“CDI”)~~after the merger. CDI amortization increased by ~~$2.5 million~~$912,000 as a result of core deposits assumed from CB. ~~Occupancy and equipment expense increased by $1.4 million due to the banking centers acquired from CB.~~ The ~~first~~third quarter of 2019 also reflected a $780,000 decrease in FDIC assessment expense.
51
Table of Contents
Nine Months of 2019 Compared to the Nine Months of 2018
Noninterest expense of $149.7 million for the first nine months of 2019 was $30.6 million higher than the prior year period. Salaries and benefit costs increased by $18.6 million primarily due to additional compensation related expenses for the newly hired and former CB employees who were retained after the merger and $1.4 million in higher stock related compensation expense. The year-over-year increase also included ~~$3.1~~a $5.9 million increase in amortization of intangible assets due to core deposits assumed from CB. The primary driver of a $2.5 million increase in occupancy and equipment expense, a $1.6 million increase in software licenses and maintenance, and a $1.3 million increase in professional services, was the merger with CB. These increases were partially offset by a $1.9 million decrease in merger related expenses. The $1.4 million increase in other expenses ~~mostly due~~was also primarily related to higher expenses related to the ~~consolidation~~operations of ~~six banking centers that occurred throughout~~a larger Bank after the ~~quarter. This compares~~CB merger. As a percentage of average assets, noninterest expense was 1.77% for the nine months ended September 30, 2019, compared to ~~$803,000 in merger related expenses~~1.80% for the same period of 2018.
For the nine months ended 2019, the efficiency ratio was 39.89%, compared to 44.31% for the same period of 2018.
Income Taxes
The Company’s effective tax rate for the three and nine months ended ~~March 31,~~September 30, 2019 was 29.00%, compared to 28.00% for the ~~three months ended March 31,~~same periods of 2018. The increase was due to higher income growth from
non-tax
advantaged revenue sources. Our estimated annual effective tax rate also 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.
52

Table of Contents
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of ~~$11.30~~$11.33 billion at ~~March 31,~~September 30, 2019. This represented a decrease of ~~$224.2~~$196.4 million, or ~~1.94%~~1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of ~~$10.04~~$10.01 billion at ~~March 31,~~September 30, 2019 decreased ~~$246.2~~$281.0 million, or ~~2.39%~~2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a ~~$157.7~~$270.2 million decrease in total loans and a ~~$71.6~~$204.2 million decrease in investment ~~securities.~~securities, partially offset by a $195.4 million increase in interest-earning balances due from the Federal Reserve. The decrease in total loans included ~~a $75.7~~an $89.2 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans declined by $181.9 million, or 2.45%. Total liabilities were ~~$9.41~~$9.37 billion at ~~March 31,~~September 30, 2019, a decrease of ~~$263.9~~$312.1 million, or ~~2.73%~~3.22%, from total liabilities of $9.68 billion at December 31, 2018. Total deposits declined by $33.2 million, or 0.38%. Total equity increased ~~$39.7~~$115.7 million, or ~~2.15%~~6.25%, to ~~$1.89~~$1.97 billion at ~~March 31,~~September 30, 2019, compared to total equity of $1.85 billion at December 31, 2018. The ~~$39.7~~$115.7 million increase in equity was due to ~~$51.6~~$156.5 million in net earnings, a ~~$12.8~~$30.4 million increase in other comprehensive income, net of tax, resulting from the net increase in market value of our investment securities portfolio, and ~~$424,000~~$4.5 million for various stock based compensation items. This was offset by ~~$25.2~~$75.7 million in cash dividends declared during the first ~~quarter~~nine months of 2019.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At ~~March 31,~~September 30, 2019, we reported total investment securities of ~~$2.41~~$2.27 billion. This represented a decrease of ~~$71.6~~$204.2 million, or ~~2.89%~~8.24%, from total investment securities of $2.48 billion at December 31, 2018. The decrease in investment securities was due to cash outflow from the portfolio, partially offset by reinvesting activity during the first nine months of 2019. At ~~March 31,~~September 30, 2019, investment securities HTM totaled ~~$733.5~~$704.0 million. At ~~March 31,~~September 30, 2019, our AFS investment securities totaled ~~$1.67~~$1.57 billion, inclusive of a
pre-tax
unrealized ~~loss~~gain of ~~$4.2~~$21.0 million. The
after-tax
unrealized ~~loss~~gain reported in AOCI on AFS investment securities was ~~$3.0~~$14.8 million.
As of ~~March 31,~~September 30, 2019, the Company had a
pre-tax
net unrealized holding ~~loss~~gain on AFS investment securities of ~~$4.2~~$21.0 million, compared to a
pre-tax
net unrealized holding loss of $23.6 million at December 31, 2018. The changes in the net unrealized holding ~~loss~~gain resulted primarily from fluctuations in market interest rates. For the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, repayments/maturities of investment securities totaled ~~$107.5~~$355.8 million and ~~$135.2~~$385.0 million, respectively. The Company purchased additional investment securities totaling ~~$19.8~~$268.3 million and $98.7 million for the first nine months ended September 30, 2019 and 2018, respectively. During the first nine months of 2019, we sold 14 investment securities at book value of approximately $152.6 million. At the close of the merger in the ~~first~~third quarter of ~~2019, compared to zero for~~2018, we liquidated the ~~same period in 2018.~~entire investment security portfolio of $717.0 million acquired from CB. No other investment securities were sold during the first ~~three~~nine months ~~of 2019 and~~ended September 30, 2018.
The tables below set forth investment securities AFS and HTM ~~for~~as of the ~~periods~~dates presented.

   March 31, 2019
     Amortized
Cost    Gross
  Unrealized
Holding
Gain    Gross
  Unrealized
Holding
Loss      Fair Value      Total Percent
   (Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
     $ 1,424,937      $ 6,107      $ (8,540)      $ 1,422,504    85.00%
CMO/REMIC - residential
   206,956    470    (2,301)    205,125    12.26%
Municipal bonds
   45,052    421    (388)    45,085    2.69%
Other securities
   787    -    -    787    0.05%










Totalavailable-for-sale securities
     $   1,677,732      $ 6,998      $ (11,229)      $ 1,673,501    100.00%










Investment securitiesheld-to-maturity:

Government agency/GSE
     $ 133,557      $ 564      $ (2,077)      $ 132,044    18.21%
Residential mortgage-backed securities
   169,367    737    (999)    169,105    23.09%
CMO
   213,145    -    (9,998)    203,147    29.06%
Municipal bonds
   217,395    1,819    (2,859)    216,355    29.64%










Totalheld-to-maturity securities
     $ 733,464      $         3,120      $ (15,933)      $ 720,651    100.00%










September 30, 2019

  Amortized
Cost

Gross
  Unrealized
Holding
Gain

Gross
  Unrealized
Holding
Loss

  Fair Value

Total Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,127,395
  $
20,105
  $
(1,341)
  $
1,146,159

72.99%

CMO/REMIC - residential

381,615

1,649

(336)

382,928

24.38%

Municipal bonds

39,564

924

(1)

40,487

2.58%

Other securities

832

-

-

832

0.05%

Total
available-for-sale
securities
  $
   1,549,406
  $
22,678
  $
(1,678)
  $
1,570,406

100.00%

Investment securities
held-to-maturity:

Government agency/GSE
  $
123,917
  $
3,238
  $
(170)
  $
126,985

17.60%

Residential mortgage-backed securities

172,919

2,624

(3)

175,540

24.56%

CMO

204,263

76

(1,467)

202,872

29.02%

Municipal bonds

202,854

4,198

(558)

206,494

28.82%

Total
held-to-maturity
securities
  $
703,953
  $
         10,136
  $
(2,198)
  $
711,891

100.00%

   December 31, 2018
     Amortized
Cost    Gross
  Unrealized
Holding
Gain    Gross
  Unrealized
Holding
Loss      Fair Value      Total Percent
   (Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
     $ 1,494,106      $ 1,348      $ (20,946)      $ 1,474,508    85.03%
CMO/REMIC - residential
   217,223    353    (3,525)    214,051    12.34%
Municipal bonds
   45,621    332    (1,143)    44,810    2.59%
Other securities
   716    -    -    716    0.04%










Totalavailable-for-sale securities
     $ 1,757,666      $ 2,033      $ (25,614)      $ 1,734,085    100.00%










Investment securitiesheld-to-maturity:

Government agency/GSE
     $ 138,274      $ 572      $ (2,622)      $ 136,224    18.57%
Residential mortgage-backed securities
   153,874    -    (3,140)    150,734    20.67%
CMO
   215,336    -    (12,081)    203,255    28.93%
Municipal bonds
   236,956    556    (6,188)    231,324    31.83%










Totalheld-to-maturity securities
     $ 744,440      $ 1,128      $ (24,031)      $ 721,537    100.00%










53
Table of Contents

December 31, 2018

  Amortized
Cost

Gross
  Unrealized
Holding
Gain

Gross
  Unrealized
Holding
Loss

  Fair Value

Total Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
$
  1,494,106
$
  1,348
  $
(20,946)
  $
1,474,508

85.03%

CMO/REMIC - residential

217,223

353

(3,525)

214,051

12.34%

Municipal bonds

45,621

332

(1,143)

44,810

2.59%

Other securities

716

-

-

716

0.04%

Total
available-for-sale
securities
$
  1,757,666
$
  2,033
  $
(25,614)
  $
1,734,085

100.00%

Investment securities
held-to-maturity:

Government agency/GSE
$
  138,274
$
  572
  $
(2,622)
  $
136,224

18.57%

Residential mortgage-backed securities

153,874

-

(3,140)

150,734

20.67%

CMO

215,336

-

(12,081)

203,255

28.93%

Municipal bonds

236,956

556

(6,188)

231,324

31.83%

Total
held-to-maturity
securities
$
  744,440
$
  1,128
  $
(24,031)
  $
721,537

100.00%

The weighted-average yield (TE) on the total investment portfolio at ~~March 31,~~September 30, 2019 was ~~2.57%~~2.56% with a weighted-average life of ~~4.1~~3.6 years. This compares to a weighted-average yield of 2.55% at December 31, 2018 with a weighted-average life of 4.3 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
pay-downs.
Approximately 89% of the securities in the total investment portfolio, at ~~March 31,~~September 30, 2019, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of ~~March 31,~~September 30, 2019, approximately ~~$86.1~~$80.2 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 11% of the total investment portfolio, are predominately AA or higher rated securities.
54
Table of Contents
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at ~~March 31,~~September 30, 2019 and December 31, 2018. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be other-than-temporarily-impaired (“OTTI”). A summary of our analysis of these securities and the unrealized losses is described more fully in Note 5 —
Investment Securities
of the notes to the unaudited condensed consolidated financial statements. Economic trends or market interest rates may adversely affect the value of the portfolio of investment securities that we hold.

March 31, 2019
Less Than 12 Months 12 Months or Longer Total
  Fair Value   Gross
  Unrealized
Holding
Losses   Fair Value   Gross
  Unrealized
Holding
Losses   Fair Value   Gross
  Unrealized
Holding
Losses
(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
$ -   $ -   $ 703,134   $ (8,540 )   $ 703,134   $ (8,540 )
CMO/REMIC - residential
66 - 160,926 (2,301 ) 160,992 (2,301 )
Municipal bonds
- - 16,689 (388 ) 16,689 (388 )

Totalavailable-for-sale securities
  $ 66   $ -   $ 880,749   $ (11,229 )   $ 880,815   $ (11,229 )

Investment securitiesheld-to-maturity:

Government agency/GSE
  $ 26,291   $ (122 )   $ 60,153   $ (1,955 )   $ 86,444   $ (2,077 )
Residential mortgage-backed securities
- - 86,568 (999 ) 86,568 (999 )
CMO
- - 203,148 (9,998 ) 203,148 (9,998 )
Municipal bonds
- - 64,790 (2,859 ) 64,790 (2,859 )

Totalheld-to-maturity securities
  $ 26,291   $ (122 )   $ 414,659   $ (15,811 )   $ 440,950   $ (15,933 )

December 31, 2018
Less Than 12 Months 12 Months or Longer Total
  Fair Value   Gross
  Unrealized
Holding
Losses   Fair Value   Gross
  Unrealized
Holding
Losses   Fair Value   Gross
  Unrealized
Holding
Losses
(Dollars in thousands)
Investment securitiesavailable-for-sale:

Residential mortgage-backed securities
  $ 692,311   $ (4,864 )   $ 593,367   $ (16,082 )   $ 1,285,678   $ (20,946 )
CMO/REMIC - residential
36,582 (365 ) 135,062 (3,160 ) 171,644 (3,525 )
Municipal bonds
9,568 (188 ) 14,181 (955 ) 23,749 (1,143 )

Totalavailable-for-sale securities
  $ 738,461   $ (5,417 )   $ 742,610   $ (20,197 )   $ 1,481,071   $ (25,614 )

Investment securitiesheld-to-maturity:

Government agency/GSE
  $ 7,479   $ (15 )   $ 54,944   $ (2,607 )   $ 62,423   $ (2,622 )
Residential mortgage-backed securities
59,871 (484 ) 90,863 (2,656 ) 150,734 (3,140 )
CMO
- - 203,254 (12,081 ) 203,254 (12,081 )
Municipal bonds
70,989 (778 ) 77,723 (5,410 ) 148,712 (6,188 )

Totalheld-to-maturity securities
  $ 138,339   $ (1,277 )   $ 426,784   $ (22,754 )   $ 565,123   $ (24,031 )

September 30, 2019

Less Than 12 Months

12 Months or Longer

Total

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
2
  $
-
  $
127,904
  $
(1,341
)   $
127,906
  $
(1,341
)
CMO/REMIC - residential

122,595

(156
)
39,498

(180
)
162,093

(336
)
Municipal bonds

-

-

564

(1
)
564

(1
)

Total
available-for-sale
securities
  $
122,597
  $
(156
)   $
167,966
  $
(1,522
)   $
290,563
  $
(1,678
)

Investment securities
held-to-maturity:

Government agency/GSE
  $
-
  $
-
  $
19,923
  $
(170
)   $
19,923
  $
(170
)
Residential mortgage-backed securities

5,021

(3
)
-

-

5,021

(3
)
CMO

-

-

178,297

(1,467
)
178,297

(1,467
)
Municipal bonds

3,037

(5
)
32,217

(553
)
35,254

(558
)

Total
held-to-maturity
securities
  $
8,058
  $
(8
)   $
230,437
  $
(2,190
)   $
238,495
  $
(2,198
)

December 31, 2018

Less Than 12 Months

12 Months or Longer

Total

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

(Dollars in thousands)

Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
692,311
  $
(4,864
)   $
593,367
  $
(16,082
)   $
1,285,678
  $
(20,946
)
CMO/REMIC - residential

36,582

(365
)
135,062

(3,160
)
171,644

(3,525
)
Municipal bonds

9,568

(188
)
14,181

(955
)
23,749

(1,143
)

Total
available-for-sale
securities
  $
738,461
  $
(5,417
)   $
742,610
  $
(20,197
)   $
1,481,071
  $
(25,614
)

Investment securities
held-to-maturity:

Government agency/GSE
  $
7,479
$
(15
)   $
54,944
  $
(2,607
)   $
62,423
  $
(2,622
)
Residential mortgage-backed securities

59,871

(484
)
90,863

(2,656
)
150,734

(3,140
)
CMO

-

-

203,254

(12,081
)
203,254

(12,081
)
Municipal bonds

70,989

(778
)
77,723

(5,410
)
148,712

(6,188
)

Total
held-to-maturity
securities
  $
138,339
  $
(1,277
)   $
426,784
  $
(22,754
)   $
565,123
  $
(24,031
)

55

Table of Contents
Loans
Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans
(“Non-PCI
loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018. At September 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at September 30, 2019 and December 31, 2018. Beginning with June 30, 2019, PCI loans were accounted for and combined with
Non-PCI
loans and were reflected in total loans and lease finance receivables.
Total loans and leases, net of deferred fees and discounts, of ~~$7.61~~$7.49 billion at ~~March 31,~~September 30, 2019 decreased by ~~$157.7~~$270.2 million, or ~~2.03%~~3.48%, from December 31, 2018. The decrease in total loans included a ~~$75.7~~$89.2 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. The decrease in total loans included declines of ~~$45.0~~$81.1 million in commercial and industrial loans, ~~and $12.1~~$33.0 million in commercial real estate loans, $31.7 million in SBA loans, $18.0 million in SFR mortgage loans, and $11.5 million in consumer and other loans.
The decline in these loan categories was generally the result of increased competition for new loan originations and higher levels of loan prepayments, including loans acquired from the recent CB merger.
The following table presents our loan portfolio ~~excluding PCI loans,~~ by type ~~for~~as of the ~~periods~~dates presented.
Distribution of Loan Portfolio by Type

       March 31, 2019          December 31, 2018
   (Dollars in thousands)
Commercial and industrial
     $ 957,126      $ 1,002,209
SBA
   337,957    350,043
Real estate:

Commercial real estate
   5,388,866    5,394,229
Construction
   121,912    122,782
SFR mortgage
   285,787    296,504
Dairy & livestock and agribusiness
   322,321    393,843
Municipal lease finance receivables
   61,249    64,186
Consumer and other loans
   120,768    128,429




Gross loans, excluding PCI loans
   7,595,986    7,752,225
Less: Deferred loan fees, net
   (4,479 )    (4,828 )




Gross loans, excluding PCI loans, net of deferred loan fees
   7,591,507    7,747,397
Less: Allowance for loan losses
   (65,021 )    (63,409 )




Net loans, excluding PCI loans
   7,526,486    7,683,988




PCI Loans
   15,356    17,214
Discount on PCI loans
   -    -
Less: Allowance for loan losses
   (180 )    (204 )




PCI loans, net
   15,176    17,010




Total loans and lease finance receivables
     $ 7,541,662      $ 7,700,998




    September 30, 2019

  December 31, 2018

Total Loans
and Leases

Non-PCI
Loans
and Leases

PCI Loans

Total Loans
and Leases

(Dollars in thousands)

Commercial and industrial
  $
921,678
  $
1,002,209
  $
519
  $
1,002,728

SBA

319,571

350,043

1,258

351,301

Real estate:

Commercial real estate

5,375,668

5,394,229

14,407

5,408,636

Construction

119,931

122,782

-

122,782

SFR mortgage

278,644

296,504

145

296,649

Dairy & livestock and agribusiness

311,229

393,843

700

394,543

Municipal lease finance receivables

54,468

64,186

-

64,186

Consumer and other loans

117,128

128,429

185

128,614

Gross loans

7,498,317

7,752,225

17,214

7,769,439

Less: Deferred loan fees, net

(3,866
)
(4,828
)
-

(4,828
)

Gross loans, net of deferred loan fees

7,494,451

7,747,397

17,214

7,764,611

Less: Allowance for loan losses

(68,672
)
(63,409
)
(204
)
(63,613
)

Total loans and lease finance receivables
  $
7,425,779
  $
7,683,988
  $
17,010
  $
     7,700,998

As of ~~March 31,~~September 30, 2019, ~~$231.1~~$245.6 million, or ~~4.29%~~4.57% of the total commercial real estate loans included loans secured by farmland, compared to ~~$229.8~~$231.0 million, or ~~4.26%~~4.27%, at December 31, 2018. The loans secured by farmland included ~~$124.2~~$130.4 million for loans secured by dairy & livestock land and ~~$106.9~~$115.1 million for loans secured by agricultural land at ~~March 31,~~September 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and ~~$102.9~~$104.1 million for loans secured by agricultural land at December 31, 2018. As of ~~March 31,~~September 30, 2019, dairy & livestock and agribusiness loans of ~~$322.3~~$311.2 million were comprised of ~~$264.8~~$251.3 million for dairy & livestock loans and ~~$57.6~~$60.0 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and ~~$53.3~~$54.0 million for agribusiness loans at December 31, 2018.
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 of ~~March 31,~~September 30, 2019, the Company had ~~$175.2~~$170.9 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
56
Table of Contents
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 representing 10% of the acquisition costs. ~~When the loans are funded, the~~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 of ~~March 31,~~September 30, 2019, the Company had ~~$163.9~~$148.7 million of total SBA 7(a) ~~loans.~~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~~long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
As of ~~March 31,~~September 30, 2019, the Company had ~~$121.9~~$119.9 million in construction loans. This represents 1.60% of total gross loans
held-for-investment. ~~There were no PCI construction loans at March 31, 2019.~~
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. ~~At March 31, 2019, construction loans consisted of $59.3 million in SFR construction loans and $62.6 million in commercial construction loans.~~ There were no nonperforming construction loans at ~~March 31,~~September 30, 2019.
~~PCI Loans from the SJB Acquisition~~
These PCI loans were acquired from SJB on October 16, 2009 and were subject to a loss sharing agreement with the FDIC. Under the terms of such loss sharing agreement, the FDIC absorbed 80% of losses and shared in 80% of loss recoveries up to $144.0 million in losses with respect to covered assets, after a first loss amount of $26.7 million. The loss sharing agreement covered 5 years for commercial loans and covers 10 years for single-family residential loans from the October 16, 2009 acquisition date and the loss recovery provisions are in effect for 8 and 10 years, respectively, for commercial and single-family residential loans from the acquisition date. The loss sharing agreement for commercial loans expired October 16, 2014. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018.
~~The following table presents PCI loans by type for the periods presented.~~

    March 31, 2019       December 31, 2018
(Dollars in thousands)
Commercial and industrial
  $ 616   $ 519
SBA
1,235 1,258
Real estate:

Commercial real estate
13,183 14,407
Construction
- -
SFR mortgage
141 145
Dairy & livestock and agribusiness
- 700
Municipal lease finance receivables
- -
Consumer and other loans
181 185

Gross PCI loans
15,356 17,214
Less: Purchase accounting discount
- -

Gross PCI loans, net of discount
15,356 17,214
Less: Allowance for PCI loan losses
(180 ) (204 )

Net PCI loans
  $ 15,176   $ 17,010

Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total
held-for-investment ~~commercial real estate loans, excluding PCI loans, by region as of March 31, 2019.~~

   March 31, 2019
   Total Loans    Commercial Real Estate
Loans
   (Dollars in thousands)
Los Angeles County
     $ 3,389,027    44.6%      $ 2,321,650    43.1%
Central Valley
   1,077,978    14.2%    825,584    15.3%
Inland Empire
   1,023,654    13.5%    890,703    16.5%
Orange County
   1,015,871    13.4%    662,837    12.3%
Central Coast
   421,011    5.5%    340,989    6.4%
San Diego
   216,787    2.9%    124,618    2.3%
Other California
   155,182    2.0%    66,129    1.2%
Out of State
   296,476    3.9%    156,356    2.9%








     $       7,595,986          100.0%      $     5,388,866        100.0%








~~The following is the breakdown of total PCIheld-for-investment~~
commercial real estate loans, by region as of ~~March 31,~~September 30, 2019.

   March 31, 2019
   Total PCI Loans    Commercial Real Estate
Loans
   (Dollars in thousands)
Central Valley
     $ 15,356    100.0%      $ 13,183    100.0%
Los Angeles County
   -    -    -    -
Central Coast
   -    -    -    -
Other California
   -    -    -    -








     $             15,356          100.0%      $         13,183        100.0%








September 30, 2019

Total Loans

Commercial Real Estate
Loans

(Dollars in thousands)
Los Angeles County
  $
3,301,874

44.0%
  $
2,267,332

42.2%

Central Valley

1,112,079

14.8%

879,344

16.3%

Orange County

1,008,152

13.5%

665,360

12.4%

Inland Empire

976,892

13.0%

853,110

15.9%

Central Coast

420,226

5.6%

343,152

6.4%

San Diego

227,235

3.0%

129,115

2.4%

Other California

140,005

1.9%

70,640

1.3%

Out of State

311,854

4.2%

167,615

3.1%

  $
       7,498,317

      100.0%
  $
     5,375,668

    100.0%

The table below breaks down our commercial real estate ~~portfolio, excluding PCI loans.~~

March 31, 2019
  Loan Balance     Percent   Percent
Owner-
    Occupied (1)     Average
Loan
    Balance
(Dollars in thousands)
SFR mortgage:

SFR mortgage - Direct
  $ 270,834 4.8% 100.0%   $ 506
SFR mortgage - Mortgage pools
14,953 0.2% 100.0% 258

Total SFR mortgage
285,787 5.0%

Commercial real estate:

Multi-family
561,129 9.9% 0.6% 1,626
Industrial
1,901,673 33.5% 55.6% 1,431
Office
918,491 16.2% 27.3% 1,474
Retail
832,087 14.7% 12.7% 1,719
Medical
274,881 4.8% 46.4% 1,808
Secured by farmland (2)
231,109 4.1% 100.0% 2,101
Other (3)
669,496 11.8% 48.3% 1,459

Total commercial real estate
5,388,866 95.0%

Total SFR mortgage and
commercial real estate loans
  $         5,674,653     100.0% 42.0% 1,386

portfolio.

September 30, 2019

  Loan Balance

  Percent

Percent
Owner-
    Occupied (1)

Average
Loan
    Balance

(Dollars in thousands)

Commercial real estate:

Industrial
  $
1,890,465

35.2%

54.6%
  $
1,430

Office

921,565

17.1%

26.9%

1,506

Retail

800,406

14.9%

13.1%

1,707

Multi-family

577,700

10.7%

0.5%

1,596

Medical

279,805

5.2%

45.3%

1,829

Secured by farmland (2)

245,574

4.6%

100.0%

2,030

Other (3)

660,153

12.3%

50.7%

1,423

Total commercial real estate
  $
         5,375,668

    100.0%

39.0%

1,535

(1)
Represents percentage of reported owner-occupied at origination in each real estate loan category.
(2)
The loans secured by farmland included ~~$124.2~~$130.4 million for loans secured by dairy & livestock land and ~~$106.9~~$115.1 million for loans secured by agricultural land at ~~March 31,~~September 30, 2019.
(3)
Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans.
In the table above, SFR mortgage — Direct loans include SFR mortgage loans which are currently generated through an internal loan origination program in our Centers. This program is focused on owner-occupied SFR’s with defined~~loan-to-value,debt-to-income~~ and other credit criteria, such as FICO credit scores, that we believe are appropriate for loans which are primarily intended for retention in our Bank’s loan portfolio. We originated loan volume in the aggregate principal amount
57
Table of ~~$6.9 million under this program during the three months ended March 31, 2019, respectively.~~
In addition, we previously purchased pools of owner-occupied single-family loans from real estate lenders, which are reflected in the table above in SFR mortgage — Mortgage Pools, with a remaining balance totaling $15.0 million at March 31, 2019. These loans were originally purchased with average FICO scores predominantly ranging from 700 to over 800 and original overall~~loan-to-value~~ ~~ratios of 60% to 80%. We have not purchased any mortgage pools since August 2007.~~
~~The table below breaks down our PCI real estate portfolio.~~

   March 31, 2019
       Loan Balance          Percent      Percent
Owner-
  Occupied (1)      Average
  Loan Balance
   (Dollars in thousands)
SFR mortgage

SFR mortgage - Direct
     $ 141    1.1%    100.0%      $ 141
SFR mortgage - Mortgage pools
   -    -      -      -





Total SFR mortgage
   141    1.1%
Commercial real estate:

Multi-family
   544    4.1%    -      544
Industrial
   2,315    17.4%    76.9%    331
Office
   1,230    9.2%    100.0%    410
Retail
   1,359    10.2%    -      340
Medical
   1,882    14.1%    100.0%    627
Secured by farmland
   366    2.7%    100.0%    183
Other (2)
   5,487    41.2%    76.2%    457





Total commercial real estate
   13,183    98.9%





Total SFR mortgage and
commercial real estate loans
     $     13,324        100.0%    71.9%    404





~~(1)~~
~~Represents percentage of reported owner-occupied at origination in each real estate loan category.~~
~~(2)~~
~~Includes loans associated with hospitality, churches, and gas stations, which represents approximately 77.4% of other loans.~~
Contents
Nonperforming Assets
The following table provides information on nonperforming assets ~~excluding PCI loans, for~~as of the ~~periods~~dates presented.

       March 31, 2019          December 31, 2018
   (Dollars in thousands)
Nonaccrual loans
     $ 16,714        $ 16,442
Troubled debt restructured loans (nonperforming)
   277      3,509
OREO, net
   2,275      420




Total nonperforming assets
     $ 19,266        $ 20,371




Troubled debt restructured performing loans
     $ 3,299        $ 3,594




Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO
   0.25%    0.26%
Percentage of nonperforming assets to total assets
   0.17%    0.18%

    September 30, 2019


December 31, 2018
(1)

(Dollars in thousands)

Nonaccrual loans
  $
6,363
  $
16,442

Troubled debt restructured loans (nonperforming)

249

3,509

OREO, net

9,450

420

Total nonperforming assets
  $
16,062
  $
20,371

Troubled debt restructured performing loans
  $
3,168
  $
3,594

Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO

0.21%

0.26%

Percentage of nonperforming assets to total assets

0.14%

0.18%

(1) Excludes PCI loans.
At ~~March 31,~~September 30, 2019, loans classified as impaired ~~excluding PCI loans,~~ totaled ~~$20.3~~$9.8 million, or ~~0.27%~~0.13% of total gross loans, compared to $23.5 million, or 0.30% of total loans at December 31, 2018. At ~~March 31,~~September 30, 2019, impaired loans resulting from troubled debt ~~restructure~~restructures represented ~~$3.6~~$3.4 million, of which ~~$277,000~~$249,000 were nonperforming and ~~$3.3~~$3.2 million were performing.
Of the ~~$20.3~~$9.8 million total impaired loans as of ~~March 31,~~September 30, 2019, ~~$17.9~~$6.9 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within one year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate was ~~$2.4~~$2.9 million.
Troubled Debt Restructurings
(“TDRs”)
Total TDRs were ~~$3.6~~$3.4 million at ~~March 31,~~September 30, 2019, compared to $7.1 million at December 31, 2018. At ~~March 31,~~September 30, 2019, we had ~~$277,000~~$249,000 in nonperforming TDR loans and ~~$3.3~~$3.2 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only impaired 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. We have not restructured loans into multiple loans in what is typically referred to as an “A/B” note structure, where normally the “A” note meets current underwriting standards and the “B” note is typically immediately charged off upon restructuring.
58
Table of Contents
The following table provides a summary of TDRs ~~excluding PCI loans, for~~as of the ~~periods~~dates presented.

   March 31, 2019    December 31, 2018
   Balance    Number of
Loans    Balance    Number of
Loans
   (Dollars in thousands)
Performing TDRs:

Commercial and industrial
     $ 124    2      $ 135    2
SBA
   563    1    575    1
Real Estate:

Commercial real estate
   455    1    472    1
Construction
   -    -    -    -
SFR mortgage
   2,157    8    2,412    9
Dairy & livestock and agribusiness
   -    -    -    -
Consumer and other
   -    -    -    -








Total performing TDRs
     $ 3,299    12      $ 3,594    13








Nonperforming TDRs:

Commercial and industrial
     $ 15    1      $ 21    1
SBA
   -    -    -    -
Real Estate:

Commercial real estate
   -    -    3,143    1
Construction
   -    -    -    -
SFR mortgage
   -    -    -    -
Dairy & livestock and agribusiness
   -    -    78    1
Consumer and other
   262    1    267    1








Total nonperforming TDRs
     $ 277    2      $ 3,509    4








Total TDRs
     $ 3,576    14      $ 7,103    17








September 30, 2019

December 31, 2018

Balance

Number of
Loans

Balance

Number of
Loans

(Dollars in thousands)

Performing TDRs:

Commercial and industrial
  $
88

2
  $
135

2

SBA

542

1

575

1

Real Estate:

Commercial real estate

417

1

472

1

Construction

-

-

-

-

SFR mortgage

2,121

8

2,412

9

Dairy & livestock and agribusiness

-

-

-

-

Consumer and other

-

-

-

-

Total performing TDRs
  $
     3,168

        12
  $
     3,594

        13

Nonperforming TDRs:

Commercial and industrial
  $
1

1
  $
21

1

SBA

-

-

-

-

Real Estate:

Commercial real estate

-

-

3,143

1

Construction

-

-

-

-

SFR mortgage

-

-

-

-

Dairy & livestock and agribusiness

-

-

78

1

Consumer and other

248

1

267

1

Total nonperforming TDRs
  $
249

2
  $
3,509

4

Total TDRs
  $
3,417

14
  $
7,103

17

At ~~March 31,~~September 30, 2019, there was no allowance for loan losses specifically allocated to TDRs. At December 31, 2018, $490,000 of the allowance for loan losses was specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. Total charge-offs on TDRs for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were $78,000, compared to no charge-offs for the same period of 2018.
59

Table of Contents
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies ~~excluding PCI loans, for~~as of the ~~periods~~dates presented.

   March 31,
2019    December 31,
2018    September 30,
2018    June 30,
2018    March 31,
2018
   (Dollars in thousands)
Nonperforming loans:

Commercial and industrial
     $ 8,388      $ 7,490      $ 3,026      $ 204      $ 272
SBA
   4,098    2,892    3,005    574    589
Real estate:

Commercial real estate
   1,134    6,068    5,856    6,517    6,746
Construction
   -    -    -    -    -
SFR mortgage
   2,894    2,937    2,961    1,578    1,309
Dairy & livestock and agribusiness
   -    78    775    800    818
Consumer and other loans
   477    486    807    509    438










Total
     $ 16,991      $ 19,951      $ 16,430      $ 10,182      $ 10,172










% of Total gross loans
   0.22%    0.26%    0.22%    0.21%    0.21%
Past due30-89 days:

Commercial and industrial
     $ 369      $ 909      $ 274      $ -      $ -
SBA
   601    1,307    123    -    -
Real estate:

Commercial real estate
   124    2,789    -    -    -
Construction
   -    -    -    -    -
SFR mortgage
   -    285    -    -    680
Dairy & livestock and agribusiness
   -    -    -    -    -
Consumer and other loans
   101    -    98    47    63










Total
     $ 1,195      $ 5,290      $ 495      $ 47      $ 743










% of Total gross loans
   0.02%    0.07%    0.01%    0.001%    0.02%
OREO:

Real estate:

Commercial real estate
     $ 2,275      $ -      $ -      $ -      $ -
Construction
   -    -    -    -    -
SFR mortgage
   -    420    420    -    -










Total
     $ 2,275      $ 420      $ 420      $ -      $ -










Total nonperforming, past due, and OREO
     $ 20,461      $ 25,661      $ 17,345      $ 10,229      $ 10,915










% of Total gross loans
   0.27%    0.33%    0.23%    0.21%    0.23%

September 30,
2019

June 30,
2019

March 31,
2019

December 31,
2018

September 30,
2018

(Dollars in thousands)

Nonperforming loans:

Commercial and industrial
  $
1,550
  $
1,993
  $
8,388
  $
7,490
  $
3,026

SBA

2,706

5,082

4,098

2,892

3,005

Real estate:

Commercial real estate

1,083

1,095

1,134

6,068

5,856

Construction

-

-

-

-

-

SFR mortgage

888

2,720

2,894

2,937

2,961

Dairy & livestock and agribusiness

-

-

-

78

775

Consumer and other loans

385

397

477

486

807

Total
  $
6,612
  $
11,287
  $
16,991
  $
19,951
  $
16,430

% of Total gross loans

0.09%

0.15%

0.22%

0.26%

0.22%

Past due
30-89
days:

Commercial and industrial
  $
756
  $
310
  $
369
  $
909
  $
274

SBA

303

-

601

1,307

123

Real estate:

Commercial real estate

368

-

124

2,789

-

Construction

-

-

-

-

-

SFR mortgage

-

-

-

285

-

Dairy & livestock and agribusiness

-

-

-

-

-

Consumer and other loans

-

22

101

-

98

Total
  $
1,427
  $
332
  $
1,195
  $
5,290
  $
495

% of Total gross loans

0.02%

0.004%

0.02%

0.07%

0.01%

OREO:

SBA
  $
444
  $
-
  $
-
  $
-
  $
-

Real estate:

Commercial real estate

2,275

2,275

2,275

-

-

SFR mortgage

6,731

-

-

420

420

Total
  $
9,450
  $
2,275
  $
2,275
  $
420
  $
420

Total nonperforming, past due, and OREO
  $
17,489
  $
       13,894
  $
       20,461
  $
25,661
  $
17,345

% of Total gross loans

0.23%

0.18%

0.27%

0.33%

0.23%

Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were ~~$17.0~~$6.6 million at ~~March 31,~~September 30, 2019, or ~~0.22%~~0.09% of total loans. Total nonperforming loans at ~~March 31,~~September 30, 2019 included ~~$13.7~~$4.5 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $20.0 million, or 0.26% of total loans, at December 31, 2018 and ~~$10.2~~$16.4 million, or ~~0.21%~~0.22%, of total loans, at ~~March 31,~~September 30, 2018. The ~~$3.0~~$4.7 million decrease in nonperforming loans quarter-over-quarter was primarily due to a ~~$4.9~~$2.4 million decrease in nonperforming ~~commercial real estate~~SBA loans, ~~partially offset by~~ a ~~$1.2~~$1.8 million ~~increase~~decrease in nonperforming ~~SBA~~SFR mortgage loans, and ~~an $898,000 increase~~a $443,000 decrease in nonperforming commercial and industrial loans.
At ~~March 31,~~September 30, 2019, we had ~~one~~three OREO ~~property~~properties with a carrying value of ~~$2.3~~$9.5 million, compared to one OREO property with a carrying value of $420,000 at both December 31, 2018 and ~~none at March 31,~~September 30, 2018. During the first quarter of 2019, we sold one OREO property, realizing a net gain on sale of $105,000. There ~~was one addition~~were three additions to OREO for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.
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, ~~increases~~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, 2018.
~~Acquired SJB Assets~~
~~Loans acquired through the SJB acquisition are accounted for under ASC Topic310-30,~~~~Loans and Debt Securities Acquired with Deteriorated Credit Quality~~ ~~(“ASC310-30”).~~ ~~PCI loans accounted for under ASC310-30~~ ~~are generally considered accruing and performing loans as the loans accrete interest income over the estimated life~~
60
Table of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonperforming loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of March 31, 2019, there were no PCI loans considered as nonperforming as described above.
~~There were no acquired SJB OREO properties remaining as of March 31, 2019 or December 31, 2018.~~
Contents
Allowance for Loan Losses
The allowance for loan losses is established as management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased (decreased) by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are added to the allowance. The determination of the balance in the allowance for loan losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is appropriate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past loan loss experience, and such other factors that are considered in estimating inherent credit losses.
The allowance for loan losses totaled ~~$65.2~~$68.7 million as of ~~March 31,~~September 30, 2019, compared to $63.6 million as of December 31, 2018 and ~~$59.9~~$60.0 million as of ~~March 31,~~September 30, 2018. The allowance for loan losses was increased by a ~~$1.5~~$5.0 million loan loss provision and ~~$88,000~~$59,000 in net recoveries for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. This compares to a ~~$1.0~~$1.5 million loan loss provision recapture, offset by net recoveries of ~~$1.4~~$1.9 million for the same period of 2018.
61
Table of Contents
The table below presents a summary of net charge-offs and recoveries by type and the resulting allowance for loan losses and recapture of provision for loan losses for the periods presented.

   As of and For the
Three Months Ended
March 31,
   2019    2018
   (Dollars in thousands)
Allowance for loan losses at beginning of period
     $ 63,613        $ 59,585
Charge-offs:

Commercial and industrial
   -         -
SBA
   (20)    -
Commercial real estate
   -         -
Construction
   -         -
SFR mortgage
   -         -
Dairy & livestock and agribusiness
   (78)    -
Consumer and other loans
   (1)    (7)




Total charge-offs
   (99)    (7)




Recoveries:

Commercial and industrial
   110      10
SBA
   5      5
Commercial real estate
   -         -
Construction
   3      1,334
SFR mortgage
   68      -
Dairy & livestock and agribusiness
   -         -
Consumer and other loans
   1      8




Total recoveries
   187      1,357




Net recoveries
   88      1,350
Provision for (recapture of) loan losses
   1,500      (1,000)




Allowance for loan losses at end of period
     $ 65,201        $ 59,935




Summary of reserve for unfunded loan commitments:

Reserve for unfunded loan commitments at beginning of period
     $ 8,959        $ 6,306
Provision for unfunded loan commitments
   -         -




Reserve for unfunded loan commitments at end of period
     $ 8,959        $ 6,306




Reserve for unfunded loan commitments to total unfunded loan commitments
   0.54%    0.61%
Amount of total loans at end of period (1)
     $ 7,606,863        $ 4,794,983
Average total loans outstanding (1)
     $ 7,662,573        $ 4,789,943
Net recoveries to average total loans
   0.00%    0.03%
Net recoveries to total loans at end of period
   0.00%    0.03%
Allowance for loan losses to average total loans
   0.85%    1.25%
Allowance for loan losses to total loans at end of period
   0.86%    1.25%
Net recoveries to allowance for loan losses
   0.13%    2.25%
Net recoveries to provision for (recapture of) loan losses
   5.87%    -135.00%

As of and For the
Nine Months Ended
September 30,

2019

2018

(Dollars in thousands)
Allowance for loan losses at beginning of period

  $        63,613

  $        59,585
Charge-offs:

Commercial and industrial

(48)

-
SBA

(295)

(257)
Commercial real estate

-

-
Construction

-

-
SFR mortgage

-

-
Dairy & livestock and agribusiness

(78)

-
Consumer and other loans

(7)

(10)

Total charge-offs

(428)

(267)

Recoveries:

Commercial and industrial

253

81
SBA

9

15
Commercial real estate

-

-
Construction

9

1,945
SFR mortgage

191

-
Dairy & livestock and agribusiness

19

19
Consumer and other loans

6

129

Total recoveries

487

2,189

Net recoveries

59

1,922
Provision for (recapture of) loan losses

5,000

(1,500)

Allowance for loan losses at end of period

  $        68,672

  $        60,007

Summary of reserve for unfunded loan commitments:

Reserve for unfunded loan commitments at beginning of period

  $          8,959

  $          6,306
Estimated fair value of reserve for unfunded loan commitment assumed from Community Bank

-

2,903
Provision for unfunded loan commitments

-

-

Reserve for unfunded loan commitments at end of period

  $          8,959

  $          9,209

Reserve for unfunded loan commitments to total unfunded loan commitments

0.55%

0.54%

Amount of total loans at end of period (1)

  $   7,494,451

  $   7,582,459
Average total loans outstanding (1)

  $   7,571,502

  $   5,312,558

Net recoveries to average total loans

0.00%

0.04%
Net recoveries to total loans at end of period

0.00%

0.03%
Allowance for loan losses to average total loans

0.91%

1.13%
Allowance for loan losses to total loans at end of period

0.92%

0.79%
Net recoveries to allowance for loan losses

0.09%

3.20%
Net recoveries to provision for (recapture of) loan losses

1.18%

-128.13%
(1)
Includes PCI loans and is net of deferred loan origination fees, costs and discounts.
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Table of Contents
Specific allowance:
For impaired loans, we incorporate specific allowances based on loans individually evaluated utilizing one of three valuation methods, as prescribed under ASC
310-10.
If the ~~measure~~measured value of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the ALLL or, alternatively, a specific allocation will be established and included in the overall ALLL balance. The specific allocation represents ~~$435,000 (0.67%~~$540,000 (0.79%), $561,000 (0.88%) and ~~zero~~$83,000 (0.14%) of the total allowance as of ~~March 31,~~September 30, 2019, December 31, 2018 and ~~March 31,~~September 30, 2018, respectively.
General allowance:
The remaining loan portfolio is collectively evaluated for impairment under ASC
450-20
and is divided into risk rating classes of loan receivables between ~~“classified”~~“Classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and is further disaggregated into loan segments by loan type with similar risk characteristics. Both the classified and
non-classified
loan categories are divided into eight (8) specific loan segments. An allowance is provided for each segment based upon that segment’s average historical loss experience over an established look back period, adjusted for the applicable loss emergence periods (i.e., the amount of time from the point at which a loss is incurred to the point at which the loss is confirmed). For each segment, the allowance is adjusted further for current conditions based on our analysis of specific environmental or qualitative loss factors (as prescribed in the 2006 Interagency Policy Statement on ALLL) affecting the collectability of our loan portfolio that may cause actual loss rates to differ from historical loss experience.
There have been no material changes to the Bank’s ALLL methodology during the first ~~quarter~~nine months of 2019. The ALLL balance increased during the first ~~quarter~~nine months of 2019 by ~~$1.5~~$5.0 million in provision for loan losses and a net recovery of loans of ~~$88,000.~~$59,000. The Bank determined that the ALLL balance of ~~$65.2~~$68.7 million was appropriate and the result of the net effect of additional requirements related to loan growth experienced during the ~~three~~nine month period within the commercial and industrial and commercial real estate ~~and dairy & livestock and agribusiness~~ segments of the
non-acquired
loan portfolio, modest increase in certain qualitative loss factors and reduced reserve requirements for the continued but moderate reductions in the historical loss rates for predominately all portfolio segments.
The ALLL balance also increased as a result of reserve requirements for acquired loan portfolios that exceeded remaining unaccreted fair value credit discounts.
While we believe that the allowance at ~~March 31,~~September 30, 2019 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 loan losses in the future.
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Table of Contents
Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were ~~$8.65~~$8.79 billion at ~~March 31,~~September 30, 2019. This represented a decrease of ~~$173.4~~$33.2 million, or ~~1.96%~~0.38%, over total deposits of $8.83 billion at December 31, 2018. The composition of deposits is summarized ~~for~~as of the ~~periods~~dates presented in the table below.

   March 31, 2019    December 31, 2018




   Balance    Percent    Balance    Percent




   (Dollars in thousands)
Noninterest-bearing deposits
     $ 5,098,822    58.92%      $ 5,204,787    58.96%
Interest-bearing deposits

Investment checking
   426,983    4.93%    460,972    5.22%
Money market
   2,218,360    25.63%    2,236,018    25.33%
Savings
   394,636    4.57%    393,769    4.46%
Time deposits
   515,319    5.95%    531,944    6.03%








Total deposits
     $     8,654,120        100.00%      $     8,827,490        100.00%








September 30, 2019

December 31, 2018

Balance

Percent

Balance

Percent

(Dollars in thousands)

Noninterest-bearing deposits
  $
5,385,104

61.23%
  $
5,204,787

58.96%

Interest-bearing deposits

Investment checking

433,615

4.93%

460,972

5.22%

Money market

2,110,780

24.00%

2,236,018

25.33%

Savings

403,108

4.59%

393,769

4.46%

Time deposits

461,723

5.25%

531,944

6.03%

Total deposits
  $
     8,794,330

    100.00%
  $
     8,827,490

    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 ~~$5.10~~$5.39 billion at ~~March 31,~~September 30, 2019, representing ~~a decrease~~an increase of ~~$106.0~~$180.3 million, or ~~2.04%~~3.46%, from noninterest-bearing deposits of $5.20 billion at December 31, 2018. Noninterest-bearing deposits represented ~~58.92%~~61.23% of total deposits for ~~March 31,~~September 30, 2019, compared to 58.96% of total deposits for December 31, 2018.
Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled ~~$3.04~~$2.95 billion at ~~March 31,~~September 30, 2019, representing a decrease of ~~$50.8~~$143.3 million, or ~~1.64%~~4.63%, from savings deposits of $3.09 billion at December 31, 2018.
Time deposits totaled ~~$515.3~~$461.7 million at ~~March 31,~~September 30, 2019, representing a decrease of ~~$16.6~~$70.2 million, or ~~3.13%~~13.20%, from total time deposits of $531.9 million for December 31, 2018.
Borrowings
In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was ~~7.08%~~4.61% for the ~~first~~third quarter of 2019, compared to ~~7.87%~~5.35% for the ~~first quarter~~same period of 2018.
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a
pre-determined
balance in a demand deposit account, in order to earn interest. As of ~~March 31,~~September 30, 2019 and December 31, 2018, total funds borrowed under these agreements were ~~$462.8~~$407.9 million and $442.3 million, respectively, with a weighted average interest rate of ~~0.66%~~0.57% and 0.39%, respectively.
We had ~~$153.0~~$4.9 million in ~~short-term~~other borrowings at ~~March 31,~~September 30, 2019, compared to $280.0 million at December 31, 2018.
At ~~March 31,~~September 30, 2019, ~~$6.18~~$5.91 billion of loans and ~~$1.53~~$1.46 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
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Table of Contents
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of ~~March 31,~~September 30, 2019.

      Maturity by Period
   Total    Less Than
One
Year    One Year
Through
Three Years    Four Years
Through
Five Years    Over
Five
Years
   (Dollars in thousands)
Deposits (1)
     $ 8,654,120      $ 8,528,341      $ 110,675      $ 6,716      $ 8,388
Customer repurchase agreements (1)
   462,774    462,774    -    -    -
Junior subordinated debentures (1)
   25,774    -    -    -    25,774
Deferred compensation
   20,860    784    1,303    881    17,892
Operating leases
   23,069    7,784    9,637    3,898    1,750
Affordable housing investment
   6,736    4,379    1,711    605    41










Total
     $ 9,193,333      $ 9,004,062      $ 123,326      $ 12,100      $ 53,845










Maturity by Period

Total

Less Than
One
Year

One Year
Through
Three Years

Four Years
Through
Five Years

Over
Five
Years

(Dollars in thousands)

Deposits (1)
  $
8,794,330
  $
8,674,968
  $
107,752
  $
3,251
  $
8,359

Customer repurchase agreements (1)

        407,850

        407,850

-

-

-

Junior subordinated debentures (1)

25,774

-

-

-

        25,774

Deferred compensation

23,305

723

1,356

807

20,419

Operating leases

23,533

7,349

9,905

        4,297

1,982

Affordable housing investment

6,242

4,167

1,984

55

36

Total
  $
9,281,034
  $
9,095,057
  $
120,997
  $
   8,410
  $
56,570

(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.
At ~~March 31,~~September 30, 2019, we had ~~$153.0~~$4.9 million in ~~short-term~~other borrowings compared to $280.0 million at December 31, 2018, and ~~zero~~$30.0 million at ~~March 31,~~September 30, 2018.
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.
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 employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under
non-cancelable
operating leases. Refer to Note 1312 —
Leases
of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.
65

Table of Contents
Off-Balance
Sheet Arrangements
The following table summarizes the
off-balance
sheet items at ~~March 31,~~September 30, 2019.

      Maturity by Period
   Total    Less Than
One
Year    One Year
to Three
Years    Four Years
to Five
Years    After
Five
Years
   (Dollars in thousands)
Commitment to extend credit:

Commercial and industrial
     $ 943,765      $ 672,586      $ 206,082      $ 14,993      $ 50,104
SBA
   628    -    4    -    624
Real estate:

Commercial real estate
   251,053    83,727    72,488    80,088    14,750
Construction
   92,655    65,429    24,026    -    3,200
SFR Mortgage
   8,836    2,106    3,500    -    3,230
Dairy & livestock and agribusiness (1)
   162,388    141,685    20,303    400    -
Consumer and other loans
   152,924    14,447    9,066    4,790    124,621










Total commitment to extend credit
   1,612,249    979,980    335,469    100,271    196,529
Obligations under letters of credit
   52,066    45,462    6,356    248    -










Total
     $ 1,664,315      $ 1,025,442      $ 341,825      $ 100,519      $ 196,529










Maturity by Period

Total

Less Than
One
Year

One Year
to Three
Years

Four Years
to Five
Years

After
Five
Years

(Dollars in thousands)

Commitment to extend credit:

Commercial and industrial
  $
951,334
  $
695,927
  $
160,214
  $
7,333
  $
87,860

SBA

410

60

4

-

346

Real estate:

Commercial real estate

253,648

48,533

86,165

100,747

18,203

Construction

80,342

63,445

13,697

-

3,200

SFR Mortgage

6,998

5,006

-

-

1,992

Dairy & livestock and agribusiness (1)

151,947

81,488

70,254

205

-

Consumer and other loans

139,059

17,430

7,036

4,894

109,699

Total commitment to extend credit

1,583,738

911,889

337,370

113,179

221,300

Obligations under letters of credit

50,244

41,383

8,613

248

-

Total
  $
1,633,982
  $
   953,272
  $
345,983
  $
113,427
  $
221,300

(1)
Total commitments to extend credit to agribusiness were ~~$15.5~~$13.3 million at ~~March 31,~~September 30, 2019.
As of ~~March 31,~~September 30, 2019, we had commitments to extend credit of approximately ~~$1.61~~$1.58 billion, and obligations under letters of credit of ~~$52.1~~$50.2 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. The Company had a reserve for unfunded loan commitments of $9.0 million as of ~~March 31,~~September 30, 2019 and December 31, 2018 included in other liabilities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
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Table of Contents
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 the Company’s capital.
The Company’s total equity was ~~$1.89~~$1.97 billion at ~~March 31,~~September 30, 2019. This represented an increase of ~~$39.7~~$115.7 million, or ~~2.15%~~6.25%, from total equity of $1.85 billion at December 31, 2018. This increase was due to ~~$51.6~~$156.5 million in net earnings, a ~~$12.8~~$30.4 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio, and ~~$424,000~~$4.5 million for various stock based compensation items. This was offset by ~~$25.2~~$75.7 million in cash dividends declared by the Company during the first ~~quarter~~nine months of 2019.
During the ~~first~~third quarter of 2019, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per ~~share, which compares to $0.14 per share in the fourth quarter of 2018.~~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 and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.
On August 11, 2016, our Board of Directors ~~authorized an increase in CVB’s common stock~~approved a program to repurchase ~~program originally announced in 2008~~up to 10,000,000 shares of CVB common stock in the open market or ~~approximately 9.3% of CVB’s outstanding shares~~in privately negotiated transactions, at ~~the time of authorization,~~times and ~~adopted a10b5-1~~ ~~plan.~~at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. ~~On March 30,~~Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current
10b5-1
plan originally adopted in November, 2018 ~~the Company terminated its10b5-1~~ ~~plan~~and subsequently amended in ~~order to comply with Regulation M, due to the then-pending CB acquisition and contemplated issuance of shares of CVB. A new10b5-1~~ ~~plan was approved by the Board of Directors and became effective on November 1, 2018.~~July, 2019. For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the Company ~~did not repurchase any~~repurchased 905 shares of CVB common stock outstanding under this program. As of ~~March 31,~~September 30, 2019, we have ~~9,577,917~~9,577,012 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.
The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At ~~March 31,~~September 30, 2019, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.
Business — Capital Adequacy Requirements
” as described in our Annual Report on Form
10-K
for the year ended December 31, 2018.
At ~~March 31,~~September 30, 2019, 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.
The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.

   March 31, 2019 December 31, 2018
Capital Ratios      Adequately
Capitalized
Ratios Well
  Capitalized
Ratios CVB Financial
Corp.
Consolidated Citizens
  Business
Bank CVB Financial
Corp.
Consolidated Citizens
  Business
Bank
Tier 1 leverage capital ratio
   4.00 % 5.00 % 11.38 % 11.27 % 10.98 % 10.90 %
Common equity Tier I capital ratio
   4.50 % 6.50 % 13.76 % 13.90 % 13.04 % 13.22 %
Tier 1 risk-based capital ratio
   6.00 % 8.00 % 14.05 % 13.90 % 13.32 % 13.22 %
Total risk-based capital ratio
   8.00 % 10.00 % 14.90 % 14.76 % 14.13 % 14.03 %

September 30, 2019

December 31, 2018

Capital Ratios

  Adequately
Capitalized
Ratios

Well
  Capitalized
Ratios

CVB Financial
Corp.
Consolidated

Citizens
  Business
Bank

CVB Financial
Corp.
Consolidated

Citizens
  Business
Bank

Tier 1 leverage capital ratio

4.00%

5.00%

12.23%

12.09%

10.98%

10.90%

Common equity Tier I capital ratio

4.50%

6.50%

14.64%

14.75%

13.04%

13.22%

Tier 1 risk-based capital ratio

6.00%

8.00%

14.93%

14.75%

13.32%

13.22%

Total risk-based capital ratio

8.00%

10.00%

15.83%

15.65%

14.13%

14.03%

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Table of Contents
Basel III also introduces a new “capital conservation buffer,” composed entirely of CET1, on top of minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum requirement but below the capital conservation buffer will face constraints on dividends, equity repurchases and payment of discretionary bonuses based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and has been fully phased in over a four-year period reaching 2.5% on January 1, 2019. The Company and the Bank are now required to maintain minimum capital ratios as follows:

   Equity Tier 1 Total Leverage
     Tier 1 Ratio     Capital Ratio     Capital Ratio           Ratio
Regulatory minimum ratio
   4.5% 6.0% 8.0% 4.0%
Plus: Capital conservation buffer requirement
   2.5% 2.5% 2.5% -
Regulatory minimum ratio plus capital conservation buffer
   7.0% 8.5% 10.5% 4.0%

Equity
  Tier 1 Ratio

Tier 1
  Capital Ratio

Total
  Capital Ratio

Leverage
        Ratio

Regulatory minimum ratio

4.5%

6.0%

8.0%

4.0%

Plus: Capital conservation buffer requirement

2.5%

2.5%

2.5%

-

Regulatory minimum ratio plus capital conservation buffer

7.0%

8.5%

10.5%

4.0%

It is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III final rule. The exact amount, however, will depend upon regulatory determinations and our prevailing risk profile under various stress scenarios.
68

Table of Contents
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Liquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly 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 ~~$8.65~~$8.79 billion at ~~March 31,~~September 30, 2019 decreased ~~$173.4~~$33.2 million, or ~~1.96%~~0.38%, over total deposits of $8.83 billion at December 31, 2018.
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. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The 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.
CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. 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. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.
Below is a summary of our average cash position and statement of cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018. 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

   For the Three Months Ended March 31,
   2019    2018
   (Dollars in thousands)
Average cash and cash equivalents
     $ 186,473        $ 250,316
Percentage of total average assets
   1.63%      3.03%
Net cash provided by operating activities
     $ 54,487        $ 45,996
Net cash provided by investing activities
   253,841      185,168
Net cash (used in) provided by financing activities
   (300,062)    80,697




Net increase in cash and cash equivalents
     $ 8,266        $ 311,861




For the Nine Months Ended September 30,

2019

2018

(Dollars in thousands)

Average cash and cash equivalents
  $
237,244
  $
237,817

Percentage of total average assets

2.10%

2.69%

Net cash provided by operating activities
  $
147,410
  $
116,564

Net cash provided by investing activities

538,256

874,202

Net cash used in financing activities

(412,066)

(940,668)

Net increase in cash and cash equivalents
  $
273,600
  $
50,098

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Table of Contents
Average cash and cash equivalents decreased by ~~$63.8 million,~~$573,000, or ~~25.50%~~0.24%, to ~~$186.5~~$237.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, compared to ~~$250.3~~$237.8 million for the same period of 2018.
At ~~March 31,~~September 30, 2019, cash and cash equivalents totaled ~~$172.2~~$437.5 million. This represented ~~a decrease~~an increase of ~~$284.0~~$243.1 million, or ~~62.25%~~124.99%, from ~~$456.2~~$194.5 million at ~~March 31,~~September 30, 2018.
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
re-pricing
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 either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the
12-month
and
24-month
time horizon.
The following depicts the Company’s net interest income sensitivity analysis as of the periods presented below.

                    Estimated Net Interest Income Sensitivity (1)
March 31, 2019 December 31, 2018
24-month Period 24-month Period
    Interest Rate Scenario
12-month Period (Cumulative) Interest Rate Scenario 12-month Period (Cumulative)
+ 200 basis points
3.71% 7.22% + 200 basis points 3.80% 7.40%
- 200 basis points
-4.93% -9.84% - 200 basis points -5.29% -10.26%

                    Estimated Net Interest Income Sensitivity (1)

September 30, 2019

December 31, 2018

    Interest Rate Scenario

12-month
Period

24-month
Period
(Cumulative)

Interest Rate Scenario

12-month
Period

24-month
Period
(Cumulative)

+ 200 basis points

4.50%

8.70%

+ 200 basis points

3.80%

7.40%

- 100 basis points

-2.30%

-5.00%

- 200 basis points

-5.29%

-10.26%

(1)
Percentage change from base.
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.
70
Table of Contents
We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term
re-pricing
risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At ~~March 31,~~September 30, 2019 and December 31, 2018, 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, 2019            December 31, 2018
200 bp decrease in interest rates
   -27.3%    -24.4%
100 bp decrease in interest rates
   -11.2%    -10.2%
100 bp increase in interest rates
   6.6%    5.8%
200 bp increase in interest rates
   11.6%    10.3%
300 bp increase in interest rates
   15.5%    13.8%
400 bp increase in interest rates
   18.5%    16.6%

Instantaneous Rate Change

    September 30, 2019

    December 31, 2018

100 bp decrease in interest rates

-19.6%

-10.2%

100 bp increase in interest rates

13.3%

5.8%

200 bp increase in interest rates

23.3%

10.3%

300 bp increase in interest rates

31.0%

13.8%

400 bp increase in interest rates

37.1%

16.6%

As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “
Asset/Liability Management and Interest Rate Sensitivity Management
” included in Item 2 “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2018. Our analysis of market risk and market-sensitive financial information ~~contain~~contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.
ITEM 4.   CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the fiscal quarter ended ~~March 31,~~September 30, 2019, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
71

Table of Contents
PART II – OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and
non-ordinary
course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.
The Company is a defendant and cross-complainant in an action entitled Edward A. Dunagan et al v. Citizens Business Bank, as successor to American Security Bank (ASB), Case No. CVDS1408287, filed in the Superior Court for San Bernardino County. The complaint was initially filed in May, 2014 against ASB, which was acquired during the same month by CBB, and a Second Amended Complaint (SAC) was filed on September 9, 2015, naming CBB as the primary defendant. The case arises out of a number of defaulted commercial real estate loans originally made by ASB to the Dunagans and various entities owned by the Dunagans (Dunagan Parties), and the SAC included claims by the Dunagans (1) contesting their liabilities under their personal guarantees for deficiencies on certain of the defaulted loans, (2) attacking the validity of ASB’s foreclosures on certain properties owned by the Dunagan Parties, and (3) claiming emotional distress caused by ASB’s allegedly wrongful actions in connection with such foreclosures. A bench trial on the Dunagans’ claims took place in late July and early August, 2018.
On February 11, 2019, the Court issued a final statement of decision and judgment finding in favor of the Dunagans and against Citizens Business Bank/ASB on all three claims made by the plaintiffs enumerated above, and awarding damages and attorney’s fees and costs to the Dunagans in an aggregate amount of approximately $1.34 million. The Company intends to vigorously appeal this decision and filed a notice of appeal on February 22, 2019. The Company also believes that the bankers professional liability insurance policy previously obtained by ASB (which provides for a $5 million per claim limit subject to a $100,000 deductible) may cover all or a substantial portion of any final monetary award to the plaintiffs. The Company continues to believe that this adverse decision and any monetary award ultimately payable to the plaintiffs are not expected to have a material adverse impact on the Company’s results of operations, financial condition or cash flows.
For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.
Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.
We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A.   RISK FACTORS
There have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form
10-K
for the year ended December 31, 2018. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form
10-K
and any subsequent Form
10-Q
or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” in this Quarterly Report on Form
10-Q.
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Table of Contents
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On ~~July 16, 2008,~~August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock ~~(such number will not be adjusted for stock splits, stock dividends, and the like)~~ in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. As a result of various repurchases made under the 2008 repurchase program, on August 11, 2016, our Board of Directors authorized an increase in CVB’s common stock repurchase program back to 10,000,000 shares, or approximately 9.3% of CVB’s currently outstanding shares at the time of authorization, and adopted a~~10b5-1~~ ~~plan.~~ There is no expiration date for this repurchase program. ~~The Company terminated its~~Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current
10b5-1
plan originally adopted in ~~January 2017~~November, 2018 and subsequently amended in ~~order to comply with Regulation M. A new10b5-1~~ ~~plan was approved by the Board of Directors effective as of May 2, 2017. On March 30, 2018, the Company terminated its10b5-1~~ ~~plan in order to comply with Regulation M, due to the then-pending CB acquisition and contemplated issuance of shares of CVB. A new10b5-1~~ ~~plan was approved by the Board of Directors effective as of November 1, 2018.~~July, 2019. For the three months ended ~~March 31,~~September 30, 2019, the Company ~~did not repurchase any~~repurchased 905 shares of CVB common stock outstanding under this program. As of ~~March 31,~~September 30, 2019, we have ~~9,577,917~~9,577,012 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.

Period

Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs

    Average Price
    Paid Per Share

Maximum Number of Shares
Available for Repurchase Under
the Plans or Programs

July 1 - 31, 2019

-
$
-

9,577,917

August 1 - 31, 2019

584

20.03

9,577,333

September 1 - 30, 2019

321

20.03

9,577,012

Total

905

20.03

9,577,012

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4.   MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5.   OTHER INFORMATION
None
ITEM 6.   EXHIBITS
~~Exhibit No.~~

Exhibit No.
Description of Exhibits
~~31.1~~
  10.1
Retirement and Consulting Agreement for Christopher D. Myers, dated July 17, 2019† (1)
  10.2
Amendment to Employment Agreement for Christopher D. Myers, dated July 17, 2019† (2)
  31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH

XBRL Taxonomy Extension Schema Document
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF

XBRL Taxonomy Extension Definition Linkbase Document
101.LAB

XBRL Taxonomy Extension Label Linkbase Document
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document
    104
The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended September 30, 2019, has been formatted in Inline XBRL.
† Indicates a management contract or compensation plan.
(1) Incorporated herein by reference to Exhibit 10.1 to our Form
8-K
filed with the SEC on July 19, 2019.
(2) Incorporated herein by reference to Exhibit 10.2 to our Form
8-K
filed with the SEC on July 19, 2019.
73

Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CVB FINANCIAL CORP.

(Registrant)
Date: ~~May 10,~~November 12, 2019

/s/ E. Allen Nicholson

E. Allen Nicholson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)
73
74


	March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	168,877		$	144,008
Interest-earning balances due from Federal Reserve		3,337			19,940

Total cash and cash equivalents		172,214			163,948

Interest-earning balances due from depository institutions		7,420			7,670
Investment securitiesavailable-for-sale, at fair value (with amortized cost of $1,677,732 at March 31, 2019, and $1,757,666 at December 31, 2018)		1,673,501			1,734,085
Investment securitiesheld-to-maturity (with fair value of $720,651 at March 31, 2019, and $721,537 at December 31, 2018)		733,464			744,440

Total investment securities		2,406,965			2,478,525

Investment in stock of Federal Home Loan Bank (FHLB)		17,688			17,688
Loans and lease finance receivables		7,606,863			7,764,611
Allowance for loan losses		(65,201	)		(63,613	)

Net loans and lease finance receivables		7,541,662			7,700,998

Premises and equipment, net		55,833			58,193
Bank owned life insurance (BOLI)		222,010			220,758
Accrued interest receivable		30,557			30,649
Intangibles		50,927			53,784
Goodwill		666,539			666,539
Other real estate owned (OREO)		2,275			420
Income taxes		35,833			62,174
Other assets		95,034			67,807

Total assets	$	11,304,957		$	11,529,153


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	5,098,822		$	5,204,787
Interest-bearing		3,555,298			3,622,703

Total deposits		8,654,120			8,827,490
Customer repurchase agreements		462,774			442,255
Other borrowings		153,000			280,000
Deferred compensation		20,860			20,033
Junior subordinated debentures		25,774			25,774
Other liabilities		97,502			82,411

Total liabilities		9,414,030			9,677,963


Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,009,185 at March 31, 2019, and 140,000,017 at December 31, 2018		1,294,093			1,293,669
Retained earnings		602,279			575,805
Accumulated other comprehensive loss, net of tax		(5,445	)		(18,284	)

Total stockholders’ equity		1,890,927			1,851,190

Total liabilities and stockholders’ equity	$	11,304,957		$	11,529,153

	September 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	222,248		$	144,008
Interest-earning balances due from Federal Reserve		215,300			19,940
Total cash and cash equivalents		437,548			163,948
Interest-earning balances due from depository institutions		5,673			7,670
Investment securities available-for-sale, at fair value (with amortized cost of $1,549,406 at September 30, 2019, and $1,757,666 at December 31, 2018)		1,570,406			1,734,085
Investment securities held-to-maturity (with fair value of $711,891 at September 30, 2019, and $721,537 at December 31, 2018)		703,953			744,440
Total investment securities		2,274,359			2,478,525
Investment in stock of Federal Home Loan Bank (FHLB)		17,688			17,688
Loans and lease finance receivables		7,494,451			7,764,611
Allowance for loan losses		(68,672	)		(63,613	)
Net loans and lease finance receivables		7,425,779			7,700,998
Premises and equipment, net		53,256			58,193
Bank owned life insurance (BOLI)		224,841			220,758
Accrued interest receivable		27,244			30,649
Intangibles		45,446			53,784
Goodwill		663,707			666,539
Other real estate owned (OREO)		9,450			420
Income taxes		44,630			62,174
Other assets		103,141			67,807
Total assets	$	11,332,762		$	11,529,153

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	5,385,104		$	5,204,787
Interest-bearing		3,409,226			3,622,703
Total deposits		8,794,330			8,827,490
Customer repurchase agreements		407,850			442,255
Other borrowings		4,914			280,000
Deferred compensation		22,334			20,033
Junior subordinated debentures		25,774			25,774
Other liabilities		110,667			82,411
Total liabilities		9,365,869			9,677,963

Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,157,063 at September 30, 2019, and 140,000,017 at December 31, 2018		1,298,138			1,293,669
Retained earnings		656,659			575,805
Accumulated other comprehensive income (loss), net of tax		12,096			(18,284	)
Total stockholders’ equity		1,966,893			1,851,190
Total liabilities and stockholders’ equity	$	11,332,762		$	11,529,153


	For the Three Months Ended March 31,
	2019			2018
Interest income:
Loans and leases, including fees	$	99,687		$	55,196
Investment securities:
Investment securitiesavailable-for-sale		10,645			11,868
Investment securitiesheld-to-maturity		4,525			4,765

Total investment income		15,170			16,633

Dividends from FHLB stock		332			332
Interest-earning deposits with other institutions		94			536

Total interest income		115,283			72,697

Interest expense:
Deposits		3,871			1,525
Borrowings and customer repurchase agreements		1,610			453
Junior subordinated debentures		266			198

Total interest expense		5,747			2,176

Net interest income before provision for (recapture of) loan losses		109,536			70,521
Provision for (recapture of) loan losses		1,500			(1,000	)

Net interest income after provision for (recapture of) loan losses		108,036			71,521

Noninterest income:
Service charges on deposit accounts		5,141			4,045
Trust and investment services		2,182			2,157
Bankcard services		950			804
BOLI income		1,336			979
Gain on OREO, net		105			3,540
Gain on sale of building, net		4,545			-
Other		2,044			1,391

Total noninterest income		16,303			12,916

Noninterest expense:
Salaries and employee benefits		29,302			22,314
Occupancy and equipment		5,615			4,192
Professional services		1,925			1,530
Software licenses and maintenance		2,422			1,760
Marketing and promotion		1,394			1,356
Amortization of intangible assets		2,857			331
Acquisition related expenses		3,149			803
Other		4,940			3,660

Total noninterest expense		51,604			35,946

Earnings before income taxes		72,735			48,491

Income taxes		21,093			13,578

Net earnings	$	51,642		$	34,913


Other comprehensive income (loss):
Unrealized gain (loss) on securities arising during the period, before tax	$	18,227		$	(32,170	)
Less: Income tax (expense) benefit related to items of other comprehensive income		(5,388	)		9,511

Other comprehensive income (loss), net of tax		12,839			(22,659	)

Comprehensive income	$	64,481		$	12,254


Basic earnings per common share	$	0.37		$	0.32
Diluted earnings per common share	$	0.37		$	0.32


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Interest income:
Loans and leases, including fees	$	98,796		$	79,818		$	300,326		$	192,382
Investment securities:
Investment securities available-for-sale		9,222			11,521			29,985			35,086
Investment securities held-to-maturity		4,298			4,666			13,249			14,238

Total investment income		13,520			16,187			43,234			49,324

Dividends from FHLB stock		301			329			931			959
Interest-earning deposits with other institutions		946			304			1,140			1,475

Total interest income		113,563			96,638			345,631			244,140

Interest expense:
Deposits		4,589			2,967			12,553			6,041
Borrowings and customer repurchase agreements		568			606			3,555			1,396
Junior subordinated debentures		247			245			771			674

Total interest expense		5,404			3,818			16,879			8,111

Net interest income before provision for (recapture of) loan losses		108,159			92,820			328,752			236,029
Provision for (recapture of) loan losses		1,500			500			5,000			(1,500	)

Net interest income after provision for (recapture of) loan losses		106,659			92,320			323,752			237,529

Noninterest income:
Service charges on deposit accounts		4,833			4,295			15,039			12,431
Trust and investment services		2,330			2,182			6,964			6,738
Bankcard services		637			875			2,614			2,637
BOLI income		1,797			936			4,482			2,984
Gain on OREO, net		-			-			129			3,540
Gain on sale of building, net		-			-			4,545			-
Gain on eminent domain condemnation, net		-			-			5,685			-
Other		2,297			1,824			6,944			4,393

Total noninterest income		11,894			10,112			46,402			32,723

Noninterest expense:
Salaries and employee benefits		30,122			26,319			88,286			69,684
Occupancy and equipment		5,092			5,324			16,348			13,834
Professional services		1,688			1,154			5,653			4,374
Software licenses and maintenance		2,450			2,317			7,414			5,836
Marketing and promotion		1,517			1,134			4,149			3,638
Amortization of intangible assets		2,648			1,736			8,338			2,395
Acquisition related expenses		244			6,645			6,005			7,942
Other		3,774			4,251			13,474			11,377

Total noninterest expense		47,535			48,880			149,667			119,080

Earnings before income taxes		71,018			53,552			220,487			151,172
Income taxes		20,595			14,994			63,941			42,328

Net earnings	$	50,423		$	38,558		$	156,546		$	108,844


Other comprehensive income (loss):
Unrealized gain (loss) on securities arising during the period, before tax	$	5,423		$	(10,387	)	$	43,136		$	(49,155	)
Less: Reclassification adjustment for net gain on securities included in net income		(5	)		-			(5	)		-
Other comprehensive income (loss), before tax		5,418			(10,387	)		43,131			(49,155	)
Less: Income tax (expense) benefit related to items of other comprehensive income		(1,602	)		3,070			(12,751	)		14,532

Other comprehensive income (loss), net of tax		3,816			(7,317	)		30,380			(34,623	)

Comprehensive income	$	54,239		$	31,241		$	186,926		$	74,221


Basic earnings per common share	$	0.36		$	0.30		$	1.12		$	0.94
Diluted earnings per common share	$	0.36		$	0.30		$	1.12		$	0.94


	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2018		110,185		$	573,453		$	494,361		$	1,452		$	1,069,266
Cumulative adjustment upon adoption of ASU2018-02		-			-			(356	)		356			-
Repurchase of common stock		(34	)		(792	)		-			-			(792	)
Exercise of stock options		87			828			-			-			828
Shares issued pursuant to stock-based compensation plan		21			736			-			-			736
Cash dividends declared on common stock ($0.14 per share)		-			-			(15,434	)		-			(15,434	)
Net earnings		-			-			34,913			-			34,913
Other comprehensive loss		-			-			-			(22,659	)		(22,659	)

Balance, March 31, 2018		110,259		$	574,225		$	513,484		$	(20,851	)	$	1,066,858


Balance, January 1, 2019		140,000		$	1,293,669		$	575,805		$	(18,284	)	$	1,851,190
Repurchase of common stock		(33	)		(735	)		-			-			(735	)
Exercise of stock options		9			140			-			-			140
Shares issued pursuant to stock-based compensation plan		33			1,019			-			-			1,019
Cash dividends declared on common stock ($0.18 per share)		-			-			(25,168	)		-			(25,168	)
Net earnings		-			-			51,642			-			51,642
Other comprehensive income		-			-			-			12,839			12,839

Balance, March 31, 2019		140,009		$	1,294,093		$	602,279		$	(5,445	)	$	1,890,927


	For the Nine Months Ended September 30,
	2019			2018
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings	$	156,546		$	108,844

Adjustments to reconcile net earnings to net cash provided by operating activities:

Gain on sale of investment securities, net		(5	)		-
Gain on eminent domain condemnation, net		(5,685	)		-
Gain on sale of building, net		(4,545	)		-
Gain on sale of other real estate owned		(105	)		(3,540	)
Increase in BOLI		(5,592	)		(3,053	)
Net amortization of premiums and discounts on investment securities		7,593			10,661
Accretion of discount for acquired loans, net		(22,369	)		(6,889	)
Provision for (recapture of) loan losses		5,000			(1,500	)
Payments to FDIC, loss share agreement		-			(65	)
Stock-based compensation		3,792			2,316
Depreciation and amortization, net		16,993			4,146
Change in other assets and liabilities		(4,213	)		5,644

Total adjustments		(9,136	)		7,720

Net cash provided by operating activities	$	147,410		$	116,564


Supplemental Disclosure of Non-cash Investing Activities
Transfer of loans to other real estate owned	$	9,450		$	420
Issuance of common stock for acquisition	$	-		$	722,767


	August 10, 2018
	(Dollars in thousands)
Merger Consideration
Cash paid	$	180,719
CVBF common stock issued		722,767
		~~August 10, 2018~~
		~~(Dollars in thousands)~~
~~Merger Consideration~~
~~Cash paid~~		$	~~180,719~~
~~CVBF common stock issued~~			~~722,767~~

Total merger consideration						$	903,486


Identifiable net assets acquired, at fair value
~~Assets Acquired~~
~~Cash and cash equivalents~~			~~47,802~~
~~Investment securities~~			~~716,996~~
~~FHLB stock~~			~~17,250~~
~~Loans~~			~~2,734,081~~
~~Accrued interest receivable~~			~~7,916~~
~~Premises and equipment~~			~~14,632~~
~~BOLI~~			~~70,904~~
~~Core deposit intangible~~			~~52,200~~
~~Other assets~~			~~54,479~~

~~Total assets acquired~~							~~3,716,260~~
~~Liabilities assumed~~ Assets Acquired
~~Deposits~~			~~2,869,986~~
~~FHLB advances~~			~~297,571~~
~~Other borrowings~~			~~166,000~~
~~Other liabilities~~			~~29,192~~

~~Total liabilities assumed~~							~~3,362,749~~
Cash and cash equivalents		47,802
Investment securities		716,996
FHLB stock		17,250
Loans		2,738,100
Accrued interest receivable		7,916
Premises and equipment		14,632
BOLI		70,904
Core deposit intangible		52,200
Other assets		53,291

Total assets acquired					3,719,091
Liabilities assumed
Deposits		2,869,986
FHLB advances		297,571
Other borrowings		166,000
Other liabilities		29,192

Total liabilities assumed					3,362,749

Total fair value of identifiable net assets, at fair value							~~353,511~~ 356,342

Goodwill				$	547,144

~~Goodwill~~						$	~~549,975~~


	~~Unaudited Pro Forma~~ ~~Three Months Ended March 31,~~
	~~2018~~
	~~(Dollars in thousands,~~
	~~except per share amounts)~~

~~Total revenues (net interest income plus noninterest income)~~	$	~~122,973~~
~~Net income~~	$	~~45,991~~
~~Earnings per share - basic~~	$	~~0.33~~
~~Earnings per share - diluted~~	$	~~0.33~~


	Unaudited Pro Forma
	Three Months Ended		Nine Months Ended
	September 30, 2018
	(Dollars in thousands, except per share amounts)

Total revenues (net interest income plus noninterest income)	$	120,467	$	364,846
Net income	$	44,623	$	138,274
Earnings per share - basic	$	0.32	$	0.99
Earnings per share - diluted	$	0.32	$	0.99


	March 31, 2019
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss		Fair Value		Total Percent
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,424,937	$	6,107	$	(8,540)	$	1,422,504		85.00%
CMO/REMIC - residential		206,956		470		(2,301)		205,125		12.26%
Municipal bonds		45,052		421		(388)		45,085		2.69%
Other securities		787		-		-		787		0.05%

Totalavailable-for-sale securities	$	1,677,732	$	6,998	$	(11,229)	$	1,673,501		100.00%

Investment securitiesheld-to-maturity:
Government agency/GSE	$	133,557	$	564	$	(2,077)	$	132,044		18.21%
Residential mortgage-backed securities		169,367		737		(999)		169,105		23.09%
CMO		213,145		-		(9,998)		203,147		29.06%
Municipal bonds		217,395		1,819		(2,859)		216,355		29.64%

Totalheld-to-maturity securities	$	733,464	$	3,120	$	(15,933)	$	720,651		100.00%


	December 31, 2018
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss		Fair Value		Total Percent
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,494,106	$	1,348	$	(20,946)	$	1,474,508		85.03%
CMO/REMIC - residential		217,223		353		(3,525)		214,051		12.34%
Municipal bonds		45,621		332		(1,143)		44,810		2.59%
Other securities		716		-		-		716		0.04%

Totalavailable-for-sale securities	$	1,757,666	$	2,033	$	(25,614)	$	1,734,085		100.00%

Investment securitiesheld-to-maturity:
Government agency/GSE	$	138,274	$	572	$	(2,622)	$	136,224		18.57%
Residential mortgage-backed securities		153,874		-		(3,140)		150,734		20.67%
CMO		215,336		-		(12,081)		203,255		28.93%
Municipal bonds		236,956		556		(6,188)		231,324		31.83%

Totalheld-to-maturity securities	$	744,440	$	1,128	$	(24,031)	$	721,537		100.00%


	September 30, 2019
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities	$	1,127,395	$	20,105	$	(1,341	)	$	1,146,159		72.99	%
CMO/REMIC - residential		381,615		1,649		(336	)		382,928		24.38	%
Municipal bonds		39,564		924		(1	)		40,487		2.58	%
Other securities		832		-		-			832		0.05	%

Total available-for-sale securities	$	1,549,406	$	22,678	$	(1,678	)	$	1,570,406		100.00	%

Investment securities held-to-maturity:
Government agency/GSE	$	123,917	$	3,238	$	(170	)	$	126,985		17.60	%
Residential mortgage-backed securities		172,919		2,624		(3	)		175,540		24.56	%
CMO		204,263		76		(1,467	)		202,872		29.02	%
Municipal bonds		202,854		4,198		(558	)		206,494		28.82	%

Total held-to-maturity securities	$	703,953	$	10,136	$	(2,198	)	$	711,891		100.00	%


	December 31, 2018
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		T otal Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities	$	1,494,106	$	1,348	$	(20,946	)	$	1,474,508		85.03	%
CMO/REMIC - residential		217,223		353		(3,525	)		214,051		12.34	%
Municipal bonds		45,621		332		(1,143	)		44,810		2.59	%
Other securities		716		-		-			716		0.04	%

Total available-for-sale securities	$	1,757,666	$	2,033	$	(25,614	)	$	1,734,085		100.00	%

Investment securities held-to-maturity:
Government agency/GSE	$	138,274	$	572	$	(2,622	)	$	136,224		18.57	%
Residential mortgage-backed securities		153,874		-		(3,140	)		150,734		20.67	%
CMO		215,336		-		(12,081	)		203,255		28.93	%
Municipal bonds		236,956		556		(6,188	)		231,324		31.83	%

Total held-to-maturity securities	$	744,440	$	1,128	$	(24,031	)	$	721,537		100.00	%


	For the Three Months Ended
	March 31,
	2019		2018
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Taxable	$	10,309	$	11,445
Tax-advantaged		336		423

Total interest income fromavailable-for-sale securities		10,645		11,868

Investment securitiesheld-to-maturity:
Taxable		2,910		2,878
Tax-advantaged		1,615		1,887

Total interest income fromheld-to-maturity securities		4,525		4,765

Total interest income from investment securities	$	15,170	$	16,633


	March 31, 2019
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	-	$	-	$	703,134	$	(8,540)	$	703,134	$	(8,540)
CMO/REMIC - residential		66		-		160,926		(2,301)		160,992		(2,301)
Municipal bonds		-		-		16,689		(388)		16,689		(388)

Totalavailable-for-sale securities	$	66	$	-	$	880,749	$	(11,229)	$	880,815	$	(11,229)

Investment securitiesheld-to-maturity:
Government agency/GSE	$	26,291	$	(122)	$	60,153	$	(1,955)	$	86,444	$	(2,077)
Residential mortgage-backed securities		-		-		86,568		(999)		86,568		(999)
CMO		-		-		203,148		(9,998)		203,148		(9,998)
Municipal bonds		-		-		64,790		(2,859)		64,790		(2,859)

Totalheld-to-maturity securities	$	26,291	$	(122)	$	414,659	$	(15,811)	$	440,950	$	(15,933)


	December 31, 2018
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	692,311	$	(4,864)	$	593,367	$	(16,082)	$	1,285,678	$	(20,946)
CMO/REMIC - residential		36,582		(365)		135,062		(3,160)		171,644		(3,525)
Municipal bonds		9,568		(188)		14,181		(955)		23,749		(1,143)

Totalavailable-for-sale securities	$	738,461	$	(5,417)	$	742,610	$	(20,197)	$	1,481,071	$	(25,614)

Investment securitiesheld-to-maturity:
Government agency/GSE	$	7,479	$	(15)	$	54,944	$	(2,607)	$	62,423	$	(2,622)
Residential mortgage-backed securities		59,871		(484)		90,863		(2,656)		150,734		(3,140)
CMO		-		-		203,254		(12,081)		203,254		(12,081)
Municipal bonds		70,989		(778)		77,723		(5,410)		148,712		(6,188)

Totalheld-to-maturity securities	$	138,339	$	(1,277)	$	426,784	$	(22,754)	$	565,123	$	(24,031)


	March 31, 2019
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	11,947	$	12,113	$	500	$	506
Due after one year through five years		1,481,462		1,479,161		264,136		254,886
Due after five years through ten years		157,640		155,816		232,213		231,964
Due after ten years		26,683		26,411		236,615		233,295

Total investment securities	$	1,677,732	$	1,673,501	$	733,464	$	720,651


	September 30, 2019
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	12,278	$	12,426	$	500	$	500
Due after one year through five years		1,345,036		1,364,026		327,802		328,561
Due after five years through ten years		171,657		173,033		161,463		163,676
Due after ten years		20,435		20,921		214,188		219,154

Total investment securities	$	1,549,406	$	1,570,406	$	703,953	$	711,891


	September 30, 2019			December 31, 2018
	Total Loans and Leases			Non-PCI Loans and Leases			PCI Loans			Total Loans and Leases
	(Dollars in thousands)
Commercial and industrial	$	921,678		$	1,002,209		$	519		$	1,002,728
SBA		319,571			350,043			1,258			351,301
Real estate:
Commercial real estate		5,375,668			5,394,229			14,407			5,408,636
Construction		119,931			122,782			-			122,782
SFR mortgage		278,644			296,504			145			296,649
Dairy & livestock and agribusiness		311,229			393,843			700			394,543
Municipal lease finance receivables		54,468			64,186			-			64,186
Consumer and other loans		117,128			128,429			185			128,614

Gross loans		7,498,317			7,752,225			17,214			7,769,439
Less: Deferred loan fees, net		(3,866	)		(4,828	)		-			(4,828	)

Gross loans, net of deferred loan fees		7,494,451			7,747,397			17,214			7,764,611
Less: Allowance for loan losses		(68,672	)		(63,409	)		(204	)		(63,613	)

Total loans and lease finance receivables	$	7,425,779		$	7,683,988		$	17,010		$	7,700,998


	March 31, 2019
	Pass		Special Mention		Substandard (1)		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	913,059	$	32,685	$	11,382	$	-	$	957,126
SBA		322,393		7,704		7,860		-		337,957
Real estate:
Commercial real estate
Owner occupied		1,986,030		96,262		16,849		-		2,099,141
Non-owner occupied		3,279,696		9,290		739		-		3,289,725
Construction
Speculative		120,801		-		-		-		120,801
Non-speculative		1,111		-		-		-		1,111
SFR mortgage		278,962		3,287		3,538		-		285,787
Dairy & livestock and agribusiness		261,438		50,451		10,432		-		322,321
Municipal lease finance receivables		60,745		504		-		-		61,249
Consumer and other loans		118,596		1,215		957		-		120,768

Total gross loans, excluding PCI loans	$	7,342,831	$	201,398	$	51,757	$	-	$	7,595,986


	December 31, 2018 (1)
	Pass		Special Mention		Substandard (2)		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	961,909	$	29,358	$	10,942	$	-	$	1,002,209
SBA		336,033		7,375		6,635		-		350,043
Real estate:
Commercial real estate
Owner occupied		2,008,169		95,841		13,980		-		2,117,990
Non-owner occupied		3,260,822		9,938		5,479		-		3,276,239
Construction
Speculative		118,233		-		-		-		118,233
Non-speculative		4,549		-		-		-		4,549
SFR mortgage		289,607		3,310		3,587		-		296,504
Dairy & livestock and agribusiness		350,044		34,586		9,213		-		393,843
Municipal lease finance receivables		63,650		536		-		-		64,186
Consumer and other loans		126,085		1,263		1,081		-		128,429
Total gross loans	$	7,519,101	$	182,207	$	50,917	$	-	$	7,752,225


	For the Three Months Ended March 31, 2019
	Ending Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance March 31, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,520	$	-		$	110	$	(31	)	$	7,599
SBA		1,062		(20	)		5		232			1,279
Real estate:				-			-
Commercial real estate		44,934		-			-		1,144			46,078
Construction		981		-			3		(120	)		864
SFR mortgage		2,196		-			68		(76	)		2,188
Dairy & livestock and agribusiness		5,215		(78	)		-		562			5,699
Municipal lease finance receivables		775		-			-		(37	)		738
Consumer and other loans		726		(1	)		1		(150	)		576
PCI loans		204		-			-		(24	)		180

Total allowance for loan losses	$	63,613	$	(99	)	$	187	$	1,500		$	65,201


	For the Three Months Ended March 31, 2018
	Ending Balance December 31, 2017		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance March 31, 2018
	(Dollars in thousands)
Commercial and industrial	$	7,280	$	-		$	10	$	209		$	7,499
SBA		869		-			5		10			884
Real estate:				-			-
Commercial real estate		41,722		-			-		141			41,863
Construction		984		-			1,334		(1,331	)		987
SFR mortgage		2,112		-			-		90			2,202
Dairy & livestock and agribusiness		4,647		-			-		19			4,666
Municipal lease finance receivables		851		-			-		(17	)		834
Consumer and other loans		753		(7	)		8		(66	)		688
PCI loans		367		-			-		(55	)		312

Total allowance for loan losses	$	59,585	$	(7	)	$	1,357	$	(1,000	)	$	59,935


	For the Three Months Ended September 30, 2019
	Ending Balance June 30, 2019		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance September 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,857	$	-		$	94	$	287		$	8,238
SBA		1,119		(65	)		-		412			1,466
Real estate:
Commercial real estate		48,287		-			-		624			48,911
Construction		871		-			3		55			929
SFR mortgage		2,323		-			8		44			2,375
Dairy & livestock and agribusiness		5,341		-			-		88			5,429
Municipal lease finance receivables		726		-			-		(64	)		662
Consumer and other loans		608		(3	)		3		54			662

Total allowance for loan losses	$	67,132	$	(68	)	$	108	$	1,500		$	68,672


	For the Three Months Ended September 30, 2018
	Ending Balance June 30, 2018		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance September 30, 2018
	(Dollars in thousands)
Commercial and industrial	$	6,970	$	-		$	44	$	477		$	7,491
SBA		841		(257	)		5		369			958
Real estate:
Commercial real estate		42,597		-			-		(1,056	)		41,541
Construction		1,003		-			15		115			1,133
SFR mortgage		2,155		-			-		(30	)		2,125
Dairy & livestock and agribusiness		4,351		-			-		673			5,024
Municipal lease finance receivables		808		-			-		7			815
Consumer and other loans		642		(1	)		118		(44	)		715
PCI loans		216		-			-		(11	)		205
Total allowance for loan losses	$	59,583	$	(258	)	$	182	$	500		$	60,007

	For the Nine Months Ended September 30, 2019
	Ending Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance September 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,528	$	(48	)	$	253	$	505		$	8,238
SBA		1,078		(295	)		9		674			1,466
Real estate:
Commercial real estate		45,097		-			-		3,814			48,911
Construction		981		-			9		(61	)		929
SFR mortgage		2,197		-			191		(13	)		2,375
Dairy & livestock and agribusiness		5,225		(78	)		19		263			5,429
Municipal lease finance receivables		775		-			-		(113	)		662
Consumer and other loans		732		(7	)		6		(69	)		662
Total allowance for loan losses	$	63,613	$	(428	)	$	487	$	5,000		$	68,672

	For the Nine Months Ended September 30, 2018
	Ending Balance December 31, 2017		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance September 30, 2018
	(Dollars in thousands)
Commercial and industrial	$	7,280	$	-		$	81	$	130		$	7,491
SBA		869		(257	)		15		331			958
Real estate:
Commercial real estate		41,722		-			-		(181	)		41,541
Construction		984		-			1,945		(1,796	)		1,133
SFR mortgage		2,112		-			-		13			2,125
Dairy & livestock and agribusiness		4,647		-			19		358			5,024
Municipal lease finance receivables		851		-			-		(36	)		815
Consumer and other loans		753		(10	)		129		(157	)		715
PCI loans		367		-			-		(162	)		205
Total allowance for loan losses	$	59,585	$	(267	)	$	2,189	$	(1,500	)	$	60,007


	March 31, 2019
	Recorded Investment in Loans						Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality
					(Dollars in thousands)
Commercial and industrial	$	8,512	$	948,614	$	-	$	117	$	7,482	$	-
SBA		4,661		333,296		-		317		962		-
Real estate:
Commercial real estate		1,589		5,387,277		-		-		46,078		-
Construction		-		121,912		-		-		864		-
SFR mortgage		5,051		280,736		-		-		2,188		-
Dairy & livestock and agribusiness		-		322,321		-		-		5,699		-
Municipal lease finance receivables		-		61,249		-		-		738		-
Consumer and other loans		477		120,291		-		1		575		-
PCI loans		-		-		15,356		-		-		180

Total	$	20,290	$	7,575,696	$	15,356	$	435	$	64,586	$	180


	March 31, 2018
	Recorded Investment in Loans						Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality
					(Dollars in thousands)
Commercial and industrial	$	432	$	513,797	$	-	$	-	$	7,499	$	-
SBA		1,201		122,231		-		-		884		-
Real estate:
Commercial real estate		7,992		3,403,224		-		-		41,863		-
Construction		-		79,898		-		-		987		-
SFR mortgage		3,576		234,042		-		-		2,202		-
Dairy & livestock and agribusiness		818		275,561		-		-		4,666		-
Municipal lease finance receivables		-		67,892		-		-		834		-
Consumer and other loans		438		63,721		-		-		688		-
PCI loans		-		-		25,861		-		-		312

Total	$	14,457	$	4,760,366	$	25,861	$	-	$	59,623	$	312


	March 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1) (3)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	339	$	30	$	369	$	8,388	$	948,369	$	957,126
SBA		601		-		601		4,098		333,258		337,957
Real estate:
Commercial real estate
Owner occupied		-		-		-		519		2,098,622		2,099,141
Non-owner occupied		124		-		124		615		3,288,986		3,289,725
Construction
Speculative (2)		-		-		-		-		120,801		120,801
Non-speculative		-		-		-		-		1,111		1,111
SFR mortgage		-		-		-		2,894		282,893		285,787
Dairy & livestock and agribusiness		-		-		-		-		322,321		322,321
Municipal lease finance receivables		-		-		-		-		61,249		61,249
Consumer and other loans		98		3		101		477		120,190		120,768

Total gross loans, excluding PCI loans	$	1,162	$	33	$	1,195	$	16,991	$	7,577,800	$	7,595,986


	September 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1) (3) (4)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	756	$	-	$	756	$	1,550	$	919,372	$	921,678
SBA		-		303		303		2,706		316,562		319,571
Real estate:
Commercial real estate
Owner occupied		-		-		-		494		2,092,597		2,093,091
Non-owner occupied		368		-		368		589		3,281,620		3,282,577
Construction
Speculative (2)		-		-		-		-		105,636		105,636
Non-speculative		-		-		-		-		14,295		14,295
SFR mortgage		-		-		-		888		277,756		278,644
Dairy & livestock and agribusiness		-		-		-		-		311,229		311,229
Municipal lease finance receivables		-		-		-		-		54,468		54,468
Consumer and other loans		-		-		-		385		116,743		117,128

Total gross loans	$	1,124	$	303	$	1,427	$	6,612	$	7,490,278	$	7,498,317


	As of and For the Three Months Ended March 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	8,208	$	12,317	$	-	$	8,230	$	2
SBA		3,400		5,779		-		3,511		11
Real estate:
Commercial real estate
Owner occupied		519		618		-		521		-
Non-owner occupied		1,070		1,231		-		1,084		7
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		5,051		5,865		-		5,082		21
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		476		625		-		482		-

Total		18,724		26,435		-		18,910		41

With a related allowance recorded:
Commercial and industrial		304		309		117		323		-
SBA		1,261		1,236		317		1,261		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		1		1		1		1		-

Total		1,566		1,546		435		1,585		-

Total impaired loans	$	20,290	$	27,981	$	435	$	20,495	$	41


	As of December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	7,436	$	11,457	$	-
SBA		3,467		5,746		-
Real estate:
Commercial real estate
Owner occupied		589		705		-
Non-owner occupied		2,808		4,324		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		5,349		6,270		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		418		526		-

Total		20,067		29,028		-

With a related allowance recorded:
Commercial and industrial		189		191		3
SBA		-		-		-
Real estate:
Commercial real estate
Owner occupied		-		-		-
Non-owner occupied		3,143		3,144		478
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		-		-		-
Dairy & livestock and agribusiness		78		78		12
Municipal lease finance receivables		-		-		-
Consumer and other loans		68		100		68

Total		3,478		3,513		561

Total impaired loans	$	23,545	$	32,541	$	561


	As of and For the Nine Months Ended September 30, 2018 (1)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,168	$	3,829	$	-	$	3,439	$	6
SBA		3,593		5,779		-		4,457		34
Real estate:
Commercial real estate
Owner occupied		615		726		-		644		-
Non-owner occupied		5,733		6,385		-		5,904		24
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		5,479		6,449		-		5,679		59
Dairy & livestock and agribusiness		775		1,091		-		808		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		737		1,025		-		867		-

Total		20,100		25,284		-		21,798		123

With a related allowance recorded:
Commercial and industrial		-		-		-		-		-
SBA		-		-		-		-		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		13		13		13		13		-
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		70		101		70		85		-

Total		83		114		83		98		-

Total impaired loans	$	20,183	$	25,398	$	83	$	21,896	$	123


	As of December 31, 2018 (1)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	7,436	$	11,457	$	-
SBA		3,467		5,746		-
Real estate:
Commercial real estate
Owner occupied		589		705		-
Non-owner occupied		2,808		4,324		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		5,349		6,270		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		418		526		-

Total		20,067		29,028		-

With a related allowance recorded:
Commercial and industrial		189		191		3
SBA		-		-		-
Real estate:
Commercial real estate
Owner occupied		-		-		-
Non-owner occupied		3,143		3,144		478
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		-		-		-
Dairy & livestock and agribusiness		78		78		12
Municipal lease finance receivables		-		-		-
Consumer and other loans		68		100		68

Total		3,478		3,513		561

Total impaired loans	$	23,545	$	32,541	$	561