0000354647 cvbf:DairyLivestockAndAgribusinessMember 2018-06-30
Table of Contents
 
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
June September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number:
000-10140
CVB FINANCIAL CORP
.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
)
(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
 
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
☒
    No
☐
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 
☒
    No
☐
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 ☐    No ☒
Yes
☐
No
☒​​​​​​​
Number of shares of common stock of the registrant:
140,143,607
140,106,948 outstanding as of JulyOctober 31, 2019.
 
Table of Contents
TABLE OF CONTENTS
PART I –
 
FINANCIAL INFORMATION (UNAUDITED)
  
3
 
       
ITEM
1.
 
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  
5
 
       
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  
10
 
       
ITEM
2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  37
41
 
       
 
CRITICAL ACCOUNTING POLICIES
  37
41
 
       
 
OVERVIEW
  37
41
 
       
 
ANALYSIS OF THE RESULTS OF OPERATIONS
  39
43
 
       
 
ANALYSIS OF FINANCIAL CONDITION
  50
53
 
       
 
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
  66
69
 
       
ITEM
3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  68
71
 
       
ITEM
4.
 
CONTROLS AND PROCEDURES
  68
71
 
       
PART II –
–
 
OTHER INFORMATION
  69
72
 
       
ITEM
1.
 
LEGAL PROCEEDINGS
  69
72
 
       
ITEM
1A.
 
RISK FACTORS
  69
72
 
       
ITEM
2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  70
73
 
       
ITEM
3.
 
DEFAULTS UPON SENIOR SECURITIES
  70
73
 
       
ITEM
4.
 
MINE SAFETY DISCLOSURES
  70
73
 
       
ITEM
5.
 
OTHER INFORMATION
  70
73
 
       
ITEM
6.
 
EXHIBITS
  70
73
 
       
SIGNATURES
   71
74
 
 
2
 
 
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 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 acceptanceimplementation 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;
 
 
 
 
 
3
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changes in commercial or consumer spending, borrowing and savings preferences or behaviors;
 
 
3
 
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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 and any litigation which we inherited from our 2018 merger with Community Bank)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.
 
4
 
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)
         
 
      June 30,      
2019
 
  December 31,  
2018
 
Assets
      
Cash and due from banks
   $
170,387
    $
144,008
 
Interest-earning balances due from Federal Reserve
  
5,453
   
19,940
 
Total cash and cash equivalents
  
175,840
   
163,948
 
Interest-earning balances due from depository institutions
  
6,425
   
7,670
 
Investment securities
available-for-sale,
at fair value (with amortized cost of $1,584,687 at June 30, 2019, and $1,757,666 at December 31, 2018)
  
1,600,020
   
1,734,085
 
Investment securities
held-to-maturity
(with fair value of $729,032 at June 30, 2019, and $721,537 at December 31, 2018)
  
728,113
   
744,440
 
Total investment securities
  
2,328,133
   
2,478,525
 
Investment in stock of Federal Home Loan Bank (FHLB)
  
17,688
   
17,688
 
Loans and lease finance receivables
  
7,535,690
   
7,764,611
 
Allowance for loan losses
  
(67,132
)  
(63,613
)
Net loans and lease finance receivables
  
7,468,558
   
7,700,998
 
Premises and equipment, net
  
54,163
   
58,193
 
Bank owned life insurance (BOLI)
  
224,172
   
220,758
 
Accrued interest receivable
  
29,481
   
30,649
 
Intangibles
  
48,094
   
53,784
 
Goodwill
  
663,707
   
666,539
 
Other real estate owned (OREO)
  
2,275
   
420
 
Income taxes
  
49,581
   
62,174
 
Other assets
  
103,466
   
67,807
 
Total assets
   $
11,171,583
    $
11,529,153
 
         
Liabilities and Stockholders’ Equity
      
Liabilities:
      
Deposits:
      
Noninterest-bearing
   $
5,250,235
    $
5,204,787
 
Interest-bearing
  
3,412,588
   
3,622,703
 
Total deposits
  
8,662,823
   
8,827,490
 
Customer repurchase agreements
  
421,271
   
442,255
 
Other borrowings
  -
   
280,000
 
Deferred compensation
  
20,953
   
20,033
 
Junior subordinated debentures
  
25,774
   
25,774
 
Other liabilities
  
104,085
   
82,411
 
Total liabilities
  
9,234,906
   
9,677,963
 
         
Commitments and Contingencies
        
Stockholders’ Equity
      
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,141,680 at June 30, 2019, and 140,000,017 at December 31, 2018
  
1,296,885
   
1,293,669
 
Retained earnings
  
631,512
   
575,805
 
Accumulated other comprehensive income (loss), net of tax
  
8,280
   
(18,284
)
Total stockholders’ equity
  
1,936,677
   
1,851,190
 
Total liabilities and stockholders’ equity
   $
11,171,583
    $
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    
June 30,
 
    For the Six Months Ended    
June 30,
 
2019
 
2018
 
2019
 
2018
 
Interest income:
                
Loans and leases, including fees
   $
101,843
    $  
57,368
    $  
201,530
    $   
112,564
 
Investment securities:
            
Investment securities
available-for-sale
  
10,118
   
11,697
   
20,763
   
23,565
 
Investment securities
held-to-maturity
  
4,426
   
4,807
   
8,951
   
9,572
 
Total investment income
  
14,544
   
16,504
   
29,714
   
33,137
 
Dividends from FHLB stock
  
298
   
298
   
630
   
630
 
Interest-earning deposits with other institutions
  
100
   
635
   
194
   
1,171
 
Total interest income
  
116,785
   
74,805
   
232,068
   
147,502
 
Interest expense:
            
Deposits
  
4,093
   
1,549
   
7,964
   
3,074
 
Borrowings and customer repurchase agreements
  
1,377
   
337
   
2,987
   
790
 
Junior subordinated debentures
  
258
   
231
   
524
   
429
 
Total interest expense
  
5,728
   
2,117
   
11,475
   
4,293
 
Net interest income before provision for (recapture of) loan losses
  
111,057
   
72,688
   
220,593
   
143,209
 
Provision for (recapture of) loan losses
  
2,000
   
(1,000
)  
3,500
   
(2,000
)
Net interest income after provision for (recapture of) loan losses
  
109,057
   
73,688
   
217,093
   
145,209
 
Noninterest income:
            
Service charges on deposit accounts
  
5,065
   
4,091
   
10,206
   
8,136
 
Trust and investment services
  
2,452
   
2,399
   
4,634
   
4,556
 
Bankcard services
  
1,027
   
958
   
1,977
   
1,762
 
BOLI income
  
1,349
   
1,069
   
2,685
   
2,048
 
Gain on OREO, net
  
24
   
-
   
129
   
3,540
 
Gain on sale of building, net
  
-
   
-
   
4,545
   
-
 
Gain on eminent domain condemnation, net  5,685   -   5,685   - 
Other
  
2,603
   
1,178
   
4,647
   
2,569
 
Total noninterest income
  
18,205
   
9,695
   
34,508
   
22,611
 
Noninterest expense:
            
Salaries and employee benefits
  
28,862
   
21,051
   
58,164
   
43,365
 
Occupancy and equipment
  
5,641
   
4,318
   
11,256
   
8,510
 
Professional services
  
2,040
   
1,690
   
3,965
   
3,220
 
Software licenses and maintenance
  
2,542
   
1,759
   
4,964
   
3,519
 
Marketing and promotion
  
1,238
   
1,148
   
2,632
   
2,504
 
Amortization of intangible assets
  
2,833
   
328
   
5,690
   
659
 
Acquisition related expenses
  
2,612
   
494
   
5,761
   
1,297
 
Other
  
4,760
   
3,466
   
9,700
   
7,126
 
Total noninterest expense
  
50,528
   
34,254
   
102,132
   
70,200
 
Earnings before income taxes
  
76,734
   
49,129
   
149,469
   
97,620
 
Income taxes
  
22,253
   
13,756
   
43,346
   
27,334
 
Net earnings
   $
54,481
    $
35,373
    $
106,123
    $
70,286
 
                 
Other comprehensive income (loss):
            
Unrealized gain (loss) on securities arising during the period, before tax
   $
19,486
    $
(6,598
)   $
37,713
    $
(38,768
)
Less: Income tax (expense) benefit related to items of other comprehensive income
  
(5,761
)  
1,951
   
(11,149
)  
11,462
 
Other comprehensive income (loss), net of tax
  
13,725
   
(4,647
)  
26,564
   
(27,306
)
Comprehensive income
   $
68,206
    $
30,726
    $
132,687
    $
42,980
 
                 
Basic earnings per common share
   $
0.39
    $
0.32
    $
0.76
    $
0.64
 
Diluted earnings per common share
   $
0.39
    $
0.32
    $
0.76
    $
0.64
 
  
   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.
 
6
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    
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
(Dollars and shares in thousands)
(Unaudited)
For the Three Months Ended JuneSeptember 30, 2019 and 2018
                     
 
Common
Shares
Outstanding
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Balance, April 1, 2018
  
  110,259
    $
574,225
    $
  513,484
    $
  (20,851
)   $
  1,066,858
 
Repurchase of common stock
  
(2
)  
(45
)  
-
   
-
   
(45
)
Exercise of stock options
  
51
   
589
   
-
   
-
   
589
 
Shares issued pursuant to stock-based compensation plan
  
(6
)  
733
   
-
   
-
   
733
 
Cash dividends declared on common stock ($0.14 per share)
  
-
   
-
   
(15,444
)  
-
   
(15,444
)
Net earnings
  
-
   
-
   
35,373
   
-
   
35,373
 
Other comprehensive loss
  
-
   
-
   
-
   
(4,647
)  
(4,647
)
Balance, June 30, 2018
  
110,302
    $
575,502
    $
533,413
    $
  (25,498
)   $
1,083,417
 
                     
Balance, April 1, 2019
  
140,009
    $
  1,294,093
    $
602,279
    $
  (5,445
)   $
1,890,927
 
Repurchase of common stock
  
(3
)  
(77
)  
-
   
-
   
(77
)
Exercise of stock options
  
136
   
1,917
   
-
   
-
   
1,917
 
Shares issued pursuant to stock-based compensation plan
  
-
   
952
   
-
   
-
   
952
 
Cash dividends declared on common stock ($0.18 per share)
  
-
   
-
   
(25,248
)  
-
   
(25,248
)
Net earnings
  
-
   
-
   
54,481
   
-
   
54,481
 
Other comprehensive income
  
-
   
-
   
-
   
13,725
   
13,725
 
Balance, June 30, 2019
  
140,142
    $
1,296,885
    $
631,512
    $
8,280
    $
1,936,677
 
                     
 
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 Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
                     
 
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
  
(36
)  
(837
)  
-
   
-
   
(837
)
Exercise of stock options
  
138
   
1,417
   
-
   
-
   
1,417
 
Shares issued pursuant to stock-based compensation plan
  
15
   
1,469
   
-
   
-
   
1,469
 
Cash dividends declared on common stock ($0.28 per share)
  
-
   
-
   
(30,878
)  
-
   
(30,878
)
Net earnings
  
-
   
-
   
70,286
   
-
   
70,286
 
Other comprehensive loss
  
-
   
-
   
-
   
(27,306
)  
(27,306
)
Balance, June 30, 2018
  
110,302
    $
575,502
    $
533,413
    $
  (25,498
)   $
1,083,417
 
                     
Balance, January 1, 2019
  
140,000
    $
  1,293,669
    $
575,805
    $
  (18,284
)   $
1,851,190
 
Repurchase of common stock
  
(36
)  
(812
)  
-
   
-
   
(812
)
Exercise of stock options
  
145
   
2,057
   
-
   
-
   
2,057
 
Shares issued pursuant to stock-based compensation plan
  
33
   
1,971
   
-
   
-
   
1,971
 
Cash dividends declared on common stock ($0.36 per share)
  
-
   
-
   
(50,416
)  
-
   
(50,416
)
Net earnings
  
-
   
-
   
106,123
   
-
   
106,123
 
Other comprehensive income
  
-
   
-
   
-
   
26,564
   
26,564
 
Balance, June 30, 2019
  
140,142
    $
1,296,885
    $
631,512
    $
8,280
    $
1,936,677
 
                     
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 Six Months Ended    
June 30,
 
 
2019
  
2018
 
Cash Flows from Operating Activities
      
Interest and dividends received
   $
  221,542
    $
150,590
 
Service charges and other fees received
  
21,368
   
17,032
 
Interest paid
  
(10,889
)  
(4,288
)
Net cash paid to vendors, employees and others
  
(106,919
)  
(68,564
)
Income taxes
  
(42,500
)  
(26,379
)
Payments to FDIC, loss share agreement  -   (65)
Net cash provided by operating activities
  
82,602
   
68,326
 
Cash Flows from Investing Activities
      
Net change in interest-earning balances from depository institutions
  
1,245
   
10,802
 
Proceeds from repayment of investment securities
available-for-sale
  
164,571
   
195,715
 
Proceeds from maturity of investment securities
available-for-sale
  
4,255
   
10,806
 
Purchases of investment securities
available-for-sale
  
-
   
(98,709
)
Proceeds from repayment and maturity of investment securities
held-to-maturity
  
51,690
   
55,021
 
Purchases of investment securities
held-to-maturity
  
(37,110
)  
-
 
Net increase in equity investments
  
(2,811
)  
(21,827
)
Net decrease in loan and lease finance receivables
  
247,450
   
20,802
 
Proceeds from BOLI death benefit
  
175
   
882
 
Proceeds on eminent domain condemnation, net  5,685   - 
Proceeds from sale of building, net  5,487   - 
Purchase of premises and equipment
  
(2,628
)  
(1,225
)
Proceeds from sales of other real estate owned
  
523
   
8,067
 
Net cash provided by investing activities
  
438,532
   
180,334
 
Cash Flows from Financing Activities
      
Net (decrease) increase in other deposits
  
(112,317
)  
11,299
 
Net decrease in time deposits
  
(52,350
)  
(22,846
)
Net decrease in other borrowings
  
(280,000
)  
-
 
Net decrease in customer repurchase agreements
  
(20,984
)  
(169,719
)
Cash dividends on common stock
  
(44,836
)  
(30,862
)
Repurchase of common stock
  
(812
)  
(837
)
Proceeds from exercise of stock options
  
2,057
   
1,417
 
Net cash used in financing activities
  
(509,242
)  
(211,548
)
Net increase in cash and cash equivalents
  
11,892
   
37,112
 
         
Cash and cash equivalents, beginning of period
  
163,948
   
144,377
 
Cash and cash equivalents, end of period
   $
175,840
    $
181,489
 
         
 
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.
8
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
         
 
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.
 
8
9
 
 
Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
         
 
    For the Six Months Ended    
June 30,
 
2019
 
2018
 
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
      
   Net earnings
   $
  106,123
    $
  70,286
 
         
   Adjustments to reconcile net earnings to net cash provided by operating activities:
      
 
 
 
 
 
 
 
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
  
(3,589
)  
(1,815
)
Net amortization of premiums and discounts on investment securities
  
5,054
   
7,302
 
Accretion of discount for acquired loans, net
  
(15,215
)  
(2,137
)
Provision for (recapture of) loan losses
  
3,500
   
(2,000
)
Payments to FDIC, loss share agreement  -   (65)
Stock-based compensation
  
1,971
   
1,469
 
Depreciation and amortization, net
  
7,832
   
354
 
Change in other assets and liabilities
  
(12,739
)  
(1,528
)
     Total adjustments
  
(23,521
)  
(1,960
)
    Net cash provided by operating activities
   $
82,602
    $
68,326
 
         
Supplemental Disclosure of
Non-cash
Investing Activities
      
   Transfer of loans to other real estate owned
   $
2,275
    $
-
 
   Issuance of common stock for acquisition
   $
-
    $
-
 
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)
1.BUSINESS
The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has one1 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 58 banking centers and three3 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 sixnine months ended JuneSeptember 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.
10
 
Table of Contents
 
Adoption of New Accounting Standards
— In August 2017, the FASB issued ASU No.
 2017-12,
“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. ASU No.
 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 ASU No.
 2018-07,
“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
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 ASU No.
 2016-02,
“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 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 ASU No.
 2018-11,
“Leases (Topic 842): Targeted Improvements”Improvements
,
” which creates a new optional transition method for implementing the new standard on leases, ASU No.
 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.
 
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111
 
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Recent Accounting Pronouncements
— In June 2016, the FASB issued ASU No.
 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. ASU No.
 2016-13
is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements. 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, and
based on
data quality and its availability. The Company continues to review update
and update validate its
assumptions and models, as appropriate.
In January 2017, the FASB issued ASU No.
 2017-04,
“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 ASU No.
 2018-13,
“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. ASU No.
 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.
The consolidation of banking centers was completed during the second quarter of 2019, in which four 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 nine9 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.
The purchase price allocation was finalized in the second quarter of 2019.
The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019.
The application of the acquisition method of accounting resulted in the recognition of goodwill of $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.

Table of Contents
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
 
      
  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
 
2,738,100
  
  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
   
356,342
      
Goodwill
    $
547,144
      
 
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3
Table of Contents
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.
The Company incurred merger related expenses associated with the CB acquisition of $
2.6
million$244,000 and $
5.8
$6.0 million for the three and sixnine months ended JuneSeptember 30, 2019,
respectively,
, and $
494,000
$6.6 million and $
1.3
$7.9 million for the three and sixnine months ended JuneSeptember 30, 2018, respectively
.respectively.
For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and sixnine months ended JuneSeptember 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
 
 
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
 
13
1
4
 
Table of Contents
         
  
Unaudited Pro Forma
 
  
Three Months Ended
  
Six Months Ended
 
  
June 30, 2019
 
  
(Dollars in thousands, except per share amounts)
 
         
Total revenues (net interest income plus noninterest income)
   $
121,406
    
 
$
244,379
   
Net income
   $
46,960
 
 
$
93,651
 
Earnings per share - basic
   $
0.34
 
 
$
0.67
 
Earnings per share - diluted
   $
0.33
 
 
$
0.67
 
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.
          
 
June 30, 2019
 
September 30, 2019
 
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
   Total Percent   
  
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
  Total Percent  
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Investment securities
available-for-sale:
                              
Residential mortgage-backed securities
   $
1,348,415
    $
16,251
    $
(2,417
)   $
1,362,249
   
85.14%
    $
1,127,395
    $
20,105
    $
(1,341
)   $
1,146,159
   
72.99
%
CMO/REMIC - residential
  
194,094
   
1,216
   
(334
)  
194,976
   
12.19%
   
381,615
   
1,649
   
(336
)  
382,928
   
24.38
%
Municipal bonds
  
41,369
   
658
   
(41
)  
41,986
   
2.62%
   
39,564
   
924
   
(1
)  
40,487
   
2.58
%
Other securities
  
809
   
-
   
-
   
809
   
0.05%
   
832
   
-
   
-
   
832
   
0.05
%
               
Total
available-for-sale
securities
   $
1,584,687
    $
18,125
    $
(2,792
)   $
1,600,020
   
100.00%
    $
1,549,406
    $
22,678
    $
(1,678
) 
 
 
 
  $
1,570,406
   
100.00
%
               
Investment securities
held-to-maturity:
                              
Government agency/GSE
   $
128,721
    $
2,627
    $
(414
)   $
130,934
   
17.68%
    $
123,917
    $
3,238
    $
(170
)   $
126,985
   
17.60
%
Residential mortgage-backed securities
  
175,552
   
1,480
   
(415
)  
176,617
   
24.11%
   
172,919
   
2,624
   
(3
)  
175,540
   
24.56
%
CMO
  
211,436
   
5
   
(4,358
)  
207,083
   
29.04%
   
204,263
   
76
   
(1,467
)  
202,872
   
29.02
%
Municipal bonds
  
212,404
   
3,245
   
(1,251
)  
214,398
   
29.17%
   
202,854
   
4,198
   
(558
)  
206,494
   
28.82
%
               
Total
held-to-maturity
securities
 $
728,113
    $
7,357
    $
(6,438
)   $
729,032
   
100.00%
    $
703,953
    $
10,136
    $
(2,198
)   $
711,891
   
100.00
%
               
    
 
December 31, 2018
 
December 31, 2018
 
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
  Total Percent  
  
   Amortized   
Cost
 
Gross
   Unrealized   
Holding
Gain
 
 
Gross
   Unrealized   
Holding
Loss
 
   Fair Value   
 
T
otal Percent
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Investment securities
available-for-sale:
                              
Residential mortgage-backed securities
   $
1,494,106
    $
1,348
    $
(20,946
)   $
1,474,508
   
85.03%
    $
1,494,106
    $
1,348
    $
(20,946
)   $
1,474,508
   
85.03
%
CMO/REMIC - residential
  
217,223
   
353
   
(3,525
)  
214,051
   
12.34%
   
217,223
   
353
   
(3,525
)  
214,051
   
12.34
%
Municipal bonds
  
45,621
   
332
   
(1,143
)  
44,810
   
2.59%
   
45,621
   
332
   
(1,143
)  
44,810
   
2.59
%
Other securities
  
716
   
-
   
-  
   
716
   
0.04%
   
716
   
-
   
-
   
716
   
0.04
%
               
Total
available-for-sale
securities
   $
1,757,666
    $
2,033
    $
(25,614
)   $
1,734,085
   
100.00%
    $
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%
    $
138,274
    $
572
    $
(2,622
)   $
136,224
   
18.57
%
Residential mortgage-backed securities
  
153,874
   
-
   
(3,140
)  
150,734
   
20.67%
   
153,874
   
-
   
(3,140
)  
150,734
   
20.67
%
CMO
  
215,336
   
-
   
(12,081
)  
203,255
   
28.93%
   
215,336
   
-
   
(12,081
)  
203,255
   
28.93
%
Municipal bonds
  
236,956
   
556
   
(6,188
)  
231,324
   
31.83%
   
236,956
   
556
   
(6,188
)  
231,324
   
31.83
%
               
Total
held-to-maturity
securities
   $
744,440
    $
1,128
    $
(24,031
)   $
721,537
   
100.00%
    $
744,440
    $
1,128
    $
(24,031
)   $
721,537
   
100.00
%
14
1
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   
June 30,
  
   For the Six Months Ended   
June 30,
  
    For the Three Months Ended    
September 30,
 
    For the Nine Months Ended    
September 30,
 
     2019     
  
     2018      
  
      2019      
  
      2018      
  
         2019         
 
         2018         
 
         2019         
 
         2018         
 
 
(Dollars in thousands)
  
 
(Dollars in thousands)
Investment securities
available-for-sale:
                        
Taxable
   $
9,821
    $
11,290
    $
20,130
    $
22,735
    $
8,949
    $
 11,126
    $
 29,079
    $
 33,861
 
Tax-advantaged
  
297
   
407
   
633
   
830
   
273
   
395
   
906
   
1,225
 
                        
Total interest income from
available-for-sale
securities
  
10,118
   
11,697
   
20,763
   
23,565
   
9,222
   
11,521
   
29,985
   
35,086
 
                        
Investment securities
held-to-maturity:
                        
Taxable
  
2,932
   
3,048
   
5,842
   
5,926
   
2,883
   
2,961
   
8,725
   
8,887
 
Tax-advantaged
  
1,494
   
1,759
   
3,109
   
3,646
   
1,415
   
1,705
   
4,524
   
5,351
 
                        
Total interest income from
held-to-maturity
securities
  
4,426
   
4,807
   
8,951
   
9,572
   
4,298
   
4,666
   
13,249
   
14,238
 
                        
Total interest income from investment securities
   $
14,544
    $
16,504
    $
29,714
    $
33,137
    $
 13,520
    $
 16,187
    $
 43,234
    $
 49,324
 
                            
 
 
 
 
 
 
Approximately 89%
89
% of the total investment securities portfolio at JuneSeptember 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 JuneSeptember 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-Impairedother-than-temporarily-
i
mpaired (“OTTI”).
            
 
June 30, 2019
 
September 30, 2019
 
    Less Than 12 Months    
 
    12 Months or Longer    
 
    Total    
 
    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
  
Fair Value
 
Gross
Unrealized
Holding
 
Losses
 
Fair Value
 
 
Gross
Unrealized
Holding
 
Losses
 
Fair Value
 
Gross
Unrealized
Holding
Losses
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Investment securities
available-for-sale:
                                    
Residential mortgage-backed securities
   $
-  
    $
-  
    $
228,518
    $
(2,417
)   $
228,518
    $
(2,417
)   $
  2
    $
  -
    $
  127,904
    $
 
 
  (1,341
)   $
  127,906
    $
  (1,341
)
CMO/REMIC - residential
  
-  
   
-  
   
71,924
   
(334
)  
71,924
   
(334
)  
122,595
   
(156
)  
39,498
   
(180
)  
162,093
   
(336
)
Municipal bonds
  
-  
   
-  
   
3,287
   
(41
)  
3,287
   
(41
)  
-
   
-
   
564
   
(1
)  
564
   
(1
)
                  
Total
available-for-sale
securities
   $
-  
    $
-  
    $
303,729 
    $
(2,792
)   $
303,729
    $
(2,792
)   $
122,597
    $
(156
)   $
167,966
    $
(1,522
)   $
290,563
    $
(1,678
)
Investment securities
held-to-maturity:
                                    
Government agency/GSE
   $
-  
    $
-  
    $
39,016
    $
(414
)   $
39,016
    $
(414
)   $
-
    $
-
    $
19,923
    $
(170
)   $
19,923
    $
(170
)
Residential mortgage-backed securities
  
10,722  
   
(45
)  
75,536
   
(370
)  
86,258
   
(415
)  
5,021
   
(3
)  
-
   
-
   
5,021
   
(3
)
CMO
  
-  
   
-
   
201,974
   
(4,358
)  
201,974
   
(4,358
)  
-
   
-
   
178,297
   
(1,467
)  
178,297
   
(1,467
)
Municipal bonds
  
-  
   
-  
   
49,102
   
(1,251
)  
49,102
   
(1,251
)  
3,037
   
(5
)  
32,217
   
(553
)  
35,254
   
(558
)
                  
Total
held-to-maturity
securities
   $
10,722  
    $
(45
)   $
365,628 
    $
(6,393
)   $   
376,350
    $   
(6,438
)   $
8,058
    $
(8
)   $
230,437
    $
(2,190
)   $
     
238,495
    $
     
(2,198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
 
 
1
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
)
     
 
   
 
   
 
   
 
      
 
                         
 
    
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 JuneSeptember 30, 2019 and December 31, 2018, investment securities having a carrying value of approximately $1.51$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 JuneSeptember 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.
                 
 
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
 
 
                 
 
June 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
   $
14,715 
    $
14,896 
    $
500 
    $
503 
 
Due after one year through five years
  
1,427,215
   
1,441,490 
   
315,591 
   
311,769 
 
Due after five years through ten years
  
114,977
   
115,535 
   
187,726 
   
189,711 
 
Due after ten years
  
27,780 
   
28,099 
   
224,296 
   
227,049 
 
Total investment securities
   $
1,584,687
    $
1,600,020
    $
728,113 
    $
729,032 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 JuneSeptember 30, 2019.
1
7
Table of Contents
6.LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
 
 
 
 
 
 
 
 
 
 
 
 
 
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”(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 JuneSeptember 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 JuneSeptember 30, 2019 and December 31, 2018. As of
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.
The following table provides a summary of the Company’s total loans and lease finance receivables by type.

 
                 
 
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
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents
The following table provides a summary of the Company’s total loans and lease finance receivables by type.
                 
 
    June 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
   $
917,953
    $
1,002,209
    $
519
    $
1,002,728
 
SBA
  
327,606
   
350,043
   
1,258
   
351,301
 
Real estate:
            
Commercial real estate
  
5,417,351
   
5,394,229
   
14,407
   
5,408,636
 
Construction
  
116,457
   
122,782
   
-
   
122,782
 
SFR mortgage
  
278,285
   
296,504
   
145
   
296,649
 
Dairy & livestock and agribusiness
  
301,752
   
393,843
   
700
   
394,543
 
Municipal lease finance receivables
  
59,985
   
64,186
   
-
   
64,186
 
Consumer and other loans
  
120,779
   
128,429
   
185
   
128,614
 
Gross loans
  
7,540,168
   
7,752,225
   
17,214
   
7,769,439
 
Less: Deferred loan fees, net
  
(4,478
)  
(4,828
)  
-
   
(4,828
)
Gross loans, net of deferred loan fees
  
7,535,690
   
7,747,397
   
17,214
   
7,764,611
 
Less: Allowance for loan losses
  
(67,132
)  
(63,409
)  
(204
)  
(63,613
)
Total loans and lease finance receivables
   $
7,468,558
    $
7,683,988
    $
17,010
    $
7,700,998
 
 
 
 
 
 
 
 
 
 
 
 
As of JuneSeptember 30, 2019, 77.08%77.01% of the Company’s total gross loan portfolio consisted of real estate loans, 71.85% 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 JuneSeptember 30, 2019, $225.6$245.6 million, or 4.16%4.57% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December 31, 2018. The loans secured by farmland included $122.7$130.4 million for loans secured by dairy & livestock land and $102.9$115.1 million for loans secured by agricultural land at JuneSeptember 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $104.1 million for loans secured by agricultural land at December 31, 2018. As of JuneSeptember 30, 2019, dairy & livestock and agribusiness loans of $301.8$311.2 million were comprised of $245.7$251.3 million for dairy & livestock loans and $56.1$60.0 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $54.0 million for agribusiness loans at December 31, 2018.
At JuneSeptember 30, 2019, the Company held approximately $3.81$3.83 billion of total fixed rate loans.
At JuneSeptember 30, 2019 and December 31, 2018, loans totaling $6.05$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 JuneSeptember 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.
17
Table of Contents
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, according to our internal risk ratings for
as of
the periods
dates
presented.
                     
 
 
June 30, 2019
 
 
Pass
 
Special
Mention
 
Substandard (1)
 
Doubtful &
Loss
 
Total
 
 
 
(Dollars in thousands)
Commercial and industrial   $883,044    $28,611    $6,298     $-    $917,953 
SBA  303,947   14,444   9,215   -   327,606 
Real estate:                    
Commercial real estate                    
Owner occupied  1,985,951   87,246   20,446   -   2,093,643 
Non-owner
occupied
  3,310,103   12,850   755   -   3,323,708 
Construction                    
Speculative  93,170   -   -   -   93,170 
Non-speculative
  23,287   -   -   -   23,287 
SFR mortgage  272,767   2,158   3,360   -   278,285 
Dairy & livestock and agribusiness  239,481   54,003   8,268   -   301,752 
Municipal lease finance receivables  59,481   504   -   -   59,985 
Consumer and other loans  118,706   1,019   1,054   -   120,779 
Total gross loans   $7,289,937    $200,835    $49,396     $-    $  7,540,168 
                                                                                                                                                       
 
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 $18.0 million of classified loans acquired from CB in the third quarter of 2018.
1
9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)Includes $
19.9
 million of classified loans acquired from CB in the third quarter of 2018.
 
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
 
                     
 
 
    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 zero0 were rated doubtful & loss.
 (2)Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018.
18
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 JuneSeptember 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 June 30, 2019
 
 
 Ending Balance 
March 31,
2019
 
   
Charge-offs
   
 
  Recoveries  
 
Provision for
 
  (Recapture of)   
Loan Losses
 
 Ending Balance 
June 30, 2019
 
 
 
(Dollars in thousands)
Commercial and industrial   $7,608    $(48)   $49    $248    $7,857 
SBA  1,294   (210)  4   31   1,119 
Real estate:                    
Commercial real estate  46,227   -     -     2,060   48,287 
Construction  864   -     3   4   871 
SFR mortgage  2,189   -     115   19   2,323 
Dairy & livestock and agribusiness  5,699   -     19   (377)  5,341 
Municipal lease finance receivables  738   -     -     (12)  726 
Consumer and other loans  582   (3)  2   27   608 
  Total allowance for loan losses   $65,201    $(261)   $192    $2,000    $67,132 
 
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 June 30, 2018
 
 Ending Balance 
March 31,
2018
 
    
Charge-offs
    
 
   Recoveries   
 
 (Recapture of)  
Provision for
Loan Losses
 
 Ending Balance 
June 30, 2018
 
 
(Dollars in thousands)
Commercial and industrial
 $
7,499
  $
-    
  $
27
  $
(556
) $
6,970
 
SBA
  
884
   
-    
   
5
   
(48
)  
841
 
Real estate:
               
Commercial real estate
  
41,863
   
-    
   
-    
   
734
   
42,597
 
Construction
  
987
   
-    
   
596
   
(580
)  
1,003
 
SFR mortgage
  
2,202
   
-    
   
-    
   
(47
)  
2,155
 
Dairy & livestock and agribusiness
  
4,666
   
-    
   
19
   
(334
)  
4,351
 
Municipal lease finance receivables
  
834
   
-    
   
-    
   
(26
)  
808
 
Consumer and other loans
  
688
   
(2
)  
3
   
(47
)  
642
 
PCI loans
  
312
   
-    
   
-    
   
(96
)  
216
 
 Total allowance for loan losses
   $
59,935
    $
(2
)   $
650
    $
(1,000
)   $
59,583
 
 
19
20
 
Table of Contents
                     
 
For the Six Months Ended June 30, 2019
 
 Ending Balance 
December 31,
2018
 
Charge-offs
 
Recoveries
 
Provision for
(Recapture of)
Loan Losses
 
 Ending Balance 
June 30, 2019
 
 
(Dollars in thousands)
Commercial and industrial
 $
7,528
  $
 (48
) $
 159
  $
218
  $
7,857
 
SBA
  
1,078
   
(230
)  
9
   
262
   
1,119
 
Real estate:
               
Commercial real estate
  
45,097
   
-     
   
-     
   
3,190
   
48,287
 
Construction
  
981
   
-     
   
6
   
(116
)  
871
 
SFR mortgage
  
2,197
   
-     
   
183
   
(57
)  
2,323
 
Dairy & livestock and agribusiness
  
5,225
   
(78
)  
19
   
175
   
5,341
 
Municipal lease finance receivables
  
775
   
-     
   
-     
   
(49
)  
726
 
Consumer and other loans
  
732
   
(4
)  
3
   
(123
)  
608
 
 Total allowance for loan losses
   $
63,613
    $
(360
)   $
379
    $
3,500
    $
67,132
 
                     
 
For the Six Months Ended June 30, 2018
 
 Ending Balance 
December 31,
2017
 
Charge-offs
 
Recoveries
 
(Recapture of)
Provision for
Loan Losses
 
 Ending Balance 
June 30, 2018
 
 
(Dollars in thousands)
Commercial and industrial
   $
7,280
    $
-    
    $
37
    $
(347
)   $
6,970
 
SBA
  
869
   
-    
   
10
   
(38
)  
841
 
Real estate:
               
Commercial real estate
  
41,722
   
-    
   
-    
   
875
   
42,597
 
Construction
  
984
   
-    
   
1,930
   
(1,911
)  
1,003
 
SFR mortgage
  
2,112
   
-    
   
-    
   
43
   
2,155
 
Dairy & livestock and agribusiness
  
4,647
   
-    
   
19
   
(315
)  
4,351
 
Municipal lease finance receivables
  
851
   
-    
   
-    
   
(43
)  
808
 
Consumer and other loans
  
753
   
(9
)  
11
   
(113
)  
642
 
PCI loans
  
367
   
-    
   
-    
   
(151
)  
216
 
 Total allowance for loan losses
   $
           59,585
    $
(9
)   $
       2,007
    $
(2,000
)   $
59,583
 
The following tables present the recorded investment in loans
held-for-investment
and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented. Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.
                     
  
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
 
 
June 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
   $
2,088
    $
915,865
     $
276
    $
7,581
 
SBA
  
5,632
   
321,974
    
93
   
1,026
 
Real estate:
             
  Commercial real estate
  
1,531
   
5,415,820
    
-
   
48,287
 
  Construction
  
-
   
116,457
    
-
   
871
 
  SFR mortgage
  
4,858
   
273,427 
    
-
   
2,323
 
Dairy & livestock and agribusiness
  
-
   
301,752 
    
-
   
5,341
 
Municipal lease finance receivables
  
-
   
59,985 
    
-
   
726
 
Consumer and other loans
  
397
   
120,382
    
2
   
606
 
                  
  Total
   $
14,506
    $
7,525,662
     $
371
    $
66,761
 
                  
  
20
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​​​​​​​ 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.
                                                                                                                                     
 
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
 
                         
 
 
June 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
   $
355
    $
508,833
    $
-
    $
-
    $
6,970
    $
-
 
SBA
  
1,174
   
119,874
   
-
   
-
   
841
   
-
 
Real estate:
                  
  Commercial real estate
  
7,741
   
3,446,289
   
-
   
-
   
42,597
   
-
 
  Construction
  
-
   
84,400
   
-
   
-
   
1,003
   
-
 
  SFR mortgage
  
4,133
   
233,021
   
-
   
13
   
2,142
   
-
 
Dairy & livestock and agribusiness
  
800
   
267,689
   
-
   
-
   
4,351
   
-
 
Municipal lease finance receivables
  
-
   
67,721
   
-
   
-
   
808
   
-
 
Consumer and other loans
  
509
   
60,366
   
-
   
3
   
639
   
-
 
PCI loans
  
-
   
-
   
19,426
   
-
   
-
   
216
 
  Total
   $
14,712
    $
4,788,193
    $
19,426
    $
16
    $
59,351
    $
216
 
22
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.
21
Table of Contents
The following tables present the recorded investment in, and the aging of, past due and nonaccrual loans by type of loans for
as of
the periods​​​​​​​
date
s presented.
 
June 30, 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
   $
300
    $
10
    $
310
    $
1,993
    $
915,650
    $
917,953
 
SBA
  
-
   
-
   
-
   
5,082
   
322,524
   
327,606
 
Real estate:
                  
 Commercial real estate
                  
  Owner occupied
  
-
   
-
   
-
   
502
   
2,093,141
   
2,093,643
 
  
Non-owner
occupied
  
-
   
-
   
-
   
593
   
3,323,115
   
3,323,708
 
 Construction
                  
  Speculative (2)
  
-
   
-
   
-
   
-
   
93,170
   
93,170
 
  
Non-speculative
  
-
   
-
   
-
   
-
   
23,287
   
23,287
 
 SFR mortgage
  
-
   
-
   
-
   
2,720
   
275,565
   
278,285
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
-
   
301,752
   
301,752
 
Municipal lease finance receivables
  
-
   
-
   
-
   
-
   
59,985
   
59,985
 
Consumer and other loans
  
22
   
-
   
22
   
397
   
120,360
   
120,779
 
 Total gross loans
   $         
322
    $
     
    
10
    $
332
    $       
11,287
    $    
7,528,549
    $   
7,540,168
 
 
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 June
September
 30, 2019, $2.8$1.0 million of nonaccruing loans were current, $360,000$661,000 were
30-59
days past due, $
832,000
$1.7 million were
60-89
days past due
,
and $7.3$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 $8.4$4.5 million of nonaccrual loans acquired from CB in the third quarter of 2018.
                         
 
 
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 
(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.
 (3)Speculative construction loans are generally for properties where there is no identified buyer or renter.
 (4)Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018.
22
Table of Contents
Impaired Loans
At JuneSeptember 30, 2019, the Company had impaired loans of $14.5$9.8 million. Impaired loans included $5.1$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, 
$
2.7
 million888,000 of nonaccrual single-family residential (“SFR”) mortgage loans, $
2.0
 million of nonaccrual
commercial
and industrial 
loans, $
1.1
 million of nonaccrual commercial real estate loans, and $
397,000
$385,000 of nonaccrual consumer and other loans. These impaired loans included $
3.5
$3.4 million of loans whose terms were modified in a troubled debt restructuring, of which $
263,000
$249,000 were classified as nonaccrual. The remaining balance of $
3.2
$3.2 million consisted of
12
loans performing according to the restructured terms. The impaired loans had a specific allowance of $
371,000
$540,000 at June 
September 30,
,
2019
. 2019. At December 
31,
,
2018,
, the Company had classified as impaired, loans with a balance of $
23.5
$23.5 million with a related allowance of $$561,000.
561,000
.
2
4
 
Table of Contents
The following tables present information ​​​​​​​for
held-for-investment
loans, individually ​​​​​​​evaluated for impairment by type of loans, as and for the periods presented.
                     
 
As of and For the Six Months Ended
June 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
   $
898
    $
1,033
    $
-    
    $
1,022
    $
2
 
SBA
  
4,369
   
5,714
   
-    
   
3,703
   
21
 
Real estate:
               
Commercial real estate
               
  Owner occupied
  
502
   
616
   
-    
   
515
   
-    
 
  Non-owner
occupied
  
1,029
   
1,209
   
-    
   
1,068
   
14
 
Construction
               
  Speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
  Non-speculative
  
-    
   
-    
   
-    
   
-    
   
-    
 
SFR mortgage
  
4,858
   
5,467
   
-    
   
4,893
   
42
 
Dairy & livestock and agribusiness
  
-    
   
-    
   
-    
   
-    
   
-    
 
Municipal lease finance receivables
  
-    
   
-    
   
-    
   
-    
   
-    
 
Consumer and other loans
  
395
   
518
   
-    
   
407
   
-    
 
                     
Total
  
12,051
   
14,557
   
-    
   
11,608
   
79
 
                     
With a related allowance recorded:
               
Commercial and industrial
  
1,190
   
1,263
   
276
   
1,251
   
-    
 
SBA
  
1,263
   
1,534
   
93
   
1,179
   
-    
 
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
  
2
   
3
   
2
   
2
   
-    
 
                     
Total
  
2,455
   
2,800
   
371
   
2,432
   
-    
 
                     
 Total impaired loans
   $
14,506
    $
17,357
    $
371
    $
14,040
    $
79
 
                     
                                                                                                                                        
 
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 Six Months Ended
June 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   $355    $864    $-        $378    $4 
SBA  1,174   1,302   -       1,204   23 
Real estate:                    
Commercial real estate                    
Owner occupied  4,294   4,747   -       4,331   -     
Non-owner
occupied
  3,447   4,894   -       3,565   44 
Construction                    
Speculative  -       -       -       -       -     
Non-speculative
  -       -       -       -       -     
SFR mortgage  4,120   4,860   -       4,159   55 
Dairy & livestock and agribusiness  800   1,091   -       819   -     
Municipal lease finance receivables  -       -       -       -       -     
Consumer and other loans  506   716   -       568   -     
                     
Total  14,696   18,474   -       15,024   126 
                     
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  3   3   3   3   -     
                     
Total  16   16   16   16   -     
                     
 Total impaired loans   $         14,712    $         18,490    $         16    $         15,040    $         126 
                     
 
                     
 
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.
24
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.
 
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 JuneSeptember 30, 2019, December 31, 2018 and JuneSeptember 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 sixnine months ended JuneSeptember 30, 2019, and 2018. As of JuneSeptember 30, 2019 and December 31, 2018, the balance in this reserve was $9.0 million and was included in other liabilities.
25
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 JuneSeptember 30, 2019, there were $3.5$3.4 million of loans classified as a TDR, of which $3.2 million were performing and $263,000$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 JuneSeptember 30, 2019, performing TDRs were comprised of eight8 SFR mortgage loans of $2.1 million, one1 SBA loan of $550,000, one$542,000, 1 commercial real estate loan of $436,000,$417,000, and two2 commercial and industrial loans of $95,000.$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 zero0 and $490,000 of specific allowance to TDRs as of JuneSeptember 30, 2019 and December 31, 2018, respectively.
The following table provides a summary of the activity related to TDRs for the periods presented.presented
.
                 
 
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
 
2019
  
2018 (1)
  
2019
  
2018 (1)
 
 
(Dollars in thousands)
 
Performing TDRs:
            
Beginning balance
   $
3,299
    $
4,285
    $
3,594
    $
4,809
 
New modifications
  
-
   
311
   
-
   
311
 
Payoffs/payments, net and other
  
(80
)  
(66
)  
(375
)  
(590
)
TDRs returned to accrual status
  
-
   
-
   
-
   
- 
 
TDRs placed on nonaccrual status
  
-
   
-
   
-
   
- 
 
Ending balance
   $
3,219
    $
4,530
    $
3,219
    $
4,530
 
Nonperforming TDRs:
            
Beginning balance
   $
277
    $
3,909
    $
3,509
    $
4,200
 
New modifications
  
-
   
38
   
-
   
38
 
Charge-offs
  
-
   
-
   
(78
)  
-
 
Transfer to OREO  -   -   (2,275)  - 
Payoffs/payments, net and other
  
(14
)  
(55
)  
(893
)  
(346
)
TDRs returned to accrual status
  
-
   
-
   
-
   
-
 
TDRs placed on nonaccrual status
  
-
   
-
   
-
   
-
 
Ending balance
   $
263
    $
3,892
    $
263
    $
3,892
 
Total TDRs
   $
3,482
    $
8,422
    $
3,482
    $
8,422
 
                 
 
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 sixnine months ended JuneSeptember 30, 2019.
26
Table of Contents
The following tables summarize loans modified as TDRs for the periods presented.
Modifications (1)
                     
 
For the Three Months Ended June 30, 2018 (2)
 
Number of
Loans
 
Pre-Modification

Outstanding
Recorded
Investment
 
Post-Modification

Outstanding
Recorded
Investment
 
Outstanding
Recorded
Investment at
June 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
    
   
31
    
   
-    
 
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
    
   
307
    
   
-    
 
Consumer:
               
Interest rate reduction
  
-
    
   
-    
   
-    
   
-    
   
-    
 
Change in amortization period or maturity
  
-
    
   
-    
   
-    
   
-    
   
-    
 
                     
Total loans
  
2
    
    $
349
    
    $
349
    
    $
338
    
    $
-    
 
                     
 
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 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  
    $
-  
 
                     
                     
 
 
For the Six Months Ended June 30, 2018 (2)
 
 
Number of
Loans
 
Pre-Modification

Outstanding
Recorded
Investment
 
Post-Modification

Outstanding
Recorded
Investment
 
Outstanding
Recorded
Investment at
June 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
   
   
31
   
   - 
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
    
   
307
    
   - 
Consumer:
  
 
   
 
   
 
   
 
   
 
 
Interest rate reduction  
-
    
   -       -       -       - 
Change in amortization period or maturity  
-
    
   -       -       -       - 
                     
Total loans  
2
    
    $
349
   
    $
349
   
    $
338
   
    $
 -
 
                     
 (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 sixnine months ended JuneSeptember 30, 2019 and 2018.
30
 
27
Table of Contents
 
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 sixnine months ended JuneSeptember 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 360,000240,000 and 396,000,184,000, respectively. For the three and sixnine months ended JuneSeptember 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 14,00056,000 and 13,000,50,000, 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 June 30,
 
For the Six Months
Ended June 30,
 
 
  For the Three Months  
Ended
 
S
eptember
 30,
 
 
  For the 
Nine
 Months  
Ended
 
September
 30,
 
 
    2019    
  
    2018    
  
    2019    
  
    2018    
 
 
   
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
   
 
  
 
2019
 
 
 
 
 
 
 
 
 
 
 
   
 
  
 
2018
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except per share amounts)
  
(In thousands, except per share amounts)
Earnings per common share:
                        
Net earnings
   $
54,481
    $
35,373
    $
106,123
    $
70,286
    $
 
 
 
50,423
    $
 
 
38,558
    $
 
 
 
 
 
 
 
 
156,546
    $
 
 
 
 
 
 
 
 
108,844
 
Less: Net earnings allocated to restricted stock
  
134
   
94
   
276
   
202
   
116
   
96
   
390
   
298
 
                           
Net earnings allocated to common shareholders
   $
54,347
    $
35,279
    $
105,847
    $
70,084
    $
50,307
    $
38,462
    $
156,156
    $
108,546
 
                               
Weighted average shares outstanding
  
139,748
   
109,983
   
139,682
   
109,921
   
139,824
   
126,574
   
139,730
   
115,533
 
Basic earnings per common share
   $
0.39
    $
0.32
    $
0.76
    $
0.64
    $
0.36
    $
0.30
    $
1.12
    $
0.94
 
                               
        
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
                        
Net income allocated to common shareholders
  
54,347
   
35,279
   
105,847
   
70,084
   
50,307
   
38,462
   
156,156
   
108,546
 
                               
Weighted average shares outstanding
  
139,748
   
109,983
   
139,682
   
109,921
   
139,824
   
126,574
   
139,730
   
115,533
 
Incremental shares from assumed exercise of outstanding options
  
149
   
372
   
179
   
418
   
151
   
363
   
217
   
397
 
                           
Diluted weighted average shares outstanding
  
139,897
   
110,355
   
139,861
   
110,339
   
139,975
   
126,937
   
139,947
   
115,930
 
Diluted earnings per common share
   $
0.39
    $
0.32
    $
0.76
    $
0.64
    $
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 JuneSeptember 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 fa​​​​​​​irfair value that requires significant management judgment or estimation.
28
Table of Contents
There were
no
0 transfers in and out of Level 1 and Level 2 during the six mon​​​​​​​thsnine months ended JuneSeptember 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  
 
Quoted Prices in
  Active Markets for  
Identical Assets
  
Significant Other
  Observable Inputs  
 
Significant
Unobservable Inputs
 
 
June 30, 2019
 
(Level 1)
  
(Level 2)
 
(Level 3)
  
  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)
 
(Dollars in thousands)
Description of assets
                        
Investment securities - AFS:
                        
Residential mortgage-backed securities
   $
1,362,249 
    $
- 
    $
1,362,249 
    $
- 
    $
 1,146,159
 
    $
 -
 
    $
 1,146,159
 
    $
 -
 
 
CMO/REMIC - residential
  
194,976 
   
- 
   
194,976 
   
- 
   
382,928 
   
- 
   
382,928 
   
- 
 
Municipal bonds
  
41,986 
   
- 
   
41,986 
   
- 
   
40,487 
   
- 
   
40,487 
   
- 
 
Other securities
  
809 
   
- 
   
809 
   
- 
   
832 
   
- 
   
832 
   
- 
 
            
Total investment securities - AFS
  
1,600,020 
   
- 
   
1,600,020 
   
- 
   
1,570,406 
   
- 
   
1,570,406 
   
- 
 
Interest rate swaps
  
10,744 
   
- 
   
10,744 
   
- 
   
16,180 
   
- 
   
16,180 
   
- 
 
            
Total assets
   $
1,610,764 
    $
- 
    $
1,610,764 
    $
- 
    $
 1,586,586
 
    $
 
 -
 
    $
 
 
1,586,586
 
    $
 
 -
 
 
                
Description of liability
                        
Interest rate swaps
   $
10,744 
    $
- 
    $
10,744 
    $
- 
    $
 16,180
 
    $
- 
    $
16,180 
    $
- 
 
            
Total liabilities
   $
10,744 
    $
- 
    $
10,744 
    $
- 
    $
 
 
16,180
 
    $
- 
    $
16,180 
    $
- 
 
                
         
 
Carrying Value at
 
Quoted Prices in
Active Markets for
Identical Assets
  
Significant Other
Observable Inputs
 
Significant
Unobservable Inputs
          
 
December 31, 2018
 
(Level 1)
  
(Level 2)
 
(Level 3)
  
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)
 
(Dollars in thousands)
Description of assets
                        
Investment securities - AFS:
                        
Residential mortgage-backed securities
   $
1,474,508 
    $
- 
    $
1,474,508 
    $
- 
    $
  1,474,508
    $
- 
    $
  1,474,508
    $
- 
 
CMO/REMIC - residential
  
214,051 
   
- 
   
214,051 
   
- 
   
214,051
   
- 
   
214,051
   
- 
 
Municipal bonds
  
44,810 
   
- 
   
44,810 
   
- 
   
44,810
   
- 
   
44,810
   
- 
 
Other securities
  
716 
   
- 
   
716 
   
- 
   
716
   
- 
   
716
   
- 
 
            
Total investment securities - AFS
  
1,734,085 
   
- 
   
1,734,085 
   
- 
   
1,734,085
   
- 
   
1,734,085
   
- 
 
Interest rate swaps
  
1,938 
   
- 
   
1,938 
   
- 
   
1,938
   
- 
   
1,938
   
- 
 
            
Total assets
   $
1,736,023 
    $
- 
    $
1,736,023 
    $
- 
    $
1,736,023
    $
- 
    $
1,736,023
    $
- 
 
                
Description of liability
                        
Interest rate swaps
   $
1,938 
    $
- 
    $
1,938 
    $
- 
    $
1,938
    $
- 
    $
1,938
    $
- 
 
            
Total liabilities
   $
1,938 
    $
- 
    $
1,938 
    $
- 
    $
1,938
    $
- 
    $
1,938
    $
- 
 
                
29
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 JuneSeptember 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
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
 
                     
 
Carrying Value at
June 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 Six
Months Ended
June 30, 2019
 
 
(Dollars in thousands)
 
Description of assets
               
Impaired loans, excluding PCI loans:               
Commercial and industrial
   $
1,190 
    $
- 
    $
- 
    $
1,190 
    $
276 
 
SBA
  
1,153 
   
- 
   
- 
   
1,153 
   
323 
 
Real estate:
               
Commercial real estate
  
- 
   
- 
   
- 
   
- 
   
- 
 
Construction
  
- 
   
- 
   
- 
   
- 
   
- 
 
SFR mortgage
  
- 
   
- 
   
- 
   
- 
   
- 
 
Dairy & livestock and agribusiness
  
- 
   
- 
   
- 
   
- 
   
- 
 
Consumer and other loans
  
2 
   
- 
   
- 
   
2 
   
2 
 
Other real estate owned
  
- 
   
- 
   
- 
   
- 
   
- 
 
Asset
held-for-sale
  
- 
   
- 
   
- 
   
- 
   
- 
 
                     
  Total assets
   $
2,345 
    $
- 
    $
- 
    $
2,345 
    $
601 
 
                     
                
 
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 valuationvaluation​​​​​​​ 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 JuneSeptember 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.
                     
 
 
June 30, 2019
 
 
 
 
Estimated Fair Value
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars in thousands)
Assets
  
 
   
 
   
 
   
 
   
 
 
Total cash and cash equivalents   $175,840    $175,840    $-    $-    $175,840 
Interest-earning
 balances due from depository
institutions
  6,425   -   6,295   -   6,295 
Investment securities
available-for-sale
  1,600,020   -   1,600,020   -   1,600,020 
Investment securities
held-to-maturity
  728,113   -   729,032   -   729,032 
Total loans, net of allowance for loan losses  7,468,558   -   -   7,433,835   7,433,835 
Swaps  10,744   -   10,744   -   10,744 
Liabilities
  
 
   
 
   
 
   
 
   
 
 
Deposits:                    
Interest-bearing   $3,412,588    $-    $3,409,516    $-    $3,409,516 
Borrowings  421,271   -   420,841   -   420,841 
Junior subordinated debentures  25,774   -   -   20,703   20,703 
Swaps  10,744   -   10,744   -   10,744 
   
 
 
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 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 
 
 
 
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 JuneSeptember 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.
31
 
3
5
Table of Contents
9.DERIVATIVE FINANCIAL INSTRUMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 JuneSeptember 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 JuneSeptember 30, 2019 and December 31, 2018, the total notional amount of the Company’s swaps was $224.8$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.
        
 
June 30, 2019
  
September 30, 2019
 
 
Asset Derivatives
  
Liability Derivatives
  
Asset Derivatives
  
Liability Derivatives
 
 
    Balance Sheet    
Location
  
Fair
    Value    
  
    Balance Sheet    
Location
  
Fair
    Value    
  
    Balance Sheet    
Location
  
Fair
    Value    
  
    Balance Sheet    
Location
  
Fair
    Value    
 
 
(Dollars in thousands)
  
(Dollars in thousands)
 
Derivatives not designated as hedging instruments:
                        
Interest rate swaps
  
Other assets
    $
10,744   
   
Other liabilities
    $
10,744   
   
Other assets
    $
16,180 
 
   
Other liabilities
    $
16,180 
 
 
                    
Total derivatives
      $
10,744   
       $
10,744   
       $
16,180 
 
       $
16,180 
 
 
                      
      
 
December 31, 2018
  
December 31, 2018
 
 
Asset Derivatives
  
Liability Derivatives
  
Asset Derivatives
  
Liability Derivatives
 
 
    Balance Sheet    
Location
  
Fair
    Value    
  
    Balance Sheet    
Location
  
Fair
    Value    
  
Balance Sheet
Location
  
Fair
Value
  
Balance Sheet
Location
  
Fair
Value
 
 
(Dollars in thousands)
  
(Dollars in thousands)
 
Derivatives not designated as hedging instruments:
                        
Interest rate swaps
  
Other assets
    $
1,938  
   
Other liabilities
    $
1,938  
   
Other assets
    $
 1,938
 
 
   
Other liabilities
    $
 1,938
 
 
 
                    
Total derivatives
      $
1,938  
       $
1,938  
       $
1,938 
 
       $
1,938 
 
 
                      
36
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
  
  Location of Gain Recognized
 
in
 
 
Income on Derivative 
Instruments
 
 
  
Amount of Gain Recognized in Income on
Derivative Instruments
 
   
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
    
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
   
2019
  
2018
  
2019
  
2018
    
2019
  
2018
  
2019
  
2018
 
   
(Dollars in thousands)
    
(Dollars in thousands)
 
Interest rate swaps
  
Other income
   $
  373
    $
  151  
  $
  757  
    $
  267  
   
Other income
     $
 
 
 
378
 
    $
 
  73 
    $
 
 
 
1,135
 
    $
  340 
  
                               
Total
     $
373
    $
151  
  $
757  
    $
267  
       $
378 
    $
73 
    $
1,135 
    $
340 
 
                                   
 
32
 
Table of Contents
 
 
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 June 30,
  
For the Three Months Ended September 30,
 
2019
  
2018
  
2019
 
2018
 
 
Before-tax
 
  
 Tax effect 
  
 
After-tax
 
  
 
Before-tax
 
  
 Tax effect 
  
 
After-tax
 
  
Before-tax
 
Tax effect
 
After-tax
 
Before-tax
 
Tax effect
 
After-tax
 
 
(Dollars in thousands)
  
(Dollars in thousands)
Investment securities:
                                    
Net change in fair value recorded in accumulated OCI
   $
  19,564
    $
  (5,784
)   $
  13,780  
    $
  (5,773
)   $
1,707
    $
  (4,066
) $
 
 
 
 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
  
(78
)  
23
   
(55
)  
(825
)  
244
   
(581
)  
(249
)  
74
   
(175
)  
(152)
   
45 
   
(107
)
                  
Net change
   $
19,486
     $
(5,761
)    $
13,725
     $
  (6,598
)    $
1,951
     $
  (4,647
)   $
 
 
 
 
5,418
    $
 
 
 
(1,602
)   $
 
 
 
 
3,816
    $
 
 
 
(10,387)
    $
 
 
3,070 
    $
 
 
(7,317
)
     
 
For the Six Months Ended June 30,
  
For the Nine Months Ended September 30,
 
2019
  
2018
  
2019
 
2018
 
Before-tax
  
Tax effect
  
After-tax
  
Before-tax
  
Tax effect
  
After-tax
  
Before-tax
 
Tax effect
 
After-tax
 
Before-tax
 
Tax effect
 
After-tax
 
 
(Dollars in thousands)
  
(Dollars in thousands)
Investment securities:
                                    
Net change in fair value recorded in accumulated OCI
 $
38,914
  $
(11,504
) $
27,410
  $
  (37,111
) $
10,972
  $
  (26,139
)   $
 
 
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
  
(1,201
)  
355
   
(846
)  
(1,657
)  
490
   
(1,167
)  
(1,450
)  
429
   
(1,021
)  
(1,809
)  
535
   
(1,274
)
                  
Net change
 $
37,713
   $
(11,149
)  $
26,564
   $
  (38,768
)  $
  11,462
   $
  (27,306
)   $
 
 
43,131
    $
 
(12,751
)   $
 
 
 
30,380
    $
 
 
 
(49,155
)   $
14,532
    $
(34,623
)
 
33
 
 
Table of Contents
11.BALANCE SHEET OFFSETTING(1)Included in other noninterest income.
 
 
 
 
 
 
 
 
 
37
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
Presented
 
in the
  
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
    
 
the Condensed
Consolidated
Balance Sheets
  
Condensed
Consolidated
Balance Sheets
  
 Condensed
Consolidated
Balance Sheets
  
Financial
Instruments
  
Collateral 
Pledged
  
Net Amount
 
 
(Dollars in thousands)
 
June 30, 2019
                  
Financial assets:
                  
Derivatives not designated as hedging instruments
   $
   10,744
    $
-
    $
-
    $
10,744
    $
-
    $
10,744
 
Total
   $
   10,744
    $
  -
    $
-
    $
10,744
    $
-
    $
10,744
 
                   
Financial liabilities:
                  
Derivatives not designated as hedging instruments
   $
10,851
    $
(107
)   $
10,744
    $
107
    $
(14,962
)   $
(4,111
)
Repurchase agreements
  
421,271
   
-
   
421,271
   
-
   
(424,648
)  
(3,377
)
Total
   $
432,122
    $
(107
)   $
432,015
    $
107
    $
(439,610
)   $
(7,488
)
                         
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
)
                         
 
 
 
 

 
34
 
 
 
 
 
 
 
 
 
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 June 30, 2019 and for the three and six months ended June 30, 2019.
As of June 30, 201938
(Dollars in thousands)
Lease Assets and Liabilities
ROU assets
  $
17,959  
Total lease liabilities
21,157
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
         
       
 
For the Three 
Months Ended  
  
For the Six 
Months Ended
 
 
June 30, 2019
 
 
(Dollars in thousands)
 
Lease Cost
      
         
Operating lease expense (1)
   $                    
1,906  
    $                        
4,006
  
 
Sublease income
  
-  
   
-  
 
         
Total lease expense
   $
1,906
  
    $
4,006  
 
         
         
(1)   Includes short-term leases and variable lease costs, which are immaterial.
 
Table of Contents
Other Information
      
Cash paid for amounts included in the measurement of lease
liabilities:
      
         
Operating cash outflows from operating leases
   $                      2,113    $                       
4,859
  
 
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 September 30, 2019.
As of September 30, 2019
(Dollars in thousands)
Lease Assets and Liabilities
ROU assets
  $
 17,340  
Total lease liabilities
20,558  
         
 
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 September 30, 2019 and the Company’s short-term lease costs and variable lease costs, for the three and nine months ended 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 September 30, 2019, excluding property taxes and insurance, are as follows:
     
 
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
 
Lease Term and Discount Rate
13.
 As of June 30, 2019 REVENUE RECOGNITION
Weighted average remaining lease term (years)
4.11
Weighted average discount rate
3.50
% 
 
 
 
 
 
 
The Company’s lease arrangements that have not yet commenced as of June 30, 2019 and the Company’s short-term lease costs and variable lease costs, for the three and six months ended June 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 June 30, 2019, excluding property taxes and insurance, are as follows:
 
As of June 30, 2019
 
 
(Dollars in thousands)
 
Year:
   
2019 (excluding the six months ended June 30, 2019)
   $
3,997
  
 
2020
  
6,604   
 
2021
  
4,806   
 
2022
  
3,622   
 
2023
  
1,941   
 
Thereafter
  
2,241   
 
     
Total future lease payments
  
23,211   
 
Less: Imputed interest
  
(2,054)  
 
     
Present value of lease liabilities
   $
21,157   
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35
Table of Contents
13.REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU No.
 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
  
For the Six Months Ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
 
Noninterest income:
            
In-scope of Topic 606:
            
Service charges on deposit accounts
   $
5,065
    $
  4,091
    $
10,206
    $
8,136
 
Trust and investment services
  
2,452
   
2,399
   
4,634
   
4,556
 
Bankcard services
  
1,027
   
958
   
1,977
   
1,762
 
Gain on OREO, net  24     -   129     3,540   
Other
  
2,603
   
1,178
   
4,647
   
2,569
 
                 
Noninterest Income
(in-scope
of Topic 606)
  
11,171
   
8,626
   
21,593
   
20,563
 
Noninterest Income
(out-of-scope
of Topic 606)
  
7,034
   
1,069
   
12,915
   
2,048
 
                 
Total noninterest income
   $
 18,205
    $
9,695
    $
34,508
    $
  22,611
 
                 
                 
 
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
 
 
 
 
 
 
 
 
 
 
 
36
 
 
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 itsthe 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
 
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 secondthird quarter of 2019, we reported net earnings of $54.5$50.4 million, compared with $51.6$54.5 million for the firstsecond quarter of 2019 and $35.4$38.6 million for the secondthird quarter of 2018. Diluted earnings per share were $0.39$0.36 for the secondthird quarter, compared to $0.37$0.39 for the prior quarter and $0.32$0.30 for the same period last year.
At JuneSeptember 30, 2019, total assets of $11.17$11.33 billion decreased $357.6$196.4 million, or 3.10%1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $9.89$10.01 billion at JuneSeptember 30, 2019 decreased $395.0$281.0 million, or 3.84%2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $228.9$270.2 million decrease in total loans and a $150.4$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 4.72%4.55% for the quarter ended JuneSeptember 30, 2019, compared to 4.62%4.72% for the firstsecond quarter of 2019 and 3.93%4.23% for the secondthird quarter of 2018.
Total investment securities were $2.33$2.27 billion at JuneSeptember 30, 2019, a decrease of $150.4$204.2 million, or 6.07%8.24%, from $2.48 billion at December 31, 2018. At JuneSeptember 30, 2019, investment securities
held-to-maturity
(“HTM”) totaled $728.1$704.0 million. At JuneSeptember 30, 2019, investment securities
available-for-sale
(“AFS”) totaled $1.60$1.57 billion, inclusive of a
pre-tax
unrealized gain of $15.3$21.0 million. HTM securities declined by $16.3$40.5 million, or 2.19%5.44%, and AFS securities declined by $134.1$163.7 million, or 7.73%9.44%, from December 31, 2018. Our tax equivalent yield on investments was 2.53%2.47% for the quarter ended JuneSeptember 30, 2019, compared to 2.57%2.53% for the firstsecond quarter of 2019 and 2.48%2.49% for the secondthird quarter of 2018.

41
Table of Contents
Total loans and leases, net of deferred fees and discounts, of $7.54$7.49 billion at JuneSeptember 30, 2019 decreased by $228.9$270.2 million, or 2.95%3.48%, from December 31, 2018. The decrease in total loans included a $94.8an $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 $134.1$181.9 million, or 1.81%2.45%. The decrease in total loans included declines of $84.8$81.1 million in commercial and industrial loans, and $23.7$33.0 million in Small Business Administration (“SBA”)commercial real estate loans, and $18.4$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 5.40%5.23% for the quarter ended JuneSeptember 30, 2019, compared to 5.27%5.40% for the firstsecond quarter of 2019 and 4.81%4.99% for the secondthird quarter of 2018. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $9.4$7.3 million for the quarter ended JuneSeptember 30, 2019, compared to $7.2$9.4 million for the firstsecond quarter of 2019 and $2.1$4.9 million for the secondthird quarter of 2018.
Noninterest-bearing deposits were $5.25$5.39 billion at JuneSeptember 30, 2019, an increase of $45.4$180.3 million, or 0.87%3.46%, when compared to December 31, 2018. At JuneSeptember 30, 2019, noninterest-bearing deposits were 60.61%61.23% of total deposits, compared to 58.96% at December 31, 2018. Our average cost of total deposits was 0.19%0.21% for the quarter ended JuneSeptember 30, 2019, compared to 0.18%0.19% for the firstsecond quarter of 2019 and 0.09%0.15% for the secondthird quarter of 2018.
Customer repurchase agreements totaled $421.3$407.9 million at JuneSeptember 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 JuneSeptember 30, 2019, unchanged from the prior quarter, and 0.11%0.20% for the second quarter of 2019, and 0.15% for the third quarter of 2018.
At JuneSeptember 30, 2019, we had no short-term$4.9 million in other borrowings compared to $280.0 million at December 31, 2018. At JuneSeptember 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 JuneSeptember 30, 2019, unchanged from the prior quarter, and 0.12%0.25% for the second quarter of 2019, and 0.18% for the third quarter of 2018.
The allowance for loan losses totaled $67.1$68.7 million at JuneSeptember 30, 2019, compared to $63.6 million at December 31, 2018. The allowance for loan losses for the first sixnine months of 2019 was increased by $3.5$5.0 million in provision for loan losses and $19,000$59,000 in net recoveries. The allowance for loan losses was 0.89%0.92% and 0.82% of total loans and leases outstanding, at JuneSeptember 30, 2019 and December 31, 2018, respectively. The ratio as of the most recent three quarters was impacted by the $2.74 billion in loans acquired from Community Bank (“CB”) that are recorded at fair market value, without a corresponding loan loss allowance. As of JuneSeptember 30, 2019, credit related discounts on acquired loans were $41.4$37.0 million.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of JuneSeptember 30, 2019, the Company’s Tier 1 leverage capital ratio totaled 11.94%12.23%, our common equity Tier 1 ratio totaled 14.23%14.64%, our Tier 1 risk-based capital ratio totaled 14.51%14.93%, and our total risk-based capital ratio totaled 15.39%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 $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $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. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the 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
 
Variance
  
For the Three Months Ended
 
Variance
 
June 30,
2019
 
March 31,
2019
 
$
  
%
  
September 30,
2019
 
June 30,
2019
 
$
 
%
 
 
(Dollars in thousands, except per share amounts)
 
(Dollars in thousands, except per share amounts)
  
Net interest income
   $
     111,057
    $
     109,536
    $
     1,521  
   
1.39%
    $
     108,159
    $
111,057
    $
 (2,898) 
   
-2.61%
 
Provision for loan losses
  
(2,000
)  
(1,500
)  
(500) 
   
-33.33%
   
(1,500
)  
(2,000
)  
500  
   
25.00%
 
Noninterest income
  
18,205
   
16,303
   
1,902  
   
11.67%
   
11,894
   
18,205
   
(6,311) 
   
-34.67%
 
Noninterest expense
  
(50,528
)  
(51,604
)  
1,076  
   
2.09%
   
(47,535
)  
(50,528
)  
2,993  
   
5.92%
 
Income taxes
  
(22,253
)  
(21,093
)  
(1,160) 
   
-5.50%
   
(20,595
)  
(22,253
)  
1,658  
   
7.45%
 
                      
Net earnings
   $
54,481
    $
51,642
    $
2,839  
   
5.50%
    $
50,423
    $
54,481
    $
 (4,058) 
   
-7.45%
 
                         
Earnings per common share:
                        
Basic
   $
0.39
    $
0.37
    $
0.02  
       $
0.36
    $
0.39
    $
 (0.03) 
    
Diluted
   $
0.39
    $
0.37
    $
0.02  
       $
0.36
    $
0.39
    $
 (0.03) 
    
Return on average assets
  
1.95%
   
1.84%
   
0.11%  
      
1.78%
   
1.95%
   
-0.17%  
    
Return on average shareholders’ equity
  
11.38%
   
11.14%
   
0.24%  
      
10.18%
   
11.38%
   
-1.20%  
    
Efficiency ratio
  
39.09%
   
41.01%
   
-1.92%  
      
39.60%
   
39.09%
   
0.51%  
    
Noninterest expense to average assets
  
1.81%
   
1.83%
   
-0.02%  
      
1.68%
   
1.81%
   
-0.13%  
    
 
                
                 
For the Three Months Ended
     
For the Nine Months Ended
    
 
For the Three Months Ended
June 30,
 
Variance
 
For the Six Months Ended
June 30,
 
Variance
  
September 30,
 
Variance
 
September 30,
 
Variance
 
 
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
 
(Dollars in thousands, except per share amounts)
  
(Dollars in thousands, except per share amounts)
 
  
Net interest income
   $
     111,057  
    $
     72,688  
    $
     38,369  
   
52.79%
    $
  220,593  
    $
  143,209  
    $
77,384  
   
54.04%
    $
108,159 
    $
92,820 
    $
 15,339 
   
16.53%
    $
328,752 
    $
236,029 
    $
92,723  
   
39.28%
 
(Provision for) recapture of provision for loan losses
  
(2,000) 
   
1,000  
   
(3,000) 
   
-300.00%
   
(3,500) 
   
2,000  
   
(5,500) 
   
-275.00%
   
(1,500)
   
(500)
   
(1,000)
   
-200.00%
   
(5,000)
   
1,500 
   
(6,500) 
   
-433.33%
 
Noninterest income
  
18,205  
   
9,695  
   
8,510  
   
87.78%
   
34,508  
   
22,611  
   
11,897  
   
52.62%
   
11,894 
   
10,112 
   
1,782 
   
17.62%
   
46,402 
   
32,723 
   
13,679  
   
41.80%
 
Noninterest expense
  
(50,528) 
   
(34,254) 
   
(16,274) 
   
-47.51%
   
(102,132) 
   
(70,200) 
   
(31,932) 
   
-45.49%
   
(47,535)
   
(48,880)
   
1,345 
   
2.75%
   
(149,667)
   
(119,080)
   
(30,587) 
   
-25.69%
 
Income taxes
  
(22,253) 
   
(13,756) 
   
(8,497) 
   
-61.77%
   
(43,346) 
   
(27,334) 
   
(16,012) 
   
-58.58%
   
(20,595)
   
(14,994)
   
(5,601)
   
-37.35%
   
(63,941)
   
(42,328)
   
(21,613) 
   
-51.06%
 
                                            
Net earnings
   $
54,481  
    $
35,373
    $
19,108  
   
54.02%
    $
106,123  
    $
70,286  
    $
35,837  
   
50.99%
    $
50,423 
    $
38,558 
    $
 11,865 
   
30.77%
    $
156,546 
    $
108,844 
    $
 47,702  
   
43.83%
 
                                                  
Earnings per common share:
                                                
Basic
   $
0.39  
    $
0.32  
    $
0.07  
   
  
    $
0.76  
    $
0.64  
    $
0.12  
       $
0.36 
    $
0.30 
    $
0.06
       $
1.12 
    $
0.94 
    $
0.18 
    
Diluted
   $
0.39  
    $
0.32  
    $
0.07  
   
  
    $
0.76  
    $
0.64  
    $
0.12  
       $
0.36 
    $
0.30 
    $
0.06
       $
1.12 
    $
0.94 
    $
0.18 
    
Return on average assets
  
1.95%  
   
1.73%  
   
0.22%  
      
1.89%  
   
1.72%  
   
0.17%  
      
1.78%
   
1.52%
   
0.26%
      
1.86%
   
1.65%
   
0.21%  
    
Return on average shareholders’ equity
  
11.38%  
   
13.08%  
   
-1.70%  
      
11.26%  
   
13.05%�� 
   
-1.79%  
      
10.18%
   
10.17%
   
0.01%
      
10.89%
   
11.86%
   
-0.97%  
    
Efficiency ratio
  
39.09%  
   
41.58%  
   
-2.49%  
      
40.04%  
   
42.34%  
   
-2.30%  
      
39.60%
   
47.49%
   
-7.89%
      
39.89%
   
44.31%
   
-4.42%  
    
Noninterest expense to average assets
  
1.81%  
   
1.68%  
   
0.13%  
      
1.82%  
   
1.72%  
   
0.10%  
      
1.68%
   
1.93%
   
-0.25%
      
1.77%
   
1.80%
   
-0.03%  
    
 

43
Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
        
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
         
 
2019
  
2018
  
2019
  
2018
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
(Dollars in thousands)
  
2019
  
2018
  
2019
  
2018
 
  
(Dollars in thousands)
 
Net Income
   $
54,481  
    $
35,373
    $
106,123  
    $
70,286  
    $
50,423  
    $
38,558  
    $
156,546  
    $
108,844  
 
Add: Amortization of intangible assets
  
2,833  
   
328  
   
5,690  
   
659  
   
2,648  
   
1,736  
   
8,338  
   
2,395  
 
Less: Tax effect of amortization of intangible assets (1)
  
(838) 
   
(97) 
   
(1,682) 
   
(195) 
   
(783) 
   
(513) 
   
(2,465) 
   
(708) 
 
                        
Tangible net income
   $
56,476  
    $
35,604  
    $
110,131  
    $
70,750  
    $
52,288  
    $
39,781  
    $
162,419  
    $
110,531  
 
                            
  
Average stockholders’ equity
   $
1,919,888  
    $
  1,085,053  
    $
1,899,898  
    $
  1,086,157  
    $
 1,965,427  
    $
1,503,643  
    $
 1,921,981  
    $
1,226,848  
 
Less: Average goodwill
  
(666,196) 
   
(116,564) 
   
(666,366) 
   
(116,564) 
   
(663,707) 
   
(419,418) 
   
(665,470) 
   
(218,625) 
 
Less: Average intangible assets
  
(49,615) 
   
(6,393) 
   
(51,188) 
   
(6,557) 
   
(46,720) 
   
(34,811) 
   
(49,682) 
   
(16,078) 
 
                        
Average tangible common equity
   $
  1,204,077  
    $
962,096  
    $
  1,182,344  
    $
963,036  
    $
 1,255,000  
    $
1,049,414  
    $
 1,206,829  
    $
992,145  
 
                            
  
Return on average equity, annualized
  
11.38%
   
13.08%
   
11.26%
   
13.05%
   
10.18
%  
10.17
%  
10.89
%  
11.86
%
Return on average tangible common equity, annualized
  
18.81%
   
14.84%
   
18.78%
   
14.81%
   
16.53
%  
15.04
%  
17.99
%  
14.89
%
 
 (1)Tax effected at respective statutory rates.
 

Table of Contents
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 sixnine months ended JuneSeptember 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 June 30,
 
For the Three Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
Average
Balance
 
Interest
 
Yield/
Rate
 
Average
Balance
 
Interest
 
Yield/
Rate
  
Average
Balance
 
Interest
 
Yield/
Rate
  
Average
Balance
 
Interest
 
Yield/
Rate
 
 
(Dollars in thousands)
 
(Dollars in thousands)
INTEREST-EARNING ASSETS
                                    
Investment securities (1)
                                    
Available-for-sale
securities:
                                    
Taxable
   $
1,590,959
    $
9,821
   
2.47%
    $
1,921,638
    $
11,290
   
2.37%
    $
1,505,087
    $
8,949
   
2.38%
    $
1,863,399
    $
11,126
   
2.39%
 
Tax-advantaged
  
43,719
   
297
   
3.75%
   
53,399
   
407
   
4.06%
   
40,189
   
273
   
3.75%
   
55,020
   
395
   
3.86%
 
Held-to-maturity
securities:
                                    
Taxable
  
511,938
   
2,932
   
2.29%
   
540,692
   
3,048
   
2.25%
   
506,203
   
2,883
   
2.28%
   
527,688
   
2,961
   
2.24%
 
Tax-advantaged
  
215,366
   
1,494
   
3.35%
   
243,910
   
1,759
   
3.49%
   
205,996
   
1,415
   
3.32%
   
237,933
   
1,705
   
3.47%
 
Investment in FHLB stock
  
17,688
   
298
   
6.76%
   
17,688
   
298
   
6.76%
   
17,688
   
301
   
6.75%
   
24,645
   
329
   
5.30%
 
Interest-earning deposits with other institutions
  
18,022
   
100
   
2.23%
   
144,081
   
635
   
1.76%
   
174,119
   
946
   
2.16%
   
63,572
   
304
   
1.90%
 
Loans (2)
  
7,558,483
   
101,843
   
5.40%
   
4,780,347
   
57,368
   
4.81%
   
7,495,289
   
98,796
   
5.23%
   
6,350,240
   
79,818
   
4.99%
 
                                
Total interest-earning assets
  
9,956,175
   
116,785
   
4.72%
   
7,701,755
   
74,805
   
3.93%
   
9,944,571
   
113,563
   
4.55%
   
9,122,497
   
96,638
   
4.23%
 
Total noninterest-earning assets
  
1,264,592
         
476,854
         
1,269,845
         
935,028
       
                            
Total assets
   $
11,220,767
          $
8,178,609
          $
 11,214,416
          $
10,057,525
       
                                
  
INTEREST-BEARING LIABILITIES
                                    
 
Savings deposits (3)
   $
3,024,664
   
2,973
   
0.39%
    $
2,233,652
   
1,293
   
0.23%
    $
2,991,330
   
3,501
   
0.46%
    $
2,850,169
   
2,101
   
0.29%
 
Time deposits
  
494,507
   
1,120
   
0.91%
   
367,871
   
256
   
0.28%
   
473,347
   
1,088
   
0.91%
   
503,649
   
866
   
0.68%
 
                                
Total interest-bearing deposits
  
3,519,171
   
4,093
   
0.47%
   
2,601,523
   
1,549
   
0.24%
   
3,464,677
   
4,589
   
0.53%
   
3,353,818
   
2,967
   
0.35%
 
FHLB advances, other borrowings, and customer repurchase agreements
  
585,550
   
1,635
   
1.11%
   
462,618
   
568
   
0.49%
   
446,087
   
815
   
0.72%
   
478,538
   
851
   
0.70%
 
                                
Interest-bearing liabilities
  
4,104,721
   
5,728
   
0.56%
   
3,064,141
   
2,117
   
0.28%
   
3,910,764
   
5,404
   
0.55%
   
3,832,356
   
3,818
   
0.39%
 
                                
Noninterest-bearing deposits
  
5,093,781
         
3,958,980
         
5,227,595
         
4,651,127
       
Other liabilities
  
102,377
         
70,435
         
110,630
         
70,399
       
Stockholders’ equity
  
1,919,888
         
1,085,053
         
1,965,427
         
1,503,643
       
                            
Total liabilities and stockholders’ equity
   $
   11,220,767
          $
   8,178,609
          $
   11,214,416
          $
   10,057,525
       
                                
  
Net interest income
      $
     111,057
          $
72,688
          $
     108,159
          $
92,820
    
                                
  
Net interest spread - tax equivalent
        
4.16%
         
3.65%
         
4.00%
         
3.84%
 
Net interest margin
        
4.47%
         
3.79%
         
4.32%
         
4.04%
 
Net interest margin - tax equivalent
        
4.49%
         
3.82%
         
4.34%
         
4.06%
 
 
 
 
 (1)Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended JuneSeptember 30, 2019 and 2018. The non TE rates were 2.46%2.40% and 2.40%2.41% for the three months ended JuneSeptember 30, 2019 and 2018, respectively.
 
 
 (2)Includes loan fees of $727,000$782,000 and $855,000$865,000 for the three months ended JuneSeptember 30, 2019 and 2018, respectively. Prepayment penalty fees of $1.3$1.0 million and $912,000$674,000 are included in interest income for the three months ended JuneSeptember 30, 2019 and 2018, respectively.
 
 
 (3)Includes interest-bearing demand and money market accounts.
 
 

45
                         
 
For the Six Months Ended June 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
   $
1,622,465
    $
20,130
   
2.48
%   $
1,950,190
    $
22,735
   
2.34
%
Tax-advantaged
  
44,048
   
633
   
3.91
%  
54,262
   
830
   
4.06
%
Held-to-maturity
securities:
                  
Taxable
  
510,781
   
5,842
   
2.29
%  
547,694
   
5,926
   
2.16
%
Tax-advantaged
  
221,602
   
3,109
   
3.39
%  
250,507
   
3,646
   
3.52
%
Investment in FHLB stock
  
17,688
   
630
   
7.18
%  
17,688
   
630
   
7.18
%
Interest-earning deposits with other institutions
  
18,356
   
194
   
2.13
%  
141,443
   
1,171
   
1.66
%
Loans (2)
  
7,610,241
   
201,530
   
5.34
%  
4,785,118
   
112,564
   
4.74
%
                         
Total interest-earning assets
  
10,045,181
   
232,068
   
4.67
%  
7,746,902
   
147,502
   
3.86
%
Total noninterest-earning assets
  
1,268,812
         
470,378
       
                         
Total assets
   $
11,313,993
          $
8,217,280
       
                         
                         
INTEREST-BEARING LIABILITIES
                  
                         
Savings deposits (3)
   $
3,075,966
   
5,658
   
0.37
%   $
2,262,271
   
2,566
   
0.23
%
Time deposits
  
509,581
   
2,306
   
0.91
%  
372,585
   
508
   
0.27
%
                         
Total interest-bearing deposits
  
3,585,547
   
7,964
   
0.45
%  
2,634,856
   
3,074
   
0.24
%
FHLB advances, other borrowings, and customer repurchase agreements
  
638,463
   
3,511
   
1.10
%  
522,606
   
1,219
   
0.47
%
                         
Interest-bearing liabilities
  
4,224,010
   
11,475
   
0.55
%  
3,157,462
   
4,293
   
0.27
%
                         
Noninterest-bearing deposits
  
5,089,795
         
3,907,901
       
Other liabilities
  
100,290
         
65,760
       
Stockholders’ equity
  
1,899,898
         
1,086,157
       
                         
Total liabilities and stockholders’ equity
   $
   11,313,993
          $
   8,217,280
       
                         
                         
Net interest income
      $
220,593
          $
143,209
    
                         
                         
Net interest spread - tax equivalent
        
4.12
%        
3.59
%
Net interest margin
        
4.42
%        
3.72
%
Net interest margin - tax equivalent
        
4.44
%        
3.75
%
                         
 
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 sixnine months ended JuneSeptember 30, 2019 and 2018. The non TE rates were 2.48%2.45% and 2.37%2.38% for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
 (2)Includes loan fees of $1.6$2.3 million and $1.8$2.6 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. Prepayment penalty fees of $2.3$3.4 million and $1.4$2.1 million are included in interest income for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
 (3)Includes interest-bearing demand and money market accounts.
43
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 June 30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
  
Comparision of Three Months Ended September 30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
 
    Volume    
  
    Rate    
  
Rate/
    Volume    
  
    Total    
  
    Volume    
 
Rate
 
Rate/
    Volume    
 
    Total    
 
   
(Dollars in thousands)
    
(Dollars in thousands)
  
Interest income:
                        
Available-for-sale
securities:
                        
Taxable investment securities
   $
(1,877
)   $
489
    $
(81
)   $
(1,469
)   $
(2,122
)   $
(46
)   $
(9
)   $
(2,177
)
Tax-advantaged
investment securities
  
(64
)  
(39
)  
(7
)  
(110
)  
(98
)  
(19
)  
(5
)  
(122
)
Held-to-maturity
securities:
                        
Taxable investment securities
  
(162
)  
49
   
(3
)  
(116
)  
(120
)  
44
   
(2
)  
(78
)
Tax-advantaged
investment securities
  
(195
)  
(63
)  
(7
)  
(265
)  
(215
)  
(66
)  
(9
)  
(290
)
Investment in FHLB stock
  
-
   
-
   
-
   
-
   
(93
)  
91
   
(26
)  
(28
)
Interest-earning deposits with other institutions
  
(556
)  
167
   
(146
)  
(535
)  
529
   
41
   
72
   
642
 
Loans
  
33,339
   
7,043
   
4,093
   
44,475
   
14,389
   
3,888
   
701
   
18,978
 
                        
Total interest income
  
30,485
   
7,646
   
3,849
   
41,980
   
12,270
   
3,933
   
722
   
16,925
 
                        
  
Interest expense:
                        
Savings deposits
  
458
   
902
   
320
   
1,680
   
104
   
1,235
   
61
   
1,400
 
Time deposits
  
88
   
577
   
199
   
864
   
(52
)  
292
   
(18
)  
222
 
FHLB advances, other borrowings, and customer repurchase agreements
  
153
   
722
   
192
   
1,067
   
(56
)  
21
   
(1
)  
(36
)
                        
Total interest expense
  
699
   
2,201
   
711
   
3,611
   
(4
)  
1,548
   
42
   
1,586
 
                        
Net interest income
   $
29,786
    $
5,445
    $
3,138
    $
38,369
    $
12,274
    $
2,385
    $
680
    $
15,339
 
                            
     
 
Comparison of Six Months Ended June 30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
  
Comparision of Nine Months Ended September��30,
 
2019 Compared to 2018
 
Increase (Decrease) Due to
 
    Volume    
  
    Rate    
  
Rate/
    Volume    
  
    Total    
  
    Volume    
 
    Rate    
 
Rate/
    Volume    
 
    Total    
 
   
(Dollars in thousands)
    
(Dollars in thousands)
  
Interest income:
                        
Available-for-sale
securities:
                        
Taxable investment securities
   $
(3,754
)   $
1,376
    $
(227
)   $
(2,605
)   $
(5,894
)   $
1,346
    $
(234
)   $
(4,782
)
Tax-advantaged
investment securities
  
(157
)  
(50
)  
10
   
(197
)  
(264
)  
(70
)  
15
   
(319
)
Held-to-maturity
securities:
                        
Taxable investment securities
  
(501
)  
447
   
(30
)  
(84
)  
(583
)  
447
   
(26
)  
(162
)
Tax-advantaged
investment securities
  
(421
)  
(131
)  
15
   
(537
)  
(651
)  
(201
)  
25
   
(827
)
Investment in FHLB stock
  
-
   
-
   
-
   
-
   
(114
)  
97
   
(11
)  
(28
)
Interest-earning deposits with other institutions
  
(1,021
)  
337
   
(293
)  
(977
)  
(567
)  
378
   
(146
)  
(335
)
Loans
  
66,439
   
14,164
   
8,363
   
88,966
   
81,793
   
18,349
   
7,802
   
107,944
 
                        
Total interest income
  
60,585
   
16,143
   
7,838
   
84,566
   
73,720
   
20,346
   
7,425
   
101,491
 
                        
  
Interest expense:
                        
Savings deposits
  
923
   
1,595
   
574
   
3,092
   
1,113
   
2,728
   
651
   
4,492
 
Time deposits
  
187
   
1,178
   
433
   
1,798
   
266
   
1,470
   
284
   
2,020
 
FHLB advances, other borrowings, and customer repurchase agreements
  
274
   
1,652
   
366
   
2,292
   
271
   
1,757
   
228
   
2,256
 
                        
Total interest expense
  
1,384
   
4,425
   
1,373
   
7,182
   
1,650
   
5,955
   
1,163
   
8,768
 
                        
Net interest income
   $
59,201
    $
11,718
    $
6,465
    $
77,384
    $
72,070
    $
14,391
    $
6,262
    $
92,723
 
                            
 
 
 
4447
 
Table of Contents
SecondThird Quarter of 2019 Compared to the SecondThird Quarter of 2018
Net interest income, before provision for (recapture of) loan losses, of $111.1$108.2 million for the secondthird quarter of 2019 increased $38.4$15.3 million, or 52.79%16.53%, compared to $72.7$92.8 million for the secondthird quarter of 2018. Interest-earning assets increased on average by $2.25 billion,$822.1 million, or 29.27%9%, from $7.70$9.12 billion for the secondthird quarter of 2018 to $9.96$9.94 billion for the secondthird 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 4.49%4.34% for the secondthird quarter of 2019, compared to 3.82%4.06% for the second quarter of 2018. The net interest margin for the second quarter of 2019 grew by 67 basis points over the second quarter of 2018. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $9.4 million for the second quarter of 2019, compared to $2.1 million for the secondthird quarter of 2018. The increase in our adjusted net interest margin was primarily due to a 7932 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 5924 basis point increase in our 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 secondthird quarter of 2019 was $116.8$113.6 million, which represented a $42.0$16.9 million, or 56.12%17.51%, increase when compared to the same period of 2018. Average interest-earning assets increased by $2.25 billion$822.1 million and the average interest-earning asset yield of 4.72%4.55%, compared to 3.93%4.23% for the secondthird quarter of 2018. The 7932 basis point increase in the interest-earning asset yield over the secondthird quarter of 2018 resulted from the combination of a 5924 basis point increase in loan yields, a six 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 62.1%69.6% in the secondthird quarter of 2018 to 75.9%75.4% in the secondthird quarter of 2019. Conversely, average investment securities declined as a percentage of earning assets from 35.8%29.4% in the prior year to 23.7%22.7% in the secondthird quarter of 2019.
Interest income and fees on loans for the secondthird quarter of 2019 of $101.8$98.8 million increased $44.5$19.0 million, or 77.53%23.78%, when compared to the secondthird quarter of 2018 primarily due to loans acquired from CB. Average loans increased $2.78$1.15 billion for the secondthird 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, secondthird quarter interest income increased by $6.1$2.5 million in comparison to the secondthird quarter of 2018. Also contributing to the 5924 basis point increase in loan yield were increases in the rate on loans indexed to variable interest rates, such as the Bank’s prime rate, which increased by 0.50%0.25% when compared to the end of secondthird quarter of 2018.
Interest income from investment securities was $14.5$13.5 million for the secondthird quarter of 2019, a $2.0$2.7 million, or 11.88%16.48%, decrease from $16.5$16.2 million for the secondthird quarter of 2018. This decrease was primarily the result of a $397.7$426.6 million decline in average investment securities for the secondthird quarter of 2019, compared to the same period of 2018. The yield on investments increaseddecreased by sixtwo basis points compared to the secondthird quarter of 2018.
Interest expense of $5.7$5.4 million for the secondthird quarter of 2019, increased $3.6$1.6 million, or 170.57%41.54%, compared to the secondthird quarter of 2018, as our average interest-bearing liabilities increased by $1.04 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 secondthird quarter of 2019 was 0.25%0.23%, compared to 0.12%0.18% for the secondthird quarter of 2018. The increase inoverall cost of funds comparedincreased by only five basis points due to the second quartercontinued strength and growth of 2018 was due tononinterest-bearing deposits, during a nine basis point increase in costperiod of deposits and customer repurchases, and $130.2 million of growth in average overnight borrowings at an average cost of 2.56%.higher short-term interest rates. Average interest-bearing deposits and customer repurchase agreements increased by $910.3$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 59.14%60.14% of our total deposits for the secondthird quarter of 2019, compared to 60.35%58.10% for the secondthird quarter of 2018.
SixNine Months of 2019 Compared to the SixNine Months of 2018
Net interest income, before recapture of provision for (recapture of) loan losses, was $220.6$328.8 million for the sixnine months ended JuneSeptember 30, 2019, an increase of $77.4$92.7 million, or 54.04%39.28%, compared to $143.2$236.0 million for the same period of 2018. Interest-earning assets increased on average by $2.30$1.80 billion, or 29.67%21.93%, from $7.75$8.21 billion for the sixnine months ended JuneSeptember 30, 2018 to $10.05$10.01 billion for the current year. Our net interest margin (TE) was 4.44%4.41% during the first sixnine months of 2019, compared to 3.75%3.87% for the same period of 2018.
Interest income for the sixnine months ended JuneSeptember 30, 2019 was $232.1$345.6 million, which represented a $84.6$101.5 million, or 57.33%41.57%, increase when compared to the same period of 2018. Compared to the first sixnine months of 2018, average interest-earning assets increased by $2.30$1.80 billion primarily due to loans acquired from CB, and the yield on interest-earning assets increased by 8163 basis points. The 8163 basis points increase in the earning asset yield over the first sixnine months of 2019, resulted from a 6046 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 61.8%64.7% for the first sixnine months of 2018 to 75.8%75.6% for the first sixnine months of 2019. Conversely, average investment securities declined as a percentage of earning assets from 36.2%33.7% in the prior year to 23.9%23.5% for the first sixnine months of 2019.

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Table of Contents
Interest income and fees on loans for the first sixnine months of 2019 of $201.5$300.3 million increased $89.0$107.9 million, or 79.04%56.11%, when compared to the same period of 2018. Average loans increased $2.83$2.26 billion for the first sixnine months of 2019 when compared with the same period of 2018, primarily due to loans acquired from CB. The first sixnine months of 2019 reflected a $13.0$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 $29.7$43.2 million for the sixnine months ended JuneSeptember 30, 2019, a $3.4$6.1 million decrease from $33.1$49.3 million for the first sixnine months of 2018. This decrease was the net result of a $403.8$411.4 million decrease in the average investment securities for the first sixnine months of 2019, compared to the same period of 2018, partially offset by an 11a seven basis points increase in the non
tax-equivalent
yield on securities.
Interest expense of $11.5$16.9 million for the sixnine months ended JuneSeptember 30, 2019, increased by $7.2$8.8 million from the same period of 2018. The average rate paid on interest-bearing liabilities increased by 2823 basis points, to 0.55% for the first sixnine months of 2019, from 0.27%0.32% for the same period of 2018. The rate on interest-bearing deposits for the first sixnine months of 2019 increased by 2119 basis points from the same period in 2018.2018, 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 $1.07 billion$733.5 million higher during the first sixnine months of 2019 when compared with the same period of 2018, primarily due to deposits assumed from CB. Average interest-bearing deposit growth of $950.7$667.7 million was partially offset by a $22.2an $8.0 million decline in customer repurchase agreements. Average noninterest-bearing deposits represented 58.67%59.17% of our total deposits for the sixnine months ended JuneSeptember 30 2019, compared to 59.73%59.11% for the same period of 2018. Total cost of funds for the first sixnine months of 2019 was 0.25%0.24%, compared with 0.12%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 $67.1$68.7 million at JuneSeptember 30, 2019, compared to $63.6 million at December 31, 2018 and $59.6$60.0 million as of JuneSeptember 30, 2018. The allowance for loan losses was increased by $3.5$5.0 million in loan loss provision and $19,000$59,000 in net recoveries for the sixnine months ended JuneSeptember 30, 2019. This compares to a $2.0$1.5 million loan loss provision recapture and net recoveries of $2.0$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 during the 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 JuneSeptember 30, 2019. The ratio of the allowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of JuneSeptember 30, 2019, December 31, 2018 and June,September, 2018 was 0.89%0.92%, 0.82% and 1.24%0.79%, respectively. The ratio as of the most recent four quarters was impacted by the $2.74 billion in loans acquired from CB that are recorded at fair market value, without a corresponding loan loss allowance. As of JuneSeptember 30, 2019, remaining credit related discounts on acquired loans were $41.4$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
June 30,
 
Variance
 
For the
Six Months Ended
June 30,
 
Variance
 
For the Three Months Ended
September 30,
 
Variance
 
For the Nine Months Ended
September 30,
 
Variance
 
 
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
  
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
    
(Dollars in thousands)
     
(Dollars in thousands)
 
Noninterest income:
                                                
Service charges on deposit accounts
 $
5,065
  $
4,091
  $
974
   
23.81%
  $
10,206
  $
8,136
  $
2,070
   
25.44%
  $
4,833
  $
4,295
  $
 538
   
12.53
% $
15,039
  $
 12,431
  $
 2,608
   
20.98
%
Trust and investment services
  
2,452
   
2,399
   
53
   
2.21%
   
4,634
   
4,556
   
78
   
1.71%
   
2,330
   
2,182
   
148
   
6.78
%  
6,964
   
6,738
   
226
   
3.35
%
Bankcard services
  
1,027
   
958
   
69
   
7.20%
   
1,977
   
1,762
   
215
   
12.20%
   
637
   
875
   
(238
)  
-27.20
%  
2,614
   
2,637
   
(23
)  
-0.87
%
BOLI income
  
1,349
   
1,069
   
280
   
26.19%
   
2,685
   
2,048
   
637
   
31.10%
   
1,797
   
936
   
861
   
91.99
%  
4,482
   
2,984
   
1,498
   
50.20
%
Gain on OREO, net
  
24
   
-
   
24
   
-
   
129
   
3,540
   
(3,411
)  
-96.36%
   
-
   
-
   
-
   
-
   
129
   
3,540
   
(3,411
)  
-96.36
%
Gain on sale of building, net
  
-
   
-
   
-
   
-
   
4,545
   
-
   
4,545
   
-
   
-
      
-
   
-
   
4,545
   
-
   
4,545
   
-
 
Gain on eminent domain condemnation, net
  
5,685
   
-
   
5,685
   
-
   
5,685
   
-
   
5,685
   
-
   
-
      
-
   
-
   
5,685
   
-
   
5,685
   
-
 
Other
  
2,603
   
1,178
   
1,425
   
120.97%
   
4,647
   
2,569
   
2,078
   
80.89%
   
2,297
   
1,824
   
473
   
25.93%
   
6,944
   
4,393
   
2,551
   
58.07%
 
                                                
Total noninterest income
 $
     18,205
  $
     9,695
  $
     8,510
   
87.78%
  $
     34,508
  $
     22,611
  $
     11,897
   
52.62%
  $
   11,894
  $
   10,112
  $
   1,782
   
17.62
% $
   46,402
  $
   32,723
  $
   13,679
   
41.80
%
                                                        
 
 
SecondThird Quarter of 2019 Compared to the SecondThird Quarter of 2018
The second quarter of 2019 included $5.7$1.8 million of net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings locatedgrowth in Bakersfield. We have since moved that banking center to another site approximately 0.5 miles away. Excluding this net gain on sale, noninterest income for the second quarterincluded an increase of 2019 increased by $2.8 million, or 29.14%, compared to the second quarter of 2018.$861,000 in BOLI income. The $1.0 million$538,000 increase in service charges on deposit accounts from the secondthird 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 JuneSeptember 30, 2019, CitizensTrust had approximately $2.82$2.83 billion in assets under management and administration, including $2.03$1.96 billion in assets under management. Themanagement compared with $1.79 billion in assets under management at September 30, 2018. CitizensTrust generated fees generatedof $2.3 million for the secondthird quarter of 2019, were consistent withan increase of $148,000 compared to the secondthird 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 $1.4 million$473,000 increase in other income included increasesa $305,000 increase in swap fee income and a $272,000 increase in international banking swapfee 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 SBA servicing income, and dividend income from various equity investments.for bankcard services by approximately $400,000 when compared to the third quarter of 2018.
SixNine Months of 2019 Compared to the SixNine Months of 2018
The $11.9$13.7 million increase in noninterest income for the sixnine months ended JuneSeptember 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 sixnine months of 2018. Service charges on deposit accounts increased by $2.1$2.6 million from the first sixnine months of 2018, primarily due to the acquisition of CB. The $637,000$1.5 million increase in BOLI income included $1.0$1.2 million in income from $70.9 million in BOLI policies acquired from CB in the third quarter of 2018 offset by a $351,000and $468,000 of death benefitbenefits included in our BOLI policies for the first sixnine months of 2018.2019. The $2.1$2.6 million increase in other income included increases of approximately $800,000 in both international banking fees and swap fee income,income. In addition, SBA servicing income and dividend income from various equity investments.
investments increased from the prior nine month period.

50
Table of Contents
Noninterest ExpenseIncome 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 third quarter of 2019, we reported net earnings of $50.4 million, compared with $54.5 million for the second quarter of 2019 and $38.6 million for the third quarter of 2018. Diluted earnings per share were $0.36 for the third quarter, compared to $0.39 for the prior quarter and $0.30 for the same period last year.
At September 30, 2019, total assets of $11.33 billion decreased $196.4 million, or 1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $10.01 billion at September 30, 2019 decreased $281.0 million, or 2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $270.2 million decrease in total loans and a $204.2 million decrease in investment 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 4.55% for the quarter ended September 30, 2019, compared to 4.72% for the second quarter of 2019 and 4.23% for the third quarter of 2018.
Total investment securities were $2.27 billion at September 30, 2019, a decrease of $204.2 million, or 8.24%, from $2.48 billion at December 31, 2018. At September 30, 2019, investment securities
held-to-maturity
(“HTM”) totaled $704.0 million. At September 30, 2019, investment securities
available-for-sale
(“AFS”) totaled $1.57 billion, inclusive of a
pre-tax
unrealized gain of $21.0 million. HTM securities declined by $40.5 million, or 5.44%, and AFS securities declined by $163.7 million, or 9.44%, from December 31, 2018. Our tax equivalent yield on investments was 2.47% for the quarter ended September 30, 2019, compared to 2.53% for the second quarter of 2019 and 2.49% for the third quarter of 2018.
41
Table of Contents
Total loans and leases, net of deferred fees and discounts, of $7.49 billion at September 30, 2019 decreased by $270.2 million, or 3.48%, from December 31, 2018. The decrease in total loans included 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 $181.9 million, or 2.45%. The decrease in total loans included declines of $81.1 million in commercial and industrial loans, $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. Our yield on loans was 5.23% for the quarter ended September 30, 2019, compared to 5.40% for the second quarter of 2019 and 4.99% for the third quarter of 2018. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.3 million for the quarter ended September 30, 2019, compared to $9.4 million for the second quarter of 2019 and $4.9 million for the third quarter of 2018.
Noninterest-bearing deposits were $5.39 billion at September 30, 2019, an increase of $180.3 million, or 3.46%, when compared to December 31, 2018. At September 30, 2019, noninterest-bearing deposits were 61.23% of total deposits, compared to 58.96% at December 31, 2018. Our average cost of total deposits was 0.21% for the quarter ended September 30, 2019, compared to 0.19% for the second quarter of 2019 and 0.15% for the third quarter of 2018.
Customer repurchase agreements totaled $407.9 million at September 30, 2019, compared to $442.3 million at December 31, 2018. Our average cost of total deposits including customer repurchase agreements was 0.22% for the quarter ended September 30, 2019, 0.20% for the second quarter of 2019, and 0.15% for the third quarter of 2018.
At September 30, 2019, we had $4.9 million in other borrowings compared to $280.0 million at December 31, 2018. At 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 0.23% for the quarter ended September 30, 2019, 0.25% for the second quarter of 2019, and 0.18% for the third quarter of 2018.
The allowance for loan losses totaled $68.7 million at September 30, 2019, compared to $63.6 million at December 31, 2018. The allowance for loan losses for the first nine months of 2019 was increased by $5.0 million in provision for loan losses and $59,000 in net recoveries. The allowance for loan losses was 0.92% and 0.82% of total loans and leases outstanding, at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, credit related discounts on acquired loans were $37.0 million.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of September 30, 2019, the Company’s Tier 1 leverage capital ratio totaled 12.23%, our common equity Tier 1 ratio totaled 14.64%, our Tier 1 risk-based capital ratio totaled 14.93%, and our total risk-based capital ratio totaled 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 $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $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. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the 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
 
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%  
    
                                 
 
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%  
    
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Table of Contents
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 table summarizesis 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 various componentsCompany’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of noninterest expense for the periods presented.return on average tangible common equity.
                 
 
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
%
                                 
 
For the
Three Months Ended
June 30,
  
Variance
  
For the
Six Months Ended
June 30,
  
Variance
 
 
2019
  
2018
  
$
  
%
  
2019
  
2018
  
$
  
%
 
       
(Dollars in thousands)
       
Noninterest expense:
                        
Salaries and employee benefits
 $
28,862
  $
21,051
  $
7,811
   
37.11%
  $
58,164
  $
43,365
  $
14,799
   
34.13% 
 
Occupancy
  
4,388
   
3,424
   
964
   
28.15%
   
8,795
   
6,756
   
2,039
   
30.18% 
 
Equipment
  
1,253
   
894
   
359
   
40.16%
   
2,461
   
1,754
   
707
   
40.31% 
 
Professional services
  
2,040
   
1,690
   
350
   
20.71%
   
3,965
   
3,220
   
745
   
23.14% 
 
Software licenses and maintenance
  
2,542
   
1,759
   
783
   
44.51%
   
4,964
   
3,519
   
1,445
   
41.06% 
 
Stationery and supplies
  
316
   
307
   
9
   
2.93%
   
608
   
544
   
64
   
11.76% 
 
Telecommunications expense
  
712
   
561
   
151
   
26.92%
   
1,470
   
1,089
   
381
   
34.99% 
 
Marketing and promotion
  
1,238
   
1,148
   
90
   
7.84%
   
2,632
   
2,504
   
128
   
5.11% 
 
Amortization of intangible assets
  
2,833
   
328
   
2,505
   
763.72%
   
5,690
   
659
   
5,031
   
  763.43% 
 
Regulatory assessments
  
734
   
666
   
68
   
10.21%
   
1,658
   
1,380
   
278
   
20.14% 
 
Insurance
  
469
   
423
   
46
   
10.87%
   
938
   
846
   
92
   
10.87% 
 
Loan expense
  
491
   
149
   
342
   
229.53%
   
807
   
404
   
403
   
99.75% 
 
Directors’ expenses
  
320
   
270
   
50
   
18.52%
   
607
   
510
   
97
   
19.02% 
 
Acquisition related expenses
  
2,612
   
494
   
2,118
   
  428.74%
   
5,761
   
1,297
   
4,464
   
344.18% 
 
Other
  
1,718
   
1,090
   
628
   
57.61%
   
3,612
   
2,353
   
1,259
   
53.51% 
 
                                 
Total noninterest expense
 $
   50,528
  $
   34,254
  $
   16,274
   
47.51%
  $
   102,132
  $
   70,200
  $
   31,932
   
45.49% 
 
                                 
                                 
Noninterest expense to average assets
  
1.81%
   
1.68%
         
1.82%
   
1.72%
       
                                 
Efficiency ratio (1)
  
39.09%
   
41.58%
         
40.04%
   
42.34%
       
 (1)Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.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 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.
Second
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 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 September 30, 2019 and 2018. The non TE rates were 2.40% and 2.41% for the three months ended September 30, 2019 and 2018, respectively.
(2)Includes loan fees of $782,000 and $865,000 for the three months ended September 30, 2019 and 2018, respectively. Prepayment penalty fees of $1.0 million and $674,000 are included in interest income for the three months ended September 30, 2019 and 2018, respectively.
(3)Includes interest-bearing demand and money market accounts.
45
                         
 
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
                                                                                                                                     
 
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 SecondThird 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. Noninterest expense as a percentage of average assets was 1.81% for the second quarter of 2019, compared to 1.68% for the second quarter of 2018. The increase is primarily the result of higher acquisition expense of $2.1 million and a $2.5 million increase in amortization of core deposit intangible (“CDI”).
Our ability to control noninterest expenses in relation to the level of total revenue (netNet interest income, before provision for loan losses, plus noninterest income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.09%$108.2 million for the secondthird quarter of 2019 increased $15.3 million, or 16.53%, compared to $92.8 million for the third quarter of 2018. Interest-earning assets increased on average by $822.1 million, or 9%, from $9.12 billion for the third quarter of 2018 to $9.94 billion for the 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 4.34% for the third quarter of 2019, compared to 41.58%4.06% for the secondthird quarter of 2018. The increase in our net interest margin was primarily due to a 32 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 24 basis point increase in our loan yield and an increase in loans as a percentage of our average 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.
The $16.3 million, or 47.51%, increase in noninterest expenseInterest income for the secondthird quarter of 2019 includedwas $113.6 million, which represented a $7.8$16.9 million, or 17.51%, increase when compared to the same period of 2018. Average interest-earning assets increased by $822.1 million and the average interest-earning asset yield of 4.55%, compared to 4.23% for the third quarter of 2018. The 32 basis point increase in salarythe interest-earning asset yield over the third quarter of 2018 resulted from the combination of a 24 basis point increase in loan yields and benefit expense principallythe change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets from 69.6% in the third quarter of 2018 to 75.4% in the third quarter of 2019. Conversely, average investment securities declined as a percentage of earning assets from 29.4% in the prior year to 22.7% in the third quarter of 2019.
Interest income and fees on loans for the third quarter of 2019 of $98.8 million increased $19.0 million, or 23.78%, when compared to the third quarter of 2018 primarily due to additional compensation related expensesloans acquired from CB. Average loans increased $1.15 billion for the formerthird quarter of 2019 when compared with the same period of 2018. As a result of higher levels of discount accretion on acquired CB employees who were retained. CDI amortizationloans and nonaccrual interest paid, third quarter interest income increased by $2.5 million in comparison to the third quarter of 2018. Also contributing to the 24 basis point increase in loan yield were increases in the rate on loans indexed to variable interest rates, such as the Bank’s prime rate, which increased by 0.25% when compared to the end of third quarter of 2018.
Interest income from investment securities was $13.5 million for the third quarter of 2019, a $2.7 million, or 16.48%, decrease from $16.2 million for the third quarter of 2018. This decrease was primarily the result of core deposits assumed from CB. Occupancy and equipmenta $426.6 million decline in average investment securities for the third quarter of 2019, compared to the same period of 2018. The yield on investments decreased by two basis points compared to the third quarter of 2018.
Interest expense of $5.4 million for the third quarter of 2019, increased $1.6 million, or 41.54%, compared to the third quarter of 2018, as our average interest-bearing liabilities increased by $1.3$110.9 million and our cost of interest-bearing deposits increased 17 basis points. Our total cost of funds for the third quarter of 2019 was 0.23%, compared to 0.18% for the third quarter of 2018. The overall cost of funds increased by only five basis points due to the banking centers acquiredcontinued strength and growth of noninterest-bearing deposits, during a period of higher short-term interest rates. Average interest-bearing deposits and customer repurchase agreements increased by $130.7 million, as we assumed $1.61 billion interest-bearing deposits from CB. The secondCB during the third quarter of 2018. Average noninterest-bearing deposits represented 60.14% of our total deposits for the third quarter of 2019, also included $2.6 million in merger related expenses mostly duecompared to 58.10% for the third quarter of 2018.
Nine Months of 2019 Compared to the consolidationNine Months of four banking centers. This compares2018
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 $494,000 in merger related expenses$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.
Six MonthsInterest 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 20192018. Compared to the Six Monthsfirst 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 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
Noninterest expense
Table of $102.1Contents
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 sixnine 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 $31.9 million higher than0.24%, compared with 0.14% for the prior year period. Salaries and benefit costssame period of 2018.
Provision for Loan Losses
The allowance for loan losses is increased by $14.8the 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 $68.7 million due to additional compensation related expenses for the newly hired and former CB employees who were retained. The year-over-year increase also included a $5.0 million increase in amortization of intangible assets due to core deposits assumed from CB and a $4.5 million increase in merger related expenses mostly due to the consolidation of 10 banking centers that occurred throughout the first six months of 2019. CB related expenses were the primary driver of a $2.7 million increase in occupancy and equipment expense and a $1.4 million increase in software licenses and maintenance. As a percentage of average assets, noninterest expense was 1.82% for the six months ended Juneat September 30, 2019, compared to 1.72%$63.6 million at December 31, 2018 and $60.0 million as of September 30, 2018. The allowance for loan losses was increased by $5.0 million in loan loss provision and $59,000 in net recoveries for the nine months ended September 30, 2019. This compares to a $1.5 million loan loss provision recapture and net recoveries of $1.9 million for the same period of 2018. The increase isin provision for loan losses was primarily due to lower levels of net recoveries and additional provision due to loan growth during the 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 higher acquisition expensethe net effect of $4.5 millionmodest increases in certain qualitative loss factors and a $5.0 million increasereduced reserve requirements for moderate reductions in amortizationhistorical loss rates across the portfolio. We believe the allowance is appropriate at September 30, 2019. The ratio of CDI. For the six months endedallowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2019, December 31, 2018 and September, 2018 was 0.92%, 0.82% and 0.79%, respectively. As of September 30, 2019, remaining credit related discounts on acquired loans were $37.0 million. Refer to the efficiency ratio was 40.04%, compareddiscussion 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 42.34%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 same periodfuture, as the nature of 2018.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
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 Third Quarter of 2018
The $1.8 million growth in noninterest income included an increase of $861,000 in BOLI income. The $538,000 increase in service charges on deposit accounts from the 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 September 30, 2019, CitizensTrust had approximately $2.83 billion in assets under management and administration, including $1.96 billion in assets under management compared with $1.79 billion in assets under management at September 30, 2018. CitizensTrust generated fees of $2.3 million for the third quarter of 2019, an increase of $148,000 compared to the third quarter of 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 $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 $1.2 million in income from $70.9 million in BOLI policies acquired from CB in the third quarter of 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
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 third quarter of 2019, we reported net earnings of $50.4 million, compared with $54.5 million for the second quarter of 2019 and $38.6 million for the third quarter of 2018. Diluted earnings per share were $0.36 for the third quarter, compared to $0.39 for the prior quarter and $0.30 for the same period last year.
At September 30, 2019, total assets of $11.33 billion decreased $196.4 million, or 1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $10.01 billion at September 30, 2019 decreased $281.0 million, or 2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $270.2 million decrease in total loans and a $204.2 million decrease in investment 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 4.55% for the quarter ended September 30, 2019, compared to 4.72% for the second quarter of 2019 and 4.23% for the third quarter of 2018.
Total investment securities were $2.27 billion at September 30, 2019, a decrease of $204.2 million, or 8.24%, from $2.48 billion at December 31, 2018. At September 30, 2019, investment securities
held-to-maturity
(“HTM”) totaled $704.0 million. At September 30, 2019, investment securities
available-for-sale
(“AFS”) totaled $1.57 billion, inclusive of a
pre-tax
unrealized gain of $21.0 million. HTM securities declined by $40.5 million, or 5.44%, and AFS securities declined by $163.7 million, or 9.44%, from December 31, 2018. Our tax equivalent yield on investments was 2.47% for the quarter ended September 30, 2019, compared to 2.53% for the second quarter of 2019 and 2.49% for the third quarter of 2018.
41
Table of Contents
Total loans and leases, net of deferred fees and discounts, of $7.49 billion at September 30, 2019 decreased by $270.2 million, or 3.48%, from December 31, 2018. The decrease in total loans included 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 $181.9 million, or 2.45%. The decrease in total loans included declines of $81.1 million in commercial and industrial loans, $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. Our yield on loans was 5.23% for the quarter ended September 30, 2019, compared to 5.40% for the second quarter of 2019 and 4.99% for the third quarter of 2018. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $7.3 million for the quarter ended September 30, 2019, compared to $9.4 million for the second quarter of 2019 and $4.9 million for the third quarter of 2018.
Noninterest-bearing deposits were $5.39 billion at September 30, 2019, an increase of $180.3 million, or 3.46%, when compared to December 31, 2018. At September 30, 2019, noninterest-bearing deposits were 61.23% of total deposits, compared to 58.96% at December 31, 2018. Our average cost of total deposits was 0.21% for the quarter ended September 30, 2019, compared to 0.19% for the second quarter of 2019 and 0.15% for the third quarter of 2018.
Customer repurchase agreements totaled $407.9 million at September 30, 2019, compared to $442.3 million at December 31, 2018. Our average cost of total deposits including customer repurchase agreements was 0.22% for the quarter ended September 30, 2019, 0.20% for the second quarter of 2019, and 0.15% for the third quarter of 2018.
At September 30, 2019, we had $4.9 million in other borrowings compared to $280.0 million at December 31, 2018. At 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 0.23% for the quarter ended September 30, 2019, 0.25% for the second quarter of 2019, and 0.18% for the third quarter of 2018.
The allowance for loan losses totaled $68.7 million at September 30, 2019, compared to $63.6 million at December 31, 2018. The allowance for loan losses for the first nine months of 2019 was increased by $5.0 million in provision for loan losses and $59,000 in net recoveries. The allowance for loan losses was 0.92% and 0.82% of total loans and leases outstanding, at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, credit related discounts on acquired loans were $37.0 million.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of September 30, 2019, the Company’s Tier 1 leverage capital ratio totaled 12.23%, our common equity Tier 1 ratio totaled 14.64%, our Tier 1 risk-based capital ratio totaled 14.93%, and our total risk-based capital ratio totaled 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 $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $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. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the 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
 
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%  
    
                                 
 
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%  
    
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Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
                 
 
Three Months Ended
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 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 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 September 30, 2019 and 2018. The non TE rates were 2.40% and 2.41% for the three months ended September 30, 2019 and 2018, respectively.
(2)Includes loan fees of $782,000 and $865,000 for the three months ended September 30, 2019 and 2018, respectively. Prepayment penalty fees of $1.0 million and $674,000 are included in interest income for the three months ended September 30, 2019 and 2018, respectively.
(3)Includes interest-bearing demand and money market accounts.
45
                         
 
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
                                                                                                                                     
 
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 Third Quarter of 2018
Net interest income, before provision for loan losses, of $108.2 million for the third quarter of 2019 increased $15.3 million, or 16.53%, compared to $92.8 million for the third quarter of 2018. Interest-earning assets increased on average by $822.1 million, or 9%, from $9.12 billion for the third quarter of 2018 to $9.94 billion for the 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 4.34% for the third quarter of 2019, compared to 4.06% for the third quarter of 2018. The increase in our net interest margin was primarily due to a 32 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 24 basis point increase in our loan yield and an increase in loans as a percentage of our average 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 third quarter of 2019 was $113.6 million, which represented a $16.9 million, or 17.51%, increase when compared to the same period of 2018. Average interest-earning assets increased by $822.1 million and the average interest-earning asset yield of 4.55%, compared to 4.23% for the third quarter of 2018. The 32 basis point increase in the interest-earning asset yield over the third quarter of 2018 resulted from the combination of a 24 basis point increase in loan yields and the change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets from 69.6% in the third quarter of 2018 to 75.4% in the third quarter of 2019. Conversely, average investment securities declined as a percentage of earning assets from 29.4% in the prior year to 22.7% in the third quarter of 2019.
Interest income and fees on loans for the third quarter of 2019 of $98.8 million increased $19.0 million, or 23.78%, when compared to the third quarter of 2018 primarily due to loans acquired from CB. Average loans increased $1.15 billion for the 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, third quarter interest income increased by $2.5 million in comparison to the third quarter of 2018. Also contributing to the 24 basis point increase in loan yield were increases in the rate on loans indexed to variable interest rates, such as the Bank’s prime rate, which increased by 0.25% when compared to the end of third quarter of 2018.
Interest income from investment securities was $13.5 million for the third quarter of 2019, a $2.7 million, or 16.48%, decrease from $16.2 million for the third quarter of 2018. This decrease was primarily the result of a $426.6 million decline in average investment securities for the third quarter of 2019, compared to the same period of 2018. The yield on investments decreased by two basis points compared to the third quarter of 2018.
Interest expense of $5.4 million for the third quarter of 2019, increased $1.6 million, or 41.54%, compared to the third quarter of 2018, as our average interest-bearing liabilities increased by $110.9 million and our cost of interest-bearing deposits increased 17 basis points. Our total cost of funds for the third quarter of 2019 was 0.23%, compared to 0.18% for the third quarter of 2018. The overall cost of funds increased by only five basis points due to the continued strength and growth of noninterest-bearing deposits, during a period of higher short-term interest rates. Average interest-bearing deposits and customer repurchase agreements increased by $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 60.14% of our total deposits for the third quarter of 2019, compared to 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 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 $68.7 million at September 30, 2019, compared to $63.6 million at December 31, 2018 and $60.0 million as of September 30, 2018. The allowance for loan losses was increased by $5.0 million in loan loss provision and $59,000 in net recoveries for the nine months ended September 30, 2019. This compares to a $1.5 million loan loss provision recapture and net recoveries of $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 during the 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 September 30, 2019, December 31, 2018 and September, 2018 was 0.92%, 0.82% and 0.79%, respectively. As of September 30, 2019, remaining credit related discounts on acquired loans 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
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 Third Quarter of 2018
The $1.8 million growth in noninterest income included an increase of $861,000 in BOLI income. The $538,000 increase in service charges on deposit accounts from the 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 September 30, 2019, CitizensTrust had approximately $2.83 billion in assets under management and administration, including $1.96 billion in assets under management compared with $1.79 billion in assets under management at September 30, 2018. CitizensTrust generated fees of $2.3 million for the third quarter of 2019, an increase of $148,000 compared to the third quarter of 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 $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 $1.2 million in income from $70.9 million in BOLI policies acquired from CB in the third quarter of 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
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
                                 
 
  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.
Third Quarter of 2019 Compared to the 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. Noninterest expense as a percentage of average assets was 1.68% for the third quarter of 2019, compared to 1.93% for the 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) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.60% for the third quarter of 2019, compared to 47.49% for the third quarter of 2018.
The $1.3 million, or 2.75%, decrease in noninterest expense for the third quarter of 2019 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 salaries and benefit costs of $3.8 million. Higher expense 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 who were retained after the merger. CDI amortization increased by $912,000 as a result of core deposits assumed from CB. The 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 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 was also primarily related to higher expenses related to the operations of a larger Bank after the CB merger. As a percentage of average assets, noninterest expense was 1.77% for the nine months ended September 30, 2019, compared to 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 sixnine months ended JuneSeptember 30, 2019 was 29.00%, compared to 28.00% for the 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
 
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $11.17$11.33 billion at JuneSeptember 30, 2019. This represented a decrease of $357.6$196.4 million, or 3.10%1.70%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $9.89$10.01 billion at JuneSeptember 30, 2019 decreased $395.0$281.0 million, or 3.84%2.73%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $228.9$270.2 million decrease in total loans and a $150.4$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 $94.8an $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 $134.1$181.9 million, or 1.81%, primarily due to increased payoffs, particularly from the former Community Bank loan portfolio.2.45%. Total liabilities were $9.23$9.37 billion at JuneSeptember 30, 2019, a decrease of $443.1$312.1 million, or 4.58%3.22%, from total liabilities of $9.68 billion at December 31, 2018. Total deposits declined by $164.7$33.2 million, or 1.87%0.38%. Total equity increased $85.5$115.7 million, or 4.62%6.25%, to $1.94$1.97 billion at JuneSeptember 30, 2019, compared to total equity of $1.85 billion at December 31, 2018. The $85.5$115.7 million increase in equity was due to $106.1$156.5 million in net earnings, a $26.6$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 $3.2$4.5 million for various stock based compensation items. This was offset by $50.4$75.7 million in cash dividends declared during the first sixnine 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 June 30, 2019, we reported total investment securities of $2.33 billion. This represented a decrease of $150.4 million, or 6.07%, from total investment securities of $2.48 billion at December 31, 2018. The decrease in investment securities was primarily due to minimal reinvestment of principal payments received from the portfolio during the first six months of 2019. At June 30, 2019, investment securities HTM totaled $728.1 million. At June 30, 2019, our AFS investment securities totaled $1.60 billion, inclusive of a
pre-tax
unrealized gain of $15.3 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $10.8 million.
As of June 30, 2019, the Company had a
pre-tax
net unrealized holding gain on AFS investment securities of $15.3 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 gain resulted primarily from fluctuations in market interest rates. For the six months ended June 30, 2019 and 2018, repayments/maturities of investment securities totaled $220.5 million and $261.5 million, respectively. The Company purchased additional investment securities totaling $37.1 million and $98.7 million for the first six months ended June 30, 2019 and 2018, respectively. No investment securities were sold during the first six months of 2019 and 2018.
The tables below set forth investment securities AFS and HTM for the periods presented.
                     
 
June 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
   $
1,348,415
    $
16,251
    $
(2,417)
    $
1,362,249
   
85.14%
 
CMO/REMIC - residential
  
194,094
   
1,216
   
(334)
   
194,976
   
12.19%
 
Municipal bonds
  
41,369
   
658
   
(41)
   
41,986
   
2.62%
 
Other securities
  
809
   
-
   
- 
   
809
   
0.05%
 
                     
Total
available-for-sale
securities
   $
   1,584,687
    $
18,125
    $
(2,792)
    $
1,600,020
   
100.00%
 
                     
Investment securities
held-to-maturity:
               
Government agency/GSE
   $
128,721
    $
2,627
    $
(414)
    $
130,934
   
17.68%
 
Residential mortgage-backed securities
  
175,552
   
1,480
   
(415)
   
176,617
   
24.11%
 
CMO
  
211,436
   
5
   
(4,358)
   
207,083
   
29.04%
 
Municipal bonds
  
212,404
   
3,245
   
(1,251)
   
214,398
   
29.17%
 
                     
Total
held-to-maturity
securities
   $
728,113
    $
         7,357
    $
(6,438)
    $
729,032
   
100.00%
 
                     

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 June 30, 2019 was 2.55% with a weighted-average life of 3.8 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 June 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 June 30, 2019, approximately $83.6 million in U.S. government agency bonds are callable. The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 11% of the total investment portfolio, are predominately AA or higher rated securities.

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 June 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 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
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 September 30, 2019, we reported total investment securities of $2.27 billion. This represented a decrease of $204.2 million, or 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 September 30, 2019, investment securities HTM totaled $704.0 million. At September 30, 2019, our AFS investment securities totaled $1.57 billion, inclusive of a
pre-tax
unrealized gain of $21.0 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $14.8 million.
As of September 30, 2019, the Company had a
pre-tax
net unrealized holding gain on AFS investment securities of $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 gain resulted primarily from fluctuations in market interest rates. For the nine months ended September 30, 2019 and 2018, repayments/maturities of investment securities totaled $355.8 million and $385.0 million, respectively. The Company purchased additional investment securities totaling $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 third quarter of 2018, we liquidated the entire investment security portfolio of $717.0 million acquired from CB. No other investment securities were sold during the first nine months ended September 30, 2018.
The tables below set forth investment securities AFS and HTM as of the dates presented.
                     
 
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%
 
                     
53
                     
 
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 September 30, 2019 was 2.56% with a weighted-average life of 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 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 September 30, 2019, approximately $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 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.
                        
 
June 30, 2019
  
September 30, 2019
 
Less Than 12 Months
 
12 Months or Longer
 
Total
  
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
  
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
     
(Dollars in thousands)
     
(Dollars in thousands)
Investment securities
available-for-sale:
                                    
Residential mortgage-backed securities
   $
-
    $
- 
    $
228,518
    $
(2,417)
    $
228,518
    $
(2,417)
    $
2
    $
-
    $
127,904
    $
(1,341
)   $
127,906
    $
(1,341
)
CMO/REMIC - residential
  
-
   
- 
   
71,924
   
(334)
   
71,924
   
(334)
   
122,595
   
(156
)  
39,498
   
(180
)  
162,093
   
(336
)
Municipal bonds
  
-
   
- 
   
3,287
   
(41)
   
3,287
   
(41)
   
-
   
-
   
564
   
(1
)  
564
   
(1
)
                                    
Total
available-for-sale
securities
   $
-
    $
- 
  $
303,729
    $
(2,792)
    $
303,729
    $
(2,792)
    $
122,597
    $
(156
)   $
167,966
    $
(1,522
)   $
290,563
    $
(1,678
)
                                          
Investment securities
held-to-maturity:
                                    
Government agency/GSE
   $
-
    $
- 
    $
39,016
    $
(414)
    $
39,016
    $
(414)
    $
-
    $
-
    $
19,923
    $
(170
)   $
19,923
    $
(170
)
Residential mortgage-backed securities
  
10,722
   
(45)
   
75,536
   
(370)
   
86,258
   
(415)
   
5,021
   
(3
)  
-
   
-
   
5,021
   
(3
)
CMO
  
-
   
- 
   
201,974
   
(4,358)
   
201,974
   
(4,358)
   
-
   
-
   
178,297
   
(1,467
)  
178,297
   
(1,467
)
Municipal bonds
  
-
   
- 
   
49,102
   
(1,251)
   
49,102
   
(1,251)
   
3,037
   
(5
)  
32,217
   
(553
)  
35,254
   
(558
)
                                    
Total
held-to-maturity
securities
   $
10,722
    $
(45)
  $
365,628
    $
(6,393)
    $
376,350
    $
(6,438)
    $
8,058
    $
(8
)   $
230,437
    $
(2,190
)   $
238,495
    $
(2,198
)
                                          
     
 
December 31, 2018
  
December 31, 2018
 
Less Than 12 Months
 
12 Months or Longer
 
Total
  
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
  
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
  Fair Value  
 
Gross
  Unrealized  
Holding
Losses
 
     
(Dollars in thousands)
       
(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)
    $
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)
   
36,582
   
(365
)  
135,062
   
(3,160
)  
171,644
   
(3,525
)
Municipal bonds
  
9,568
   
(188)
   
14,181
   
(955)
   
23,749
   
(1,143)
   
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)
    $
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)
    $
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)
   
59,871
   
(484
)  
90,863
   
(2,656
)  
150,734
   
(3,140
)
CMO
  
-
   
- 
   
203,254
   
(12,081)
   
203,254
   
(12,081)
   
-
   
-
   
203,254
   
(12,081
)  
203,254
   
(12,081
)
Municipal bonds
  
70,989
   
(778)
   
77,723
   
(5,410)
   
148,712
   
(6,188)
   
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)
    $
138,339
    $
(1,277
)   $
426,784
    $
(22,754
)   $
565,123
    $
(24,031
)
                                          
 

55
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 JuneSeptember 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 JuneSeptember 30, 2019 and December 31, 2018. As ofBeginning 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 $7.54$7.49 billion at JuneSeptember 30, 2019 decreased by $228.9$270.2 million, or 2.95%3.48%, from December 31, 2018. The decrease in total loans included a $94.8$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 $84.8$81.1 million in commercial and industrial loans, $23.7$33.0 million in commercial real estate loans, $31.7 million in SBA loans, and $18.4$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 by type foras of the periodsdates presented.
Distribution of Loan Portfolio by Type
                
 
June 30, 2019
  
  December 31, 2018  
  
    September 30, 2019    
 
  December 31, 2018  
 
    Total Loans    
and Leases
  
Non-PCI
 Loans
and Leases
  
PCI Loans
  
Total Loans
and Leases
  
Total Loans
and Leases
 
Non-PCI
 Loans
and Leases
 
PCI Loans
 
Total Loans
and Leases
 
   
(Dollars in thousands)
    
(Dollars in thousands)
  
Commercial and industrial
   $
917,953
    $
1,002,209
    $
519
    $
1,002,728
    $
921,678
    $
1,002,209
    $
519
    $
1,002,728
 
SBA
  
327,606
   
350,043
   
1,258
   
351,301
   
319,571
   
350,043
   
1,258
   
351,301
 
Real estate:
                        
Commercial real estate
  
5,417,351
   
5,394,229
   
14,407
   
5,408,636
   
5,375,668
   
5,394,229
   
14,407
   
5,408,636
 
Construction
  
116,457
   
122,782
   
-
   
122,782
   
119,931
   
122,782
   
-
   
122,782
 
SFR mortgage
  
278,285
   
296,504
   
145
   
296,649
   
278,644
   
296,504
   
145
   
296,649
 
Dairy & livestock and agribusiness
  
301,752
   
393,843
   
700
   
394,543
   
311,229
   
393,843
   
700
   
394,543
 
Municipal lease finance receivables
  
59,985
   
64,186
   
-
   
64,186
   
54,468
   
64,186
   
-
   
64,186
 
Consumer and other loans
  
120,779
   
128,429
   
185
   
128,614
   
117,128
   
128,429
   
185
   
128,614
 
                        
Gross loans
  
7,540,168
   
7,752,225
   
17,214
   
7,769,439
   
7,498,317
   
7,752,225
   
17,214
   
7,769,439
 
Less: Deferred loan fees, net
  
(4,478
)  
(4,828
)  
-
   
(4,828
)  
(3,866
)  
(4,828
)  
-
   
(4,828
)
                        
Gross loans, net of deferred loan fees
  
7,535,690
   
7,747,397
   
17,214
   
7,764,611
   
7,494,451
   
7,747,397
   
17,214
   
7,764,611
 
Less: Allowance for loan losses
  
(67,132
)  
(63,409
)  
(204
)  
(63,613
)  
(68,672
)  
(63,409
)  
(204
)  
(63,613
)
                        
Total loans and lease finance receivables
   $
7,468,558
    $
7,683,988
    $
17,010
    $
7,700,998
    $
7,425,779
    $
7,683,988
    $
17,010
    $
     7,700,998
 
                        
 
As of JuneSeptember 30, 2019, $225.6$245.6 million, or 4.16%4.57% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December 31, 2018. The loans secured by farmland included $122.7$130.4 million for loans secured by dairy & livestock land and $102.9$115.1 million for loans secured by agricultural land at JuneSeptember 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $104.1 million for loans secured by agricultural land at December 31, 2018. As of JuneSeptember 30, 2019, dairy & livestock and agribusiness loans of $301.8$311.2 million were comprised of $245.7$251.3 million for dairy & livestock loans and $56.1$60.0 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $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 JuneSeptember 30, 2019, the Company had $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
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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. 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

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real estate acquisition. As of JuneSeptember 30, 2019, the Company had $156.7$148.7 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long termlong-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
As of JuneSeptember 30, 2019, the Company had $116.5$119.9 million in construction loans. This represents 1.50%1.60% of total gross loans
held-for-investment.
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at JuneSeptember 30, 2019.
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, by region as of JuneSeptember 30, 2019.
                
 
June 30, 2019
 
September 30, 2019
 
Total Loans
 
Commercial Real Estate
Loans
 
Total Loans
 
Commercial Real Estate
Loans
 
(Dollars in thousands)
 
(Dollars in thousands)
Los Angeles County
   $
3,356,850
   
44.5%
    $
2,336,783
   
43.1%
    $
3,301,874
   
44.0%
    $
2,267,332
   
42.2%
 
Central Valley
  
1,081,432
   
14.3%
   
854,911
   
15.8%
   
1,112,079
   
14.8%
   
879,344
   
16.3%
 
Orange County
  
1,008,152
   
13.5%
   
665,360
   
12.4%
 
Inland Empire
  
1,001,398
   
13.3%
   
878,518
   
16.2%
   
976,892
   
13.0%
   
853,110
   
15.9%
 
Orange County
  
989,992
   
13.1%
   
651,925
   
12.0%
 
Central Coast
  
426,121
   
5.7%
   
339,141
   
  6.3%
   
420,226
   
5.6%
   
343,152
   
6.4%
 
San Diego
  
224,599
   
3.0%
   
128,176
   
  2.4%
   
227,235
   
3.0%
   
129,115
   
2.4%
 
Other California
  
146,573
   
1.9%
   
70,081
   
  1.3%
   
140,005
   
1.9%
   
70,640
   
1.3%
 
Out of State
  
313,203
   
4.2%
   
157,816
   
  2.9%
   
311,854
   
4.2%
   
167,615
   
3.1%
 
                        
   $
       7,540,168
   
100.0%
    $
     5,417,351
   
    100.0%
    $
       7,498,317
   
      100.0%
    $
     5,375,668
   
    100.0%
 
                            
 
The table below breaks down our commercial real estate portfolio.
                
 
June 30, 2019
 
September 30, 2019
 
  Loan Balance  
 
  Percent  
 
Percent
Owner-
    Occupied (1)    
 
Average
Loan
    Balance    
  
  Loan Balance  
 
  Percent  
 
Percent
Owner-
    Occupied (1)    
 
Average
Loan
    Balance    
 
  
(Dollars in thousands)
    
(Dollars in thousands)
  
Commercial real estate:
                        
Multi-family
   $
572,908
   
10.6%
   
0.6%
    $
1,628
 
Industrial
  
1,903,504
   
35.1%
   
55.2%
   
1,429
    $
1,890,465
   
35.2%
   
54.6%
    $
1,430
 
Office
  
947,407
   
17.5%
   
26.7%
   
1,528
   
921,565
   
17.1%
   
26.9%
   
1,506
 
Retail
  
828,133
   
15.3%
   
13.6%
   
1,732
   
800,406
   
14.9%
   
13.1%
   
1,707
 
Multi-family
  
577,700
   
10.7%
   
0.5%
   
1,596
 
Medical
  
280,096
   
5.2%
   
44.8%
   
1,819
   
279,805
   
5.2%
   
45.3%
   
1,829
 
Secured by farmland (2)
  
225,553
   
4.1%
   
100.0%
   
2,032
   
245,574
   
4.6%
   
100.0%
   
2,030
 
  
Other (3)
  
659,750
   
12.2%
   
49.0%
   
1,416
   
660,153
   
12.3%
   
50.7%
   
1,423
 
                    
Total commercial real estate
   $
5,417,351
   
100.0%
          $
         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 $122.7$130.4 million for loans secured by dairy & livestock land and $102.9$115.1 million for loans secured by agricultural land at JuneSeptember 30, 2019.
 
 (3)Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans.
 

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Nonperforming Assets
The following table provides information on nonperforming assets foras of the periodsdates presented.
        
 
    June 30, 2019    
  
  
December
 31, 2018 
(1)  
  
    September 30, 2019    
  
  
December 31, 2018
 (1)  
 
 
(Dollars in thousands)
  
(Dollars in thousands)
 
Nonaccrual loans
   $
11,024  
    $
16,442  
    $
6,363  
    $
16,442  
 
Troubled debt restructured loans (nonperforming)
  
263  
   
3,509  
   
249  
   
3,509  
 
OREO, net
  
2,275  
   
420  
   
9,450  
   
420  
 
            
Total nonperforming assets
   $
13,562  
    $
20,371  
    $
16,062  
    $
20,371  
 
              
Troubled debt restructured performing loans
   $
3,219  
    $
3,594  
    $
3,168  
    $
3,594  
 
              
Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO
  
0.18%
   
0.26%
   
0.21%
   
0.26%
 
Percentage of nonperforming assets to total assets
  
0.12%
   
0.18%
   
0.14%
   
0.18%
 
 
 (1)Excludes PCI loans.
 
At JuneSeptember 30, 2019, loans classified as impaired totaled $14.5$9.8 million, or 0.19%0.13% of total gross loans, compared to $23.5 million, or 0.30% of total loans at December 31, 2018. At JuneSeptember 30, 2019, impaired loans resulting from troubled debt restructures represented $3.5$3.4 million, of which $263,000$249,000 were nonperforming and $3.2 million were performing.
Of the $14.5$9.8 million total impaired loans as of JuneSeptember 30, 2019, $11.5$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 $3.0$2.9 million.
Troubled Debt Restructurings (“TDRs”)
Total TDRs were $3.5$3.4 million at JuneSeptember 30, 2019, compared to $7.1 million at December 31, 2018. At JuneSeptember 30, 2019, we had $263,000$249,000 in nonperforming TDR loans and $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.

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The following table provides a summary of TDRs foras of the periodsdates presented.
                
 
June 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
 
Balance
 
Number of
Loans
 
Balance
 
Number of
Loans
  
Balance
 
Number of
Loans
 
Balance
 
Number of
Loans
 
  
(Dollars in thousands)
    
(Dollars in thousands)
  
Performing TDRs:
                        
Commercial and industrial
   $
95
   
2
    $
135
   
2
    $
88
   
2
    $
135
   
2
 
SBA
  
550
   
1
   
575
   
1
   
542
   
1
   
575
   
1
 
Real Estate:
                        
Commercial real estate
  
436
   
1
   
472
   
1
   
417
   
1
   
472
   
1
 
Construction
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
2,138
   
8
   
2,412
   
9
   
2,121
   
8
   
2,412
   
9
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Consumer and other
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
                        
Total performing TDRs
   $
     3,219
   
        12
    $
     3,594
   
        13
    $
     3,168
   
        12
    $
     3,594
   
        13
 
                        
  
Nonperforming TDRs:
                        
Commercial and industrial
   $
9
   
1
    $
21
   
1
    $
1
   
1
    $
21
   
1
 
SBA
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Real Estate:
                        
Commercial real estate
  
-
   
-
   
3,143
   
1
   
-
   
-
   
3,143
   
1
 
Construction
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Dairy & livestock and agribusiness
  
-
   
-
   
78
   
1
   
-
   
-
   
78
   
1
 
Consumer and other
  
254
   
1
   
267
   
1
   
248
   
1
   
267
   
1
 
                        
Total nonperforming TDRs
   $
263
   
2
    $
3,509
   
4
    $
249
   
2
    $
3,509
   
4
 
                        
Total TDRs
   $
3,482
   
14
    $
7,103
   
17
    $
3,417
   
14
    $
7,103
   
17
 
                            
 
At JuneSeptember 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 sixnine months ended JuneSeptember 30, 2019 were $78,000, compared to no charge-offs for the same period of 2018.

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Table of Contents
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies foras of the periodsdates presented.
                    
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
  
September 30,
2019
  
June 30,
2019
  
March 31,
2019
  
December 31,
2018
  
September 30,
2018
 
 
(Dollars in thousands)
 
(Dollars in thousands)
 
Nonperforming loans:
                              
Commercial and industrial
 $
1,993
  $
8,388
  $
7,490
  $
3,026
  $
204
    $
1,550
    $
1,993
    $
8,388
    $
7,490
    $
3,026
 
SBA
  
5,082
   
4,098
   
2,892
   
3,005
   
574
   
2,706
   
5,082
   
4,098
   
2,892
   
3,005
 
Real estate:
                              
Commercial real estate
  
1,095
   
1,134
   
6,068
   
5,856
   
6,517
   
1,083
   
1,095
   
1,134
   
6,068
   
5,856
 
Construction
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
2,720
   
2,894
   
2,937
   
2,961
   
1,578
   
888
   
2,720
   
2,894
   
2,937
   
2,961
 
Dairy & livestock and agribusiness
  
-
   
-
   
78
   
775
   
800
   
-
   
-
   
-
   
78
   
775
 
Consumer and other loans
  
397
   
477
   
486
   
807
   
509
   
385
   
397
   
477
   
486
   
807
 
                              
Total
 
$
         11,287
  
$
       16,991
  
$
       19,951
  
$
       16,430
  
$
       10,182
    $
6,612
    $
11,287
    $
16,991
    $
19,951
    $
16,430
 
                              
% of Total gross loans
  
0.15%
   
0.22%
   
0.26%
   
0.22%
   
0.21%
   
0.09%
   
0.15%
   
0.22%
   
0.26%
   
0.22%
 
  
Past due 30-89 days:
                              
Commercial and industrial
 $
310
  $
369
  $
909
  $
274
  $
-
    $
756
    $
310
    $
369
    $
909
    $
274
 
SBA
  
-
   
601
   
1,307
   
123
   
-
   
303
   
-
   
601
   
1,307
   
123
 
Real estate:
                              
Commercial real estate
  
-
   
124
   
2,789
   
-
   
-
   
368
   
-
   
124
   
2,789
   
-
 
Construction
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
SFR mortgage
  
-
   
-
   
285
   
-
   
-
   
-
   
-
   
-
   
285
   
-
 
Dairy & livestock and agribusiness
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Consumer and other loans
  
22
   
101
   
-
   
98
   
47
   
-
   
22
   
101
   
-
   
98
 
                              
Total
 
$
332
  
$
1,195
  
$
5,290
  
$
495
  
$
47
    $
1,427
    $
332
    $
1,195
    $
5,290
    $
495
 
                              
% of Total gross loans
  
0.004%
   
0.02%
   
0.07%
   
0.01%
   
0.001%
   
0.02%
   
0.004%
   
0.02%
   
0.07%
   
0.01%
 
  
OREO:
                              
SBA
   $
444
    $
-
    $
-
    $
-
    $
-
 
Real estate:
                              
Commercial real estate
 $
2,275
  $
2,275
  $
-
  $
-
  $
-
   
2,275
   
2,275
   
2,275
   
-
   
-
 
SFR mortgage
  
-
   
-
   
420
   
420
   
-
   
6,731
   
-
   
-
   
420
   
420
 
                              
Total
 
$
2,275
  
$
2,275
  
$
420
  
$
420
  
$
-
    $
9,450
    $
2,275
    $
2,275
    $
420
    $
420
 
                              
Total nonperforming, past due, and OREO
 
$
13,894
  
$
20,461
  
$
25,661
  
$
17,345
  
$
10,229
    $
17,489
    $
       13,894
    $
       20,461
    $
25,661
    $
17,345
 
                              
% of Total gross loans
  
0.18%
   
0.27%
   
0.33%
   
0.23%
   
0.21%
   
0.23%
   
0.18%
   
0.27%
   
0.33%
   
0.23%
 
Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $11.3$6.6 million at JuneSeptember 30, 2019, or 0.15%0.09% of total loans.
Total nonperforming loans at JuneSeptember 30, 2019 included $8.4$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 JuneSeptember 30, 2018. The $5.7$4.7 million decrease in nonperforming loans quarter-over-quarter was primarily due to a $6.4$2.4 million decrease in nonperforming SBA loans, a $1.8 million decrease in nonperforming SFR mortgage loans, and a $443,000 decrease in nonperforming commercial and industrial loans, partially offset by a $1.0 million increase in nonperforming SBA loans.
At JuneSeptember 30, 2019, we had onethree OREO propertyproperties 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 JuneSeptember 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 additionwere three additions to OREO for the sixnine months ended JuneSeptember 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, 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.

60
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 $67.1$68.7 million as of JuneSeptember 30, 2019, compared to $63.6 million as of December 31, 2018 and $59.6$60.0 million as of JuneSeptember 30, 2018. The allowance for loan losses was increased by a $3.5$5.0 million loan loss provision and $19,000$59,000 in net recoveries for the sixnine months ended JuneSeptember 30, 2019. This compares to a $2.0$1.5 million loan loss provision recapture, offset by net recoveries of $2.0$1.9 million for the same period of 2018.

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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
Six Months Ended June 30,
 
As of and For the
Nine Months Ended
September 30,
 
2019
 
2018
  
2019
 
2018
 
(Dollars in thousands)
 
(Dollars in thousands)
Allowance for loan losses at beginning of period
 $
63,613
  $
59,585
  
  $        63,613  
 
  $        59,585  
Charge-offs:
        
Commercial and industrial
  
(48
)  
-
  
(48) 
 
-     
SBA
  
(230
)  
-
  
(295) 
 
(257) 
Commercial real estate
  
-
   
-
  
-     
 
-     
Construction
  
-
   
-
  
-     
 
-     
SFR mortgage
  
-
   
-
  
-     
 
-     
Dairy & livestock and agribusiness
  
(78
)  
-
  
(78) 
 
-     
Consumer and other loans
  
(4
)  
(9
) 
(7) 
 
(10) 
          
Total charge-offs
  
(360
)  
(9
) 
(428) 
 
(267) 
          
Recoveries:
        
Commercial and industrial
  
159
   
37
  
253  
 
81  
SBA
  
9
   
10
  
9  
 
15  
Commercial real estate
  
-
   
-
  
-     
 
-     
Construction
  
6
   
1,930
  
9  
 
1,945  
SFR mortgage
  
183
   
-
  
191  
 
-     
Dairy & livestock and agribusiness
  
19
   
19
  
19  
 
19  
Consumer and other loans
  
3
   
11
  
6  
 
129  
          
Total recoveries
  
379
   
2,007
  
487  
 
2,189  
          
Net recoveries
  
19
   
            1,998
  
59  
 
1,922  
Provision for (recapture of) loan losses
  
            3,500
   
(2,000
) 
5,000  
 
(1,500) 
          
Allowance for loan losses at end of period
 $
67,132
  $
59,583
  
  $        68,672  
 
  $        60,007  
          
Summary of reserve for unfunded loan commitments:
        
Reserve for unfunded loan commitments at beginning of period
 $
8,959
  $
6,306
  
  $          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
  $
6,306
  
  $          8,959  
 
  $          9,209  
          
Reserve for unfunded loan commitments to total unfunded loan commitments
  
0.53%
   
0.59%
  
0.55% 
 
0.54% 
  
Amount of total loans at end of period (1)
 $
7,535,690
  $
4,816,956
  
  $   7,494,451  
 
  $   7,582,459  
Average total loans outstanding (1)
 $
7,610,241
  $
4,785,118
  
  $   7,571,502  
 
  $   5,312,558  
  
Net recoveries to average total loans
  
0.00%
   
0.04%
  
0.00% 
 
0.04% 
Net recoveries to total loans at end of period
  
0.00%
   
0.04%
  
0.00% 
 
0.03% 
Allowance for loan losses to average total loans
  
0.88%
   
1.25%
  
0.91% 
 
1.13% 
Allowance for loan losses to total loans at end of period
  
0.89%
   
1.24%
  
0.92% 
 
0.79% 
Net recoveries to allowance for loan losses
  
0.03%
   
3.35%
  
0.09% 
 
3.20% 
Net recoveries to provision for (recapture of) loan losses
  
0.54%
   
-99.90%
  
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 measuremeasured 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 $371,000 (0.55%$540,000 (0.79%), $561,000 (0.88%) and $16,000 (0.03%$83,000 (0.14%) of the total allowance as of JuneSeptember 30, 2019, December 31, 2018 and JuneSeptember 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 sixnine months of 2019. The ALLL balance increased during the first sixnine months of 2019 by $3.5$5.0 million in provision for loan losses and a net recovery of loans of $19,000.$59,000. The Bank determined that the ALLL balance of $67.1$68.7 million was appropriate and the result of the net effect of additional requirements related to loan growth experienced during the sixnine month period within the commercial and industrial and commercial real estate 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 JuneSeptember 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.

63
Table of Contents
Deposits
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were $8.66$8.79 billion at JuneSeptember 30, 2019. This represented a decrease of $164.7$33.2 million, or 1.87%0.38%, over total deposits of $8.83 billion at December 31, 2018. The composition of deposits is summarized foras of the periodsdates presented in the table below.
                
 
June 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
        
 
Balance
 
Percent
 
Balance
 
Percent
  
Balance
 
Percent
 
Balance
 
Percent
 
        
 
(Dollars in thousands)
 
(Dollars in thousands)
  
Noninterest-bearing deposits
 $
5,250,235
   
60.61%
  $
5,204,787
   
58.96%
    $
5,385,104
   
61.23%
    $
5,204,787
   
58.96%
 
Interest-bearing deposits
                        
Investment checking
  
436,090
   
5.03%
   
460,972
   
5.22%
   
433,615
   
4.93%
   
460,972
   
5.22%
 
Money market
  
2,099,751
   
24.24%
   
2,236,018
   
25.33%
   
2,110,780
   
24.00%
   
2,236,018
   
25.33%
 
Savings
  
397,153
   
4.58%
   
393,769
   
4.46%
   
403,108
   
4.59%
   
393,769
   
4.46%
 
Time deposits
  
479,594
   
5.54%
   
531,944
   
6.03%
   
461,723
   
5.25%
   
531,944
   
6.03%
 
                        
Total deposits
 $
8,662,823
   
100.00%
  $
8,827,490
   
100.00%
    $
     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 $5.25$5.39 billion at JuneSeptember 30, 2019, representing an increase of $45.4$180.3 million, or 0.87%3.46%, from noninterest-bearing deposits of $5.20 billion at December 31, 2018. Noninterest-bearing deposits represented 60.61%61.23% of total deposits for JuneSeptember 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 $2.93$2.95 billion at JuneSeptember 30, 2019, representing a decrease of $157.8$143.3 million, or 5.10%4.63%, from savings deposits of $3.09 billion at December 31, 2018.
Time deposits totaled $479.6$461.7 million at JuneSeptember 30, 2019, representing a decrease of $52.4$70.2 million, or 9.84%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 6.10%4.61% for the secondthird quarter of 2019, compared to 6.24%5.35% for the 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 JuneSeptember 30, 2019 and December 31, 2018, total funds borrowed under these agreements were $421.3$407.9 million and $442.3 million, respectively, with a weighted average interest rate of 0.57% and 0.39%, respectively.
We had no short-term$4.9 million in other borrowings at JuneSeptember 30, 2019, compared to $280.0 million at December 31, 2018.
At JuneSeptember 30, 2019, $6.05$5.91 billion of loans and $1.51$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.

64
Table of Contents
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of JuneSeptember 30, 2019.
                    
  
Maturity by Period
   
Maturity by Period
 
 
Total
 
Less Than
One
Year
 
One Year
Through
Three Years
 
Four Years
Through
Five Years
 
Over Five
Years
  
Total
  
Less Than
One
Year
  
One Year
Through
Three Years
  
Four Years
Through
Five Years
  
Over
Five
Years
 
 
(Dollars in thousands)
 
(Dollars in thousands)
 
Deposits (1)
 $
  8,662,823
  $
  8,539,629
  $
  111,359
  $
  3,514
  $
   8,321
    $
8,794,330
    $
8,674,968
    $
107,752
    $
3,251
    $
8,359
 
Customer repurchase agreements (1)
  
        421,271
   
        421,271
   
-
   
-
   
-
   
        407,850
   
        407,850
   
-
   
-
   
-
 
Junior subordinated debentures (1)
  
25,774
   
-
   
-
   
-
   
        25,774
   
25,774
   
-
   
-
   
-
   
        25,774
 
Deferred compensation
  
20,953
   
745
   
1,359
   
876
   
17,973
   
23,305
   
723
   
1,356
   
807
   
20,419
 
Operating leases
  
23,211
   
7,556
   
        9,845
   
        4,180
   
1,630
   
23,533
   
7,349
   
9,905
   
        4,297
   
1,982
 
Affordable housing investment
  
6,736
   
4,661
   
1,984
   
55
   
36
   
6,242
   
4,167
   
1,984
   
55
   
36
 
                              
Total
 $
  9,160,768
  $
  8,973,862
  $
  124,547
  $
  8,625
  $
  53,734
    $
 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 JuneSeptember 30, 2019, we had no short-term$4.9 million in other borrowings compared to $280.0 million at December 31, 2018, and zero$30.0 million at JuneSeptember 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 JuneSeptember 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
   $
975,463
    $
705,376
    $
212,341
    $
14,211
    $
43,535
 
SBA
  
585
   
60
   
4
   
-
   
521
 
Real estate:
               
Commercial real estate
  
244,242
   
46,984
   
82,328
   
96,632
   
18,298
 
Construction
  
79,736
   
53,419
   
23,117
   
-
   
3,200
 
SFR Mortgage
  
7,638
   
2,106
   
3,500
   
-
   
2,032
 
Dairy & livestock and agribusiness (1)
  
180,983
   
159,352
   
21,231
   
400
   
-
 
Consumer and other loans
  
146,470
   
17,756
   
7,199
   
4,423
   
117,092
 
                     
Total commitment to extend credit
  
1,635,117
   
985,053
   
349,720
   
115,666
   
184,678
 
Obligations under letters of credit
  
50,411
   
43,031
   
7,132
   
248
   
-
 
                     
Total
   $
1,685,528
    $
1,028,084
    $
356,852
    $
115,914
    $
184,678
 
                     
                     
   
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 $17.1$13.3 million at JuneSeptember 30, 2019.
As of JuneSeptember 30, 2019, we had commitments to extend credit of approximately $1.64$1.58 billion, and obligations under letters of credit of $50.4$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 JuneSeptember 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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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 $1.94$1.97 billion at JuneSeptember 30, 2019. This represented an increase of $85.5$115.7 million, or 4.62%6.25%, from total equity of $1.85 billion at December 31, 2018. This increase was due to $106.1$156.5 million in net earnings, a $26.6$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 $3.2$4.5 million for various stock based compensation items. This was offset by $50.4$75.7 million in cash dividends declared by the Company during the first sixnine months of 2019.
During the secondthird quarter of 2019, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal 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 approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. 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 and subsequently amended in July, 2019. For the sixnine months ended JuneSeptember 30, 2019, the Company did not repurchase anyrepurchased 905 shares of CVB common stock outstanding under this program. As of JuneSeptember 30, 2019, we have 9,577,9179,577,012 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 JuneSeptember 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 JuneSeptember 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.
                         
     
June 30, 2019
 
December 31, 2018
      
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
  
  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%
   
11.94%
   
11.80%
   
10.98%
   
10.90%
   
4.00%
   
5.00%
   
12.23%
   
12.09%
   
10.98%
   
10.90%
 
Common equity Tier I capital ratio
  
4.50%
   
  6.50%
   
14.23%
   
14.34%
   
13.04%
   
13.22%
   
4.50%
   
6.50%
   
14.64%
   
14.75%
   
13.04%
   
13.22%
 
Tier 1 risk-based capital ratio
  
6.00%
   
  8.00%
   
14.51%
   
14.34%
   
13.32%
   
13.22%
   
6.00%
   
8.00%
   
14.93%
   
14.75%
   
13.32%
   
13.22%
 
Total risk-based capital ratio
  
8.00%
   
10.00%
   
15.39%
   
15.22%
   
14.13%
   
14.03%
   
8.00%
   
10.00%
   
15.83%
   
15.65%
   
14.13%
   
14.03%
 
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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

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

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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 $8.66$8.79 billion at JuneSeptember 30, 2019 decreased $164.7$33.2 million, or 1.87%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 sixnine months ended JuneSeptember 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 Six Months Ended June 30,
  
For the Nine Months Ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(Dollars in thousands)
  
(Dollars in thousands)
 
  
Average cash and cash equivalents
   $
184,301  
    $
255,226  
    $
237,244  
    $
237,817  
 
Percentage of total average assets
  
1.63%  
   
3.11%  
   
2.10%  
   
2.69%  
 
  
Net cash provided by operating activities
   $
82,602  
    $
68,326  
    $
147,410  
    $
116,564  
 
Net cash provided by investing activities
  
438,532  
   
180,334  
   
538,256  
   
874,202  
 
Net cash used in financing activities
  
(509,242) 
   
(211,548)  
   
(412,066) 
   
(940,668) 
 
            
Net increase in cash and cash equivalents
   $
11,892  
    $
37,112  
    $
273,600  
    $
50,098  
 
            

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Average cash and cash equivalents decreased by $70.9 million,$573,000, or 27.79%0.24%, to $184.3$237.2 million for the sixnine months ended JuneSeptember 30, 2019, compared to $255.2$237.8 million for the same period of 2018.
At JuneSeptember 30, 2019, cash and cash equivalents totaled $175.8$437.5 million. This represented a decreasean increase of $5.6$243.1 million, or 3.11%124.99%, from $181.5$194.5 million at JuneSeptember 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)
 
 
June 30, 2019
   
December 31, 2018
 
Estimated Net Interest Income Sensitivity (1)
Estimated Net Interest Income Sensitivity (1)
 
   
24-month
 Period
      
24-month
 Period
  
September 30, 2019
   
December 31, 2018
 
Interest Rate Scenario
 
12-month
 Period
  
(Cumulative)
  
Interest Rate Scenario
  
12-month
 Period
  
(Cumulative)
  
12-month
 Period
  
24-month
 Period
(Cumulative)
  
Interest Rate Scenario
  
12-month
 Period
  
24-month
 Period
(Cumulative)
 
+ 200 basis points
  
3.80%
   
7.59%
   
+ 200 basis points
   
3.80%
   
7.40%
   
4.50%
   
8.70%
   
+ 200 basis points
   
3.80%
   
7.40%
 
- 200 basis points
  
-4.63%
   
-9.24%
   
- 200 basis points
   
-5.29%
   
-10.26%
 
- 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
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 JuneSeptember 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
 
June 30, 2019
    
December 31, 2018
  
    September 30, 2019    
    
    December 31, 2018    
 
  
200 bp decrease in interest rates
  
-39.3%
      
-24.4%
 
100 bp decrease in interest rates
  
-15.2%
      
-10.2%
   
-19.6%
      
-10.2%
 
100 bp increase in interest rates
  
9.4%
      
5.8%
   
13.3%
      
5.8%
 
200 bp increase in interest rates
  
16.5%
      
10.3%
   
23.3%
      
10.3%
 
300 bp increase in interest rates
  
22.0%
      
13.8%
   
31.0%
      
13.8%
 
400 bp increase in interest rates
  
26.5%
      
16.6%
   
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 containcontains 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 JuneSeptember 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.

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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 was 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. The case arose 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 complaint 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. At a bench trial conducted in July and August, 2018, the judge found in favor of the Dunagans on all three claims and awarded damages and attorney’s fees and costs to the Dunagans in an aggregate amount of approximately $1.34 million. During the period while the Company’s appeal of this judgment was pending, the parties participated in a court-sponsored mediation, and on June 24, 2019, the parties executed a full and final settlement of the case for a substantially reduced aggregate damages amount, all of which was paid by the insurer under a bankers professional liability insurance policy previously obtained by ASB.
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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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. 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 and subsequently amended in July, 2019. For the three months ended JuneSeptember 30, 2019, the Company did not repurchase anyrepurchased 905 shares of CVB common stock outstanding under this program. As of JuneSeptember 30, 2019, we have 9,577,9179,577,012 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.
  
Description of Exhibits
     
 
  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.
 
 
 

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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: August 9,November 12, 2019
  
     
  
/s/ E. Allen Nicholson
  
E. Allen Nicholson
  
Executive Vice President and Chief Financial Officer
  
(Principal Financial Officer)
 
 
 
 
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