CVB Financial (CVBF) 10-Q 2018 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM10-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 30, 2018

or

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

For the transition period from _____ to _____

Commission File Number:0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

California	95-3629339
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
701 North Haven Ave., Suite 350
Ontario, California	91764
(Address of principal executive offices)	(Zip Code)

(909)980-4030

(Registrant’s telephone number,

including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐     (Do not check if a smaller reporting company)	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 Rule12b-2 of the Exchange Act). Yes  ☐  No  ☒

Number of shares of common stock of the registrant: 110,301,160 outstanding as of July 31, 2018.

TABLE OF CONTENTS

PART I –	FINANCIAL INFORMATION (UNAUDITED)	1
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
	CRITICAL ACCOUNTING POLICIES	43
	OVERVIEW	43
	ANALYSIS OF THE RESULTS OF OPERATIONS	45
	RESULTS BY BUSINESS SEGMENTS	55
	ANALYSIS OF FINANCIAL CONDITION	58
	ASSET/LIABILITY AND MARKET RISK MANAGEMENT	74
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	76
ITEM 4.	CONTROLS AND PROCEDURES	76
PART II–	OTHER INFORMATION	77
ITEM 1.	LEGAL PROCEEDINGS	77
ITEM 1A.	RISK FACTORS	77
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	78
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	78
ITEM 4.	MINE SAFETY DISCLOSURES	78
ITEM 5.	OTHER INFORMATION	78
ITEM 6.	EXHIBITS	78
SIGNATURES		79

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 events and the impact they may have on us, our customers and our assets and liabilities;

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

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

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

• changes in the financial performance and/or condition of our borrowers, 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 pending 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, including any anticipated cost savings or synergies, 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, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, fair lending, employment, executive compensation, insurance, vendor management and information privacy and security) with which we and our subsidiaries must comply or believe we should comply, including additional legal and regulatory requirements to which we may become subject in the event our total assets exceed $10 billion;

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

• 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 expected credit losses;

• inflation, interest rate, securities market and monetary fluctuations;

• changes in government interest rates or monetary or tax policies;

• changes in the amount and availability of deposit insurance;

• political developments, uncertainties or instability;

• 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, cyber incidents, terrorist and political activities, disease pandemics, catastrophic events, natural disasters such as earthquakes, extreme weather events, electrical, facilities, computer servers, and communications or other services we use, or that affect our employees or third parties with whom we conduct business;

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

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

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

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

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

• changes in the competitive environment among financial and bank holding companies, banks and other financial service providers;

• competition and innovation with respect to financial products and services by banks, financial institutions and

1

non-traditional providers including retail businesses and technology companies;

• volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions;

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

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

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

• the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (such as securities, bank operations, consumer or employee class action litigation);

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

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

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

• all other factors set forth in the Company’s public reports including its Annual Report on Form10-K for the year ended December 31, 2017, 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.

2

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

	June 30,			December 31,
	2018			2017
Assets
Cash and due from banks	$	119,495		$	119,841
Interest-earning balances due from Federal Reserve		61,994			24,536
Total cash and cash equivalents		181,489			144,377
Interest-earning balances due from depository institutions		7,150			17,952
Investment securitiesavailable-for-sale, at fair value (with amortized cost of $1,964,251 at June 30, 2018, and $2,078,131 at December 31, 2017)		1,929,994			2,080,985
Investment securitiesheld-to-maturity (with fair value of $747,589 at June 30, 2018, and $819,215 at December 31, 2017)		772,469			829,890
Total investment securities		2,702,463			2,910,875
Investment in stock of Federal Home Loan Bank (FHLB)		17,688			17,688
Loans and lease finance receivables		4,816,956			4,830,631
Allowance for loan losses		(59,583	)		(59,585	)
Net loans and lease finance receivables		4,757,373			4,771,046
Premises and equipment, net		44,691			46,166
Bank owned life insurance (BOLI)		147,419			146,486
Accrued interest receivable		21,778			22,704
Intangibles		6,179			6,838
Goodwill		116,564			116,564
Other real estate owned (OREO)		-			4,527
Income taxes		50,288			40,046
Other assets		40,781			25,317
Total assets	$	8,093,863		$	8,270,586
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	3,980,666		$	3,846,436
Interest-bearing		2,554,640			2,700,417
Total deposits		6,535,306			6,546,853
Customer repurchase agreements		384,054			553,773
Deferred compensation		19,012			18,223
Junior subordinated debentures		25,774			25,774
Other liabilities		46,300			56,697
Total liabilities		7,010,446			7,201,320
Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,302,468 at June 30, 2018, and 110,184,922 at December 31, 2017		575,502			573,453
Retained earnings		533,413			494,361
Accumulated other comprehensive (loss) income, net of tax		(25,498	)		1,452
Total stockholders’ equity		1,083,417			1,069,266
Total liabilities and stockholders’ equity	$	8,093,863		$	8,270,586

See accompanying notes to the unaudited condensed consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Interest income:
Loans and leases, including fees	$	57,368		$	53,614		$	112,564		$	102,255
Investment securities:
Investment securitiesavailable-for-sale		11,697			13,007			23,565			25,647
Investment securitiesheld-to-maturity		4,807			5,323			9,572			10,830
Total investment income		16,504			18,330			33,137			36,477
Dividends from FHLB stock		298			359			630			752
Interest-earning deposits with other institutions and federal funds sold		635			286			1,171			553
Total interest income		74,805			72,589			147,502			140,037
Interest expense:
Deposits		1,549			1,559			3,074			2,992
Borrowings and customer repurchase agreements		337			382			790			811
Junior subordinated debentures		231			165			429			318
Total interest expense		2,117			2,106			4,293			4,121
Net interest income before recapture of provision for loan losses		72,688			70,483			143,209			135,916
Recapture of provision for loan losses		(1,000	)		(1,000	)		(2,000	)		(5,500	)
Net interest income after recapture of provision for loan losses		73,688			71,483			145,209			141,416
Noninterest income:
Service charges on deposit accounts		4,091			3,982			8,136			7,709
Trust and investment services		2,399			2,613			4,556			4,909
Bankcard services		958			871			1,762			1,636
BOLI income		1,069			1,497			2,048			2,212
Gain on OREO, net		-			2			3,540			2
Other		1,178			1,811			2,569			3,030
Total noninterest income		9,695			10,776			22,611			19,498
Noninterest expense:
Salaries and employee benefits		21,051			21,706			43,365			43,281
Occupancy and equipment		4,318			4,554			8,510			8,238
Professional services		1,690			1,843			3,220			3,100
Software licenses and maintenance		1,759			1,627			3,519			3,188
Marketing and promotion		1,148			1,190			2,504			2,429
Acquisition related expenses		494			1,250			1,297			1,926
Other		3,794			4,703			7,785			8,828
Total noninterest expense		34,254			36,873			70,200			70,990
Earnings before income taxes		49,129			45,386			97,620			89,924
Income taxes		13,756			17,013			27,334			33,047
Net earnings	$	35,373		$	28,373		$	70,286		$	56,877
Other comprehensive income (loss):
Unrealized (loss) gain on securities arising during the period, before tax	$	(6,598	)	$	1,642		$	(38,768	)	$	2,066
Less: Reclassification adjustment for net gain on securities included in net income		-			(402	)		-			(402	)
Other comprehensive (loss) income, before tax		(6,598	)		1,240			(38,768	)		1,664
Less: Income tax benefit (expense) related to items of other comprehensive income		1,951			(521	)		11,462			(699	)
Other comprehensive (loss) income, net of tax		(4,647	)		719			(27,306	)		965
Comprehensive income	$	30,726		$	29,092		$	42,980		$	57,842
Basic earnings per common share	$	0.32		$	0.26		$	0.64		$	0.52
Diluted earnings per common share	$	0.32		$	0.26		$	0.64		$	0.52
Cash dividends declared per common share	$	0.14		$	0.14		$	0.28		$	0.26

See accompanying notes to the unaudited condensed consolidated financial statements.

4

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended June 30, 2018 and 2017

(Dollars and shares in thousands)

(Unaudited)

										Accumulated
	Common									Other
	Shares			Common			Retained			Comprehensive
	Outstanding			Stock			Earnings			Income (Loss)			Total
Balance, January 1, 2017		108,252		$	531,192		$	449,499		$	10,171		$	990,862
Cumulative adjustment upon adoption of ASU2016-09		-			116			(66	)		-			50
Repurchase of common stock		(37	)		(833	)		-			-			(833	)
Issuance of common stock for acquisition of Valley Commerce Bancorp		1,634			37,637			-			-			37,637
Exercise of stock options		257			2,389			-			-			2,389
Shares issued pursuant to stock-based compensation plan		43			1,457			-			-			1,457
Cash dividends declared on common stock ($0.26 per share)		-			-			(28,635	)		-			(28,635	)
Net earnings		-			-			56,877			-			56,877
Other comprehensive income		-			-			-			965			965
Balance, June 30, 2017		110,149		$	571,958		$	477,675		$	11,136		$	1,060,769
Balance, January 1, 2018		110,185		$	573,453		$	494,361		$	1,452		$	1,069,266
Cumulative adjustment upon adoption of ASU2018-02		-			-			(356	)		356			-
Repurchase of common stock		(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 income		-			-			-			(27,306	)		(27,306	)
Balance, June 30, 2018		110,302		$	575,502		$	533,413		$	(25,498	)	$	1,083,417

See accompanying notes to the unaudited condensed consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	For the Six Months Ended
	June 30,
	2018			2017
Cash Flows from Operating Activities
Interest and dividends received	$	150,590		$	145,978
Service charges and other fees received		17,032			17,456
Interest paid		(4,288	)		(4,168	)
Net cash paid to vendors, employees and others		(68,564	)		(54,185	)
Income taxes		(26,379	)		(40,097	)
Payments to FDIC, loss share agreement		(65	)		(474	)
Net cash provided by operating activities		68,326			64,510
Cash Flows from Investing Activities
Proceeds from redemption of FHLB stock		-			1,952
Net change in interest-earning balances from depository institutions		10,802			23,277
Proceeds from sale of investment securitiesheld-for-sale		-			5,403
Proceeds from repayment of investment securitiesavailable-for-sale		195,715			201,546
Proceeds from maturity of investment securitiesavailable-for-sale		10,806			16,615
Purchases of investment securitiesavailable-for-sale		(98,709	)		(235,061	)
Proceeds from repayment and maturity of investment securitiesheld-to-maturity		55,021			70,949
Purchases of investment securitiesheld-to-maturity		-			(30,112	)
Net increase in equity investments		(21,827	)		(601	)
Net decrease in loan and lease finance receivables		20,802			25,211
Proceeds from BOLI death benefit		882			2,457
Purchase of premises and equipment		(1,225	)		(2,469	)
Proceeds from sales of other real estate owned		8,067			-
Cash acquired from acquisition, net of cash paid		-			28,325
Net cash provided by investing activities		180,334			107,492
Cash Flows from Financing Activities
Net increase in other deposits		11,299			58,901
Net decrease in time deposits		(22,846	)		(33,197	)
Net decrease in other borrowings		-			(53,000	)
Net decrease in customer repurchase agreements		(169,719	)		(56,943	)
Cash dividends on common stock		(30,862	)		(26,205	)
Repurchase of common stock		(837	)		(833	)
Proceeds from exercise of stock options		1,417			2,389
Net cash used in financing activities		(211,548	)		(108,888	)
Net increase in cash and cash equivalents		37,112			63,114
Cash and cash equivalents, beginning of period		144,377			121,633
Cash and cash equivalents, end of period	$	181,489		$	184,747

See accompanying notes to the unaudited condensed consolidated financial statements.

6

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

	For the Six Months Ended
	June 30,
	2018			2017
Reconciliation of Net Earnings to Net Cash Provided by  Operating Activities
Net earnings	$	70,286		$	56,877
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain loss on sale of investment securities		-			(402	)
Gain on sale of other real estate owned		(3,540	)		-
Increase in BOLI		(1,815	)		(3,691	)
Net amortization of premiums and discounts on investment securities		7,302			8,989
Accretion of PCI discount		(2,137	)		(505	)
Recapture of provision for loan losses		(2,000	)		(5,500	)
Payments to FDIC, loss share agreement		(65	)		(474	)
Stock-based compensation		1,469			1,457
Depreciation and amortization, net		354			(402	)
Change in other assets and liabilities		(1,528	)		8,161
Total adjustments		(1,960	)		7,633
Net cash provided by operating activities	$	68,326		$	64,510
Supplemental Disclosure ofNon-cash Investing Activities
Securities purchased and not settled	$	-		$	16,346
Issuance of common stock for acquisition	$	-		$	37,637

See accompanying notes to the unaudited condensed consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BUSINESS

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

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust. The Bank’s customers consist primarily of small tomid-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 51 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On February 26, 2018, we entered into a definitive agreement to merge Community Bank with and into Citizens Business Bank. As of June 30, 2018, Community Bank had approximately $3.71 billion in total assets, $2.79 billion in gross loans and $2.86 billion in total deposits. Under the terms of the merger, Community Bank shareholders will have the right to receive, in respect of each share of common stock of Community Bank, 9.4595 shares of CVB common stock and $56.00 per share in cash, subject to any adjustments set forth in the Merger Agreement. The merger transaction is valued at approximately $885.2 million based on CVB’s closing stock price of $23.60 on February 26, 2018. The shareholders of both Companies approved the merger on June 21, 2018. All regulatory approvals have been received and the merger is expected to close on August 10, 2018.

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 Form10-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 six months ended June 30, 2018 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 Form10-K for the fiscal year ended December 31, 2017, 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.

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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 Form10-K for the year ended December 31, 2017 as filed with the SEC (“Form10-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.

Adoption of New Accounting Standards — In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. This update to the ASC requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in U.S. GAAP. In applying the revenue model to contracts within its scope, an entity should apply the following steps: (1) Identify the contract(s) with a customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. The standard applies to all contracts with customers except those that are within the scope of other topics in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition. In August 2015, the FASB issued ASUNo. 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date”, which deferred the effective date of ASUNo. 2014-09 to January 1, 2018. The Company adopted the ASU during the first quarter of 2018, as required, using the modified retrospective approach. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, as substantially all of the Company’s revenues are excluded from the scope of the new standard. Since there was no net income impact upon adoption of this ASU, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See Note 14Revenue Recognition for more information.

In January 2016, the FASB issued ASUNo. 2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance in this ASU among other things, (i) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related toavailable-for-sale securities. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU2016-01 effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio at June 30, 2018 using an exit price notion. See Note 9Fair Value Information.

In August 2016, the FASB issued ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs,zero-coupon debt, and contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is

9

effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company adopted this ASU retrospectively effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASUNo. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in ASU2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASUNo. 2017-09 are effective for annual periods, and interim within those annual reporting periods, beginning after December 15, 2017; early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASUNo. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments in ASU2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act (“Tax Reform Act”). The amendments in this update also require entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and the provisions of the amendment should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company elected to early adopt ASU2018-02 in the first quarter of 2018 and reclassified $356,000 related to the stranded tax effects from accumulated other comprehensive income to retained earnings within our consolidated statements of stockholders’ equity.

Recent Accounting Pronouncements — In February 2016, FASB issued ASUNo. 2016-02, “Leases (Topic 842)”. ASU2016-02 establishes aright-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. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. 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) certainoff-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 toavailable-for-sale debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASUNo. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In January 2017, the FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognized an impairment

10

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 2017, the FASB issued ASUNo. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU2017-12 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 bothnon-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASUNo. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASUNo. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting.” The intention of ASU2018-07 is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU2018-07 is effective for fiscal years beginning after December 15, 2019 and is applied retrospectively. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

4. BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

On March 10, 2017, the Company completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for Valley Business Bank (“VBB”), headquartered in the Central Valley area of California. The Company acquired all of the assets and assumed all of the liabilities of VCBP for $23.2 million in cash and $37.6 million in stock. As a result, VBB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction serves to further strengthen its presence in the Central Valley area of California. At close, VBB had four branches located in Visalia, Tulare, Fresno, and Woodlake. The systems integration of VCBP and CBB was completed in May 2017. Three of these center locations were consolidated with nearby CBB locations in the third quarter of 2017 and the Company sold the Woodlake branch in the fourth quarter of 2017.

Goodwill of $27.0 million from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

The total fair value of assets acquired approximated $405.9 million, which included $28.3 million in cash and cash equivalents net of cash paid, $2.0 million in FHLB stock, $309.7 million in loans and lease finance receivables, $5.3 million in fixed assets, $9.4 million in BOLI, $3.2 million in core deposit intangible assets acquired and $21.0 million in other assets. The total fair value of liabilities assumed was $368.3 million, which included $361.8 million in deposits, and $6.5 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of March 10, 2017. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The purchase price allocation was finalized in the third quarter of 2017.

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

For the six months ended June 30, 2018, the Company did not incur any merger related expenses associated with the VCBP acquisition and incurred $1.3 million and $1.9 million for the three and six months ended June 30, 2017, respectively.

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5. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held areavailable-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, 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	$	1,665,717	$	1,489	$	(30,322	)	$	1,636,884		84.81	%
CMO/REMIC - residential		244,227		357		(5,073	)		239,511		12.41	%
Municipal bonds		53,557		400		(1,108	)		52,849		2.74	%
Other securities		750		-		-			750		0.04	%
Total available-for-sale  securities	$	1,964,251	$	2,246	$	(36,503	)	$	1,929,994		100.00	%
Investment securities  held-to-maturity:
Government agency/GSE	$	149,693	$	406	$	(2,948	)	$	147,151		19.38	%
Residential mortgage-backed securities		164,914		-		(4,020	)		160,894		21.35	%
CMO		219,159		-		(12,773	)		206,386		28.37	%
Municipal bonds		238,703		574		(6,119	)		233,158		30.90	%
Total held-to-maturity  securities	$	772,469	$	980	$	(25,860	)	$	747,589		100.00	%
	December 31, 2017
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,747,780	$	11,231	$	(8,102	)	$	1,750,909		84.14	%
CMO/REMIC - residential		274,634		1,277		(2,082	)		273,829		13.16	%
Municipal bonds		54,966		774		(244	)		55,496		2.66	%
Other securities		751		-		-			751		0.04	%
Totalavailable-for-sale securities	$	2,078,131	$	13,282	$	(10,428	)	$	2,080,985		100.00	%
Investment securitiesheld-to-maturity:
Government agency/GSE	$	159,716	$	854	$	(2,134	)	$	158,436		19.25	%
Residential mortgage-backed securities		176,427		667		(382	)		176,712		21.26	%
CMO		225,072		-		(8,641	)		216,431		27.12	%
Municipal bonds		268,675		2,751		(3,790	)		267,636		32.37	%
Totalheld-to-maturity securities	$	829,890	$	4,272	$	(14,947	)	$	819,215		100.00	%

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Taxable	$	11,290	$	12,420	$	22,735	$	24,346
Tax-advantaged		407		587		830		1,301
Total interest income fromavailable-for-sale securities		11,697		13,007		23,565		25,647
Investment securitiesheld-to-maturity:
Taxable		3,048		3,203		5,926		6,480
Tax-advantaged		1,759		2,120		3,646		4,350
Total interest income fromheld-to-maturity securities		4,807		5,323		9,572		10,830
Total interest income from investment securities	$	16,504	$	18,330	$	33,137	$	36,477

Approximately 89% of the total investment securities portfolio at June 30, 2018 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 June 30, 2018 and December 31, 2017. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis isother-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 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”).

	June 30, 2018
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,253,569	$	(18,601	)	$	272,657	$	(11,721	)	$	1,526,226	$	(30,322	)
CMO/REMIC - residential		130,072		(2,291	)		64,326		(2,782	)		194,398		(5,073	)
Municipal bonds		9,294		(221	)		13,304		(887	)		22,598		(1,108	)
Totalavailable-for-sale securities	$	1,392,935	$	(21,113	)	$	350,287	$	(15,390	)	$	1,743,222	$	(36,503	)
Investment securitiesheld-to-maturity:
Government agency/GSE	$	53,518	$	(437	)	$	41,567	$	(2,511	)	$	95,085	$	(2,948	)
Residential mortgage-backed securities		106,204		(2,225	)		54,691		(1,795	)		160,895		(4,020	)
CMO		-		-			206,386		(12,773	)		206,386		(12,773	)
Municipal bonds		91,541		(1,499	)		61,207		(4,620	)		152,748		(6,119	)
Totalheld-to-maturity securities	$	251,263	$	(4,161	)	$	363,851	$	(21,699	)	$	615,114	$	(25,860	)

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	December 31, 2017
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	414,091	$	(1,828	)	$	303,746	$	(6,274	)	$	717,837	$	(8,102	)
CMO/REMIC - residential		95,137		(487	)		71,223		(1,595	)		166,360		(2,082	)
Municipal bonds		946		(4	)		13,956		(240	)		14,902		(244	)
Totalavailable-for-sale securities	$	510,174	$	(2,319	)	$	388,925	$	(8,109	)	$	899,099	$	(10,428	)
Investment securitiesheld-to-maturity:
Government agency/GSE	$	18,950	$	(27	)	$	43,495	$	(2,107	)	$	62,445	$	(2,134	)
Residential mortgage-backed securities		51,297		(188	)		55,306		(194	)		106,603		(382	)
CMO		-		-			216,431		(8,641	)		216,431		(8,641	)
Municipal bonds		32,069		(492	)		66,217		(3,298	)		98,286		(3,790	)
Totalheld-to-maturity securities	$	102,316	$	(707	)	$	381,449	$	(14,240	)	$	483,765	$	(14,947	)

At June 30, 2018 and December 31, 2017, investment securities having a carrying value of approximately $1.74 billion and $1.91 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at June 30, 2018, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, 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.

	June 30, 2018
	Available-for-sale				Held-to-maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	26,487	$	26,762	$	-	$	-
Due after one year through five years		1,711,078		1,682,200		283,278		270,230
Due after five years through ten years		197,590		192,738		209,623		205,138
Due after ten years		29,096		28,294		279,568		272,221
Total investment securities	$	1,964,251	$	1,929,994	$	772,469	$	747,589

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through June 30, 2018.

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6. ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3 –Summary of Significant Accounting Policies, included in our Annual Report on Form10-K for the year ended December 31, 2017. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans.

At June 30, 2018, the remaining discount associated with the PCI loans was zero. The loss sharing agreement for commercial loans expired October 16, 2014. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018.

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

	June 30, 2018			December 31, 2017
	(Dollars in thousands)
Commercial and industrial	$	562		$	934
SBA		1,311			1,383
Real estate:
Commercial real estate		17,214			27,431
Construction		-			-
SFR mortgage		154			162
Dairy & livestock and agribusiness		-			770
Municipal lease finance receivables		-			-
Consumer and other loans		185			228
Gross PCI loans		19,426			30,908
Less: Purchase accounting discount		-			(2,026	)
Gross PCI loans, net of discount		19,426			28,882
Less: Allowance for PCI loan losses		(216	)		(367	)
Net PCI loans	$	19,210		$	28,515

Credit Quality Indicators

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

	June 30, 2018		December 31, 2017
	(Dollars in thousands)
Pass	$	18,137	$	26,439
Special mention		1,044		1,088
Substandard		245		3,381
Doubtful & loss		-		-
Total gross PCI loans	$	19,426	$	30,908

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

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

	June 30, 2018			December 31, 2017
	(Dollars in thousands)
Commercial and industrial	$	509,188		$	513,325
SBA		121,048			122,055
Real estate:
Commercial real estate		3,454,030			3,376,713
Construction		84,400			77,982
SFR mortgage		237,154			236,202
Dairy & livestock and agribusiness		268,489			347,289
Municipal lease finance receivables		67,721			70,243
Consumer and other loans		60,875			64,229
Gross loans, excluding PCI loans		4,802,905			4,808,038
Less: Deferred loan fees, net		(5,375	)		(6,289	)
Gross loans, excluding PCI loans, net of deferred loan fees		4,797,530			4,801,749
Less: Allowance for loan losses		(59,367	)		(59,218	)
Net loans, excluding PCI loans		4,738,163			4,742,531
PCI Loans		19,426			30,908
Discount on PCI loans		-			(2,026	)
Less: Allowance for loan losses		(216	)		(367	)
PCI loans, net		19,210			28,515
Total loans and lease finance receivables	$	4,757,373		$	4,771,046

As of June 30, 2018, 78.61% of the Company’s total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 71.92% of which consisted of commercial real estate loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2018, $212.5 million, or 6.15% of the total commercial real estate loans included loans secured by farmland, compared to $206.1 million, or 6.10%, at December 31, 2017. The loans secured by farmland included $123.7 million for loans secured by dairy & livestock land and $88.8 million for loans secured by agricultural land at June 30, 2018, compared to $118.2 million for loans secured by dairy & livestock land and $87.9 million for loans secured by agricultural land at December 31, 2017. As of June 30, 2018, dairy & livestock and agribusiness loans of $268.5 million were comprised of $231.5 million for dairy & livestock loans and $37.0 million for agribusiness loans, compared to $310.6 million for dairy & livestock loans and $36.7 million for agribusiness loans at December 31, 2017.

At June 30, 2018, the Company held approximately $2.20 billion of total fixed rate loans, including PCI loans.

At June 30, 2018 and December 31, 2017, loans totaling $3.73 billion and $3.68 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loansheld-for-sale as of June 30, 2018 and December 31, 2017.

16

Credit Quality Indicators

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

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

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

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

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

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

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

17

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

	June 30, 2018
	Pass		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	490,231	$	16,415	$	2,542	$	-	$	509,188
SBA		111,616		6,686		2,746		-		121,048
Real estate:
Commercial real estate
Owner occupied		1,063,163		61,509		19,102		-		1,143,774
Non-owner occupied		2,290,652		13,880		5,724		-		2,310,256
Construction
Speculative		74,785		-		-		-		74,785
Non-speculative		9,615		-		-		-		9,615
SFR mortgage		229,831		3,070		4,253		-		237,154
Dairy & livestock and agribusiness		244,408		19,581		4,500		-		268,489
Municipal lease finance receivables		67,153		568		-		-		67,721
Consumer and other loans		59,076		921		878		-		60,875
Total gross loans, excluding PCI loans	$	4,640,530	$	122,630	$	39,745	$	-	$	4,802,905
	December 31, 2017
	Pass		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	483,641	$	19,566	$	10,118	$	-	$	513,325
SBA		112,835		5,358		3,862		-		122,055
Real estate:
Commercial real estate
Owner occupied		1,009,199		76,111		10,970		-		1,096,280
Non-owner occupied		2,257,130		16,434		6,869		-		2,280,433
Construction
Speculative		60,042		-		-		-		60,042
Non-speculative		17,940		-		-		-		17,940
SFR mortgage		229,032		3,124		4,046		-		236,202
Dairy & livestock and agribusiness		321,413		9,047		16,829		-		347,289
Municipal lease finance receivables		69,644		599		-		-		70,243
Consumer and other loans		61,715		1,255		1,259		-		64,229
Total gross loans, excluding PCI loans	$	4,622,591	$	131,494	$	53,953	$	-	$	4,808,038

Allowance for Loan Losses (“ALLL”)

The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approves the ALLL 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 2017 Annual Report on Form10-K for the year ended December 31, 2017 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at June 30, 2018 and December 31, 2017. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

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

	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
	For the Three Months Ended June 30, 2017
	Ending Balance March 31, 2017		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2017
	(Dollars in thousands)
Commercial and industrial	$	7,956	$	-		$	42	$	62		$	8,060
SBA		871		-			38		4			913
Real estate:
Commercial real estate		38,986		-			154		787			39,927
Construction		820		-			1,694		(1,455	)		1,059
SFR mortgage		2,186		-			-		183			2,369
Dairy & livestock and agribusiness		5,842		-			19		(421	)		5,440
Municipal lease finance receivables		889		-			-		(37	)		852
Consumer and other loans		937		-			42		(57	)		922
PCI loans		725		-			-		(66	)		659
Total allowance for loan losses	$	59,212	$	-		$	1,989	$	(1,000	)	$	60,201

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	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
	For the Six Months Ended June 30, 2017
	Ending Balance December 31, 2016		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2017
	(Dollars in thousands)
Commercial and industrial	$	8,154	$	-		$	94	$	(188	)	$	8,060
SBA		871		-			42		-			913
Real estate:
Commercial real estate		37,443		-			154		2,330			39,927
Construction		1,096		-			3,719		(3,756	)		1,059
SFR mortgage		2,287		-			64		18			2,369
Dairy & livestock and agribusiness		8,541		-			19		(3,120	)		5,440
Municipal lease finance receivables		941		-			-		(89	)		852
Consumer and other loans		988		(2	)		71		(135	)		922
PCI loans		1,219		-			-		(560	)		659
Total allowance for loan losses	$	61,540	$	(2	)	$	4,163	$	(5,500	)	$	60,201

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The following tables present the recorded investment in loansheld-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.

	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
	June 30, 2017
	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	$	1,605	$	535,742	$	-	$	13	$	8,047	$	-
SBA		2,478		126,805		-		6		907		-
Real estate:
Commercial real estate		18,558		3,247,300		-		-		39,927		-
Construction		-		77,294		-		-		1,059		-
SFR mortgage		4,195		245,738		-		-		2,369		-
Dairy & livestock and agribusiness		829		244,426		-		-		5,440		-
Municipal lease finance receivables		-		66,048		-		-		852		-
Consumer and other loans		1,131		72,778		-		94		828		-
PCI loans		-		-		49,869		-		-		659
Total	$	28,796	$	4,616,131	$	49,869	$	113	$	59,429	$	659

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 Form10-K for the year ended December 31, 2017, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a Troubled Debt Restructuring (“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 onnon-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans

21

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.

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

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

	June 30, 2018
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
					(Dollars in thousands)
Commercial and industrial	$	-	$	-	$	-	$	204	$	508,984	$	509,188
SBA		-		-		-		574		120,474		121,048
Real estate:
Commercial real estate
Owner occupied		-		-		-		4,294		1,134,706		1,139,000
Non-owner occupied		-		-		-		2,223		2,312,807		2,315,030
Construction
Speculative (2)		-		-		-		-		74,785		74,785
Non-speculative		-		-		-		-		9,615		9,615
SFR mortgage		-		-		-		1,578		235,576		237,154
Dairy & livestock and agribusiness		-		-		-		800		267,689		268,489
Municipal lease finance receivables		-		-		-		-		67,721		67,721
Consumer and other loans		47		-		47		509		60,319		60,875
Total gross loans, excluding PCI loans	$	47	$	-	$	47	$	10,182	$	4,792,676	$	4,802,905

(1) As of June 30, 2018, $3.2 million of nonaccruing loans were current, $164,000 were30-59 days past due, $129,000 were60-89 days past due and $6.7 million were 90+ days past due.

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

	December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
					(Dollars in thousands)
Commercial and industrial	$	768	$	-	$	768	$	250	$	512,307	$	513,325
SBA		403		-		403		906		120,746		122,055
Real estate:
Commercial real estate
Owner occupied		-		-		-		4,365		1,091,915		1,096,280
Non-owner occupied		-		-		-		2,477		2,277,956		2,280,433
Construction
Speculative (2)		-		-		-		-		60,042		60,042
Non-speculative		-		-		-		-		17,940		17,940
SFR mortgage		-		-		-		1,337		234,865		236,202
Dairy & livestock and agribusiness		-		-		-		829		346,460		347,289
Municipal lease finance receivables		-		-		-		-		70,243		70,243
Consumer and other loans		1		-		1		552		63,676		64,229
Total gross loans, excluding PCI loans	$	1,172	$	-	$	1,172	$	10,716	$	4,796,150	$	4,808,038

(1) As of December 31, 2017, $3.6 million of nonaccruing loans were current, $376,000 were60-89 days past due and $6.8 million were 90+ days past due.

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

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Impaired Loans

At June 30, 2018, the Company had impaired loans, excluding PCI loans, of $14.7 million. Impaired loans included $6.5 million of nonaccrual commercial real estate loans, $1.6 million of nonaccrual single-family residential (“SFR”) mortgage loans, $800,000 of nonaccrual dairy & livestock and agribusiness loans, $574,000 of nonaccrual Small Business Administration (“SBA”) loans, $509,000 of nonaccrual consumer and other loans, and $204,000 of nonaccrual commercial and industrial loans. These impaired loans included $8.4 million of loans whose terms were modified in a troubled debt restructuring, of which $3.9 million were classified as nonaccrual. The remaining balance of $4.5 million consisted of 15 loans performing according to the restructured terms. The impaired loans had a specific allowance of $16,000 at June 30, 2018. At December 31, 2017, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $15.5 million with a related allowance of $75,000.

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

	As of and For the Six Months Ended June 30, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
					(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	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

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	As of and For the Six Months Ended June 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
					(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,465	$	1,939	$	-	$	1,572	$	13
SBA		2,472		2,750		-		2,538		32
Real estate:
Commercial real estate
Owner occupied		5,541		5,866		-		5,240		69
Non-owner occupied		13,017		15,469		-		12,908		798
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		4,195		4,983		-		4,242		73
Dairy & livestock and agribusiness		829		1,091		-		1,123		1
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		734		941		-		752		9
Total		28,253		33,039		-		28,375		995
With a related allowance recorded:
Commercial and industrial		140		187		13		157		1
SBA		6		23		6		9		-
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		397		402		94		399		-
Total		543		612		113		565		1
Total impaired loans	$	28,796	$	33,651	$	113	$	28,940	$	996

24

	As of December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance
			(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	440	$	980	$	-
SBA		1,530		1,699		-
Real estate:
Commercial real estate
Owner occupied		4,365		4,763		-
Non-owner occupied		3,768		5,107		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		4,040		4,692		-
Dairy & livestock and agribusiness		829		1,091		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		174		370		-
Total		15,146		18,702		-
With a related allowance recorded:
Commercial and industrial		-		-		-
SBA		1		18		1
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		378		391		74
Total		379		409		75
Total impaired loans	$	15,525	$	19,111	$	75

The Company recognizes thecharge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2018, December 31, 2017 and June 30, 2017 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where acharge-off is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balancenon-collateral dependent loans.

Reserve for Unfunded Loan Commitments

The allowance foroff-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 theoff-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2018, and 2017. As of June 30, 2018 and December 31, 2017, the balance in this reserve was $6.3 million and was included in other liabilities.

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Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired andcharge-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 Form10-K for the year ended December 31, 2017 for a more detailed discussion regarding TDRs.

As of June 30, 2018, there were $8.4 million of loans classified as a TDR, of which $3.9 million were nonperforming and $4.5 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2018, performing TDRs were comprised of 10 SFR mortgage loans of $2.6 million, two commercial real estate loans of $1.2 million, one SBA loan of $600,000, and two commercial and industrial loans of $151,000.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated zero and $1,000 of specific allowance to TDRs as of June 30, 2018 and December 31, 2017, respectively.

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

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	4,285		$	19,702		$	4,809		$	19,233
New modifications		311			-			311			3,143
Payoffs/payments, net and other		(66	)		16			(590	)		(2,987	)
TDRs returned to accrual status		-			-			-			329
TDRs placed on nonaccrual status		-			(3,144	)		-			(3,144	)
Ending balance	$	4,530		$	16,574		$	4,530		$	16,574
Nonperforming TDRs:
Beginning balance	$	3,909		$	1,407		$	4,200		$	1,626
New modifications		38			-			38			2,066
Charge-offs		-			-			-			-
Payoffs/payments, net and other		(55	)		(160	)		(346	)		(2,116	)
TDRs returned to accrual status		-			-			-			(329	)
TDRs placed on nonaccrual status		-			3,144			-			3,144
Ending balance	$	3,892		$	4,391		$	3,892		$	4,391
Total TDRs	$	8,422		$	20,965		$	8,422		$	20,965

26

The following table summarizes loans modified as troubled debt restructurings for the period presented.

Modifications (1)

	For the Three Months Ended June 30, 2018
	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 (2)
	(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		1		311		311		307		-
Change in amortization period or maturity		-		-		-		-		-
Dairy & livestock and agribusiness:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Total loans		2	$	349	$	349	$	338	$	-

27

	For the Three Months Ended June 30, 2017
	Number of     Loans		Pre-Modification     Outstanding Recorded Investment		Post-Modification     Outstanding Recorded Investment		Outstanding Recorded Investment at   June 30, 2017		Financial Effect Resulting From     Modifications (2)
	(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		-		-		-		-		-
Dairy & livestock and agribusiness:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Total loans		-	$	-	$	-	$	-	$	-

28

	For the Six Months Ended June 30, 2018
	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 (2)
	(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		-
Dairy & livestock and agribusiness:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Total loans		2	$	349	$	349	$	338	$	-

29

	For the Six Months Ended June 30, 2017
	Number of     Loans		Pre-Modification     Outstanding Recorded Investment		Post-Modification     Outstanding Recorded Investment		Outstanding Recorded Investment at   June 30, 2017		Financial Effect Resulting From     Modifications (2)
	(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		1		3,143		3,143		3,143		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
SFR mortgage:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Dairy & livestock and agribusiness:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		1,984		1,984		78		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		82		82		78		-
Total loans		3	$	5,209	$	5,209	$	3,299	$	-

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

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

As of June 30, 2018, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2018.

As of June 30, 2017, there was one commercial real estate loan with an outstanding balance of $3.1 million that was modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2017.

30

8.     EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and six months ended June 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 14,000 and 13,000, respectively. For the three and six months ended June 30, 2017, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 11,000 and 8,000, 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,
	2018		2017                 2018				2017
	(In thousands, except per  share amounts)
Earnings per common share:
Net earnings	$	35,373	$	28,373	$	70,286	$	56,877
Less: Net earnings allocated to restricted stock		94		105		202		217
Net earnings allocated to common shareholders	$	35,279	$	28,268	$	70,084	$	56,660
Weighted average shares outstanding		109,983		109,730		109,921		109,039
Basic earnings per common share	$	0.32	$	0.26	$	0.64	$	0.52
Diluted earnings per common share:
Net income allocated to common shareholders		35,279		28,268		70,084		56,660
Weighted average shares outstanding		109,983		109,730		109,921		109,039
Incremental shares from assumed exercise of outstanding options		372		348		418		406
Diluted weighted average shares outstanding		110,355		110,078		110,339		109,445
Diluted earnings per common share	$	0.32	$	0.26	$	0.64	$	0.52

31

9.     FAIR VALUE INFORMATION

Fair Value Hierarchy

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

The following disclosure provides the fair value information for financial assets and liabilities as of June 30, 2018. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

· Level 1 – Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.

· Level 2 – Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.

There were no transfers in and out of Level 1 and Level 2 during the six months ended June 30, 2018 and 2017.

32

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

	Carrying Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	June 30, 2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Residential mortgage-backed securities	$	1,636,884	$	-	$	1,636,884	$	-
CMO/REMIC - residential		239,511		-		239,511		-
Municipal bonds		52,849		-		52,849		-
Other securities		750		-		750		-
Total investment securities - AFS		1,929,994		-		1,929,994		-
Interest rate swaps		1,405		-		1,405		-
Total assets	$	1,931,399	$	-	$	1,931,399	$	-
Description of liability
Interest rate swaps	$	1,405	$	-	$	1,405	$	-
Total liabilities	$	1,405	$	-	$	1,405	$	-
	Carrying Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Residential mortgage-backed securities	$	1,750,909	$	-	$	1,750,909	$	-
CMO/REMIC - residential		273,829		-		273,829		-
Municipal bonds		55,496		-		55,496		-
Other securities		751		-		751		-
Total investment securities - AFS		2,080,985		-		2,080,985		-
Interest rate swaps		3,211		-		3,211		-
Total assets	$	2,084,196	$	-	$	2,084,196	$	-
Description of liability
Interest rate swaps	$	3,211	$	-	$	3,211	$	-
Total liabilities	$	3,211	$	-	$	3,211	$	-

33

Assets and Liabilities Measured at Fair Value on aNon-Recurring Basis

We may be required to measure certain assets at fair value on anon-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 anon-recurring basis that were held on the balance sheet at June 30, 2018 and December 31, 2017, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

	Carrying Value at June 30, 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 Six Months Ended June 30, 2018
	(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial	$	-	$	-		$	-	$	-	$	-
SBA		-		-			-		-		-
Real estate:
Commercial real estate		-		-			-		-		-
Construction		-		-			-		-		-
SFR mortgage		13		-			-		13		13
Dairy & livestock and agribusiness		-		-			-		-		-
Consumer and other loans		3		-			-		3		3
Other real estate owned		-		-			-		-		-
Assetheld-for-sale		-		-			-		-		-
Total assets	$	16	$	-		$	-	$	16	$	16
	Carrying Value at December 31, 2017		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, 2017
	(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial	$	-	$	-		$	-	$	-	$	-
SBA		-		-			-		-		-
Real estate:
Commercial real estate		-		-			-		-		-
Construction		-		-			-		-		-
SFR mortgage		-		-			-		-		-
Dairy & livestock and agribusiness		-		-	��		-		-		-
Consumer and other loans		378		-			-		378		74
Other real estate owned		-		-			-		-		-
Assetheld-for-sale		-		-			-		-		-
Total assets	$	378	$	-		$	-	$	378	$	74

34

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of June 30, 2018 and December 31, 2017, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

	June 30, 2018
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	181,489	$	181,489	$	-	$	-	$	181,489
Interest-earning balances due from depository institutions		7,150		-		7,086		-		7,086
Investment securitiesavailable-for-sale		1,929,994		-		1,929,994		-		1,929,994
Investment securitiesheld-to-maturity		772,469		-		747,589		-		747,589
Total loans, net of allowance for loan losses (1)		4,757,373		-		-		4,634,939		4,634,939
Swaps		1,405		-		1,405		-		1,405
Liabilities
Deposits:
Interest-bearing	$	2,554,640	$	-	$	2,551,285	$	-	$	2,551,285
Borrowings		384,054		-		383,725		-		383,725
Junior subordinated debentures		25,774		-		-		20,910		20,910
Swaps		1,405		-		1,405		-		1,405

(1) The fair value of loans as of June 30, 2018 was measured using an exit price notion.

	December 31, 2017
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and due from banks	$	144,377	$	144,377	$	-	$	-	$	144,377
Interest-earning balances due from depository institutions		17,952		-		17,951		-		17,951
FHLB stock		17,688		-		17,688		-		17,688
Investment securitiesavailable-for-sale		2,080,985		-		2,080,985		-		2,080,985
Investment securitiesheld-to-maturity		829,890		-		819,215		-		819,215
Total loans, net of allowance for loan losses		4,771,046		-		-		4,678,402		4,678,402
Swaps		3,211		-		3,211		-		3,211
Liabilities
Deposits:
Noninterest-bearing	$	3,846,436	$	3,846,436	$	-	$	-	$	3,846,436
Interest-bearing		2,700,417		-		2,697,781		-		2,697,781
Borrowings		553,773		-		553,416		-		553,416
Junior subordinated debentures		25,774		-		-		18,070		18,070
Swaps		3,211		-		3,211		-		3,211

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2018 and December 31, 2017. 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.

35

10. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Banking Centers (“Centers”) and Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. The Bank has 51 Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating departments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these two segments in deciding how to allocate resources and to assess performance. Our two principal reporting segments, Centers and Dairy & Livestock and Agribusiness, are aggregated into separate operating segments as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. All other operating departments have been aggregated and included in “Other” for reporting purposes. Recapture of provision for loan losses was allocated by reporting segment based on loan type. In addition, the Company allocates internal funds to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in the ”Other” category.

The following tables represent the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 –Summary of Significant Accounting Policies, included in our Annual Report on Form10-K for the year ended December 31, 2017. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the Centers category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the condensed consolidated financial statements. All income and expense items not directly associated with the Centers’ business segment are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

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

	For the Three Months Ended June 30, 2018
	Centers			Dairy & livestock and agribusiness			Other (1)			Total
	(Dollars in thousands)
Net interest income	$	52,271		$	3,467		$	16,950		$	72,688
Recapture of provision for loan losses		(70	)		(334	)		(596	)		(1,000	)
Net interest income after recapture of provision for loan losses		52,341			3,801			17,546			73,688
Noninterest income		5,637			47			4,011			9,695
Noninterest expense		12,779			472			21,003			34,254
Segmentpre-tax profit	$	45,199		$	3,376		$	554		$	49,129
Goodwill	$	116,564		$	-		$	-		$	116,564
Segment assets as of June 30, 2018	$	6,996,216		$	404,236		$	693,411		$	8,093,863

(1) Includes treasury and administration, as well as the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

36

	For the Three Months Ended June 30, 2017
	Centers		Dairy & livestock and agribusiness			Other (1)			Total
	(Dollars in thousands)
Net interest income	$	48,762	$	2,369		$	19,352		$	70,483
(Recapture of) provision for loan losses		875		(421	)		(1,454	)		(1,000	)
Net interest income after (recapture of) provision for loan losses		47,887		2,790			20,806			71,483
Noninterest income		5,303		49			5,424			10,776
Noninterest expense		13,206		504			23,163			36,873
Debt termination expense		-		-			-			-
Segmentpre-tax profit	$	39,984	$	2,335		$	3,067		$	45,386
Goodwill	$	119,193	$	-		$	-		$	119,193
Segment assets as of June 30, 2017	$	7,314,110	$	348,570		$	755,523		$	8,418,203

(1) Includes treasury and administration, as well as the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

	For the Six Months Ended June 30, 2018
	Centers		Dairy & livestock and agribusiness			Other (1)			Total
	(Dollars in thousands)
Net interest income	$	101,854	$	7,318		$	34,037		$	143,209
(Recapture of) provision for loan losses		259		(315	)		(1,944	)		(2,000	)
Net interest income after (recapture of) provision for loan losses		101,595		7,633			35,981			145,209
Noninterest income		10,938		92			11,581			22,611
Noninterest expense		26,004		989			43,207			70,200
Debt termination expense		-		-			-			-
Segmentpre-tax profit	$	86,529	$	6,736		$	4,355		$	97,620
Goodwill	$	116,564	$	-		$	-		$	116,564
Segment assets as of June 30, 2018	$	6,996,216	$	404,236		$	693,411		$	8,093,863

(1) Includes treasury and administration, as well as the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

	For the Six Months Ended June 30, 2017
	Centers		Dairy & livestock and agribusiness			Other (1)			Total
	(Dollars in thousands)
Net interest income	$	94,340	$	4,513		$	37,063		$	135,916
(Recapture of) provision for loan losses		1,386		(3,120	)		(3,766	)		(5,500	)
Net interest income after (recapture of) provision for loan losses		92,954		7,633			40,829			141,416
Noninterest income		10,510		104			8,884			19,498
Noninterest expense		25,644		1,005			44,341			70,990
Debt termination expense		-		-			-			-
Segmentpre-tax profit	$	77,820	$	6,732		$	5,372		$	89,924
Goodwill	$	119,193	$	-		$	-		$	119,193
Segment assets as of June 30, 2017	$	7,314,110	$	348,570		$	755,523		$	8,418,203

(1) Includes treasury and administration, as well as the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

37

11. 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 June 30, 2018, the Bank has entered into 75 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. 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, which has the effect of passing on the interest-rate risk associated with the customer’s fixed rate swap to the counterparty bank. 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. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the 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 June 30, 2018 and December 31, 2017, the total notional amount of the Company’s swaps was $186.8 million, and $198.5 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

	June 30, 2018
	Asset Derivatives				Liability Derivatives
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
	(Dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps		Other assets	$	1,405		Other liabilities	$	1,405
Total derivatives			$	1,405			$	1,405
	December 31, 2017
	Asset Derivatives				Liability Derivatives
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
	(Dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps		Other assets	$	3,211		Other liabilities	$	3,211
Total derivatives			$	3,211			$	3,211

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The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings

The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.

Derivatives Not Designated as     Hedging Instruments	Location of Gain Recognized in   Income on Derivative Instruments		Amount of Gain Recognized in Income on Derivative Instruments
			For the Three Months Ended June 30,				For the Six Months Ended June 30,
			2018		2017		2018		2017
			(Dollars in thousands)
Interest rate swaps		Other income	$	151	$	71	$	267	$	394
Total			$	151	$	71	��$	267	$	394

12. 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,
	2018								2017
	Before-tax			Tax effect		After-tax			Before-tax			Tax effect			After-tax
						(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	(5,773	)	$	1,707	$	(4,066	)	$	2,838		$	(1,192	)	$	1,646
Amortization of unrealized (gains) losses on securities transferred fromavailable-for-sale toheld-to-maturity		(825	)		244		(581	)		(1,196	)		502			(694	)
Net realized gain reclassified into earnings (1)		-			-		-			(402	)		169			(233	)
Net change	$	(6,598	)	$	1,951	$	(4,647	)	$	1,240		$	(521	)	$	719
	For the Six Months Ended June 30,
	2018								2017
	Before-tax			Tax effect		After-tax			Before-tax			Tax effect			After-tax
						(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	(37,111	)	$	10,972	$	(26,139	)	$	4,045		$	(1,699	)	$	2,346
Amortization of unrealized (gains) losses on securities transferred fromavailable-for-sale toheld-to-maturity		(1,657	)		490		(1,167	)		(1,979	)		831			(1,148	)
Net realized gain reclassified into earnings (1)		-			-		-			(402	)		169			(233	)
Net change	$	(38,768	)	$	11,462	$	(27,306	)	$	1,664		$	(699	)	$	965

(1) Included in other noninterest income.

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13. 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 to a master netting arrangement with one counterparty bank. 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 the counterparty bank 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 condensed consolidated balances.

	Gross Amounts Recognized in the Condensed Consolidated Balance Sheets		Gross Amounts Offset in the Condensed Consolidated Balance Sheets			Net Amounts of Assets 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)
June 30, 2018
Financial assets:
Derivatives not designated as hedging instruments	$	1,405	$	-		$	-	$	1,405	$	-		$	1,405
Total	$	1,405	$	-		$	-	$	1,405	$	-		$	1,405
Financial liabilities:
Derivatives not designated as hedging instruments	$	5,291	$	(3,886	)	$	1,405	$	3,886	$	-		$	5,291
Repurchase agreements		384,054		-			384,054		-		(485,522	)		(101,468	)
Total	$	389,345	$	(3,886	)	$	385,459	$	3,886	$	(485,522	)	$	(96,177	)
December 31, 2017
Financial assets:
Derivatives not designated as hedging instruments	$	3,211	$	-		$	-	$	3,211	$	-		$	3,211
Total	$	3,211	$	-		$	-	$	3,211	$	-		$	3,211
Financial liabilities:
Derivatives not designated as hedging instruments	$	4,495	$	(1,284	)	$	3,211	$	1,284	$	(12,760	)	$	(8,265	)
Repurchase agreements		553,773		-			553,773		-		(573,759	)		(19,986	)
Total	$	558,268	$	(1,284	)	$	556,984	$	1,284	$	(586,519	)	$	(28,251	)

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14. REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASUNo. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 3 –Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streamsin-scope of Topic 606 are discussed below.

Trust and Investment Services

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the monthly market value of the assets under management and the applicable fee rate. Payment is generally received at month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Other services related to real estate and tax return preparation services are also provided to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Wealth Management contracts with customers have no clauses that would entitle customers to additional services. Fees are generally earned based on market value of assets under management (AUM) and miscellaneous fees are transaction driven and are charged based on an agreed upon fee schedule. Performance obligation is satisfied upon execution of the transaction and there is no need to allocate transaction price to the performance obligation(s) in the contract. Wealth Management customers can also terminate the contract at will. Based on our review, we did not find provisions in the contracts that will require changes to the current accounting under Topic 606.

For Investment Services, the fees are earned based on services performed for customers as provided through an affiliated broker-dealer. Fees are earned from gross dealer commission based on trade date. Performance obligation is satisfied upon execution of the transaction and there is no need to allocate transaction price to the performance obligation(s) in the contract. Based on our review, we did not find provisions in the contracts that will require changes to the current accounting under Topic 606.

Deposit-related Fees

Service charges on deposit accounts consist of account analysis fees earned on analyzed business checking accounts, monthly service fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Bankcard Services

The Bank generates revenues from merchant servicing to its clients. A fee schedule is part of the contract and is calculated based on sales of merchants on a monthly basis. There is no future promise or claim to deliver services as merchant fees are based on monthly merchant transactions. The Company’s performance obligations are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Therefore, the new revenue standard has no impact on revenues generated from bankcard services.

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The following presents noninterest income, segregated by revenue streamsin-scope andout-of-scope of Topic 606, for the three and six months ended June 30, 2018 and 2017.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
			(Dollars in thousands)
Noninterest income:
In-scope of Topic 606:
Service charges on deposit accounts	$	4,091	$	3,982	$	8,136	$	7,709
Trust and investment services		2,399		2,613		4,556		4,909
Bankcard services		958		871		1,762		1,636
Other		1,178		1,409		2,569		2,628
Noninterest Income(in-scope of Topic 606)		8,626		8,875		17,023		16,882
Noninterest Income(out-of-scope of Topic 606)		1,069		1,901		5,588		2,616
Total noninterest income	$	9,695	$	10,776	$	22,611	$	19,498

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standardmonth-end revenue accruals such as asset management fees based onmonth-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient, which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.

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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. and its wholly owned bank subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form10-K for the year ended December 31, 2017, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon its 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”)

● Income Taxes

Our significant accounting policies are described in greater detail in our 2017 Annual Report on Form10-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 Form10-K for the year ended December 31, 2017, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

For the second quarter of 2018, we reported net earnings of $35.4 million, compared with $34.9 million for the first quarter of 2018 and $28.4 million for the second quarter of 2017. This represented an increase of $460,000 over the prior quarter and an increase of $7.0 million from the second quarter of 2017. Diluted earnings per share were $0.32 for the second quarter, compared to $0.32 for the prior quarter and $0.26 for the same period last year.

At June 30, 2018, total assets of $8.09 billion decreased $176.7 million, or 2.14%, from total assets of $8.27 billion at December 31, 2017. Interest-earning assets of $7.61 billion at June 30, 2018 decreased $195.4 million, or 2.50%, when compared with $7.80 billion at December 31, 2017. The decrease in interest-earning assets was primarily due to a $208.4 million decrease in investment securities and a $13.7 million decrease in total loans. This decrease was partially offset by a $37.5 million increase in interest-earning balances due from the Federal Reserve. The decrease in total loans was due to the approximate $79.6 million decline in seasonal borrowings of dairy & livestock and agribusiness loans.

Total investment securities were $2.70 billion at June 30, 2018, a decrease of $208.4 million, or 7.16%, from $2.91 billion at December 31, 2017. At June 30, 2018, investment securitiesheld-to-maturity (“HTM”) totaled $772.5 million. At June 30, 2018, investment securitiesavailable-for-sale (“AFS”) totaled $1.93 billion, inclusive of apre-tax unrealized loss of $34.3 million. HTM securities declined by $57.4 million, or 6.92%, and AFS securities declined by $151.0 million, or 7.26%, from December 31, 2017.

Total loans and leases, net of deferred fees and discounts, were $4.82 billion at June 30, 2018, compared to $4.83 billion at December 31, 2017. Total loans decreased $13.7 million, or 0.28%, from December 31, 2017. The decrease in total loans was principally due to a decline of $79.6 million in

43

dairy & livestock and agribusiness loans primarily due to seasonal paydowns. The overall decrease was partially offset by growth of $67.1 million in commercial real estate loans. Excluding the decrease in dairy & livestock and agribusiness loans, total loans grew by $65.9 million or 1.36%.

Noninterest-bearing deposits were $3.98 billion at June 30, 2018, an increase of $134.2 million, or 3.49%, when compared to December 31, 2017. At June 30, 2018, noninterest-bearing deposits were 60.91% of total deposits, compared to 58.75% at December 31, 2017. Our average cost of total deposits was 0.09% for the quarter ended June 30, 2018, unchanged from both the first quarter of 2018 and the second quarter of 2017.

Customer repurchase agreements totaled $384.1 million at June 30, 2018, compared to $553.8 million at December 31, 2017. Our average cost of total deposits including customer repurchase agreements was 0.11% for the quarters ended June 30, 2018, March 31, 2018 and June 30, 2017.

There were no short-term borrowings outstanding at June 30, 2018 and December 31, 2017. At June 30, 2018, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2017. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

The allowance for loan losses totaled $59.6 million at June 30, 2018, compared to $59.6 million at December 31, 2017. The allowance for loan losses for the first six months of 2018 was increased by net recoveries on loans of $2.0 million and was reduced by a $2.0 million loan loss provision recapture. The allowance for loan losses was 1.24% and 1.23% of total loans and leases outstanding, at June 30, 2018 and December 31, 2017, respectively.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of June 30, 2018, the Company’s Tier 1 leverage capital ratio totaled 12.55%, our common equity Tier 1 ratio totaled 17.06%, our Tier 1 risk-based capital ratio totaled 17.49%, and our total risk-based capital ratio totaled 18.63%. Refer to ourAnalysis of Financial Condition – Capital Resources for discussion of the new capital rules which were effective beginning with the first quarter ended March 31, 2015.

Recent Acquisition

On February 26, 2018, we entered into a definitive agreement to merge Community Bank with and into Citizens Business Bank. As of June 30, 2018, Community Bank had approximately $3.71 billion in total assets, $2.79 billion in gross loans and $2.86 billion in total deposits. Under the terms of the merger, Community Bank shareholders will have the right to receive, in respect of each share of common stock of Community Bank, 9.4595 shares of CVB common stock and $56.00 per share in cash, subject to any adjustments set forth in the Merger Agreement. The merger transaction is valued at approximately $885.2 million based on CVB’s closing stock price of $23.60 on February 26, 2018. The shareholders of both Companies approved the merger on June 21, 2018. All regulatory approvals have been received and the merger is expected to close on August 10, 2018.

44

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

	For the Three Months Ended						Variance
	June 30,			March 31,
	2018			2018			$			%
	(Dollars in thousands, except per share amounts)
Net interest income	$	72,688		$	70,521		$	2,167			3.07%
Recapture of provision for loan losses		1,000			1,000			-			-
Noninterest income		9,695			12,916			(3,221	)		-24.94%
Noninterest expense		(34,254	)		(35,946	)		1,692			4.71%
Income taxes		(13,756	)		(13,578	)		(178	)		-1.31%
Net earnings	$	35,373		$	34,913		$	460			1.32%
Earnings per common share:
Basic	$	0.32		$	0.32		$	-
Diluted	$	0.32		$	0.32		$	-
Return on average assets		1.73%			1.71%			0.02%
Return on average shareholders’ equity		13.08%			13.02%			0.06%
Efficiency ratio		41.58%			43.08%			-1.50%
Noninterest expense to average assets		1.68%			1.77%			-0.09%
	For the Three Months Ended											For the Six Months Ended
	June 30,						Variance					June 30,						Variance
	2018			2017			$			%		2018			2017			$			%
	(Dollars in thousands, except per share amounts)
Net interest income	$	72,688		$	70,483		$	2,205			3.13%	$	143,209		$	135,916		$	7,293			5.37%
Recapture of provision for loan losses		1,000			1,000			-			-		2,000			5,500			(3,500	)		-63.64%
Noninterest income		9,695			10,776			(1,081	)		-10.03%		22,611			19,498			3,113			15.97%
Noninterest expense		(34,254	)		(36,873	)		2,619			7.10%		(70,200	)		(70,990	)		790			1.11%
Income taxes		(13,756	)		(17,013	)		3,257			19.14%		(27,334	)		(33,047	)		5,713			17.29%
Net earnings	$	35,373		$	28,373		$	7,000			24.67%	$	70,286		$	56,877		$	13,409			23.58%
Earnings per common share:
Basic	$	0.32		$	0.26		$	0.06				$	0.64		$	0.52		$	0.12
Diluted	$	0.32		$	0.26		$	0.06				$	0.64		$	0.52		$	0.12
Return on average assets		1.73%			1.35%			0.38%					1.72%			1.39%			0.33%
Return on average shareholders’ equity		13.08%			10.73%			2.35%					13.05%			11.05%			2.00%
Efficiency ratio		41.58%			45.38%			-3.80%					42.34%			45.68%			-3.34%
Noninterest expense to average assets		1.68%			1.76%			-0.08%					1.72%			1.73%			-0.01%

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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 rate of 21% and 35% in effect for the three and six months ended June 30, 2018 and 2017, respectively. 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 Managementincluded herein.

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.

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Interest-Earning Assets and Interest-Bearing Liabilities

	For the Three Months Ended June 30,
	2018							2017
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,921,638	$	11,290		2.37	%	$	2,190,489	$	12,420		2.28	%
Tax-advantaged		53,399		407		4.06	%		73,443		587		4.76	%
Held-to-maturity securities:
Taxable		540,692		3,048		2.25	%		593,315		3,203		2.16	%
Tax-advantaged		243,910		1,759		3.49	%		277,525		2,120		4.13	%
Investment in FHLB stock		17,688		298		6.76	%		18,675		359		7.60	%
Interest-earning deposits with other institutions		144,081		635		1.76	%		110,065		286		1.04	%
Loans (2)		4,780,347		57,368		4.81	%		4,643,505		53,614		4.63	%
Total interest-earning assets		7,701,755		74,805		3.93	%		7,907,017		72,589		3.74	%
Total noninterest-earning assets		476,854							513,105
Total assets	$	8,178,609						$	8,420,122
INTEREST-BEARING LIABILITIES
Savings deposits (3)	$	2,233,652		1,293		0.23	%	$	2,390,652		1,266		0.21	%
Time deposits		367,871		256		0.28	%		418,217		293		0.28	%
Total interest-bearing deposits		2,601,523		1,549		0.24	%		2,808,869		1,559		0.22	%
FHLB advances, other borrowings, and customer repurchase agreements		462,618		568		0.49	%		587,571		547		0.37	%
Interest-bearing liabilities		3,064,141		2,117		0.28	%		3,396,440		2,106		0.25	%
Noninterest-bearing deposits		3,958,980							3,890,656
Other liabilities		70,435							72,284
Stockholders’ equity		1,085,053							1,060,742
Total liabilities and stockholders’ equity	$	8,178,609						$	8,420,122
Net interest income			$	72,688						$	70,483
Net interest spread - tax equivalent						3.65	%						3.49	%
Net interest margin						3.79	%						3.58	%
Net interest margin - tax equivalent						3.82	%						3.63	%

(1) Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 21% and 35% in effect for the three months ended June 30, 2018 and 2017, respectively. Non TE rate was 2.40% and 2.35% for the three months ended June 30, 2018 and 2017, respectively.

(2) Includes loan fees of $855,000 and $897,000 for the three months ended June 30, 2018 and 2017, respectively. Prepayment penalty fees of $912,000 and $268,000 are included in interest income for the three months ended June 30, 2018 and 2017, respectively.

(3) Includes interest-bearing demand and money market accounts.

47

	For the Six Months Ended June 30,
	2018							2017
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,950,190	$	22,735		2.34	%	$	2,179,986	$	24,346		2.25	%
Tax-advantaged		54,262		830		4.06	%		74,929		1,301		5.03	%
Held-to-maturity securities:
Taxable		547,694		5,926		2.16	%		600,933		6,480		2.16	%
Tax-advantaged		250,507		3,646		3.52	%		280,977		4,350		4.18	%
Investment in FHLB stock		17,688		630		7.18	%		18,411		752		8.12	%
Interest-earning deposits with other institutions		141,443		1,171		1.66	%		113,185		553		0.98	%
Loans (2)		4,785,118		112,564		4.74	%		4,512,039		102,255		4.57	%
Total interest-earning assets		7,746,902		147,502		3.86	%		7,780,460		140,037		3.68	%
Total noninterest-earning assets		470,378							491,287
Total assets	$	8,217,280						$	8,271,747
INTEREST-BEARING LIABILITIES
Savings deposits (3)	$	2,262,271		2,566		0.23	%	$	2,341,105		2,422		0.21	%
Time deposits		372,585		508		0.27	%		406,188		570		0.28	%
Total interest-bearing deposits		2,634,856		3,074		0.24	%		2,747,293		2,992		0.22	%
FHLB advances, other borrowings, and customer repurchase agreements		522,606		1,219		0.47	%		617,894		1,129		0.37	%
Interest-bearing liabilities		3,157,462		4,293		0.27	%		3,365,187		4,121		0.25	%
Noninterest-bearing deposits		3,907,901							3,796,139
Other liabilities		65,760							72,550
Stockholders’ equity		1,086,157							1,037,871
Total liabilities and stockholders’ equity	$	8,217,280						$	8,271,747
Net interest income			$	143,209						$	135,916
Net interest spread - tax equivalent						3.59	%						3.43	%
Net interest margin						3.72	%						3.52	%
Net interest margin - tax equivalent						3.75	%						3.57	%

(1) Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 21% and 35% in effect for the six months ended June 30, 2018 and 2017, respectively. Non TE rate was 2.37% and 2.33% for the six months ended June 30, 2018 and 2017, respectively.

(2) Includes loan fees of $1,751,000 and $1,797,000 for the six months ended June 30, 2018 and 2017, respectively. Prepayment penalty fees of $1,446,000 and $1,055,000 are included in interest income for the six months ended June 30, 2018 and 2017, respectively.

(3) Includes interest-bearing demand and money market accounts.

48

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 June 30,          2018 Compared to 2017 Increase (Decrease) Due to
							Rate/
	Volume			Rate			Volume			Total
	(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(1,539	)	$	467		$	(58	)	$	(1,130	)
Tax-advantaged investment securities		(148	)		(25	)		(7	)		(180	)
Held-to-maturity securities:
Taxable investment securities		(283	)		140			(12	)		(155	)
Tax-advantaged investment securities		(232	)		(115	)		(14	)		(361	)
Investment in FHLB stock		(19	)		(40	)		(2	)		(61	)
Interest-earning deposits with other institutions		89			199			61			349
Loans		1,577			2,115			62			3,754
Total interest income		(555	)		2,741			30			2,216
Interest expense:
Savings deposits		(54	)		87			(6	)		27
Time deposits		(36	)		(1	)		-			(37	)
FHLB advances, other borrowings, and customer repurchase agreements		(93	)		145			(31	)		21
Total interest expense		(183	)		231			(37	)		11
Net interest income	$	(372	)	$	2,510		$	67		$	2,205

	Comparision of Six Months Ended June 30,         2018 Compared to 2017 Increase (Decrease) Due to
							Rate/
	Volume			Rate			Volume			Total
	(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(2,459	)	$	946		$	(98	)	$	(1,611	)
Tax-advantaged investment securities		(358	)		(155	)		42			(471	)
Held-to-maturity securities:
Taxable investment securities		(565	)		12			(1	)		(554	)
Tax-advantaged investment securities		(463	)		(269	)		28			(704	)
Investment in FHLB stock		(32	)		(94	)		4			(122	)
Interest-earning deposits with other institutions		139			383			96			618
Loans		6,212			3,863			234			10,309
Total interest income		2,474			4,686			305			7,465
Interest expense:
Savings deposits		(93	)		245			(8	)		144
Time deposits		(51	)		(12	)		1			(62	)
FHLB advances, other borrowings, and customer repurchase agreements		(186	)		326			(50	)		90
Total interest expense		(330	)		559			(57	)		172
Net interest income	$	2,804		$	4,127		$	362		$	7,293

49

Second Quarter of 2018 Compared to the Second Quarter of 2017

Net interest income, before recapture of provision for loan losses, of $72.7 million for the second quarter of 2018 increased $2.2 million, or 3.13%, compared to $70.5 million for the second quarter of 2017. Interest-earning assets declined on average by $205.3 million, or 2.60%, from $7.91 billion for the second quarter of 2017 to $7.70 billion for the second quarter of 2018. Our net interest margin (TE) was 3.82% for the second quarter of 2018, compared to 3.63% for the second quarter of 2017. On a nominal basis, excluding the impact fromtax-exempt interest, the net interest margin for the second quarter of 2018 grew by 21 basis points over the second quarter of 2017.

Interest income for the second quarter of 2018 was $74.8 million, which represented a $2.2 million, or 3.05%, increase when compared to the same period of 2017. Average interest-earning assets decreased by $205.3 million and the average interest-earning asset yield of 3.93%, increased by 19 basis points compared to the second quarter of 2017. The 19 basis point increase in the interest-earning asset yield over the second quarter of 2017 resulted from the combination of an 18 basis point increase in loan yield and the change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets from 58.7% in the second quarter of 2017 to 62.1% in the second quarter of 2018. Conversely, average investment securities declined as a percentage of earning assets from 40.0% in the prior year to 35.8% in the second quarter of 2018.

Interest income and fees on loans for the second quarter of 2018 totaled $57.4 million, which represented a $3.8 million, or 7.00%, increase when compared to the second quarter of 2017. Average loans increased $136.8 million for the second quarter of 2018 when compared with the same period of 2017. Contributing to the 18 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 0.75% when compared to the second quarter of 2017.

In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans at June .30, 2018 and 2017. As of June 30, 2018 and 2017, we had $10.2 million and $12.2 million of nonaccrual loans (excluding PCI loans), respectively.

Interest income from investment securities was $16.5 million for the second quarter of 2018, a $1.8 million, or 9.96%, decrease from $18.3 million for the second quarter of 2017. This decrease was the result of a $375.1 million decrease in the average investment securities for the second quarter of 2018, compared to the same period of 2017. The nominal yield on investments increased by five basis points compared to the second quarter of 2017, while the tax equivalent yield remained unchanged due to the reduction of the federal tax rate ontax-exempt investments resulting from the Tax Reform Act.

Interest expense of $2.1 million for the second quarter of 2018, increased $11,000, or 0.52%, compared to the second quarter of 2017. The average rate paid on interest-bearing liabilities increased three basis points, to 0.28% for the second quarter of 2018, from 0.25% for the second quarter of 2017. Average interest-bearing liabilities were $332.3 million lower during the second quarter of 2018, compared to the second quarter of 2017, as interest-bearing deposits and repurchase agreements declined by $207.3 million and $120.5 million, respectively. Average noninterest-bearing deposits represented 60.35% of our total deposits for the second quarter of 2018, compared to 58.07% for the second quarter of 2017. Our total cost of funds for the second quarter of 2018 was 0.12%, unchanged from the second quarter of 2017.

Six Months of 2018 Compared to the Six Months of 2017

Net interest income, before recapture of provision for loan losses, was $143.2 million for the six months ended June 30, 2018, an increase of $7.3 million, or 5.37%, compared to $135.9 million for the same period of 2017. Interest-earning assets declined on average by $33.6 million, or 0.43%, from $7.78 billion for the six months ended June 30, 2017 to $7.75 billion for the current year. Our net interest margin (TE) was 3.75% during the first six months of 2018, compared to 3.57% for the same period of 2017.

Interest income for the six months ended June 30, 2018 was $147.5 million, which represented a $7.5 million, or 5.33%, increase when compared to the same period of 2017. Compared to the first six months of 2017, average interest-earning assets decreased by $33.6 million, but the yield on interest-earning assets increased by 18 basis points.

Interest income and fees on loans for the first six months of 2018 totaled $112.6 million, which represented a $10.3 million, or 10.08%, increase when compared to the same period of 2017. Average loans increased $273.1 million for the first six months of 2018 when compared with the same period of 2017.

50

The increase in the earning asset yield over the first six months of 2018 of 18 basis points resulted from the change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets growing from 61.8% to 58.0% for the first six months of 2017.

Interest income from investment securities was $33.1 million for the six months ended June 30, 2018, a $3.3 million decrease from $36.5 million for the first six months of 2017. This decrease was the net result of a $334.2 million decrease in the average investment securities for the first six months of 2018, compared to the same period of 2017 and a four basis points increase in the nontax-equivalent yield on securities.

Interest expense of $4.3 million for the six months ended June 30, 2018, increased by $172,000 from the same period of 2017. The average rate paid on interest-bearing liabilities increased by two basis points, to 0.27% for the first six months of 2017, from 0.25% for the same period of 2017. The rate on interest-bearing deposits for the first six months of 2018 increased by two basis points from the same period in 2017. Average interest-bearing liabilities were $95.3 million lower during the first six months of 2018, compared to the same period of 2017, as interest-bearing deposits and repurchase agreements declined by $112.4 million and $90.0 million, respectively. Average noninterest-bearing deposits represented 59.73% of our total deposits for the six months ended June 30 2018, compared to 58.01% for the same period of 2017. Total cost of funds for the first six months of 2018 was 0.12%, unchanged from the same period of 2017.

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 $59.6 million at June 30, 2018, compared to $59.6 million at December 31, 2017. The allowance for loan losses was increased by net recoveries on loans of $2.0 million and was reduced by a $2.0 million loan loss provision recapture for the six months ended June 30, 2018. This compares to a $5.5 million loan loss provision recapture and net recoveries of $4.2 million for the same period of 2017. We believe the allowance is appropriate at June 30, 2018. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. The ratio of the allowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of June 30, 2018 and December 31, 2017 was 1.24% and 1.23%, respectively. 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 not be reflected in increased provisions for loan losses in the future, as the nature of this process requires considerable judgment. Net recoveries totaled $2.0 million for the six months ended June 30, 2018, compared to $4.2 million for the same period of 2017. See “Allowance for Loan Losses” underAnalysis of Financial Conditionherein.

PCI loans acquired in the FDIC-assisted transaction were initially recorded at their fair value and were covered by loss sharing agreements with the FDIC. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018. Refer to Note 3 —Summary of Significant Accounting Policies included in our Annual Report on Form10-K for the year ended December 31, 2017 for a more detailed discussion about the FDIC loss sharing asset/liability. For the six months ended June 30, 2018 and 2017, there were zero in net charge-offs for loans in excess of the amount originally expected in the fair value of the loans at acquisition.

51

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
	2018		2017		$			%			2018		2017		$			%
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	4,091	$	3,982	$	109			2.74	%	$	8,136	$	7,709	$	427			5.54	%
Trust and investment services		2,399		2,613		(214	)		-8.19	%		4,556		4,909		(353	)		-7.19	%
Bankcard services		958		871		87			9.99	%		1,762		1,636		126			7.70	%
BOLI income		1,069		1,497		(428	)		-28.59	%		2,048		2,212		(164	)		-7.41	%
Gain on sale of investment securities, net		-		402		(402	)		-100.00	%		-		402		(402	)		-100.00	%
Gain on OREO, net		-		2		(2	)		-100.00	%		3,540		2		3,538			176900.00	%
Other		1,178		1,409		(231	)		-16.39	%		2,569		2,628		(59	)		-2.25	%
Total noninterest income	$	9,695	$	10,776	$	(1,081	)		-10.03	%	$	22,611	$	19,498	$	3,113			15.97	%

Second Quarter of 2018 Compared to the Second Quarter of 2017

The $1.1 million decrease in noninterest income was primarily due to a $428,000 decrease in BOLI income, a $402,000 gain on sale of an investment security in the second quarter of 2017, and a $214,000 decrease in trust and wealth management fees.

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 othernon-insured investment products. At June 30, 2018, CitizensTrust had approximately $2.52 billion in assets under management and administration, including $1.76 billion in assets under management. CitizensTrust generated fees of $2.4 million for the second quarter of 2018, a decrease of $214,000 compared to the second quarter of 2017.

The Bank’s investment in Bank-Owned Life Insurance (“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. The decrease in BOLI income was due to a $351,000 death benefit included in our BOLI policies for the second quarter of 2018, compared to a $775,000 death benefit included in our BOLI policies for the same period of 2017.

Six Months of 2018 Compared to the Six Months of 2017

The $3.1 million increase in noninterest income for the six months ended June 30, 2018, was the result of a $3.5 million net gain on the sale of one OREO property and a $553,000 increase in service charges on deposits and Bankcard services. Partially offsetting the overall increase was a $353,000 decrease in trust and wealth management fees. The first six months of 2018 also included a $475,000 recovery of a VBB loan that was fully charged off prior to acquisition, compared to $443,000 of recoveries on American Security Bank (“ASB”) loans that were charged off prior to the acquisition for the first six months of 2017.

52

Noninterest Expense

The following table summarizes the various components of noninterest expense for the periods presented.

	For the Three Months Ended June 30,				Variance						For the Six Months Ended June 30,				Variance
	2018		2017		$			%			2018		2017		$			%
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	21,051	$	21,706	$	(655	)		-3.02	%	$	43,365	$	43,281	$	84			0.19	%
Occupancy		3,424		3,542		(118	)		-3.33	%		6,756		6,450		306			4.74	%
Equipment		894		1,012		(118	)		-11.66	%		1,754		1,788		(34	)		-1.90	%
Professional services		1,690		1,843		(153	)		-8.30	%		3,220		3,100		120			3.87	%
Software licenses and maintenance		1,759		1,627		132			8.11	%		3,519		3,188		331			10.38	%
Stationery and supplies		307		387		(80	)		-20.67	%		544		663		(119	)		-17.95	%
Telecommunications expense		561		625		(64	)		-10.24	%		1,089		1,182		(93	)		-7.87	%
Marketing and promotion		1,148		1,190		(42	)		-3.53	%		2,504		2,429		75			3.09	%
Amortization of intangible assets		328		373		(45	)		-12.06	%		659		648		11			1.70	%
Regulatory assessments		666		802		(136	)		-16.96	%		1,380		1,585		(205	)		-12.93	%
Insurance		423		443		(20	)		-4.51	%		846		903		(57	)		-6.31	%
Loan expense		149		218		(69	)		-31.65	%		404		408		(4	)		-0.98	%
OREO expense		-		10		(10	)		-100.00	%		7		67		(60	)		-89.55	%
Directors’ expenses		270		260		10			3.85	%		510		468		42			8.97	%
Acquisition related expenses		494		1,250		(756	)		-60.48	%		1,297		1,926		(629	)		-32.66	%
Other		1,090		1,585		(495	)		-31.23	%		2,346		2,904		(558	)		-19.21	%
Total noninterest expense	$	34,254	$	36,873	$	(2,619	)		-7.10	%	$	70,200	$	70,990	$	(790	)		-1.11	%
Noninterest expense to average assets		1.68%		1.76%								1.72%		1.73%
Efficiency ratio (1)		41.58%		45.38%								42.34%		45.68%

(1) Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.

Second Quarter of 2018 Compared to the Second Quarter of 2017

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 measured as a percentage of average assets was 1.68% for the second quarter of 2018, compared to 1.76% for the second quarter of 2017.

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) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For the second quarter of 2018, the efficiency ratio was 41.58%, compared to 45.38% for the second quarter of 2017.

The $2.6 million, or 7.10%, decrease in noninterest expense for the second quarter of 2018 was primarily due to a decrease of $756,000 in acquisition expense, a $655,000 decrease in salaries and employee benefits, and a $236,000 decrease in occupancy and equipment costs.

Six Months of 2018 Compared to the Six Months of 2017

Noninterest expense of $70.2 million for the first six months of 2018 was $790,000 lower than the prior year period. The year-over-year decrease included $629,000 in acquisition costs related to the integration of VCBP and the systems conversion that was completed in the second quarter of 2017. Other expense for 2017 included a $275,000 write-down of equity investments. Regulatory assessment fees were also down by $205,000 year-over-year. Offsetting these expense decreases were higher software licenses and maintenance costs of $331,000 and a $306,000 increase in occupancy expense. As a percentage of average assets, noninterest expense was 1.72% for the six months ended June 30, 2018, compared to 1.73% for the same period of 2017. For the six months ended 2018, the efficiency ratio was 42.34%, compared to 45.68% for the same period of 2017.

53

Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2018 was 28.00%, compared to 37.49% and 36.75% for the three and six months ended June 30, 2017, respectively. On December 22, 2017, the Tax Reform Act was enacted into law. Beginning in 2018, the Tax Reform Act reduces the federal tax rate for corporations from 35% to 21% and changes or limits certain tax deductions. During the fourth quarter of 2017, we recorded a $13.2 millionone-time charge to income tax expense due to the tax rate reduction andre-measurement of our net DTA. Our estimated annual effective tax rate also varies depending upon the level oftax-advantaged income as well as available tax credits.

The effective tax rates are below the nominal combined Federal and State tax rate primarily as a result oftax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.

54

RESULTS BY BUSINESS SEGMENTS

We have two reportable business segments: (i) Business Financial and Commercial Banking Centers (“Centers”) and (ii) Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. Our Centers and Dairy & Livestock and Agribusiness are the focal points for customer sales and services and the primary focus of management of the Company. All other operating departments have been aggregated and included in the “Other” category for reporting purposes. Recapture of provision for loan losses was allocated by reporting segment based on loan type. In addition, the Company allocates internal funds to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in the “Other” category. Taxes are not included in the segments as this is accounted for at the corporate level. The results of these two segments are included in the reconciliation between business segment totals and our consolidated total. Refer to Note 3 —Summary of Significant Accounting Policies included in our Annual Report on Form10-K for the year ended December 31, 2017 and Note 10—Business Segments of the unaudited condensed consolidated financial statements.

Key measures we use to evaluate the segments’ performance are included in the following table for the three months ended June 30, 2018 and 2017. These tables also provide additional segment measures useful to understanding the performance of these segments.

Business Financial and Commercial Banking Centers

	For the Three Months Ended     June 30,					For the Six Months Ended     June 30,
	2018			2017		2018		2017
Key Measures:	(Dollars in thousands)
Statement of Operations
Net interest income	$	52,271		$	48,762	$	101,854	$	94,340
(Recapture of) provision for loan losses		(70	)		875		259		1,386
Noninterest income		5,637			5,303		10,938		10,510
Noninterest expense		12,779			13,206		26,004		25,644
Segmentpre-tax profit	$	45,199		$	39,984	$	86,529	$	77,820
Balance Sheet
Average loans	$	3,975,074		$	3,883,308	$	3,971,769	$	3,731,216
Average interest-bearing deposits and customer repurchase agreements	$	3,039,373		$	3,368,117	$	3,127,889	$	3,329,979
Yield on loans (1)		4.66%			4.50%		4.62%		4.51%
Rate paid on interest-bearing deposits and customer repurchases		0.25%			0.23%		0.25%		0.23%

(1) Yield on loans excludes PCI discount accretion, and is accounted for at the corporate level.

For the second quarter of 2018, the Centers’ segmentpre-tax profit increased primarily due to a $2.9 million, or 5.52%, increase in net interest income when compared to the second quarter of 2017. Average loans grew by $91.8 million. Loan yield increased by 16 basis points to 4.66% for the second quarter of 2018, compared to 4.50% for the second quarter of 2017. Contributing to the 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 0.75% when compared to the second quarter of 2017. The second quarter of 2018 included a loan loss provision recapture of $70,000, compared to loan loss provision of $875,000 for the same period of 2017.

55

Dairy & Livestock and Agribusiness

	For the Three Months Ended     June 30,						For the Six Months Ended     June 30,
	2018			2017			2018			2017
Key Measures:	(Dollars in thousands)
Statement of Operations
Net interest income	$	3,467		$	2,369		$	7,318		$	4,513
(Recapture of) provision for loan losses		(334	)		(421	)		(315	)		(3,120	)
Noninterest income		47			49			92			104
Noninterest expense		472			504			989			1,005
Segmentpre-tax profit	$	3,376		$	2,335		$	6,736		$	6,732
Balance Sheet
Average loans	$	490,628		$	406,384		$	497,140		$	418,124
Average interest-bearing deposits and customer repurchase agreements	$	26,051		$	39,728		$	26,654		$	35,504
Yield on loans (1)		4.41%			3.93%			4.31%			3.79%
Rate paid on interest-bearing deposits and customer repurchases		0.20%			0.30%			0.20%			0.27%

(1) Yield on loans excludes PCI discount accretion, and is accounted for at the corporate level.

For the second quarter of 2018, the dairy & livestock and agribusiness segmentpre-tax profit increased by $1.0 million. This increase was primarily due to higher interest income of $1.4 million due to a 48 basis point increase in the loan yield for the second quarter of 2018 compared to the same period of 2017, principally due to an increase in the Bank’s Prime rate.

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Other

	For the Three Months Ended     June 30,						For the Six Months Ended     June 30,
	2018			2017			2018			2017
Key Measures:	(Dollars in thousands)
Statement of Operations
Net interest income (1)	$	16,950		$	19,352			34,037			37,063
Recapture of provision for loan losses		(596	)		(1,454	)		(1,944	)		(3,766	)
Noninterest income		4,011			5,424			11,581			8,884
Noninterest expense		21,003			23,163			43,207			44,341
Segmentpre-tax profit	$	554		$	3,067		$	4,355		$	5,372
Balance Sheet
Average investment securities	$	2,759,639		$	3,134,772		$	2,802,653		$	3,136,826
Average loans	$	314,645		$	353,813		$	316,209		$	362,699
Average interest-bearing deposits	$	-		$	-		$	-		$	-
Average borrowings	$	29,076		$	33,555		$	34,141		$	39,429
Yield on investment securities-TE		2.48%			2.48%			2.44%			2.47%
Non-tax equivalent yield on investment securities		2.40%			2.35%			2.37%			2.33%
Yield on loans		7.44%			6.82%			6.93%			6.07%
Average cost of borrowings		3.34%			2.15%			2.86%			1.85%

(1) Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers. Yield on loans includes PCI discount accretion and interest recaptured on PCI loans.

For the second quarter of 2018,pre-tax profit of the Company’s other operating departments, including treasury and administration, decreased $2.5 million compared to 2017. Net interest income decreased by $2.4 million primarily due to a $375.1 million decline in average investment securities when compared with the second quarter of 2017, partially offset by a five basis point increase in thenon-TE yield on securities. The tax equivalent yield on investments was unchanged from the second quarter of 2017, due to a reduction of the federal tax rate ontax-exempt investments resulting from the Tax Reform Act, from 35% for the second quarter of 2017 to 21% for the second quarter of 2018. Loan loss provision recapture decreased $858,000 for the second quarter of 2018, compared to the second quarter of 2017. The $1.4 million decrease in noninterest income for 2018 was primarily due to a $428,000 decrease in BOLI income, and a $402,000 gain on sale of an investment security in the second quarter of 2017. The second quarter of 2017 also included $443,000 of recoveries on ASB loans that were charged off prior to the acquisition. The $2.2 million decrease in noninterest expense for the second quarter of 2018 was primarily due to decreases in salaries and employee benefits, as well as occupancy and equipment costs. Acquisition expense of $494,000 for the second quarter of 2018 also decreased $756,000 compared to the second quarter of 2017.

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ANALYSIS OF FINANCIAL CONDITION

The Company reported total assets of $8.09 billion at June 30, 2018. This represented a decrease of $176.7 million, or 2.14%, from total assets of $8.27 billion at December 31, 2017. Interest-earning assets of $7.61 billion at June 30, 2018 decreased $195.4 million, or 2.50%, when compared with interest-earning assets of $7.80 billion at December 31, 2017. The decrease in interest-earning assets was primarily due to $208.4 million decrease in investment securities and a $13.7 million decrease in total loans. This decrease was partially offset by a $37.5 million increase in interest-earning balances due from the Federal Reserve. The decrease in total loans was due to the approximate $79.6 million decline in seasonal borrowings of dairy & livestock and agribusiness loans. Total liabilities were $7.01 billion at June 30, 2018, a decrease of $190.9 million, or 2.65%, from total liabilities of $7.20 billion at December 31, 2017. Total equity increased $14.2 million, or 1.32%, to $1.08 billion at June 30, 2018, compared to total equity of $1.07 billion at December 31, 2017. The $14.2 million increase in equity was due to $70.3 million in net earnings and $2.1 million for various stock-based compensation items. This was offset by $30.9 million in cash dividends declared and a $27.3 million decrease in other comprehensive income, net of tax, resulting from the net change in fair value of our investment securities portfolio.

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, 2018, we reported total investment securities of $2.70 billion. This represented a decrease of $208.4 million, or 7.16%, from total investment securities of $2.91 billion at December 31, 2017. At June 30, 2018, investment securities HTM totaled $772.5 million. At June 30, 2018, our AFS investment securities totaled $1.93 billion, inclusive of apre-tax unrealized loss of $34.3 million. Theafter-tax unrealized loss reported in AOCI on AFS investment securities was $24.1 million.

As of June 30, 2018, the Company had apre-tax net unrealized holding loss on AFS investment securities of $34.3 million, compared to apre-tax net unrealized holding gain of $2.9 million at December 31, 2017. The changes in the net unrealized holding loss resulted primarily from fluctuations in market interest rates. For the six months ended June 30, 2018 and 2017, repayments/maturities of investment securities totaled $261.5 million and $289.1 million, respectively. The Company purchased additional investment securities totaling $98.7 million and $265.2 million for the six months ended June 30, 2018 and 2017, respectively. No investment securities were sold during the first six months of 2018. During the second quarter of 2017, we sold one investment security, realizing a gain of $402,000.

The tables below set forth investment securities AFS and HTM for the periods presented.

	June 30, 2018
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding					Total
	Cost		Gain		Loss			Fair Value		Percent
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,665,717	$	1,489	$	(30,322	)	$	1,636,884		84.81	%
CMO/REMIC - residential		244,227		357		(5,073	)		239,511		12.41	%
Municipal bonds		53,557		400		(1,108	)		52,849		2.74	%
Other securities		750		-		-			750		0.04	%
Totalavailable-for-sale securities	$	1,964,251	$	2,246	$	(36,503	)	$	1,929,994		100.00	%
Investment securitiesheld-to-maturity:
Government agency/GSE	$	149,693	$	406	$	(2,948	)	$	147,151		19.38	%
Residential mortgage-backed securities		164,914		-		(4,020	)		160,894		21.35	%
CMO		219,159		-		(12,773	)		206,386		28.37	%
Municipal bonds		238,703		574		(6,119	)		233,158		30.90	%
Totalheld-to-maturity securities	$	772,469	$	980	$	(25,860	)	$	747,589		100.00	%

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	December 31, 2017
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding					Total
	Cost		Gain		Loss			Fair Value		Percent
	(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,747,780	$	11,231	$	(8,102	)	$	1,750,909		84.14	%
CMO/REMIC - residential		274,634		1,277		(2,082	)		273,829		13.16	%
Municipal bonds		54,966		774		(244	)		55,496		2.66	%
Other securities		751		-		-			751		0.04	%
Totalavailable-for-sale securities	$	2,078,131	$	13,282	$	(10,428	)	$	2,080,985		100.00	%
Investment securitiesheld-to-maturity:
Government agency/GSE	$	159,716	$	854	$	(2,134	)	$	158,436		19.25	%
Residential mortgage-backed securities		176,427		667		(382	)		176,712		21.26	%
CMO		225,072		-		(8,641	)		216,431		27.12	%
Municipal bonds		268,675		2,751		(3,790	)		267,636		32.37	%
Totalheld-to-maturity securities	$	829,890	$	4,272	$	(14,947	)	$	819,215		100.00	%

The weighted-average yield (TE) on the total investment portfolio at June 30, 2018 was 2.52% with a weighted-average life of 4.4 years. This compares to a weighted-average yield of 2.50% at December 31, 2017 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 principalpay-downs.

Approximately 89% of the securities in the total investment portfolio, at June 30, 2018, 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, 2018, approximately $96.1 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.

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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, 2018 and December 31, 2017. 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 of the notes to the unaudited condensed consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

	June 30, 2018
	Less Than 12 Months					12 Months or Longer					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
			Holding					Holding					Holding
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
						(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	1,253,569	$	(18,601	)	$	272,657	$	(11,721	)	$	1,526,226	$	(30,322	)
CMO/REMIC - residential		130,072		(2,291	)		64,326		(2,782	)		194,398		(5,073	)
Municipal bonds		9,294		(221	)		13,304		(887	)		22,598		(1,108	)
Totalavailable-for-sale securities	$	1,392,935	$	(21,113	)	$	350,287	$	(15,390	)	$	1,743,222	$	(36,503	)
Investment securitiesheld-to-maturity:
Government agency/GSE	$	53,518	$	(437	)	$	41,567	$	(2,511	)	$	95,085	$	(2,948	)
Residential mortgage-backed securities		106,204		(2,225	)		54,691		(1,795	)		160,895		(4,020	)
CMO		-		-			206,386		(12,773	)		206,386		(12,773	)
Municipal bonds		91,541		(1,499	)		61,207		(4,620	)		152,748		(6,119	)
Totalheld-to-maturity securities	$	251,263	$	(4,161	)	$	363,851	$	(21,699	)	$	615,114	$	(25,860	)
	December 31, 2017
	Less Than 12 Months					12 Months or Longer					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
			Holding					Holding					Holding
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
						(Dollars in thousands)
Investment securitiesavailable-for-sale:
Residential mortgage-backed securities	$	414,091	$	(1,828	)	$	303,746	$	(6,274	)	$	717,837	$	(8,102	)
CMO/REMIC - residential		95,137		(487	)		71,223		(1,595	)		166,360		(2,082	)
Municipal bonds		946		(4	)		13,956		(240	)		14,902		(244	)
Totalavailable-for-sale securities	$	510,174	$	(2,319	)	$	388,925	$	(8,109	)	$	899,099	$	(10,428	)
Investment securitiesheld-to-maturity:
Government agency/GSE	$	18,950	$	(27	)	$	43,495	$	(2,107	)	$	62,445	$	(2,134	)
Residential mortgage-backed securities		51,297		(188	)		55,306		(194	)		106,603		(382	)
CMO		-		-			216,431		(8,641	)		216,431		(8,641	)
Municipal bonds		32,069		(492	)		66,217		(3,298	)		98,286		(3,790	)
Totalheld-to-maturity securities	$	102,316	$	(707	)	$	381,449	$	(14,240	)	$	483,765	$	(14,947	)

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Loans

Total loans and leases, net of deferred fees and discounts, of $4.82 billion at June 30, 2018 decreased by $13.7 million, or 0.28%, from December 31, 2017. The decrease in total loans was principally due to a decline of $79.6 million in dairy & livestock and agribusiness loans primarily due to seasonal paydowns. The overall decrease was partially offset by growth of $67.1 million in commercial real estate loans.

The following table presents our loan portfolio, excluding PCI loans, by type for the periods presented.

Distribution of Loan Portfolio by Type

	June 30, 2018			December 31, 2017
	(Dollars in thousands)
Commercial and industrial	$	509,188		$	513,325
SBA		121,048			122,055
Real estate:
Commercial real estate		3,454,030			3,376,713
Construction		84,400			77,982
SFR mortgage		237,154			236,202
Dairy & livestock and agribusiness		268,489			347,289
Municipal lease finance receivables		67,721			70,243
Consumer and other loans		60,875			64,229
Gross loans, excluding PCI loans		4,802,905			4,808,038
Less: Deferred loan fees, net		(5,375	)		(6,289	)
Gross loans, excluding PCI loans, net of deferred loan fees		4,797,530			4,801,749
Less: Allowance for loan losses		(59,367	)		(59,218	)
Net loans, excluding PCI loans		4,738,163			4,742,531
PCI Loans		19,426			30,908
Discount on PCI loans		-			(2,026	)
Less: Allowance for loan losses		(216	)		(367	)
PCI loans, net		19,210			28,515
Total loans and lease finance receivables	$	4,757,373		$	4,771,046

As of June 30, 2018, $212.5 million, or 6.15% of the total commercial real estate loans included loans secured by farmland, compared to $206.1 million, or 6.10%, at December 31, 2017. The loans secured by farmland included $123.7 million for loans secured by dairy & livestock land and $88.8 million for loans secured by agricultural land at June 30, 2018, compared to $118.2 million for loans secured by dairy & livestock land and $87.9 million for loans secured by agricultural land at December 31, 2017. As of June 30, 2018, dairy & livestock and agribusiness loans of $268.5 million were comprised of $231.5 million for dairy & livestock loans and $37.0 million for agribusiness loans, compared to $310.6 million for dairy & livestock loans and $36.7 million for agribusiness loans at December 31, 2017.

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 auto and equipment leases, installment loans to consumers as well as home equity loans 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 June 30, 2018, the Company had $107.5 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the Borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the Borrower’s down payment of 10%. When the loans are funded the Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of June 30, 2018, the Company had $14.9 million of total SBA 7(a) loans. The SBA 7(a) loans include revolving lines of credit (SBA

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Express) and term loans to finance long term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.

As of June 30, 2018, the Company had $84.4 million in construction loans. This represents 1.75% of total gross loansheld-for-investment. There were no PCI construction loans at June 30, 2018. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. At June 30, 2018, construction loans consisted of $53.5 million in SFR construction loans and $30.9 million in commercial construction loans. There were no nonperforming construction loans at June 30, 2018.

PCI Loans from the SJB Acquisition

These PCI loans were acquired from SJB on October 16, 2009 and were subject to a loss sharing agreement with the FDIC. Under the terms of such loss sharing agreement, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries up to $144.0 million in losses with respect to covered assets, after a first loss amount of $26.7 million. The loss sharing agreement covered 5 years for commercial loans and covers 10 years for single-family residential loans from the October 16, 2009 acquisition date and the loss recovery provisions are in effect for 8 and 10 years, respectively, for commercial and single-family residential loans from the acquisition date. The loss sharing agreement for commercial loans expired October 16, 2014. The loss sharing agreement with the FDIC for single-family residential loans, which would have expired on October 16, 2019, was terminated by the Bank on July 20, 2018.

The PCI loan portfolio included unfunded commitments for commercial lines of credit, construction draws and other lending activity. The total commitments outstanding as of the acquisition date are included under the shared-loss agreement. As such, any additional advances up to the total commitment outstanding at the time of acquisition were covered under the loss sharing agreement.

	June 30, 2018			December 31, 2017
	(Dollars in thousands)
Commercial and industrial	$	562		$	934
SBA		1,311			1,383
Real estate:
Commercial real estate		17,214			27,431
Construction		-			-
SFR mortgage		154			162
Dairy & livestock and agribusiness		-			770
Municipal lease finance receivables		-			-
Consumer and other loans		185			228
Gross PCI loans		19,426			30,908
Less: Purchase accounting discount		-			(2,026	)
Gross PCI loans, net of discount		19,426			28,882
Less: Allowance for PCI loan losses		(216	)		(367	)
Net PCI loans	$	19,210		$	28,515

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Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our totalheld-for-investment commercial real estate loans, excluding PCI loans, by region as of June 30, 2018.

	June 30, 2018
					Commercial Real Estate
	Total Loans				Loans
	(Dollars in thousands)
Los Angeles County	$	1,653,916	34.4	%	$	1,177,768	34.1	%
Central Valley		979,910	20.4	%		720,840	20.9	%
Inland Empire		759,503	15.8	%		626,288	18.1	%
Orange County		600,335	12.5	%		366,729	10.6	%
Central Coast		354,382	7.4	%		289,178	8.4	%
San Diego		132,259	2.8	%		81,285	2.4	%
Other California		107,432	2.2	%		59,198	1.7	%
Out of State		215,168	4.5	%		132,744	3.8	%
	$	4,802,905	100.0	%	$	3,454,030	100.0	%

The following is the breakdown of total PCIheld-for-investment commercial real estate loans by region as of June 30, 2018.

	June 30, 2018
	Total				Commercial Real Estate
	PCI Loans				Loans
	(Dollars in thousands)
Central Valley	$	19,426	100.0	%	$	17,214	100.0	%
Los Angeles County		-	-			-	-
Central Coast		-	-			-	-
Other California		-	-			-	-
Out of State		-	-			-	-
	$	19,426	100.0	%	$	17,214	100.0	%

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

	June 30, 2018
					Percent
					Owner-		Average
	Loan Balance		Percent		Occupied (1)		Loan Balance
	(Dollars in thousands)
SFR mortgage:
SFR mortgage - Direct	$	212,894		5.8%		100.0%	$	532
SFR mortgage - Mortgage pools		24,260		0.6%		100.0%		147
Total SFR mortgage		237,154		6.4%
Commercial real estate:
Multi-family		327,322		8.9%		-		1,304
Industrial		1,045,985		28.3%		41.6%		1,262
Office		603,828		16.4%		25.7%		1,293
Retail		504,800		13.7%		8.3%		1,476
Medical		257,575		7.0%		39.1%		2,028
Secured by farmland (2)		212,543		5.7%		100.0%		1,986
Other (3)		501,977		13.6%		39.7%		1,318
Total commercial real estate		3,454,030		93.6%
Total SFR mortgage and commercial real estate loans	$	3,691,184		100.0%		37.4%		1,203

(1) Represents percentage of reported owner-occupied at origination in each real estate loan category.

(2) The loans secured by farmland included $123.7 million for loans secured by dairy & livestock land and $88.8 million for loans secured by agricultural land at June 30, 2018.

(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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In the table above, SFR mortgage — Direct loans include SFR mortgage loans which are currently generated through an internal program in our Centers. This program is focused on owner-occupied SFR’s with definedloan-to-value,debt-to-income and other credit criteria, such as FICO credit scores, that we believe are appropriate for loans which are primarily intended for retention in our Bank’s loan portfolio. We originated loan volume in the aggregate principal amount of $9.0 million and $19.6 million under this program during the three and six months ended June 30, 2018, respectively.

In addition, we previously purchased pools of owner-occupied single-family loans from real estate lenders, SFR mortgage — Mortgage Pools, with a remaining balance totaling $24.3 million at June 30, 2018. These loans were purchased with average FICO scores predominantly ranging from 700 to over 800 and overall originalloan-to-value ratios of 60% to 80%. We have not purchased any mortgage pools since August 2007.

The table below breaks down our PCI real estate portfolio.

	June 30, 2018
						Percent
						Owner-			Average
	Loan Balance		Percent			Occupied (1)			Loan Balance
	(Dollars in thousands)
SFR mortgage
SFR mortgage - Direct	$	154		0.9	%		100.0	%	$	154
SFR mortgage - Mortgage pools		-		-			-			-
Total SFR mortgage		154		0.9	%
Commercial real estate:
Multi-family		568		3.3	%		-			568
Industrial		3,456		19.9	%		100.0	%		432
Office		356		2.0	%		100.0	%		178
Retail		2,424		13.9	%		39.3	%		404
Medical		2,670		15.4	%		100.0	%		668
Secured by farmland		1,262		7.3	%		100.0	%		316
Other (2)		6,478		37.3	%		77.2	%		405
Total commercial real estate		17,214		99.1	%
Total SFR mortgage and commercial real estate loans	$	17,368		100.0	%		79.7	%		414

(1) Represents percentage of reported owner-occupied at origination in each real estate loan category.

(2) Includes loans associated with hospitality, churches, and gas stations, which represents approximately 71% of other loans.

Nonperforming Assets

The following table provides information on nonperforming assets, excluding PCI loans, for the periods presented.

	June 30, 2018		December 31, 2017
	(Dollars in thousands)
Nonaccrual loans	$	6,290	$	6,516
Troubled debt restructured loans (nonperforming)		3,892		4,200
OREO, net		-		4,527
Total nonperforming assets	$	10,182	$	15,243
Troubled debt restructured performing loans	$	4,530	$	4,809
Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO		0.21%		0.32%
Percentage of nonperforming assets to total assets		0.13%		0.18%

At June 30, 2018, loans classified as impaired, excluding PCI loans, totaled $14.7 million, or 0.31% of total gross loans, compared to $15.5 million, or 0.32% of total loans at December 31, 2017. At June 30, 2018, impaired loans which were restructured in a troubled debt restructure represented $8.4 million, of which $3.9 million were nonperforming and $4.5 million were performing.

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Of the $14.7 million total impaired loans as of June 30, 2018, $12.1 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate were $2.6 million.

Troubled Debt Restructurings

Total TDRs were $8.4 million at June 30, 2018, compared to $9.0 million at December 31, 2017. At June 30, 2018, we had $3.9 million in nonperforming TDR loans and $4.5 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were granted in response to borrower financial difficulty and generally provide for a modification of loan repayment terms. The performing restructured loans represent the only impaired loans accruing interest at each respective reporting date. A performing restructured loan 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.

The following table provides a summary of TDRs, excluding PCI loans, for the periods presented.

	June 30, 2018				December 31, 2017
	Balance		Number of   Loans		Balance		Number of   Loans
			(Dollars in thousands)
Performing TDRs:
Commercial and industrial	$	151		2	$	190		3
SBA		600		1		625		1
Real Estate:
Commercial real estate		1,224		2		1,291		2
Construction		-		-		-		-
SFR mortgage		2,555		10		2,703		10
Dairy & livestock and agribusiness		-		-		-		-
Consumer and other		-		-		-		-
Total performing TDRs	$	4,530		15	$	4,809		16
Nonperforming TDRs:
Commercial and industrial	$	68		2	$	50		1
SBA		-		-		281		2
Real Estate:
Commercial real estate		3,746		2		3,791		2
Construction		-		-		-		-
SFR mortgage		-		-		-		-
Dairy & livestock and agribusiness		78		1		78		1
Consumer and other		-		-		-		-
Total nonperforming TDRs	$	3,892		5	$	4,200		6
Total TDRs	$	8,422		20	$	9,009		22

At June 30, 2018 and December 31, 2017, zero and $1,000 of the allowance for loan losses was specifically allocated to TDRs, respectively. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. There were no charge-offs on TDRs for the six months ended June 30, 2018 and 2017.

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Nonperforming Assets and Delinquencies

The table below provides trends in our nonperforming assets and delinquencies, excluding PCI loans, for the periods presented.

	June 30,       2018		March 31,      2018		December 31,   2017		September 30,   2017		June 30,       2017
					(Dollars in thousands)
Nonperforming loans:
Commercial and industrial	$	204	$	272	$	250	$	313	$	1,058
SBA		574		589		906		1,611		1,651
Real estate:
Commercial real estate		6,517		6,746		6,842		6,728		6,950
Construction		-		-		-		-		-
SFR mortgage		1,578		1,309		1,337		1,349		963
Dairy & livestock and agribusiness		800		818		829		829		829
Consumer and other loans		509		438		552		743		771
Total	$	10,182	$	10,172	$	10,716	$	11,573	$	12,222
% of Total gross loans		0.21%		0.21%		0.22%		0.24%		0.26%
Past due30-89 days:
Commercial and industrial	$	-	$	-	$	768	$	45	$	-
SBA		-		-		403		-		-
Real estate:
Commercial real estate		-		-		-		220		218
Construction		-		-		-		-		-
SFR mortgage		-		680		-		-		400
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		47		63		1		6		1
Total	$	47	$	743	$	1,172	$	271	$	619
% of Total gross loans		0.001%		0.02%		0.02%		0.01%		0.01%
OREO:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-
Real estate:
Commercial real estate		-		-		-		-		-
Construction		-		-		4,527		4,527		4,527
Total	$	-	$	-	$	4,527	$	4,527	$	4,527
Total nonperforming, past due, and OREO	$	10,229	$	10,915	$	16,415	$	16,371	$	17,368
% of Total gross loans		0.21%		0.23%		0.34%		0.34%		0.37%

Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $10.2 million at June 30, 2018, or 0.21% of total loans. This compares to nonperforming loans of $10.2 million, or 0.21% of total loans, at March 31, 2018, $10.7 million, or 0.22%, of total loans, at December 31, 2017, and $12.2 million, or 0.26%, of total loans, at June 30, 2017.

At June 30, 2018, we had no OREO, compared to one property with a carrying value of $4.5 million at December 31, 2017. During the first quarter of 2018, we sold this OREO property, realizing a net gain on sale of $3.5 million. There were no additions of OREO for the six months ended June 30, 2018.

Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, increases in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a borrower’s ability to pay or the value of our collateral. See “Risk Management – Credit Risk Management” contained in our Annual Report on Form10-K for the year ended December 31, 2017.

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Acquired SJB Assets

Loans acquired through the SJB acquisition are accounted for under ASC Topic310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC310-30”). PCI loans accounted for under ASC310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonperforming loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of June 30, 2018, there were no PCI loans considered as nonperforming as described above.

There were no acquired SJB OREO properties remaining as of June 30, 2018 or December 31, 2017.

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 $59.6 million as of June 30, 2018, compared to $59.6 million as of December 31, 2017. The allowance for loan losses was increased by net recoveries on loans of $2.0 million and was reduced by a $2.0 million loan loss provision recapture for the six months ended June 30, 2018. This compares to a $5.5 million loan loss provision recapture, offset by net recoveries of $4.2 million for the same period of 2017.

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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,
	2018			2017
	(Dollars in thousands)
Allowance for loan losses at beginning of period	$	59,585		$	61,540
Charge-offs:
Commercial and industrial		-			-
SBA		-			-
Commercial real estate		-			-
Construction		-			-
SFR mortgage		-			-
Dairy & livestock and agribusiness		-			-
Consumer and other loans		(9	)		(2	)
Total charge-offs		(9	)		(2	)
Recoveries:
Commercial and industrial		37			94
SBA		10			42
Commercial real estate		-			154
Construction		1,930			3,719
SFR mortgage		-			64
Dairy & livestock and agribusiness		19			19
Consumer and other loans		11			71
Total recoveries		2,007			4,163
Net recoveries		1,998			4,161
Recapture of provision for loan losses		(2,000	)		(5,500	)
Allowance for loan losses at end of period	$	59,583		$	60,201
Summary of reserve for unfunded loan commitments:
Reserve for unfunded loan commitments at beginning of period	$	6,306		$	6,706
Provision for unfunded loan commitments		-			-
Reserve for unfunded loan commitments at end of period	$	6,306		$	6,706
Reserve for unfunded loan commitments to total unfunded loan commitments		0.59%			0.65%
Amount of total loans at end of period (1)	$	4,816,956		$	4,687,698
Average total loans outstanding (1)	$	4,785,118		$	4,512,039
Net recoveries to average total loans		0.04%			0.09%
Net recoveries to total loans at end of period		0.04%			0.09%
Allowance for loan losses to average total loans		1.25%			1.33%
Allowance for loan losses to total loans at end of period		1.24%			1.28%
Net recoveries to allowance for loan losses		3.35%			6.91%
Net recoveries to recapture of provision for loan losses		99.90%			75.65%

(1) Includes PCI loans and is net of deferred loan origination fees, costs and discounts.

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Specific allowance: For impaired loans, we incorporate specific allowances based on loans individually evaluated utilizing one of three valuation methods, as prescribed under ASC310-10. If the measure 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 $16,000 (0.03%) and $75,000 (0.13%) of the total allowance as of June 30, 2018 and December 31, 2017, respectively.

General allowance: The loan portfolio collectively evaluated for impairment under ASC450-20 is divided into risk rating classes of loan receivables between “classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and are further disaggregated into loan segments by loan type with similar risk characteristics. Both the classified andnon-classified loan categories are divided into eight (8) specific loan segments. The allowance is provided for each segment based upon that segment’s average historical loss experience over an established look back period, adjusted for 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), and further adjusted 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. The above description reflects certain changes made to the Bank’s ALLL methodology in the current period described further below. Beginning with the fourth quarter of 2015 and coinciding with the implementation of the new ALLL methodology, the Bank’s previous “unallocated reserve” was absorbed into the qualitative component of the allowance and eliminated.

There were no material changes to the Bank’s ALLL methodology in either the first or second quarter of 2018. The Bank determined that the ALLL balance of $59.6 million was appropriate as a result of the net effect of reduced reserve requirements for (i) continued, moderate reductions in the historical loss rates for all portfolio segments (ii) positive migration in risk grades, (iii) modest decrease in qualitative factors due to a decrease in the effect from various economic factors and certain factors specific to the loan portfolio, offset by net recoveries of $2.0 million and additional requirements related to loan growth experienced during the six month period within the commercial real estate segments of thenon-acquired loan portfolio.

While we believe that the allowance at June 30, 2018 was appropriate to absorb losses from any known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers, or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for loan losses in the future.

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Deposits

The primary source of funds to support earning assets (loans and investments) is the generation of deposits.

Total deposits were $6.54 billion at June 30, 2018. This represented a decrease of $11.5 million, or 0.18%, over total deposits of $6.55 billion at December 31, 2017. The composition of deposits is summarized for the periods presented in the table below.

	June 30, 2018				December 31, 2017
	Balance		Percent		Balance		Percent
			(Dollars in thousands)
Noninterest-bearing deposits	$	3,980,666		60.91%	$	3,846,436		58.75%
Interest-bearing deposits
Investment checking		432,455		6.62%		433,971		6.63%
Money market		1,390,030		21.27%		1,517,050		23.17%
Savings		369,654		5.65%		364,049		5.56%
Time deposits		362,501		5.55%		385,347		5.89%
Total deposits	$	6,535,306		100.00%	$	6,546,853		100.00%

The amount of noninterest-bearing deposits in relation to total deposits is an integral element in achieving a low cost of funds. Noninterest-bearing deposits totaled $3.98 billion at June 30, 2018, representing an increase of $134.2 million, or 3.49%, from noninterest-bearing deposits of $3.85 billion at December 31, 2017. Noninterest-bearing deposits represented 60.91% of total deposits for June 30, 2018, compared to 58.75% of total deposits for December 31, 2017.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $2.19 billion at June 30, 2018, representing a decrease of $122.9 million, or 5.31%, from savings deposits of $2.32 billion at December 31, 2017.

Time deposits totaled $362.5 million at June 30, 2018, representing a decrease of $22.8 million, or 5.93%, from total time deposits of $385.3 million for December 31, 2017.

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 6.24% for the second quarter of 2018, compared to 7.74% for the same quarter of 2017.

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 which reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above apre-determined balance in a demand deposit account, in order to earn interest. As of June 30, 2018 and December 31, 2017, total customer repurchases were $384.1 million and $553.8 million, respectively, with a weighted average interest rate of 0.33% and 0.30%, respectively.

We had no short-term borrowings at both June 30, 2018 and at December 31, 2017.

At June 30, 2018, $3.73 billion of loans and $1.74 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

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Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of June 30, 2018.

			Maturity by Period
	Total		Less Than One Year		One Year Through Three Years		Four Years Through Five Years		Over Five Years
			(Dollars in thousands)
Deposits (1)	$	6,535,306	$	6,506,326	$	19,004	$	1,680	$	8,296
Customer repurchase agreements (1)		384,054		384,054		-		-		-
Junior subordinated debentures (1)		25,774		-		-		-		25,774
Deferred compensation		19,012		1,263		1,359		1,181		15,209
Operating leases		18,567		5,414		7,665		4,087		1,401
Affordable housing investment		1,297		1,184		35		43		35
Advertising agreements		1,096		1,088		8		-		-
Total	$	6,985,106	$	6,899,329	$	28,071	$	6,991	$	50,715

(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.

We had no short-term borrowings at both June 30, 2018 and at December 31, 2017.

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 undernon-cancelable operating leases.

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Off-Balance Sheet Arrangements

The following table summarizes theoff-balance sheet items at June 30, 2018.

			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	$	512,490	$	384,645	$	87,549	$	8,015	$	32,281
SBA		4		-		-		4		-
Real estate:
Commercial real estate		164,415		32,259		66,167		55,924		10,065
Construction		87,134		71,373		15,761		-		-
SFR Mortgage		-		-		-		-		-
Dairy & livestock and agribusiness (1)		191,794		86,238		105,556		-		-
Consumer and other loans		74,216		12,741		8,350		6,449		46,676
Total commitment to extend credit		1,030,053		587,256		283,383		70,392		89,022
Obligations under letters of credit		38,808		29,195		9,413		200		-
Total	$	1,068,861	$	616,451	$	292,796	$	70,592	$	89,022

(1) Total commitments to extend credit to agribusiness were $14.4 million at June 30, 2018.

As of June 30, 2018, we had commitments to extend credit of approximately $1.03 billion, and obligations under letters of credit of $38.8 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any 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 foron-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company had a reserve for unfunded loan commitments of $6.3 million as of June 30, 2018 and December 31, 2017 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.

Capital Resources

Our primary source of capital has been the retention of operating earnings. 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 capital.

The Company’s total equity was $1.08 billion at June 30, 2018. This represented an increase of $14.2 million, or 1.32%, from total equity of $1.07 billion at December 31, 2017. This increase was due to $70.3 million in net earnings and $2.1 million for various stock based compensation items. This was offset by $30.9 million in cash dividends declared and a $27.3 million decline in other comprehensive income resulting from the tax effected impact of the decline in market value of our investment securities portfolio.

During the second quarter of 2018, the Board of Directors of CVB declared quarterly cash dividends totaling $0.14 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 authorized an increase in the Company’s common stock repurchase

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program originally announced in 2008 to 10,000,000 shares, or approximately 9.3% of the Company’s outstanding shares at the time of authorization, and adopted a10b5-1. There is no expiration date for this repurchase program. On March 30, 2018, the Company terminated its10b5-1 plan in order to comply with Regulation M. For the three months ended June 30, 2018, the Company did not repurchase any shares of common stock under this program. As of June 30, 2018, we have 9,918,200 shares of our 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 June 30, 2018, 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 Form10-K for the year ended December 31, 2017.

At June 30, 2018, 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, 2018		December 31, 2017
Capital Ratios	Adequately     Capitalized Ratios	Well     Capitalized     Ratios	CVB Financial Corp. Consolidated	Citizens     Business     Bank	CVB Financial Corp. Consolidated	Citizens     Business     Bank
Tier 1 leverage capital ratio	4.00%	5.00%	12.55%	12.41%	11.88%	11.77%
Common equity Tier I capital ratio	4.50%	6.50%	17.06%	17.30%	16.43%	16.71%
Tier 1 risk-based capital ratio	6.00%	8.00%	17.49%	17.30%	16.87%	16.71%
Total risk-based capital ratio	8.00%	10.00%	18.63%	18.44%	18.01%	17.86%

Basel III also introduces a new “capital conservation buffer,” composed entirely of CET1, on top of minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum requirement but below the capital conservation buffer will face constraints on dividends, equity repurchases and payment of discretionary bonuses based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Thus, when fully phased in on January 1, 2019, the Bank will be required to maintain this additional capital conservation buffer of 2.5% of CET1. When fully phased in on January 1, 2019, the Company and the Bank will be required to maintain minimum capital ratios as follows:

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

We anticipate that the Company and the Bank will meet these requirements well in advance of the ultimate fullphase-in date. However, 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 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 at least quarterly. 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 fromperiod-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $6.54 billion at June 30, 2018 decreased $11.5 million, or 0.18%, over total deposits of $6.55 billion at December 31, 2017.

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 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 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 six months ended June 30, 2018 and 2017. 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,
	2018			2017
	(Dollars in thousands)
Average cash and cash equivalents	$	255,226		$	206,259
Percentage of total average assets		3.11%			2.49%
Net cash provided by operating activities	$	68,326		$	64,510
Net cash provided by investing activities		180,334			107,492
Net cash used in financing activities		(211,548	)		(108,888	)
Net increase in cash and cash equivalents	$	37,112		$	63,114

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Average cash and cash equivalents increased by $49.0 million, or 23.74%, to $255.2 million for the six months ended June 30, 2018, compared to $206.3 million for the same period of 2017.

At June 30, 2018, cash and cash equivalents totaled $181.5 million. This represented a decrease of $3.3 million, or 1.76%, from $184.7 million at June 30, 2017.

Interest Rate Sensitivity Management

During periods of changing interest rates, the ability tore-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 liabilityre-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 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 twists. 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 there-pricing characteristics and balance fluctuations of deposits with indeterminate ornon-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 aone-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the12-month and24-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, 2018		December 31, 2017
Interest Rate Scenario	12-month Period	24-month Period  (Cumulative)	12-month Period	24-month Period  (Cumulative)
+ 200 basis points	3.59%	7.12%	3.17%	6.35%
- 100 basis points	-2.38%	-5.00%	-2.70%	-5.53%

(1) Percentage change from base.

Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is slightly 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 ornon-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

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competitor influences might change.

We also perform valuation analysis which incorporates all cash flows over the estimated remaining life of all 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-termre-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 June 30, 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, 2018	December 31, 2017
100 bp decrease in interest rates	-7.8%	-9.8%
100 bp increase in interest rates	3.9%	4.2%
200 bp increase in interest rates	6.6%	7.1%
300 bp increase in interest rates	6.0%	6.0%
400 bp increase in interest rates	4.8%	4.2%

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

For 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 Form10-K for the year ended December 31, 2017. Our analysis of market risk and market-sensitive financial information contain forward looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.

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 June 30, 2018, 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 andnon-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, wage-hour and labor law claims, consumer, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.

The Company is a defendant and cross-complainant in an action entitled Edward A. Dunaganet alv. Citizens Business Bank, as successor to American Security Bank, Case No. CVDS1408287, filed in the Superior Court for San Bernardino County. The complaint was initially filed in May, 2014 against ASB, which was acquired during the same month by CBB, and a Second Amended Complaint (SAC) was filed on September 9, 2015, naming CBB as the primary defendant. The case arises out of a number of defaulted commercial real estate loans originally made by ASB to the Dunagans and various entities owned by the Dunagans (Dunagan Parties), and the SAC includes 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/CBB’s allegedly wrongful actions in connection with such foreclosures. The Dunagans seek compensatory damages in excess of $2 million plus punitive damages. ASB/CBB filed a cross-complaint against the Dunagans alleging breach of guaranty, slander of title, and demanding additional damages. A bench trial on the respective claims by the Dunagans and ASB/CBB took place during the middle of July, 2018, and post-trial briefing by the parties is scheduled to be completed in August and September, 2018. The Company currently maintains no accrual in connection with this litigation, as the Company continues to believe that the allegations in the plaintiffs’ complaint are unfounded and that any potential liability on the part of the Company is not reasonably estimable.

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 ambiguities and inconsistencies in the myriad 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 liquidity, consolidated financial position, and/or results of operations.

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 Form10-K for the year ended December 31, 2017. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form10-K and any subsequent Form10-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 Conditionand Results of Operations” in this Quarterly Report on Form10-Q.

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

On July 16, 2008, our Board of Directors approved a program to repurchase up to 10,000,000 shares of our common stock (such number will not be adjusted for stock splits, stock dividends, and the like) in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. As a result of various repurchases made under the 2008 repurchase program, on August 11, 2016, our Board of Directors authorized an increase in the Company’s common stock repurchase program back to 10,000,000 shares, or approximately 9.3% of the Company’s currently outstanding shares at the time of authorization, and adopted a10b5-1 plan. There is no expiration date for this repurchase program. The Company terminated its10b5-1 plan in January 2017 in order to comply with Regulation M. A new10b5-1 plan was approved by the Board of Directors effective as of May 2, 2017. On March 30, 2018, the Company terminated its10b5-1 plan in order to comply with Regulation M. For the three months ended June 30, 2018, the Company did not repurchase any shares of common stock under this program. As of June 30, 2018, we have 9,918,200 shares of our common stock remaining that are eligible for repurchase under the common stock repurchase program.

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
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	XBRL Instance 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

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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, 2018
	/s/ E. Allen Nicholson
	E. Allen Nicholson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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