10-Q 1 d448945d10q.htm FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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 Regulation S-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 Rule 12b-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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock of the registrant: 110,156,656 outstanding as of October 31, 2017.

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TABLE OF CONTENTS

PART I – |  | FINANCIAL INFORMATION (UNAUDITED) |  |  | 3 |
ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |  |  | 5 |
|  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |  |  | 10 |
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 |  |  | 76 |
ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |  |  | 78 |
ITEM 4. |  | CONTROLS AND PROCEDURES |  |  | 78 |
PART II – |  | OTHER INFORMATION |  |  | 79 |
ITEM 1. |  | LEGAL PROCEEDINGS |  |  | 79 |
ITEM 1A. |  | RISK FACTORS |  |  | 80 |
ITEM 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |  |  | 80 |
ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES |  |  | 80 |
ITEM 4. |  | MINE SAFETY DISCLOSURES |  |  | 80 |
ITEM 5. |  | OTHER INFORMATION |  |  | 80 |
ITEM 6. |  | EXHIBITS |  |  | 80 |
SIGNATURES |  |  | 81 |

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PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

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

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

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

| • |  | supply and demand for 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 sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;

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

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

| • |  | the costs or effects of acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits associated with any such acquisitions or dispositions;

| • |  | our ability to realize cost savings and business synergies in connection with our recent acquisition of Valley Commerce Bancorp within expected time frames or at all;

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

| • |  | the costs and effects of 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 or delinquencies;

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

| • |  | changes in government-established interest rates or monetary policies;

| • |  | changes in the amount, availability and cost of deposit insurance or other types of insurance coverage;

| • |  | disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communications facilities;

| • |  | cyber incidents or theft or loss of Company or customer data or funds;

| • |  | political uncertainty or instability;

| • |  | acts of war or terrorism, or natural disasters, such as earthquakes, drought, or the effects of pandemic diseases;

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

| • |  | the Company’s relationships with and reliance upon vendors with respect to the operation of 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 and financial services (including the adoption of mobile banking and funds transfer applications);

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

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

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

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

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

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

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

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

| • |  | the possibility that any settlement of any putative class action lawsuits may not be approved by the relevant court or that significant numbers of putative class members may opt out of any settlement;

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

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

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

| • |  | all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2016, 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.

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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

|  | September 30, |  | December 31,
|  | 2017 |  | 2016
Assets |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 137,196 |  |  | $ | 119,445 |
Interest-earning balances due from Federal Reserve |  |  | 6,594 |  |  |  | 2,188 |
Total cash and cash equivalents |  |  | 143,790 |  |  |  | 121,633 |
Interest-earning balances due from depository institutions |  |  | 20,521 |  |  |  | 47,848 |
Investment securities available-for-sale, at fair value (with amortized cost of $2,155,330 at September 30, 2017, and $2,255,874 at December 31, 2016) |  |  | 2,175,648 |  |  |  | 2,270,466 |
Investment securities held-to-maturity (with fair value of $842,050 at September 30, 2017, and $897,374 at December 31, 2016) |  |  | 848,382 |  |  |  | 911,676 |
Total investment securities |  |  | 3,024,030 |  |  |  | 3,182,142 |
Investment in stock of Federal Home Loan Bank (FHLB) |  |  | 17,688 |  |  |  | 17,688 |
Loans and lease finance receivables |  |  | 4,746,424 |  |  |  | 4,395,064 |
Allowance for loan losses |  |  | (60,631 | ) |  |  | (61,540 | )
Net loans and lease finance receivables |  |  | 4,685,793 |  |  |  | 4,333,524 |
Premises and equipment, net |  |  | 46,654 |  |  |  | 42,086 |
Bank owned life insurance (BOLI) |  |  | 145,970 |  |  |  | 134,785 |
Accrued interest receivable |  |  | 21,518 |  |  |  | 22,259 |
Intangibles |  |  | 7,177 |  |  |  | 5,010 |
Goodwill |  |  | 116,564 |  |  |  | 89,533 |
Other real estate owned (OREO) |  |  | 4,527 |  |  |  | 4,527 |
Income taxes |  |  | 48,145 |  |  |  | 45,429 |
Asset held-for-sale |  |  | - |  |  |  | 3,411 |
Other assets |  |  | 21,635 |  |  |  | 23,832 |
Total assets |  | $ | 8,304,012 |  |  | $ | 8,073,707 |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 3,908,809 |  |  | $ | 3,673,541 |
Interest-bearing |  |  | 2,699,287 |  |  |  | 2,636,139 |
Total deposits |  |  | 6,608,096 |  |  |  | 6,309,680 |
Customer repurchase agreements |  |  | 455,069 |  |  |  | 603,028 |
Other borrowings |  |  | 63,000 |  |  |  | 53,000 |
Deferred compensation |  |  | 18,024 |  |  |  | 12,361 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | 25,774 |
Payable for securities purchased |  |  | 1,625 |  |  |  | 23,777 |
Other liabilities |  |  | 55,960 |  |  |  | 55,225 |
Total liabilities |  |  | 7,227,548 |  |  |  | 7,082,845 |
Commitments and Contingencies |  |  |  |  |  |  |  |
Stockholders’ Equity |  |  |  |  |  |  |  |
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,157,384 at September 30, 2017, and 108,251,981 at December 31, 2016 |  |  | 572,685 |  |  |  | 531,192 |
Retained earnings |  |  | 491,935 |  |  |  | 449,499 |
Accumulated other comprehensive income, net of tax |  |  | 11,844 |  |  |  | 10,171 |
Total stockholders’ equity |  |  | 1,076,464 |  |  |  | 990,862 |
Total liabilities and stockholders’ equity |  | $ | 8,304,012 |  |  | $ | 8,073,707 |

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 September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases, including fees |  | $ | 55,998 |  |  | $ | 47,754 |  |  | $ | 158,253 |  |  | $ | 143,781 |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale |  |  | 12,240 |  |  |  | 11,425 |  |  |  | 37,887 |  |  |  | 36,242 |
Investment securities held-to-maturity |  |  | 5,184 |  |  |  | 4,787 |  |  |  | 16,014 |  |  |  | 14,878 |
Total investment income |  |  | 17,424 |  |  |  | 16,212 |  |  |  | 53,901 |  |  |  | 51,120 |
Dividends from FHLB stock |  |  | 318 |  |  |  | 403 |  |  |  | 1,070 |  |  |  | 1,210 |
Interest-earning deposits with other institutions and federal funds sold |  |  | 130 |  |  |  | 802 |  |  |  | 683 |  |  |  | 1,575 |
Total interest income |  |  | 73,870 |  |  |  | 65,171 |  |  |  | 213,907 |  |  |  | 197,686 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,555 |  |  |  | 1,525 |  |  |  | 4,547 |  |  |  | 4,544 |
Borrowings and customer repurchase agreements |  |  | 402 |  |  |  | 349 |  |  |  | 1,213 |  |  |  | 1,117 |
Junior subordinated debentures |  |  | 174 |  |  |  | 136 |  |  |  | 492 |  |  |  | 392 |
Total interest expense |  |  | 2,131 |  |  |  | 2,010 |  |  |  | 6,252 |  |  |  | 6,053 |
Net interest income before recapture of provision for loan losses |  |  | 71,739 |  |  |  | 63,161 |  |  |  | 207,655 |  |  |  | 191,633 |
Recapture of provision for loan losses |  |  | (1,500 | ) |  |  | (2,000 | ) |  |  | (7,000 | ) |  |  | (2,000 | )
Net interest income after recapture of provision for loan losses |  |  | 73,239 |  |  |  | 65,161 |  |  |  | 214,655 |  |  |  | 193,633 |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 4,085 |  |  |  | 3,817 |  |  |  | 11,794 |  |  |  | 11,386 |
Trust and investment services |  |  | 2,523 |  |  |  | 2,328 |  |  |  | 7,432 |  |  |  | 7,039 |
Bankcard services |  |  | 927 |  |  |  | 827 |  |  |  | 2,563 |  |  |  | 2,166 |
BOLI income |  |  | 692 |  |  |  | 706 |  |  |  | 2,904 |  |  |  | 2,005 |
Gain on sale of loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,101 |
Other |  |  | 1,811 |  |  |  | 1,505 |  |  |  | 4,843 |  |  |  | 3,443 |
Total noninterest income |  |  | 10,038 |  |  |  | 9,183 |  |  |  | 29,536 |  |  |  | 27,140 |
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 21,835 |  |  |  | 20,403 |  |  |  | 65,116 |  |  |  | 63,004 |
Occupancy and equipment |  |  | 4,400 |  |  |  | 4,102 |  |  |  | 12,638 |  |  |  | 11,940 |
Professional services |  |  | 1,091 |  |  |  | 1,404 |  |  |  | 4,191 |  |  |  | 3,727 |
Software licenses and maintenance |  |  | 1,510 |  |  |  | 1,358 |  |  |  | 4,698 |  |  |  | 4,077 |
Marketing and promotion |  |  | 1,055 |  |  |  | 1,199 |  |  |  | 3,484 |  |  |  | 3,818 |
Acquisition related expenses |  |  | 250 |  |  |  | 353 |  |  |  | 2,176 |  |  |  | 1,557 |
Other |  |  | 4,565 |  |  |  | 4,187 |  |  |  | 13,393 |  |  |  | 13,685 |
Total noninterest expense |  |  | 34,706 |  |  |  | 33,006 |  |  |  | 105,696 |  |  |  | 101,808 |
Earnings before income taxes |  |  | 48,571 |  |  |  | 41,338 |  |  |  | 138,495 |  |  |  | 118,965 |
Income taxes |  |  | 18,888 |  |  |  | 15,890 |  |  |  | 51,935 |  |  |  | 44,612 |
Net earnings |  | $ | 29,683 |  |  | $ | 25,448 |  |  | $ | 86,560 |  |  | $ | 74,353 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on securities arising during the period, before tax |  | $ | 1,221 |  |  | $ | (3,709 | ) |  | $ | 3,287 |  |  | $ | 31,054 |
Less: Reclassification adjustment for net (gain) loss on securities included in net income |  |  | - |  |  |  | (548 | ) |  |  | (402 | ) |  |  | (548 | )
Other comprehensive income (loss), before tax |  |  | 1,221 |  |  |  | (4,257 | ) |  |  | 2,885 |  |  |  | 30,506 |
Less: Income tax (expense) benefit related to items of other comprehensive income |  |  | (513 | ) |  |  | 1,788 |  |  |  | (1,212 | ) |  |  | (12,812 | )
Other comprehensive income (loss), net of tax |  |  | 708 |  |  |  | (2,469 | ) |  |  | 1,673 |  |  |  | 17,694 |
Comprehensive income |  | $ | 30,391 |  |  | $ | 22,979 |  |  | $ | 88,233 |  |  | $ | 92,047 |
Basic earnings per common share |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.79 |  |  | $ | 0.69 |
Diluted earnings per common share |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.79 |  |  | $ | 0.69 |
Cash dividends declared per common share |  | $ | 0.14 |  |  | $ | 0.12 |  |  | $ | 0.40 |  |  | $ | 0.36 |

See accompanying notes to the unaudited condensed consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2017 and 2016

(Dollars and shares in thousands)

(Unaudited)

|  |  |  |  |  |  |  | Accumulated |  |
|  | Common |  |  |  |  |  | Other |  |
|  | Shares |  | Common |  | Retained |  | Comprehensive |  |
|  | Outstanding |  | Stock |  | Earnings |  | Income |  | Total
Balance, January 1, 2016 |  |  | 106,385 |  |  | $ | 502,571 |  |  | $ | 399,919 |  |  | $ | 20,909 |  |  | $ | 923,399 |
Repurchase of common stock |  |  | (66 | ) |  |  | (496 | ) |  |  | - |  |  |  | - |  |  |  | (496 | )
Issuance of common stock for acquisition of County Commerce Bank |  |  | 1,394 |  |  |  | 21,642 |  |  |  | - |  |  |  | - |  |  |  | 21,642 |
Exercise of stock options |  |  | 274 |  |  |  | 3,174 |  |  |  | - |  |  |  | - |  |  |  | 3,174 |
Tax benefit from exercise of stock options |  |  | - |  |  |  | 236 |  |  |  | - |  |  |  | - |  |  |  | 236 |
Shares issued pursuant to stock-based compensation plan |  |  | 110 |  |  |  | 2,154 |  |  |  | - |  |  |  | - |  |  |  | 2,154 |
Cash dividends declared on common stock ($0.36 per share) |  |  | - |  |  |  | - |  |  |  | (38,853 | ) |  |  | - |  |  |  | (38,853 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 74,353 |  |  |  | - |  |  |  | 74,353 |
Other comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 17,694 |  |  |  | 17,694 |
Balance, September 30, 2016 |  |  | 108,097 |  |  | $ | 529,281 |  |  | $ | 435,419 |  |  | $ | 38,603 |  |  | $ | 1,003,303 |
Balance, January 1, 2017 |  |  | 108,252 |  |  | $ | 531,192 |  |  | $ | 449,499 |  |  | $ | 10,171 |  |  | $ | 990,862 |
Cumulative adjustment upon adoption of ASU 2016-09 |  |  | - |  |  |  | 116 |  |  |  | (66 | ) |  |  | - |  |  |  | 50 |
Repurchase of common stock |  |  | (45 | ) |  |  | (997 | ) |  |  | - |  |  |  | - |  |  |  | (997 | )
Issuance of common stock for acquisition of Valley Commerce Bancorp |  |  | 1,634 |  |  |  | 37,637 |  |  |  | - |  |  |  | - |  |  |  | 37,637 |
Exercise of stock options |  |  | 270 |  |  |  | 2,537 |  |  |  | - |  |  |  | - |  |  |  | 2,537 |
Shares issued pursuant to stock-based compensation plan |  |  | 46 |  |  |  | 2,200 |  |  |  | - |  |  |  | - |  |  |  | 2,200 |
Cash dividends declared on common stock ($0.40 per share) |  |  | - |  |  |  | - |  |  |  | (44,058 | ) |  |  | - |  |  |  | (44,058 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 86,560 |  |  |  | - |  |  |  | 86,560 |
Other comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,673 |  |  |  | 1,673 |
Balance, September 30, 2017 |  |  | 110,157 |  |  | $ | 572,685 |  |  | $ | 491,935 |  |  | $ | 11,844 |  |  | $ | 1,076,464 |

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 Nine Months Ended
|  | September 30,
|  | 2017 |  | 2016
Cash Flows from Operating Activities |  |  |  |  |  |  |  |
Interest and dividends received |  | $ | 223,172 |  |  | $ | 208,995 |
Service charges and other fees received |  |  | 26,769 |  |  |  | 23,185 |
Interest paid |  |  | (6,279 | ) |  |  | (6,089 | )
Net cash paid to vendors, employees and others |  |  | (82,411 | ) |  |  | (95,870 | )
Income taxes |  |  | (53,278 | ) |  |  | (31,495 | )
Payments to FDIC, loss share agreement |  |  | (498 | ) |  |  | (510 | )
Net cash provided by operating activities |  |  | 107,475 |  |  |  | 98,216 |
Cash Flows from Investing Activities |  |  |  |  |  |  |  |
Proceeds from redemption of FHLB stock |  |  | 1,952 |  |  |  | 1,423 |
Net change in interest-earning balances from depository institutions |  |  | 27,806 |  |  |  | 11,849 |
Proceeds from sale of investment securities held-for-sale |  |  | 5,403 |  |  |  | 1,957 |
Proceeds from repayment of investment securities available-for-sale |  |  | 320,599 |  |  |  | 325,912 |
Proceeds from maturity of investment securities available-for-sale |  |  | 20,937 |  |  |  | 81,209 |
Purchases of investment securities available-for-sale |  |  | (280,365 | ) |  |  | (208,563 | )
Proceeds from repayment and maturity of investment securities held-to-maturity |  |  | 96,447 |  |  |  | 231,355 |
Purchases of investment securities held-to-maturity |  |  | (36,166 | ) |  |  | (261,457 | )
Net increase in loan and lease finance receivables |  |  | (29,713 | ) |  |  | (109,046 | )
Proceeds from sale of loans |  |  | - |  |  |  | 6,417 |
Proceeds from sale of asset held-for-sale |  |  | 4,012 |  |  |  | - |
Purchase of premises and equipment |  |  | (3,129 | ) |  |  | (2,343 | )
Proceeds from sales of other real estate owned |  |  | - |  |  |  | 1,846 |
Cash used in sale of branch, net |  |  | - |  |  |  | (8,217 | )
Cash acquired from acquisition, net of cash paid |  |  | 28,325 |  |  |  | (7,504 | )
Net cash provided by investing activities |  |  | 156,108 |  |  |  | 64,838 |
Cash Flows from Financing Activities |  |  |  |  |  |  |  |
Net (decrease) increase in other deposits |  |  | (23,896 | ) |  |  | 508,916 |
Net decrease in time deposits |  |  | (39,485 | ) |  |  | (319,877 | )
Repayment of FHLB advances |  |  | - |  |  |  | (5,000 | )
Net increase (decrease) in other borrowings |  |  | 10,000 |  |  |  | (46,000 | )
Net decrease in customer repurchase agreements |  |  | (147,959 | ) |  |  | (112,293 | )
Cash dividends on common stock |  |  | (41,626 | ) |  |  | (38,652 | )
Repurchase of common stock |  |  | (997 | ) |  |  | (496 | )
Proceeds from exercise of stock options |  |  | 2,537 |  |  |  | 3,174 |
Tax benefit related to exercise of stock options |  |  | - |  |  |  | 236 |
Net cash used in financing activities |  |  | (241,426 | ) |  |  | (9,992 | )
Net increase in cash and cash equivalents |  |  | 22,157 |  |  |  | 153,062 |
Cash and cash equivalents, beginning of period |  |  | 121,633 |  |  |  | 106,097 |
Cash and cash equivalents, end of period |  | $ | 143,790 |  |  | $ | 259,159 |

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 (Continued)

(Dollars in thousands)

(Unaudited)

|  | For the Nine Months Ended
|  | September 30,
|  | 2017 |  | 2016
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities |  |  |  |  |  |  |  |
Net earnings |  | $ | 86,560 |  |  | $ | 74,353 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |  |  |  |  |  |
Gain on sale of loans |  |  | - |  |  |  | (1,101 | )
Gain on sale of branch |  |  | - |  |  |  | (272 | )
Gain on sale of investment securities |  |  | (402 | ) |  |  | (548 | )
Gain on sale of other real estate owned |  |  | - |  |  |  | (30 | )
Increase in bank owned life insurance |  |  | (1,763 | ) |  |  | (3,117 | )
Net amortization of premiums and discounts on investment securities |  |  | 13,585 |  |  |  | 15,422 |
Accretion of PCI discount |  |  | (756 | ) |  |  | (2,112 | )
Recapture of provision for loan losses |  |  | (7,000 | ) |  |  | (2,000 | )
Valuation adjustment on other real estate owned |  |  | - |  |  |  | 337 |
Payments to FDIC, loss share agreement |  |  | (498 | ) |  |  | (510 | )
Stock-based compensation |  |  | 2,200 |  |  |  | 2,154 |
Depreciation and amortization, net |  |  | (433 | ) |  |  | 3,128 |
Change in other assets and liabilities |  |  | 15,982 |  |  |  | 12,512 |
Total adjustments |  |  | 20,915 |  |  |  | 23,863 |
Net cash provided by operating activities |  | $ | 107,475 |  |  | $ | 98,216 |
Supplemental Disclosure of Non-cash Investing Activities |  |  |  |  |  |  |  |
Securities purchased and not settled |  | $ | 1,625 |  |  | $ | 43,111 |
Issuance of common stock for acquisition |  | $ | 37,637 |  |  | $ | 21,642 |

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 its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 51 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On March 10, 2017, we completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for Valley Business Bank (“VBB”), headquartered in the Central Valley area of California with four branch locations and total assets of approximately $400 million. This acquisition strengthens our market share in the Central Valley area of California. Our condensed consolidated financial statements for 2017 include VBB operations, post-merger. See Note 4 – Business Combinations, included herein.

2. | BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, 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 Form 10-K for the year ended December 31, 2016 as filed with the SEC (“Form 10-K”).

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

Adoption of New Accounting Standard— In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for the fiscal years beginning after December 15, 2016, and interim periods within those years. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company’s condensed consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by approximately $1.5 million for the nine months ended September 30, 2017. We also elected to account for forfeitures as they occur, rather than to estimate forfeitures over the vesting period. The remaining provisions of this accounting standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements— In May 2014, the FASB issued ASU No. 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 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. 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 ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date”, which deferred the effective date for us of ASU No. 2014-09 to January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company does not expect this ASU to 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.

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU 2016-02 establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure

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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. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 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, 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 effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted this ASU effective January 1, 2017 and the adoption did not have a significant impact on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in ASU 2017-09 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 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 ASU No. 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 does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

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4. | BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

On March 10, 2017, the Company completed the acquisition of VCBP, the holding company for 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 into nearby CBB locations in the third quarter of 2017. The Company has entered into an agreement to sell the Woodlake branch, which is expected to close 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 Bank-Owned Life Insurance (“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 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 three and nine months ended September 30, 2017, the Company incurred non-recurring merger related expenses associated with the VCBP acquisition of $250,000 and $2.2 million, respectively.

County Commerce Bank Acquisition

On February 29, 2016, the Bank acquired all of the assets and assumed all of the liabilities of County Commerce Bank (“CCB”) for $20.6 million in cash and $21.6 million in stock. As a result, CCB was merged with the Bank, the principal subsidiary of CVB. The Company believes this transaction served to further expand its footprint northward into and along the central coast of California. At close, CCB had four branches located in Ventura, Oxnard, Camarillo, and Westlake Village.

Goodwill of $15.3 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 $252.4 million, which included $54.8 million in cash and balances due from depository institutions net of cash paid, $1.5 million in FHLB stock, $168.0 million in loans and lease finance receivables, $8.6 million in fixed assets, $3.9 million in core deposit intangible assets acquired and $289,000 in other assets. The total fair value of liabilities assumed was $230.8 million, which included $224.2 million in deposits, $5.0 million in FHLB advances and $1.6 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of February 29, 2016. The assets acquired and liabilities assumed have been accounted for under the acquisition method accounting. The purchase price allocation was finalized in the fourth quarter of 2016.

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

For the three and nine months ended September 30, 2016, the Company incurred non-recurring merger related expenses associated with the CCB acquisition of $145,000 and $1.3 million, 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 are traded in markets where similar assets are actively traded. Estimated fair values were obtained from an independent pricing service based upon market quotes.

|  | September 30, 2017
|  | 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 |  | $ | 1,799,972 |  |  | $ | 22,164 |  |  | $ | (4,102 | ) |  | $ | 1,818,034 |  |  |  | 83.57 | %
CMO/REMIC - residential |  |  | 291,984 |  |  |  | 2,665 |  |  |  | (867 | ) |  |  | 293,782 |  |  |  | 13.50 | %
Municipal bonds |  |  | 62,657 |  |  |  | 726 |  |  |  | (268 | ) |  |  | 63,115 |  |  |  | 2.90 | %
Other securities |  |  | 717 |  |  |  | - |  |  |  | - |  |  |  | 717 |  |  |  | 0.03 | %
Total available-for-sale securities |  | $ | 2,155,330 |  |  | $ | 25,555 |  |  | $ | (5,237 | ) |  | $ | 2,175,648 |  |  |  | 100.00 | %
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 164,886 |  |  | $ | 1,532 |  |  | $ | (1,489 | ) |  | $ | 164,929 |  |  |  | 19.44 | %
Residential mortgage-backed securities |  |  | 178,246 |  |  |  | 880 |  |  |  | (61 | ) |  |  | 179,065 |  |  |  | 21.01 | %
CMO |  |  | 229,885 |  |  |  | - |  |  |  | (6,865 | ) |  |  | 223,020 |  |  |  | 27.09 | %
Municipal bonds |  |  | 275,365 |  |  |  | 2,800 |  |  |  | (3,129 | ) |  |  | 275,036 |  |  |  | 32.46 | %
Total held-to-maturity securities |  | $ | 848,382 |  |  | $ | 5,212 |  |  | $ | (11,544 | ) |  | $ | 842,050 |  |  |  | 100.00 | %
|  | December 31, 2016
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 2,750 |  |  | $ | 2 |  |  | $ | - |  |  | $ | 2,752 |  |  |  | 0.12 | %
Residential mortgage-backed securities |  |  | 1,822,168 |  |  |  | 18,812 |  |  |  | (6,232 | ) |  |  | 1,834,748 |  |  |  | 80.81 | %
CMO/REMIC - residential |  |  | 345,313 |  |  |  | 3,361 |  |  |  | (1,485 | ) |  |  | 347,189 |  |  |  | 15.29 | %
Municipal bonds |  |  | 80,137 |  |  |  | 889 |  |  |  | (955 | ) |  |  | 80,071 |  |  |  | 3.53 | %
Other securities |  |  | 5,506 |  |  |  | 200 |  |  |  | - |  |  |  | 5,706 |  |  |  | 0.25 | %
Total available-for-sale securities |  | $ | 2,255,874 |  |  | $ | 23,264 |  |  | $ | (8,672 | ) |  | $ | 2,270,466 |  |  |  | 100.00 | %
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 182,648 |  |  | $ | 362 |  |  | $ | (1,972 | ) |  | $ | 181,038 |  |  |  | 20.03 | %
Residential mortgage-backed securities |  |  | 193,699 |  |  |  | - |  |  |  | (1,892 | ) |  |  | 191,807 |  |  |  | 21.25 | %
CMO |  |  | 244,419 |  |  |  | - |  |  |  | (6,808 | ) |  |  | 237,611 |  |  |  | 26.81 | %
Municipal bonds |  |  | 290,910 |  |  |  | 776 |  |  |  | (4,768 | ) |  |  | 286,918 |  |  |  | 31.91 | %
Total held-to-maturity securities |  | $ | 911,676 |  |  | $ | 1,138 |  |  | $ | (15,440 | ) |  | $ | 897,374 |  |  |  | 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 |  | For the Nine Months Ended
|  | September 30, |  | September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 11,767 |  |  | $ | 10,546 |  |  | $ | 36,113 |  |  | $ | 32,754 |
Tax-advantaged |  |  | 473 |  |  |  | 879 |  |  |  | 1,774 |  |  |  | 3,488 |
Total interest income from available-for-sale securities |  |  | 12,240 |  |  |  | 11,425 |  |  |  | 37,887 |  |  |  | 36,242 |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 3,111 |  |  |  | 2,349 |  |  |  | 9,591 |  |  |  | 7,184 |
Tax-advantaged |  |  | 2,073 |  |  |  | 2,438 |  |  |  | 6,423 |  |  |  | 7,694 |
Total interest income from held-to-maturity securities |  |  | 5,184 |  |  |  | 4,787 |  |  |  | 16,014 |  |  |  | 14,878 |
Total interest income from investment securities |  | $ | 17,424 |  |  | $ | 16,212 |  |  | $ | 53,901 |  |  | $ | 51,120 |

Approximately 89% of the total investment securities portfolio at September 30, 2017 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale Collateralized Mortgage Obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of September 30, 2017 and December 31, 2016.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“OTTI”).

|  | September 30, 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 securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 352,129 |  |  | $ | (4,102 | ) |  | $ | - |  |  | $ | - |  |  | $ | 352,129 |  |  | $ | (4,102 | )
CMO/REMIC - residential |  |  | 42,017 |  |  |  | (463 | ) |  |  | 33,454 |  |  |  | (404 | ) |  |  | 75,471 |  |  |  | (867 | )
Municipal bonds |  |  | 15,008 |  |  |  | (267 | ) |  |  | 5,996 |  |  |  | (1 | ) |  |  | 21,004 |  |  |  | (268 | )
Total available-for-sale securities |  | $ | 409,154 |  |  | $ | (4,832 | ) |  | $ | 39,450 |  |  | $ | (405 | ) |  | $ | 448,604 |  |  | $ | (5,237 | )
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 39,929 |  |  | $ | (1,305 | ) |  | $ | 5,411 |  |  | $ | (184 | ) |  | $ | 45,340 |  |  | $ | (1,489 | )
Residential mortgage-backed securities |  |  | 62,677 |  |  |  | (61 | ) |  |  | - |  |  |  | - |  |  |  | 62,677 |  |  |  | (61 | )
CMO |  |  | 173,752 |  |  |  | (5,200 | ) |  |  | 49,268 |  |  |  | (1,665 | ) |  |  | 223,020 |  |  |  | (6,865 | )
Municipal bonds |  |  | 66,912 |  |  |  | (1,676 | ) |  |  | 32,921 |  |  |  | (1,453 | ) |  |  | 99,833 |  |  |  | (3,129 | )
Total held-to-maturity securities |  | $ | 343,270 |  |  | $ | (8,242 | ) |  | $ | 87,600 |  |  | $ | (3,302 | ) |  | $ | 430,870 |  |  | $ | (11,544 | )

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|  | December 31, 2016
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
|  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 583,143 |  |  | $ | (6,232 | ) |  | $ | - |  |  | $ | - |  |  | $ | 583,143 |  |  | $ | (6,232 | )
CMO/REMIC - residential |  |  | 128,595 |  |  |  | (1,485 | ) |  |  | - |  |  |  | - |  |  |  | 128,595 |  |  |  | (1,485 | )
Municipal bonds |  |  | 23,255 |  |  |  | (954 | ) |  |  | 5,981 |  |  |  | (1 | ) |  |  | 29,236 |  |  |  | (955 | )
Total available-for-sale securities |  | $ | 734,993 |  |  | $ | (8,671 | ) |  | $ | 5,981 |  |  | $ | (1 | ) |  | $ | 740,974 |  |  | $ | (8,672 | )
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 76,854 |  |  | $ | (1,972 | ) |  | $ | - |  |  | $ | - |  |  | $ | 76,854 |  |  | $ | (1,972 | )
Residential mortgage-backed securities |  |  | 191,807 |  |  |  | (1,892 | ) |  |  | - |  |  |  | - |  |  |  | 191,807 |  |  |  | (1,892 | )
CMO |  |  | 237,611 |  |  |  | (6,808 | ) |  |  | - |  |  |  | - |  |  |  | 237,611 |  |  |  | (6,808 | )
Municipal bonds |  |  | 145,804 |  |  |  | (3,711 | ) |  |  | 36,971 |  |  |  | (1,057 | ) |  |  | 182,775 |  |  |  | (4,768 | )
Total held-to-maturity securities |  | $ | 652,076 |  |  | $ | (14,383 | ) |  | $ | 36,971 |  |  | $ | (1,057 | ) |  | $ | 689,047 |  |  | $ | (15,440 | )

At September 30, 2017 and December 31, 2016, investment securities having a carrying value of approximately $1.88 billion and $2.19 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 September 30, 2017, 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.

|  | September 30, 2017
|  | Available-for-sale |  | Held-to-maturity
|  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
|  | (Dollars in thousands)
Due in one year or less |  | $ | 18,711 |  |  | $ | 18,895 |  |  | $ | 885 |  |  | $ | 887 |
Due after one year through five years |  |  | 1,985,884 |  |  |  | 2,005,750 |  |  |  | 251,948 |  |  |  | 249,473 |
Due after five years through ten years |  |  | 116,933 |  |  |  | 116,800 |  |  |  | 237,282 |  |  |  | 235,069 |
Due after ten years |  |  | 33,802 |  |  |  | 34,203 |  |  |  | 358,267 |  |  |  | 356,621 |
Total investment securities |  | $ | 2,155,330 |  |  | $ | 2,175,648 |  |  | $ | 848,382 |  |  | $ | 842,050 |

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 September 30, 2017.

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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 Form 10-K for the year ended December 31, 2016. 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 September 30, 2017, the remaining discount associated with the PCI loans approximated $758,000. The loss sharing agreement for commercial loans expired October 16, 2014 and will expire for single-family residential loans on October 16, 2019.

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.

|  | September 30, 2017 |  | December 31, 2016
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 1,002 |  |  | $ | 2,309 |
SBA |  |  | 1,410 |  |  |  | 327 |
Real estate: |  |  |  |  |  |  |  |
Commercial real estate |  |  | 33,799 |  |  |  | 67,594 |
Construction |  |  | - |  |  |  | - |
SFR mortgage |  |  | 166 |  |  |  | 178 |
Dairy & livestock and agribusiness |  |  | 335 |  |  |  | 1,216 |
Municipal lease finance receivables |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 594 |  |  |  | 1,469 |
Gross PCI loans |  |  | 37,306 |  |  |  | 73,093 |
Less: Purchase accounting discount |  |  | (758 | ) |  |  | (1,508 | )
Gross PCI loans, net of discount |  |  | 36,548 |  |  |  | 71,585 |
Less: Allowance for PCI loan losses |  |  | (431 | ) |  |  | (1,219 | )
Net PCI loans |  | $ | 36,117 |  |  | $ | 70,366 |

Credit Quality Indicators

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

|  | September 30, 2017 |  | December 31, 2016
|  | (Dollars in thousands)
Pass |  | $ | 32,309 |  |  | $ | 59,409 |
Special mention |  |  | 147 |  |  |  | 1,162 |
Substandard |  |  | 4,850 |  |  |  | 12,522 |
Doubtful & loss |  |  | - |  |  |  | - |
Total gross PCI loans |  | $ | 37,306 |  |  | $ | 73,093 |

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##### Table of Contents

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

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

|  | September 30, 2017 |  | December 31, 2016
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 528,659 |  |  | $ | 485,078 |
SBA |  |  | 124,091 |  |  |  | 97,184 |
Real estate: |  |  |  |  |  |  |  |
Commercial real estate |  |  | 3,332,517 |  |  |  | 2,930,141 |
Construction |  |  | 74,148 |  |  |  | 85,879 |
SFR mortgage |  |  | 244,662 |  |  |  | 250,605 |
Dairy & livestock and agribusiness |  |  | 270,482 |  |  |  | 338,631 |
Municipal lease finance receivables |  |  | 71,352 |  |  |  | 64,639 |
Consumer and other loans |  |  | 70,415 |  |  |  | 78,274 |
Gross loans, excluding PCI loans |  |  | 4,716,326 |  |  |  | 4,330,431 |
Less: Deferred loan fees, net |  |  | (6,450 | ) |  |  | (6,952 | )
Gross loans, excluding PCI loans, net of deferred loan fees |  |  | 4,709,876 |  |  |  | 4,323,479 |
Less: Allowance for loan losses |  |  | (60,200 | ) |  |  | (60,321 | )
Net loans, excluding PCI loans |  |  | 4,649,676 |  |  |  | 4,263,158 |
PCI Loans |  |  | 37,306 |  |  |  | 73,093 |
Discount on PCI loans |  |  | (758 | ) |  |  | (1,508 | )
Less: Allowance for loan losses |  |  | (431 | ) |  |  | (1,219 | )
PCI loans, net |  |  | 36,117 |  |  |  | 70,366 |
Total loans and lease finance receivables |  | $ | 4,685,793 |  |  | $ | 4,333,524 |

As of September 30, 2017, 77.42% of the total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 70.66% 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 September 30, 2017, $180.2 million, or 5.41% of the total commercial real estate loans included loans secured by farmland, compared to $180.6 million, or 6.16%, at December 31, 2016. The loans secured by farmland included $102.0 million for loans secured by dairy & livestock land and $78.2 million for loans secured by agricultural land at September 30, 2017, compared to $127.1 million for loans secured by dairy & livestock land and $53.6 million for loans secured by agricultural land at December 31, 2016. As of September 30, 2017, dairy & livestock and agribusiness loans of $270.5 million were comprised of $235.2 million for dairy & livestock loans and $35.3 million for agribusiness loans, compared to $317.9 million for dairy & livestock loans and $20.7 million for agribusiness loans at December 31, 2016.

At September 30, 2017, the Company held approximately $2.16 billion of total fixed rate loans, including PCI loans.

At September 30, 2017 and December 31, 2016, loans totaling $3.61 billion and $3.11 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 loans held-for-sale as of September 30, 2017 and December 31, 2016.

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##### Table of Contents

Credit Quality Indicators

Central to our 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 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.

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##### Table of Contents

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

|  | September 30, 2017
|  | Pass |  | Special Mention |  | Substandard |  | Doubtful & Loss |  | Total
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 485,025 |  |  | $ | 30,675 |  |  | $ | 12,959 |  |  | $ | - |  |  | $ | 528,659 |
SBA |  |  | 113,423 |  |  |  | 4,504 |  |  |  | 6,164 |  |  |  | - |  |  |  | 124,091 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 960,523 |  |  |  | 88,507 |  |  |  | 21,327 |  |  |  | - |  |  |  | 1,070,357 |
Non-owner occupied |  |  | 2,238,827 |  |  |  | 16,363 |  |  |  | 6,970 |  |  |  | - |  |  |  | 2,262,160 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | 51,596 |  |  |  | 2,966 |  |  |  | - |  |  |  | - |  |  |  | 54,562 |
Non-speculative |  |  | 19,586 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 19,586 |
SFR mortgage |  |  | 236,027 |  |  |  | 4,560 |  |  |  | 4,075 |  |  |  | - |  |  |  | 244,662 |
Dairy & livestock and agribusiness |  |  | 206,720 |  |  |  | 46,614 |  |  |  | 17,148 |  |  |  | - |  |  |  | 270,482 |
Municipal lease finance receivables |  |  | 70,723 |  |  |  | 629 |  |  |  | - |  |  |  | - |  |  |  | 71,352 |
Consumer and other loans |  |  | 67,362 |  |  |  | 1,457 |  |  |  | 1,594 |  |  |  | 2 |  |  |  | 70,415 |
Total gross loans, excluding PCI loans |  | $ | 4,449,812 |  |  | $ | 196,275 |  |  | $ | 70,237 |  |  | $ | 2 |  |  | $ | 4,716,326 |
|  | December 31, 2016
|  | Pass |  | Special Mention |  | Substandard |  | Doubtful & Loss |  | Total
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 449,658 |  |  | $ | 21,610 |  |  | $ | 13,809 |  |  | $ | 1 |  |  | $ | 485,078 |
SBA |  |  | 80,138 |  |  |  | 10,553 |  |  |  | 6,482 |  |  |  | 11 |  |  |  | 97,184 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 842,992 |  |  |  | 87,781 |  |  |  | 19,046 |  |  |  | - |  |  |  | 949,819 |
Non-owner occupied |  |  | 1,941,203 |  |  |  | 23,534 |  |  |  | 15,585 |  |  |  | - |  |  |  | 1,980,322 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | 48,841 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 48,841 |
Non-speculative |  |  | 37,038 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 37,038 |
SFR mortgage |  |  | 243,374 |  |  |  | 4,930 |  |  |  | 2,301 |  |  |  | - |  |  |  | 250,605 |
Dairy & livestock and agribusiness |  |  | 187,819 |  |  |  | 114,106 |  |  |  | 36,706 |  |  |  | - |  |  |  | 338,631 |
Municipal lease finance receivables |  |  | 60,102 |  |  |  | 4,537 |  |  |  | - |  |  |  | - |  |  |  | 64,639 |
Consumer and other loans |  |  | 74,328 |  |  |  | 2,123 |  |  |  | 1,819 |  |  |  | 4 |  |  |  | 78,274 |
Total gross loans, excluding PCI loans |  | $ | 3,965,493 |  |  | $ | 269,174 |  |  | $ | 95,748 |  |  | $ | 16 |  |  | $ | 4,330,431 |

Allowance for Loan Losses (“ALLL”)

The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2016 Annual Report on Form 10-K for the year ended December 31, 2016 for a more detailed discussion concerning the allowance for loan losses.

Management believes that the ALLL was appropriate at September 30, 2017 and December 31, 2016. 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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##### Table of Contents

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

|  | For the Three Months Ended September 30, 2017
|  | Ending Balance June 30, 2017 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance September 30, 2017
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 8,060 |  |  | $ | (138 | ) |  | $ | 12 |  |  | $ | 129 |  |  | $ | 8,063 |
SBA |  |  | 913 |  |  |  | - |  |  |  | 5 |  |  |  | (54 | ) |  |  | 864 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 39,927 |  |  |  | - |  |  |  | - |  |  |  | 943 |  |  |  | 40,870 |
Construction |  |  | 1,059 |  |  |  | - |  |  |  | 2,055 |  |  |  | (2,181 | ) |  |  | 933 |
SFR mortgage |  |  | 2,369 |  |  |  | - |  |  |  | - |  |  |  | (49 | ) |  |  | 2,320 |
Dairy & livestock and agribusiness |  |  | 5,440 |  |  |  | - |  |  |  | - |  |  |  | (66 | ) |  |  | 5,374 |
Municipal lease finance receivables |  |  | 852 |  |  |  | - |  |  |  | - |  |  |  | 54 |  |  |  | 906 |
Consumer and other loans |  |  | 922 |  |  |  | (9 | ) |  |  | 5 |  |  |  | (48 | ) |  |  | 870 |
PCI loans |  |  | 659 |  |  |  | - |  |  |  | - |  |  |  | (228 | ) |  |  | 431 |
Total allowance for loan losses |  | $ | 60,201 |  |  | $ | (147 | ) |  | $ | 2,077 |  |  | $ | (1,500 | ) |  | $ | 60,631 |
|  | For the Three Months Ended September 30, 2016
|  | Ending Balance June 30, 2016 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance September 30, 2016
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 9,387 |  |  | $ | - |  |  | $ | 49 |  |  | $ | 30 |  |  | $ | 9,466 |
SBA |  |  | 1,177 |  |  |  | - |  |  |  | 6 |  |  |  | (179 | ) |  |  | 1,004 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 39,919 |  |  |  | - |  |  |  | 156 |  |  |  | (1,267 | ) |  |  | 38,808 |
Construction |  |  | 1,228 |  |  |  | - |  |  |  | 1,731 |  |  |  | (1,851 | ) |  |  | 1,108 |
SFR mortgage |  |  | 2,501 |  |  |  | - |  |  |  | - |  |  |  | 70 |  |  |  | 2,571 |
Dairy & livestock and agribusiness |  |  | 4,882 |  |  |  | - |  |  |  | - |  |  |  | 1,089 |  |  |  | 5,971 |
Municipal lease finance receivables |  |  | 1,115 |  |  |  | - |  |  |  | - |  |  |  | (82 | ) |  |  | 1,033 |
Consumer and other loans |  |  | 419 |  |  |  | (7 | ) |  |  | 128 |  |  |  | (100 | ) |  |  | 440 |
PCI loans |  |  | 310 |  |  |  | - |  |  |  | - |  |  |  | 290 |  |  |  | 600 |
Total allowance for loan losses |  | $ | 60,938 |  |  | $ | (7 | ) |  | $ | 2,070 |  |  | $ | (2,000 | ) |  | $ | 61,001 |

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##### Table of Contents

|  | For the Nine Months Ended September 30, 2017
|  | Ending Balance December 31, 2016 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance September 30, 2017
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 8,154 |  |  | $ | (138 | ) |  | $ | 106 |  |  | $ | (59 | ) |  | $ | 8,063 |
SBA |  |  | 871 |  |  |  | - |  |  |  | 47 |  |  |  | (54 | ) |  |  | 864 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 37,443 |  |  |  | - |  |  |  | 154 |  |  |  | 3,273 |  |  |  | 40,870 |
Construction |  |  | 1,096 |  |  |  | - |  |  |  | 5,774 |  |  |  | (5,937 | ) |  |  | 933 |
SFR mortgage |  |  | 2,287 |  |  |  | - |  |  |  | 64 |  |  |  | (31 | ) |  |  | 2,320 |
Dairy & livestock and agribusiness |  |  | 8,541 |  |  |  | - |  |  |  | 19 |  |  |  | (3,186 | ) |  |  | 5,374 |
Municipal lease finance receivables |  |  | 941 |  |  |  | - |  |  |  | - |  |  |  | (35 | ) |  |  | 906 |
Consumer and other loans |  |  | 988 |  |  |  | (11 | ) |  |  | 76 |  |  |  | (183 | ) |  |  | 870 |
PCI loans |  |  | 1,219 |  |  |  | - |  |  |  | - |  |  |  | (788 | ) |  |  | 431 |
Total allowance for loan losses |  | $ | 61,540 |  |  | $ | (149 | ) |  | $ | 6,240 |  |  | $ | (7,000 | ) |  | $ | 60,631 |
|  | For the Nine Months Ended September 30, 2016
|  | Ending Balance December 31, 2015 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance September 30, 2016
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 8,588 |  |  | $ | (85 | ) |  | $ | 253 |  |  | $ | 710 |  |  | $ | 9,466 |
SBA |  |  | 993 |  |  |  | - |  |  |  | 9 |  |  |  | 2 |  |  |  | 1,004 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 36,995 |  |  |  | - |  |  |  | 791 |  |  |  | 1,022 |  |  |  | 38,808 |
Construction |  |  | 2,389 |  |  |  | - |  |  |  | 2,615 |  |  |  | (3,896 | ) |  |  | 1,108 |
SFR mortgage |  |  | 2,103 |  |  |  | (102 | ) |  |  | - |  |  |  | 570 |  |  |  | 2,571 |
Dairy & livestock and agribusiness |  |  | 6,029 |  |  |  | - |  |  |  | 206 |  |  |  | (264 | ) |  |  | 5,971 |
Municipal lease finance receivables |  |  | 1,153 |  |  |  | - |  |  |  | - |  |  |  | (120 | ) |  |  | 1,033 |
Consumer and other loans |  |  | 906 |  |  |  | (8 | ) |  |  | 166 |  |  |  | (624 | ) |  |  | 440 |
PCI loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 600 |  |  |  | 600 |
Total allowance for loan losses |  | $ | 59,156 |  |  | $ | (195 | ) |  | $ | 4,040 |  |  | $ | (2,000 | ) |  | $ | 61,001 |

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##### Table of Contents

The following tables present the recorded investment in loans held-for-investment and the related allowance for loan losses by loan type, based on the Company’s methodology for determining the allowance for loan losses for the periods presented. The Company’s ALLL methodology for the first nine months of 2017 excludes the impact of the recent VCBP acquisition from certain of the Bank’s qualitative factors that are otherwise designed to capture incremental risk in the legacy loan portfolio. The VBB acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.

|  | September 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 |  | $ | 745 |  |  | $ | 527,914 |  |  | $ | - |  |  | $ | 2 |  |  | $ | 8,061 |  |  | $ | - |
SBA |  |  | 2,273 |  |  |  | 121,818 |  |  |  | - |  |  |  | 3 |  |  |  | 861 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 8,168 |  |  |  | 3,324,349 |  |  |  | - |  |  |  | - |  |  |  | 40,870 |  |  |  | - |
Construction |  |  | - |  |  |  | 74,148 |  |  |  | - |  |  |  | - |  |  |  | 933 |  |  |  | - |
SFR mortgage |  |  | 4,550 |  |  |  | 240,112 |  |  |  | - |  |  |  | - |  |  |  | 2,320 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 829 |  |  |  | 269,653 |  |  |  | - |  |  |  | - |  |  |  | 5,374 |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | 71,352 |  |  |  | - |  |  |  | - |  |  |  | 906 |  |  |  | - |
Consumer and other loans |  |  | 743 |  |  |  | 69,672 |  |  |  | - |  |  |  | 83 |  |  |  | 787 |  |  |  | - |
PCI loans |  |  | - |  |  |  | - |  |  |  | 36,548 |  |  |  | - |  |  |  | - |  |  |  | 431 |
Total |  | $ | 17,308 |  |  | $ | 4,699,018 |  |  | $ | 36,548 |  |  | $ | 88 |  |  | $ | 60,112 |  |  | $ | 431 |
|  | September 30, 2016
|  | 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 |  | $ | 1,349 |  |  | $ | 493,134 |  |  | $ | - |  |  | $ | 493 |  |  | $ | 8,973 |  |  | $ | - |
SBA |  |  | 3,867 |  |  |  | 100,176 |  |  |  | - |  |  |  | 33 |  |  |  | 971 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 15,806 |  |  |  | 2,895,959 |  |  |  | - |  |  |  | - |  |  |  | 38,808 |  |  |  | - |
Construction |  |  | 7,651 |  |  |  | 83,059 |  |  |  | - |  |  |  | 4 |  |  |  | 1,104 |  |  |  | - |
SFR mortgage |  |  | 5,502 |  |  |  | 235,988 |  |  |  | - |  |  |  | 6 |  |  |  | 2,565 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 659 |  |  |  | 238,583 |  |  |  | - |  |  |  | - |  |  |  | 5,971 |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | 68,309 |  |  |  | - |  |  |  | - |  |  |  | 1,033 |  |  |  | - |
Consumer and other loans |  |  | 850 |  |  |  | 78,814 |  |  |  | - |  |  |  | 12 |  |  |  | 428 |  |  |  | - |
PCI loans |  |  | - |  |  |  | - |  |  |  | 73,035 |  |  |  | - |  |  |  | - |  |  |  | 600 |
Total |  | $ | 35,684 |  |  | $ | 4,194,022 |  |  | $ | 73,035 |  |  | $ | 548 |  |  | $ | 59,853 |  |  | $ | 600 |

23

##### Table of Contents

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016, 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 these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. 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.

24

##### Table of Contents

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.

|  | September 30, 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 |  | $ | 45 |  |  | $ | - |  |  | $ | 45 |  |  | $ | 313 |  |  | $ | 528,301 |  |  | $ | 528,659 |
SBA |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,611 |  |  |  | 122,480 |  |  |  | 124,091 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 220 |  |  |  | - |  |  |  | 220 |  |  |  | 4,184 |  |  |  | 1,065,953 |  |  |  | 1,070,357 |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,544 |  |  |  | 2,259,616 |  |  |  | 2,262,160 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative (2) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 54,562 |  |  |  | 54,562 |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 19,586 |  |  |  | 19,586 |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,349 |  |  |  | 243,313 |  |  |  | 244,662 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 829 |  |  |  | 269,653 |  |  |  | 270,482 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 71,352 |  |  |  | 71,352 |
Consumer and other loans |  |  | 6 |  |  |  | - |  |  |  | 6 |  |  |  | 743 |  |  |  | 69,666 |  |  |  | 70,415 |
Total gross loans, excluding PCI Loans |  | $ | 271 |  |  | $ | - |  |  | $ | 271 |  |  | $ | 11,573 |  |  | $ | 4,704,482 |  |  | $ | 4,716,326 |

(1) As of September 30, 2017, $4.5 million of nonaccruing loans were current, $1.4 million were 30-59 days past due, $423,000 were 60-89 days past due and $5.3 million were 90+ days past due. (2) Speculative construction loans are generally for properties where there is no identified buyer or renter.

|  | December 31, 2016
|  | 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 |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 156 |  |  | $ | 484,922 |  |  | $ | 485,078 |
SBA |  |  | 352 |  |  |  | - |  |  |  | 352 |  |  |  | 2,737 |  |  |  | 94,095 |  |  |  | 97,184 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 635 |  |  |  | 949,184 |  |  |  | 949,819 |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,048 |  |  |  | 1,979,274 |  |  |  | 1,980,322 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative (2) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 48,841 |  |  |  | 48,841 |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 37,038 |  |  |  | 37,038 |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,207 |  |  |  | 248,398 |  |  |  | 250,605 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 338,631 |  |  |  | 338,631 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 64,639 |  |  |  | 64,639 |
Consumer and other loans |  |  | 84 |  |  |  | - |  |  |  | 84 |  |  |  | 369 |  |  |  | 77,821 |  |  |  | 78,274 |
Total gross loans, excluding PCI Loans |  | $ | 436 |  |  | $ | - |  |  | $ | 436 |  |  | $ | 7,152 |  |  | $ | 4,322,843 |  |  | $ | 4,330,431 |

| (1) | As of December 31, 2016, $4.7 million of nonaccruing loans were current, $514,000 were 30-59 days past due, $435,000 were 60-89 days past due and $1.5 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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##### Table of Contents

Impaired Loans

At September 30, 2017, the Company had impaired loans, excluding PCI loans, of $17.3 million and included $4.5 million of loans acquired from VBB in the first quarter of 2017. Impaired loans included $6.7 million of nonaccrual commercial real estate loans, $1.6 million of nonaccrual Small Business Administration (“SBA”) loans, $1.3 million of nonaccrual single-family residential (“SFR”) mortgage loans, $829,000 of nonaccrual dairy & livestock and agribusiness loans, $743,000 of nonaccrual consumer and other loans, and $313,000 of nonaccrual commercial and industrial loans. These impaired loans included $10.0 million of loans whose terms were modified in a troubled debt restructuring, of which $4.3 million were classified as nonaccrual. The remaining balance of $5.7 million consisted of 21 loans performing according to the restructured terms. The impaired loans had a specific allowance of $88,000 at September 30, 2017. At December 31, 2016, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $26.4 million with a related allowance of $141,000.

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

|  | As of and For the Nine Months Ended September 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 |  | $ | 726 |  |  | $ | 1,256 |  |  | $ | - |  |  | $ | 870 |  |  | $ | 15 |
SBA |  |  | 2,270 |  |  |  | 2,573 |  |  |  | - |  |  |  | 2,489 |  |  |  | 38 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 4,313 |  |  |  | 4,625 |  |  |  | - |  |  |  | 4,361 |  |  |  | 42 |
Non-owner occupied |  |  | 3,855 |  |  |  | 5,155 |  |  |  | - |  |  |  | 4,010 |  |  |  | 72 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 4,550 |  |  |  | 5,345 |  |  |  | - |  |  |  | 4,620 |  |  |  | 109 |
Dairy & livestock and agribusiness |  |  | 829 |  |  |  | 1,091 |  |  |  | - |  |  |  | 1,035 |  |  |  | 1 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 356 |  |  |  | 571 |  |  |  | - |  |  |  | 381 |  |  |  | - |
Total |  |  | 16,899 |  |  |  | 20,616 |  |  |  | - |  |  |  | 17,766 |  |  |  | 277 |
With a related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 19 |  |  |  | 20 |  |  |  | 2 |  |  |  | 42 |  |  |  | 1 |
SBA |  |  | 3 |  |  |  | 20 |  |  |  | 3 |  |  |  | 7 |  |  |  | - |
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 |  |  | 387 |  |  |  | 394 |  |  |  | 83 |  |  |  | 390 |  |  |  | - |
Total |  |  | 409 |  |  |  | 434 |  |  |  | 88 |  |  |  | 439 |  |  |  | 1 |
Total impaired loans |  | $ | 17,308 |  |  | $ | 21,050 |  |  | $ | 88 |  |  | $ | 18,205 |  |  | $ | 278 |

26

##### Table of Contents

|  | As of and For the Nine Months Ended September 30, 2016
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
|  | (Dollars in thousands)
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 786 |  |  | $ | 1,687 |  |  | $ | - |  |  | $ | 858 |  |  | $ | 20 |
SBA |  |  | 3,665 |  |  |  | 4,452 |  |  |  | - |  |  |  | 3,770 |  |  |  | 38 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 2,773 |  |  |  | 3,786 |  |  |  | - |  |  |  | 3,039 |  |  |  | 63 |
Non-owner occupied |  |  | 13,033 |  |  |  | 15,764 |  |  |  | - |  |  |  | 13,386 |  |  |  | 130 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 5,239 |  |  |  | 6,118 |  |  |  | - |  |  |  | 5,370 |  |  |  | 93 |
Dairy & livestock and agribusiness |  |  | 659 |  |  |  | 722 |  |  |  | - |  |  |  | 695 |  |  |  | 24 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 838 |  |  |  | 1,409 |  |  |  | - |  |  |  | 896 |  |  |  | 11 |
Total |  |  | 26,993 |  |  |  | 33,938 |  |  |  | - |  |  |  | 28,014 |  |  |  | 379 |
With a related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 563 |  |  |  | 625 |  |  |  | 493 |  |  |  | 671 |  |  |  | 8 |
SBA |  |  | 202 |  |  |  | 217 |  |  |  | 33 |  |  |  | 209 |  |  |  | 10 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | 7,651 |  |  |  | 7,651 |  |  |  | 4 |  |  |  | 7,651 |  |  |  | 291 |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 263 |  |  |  | 263 |  |  |  | 6 |  |  |  | 273 |  |  |  | 4 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 12 |  |  |  | 12 |  |  |  | 12 |  |  |  | 12 |  |  |  | - |
Total |  |  | 8,691 |  |  |  | 8,768 |  |  |  | 548 |  |  |  | 8,816 |  |  |  | 313 |
Total impaired loans |  | $ | 35,684 |  |  | $ | 42,706 |  |  | $ | 548 |  |  | $ | 36,830 |  |  | $ | 692 |

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|  | As of December 31, 2016 |  |
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |
|  | (Dollars in thousands) |
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 730 |  |  | $ | 1,646 |  |  | $ | - |  |
SBA |  |  | 3,386 |  |  |  | 4,189 |  |  |  | - |  |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 1,797 |  |  |  | 2,276 |  |  |  | - |  |
Non-owner occupied |  |  | 13,331 |  |  |  | 15,842 |  |  |  | - |  |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |
SFR mortgage |  |  | 5,174 |  |  |  | 6,075 |  |  |  | - |  |
Dairy & livestock and agribusiness |  |  | 747 |  |  |  | 747 |  |  |  | - |  |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |
Consumer and other loans |  |  | 853 |  |  |  | 1,423 |  |  |  | - |  |
Total |  |  | 26,018 |  |  |  | 32,198 |  |  |  | - |  |
With a related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 171 |  |  |  | 171 |  |  |  | 114 |  |
SBA |  |  | 196 |  |  |  | 212 |  |  |  | 27 |  |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |
Consumer and other loans |  |  | - |  |  |  | - |  |  |  | - |  |
Total |  |  | 367 |  |  |  | 383 |  |  |  | 141 |  |
Total impaired loans |  | $ | 26,385 |  |  | $ | 32,581 |  |  | $ | 141 |  |

The Company recognizes the charge-off of the impairment allowance on impaired loans in the period in which a loss is identified for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of September 30, 2017, December 31, 2016 and September 30, 2016 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a charge-off is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or smaller balance non-collateral dependent loans.

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Reserve for Unfunded Loan Commitments

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was no provision or recapture of provision for unfunded loan commitments for the three and nine months ended September 30, 2017, and 2016. As of September 30, 2017 and December 31, 2016, the balance in this reserve was $6.7 million and was included in other liabilities.

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered impaired and charge-off amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a more detailed discussion regarding TDRs.

As of September 30, 2017, there were $10.0 million of loans classified as a TDR, of which $4.3 million were nonperforming and $5.7 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 September 30, 2017, performing TDRs were comprised of three commercial real estate loans of $1.4 million, 11 SFR mortgage loans of $3.2 million, two SBA loans of $662,000, and five commercial and industrial loans of $432,000.

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 $5,000 and $141,000 of specific allowance to TDRs as of September 30, 2017 and December 31, 2016, respectively.

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

|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  | (Dollars in thousands)
Performing TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 16,574 |  |  | $ | 20,292 |  |  | $ | 19,233 |  |  | $ | 42,687 |
New modifications |  |  | - |  |  |  | 759 |  |  |  | 3,143 |  |  |  | 1,877 |
Payoffs/payments, net and other |  |  | (10,839 | ) |  |  | (2,584 | ) |  |  | (13,826 | ) |  |  | (26,097 | )
TDRs returned to accrual status |  |  | - |  |  |  | 8,551 |  |  |  | 329 |  |  |  | 8,551 |
TDRs placed on nonaccrual status |  |  | - |  |  |  | - |  |  |  | (3,144 | ) |  |  | - |
Ending balance |  | $ | 5,735 |  |  | $ | 27,018 |  |  | $ | 5,735 |  |  | $ | 27,018 |
Nonperforming TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 4,391 |  |  | $ | 12,029 |  |  | $ | 1,626 |  |  | $ | 12,622 |
New modifications |  |  | - |  |  |  | 20 |  |  |  | 2,066 |  |  |  | 102 |
Charge-offs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (38 | )
Payoffs/payments, net and other |  |  | (81 | ) |  |  | (465 | ) |  |  | (2,197 | ) |  |  | (1,102 | )
TDRs returned to accrual status |  |  | - |  |  |  | (8,551 | ) |  |  | (329 | ) |  |  | (8,551 | )
TDRs placed on nonaccrual status |  |  | - |  |  |  | - |  |  |  | 3,144 |  |  |  | - |
Ending balance |  | $ | 4,310 |  |  | $ | 3,033 |  |  | $ | 4,310 |  |  | $ | 3,033 |
Total TDRs |  | $ | 10,045 |  |  | $ | 30,051 |  |  | $ | 10,045 |  |  | $ | 30,051 |

There were no loans that were modified as TDRs during the three months ended September 30, 2017.

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The following tables summarize loans modified as troubled debt restructurings for the periods presented.

Modifications (1)

|  | For the Three Months Ended September 30, 2016
|  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Outstanding Recorded Investment at September 30, 2016 |  | Financial Effect Resulting From Modifications (2)
|  | (Dollars in thousands)
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SBA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 20 |  |  |  | 20 |  |  |  | 14 |  |  |  | - |
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 |  |  | 1 |  |  |  | 759 |  |  |  | 759 |  |  |  | 759 |  |  |  | - |
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 |  |  | $ | 779 |  |  | $ | 779 |  |  | $ | 773 |  |  | $ | - |

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|  | For the Nine Months Ended September 30, 2017
|  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Outstanding Recorded Investment at September 30, 2017 |  | Financial Effect Resulting From Modifications (2)
|  | (Dollars in thousands)
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SBA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
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 |  |  |  | 76 |  |  |  | - |
Total loans |  |  | 3 |  |  | $ | 5,209 |  |  | $ | 5,209 |  |  | $ | 3,297 |  |  | $ | - |

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|  | For the Nine Months Ended September 30, 2016
|  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Outstanding Recorded Investment at September 30, 2016 |  | Financial Effect Resulting From Modifications (2)
|  | (Dollars in thousands)
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 112 |  |  |  | 112 |  |  |  | 184 |  |  |  | - |
SBA: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | 2 |  |  |  | 214 |  |  |  | 214 |  |  |  | 202 |  |  |  | 28 |
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 |  |  | 1 |  |  |  | 759 |  |  |  | 759 |  |  |  | 759 |  |  |  | - |
Dairy & livestock and agribusiness: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 24 |  |  |  | 24 |  |  |  | 22 |  |  |  | - |
Total loans |  |  | 5 |  |  | $ | 1,109 |  |  | $ | 1,109 |  |  | $ | 1,167 |  |  | $ | 28 |

| (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 September 30, 2017, there was one commercial real estate loan with an outstanding balance of $3.1 million and one dairy & livestock and agribusiness loan with an outstanding balance of $78,000 that was modified as a TDR within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2017.

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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 tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and nine months ended September 30, 2017, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 15,000 and 10,000, respectively. For the three and nine months ended September 30, 2016, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 299,000 and 281,000, 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 September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  | (In thousands, except per share amounts)
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 29,683 |  |  | $ | 25,448 |  |  | $ | 86,560 |  |  | $ | 74,353 |
Less: Net earnings allocated to restricted stock |  |  | 107 |  |  |  | 98 |  |  |  | 325 |  |  |  | 305 |
Net earnings allocated to common shareholders |  | $ | 29,576 |  |  | $ | 25,350 |  |  | $ | 86,235 |  |  | $ | 74,048 |
Weighted average shares outstanding |  |  | 109,754 |  |  |  | 108,984 |  |  |  | 109,280 |  |  |  | 107,144 |
Basic earnings per common share |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.79 |  |  | $ | 0.69 |
Diluted earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income allocated to common shareholders |  | $ | 29,576 |  |  | $ | 25,350 |  |  | $ | 86,235 |  |  | $ | 74,048 |
Weighted average shares outstanding |  |  | 109,754 |  |  |  | 108,984 |  |  |  | 109,280 |  |  |  | 107,144 |
Incremental shares from assumed exercise of outstanding options |  |  | 365 |  |  |  | 386 |  |  |  | 392 |  |  |  | 403 |
Diluted weighted average shares outstanding |  |  | 110,119 |  |  |  | 109,370 |  |  |  | 109,672 |  |  |  | 107,547 |
Diluted earnings per common share |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.79 |  |  | $ | 0.69 |

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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 September 30, 2017. 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 - includes assets and liabilities that have an active market that provides an objective quoted value for each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most objective measurement of fair value. Level 2 is less objective and Level 3 is the least objective (most subjective) in estimating fair value.

| • |  | Level 2 - assets and liabilities are ones where there is no active market in the same assets, but where there are parallel markets or alternative means to estimate fair value using observable information inputs such as the value placed on similar assets or liability that were recently traded.

| • |  | Level 3 - fair values are based on information from the entity that reports these values in their financial statements. Such data are referred to as unobservable, in that the valuations are not based on data available to parties outside the entity.

Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy. Inputs here refer explicitly to the types of information used to obtain the fair value of the asset or liability.

Observable inputs include data sources and market prices available and visible outside of the entity. While there will continue to be judgments required when an active market price is not available, these inputs are external to the entity and observable outside the entity; they are consequently considered more objective than internal unobservable inputs used for Level 3 fair value.

Unobservable inputs are data and analyses that are developed within the entity to assess the fair value, such as management estimates of future benefits from use of assets.

There were no transfers in and out of Level 1 and Level 2 during the nine months ended September 30, 2017 and 2016.

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##### Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

|  | Carrying Value at September 30, 2017 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
|  | (Dollars in thousands)
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Residential mortgage-backed securities |  |  | 1,818,034 |  |  |  | - |  |  |  | 1,818,034 |  |  |  | - |
CMO/REMIC - residential |  |  | 293,782 |  |  |  | - |  |  |  | 293,782 |  |  |  | - |
Municipal bonds |  |  | 63,115 |  |  |  | - |  |  |  | 63,115 |  |  |  | - |
Other securities |  |  | 717 |  |  |  | - |  |  |  | 717 |  |  |  | - |
Total investment securities - AFS |  |  | 2,175,648 |  |  |  | - |  |  |  | 2,175,648 |  |  |  | - |
Interest rate swaps |  |  | 4,819 |  |  |  | - |  |  |  | 4,819 |  |  |  | - |
Total assets |  | $ | 2,180,467 |  |  | $ | - |  |  | $ | 2,180,467 |  |  | $ | - |
Description of liability |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 4,819 |  |  | $ | - |  |  | $ | 4,819 |  |  | $ | - |
Total liabilities |  | $ | 4,819 |  |  | $ | - |  |  | $ | 4,819 |  |  | $ | - |
|  | Carrying Value at December 31, 2016 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
|  | (Dollars in thousands)
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 2,752 |  |  | $ | - |  |  | $ | 2,752 |  |  | $ | - |
Residential mortgage-backed securities |  |  | 1,834,748 |  |  |  | - |  |  |  | 1,834,748 |  |  |  | - |
CMO/REMIC - residential |  |  | 347,189 |  |  |  | - |  |  |  | 347,189 |  |  |  | - |
Municipal bonds |  |  | 80,071 |  |  |  | - |  |  |  | 80,071 |  |  |  | - |
Other securities |  |  | 5,706 |  |  |  | - |  |  |  | 5,706 |  |  |  | - |
Total investment securities - AFS |  |  | 2,270,466 |  |  |  | - |  |  |  | 2,270,466 |  |  |  | - |
Interest rate swaps |  |  | 5,783 |  |  |  | - |  |  |  | 5,783 |  |  |  | - |
Total assets |  | $ | 2,276,249 |  |  | $ | - |  |  | $ | 2,276,249 |  |  | $ | - |
Description of liability |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 5,783 |  |  | $ | - |  |  | $ | 5,783 |  |  | $ | - |
Total liabilities |  | $ | 5,783 |  |  | $ | - |  |  | $ | 5,783 |  |  | $ | - |

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

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at September 30, 2017 and December 31, 2016, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

|  | Carrying Value at September 30, 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 Nine Months Ended September 30, 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 |  |  | 386 |  |  |  | - |  |  |  | - |  |  |  | 386 |  |  |  | 83 |
Other real estate owned |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Asset held-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total assets |  | $ | 386 |  |  | $ | - |  |  | $ | - |  |  | $ | 386 |  |  | $ | 83 |
|  | Carrying Value at December 31, 2016 |  | 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, 2016
|  | (Dollars in thousands)
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans, excluding PCI loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 65 |  |  | $ | - |  |  | $ | - |  |  | $ | 65 |  |  | $ | 8 |
SBA |  |  | 196 |  |  |  | - |  |  |  | - |  |  |  | 196 |  |  |  | 27 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Other real estate owned |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Asset held-for-sale |  |  | 3,411 |  |  |  |  |  |  |  |  |  |  |  | 3,411 |  |  |  | 2,558 |
Total assets |  | $ | 3,672 |  |  | $ | - |  |  | $ | - |  |  | $ | 3,672 |  |  | $ | 2,593 |

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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 September 30, 2017 and December 31, 2016, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

|  | September 30, 2017
|  |  |  | Estimated Fair Value
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
|  | (Dollars in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total cash and cash equivalents |  | $ | 143,790 |  |  | $ | 143,790 |  |  | $ | - |  |  | $ | - |  |  | $ | 143,790 |
Interest-earning balances due from depository institutions |  |  | 20,521 |  |  |  | - |  |  |  | 20,567 |  |  |  | - |  |  |  | 20,567 |
FHLB stock |  |  | 17,688 |  |  |  | - |  |  |  | 17,688 |  |  |  | - |  |  |  | 17,688 |
Investment securities available-for-sale |  |  | 2,175,648 |  |  |  | - |  |  |  | 2,175,648 |  |  |  | - |  |  |  | 2,175,648 |
Investment securities held-to-maturity |  |  | 848,382 |  |  |  | - |  |  |  | 842,050 |  |  |  | - |  |  |  | 842,050 |
Total loans, net of allowance for loan losses |  |  | 4,685,793 |  |  |  | - |  |  |  | - |  |  |  | 4,619,896 |  |  |  | 4,619,896 |
Swaps |  |  | 4,819 |  |  |  | - |  |  |  | 4,819 |  |  |  | - |  |  |  | 4,819 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 3,908,809 |  |  | $ | 3,908,809 |  |  | $ | - |  |  | $ | - |  |  | $ | 3,908,809 |
Interest-bearing |  |  | 2,699,287 |  |  |  | - |  |  |  | 2,697,349 |  |  |  | - |  |  |  | 2,697,349 |
Borrowings |  |  | 518,069 |  |  |  | - |  |  |  | 517,827 |  |  |  | - |  |  |  | 517,827 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | 18,260 |  |  |  | 18,260 |
Swaps |  |  | 4,819 |  |  |  | - |  |  |  | 4,819 |  |  |  | - |  |  |  | 4,819 |
|  | December 31, 2016
|  |  |  | Estimated Fair Value
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
|  | (Dollars in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total cash and cash equivalents |  | $ | 119,445 |  |  | $ | 119,445 |  |  | $ | - |  |  | $ | - |  |  | $ | 119,445 |
Interest-earning balances due from depository institutions |  |  | 2,188 |  |  |  | - |  |  |  | 2,188 |  |  |  | - |  |  |  | 2,188 |
FHLB stock |  |  | 17,688 |  |  |  | - |  |  |  | 17,688 |  |  |  | - |  |  |  | 17,688 |
Investment securities available-for-sale |  |  | 2,270,466 |  |  |  | - |  |  |  | 2,270,466 |  |  |  | - |  |  |  | 2,270,466 |
Investment securities held-to-maturity |  |  | 911,676 |  |  |  | - |  |  |  | 897,374 |  |  |  | - |  |  |  | 897,374 |
Total loans, net of allowance for loan losses |  |  | 4,333,524 |  |  |  | - |  |  |  | - |  |  |  | 4,306,225 |  |  |  | 4,306,225 |
Swaps |  |  | 5,783 |  |  |  | - |  |  |  | 5,783 |  |  |  | - |  |  |  | 5,783 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 3,673,541 |  |  | $ | 3,673,541 |  |  | $ | - |  |  | $ | - |  |  | $ | 3,673,541 |
Interest-bearing |  |  | 2,636,139 |  |  |  | - |  |  |  | 2,634,443 |  |  |  | - |  |  |  | 2,634,443 |
Borrowings |  |  | 656,028 |  |  |  | - |  |  |  | 655,820 |  |  |  | - |  |  |  | 655,820 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | 18,463 |  |  |  | 18,463 |
Swaps |  |  | 5,783 |  |  |  | - |  |  |  | 5,783 |  |  |  | - |  |  |  | 5,783 |

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2017 and December 31, 2016. 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.

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10. | BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial 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. In 2016, Dairy & Livestock and Agribusiness was reflected as our second reportable segment. All other operating departments have been aggregated and included in “Other” for reporting purposes. Recapture of provision for loan losses was allocated by segment based on loan type in 2016. Prior period information has been conformed to the current presentation. 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 Form 10-K for the year ended December 31, 2016. 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 September 30, 2017
|  | Centers |  | Dairy & livestock and agribusiness |  | Other (1) |  | Total
|  | (Dollars in thousands)
Net interest income |  | $ | 50,539 |  |  | $ | 2,728 |  |  | $ | 18,472 |  |  | $ | 71,739 |
(Recapture of) provision for loan losses |  |  | 772 |  |  |  | (66 | ) |  |  | (2,206 | ) |  |  | (1,500 | )
Net interest income after (recapture of) provision for loan losses |  |  | 49,767 |  |  |  | 2,794 |  |  |  | 20,678 |  |  |  | 73,239 |
Noninterest income |  |  | 5,764 |  |  |  | 84 |  |  |  | 4,190 |  |  |  | 10,038 |
Noninterest expense |  |  | 12,963 |  |  |  | 479 |  |  |  | 21,264 |  |  |  | 34,706 |
Segment pre-tax profit |  | $ | 42,568 |  |  | $ | 2,399 |  |  | $ | 3,604 |  |  | $ | 48,571 |
Goodwill |  | $ | 116,564 |  |  | $ | - |  |  | $ | - |  |  | $ | 116,564 |
Segment assets as of September 30, 2017 |  | $ | 7,166,356 |  |  | $ | 377,670 |  |  | $ | 759,986 |  |  | $ | 8,304,012 |

| (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.

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##### Table of Contents

|  | For the Three Months Ended September 30, 2016
|  | Centers |  | Dairy & livestock and agribusiness |  | Other (1) |  | Total
|  | (Dollars in thousands)
Net interest income |  | $ | 45,499 |  |  | $ | 2,008 |  |  | $ | 15,654 |  |  | $ | 63,161 |
(Recapture of) provision for loan losses |  |  | (1,164 | ) |  |  | 1,089 |  |  |  | (1,925 | ) |  |  | (2,000 | )
Net interest income after (recapture of) provision for loan losses |  |  | 46,663 |  |  |  | 919 |  |  |  | 17,579 |  |  |  | 65,161 |
Noninterest income |  |  | 5,182 |  |  |  | 73 |  |  |  | 3,928 |  |  |  | 9,183 |
Noninterest expense |  |  | 12,423 |  |  |  | 474 |  |  |  | 20,109 |  |  |  | 33,006 |
Segment pre-tax profit |  | $ | 39,422 |  |  | $ | 518 |  |  | $ | 1,398 |  |  | $ | 41,338 |
Goodwill |  | $ | 88,174 |  |  | $ | - |  |  | $ | - |  |  | $ | 88,174 |
Segment assets as of September 30, 2016 |  | $ | 6,945,214 |  |  | $ | 376,862 |  |  | $ | 722,917 |  |  | $ | 8,044,993 |

| (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.

|  | For the Nine Months Ended September 30, 2017
|  | Centers |  | Dairy & livestock and agribusiness |  | Other (1) |  | Total
|  | (Dollars in thousands)
Net interest income |  | $ | 144,879 |  |  | $ | 7,241 |  |  | $ | 55,535 |  |  | $ | 207,655 |
(Recapture of) provision for loan losses |  |  | 2,158 |  |  |  | (3,186 | ) |  |  | (5,972 | ) |  |  | (7,000 | )
Net interest income after (recapture of) provision for loan losses |  |  | 142,721 |  |  |  | 10,427 |  |  |  | 61,507 |  |  |  | 214,655 |
Noninterest income |  |  | 16,274 |  |  |  | 188 |  |  |  | 13,074 |  |  |  | 29,536 |
Noninterest expense |  |  | 38,607 |  |  |  | 1,484 |  |  |  | 65,605 |  |  |  | 105,696 |
Segment pre-tax profit |  | $ | 120,388 |  |  | $ | 9,131 |  |  | $ | 8,976 |  |  | $ | 138,495 |
Goodwill |  | $ | 116,564 |  |  | $ | - |  |  | $ | - |  |  | $ | 116,564 |
Segment assets as of September 30, 2017 |  | $ | 7,166,356 |  |  | $ | 377,670 |  |  | $ | 759,986 |  |  | $ | 8,304,012 |

| (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.

|  | For the Nine Months Ended September 30, 2016
|  | Centers |  | Dairy & livestock and agribusiness |  | Other (1) |  | Total
|  | (Dollars in thousands)
Net interest income |  | $ | 132,316 |  |  | $ | 5,927 |  |  | $ | 53,390 |  |  | $ | 191,633 |
(Recapture of) provision for loan losses |  |  | 2,251 |  |  |  | (264 | ) |  |  | (3,987 | ) |  |  | (2,000 | )
Net interest income after (recapture of) provision for loan losses |  |  | 130,065 |  |  |  | 6,191 |  |  |  | 57,377 |  |  |  | 193,633 |
Noninterest income |  |  | 15,335 |  |  |  | 180 |  |  |  | 11,625 |  |  |  | 27,140 |
Noninterest expense |  |  | 37,924 |  |  |  | 1,452 |  |  |  | 62,432 |  |  |  | 101,808 |
Segment pre-tax profit |  | $ | 107,476 |  |  | $ | 4,919 |  |  | $ | 6,570 |  |  | $ | 118,965 |
Goodwill |  | $ | 88,174 |  |  | $ | - |  |  | $ | - |  |  | $ | 88,174 |
Segment assets as of September 30, 2016 |  | $ | 6,945,214 |  |  | $ | 376,862 |  |  | $ | 722,917 |  |  | $ | 8,044,993 |

| (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.

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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 September 30, 2017, the Bank has entered into 77 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 a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with the customer fixed rate swaps. 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 September 30, 2017 and December 31, 2016, the total notional amount of the Company’s swaps was $199.9 million, and $202.7 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

|  | September 30, 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 |  |  | $ | 4,819 |  |  |  | Other liabilities |  |  | $ | 4,819 |
Total derivatives |  |  |  |  |  | $ | 4,819 |  |  |  |  |  |  | $ | 4,819 |
|  | December 31, 2016 |
|  | 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 |  |  | $ | 5,783 |  |  |  | Other liabilities |  |  | $ | 5,783 |
Total derivatives |  |  |  |  |  | $ | 5,783 |  |  |  |  |  |  | $ | 5,783 |

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##### Table of Contents

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

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

Derivatives Not Designated as Hedging Instruments |  | Location of Gain Recognized in Income on Derivative Instruments |  | Amount of Gain Recognized in Income on Derivative Instruments
|  |  |  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
|  |  |  | 2017 |  | 2016 |  | 2017 |  | 2016
|  |  |  | (Dollars in thousands)
Interest rate swaps |  | Other income |  | $ | 198 |  |  | $ | 136 |  |  | $ | 592 |  |  | $ | 521 |
Total |  |  |  | $ | 198 |  |  | $ | 136 |  |  | $ | 592 |  |  | $ | 521 |

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 September 30,
|  | 2017 |  | 2016
|  | 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 |  | $ | 2,083 |  |  | $ | 875 |  |  | $ | 1,208 |  |  | $ | (4,006 | ) |  | $ | (1,683 | ) |  | $ | (2,323 | )
Amortization of unrealized gain (loss) on securities transferred from available-for-sale to held-to-maturity |  |  | (862 | ) |  |  | (362 | ) |  |  | (500 | ) |  |  | 297 |  |  |  | 125 |  |  |  | 172 |
Net realized gain reclassified into earnings (1) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (548 | ) |  |  | (230 | ) |  |  | (318 | )
Net change |  | $ | 1,221 |  |  | $ | 513 |  |  | $ | 708 |  |  | $ | (4,257 | ) |  | $ | (1,788 | ) |  | $ | (2,469 | )
|  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016
|  | 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 |  | $ | 6,128 |  |  | $ | 2,574 |  |  | $ | 3,554 |  |  | $ | 31,617 |  |  | $ | 13,279 |  |  | $ | 18,338 |
Amortization of unrealized gain on securities transferred from available-for-sale to held-to-maturity |  |  | (2,841 | ) |  |  | (1,193 | ) |  |  | (1,648 | ) |  |  | (563 | ) |  |  | (237 | ) |  |  | (326 | )
Net realized gain reclassified into earnings (1) |  |  | (402 | ) |  |  | (169 | ) |  |  | (233 | ) |  |  | (548 | ) |  |  | (230 | ) |  |  | (318 | )
Net change |  | $ | 2,885 |  |  | $ | 1,212 |  |  | $ | 1,673 |  |  | $ | 30,506 |  |  | $ | 12,812 |  |  | $ | 17,694 |

(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 |  | Gross Amounts offset in the Condensed |  | Net Amounts of Assets Presented in the Condensed |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  | Net Amount
|  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Consolidated Balance Sheets |  | Financial Instruments |  | Collateral Pledged |
|  | (Dollars in thousands)
September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 4,819 |  |  | $ | - |  |  | $ | - |  |  | $ | 4,819 |  |  | $ | - |  |  | $ | 4,819 |
Total |  | $ | 4,819 |  |  | $ | - |  |  | $ | - |  |  | $ | 4,819 |  |  | $ | - |  |  | $ | 4,819 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 5,709 |  |  | $ | (890 | ) |  | $ | 4,819 |  |  | $ | 890 |  |  | $ | (12,778 | ) |  | $ | (7,069 | )
Repurchase agreements |  |  | 455,069 |  |  |  | - |  |  |  | 455,069 |  |  |  | - |  |  |  | (510,351 | ) |  |  | (55,282 | )
Total |  | $ | 460,778 |  |  | $ | (890 | ) |  | $ | 459,888 |  |  | $ | 890 |  |  | $ | (523,129 | ) |  | $ | (62,351 | )
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 5,783 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,783 |  |  | $ | - |  |  | $ | 5,783 |
Total |  | $ | 5,783 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,783 |  |  | $ | - |  |  | $ | 5,783 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 6,855 |  |  | $ | (1,072 | ) |  | $ | 5,783 |  |  | $ | 1,072 |  |  | $ | (12,800 | ) |  | $ | (5,945 | )
Repurchase agreements |  |  | 603,028 |  |  |  | - |  |  |  | 603,028 |  |  |  | - |  |  |  | (683,413 | ) |  |  | (80,385 | )
Total |  | $ | 609,883 |  |  | $ | (1,072 | ) |  | $ | 608,811 |  |  | $ | 1,072 |  |  | $ | (696,213 | ) |  | $ | (86,330 | )

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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 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 Form 10-K for the year ended December 31, 2016, 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.

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”)

| ● |  | Troubled Debt Restructurings (“TDRs”)

| ● |  | Investment Securities

| ● |  | Goodwill Impairment

| ● |  | Acquired Loans

| ● |  | Purchase Credit Impaired (“PCI”) Loans

| ● |  | Fair Value of Financial Instruments

| ● |  | Income Taxes

| ● |  | Stock-Based Compensation

Our significant accounting policies are described in greater detail in our 2016 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 — Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

For the third quarter of 2017, we reported net earnings of $29.7 million, compared with $28.4 million for the second quarter of 2017 and $25.4 million for the third quarter of 2016. This represented an increase of $1.3 million over the prior quarter and an increase of $4.2 million from the third quarter of 2016. Diluted earnings per share were $0.27 for the third quarter, compared to $0.26 for the prior quarter and $0.23 for the same period last year.

At September 30, 2017, total assets of $8.30 billion increased $230.3 million, or 2.85%, from total assets of $8.07 billion at December 31, 2016. Interest-earning assets of $7.82 billion at September 30, 2017 increased $170.3 million, or 2.23%, when compared with $7.64 billion at December 31, 2016. The increase in interest-earning assets was primarily due to a $351.4 million increase in total loans. This was partially offset by a $158.1 million decrease in investment securities.

Total investment securities were $3.02 billion at September 30, 2017, a decrease of $158.1 million, or 4.97%, from $3.18 billion at December 31, 2016. At September 30, 2017, investment securities held-to-maturity (“HTM”) totaled $848.4 million. At September 30, 2017, investment securities available-for-sale (“AFS”) totaled $2.18 billion, inclusive of a pre-tax unrealized gain of $20.3 million. HTM securities declined by $63.3 million, or 6.94%, and AFS securities declined by $94.8 million, or 4.18%, from December 31, 2016.

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Total loans and leases, net of deferred fees and discounts, were $4.75 billion at September 30, 2017, compared to $4.40 billion at December 31, 2016 and $4.30 billion at September 30, 2016. Total loans increased $351.4 million, or 7.99%, from December 31, 2016 and included $309.7 million of loans acquired from Valley Business Bank (“VBB”) in the first quarter of 2017. Excluding the acquired VBB loans, dairy & livestock and agribusiness loans decreased by $83.1 million, primarily due to seasonal pay-downs. Excluding the acquired VBB loans and the decrease in dairy & livestock and agribusiness loans, loans increased by $124.8 million, or 2.84% overall, for the first nine months of 2017. Total loans and leases, net of deferred fees and discounts, of $4.75 billion at September 30, 2017 increased by $451.3 million, or 10.51%, from September 30, 2016. Excluding the acquired VBB loans, overall loan growth year-over-year was approximately $141.6 million, or 3.30%.

Noninterest-bearing deposits were $3.91 billion at September 30, 2017, an increase of $235.3 million, or 6.40%, when compared to December 31, 2016 and an increase of $251.2 million, or 6.87%, compared to $3.66 billion at September 30, 2016. The increase in noninterest-bearing deposits at September 30, 2017 included $172.5 million of noninterest-bearing deposits assumed from VBB during the first quarter of 2017. At September 30, 2017, noninterest-bearing deposits were 59.15% of total deposits, compared to 58.22% at December 31, 2016 and 57.86% at September 30, 2016. Our average cost of total deposits was 0.09% for the quarter ended September 30, 2017, unchanged from the same period last year.

Customer repurchase agreements totaled $455.1 million at September 30, 2017, compared to $603.0 million and $578.0 million at December 31, 2016 and September 30, 2016, respectively. Our average cost of total deposits including customer repurchase agreements was 0.10% for the quarters ended September 30, 2017 and 2016.

At September 30, 2017, there were $63.0 million in short-term borrowings, compared to $53.0 million at December 31, 2016 and zero at September 30, 2016. At September 30, 2017, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2016 and June 30, 2016. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

The allowance for loan losses totaled $60.6 million at September 30, 2017, compared to $60.2 million at June 30, 2017, $61.5 million at December 31, 2016, and $61.0 million at September 30, 2016. The allowance for loan losses was increased by net recoveries on loans of $1.9 million for the third quarter of 2017 and was reduced by a $1.5 million loan loss provision recapture for the third quarter of 2017. The allowance for loan losses was 1.28%, 1.28%, 1.28%, 1.40%, and 1.42% of total loans and leases outstanding, at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016, and September 30, 2016, respectively. The ratio as of the most recent three quarters was impacted by the $309.7 million loans acquired from Valley Business Bank that are recorded at fair market value, without a corresponding loan loss allowance.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of September 30, 2017, the Company’s Tier 1 leverage capital ratio totaled 11.81%, our common equity Tier 1 ratio totaled 16.62%, our Tier 1 risk-based capital ratio totaled 17.06%, and our total risk-based capital ratio totaled 18.25%. Refer to our Analysis 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 March 10, 2017, we completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for VBB. Our financial statements for the first nine months of 2017 include 204 days of VBB operations, post-merger. At close, Citizens Business Bank acquired $309.7 million of loans and assumed $361.8 million of total deposits, including $172.5 million of noninterest-bearing deposits.

At close, VBB had four branches located in Visalia, Tulare, Fresno, and Woodlake. The consolidation of three of these branches occurred in the third quarter of 2017. The sale of the Woodlake branch is expected to occur in the fourth quarter of 2017.

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ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

|  | For the Three Months Ended |  |  |  |  |  | Variance
|  | September 30, |  | June 30, |  |  |  |  |  |  |  |
|  | 2017 |  | 2017 |  |  |  |  |  | $ |  | %
|  | (Dollars in thousands, except per share amounts)
Net interest income |  | $ | 71,739 |  |  | $ | 70,483 |  |  |  |  |  |  |  |  |  |  | $ | 1,256 |  |  |  | 1.78% |
Recapture of provision for loan losses |  |  | 1,500 |  |  |  | 1,000 |  |  |  |  |  |  |  |  |  |  |  | 500 |  |  |  | 50.00% |
Noninterest income |  |  | 10,038 |  |  |  | 10,776 |  |  |  |  |  |  |  |  |  |  |  | (738) |  |  |  | -6.85% |
Noninterest expense |  |  | 34,706 |  |  |  | 36,873 |  |  |  |  |  |  |  |  |  |  |  | (2,167) |  |  |  | -5.88% |
Income taxes |  |  | 18,888 |  |  |  | 17,013 |  |  |  |  |  |  |  |  |  |  |  | 1,875 |  |  |  | 11.02% |
Net earnings |  | $ | 29,683 |  |  | $ | 28,373 |  |  |  |  |  |  |  |  |  |  | $ | 1,310 |  |  |  | 4.62% |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.27 |  |  | $ | 0.26 |  |  |  |  |  |  |  |  |  |  | $ | 0.01 |  |  |  |  |
Diluted |  | $ | 0.27 |  |  | $ | 0.26 |  |  |  |  |  |  |  |  |  |  | $ | 0.01 |  |  |  |  |
Return on average assets |  |  | 1.41% |  |  |  | 1.35% |  |  |  |  |  |  |  |  |  |  |  | 0.06% |  |  |  |  |
Return on average shareholders’ equity |  |  | 10.93% |  |  |  | 10.73% |  |  |  |  |  |  |  |  |  |  |  | 0.20% |  |  |  |  |
Efficiency ratio |  |  | 42.44% |  |  |  | 45.38% |  |  |  |  |  |  |  |  |  |  |  | -2.94% |  |  |  |  |
Noninterest expense to average assets |  |  | 1.65% |  |  |  | 1.76% |  |  |  |  |  |  |  |  |  |  |  | -0.11% |  |  |  |  |

|  | For the Three Months Ended September 30, |  | Variance |  | For the Nine Months Ended September 30, |  | Variance
|  | 2017 |  | 2016 |  | $ |  | % |  |  | 2017 |  | 2016 |  | $ |  | % |
|  | (Dollars in thousands, except per share amounts)
Net interest income |  | $ | 71,739 |  |  | $ | 63,161 |  |  | $ | 8,578 |  |  |  | 13.58% |  |  | $ | 207,655 |  |  | $ | 191,633 |  |  | $ | 16,022 |  |  |  | 8.36% |
Recapture of provision for loan losses |  |  | 1,500 |  |  |  | 2,000 |  |  |  | (500) |  |  |  | -25.00% |  |  |  | 7,000 |  |  |  | 2,000 |  |  |  | 5,000 |  |  |  | 250.00% |
Noninterest income |  |  | 10,038 |  |  |  | 9,183 |  |  |  | 855 |  |  |  | 9.31% |  |  |  | 29,536 |  |  |  | 27,140 |  |  |  | 2,396 |  |  |  | 8.83% |
Noninterest expense |  |  | 34,706 |  |  |  | 33,006 |  |  |  | 1,700 |  |  |  | 5.15% |  |  |  | 105,696 |  |  |  | 101,808 |  |  |  | 3,888 |  |  |  | 3.82% |
Income taxes |  |  | 18,888 |  |  |  | 15,890 |  |  |  | 2,998 |  |  |  | 18.87% |  |  |  | 51,935 |  |  |  | 44,612 |  |  |  | 7,323 |  |  |  | 16.41% |
Net earnings |  | $ | 29,683 |  |  | $ | 25,448 |  |  | $ | 4,235 |  |  |  | 16.64% |  |  | $ | 86,560 |  |  | $ | 74,353 |  |  | $ | 12,207 |  |  |  | 16.42% |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.04 |  |  |  |  |  |  | $ | 0.79 |  |  | $ | 0.69 |  |  | $ | 0.10 |  |  |  |  |
Diluted |  | $ | 0.27 |  |  | $ | 0.23 |  |  | $ | 0.04 |  |  |  |  |  |  | $ | 0.79 |  |  | $ | 0.69 |  |  | $ | 0.10 |  |  |  |  |
Return on average assets |  |  | 1.41% |  |  |  | 1.23% |  |  |  | 0.18% |  |  |  |  |  |  |  | 1.40% |  |  |  | 1.24% |  |  |  | 0.16% |  |  |  |  |
Return on average shareholders’ equity |  |  | 10.93% |  |  |  | 10.05% |  |  |  | 0.88% |  |  |  |  |  |  |  | 11.01% |  |  |  | 10.14% |  |  |  | 0.87% |  |  |  |  |
Efficiency ratio |  |  | 42.44% |  |  |  | 45.62% |  |  |  | -3.18% |  |  |  |  |  |  |  | 44.56% |  |  |  | 46.54% |  |  |  | -1.98% |  |  |  |  |
Noninterest expense to average assets |  |  | 1.65% |  |  |  | 1.59% |  |  |  | 0.06% |  |  |  |  |  |  |  | 1.70% |  |  |  | 1.70% |  |  |  | 0.00% |  |  |  |  |

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 35%. 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

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein.

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.

Interest-Earning Assets and Interest-Bearing Liabilities

|  | For the Three Months Ended September 30,
|  | 2017 |  | 2016
|  | Average Balance |  | Interest |  | Yield/ Rate |  |  | Average Balance |  | Interest |  | Yield/ Rate |
|  | (Dollars in thousands)
INTEREST-EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 2,124,093 |  |  | $ | 11,767 |  |  |  | 2.22 | % |  | $ | 2,128,181 |  |  | $ | 10,546 |  |  |  | 2.03 | %
Tax-advantaged |  |  | 64,839 |  |  |  | 473 |  |  |  | 4.39 | % |  |  | 111,259 |  |  |  | 879 |  |  |  | 4.69 | %
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 578,450 |  |  |  | 3,111 |  |  |  | 2.15 | % |  |  | 452,897 |  |  |  | 2,349 |  |  |  | 2.07 | %
Tax-advantaged |  |  | 277,920 |  |  |  | 2,073 |  |  |  | 4.04 | % |  |  | 294,916 |  |  |  | 2,438 |  |  |  | 4.46 | %
Investment in FHLB stock |  |  | 17,688 |  |  |  | 318 |  |  |  | 7.03 | % |  |  | 17,688 |  |  |  | 403 |  |  |  | 8.92 | %
Interest-earning deposits with other institutions |  |  | 44,758 |  |  |  | 130 |  |  |  | 1.16 | % |  |  | 562,754 |  |  |  | 802 |  |  |  | 0.57 | %
Loans (2) |  |  | 4,710,900 |  |  |  | 55,998 |  |  |  | 4.72 | % |  |  | 4,248,225 |  |  |  | 47,754 |  |  |  | 4.46 | %
Total interest-earning assets |  |  | 7,818,648 |  |  |  | 73,870 |  |  |  | 3.81 | % |  |  | 7,815,920 |  |  |  | 65,171 |  |  |  | 3.40 | %
Total noninterest-earning assets |  |  | 520,728 |  |  |  |  |  |  |  |  |  |  |  | 440,634 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 8,339,376 |  |  |  |  |  |  |  |  |  |  | $ | 8,256,554 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits (3) |  | $ | 2,352,971 |  |  |  | 1,261 |  |  |  | 0.21 | % |  | $ | 2,260,687 |  |  |  | 1,139 |  |  |  | 0.20 | %
Time deposits |  |  | 398,810 |  |  |  | 294 |  |  |  | 0.29 | % |  |  | 544,180 |  |  |  | 386 |  |  |  | 0.28 | %
Total interest-bearing deposits |  |  | 2,751,781 |  |  |  | 1,555 |  |  |  | 0.22 | % |  |  | 2,804,867 |  |  |  | 1,525 |  |  |  | 0.22 | %
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 551,193 |  |  |  | 576 |  |  |  | 0.41 | % |  |  | 608,313 |  |  |  | 485 |  |  |  | 0.32 | %
Interest-bearing liabilities |  |  | 3,302,974 |  |  |  | 2,131 |  |  |  | 0.26 | % |  |  | 3,413,180 |  |  |  | 2,010 |  |  |  | 0.23 | %
Noninterest-bearing deposits |  |  | 3,891,381 |  |  |  |  |  |  |  |  |  |  |  | 3,715,018 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 67,718 |  |  |  |  |  |  |  |  |  |  |  | 121,338 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 1,077,303 |  |  |  |  |  |  |  |  |  |  |  | 1,007,018 |  |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 8,339,376 |  |  |  |  |  |  |  |  |  |  | $ | 8,256,554 |  |  |  |  |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 71,739 |  |  |  |  |  |  |  |  |  |  | $ | 63,161 |  |  |  |  |
Net interest spread - tax equivalent |  |  |  |  |  |  |  |  |  |  | 3.55 | % |  |  |  |  |  |  |  |  |  |  | 3.17 | %
Net interest margin |  |  |  |  |  |  |  |  |  |  | 3.65 | % |  |  |  |  |  |  |  |  |  |  | 3.24 | %
Net interest margin - tax equivalent |  |  |  |  |  |  |  |  |  |  | 3.70 | % |  |  |  |  |  |  |  |  |  |  | 3.30 | %

| (1) | Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 35%. Non TE rate was 2.29% and 2.21% for the three months ended September 30, 2017 and 2016, respectively.

| (2) | Includes loan fees of $885,000 and $917,000 for the three months ended September 30, 2017 and 2016, respectively. Prepayment penalty fees of $903,000 and $766,000 are included in interest income for the three months ended September 30, 2017 and 2016, respectively.

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

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##### Table of Contents

|  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016
|  | Average Balance |  | Interest |  | Yield/ Rate |  |  | Average Balance |  | Interest |  | Yield/ Rate |
|  | (Dollars in thousands)
INTEREST-EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 2,161,151 |  |  | $ | 36,113 |  |  |  | 2.24 | % |  | $ | 2,118,862 |  |  | $ | 32,754 |  |  |  | 2.08 | %
Tax-advantaged |  |  | 71,528 |  |  |  | 1,774 |  |  |  | 4.84 | % |  |  | 135,688 |  |  |  | 3,488 |  |  |  | 4.96 | %
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 593,357 |  |  |  | 9,591 |  |  |  | 2.16 | % |  |  | 466,591 |  |  |  | 7,184 |  |  |  | 2.05 | %
Tax-advantaged |  |  | 279,947 |  |  |  | 6,423 |  |  |  | 4.14 | % |  |  | 303,388 |  |  |  | 7,694 |  |  |  | 4.56 | %
Investment in FHLB stock |  |  | 18,167 |  |  |  | 1,070 |  |  |  | 7.77 | % |  |  | 17,935 |  |  |  | 1,210 |  |  |  | 8.86 | %
Interest-earning deposits with other institutions |  |  | 90,125 |  |  |  | 683 |  |  |  | 1.01 | % |  |  | 364,186 |  |  |  | 1,575 |  |  |  | 0.58 | %
Loans (2) |  |  | 4,579,054 |  |  |  | 158,253 |  |  |  | 4.62 | % |  |  | 4,155,717 |  |  |  | 143,781 |  |  |  | 4.61 | %
Total interest-earning assets |  |  | 7,793,329 |  |  |  | 213,907 |  |  |  | 3.72 | % |  |  | 7,562,367 |  |  |  | 197,686 |  |  |  | 3.57 | %
Total noninterest-earning assets |  |  | 501,209 |  |  |  |  |  |  |  |  |  |  |  | 437,427 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 8,294,538 |  |  |  |  |  |  |  |  |  |  | $ | 7,999,794 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits (3) |  | $ | 2,345,105 |  |  |  | 3,684 |  |  |  | 0.21 | % |  | $ | 2,159,344 |  |  |  | 3,207 |  |  |  | 0.20 | %
Time deposits |  |  | 403,701 |  |  |  | 863 |  |  |  | 0.29 | % |  |  | 650,087 |  |  |  | 1,337 |  |  |  | 0.27 | %
Total interest-bearing deposits |  |  | 2,748,806 |  |  |  | 4,547 |  |  |  | 0.22 | % |  |  | 2,809,431 |  |  |  | 4,544 |  |  |  | 0.22 | %
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 595,415 |  |  |  | 1,705 |  |  |  | 0.38 | % |  |  | 644,283 |  |  |  | 1,509 |  |  |  | 0.31 | %
Interest-bearing liabilities |  |  | 3,344,221 |  |  |  | 6,252 |  |  |  | 0.25 | % |  |  | 3,453,714 |  |  |  | 6,053 |  |  |  | 0.23 | %
Noninterest-bearing deposits |  |  | 3,828,235 |  |  |  |  |  |  |  |  |  |  |  | 3,480,739 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 70,923 |  |  |  |  |  |  |  |  |  |  |  | 85,739 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 1,051,159 |  |  |  |  |  |  |  |  |  |  |  | 979,602 |  |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 8,294,538 |  |  |  |  |  |  |  |  |  |  | $ | 7,999,794 |  |  |  |  |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 207,655 |  |  |  |  |  |  |  |  |  |  | $ | 191,633 |  |  |  |  |
Net interest spread - tax equivalent |  |  |  |  |  |  |  |  |  |  | 3.47 | % |  |  |  |  |  |  |  |  |  |  | 3.34 | %
Net interest margin |  |  |  |  |  |  |  |  |  |  | 3.56 | % |  |  |  |  |  |  |  |  |  |  | 3.39 | %
Net interest margin - tax equivalent |  |  |  |  |  |  |  |  |  |  | 3.62 | % |  |  |  |  |  |  |  |  |  |  | 3.46 | %

| (1) | Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 35%. Non TE rate was 2.32% and 2.27% for the nine months ended September 30, 2017 and 2016, respectively.

| (2) | Includes loan fees of $2.7 million and $2.9 million for the nine months ended September 30, 2017 and 2016, respectively. Prepayment penalty fees of $2.0 million and $2.7 million are included in interest income for the nine months ended September 30, 2017 and 2016, respectively.

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

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##### Table of Contents

The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.

Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

|  | Comparision of Three Months Ended September 30, 2017 Compared to 2016 Increase (Decrease) Due to
|  | Volume |  | Rate |  | Rate/ Volume |  | Total
|  | (Dollars in thousands)
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  | $ | (26 | ) |  | $ | 1,250 |  |  | $ | (3 | ) |  | $ | 1,221 |
Tax-advantaged investment securities |  |  | (358 | ) |  |  | (82 | ) |  |  | 34 |  |  |  | (406 | )
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  |  | 651 |  |  |  | 87 |  |  |  | 24 |  |  |  | 762 |
Tax-advantaged investment securities |  |  | (144 | ) |  |  | (235 | ) |  |  | 14 |  |  |  | (365 | )
Investment in FHLB stock |  |  | - |  |  |  | (85 | ) |  |  | - |  |  |  | (85 | )
Interest-earning deposits with other institutions |  |  | (738 | ) |  |  | 832 |  |  |  | (766 | ) |  |  | (672 | )
Loans |  |  | 5,202 |  |  |  | 2,743 |  |  |  | 299 |  |  |  | 8,244 |
Total interest income |  |  | 4,587 |  |  |  | 4,510 |  |  |  | (398 | ) |  |  | 8,699 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits |  |  | 46 |  |  |  | 73 |  |  |  | 3 |  |  |  | 122 |
Time deposits |  |  | (102 | ) |  |  | 14 |  |  |  | (4 | ) |  |  | (92 | )
FHLB advances, other borrowings, and customer repurchase agreements |  |  | (46 | ) |  |  | 151 |  |  |  | (14 | ) |  |  | 91 |
Total interest expense |  |  | (102 | ) |  |  | 238 |  |  |  | (15 | ) |  |  | 121 |
Net interest income |  | $ | 4,689 |  |  | $ | 4,272 |  |  | $ | (383 | ) |  | $ | 8,578 |
|  | Comparision of Nine Months Ended September 30, 2017 Compared to 2016 Increase (Decrease) Due to
|  | Volume |  | Rate |  | Rate/ Volume |  | Total
|  | (Dollars in thousands)
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  | $ | 698 |  |  | $ | 2,609 |  |  | $ | 52 |  |  | $ | 3,359 |
Tax-advantaged investment securities |  |  | (1,643 | ) |  |  | (136 | ) |  |  | 65 |  |  |  | (1,714 | )
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  |  | 1,951 |  |  |  | 358 |  |  |  | 98 |  |  |  | 2,407 |
Tax-advantaged investment securities |  |  | (603 | ) |  |  | (724 | ) |  |  | 56 |  |  |  | (1,271 | )
Investment in FHLB stock |  |  | 16 |  |  |  | (154 | ) |  |  | (2 | ) |  |  | (140 | )
Interest-earning deposits with other institutions |  |  | (1,185 | ) |  |  | 1,185 |  |  |  | (892 | ) |  |  | (892 | )
Loans |  |  | 14,107 |  |  |  | 331 |  |  |  | 34 |  |  |  | 14,472 |
Total interest income |  |  | 13,341 |  |  |  | 3,469 |  |  |  | (589 | ) |  |  | 16,221 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits |  |  | 267 |  |  |  | 193 |  |  |  | 17 |  |  |  | 477 |
Time deposits |  |  | (510 | ) |  |  | 58 |  |  |  | (22 | ) |  |  | (474 | )
FHLB advances, other borrowings, and customer repurchase agreements |  |  | (110 | ) |  |  | 332 |  |  |  | (26 | ) |  |  | 196 |
Total interest expense |  |  | (353 | ) |  |  | 583 |  |  |  | (31 | ) |  |  | 199 |
Net interest income |  | $ | 13,694 |  |  | $ | 2,886 |  |  | $ | (558 | ) |  | $ | 16,022 |

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##### Table of Contents

Third Quarter of 2017 Compared to the Third Quarter of 2016

Net interest income, before recapture of provision for loan losses, of $71.7 million for the third quarter of 2017 increased $8.6 million, or 13.58%, compared to $63.2 million for the third quarter of 2016. Average interest-earning assets of $7.82 billion grew by $2.7 million, or 0.03%, from $7.82 billion for the third quarter of 2016. Our net interest margin (TE) was 3.70% for the third quarter of 2017, compared to 3.30% for the third quarter of 2016.

Interest income of $73.9 million for the third quarter of 2017 grew by $8.7 million, or 13.35%, when compared to the same period of 2016, as average interest-earning assets were higher by $2.7 million and the yield on interest-earning assets grew by 41 basis points. Excluding interest recaptured on nonaccrual loans, interest income grew by about $7.7 million, or 11.75%, year-over-year.

The increase in average interest-earning assets of $2.7 million includes an increase in average loans of $462.7 million, or 10.89%, and an increase in average investments of $58.0 million or 1.94%. Interest-earning assets at the Federal Reserve and other financial institutions declined on average by $518.0 million or 92.05%.

The increase in earning asset yield over the third quarter of 2016 resulted from a combination of a 26 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 54.4% in the third quarter of 2016 to 60.3% in the third quarter of 2017. Conversely, interest-earning assets at the Federal Reserve and other financial institutions declined as a percentage of earning assets from 7.2% in the prior year to 0.6% in the third quarter of 2017. Also contributing to the increase in the yield on earning assets, was a four basis point increase in tax-equivalent yield on investments. Loan yield was positively impacted by nine basis points from interest recaptured on nonaccrual loans in the third quarter of 2017. Excluding the impact of interest recapture, the yield on interest earning assets increased by 35 basis points.

Interest income and fees on loans for the third quarter of 2017 totaled $56.0 million which represented an $8.2 million, or 17.26%, increase when compared to the third quarter of 2016. Average loans increased $462.7 million for the third quarter of 2017 when compared with the same period of 2016 and included approximately $309.0 million of acquired VBB loans. Excluding interest recaptured on nonaccrual loans, interest income and fees on loans increased by $7.2 million and the yield on loans increased by 17 basis points. 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 1% when compared to the third quarter of 2016. During the third quarter of 2017, there was one TDR loan that was previously on nonaccrual that paid in full, resulting in the recognition of $1.0 million of interest, elevating the yield on loans by nine basis points.

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 September 30, 2017 and 2016. As of September 30, 2017 and 2016, we had $11.6 million and $8.7 million of nonaccrual loans (excluding PCI loans), respectively.

Interest income from total investments was $17.4 million for the third quarter of 2017, an increase of $1.2 million from the third quarter of 2016. Average investment securities increased by $58.0 million for the third quarter of 2017, compared to the same period of 2016. The non tax-equivalent yield on securities increased from 2.21% in the third quarter of 2016 to 2.29% for the third quarter of 2017, as yields on mortgage-backed securities increased due to slower premium amortization resulting from rising interest rates and corresponding declines in the velocity of prepayments on mortgages.

Interest expense of $2.1 million for the third quarter of 2017, increased $121,000, or 6.02%, when compared to the third quarter of 2016. The average rate paid on interest-bearing liabilities increased three basis points, to 0.26% for the third quarter of 2017, from 0.23% for the third quarter of 2016, due to higher rates of interest from overnight borrowings and subordinated debt. The rate on interest-bearing deposits did not change from the third quarter of 2016. Average interest-bearing liabilities were $110.2 million lower during the third quarter of 2017, compared to the third quarter of 2016. The decline in interest-bearing liabilities included a $145.4 million decline in average time deposits due to the Bank’s election to not renew time deposits issued to the State of California during the third and fourth quarters of 2016. Excluding the impact of the decline in time deposits, interest-bearing liabilities increased by $35.2 million.

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##### Table of Contents

Nine Months of 2017 Compared to the Nine Months of 2016

Net interest income, before recapture of provision for loan losses, was $207.7 million for the nine months ended September 30, 2017, an increase of $16.0 million, or 8.36%, compared to $191.6 million for the same period of 2016. Interest-earning assets grew on average by $231.0 million, or 3.05%, from $7.56 billion for the nine months ended September 30, 2016 to $7.79 billion for the current year. Our net interest margin (TE) was 3.62% during the first nine months of 2017, compared to 3.46% for the same period of 2016. Excluding interest recaptured on nonaccrual loans, the net interest margin (TE) was 18 basis points higher than the first nine months of 2016.

Interest income for the nine months ended September 30, 2017 was $213.9 million, which represented a $16.2 million, or 8.21%, increase when compared to the same period of 2016. Compared to the first nine months of 2016, average interest-earning assets increased by $231.0 million and the yield on interest-earning assets increased by 15 basis points. Excluding interest recaptured on nonaccrual loans, interest income grew by about $17.4 million, or 8.92%, year-over-year. When the impact of the recaptured interest is excluded, the yield on interest-earning assets increased from 3.52% for the nine months ended September 30, 2016 to 3.70% for the nine months ended September 30, 2017.

Interest income and fees on loans for the first nine months of 2017 totaled $158.3 million, which represented a $14.5 million, or 10.07%, increase when compared to the same period of 2016. Average loans increased $423.3 million for the first nine months of 2017 when compared with the same period of 2016, and included approximately $224.0 million of acquired VBB loans. The increase in the earning asset yield over the first nine months of 2016 of 15 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 55.0% to 58.8% for the first nine months of 2017.

During the first nine months of 2016, there were three TDR loans that were paid in full, resulting in a $2.6 million increase in interest income, or an eight basis point increase in the loan yield. This compares to $1.4 million of recaptured interest or a four basis point increase in loan yield for the same period of 2017, including one TDR loan that was previously on nonaccrual that paid in full, resulting in a $1.0 million increase in interest income. When the impact of the recaptured interest is excluded, the yield on loans increased from 4.53% for the nine months ended September 30, 2016 to 4.58% for the nine months ended September 30, 2017.

Interest income from investment securities was $53.9 million for the nine months ended September 30, 2017, a $2.8 million increase from $51.1 million for the first nine months of 2016. This increase was the result of an $81.5 million increase in the average investment securities for the first nine months of 2017, compared to the same period of 2016 and a five basis points increase in the non tax-equivalent yield on securities.

Interest expense of $6.3 million for the nine months ended September 30, 2017, increased by $199,000 from the same period of 2016. The average rate paid on interest-bearing liabilities increased two basis points, to 0.25% for the first nine months of 2017, from 0.23% for the same period of 2016. The increase was due to higher rates of interest from overnight borrowings and subordinated debt. The rate on interest-bearing deposits for the first nine months of 2017 did not change from the same period in 2016. Average interest-bearing liabilities were $109.5 million lower during the first nine months of 2017, compared to the same period of 2016. Excluding a $246.4 million decline in average time deposits, interest-bearing liabilities increased by $136.9 million.

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##### Table of Contents

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 $60.6 million at September 30, 2017, compared to $61.5 million at December 31, 2016. The allowance for loan losses was reduced by a $7.0 million loan loss provision recapture and was increased by net recoveries on loans of $6.1 million for the nine months ended September 30, 2017. This compares to a $2.0 million loan loss provision recapture and net recoveries of $3.8 million for the same period of 2016. We believe the allowance is appropriate at September 30, 2017. 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 September 30, 2017 and December 31, 2016 was 1.28% and 1.40%, respectively. The ratio as of the most recent three quarters was impacted by the $309.7 million loans acquired from Valley Business Bank that are recorded at fair market value, without a corresponding loan loss allowance. 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 $6.1 million for the nine months ended September 30, 2017, compared to $3.8 million for the same period of 2016. See “Allowance for Loan Losses” under Analysis of Financial Condition herein.

PCI loans acquired in the FDIC-assisted transaction were initially recorded at their fair value and were covered by a loss sharing agreement with the FDIC, which expired in October 2014 for commercial loans. Due to the timing of the acquisition and the October 16, 2009 fair value estimate, there was no provision for loan losses on the PCI loans in 2009. Refer to Note 3 – Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2016 for a more detailed discussion about the FDIC loss sharing asset/liability. For the nine months ended September 30, 2017 and 2016, 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.

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##### Table of Contents

Noninterest Income

Noninterest income includes income derived from special services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.

The following table sets forth the various components of noninterest income for the periods presented.

|  | For the Three Months Ended September 30, |  | Variance |  | For the Nine Months Ended September 30, |  | Variance
|  | 2017 |  | 2016 |  | $ |  | % |  |  | 2017 |  | 2016 |  | $ |  | % |
|  | (Dollars in thousands)
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 4,085 |  |  | $ | 3,817 |  |  | $ | 268 |  |  |  | 7.02% |  |  | $ | 11,794 |  |  | $ | 11,386 |  |  | $ | 408 |  |  |  | 3.58% |
Trust and investment services |  |  | 2,523 |  |  |  | 2,328 |  |  |  | 195 |  |  |  | 8.38% |  |  |  | 7,432 |  |  |  | 7,039 |  |  |  | 393 |  |  |  | 5.58% |
Bankcard services |  |  | 927 |  |  |  | 827 |  |  |  | 100 |  |  |  | 12.09% |  |  |  | 2,563 |  |  |  | 2,166 |  |  |  | 397 |  |  |  | 18.33% |
BOLI income |  |  | 692 |  |  |  | 706 |  |  |  | (14 | ) |  |  | -1.98% |  |  |  | 2,904 |  |  |  | 2,005 |  |  |  | 899 |  |  |  | 44.84% |
Swap fee income |  |  | 198 |  |  |  | 136 |  |  |  | 62 |  |  |  | 45.59% |  |  |  | 592 |  |  |  | 521 |  |  |  | 71 |  |  |  | 13.63% |
Gain on sale of investment securities, net |  |  | - |  |  |  | 548 |  |  |  | (548 | ) |  |  | -100.00% |  |  |  | 402 |  |  |  | 548 |  |  |  | (146 | ) |  |  | -26.64% |
Gain on sale of loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,101 |  |  |  | (1,101 | ) |  |  | -100.00% |
Gain on sale of asset held-for-sale |  |  | 542 |  |  |  | - |  |  |  | 542 |  |  |  | - |  |  |  | 542 |  |  |  | - |  |  |  | 542 |  |  |  | - |
Other |  |  | 1,071 |  |  |  | 821 |  |  |  | 250 |  |  |  | 30.45% |  |  |  | 3,307 |  |  |  | 2,374 |  |  |  | 933 |  |  |  | 39.30% |
Total noninterest income |  | $ | 10,038 |  |  | $ | 9,183 |  |  | $ | 855 |  |  |  | 9.31% |  |  | $ | 29,536 |  |  | $ | 27,140 |  |  | $ | 2,396 |  |  |  | 8.83% |

Third Quarter of 2017 Compared to the Third Quarter of 2016

The $855,000 increase in noninterest income was primarily due to a $542,000 net gain on the sale of our former operations/technology center, which was classified as an asset held-for-sale at December 31, 2016, a $368,000 increase in service charges on deposit accounts and Bankcard services, and a $195,000 increase in trust and investment services income. These increases were offset by a $548,000 net gain on sale of securities in the third quarter of 2016.

CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At September 30, 2017, CitizensTrust had approximately $2.84 billion in assets under management and administration, including $2.13 billion in assets under management. CitizensTrust generated fees of $2.5 million for the third quarter of 2017, an increase of $195,000 compared to the third quarter of 2016.

The Bank’s investment in BOLI includes life insurance policies acquired through bank 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. BOLI income of $692,000 for the third quarter of 2017 decreased $14,000, or 1.98%, from the third quarter of 2016.

Nine Months of 2017 Compared to the Nine Months of 2016

The $2.4 million increase in noninterest income for the nine months ended September 30, 2017, was the result of an $899,000 increase in BOLI income, including $775,000 in tax free income on the death benefit of a former director, $443,000 of recoveries on ASB loans that were charged off prior to the acquisition, an $805,000 increase in service charges on deposits and Bankcard services, a $542,000 net gain on the sale of our former operations/technology center, and a $393,000 increase in trust and wealth management fees. The first nine months of 2016 included a $1.1 million net gain on the sale of loans during the first quarter of 2016 and a $272,000 net gain on the sale of our Porterville branch in the second quarter of 2016.

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Noninterest Expense

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

|  | For the Three Months Ended September 30, |  | Variance |  | For the Nine Months Ended September 30, |  | Variance
|  | 2017 |  | 2016 |  | $ |  | % |  |  | 2017 |  | 2016 |  | $ |  | % |
|  | (Dollars in thousands)
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | $ | 21,835 |  |  | $ | 20,403 |  |  | $ | 1,432 |  |  |  | 7.02% |  |  | $ | 65,116 |  |  | $ | 63,004 |  |  | $ | 2,112 |  |  |  | 3.35% |
Occupancy |  |  | 3,514 |  |  |  | 3,187 |  |  |  | 327 |  |  |  | 10.26% |  |  |  | 9,964 |  |  |  | 9,192 |  |  |  | 772 |  |  |  | 8.40% |
Equipment |  |  | 886 |  |  |  | 915 |  |  |  | (29 | ) |  |  | -3.17% |  |  |  | 2,674 |  |  |  | 2,748 |  |  |  | (74 | ) |  |  | -2.69% |
Professional services |  |  | 1,091 |  |  |  | 1,404 |  |  |  | (313 | ) |  |  | -22.29% |  |  |  | 4,191 |  |  |  | 3,727 |  |  |  | 464 |  |  |  | 12.45% |
Software licenses and maintenance |  |  | 1,510 |  |  |  | 1,358 |  |  |  | 152 |  |  |  | 11.19% |  |  |  | 4,698 |  |  |  | 4,077 |  |  |  | 621 |  |  |  | 15.23% |
Stationery and supplies |  |  | 254 |  |  |  | 251 |  |  |  | 3 |  |  |  | 1.20% |  |  |  | 917 |  |  |  | 866 |  |  |  | 51 |  |  |  | 5.89% |
Telecommunications expense |  |  | 581 |  |  |  | 532 |  |  |  | 49 |  |  |  | 9.21% |  |  |  | 1,763 |  |  |  | 1,604 |  |  |  | 159 |  |  |  | 9.91% |
Marketing and promotion |  |  | 1,055 |  |  |  | 1,199 |  |  |  | (144 | ) |  |  | -12.01% |  |  |  | 3,484 |  |  |  | 3,818 |  |  |  | (334 | ) |  |  | -8.75% |
Amortization of intangible assets |  |  | 343 |  |  |  | 292 |  |  |  | 51 |  |  |  | 17.47% |  |  |  | 991 |  |  |  | 823 |  |  |  | 168 |  |  |  | 20.41% |
Regulatory assessments |  |  | 776 |  |  |  | 1,093 |  |  |  | (317 | ) |  |  | -29.00% |  |  |  | 2,361 |  |  |  | 3,343 |  |  |  | (982 | ) |  |  | -29.37% |
Insurance |  |  | 446 |  |  |  | 417 |  |  |  | 29 |  |  |  | 6.95% |  |  |  | 1,349 |  |  |  | 1,256 |  |  |  | 93 |  |  |  | 7.40% |
Loan expense |  |  | 234 |  |  |  | 212 |  |  |  | 22 |  |  |  | 10.38% |  |  |  | 642 |  |  |  | 779 |  |  |  | (137 | ) |  |  | -17.59% |
OREO expense |  |  | 8 |  |  |  | 15 |  |  |  | (7 | ) |  |  | -46.67% |  |  |  | 75 |  |  |  | 443 |  |  |  | (368 | ) |  |  | -83.07% |
Directors’ expenses |  |  | 251 |  |  |  | 174 |  |  |  | 77 |  |  |  | 44.25% |  |  |  | 719 |  |  |  | 615 |  |  |  | 104 |  |  |  | 16.91% |
Acquisition related expenses |  |  | 250 |  |  |  | 353 |  |  |  | (103 | ) |  |  | -29.18% |  |  |  | 2,176 |  |  |  | 1,557 |  |  |  | 619 |  |  |  | 39.76% |
Other |  |  | 1,672 |  |  |  | 1,201 |  |  |  | 471 |  |  |  | 39.22% |  |  |  | 4,576 |  |  |  | 3,956 |  |  |  | 620 |  |  |  | 15.67% |
Total noninterest expense |  | $ | 34,706 |  |  | $ | 33,006 |  |  | $ | 1,700 |  |  |  | 5.15% |  |  | $ | 105,696 |  |  | $ | 101,808 |  |  | $ | 3,888 |  |  |  | 3.82% |
Noninterest expense to average assets |  |  | 1.65% |  |  |  | 1.59% |  |  |  |  |  |  |  |  |  |  |  | 1.70% |  |  |  | 1.70% |  |  |  |  |  |  |  |  |
Efficiency ratio (1) |  |  | 42.44% |  |  |  | 45.62% |  |  |  |  |  |  |  |  |  |  |  | 44.56% |  |  |  | 46.54% |  |  |  |  |  |  |  |  |

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

Third Quarter of 2017 Compared to the Third Quarter of 2016

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 1.65% for the third quarter of 2017, compared to 1.59% for the third quarter of 2016.

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 third quarter of 2017, the efficiency ratio was 42.44%, compared to 45.62% for the third quarter of 2016.

The $1.7 million increase in noninterest expense for the third quarter of 2017 included expenses related to the acquisition of VBB and the build-out and relocation to our new operations/technology building. The $1.4 million, or 7.02%, increase in compensation and benefit expense includes additional staff from the acquisition of VBB. Offsetting these expense increases were lower regulatory assessments of $317,000 and $313,000 in reduced professional services expense. The year-over-year decrease in professional services was impacted by a $405,000 recovery of legal expense on a nonperforming loan in the third quarter of 2017.

Nine Months of 2017 Compared to the Nine Months of 2016

Noninterest expense of $105.7 million for the first nine months of 2017 was $3.9 million higher than the prior year period. The year-over-year increase included expenses related to the acquisition of VBB and the build-out and relocation to our new operations/ technology building. Acquisition related expenses were $2.2 million, up $619,000 from the prior year, which included expenses associated with the integration of VBB and the systems conversion that was completed in the second quarter of 2017. The $2.1 million, or 3.35%, increase in compensation and benefit expense includes additional staff from the acquisition of VBB. Occupancy and software licenses and maintenance increased $772,000 and $621,000, respectively. Increases in professional services included $326,000 in higher legal expenses. Offsetting these expense increases were lower regulatory assessments of $982,000 and $368,000 in reduced OREO expenses. As a percentage of average assets, noninterest expense was 1.70% for both the nine months ended September 30, 2017 and September 30, 2016.

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Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 38.89% and 37.50%, respectively, compared to 38.44% and 37.50%, respectively, for the three and nine months ended September 30, 2016. The effective tax rate for 2017 was impacted by the tax effects related to the adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which resulted in the recognition of excess tax benefits of approximately $1.5 million in our provision for income taxes, rather than as an adjustment of paid-in capital. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income and available tax credits. Our effective tax rate for the nine months ended September 30, 2017 was also impacted by $775,000 in tax free income on the death benefit of a former director included in our BOLI policies.

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

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##### Table of Contents

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. In 2016, Dairy & Livestock and Agribusiness was reflected as our second reportable segment. 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 segment based on loan type in 2016. Prior period information has been conformed to the current presentation. 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 Form 10-K for the year ended December 31, 2016 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 and nine months ended September 30, 2017 and 2016. 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 September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  |  |  | (Dollars in thousands) |  |
Key Measures: |  |  |  |  |  |  |  |  |  |  |  |
Statement of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 50,539 |  |  | $ | 45,499 |  |  | $ | 144,879 |  |  | $ | 132,316 |
(Recapture of) provision for loan losses |  |  | 772 |  |  |  | (1,164 | ) |  |  | 2,158 |  |  |  | 2,251 |
Noninterest income |  |  | 5,764 |  |  |  | 5,182 |  |  |  | 16,274 |  |  |  | 15,335 |
Noninterest expense |  |  | 12,963 |  |  |  | 12,423 |  |  |  | 38,607 |  |  |  | 37,924 |
Segment pre-tax profit |  | $ | 42,568 |  |  | $ | 39,422 |  |  | $ | 120,388 |  |  | $ | 107,476 |
Balance Sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Average loans |  | $ | 3,938,693 |  |  | $ | 3,457,939 |  |  | $ | 3,801,132 |  |  | $ | 3,341,301 |
Average interest-bearing deposits and customer repurchase agreements |  | $ | 3,259,229 |  |  | $ | 3,245,407 |  |  | $ | 3,306,137 |  |  | $ | 3,190,330 |
Yield on loans (1) |  |  | 4.59% |  |  |  | 4.49% |  |  |  | 4.54% |  |  |  | 4.58% |
Rate paid on interest-bearing deposits and customer repurchases |  |  | 0.23% |  |  |  | 0.21% |  |  |  | 0.23% |  |  |  | 0.22% |

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

For the third quarter of 2017, the Centers’ segment pre-tax profit increased primarily due to a $5.0 million, or 11.08%, increase in net interest income when compared to the third quarter of 2016. Average loans increased $480.8 million and included approximately $309.0 million of acquired VBB loans. Loan yield increased by 10 basis points to 4.59% for the third quarter of 2017, compared to 4.49% for the third quarter of 2016. 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 1% when compared to the third quarter of 2016. The third quarter of 2017 included a loan loss provision of $772,000, compared to a loan loss provision recapture of $1.2 million for the same period of 2016.

For the first nine months of 2017, the Centers’ segment pre-tax profit increased primarily due to a $15.1 million, or 10.67%, increase in interest income when compared with the same period of 2016. Average loans increased $459.8 million and included approximately $224.0 million of acquired VBB loans. This was offset by a four basis point drop in the loan yield when compared to the nine months ended September 30, 2016. The year-over-year increase in interest income was offset by a $2.5 million increase in interest expense for the first nine months of 2017 compared to 2016, principally due to a $115.8 million increase in average interest-bearing deposits and customer repurchase agreements and included about $134.5 million of VBB interest-bearing deposits. In addition, the first nine months of 2017 included a loan loss provision of $2.2 million, compared to $2.3 million for the same period of 2016.

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##### Table of Contents

Dairy &Livestock and Agribusiness

|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  |  |  | (Dollars in thousands) |  |
Key Measures: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Statement of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 2,728 |  |  | $ | 2,008 |  |  | $ | 7,241 |  |  | $ | 5,927 |
(Recapture of) provision for loan losses |  |  | (66 | ) |  |  | 1,089 |  |  |  | (3,186 | ) |  |  | (264 | )
Noninterest income |  |  | 84 |  |  |  | 73 |  |  |  | 188 |  |  |  | 180 |
Noninterest expense |  |  | 479 |  |  |  | 474 |  |  |  | 1,484 |  |  |  | 1,452 |
Segment pre-tax profit |  | $ | 2,399 |  |  | $ | 518 |  |  | $ | 9,131 |  |  | $ | 4,919 |
Balance Sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Average loans |  | $ | 435,076 |  |  | $ | 418,726 |  |  | $ | 423,837 |  |  | $ | 422,291 |
Average interest-bearing deposits and customer repurchase agreements |  | $ | 50,105 |  |  | $ | 23,733 |  |  | $ | 40,425 |  |  | $ | 23,680 |
Yield on loans (1) |  |  | 4.06% |  |  |  | 3.53% |  |  |  | 3.88% |  |  |  | 3.47% |
Rate paid on interest-bearing deposits and customer repurchases |  |  | 0.32% |  |  |  | 0.15% |  |  |  | 0.29% |  |  |  | 0.15% |

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

For the third quarter of 2017, the dairy & livestock and agribusiness segment pre-tax profit increased by $1.9 million, primarily due to a $1.2 million decrease in the loan loss provision. Higher interest income of $743,000 resulted from a 53 basis point increase in the loan yield for the third quarter of 2017 compared to the same period of 2016, principally due to an increase in the Bank’s Prime rate.

Pre-tax profit increased $4.2 million, or 85.63%, for the nine months ended September 30, 2017 primarily due to a $2.9 million increase in the loan loss provision recapture and a $1.3 million increase in interest income for the first nine months of 2017, compared to the same period of 2016. Interest income increased principally due to a 41 basis point increase in loan yield when compared to the nine months ended September 30, 2016, as the Bank’s Prime rate increased over the comparative period.

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Other

|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  |  |  | (Dollars in thousands) |  |
Key Measures: |  |  |  |  |  |  |  |  |  |  |  |
Statement of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net interest income (1) |  | $ | 18,472 |  |  | $ | 15,654 |  |  |  | 55,535 |  |  |  | 53,390 |
Recapture of provision for loan losses |  |  | (2,206 | ) |  |  | (1,925 | ) |  |  | (5,972 | ) |  |  | (3,987 | )
Noninterest income |  |  | 4,190 |  |  |  | 3,928 |  |  |  | 13,074 |  |  |  | 11,625 |
Noninterest expense |  |  | 21,264 |  |  |  | 20,109 |  |  |  | 65,605 |  |  |  | 62,432 |
Segment pre-tax profit |  | $ | 3,604 |  |  | $ | 1,398 |  |  | $ | 8,976 |  |  | $ | 6,570 |
Balance Sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Average investment securities |  | $ | 3,045,302 |  |  | $ | 2,987,253 |  |  | $ | 3,105,983 |  |  | $ | 3,024,529 |
Average loans |  | $ | 337,131 |  |  | $ | 371,561 |  |  | $ | 354,085 |  |  | $ | 392,124 |
Average interest-bearing deposits |  | $ | - |  |  | $ | 142,114 |  |  | $ | - |  |  | $ | 233,156 |
Average borrowings |  | $ | 50,108 |  |  | $ | 25,774 |  |  | $ | 43,027 |  |  | $ | 29,260 |
Yield on investment securities -TE |  |  | 2.42% |  |  |  | 2.38% |  |  |  | 2.45% |  |  |  | 2.46% |
Non-tax equivalent yield on investment securities |  |  | 2.29% |  |  |  | 2.21% |  |  |  | 2.32% |  |  |  | 2.27% |
Yield on loans |  |  | 7.05% |  |  |  | 5.36% |  |  |  | 6.38% |  |  |  | 6.24% |
Average cost of borrowings |  |  | 1.92% |  |  |  | 2.07% |  |  |  | 1.88% |  |  |  | 1.83% |

| (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.

For the third quarter of 2017, pre-tax profit of the Company’s other operating departments, including treasury and administration, increased primarily due to a $1.9 million increase in interest income and a $961,000 decrease in interest expense when compared with the third quarter of 2016. During the third quarter of 2017, there was one TDR loan that was previously on nonaccrual that paid in full, resulting in the recognition of $1.0 million of interest. Loan loss provision recapture increased $281,000 for the third quarter of 2017, compared to the third quarter of 2016. The $1.2 million increase in noninterest expense for the third quarter of 2017 was primarily due to increases in salaries and employee benefits and occupancy costs.

For the first nine months of 2017, pre-tax profit increased by $2.4 million, including a $2.0 million increase in recapture of loan loss provision. Net interest income increased by $2.1 million as interest expense declined by $2.4 million as a result of not renewing the time deposits with the State of California. The $1.4 million increase in noninterest income for the nine months ended September 30, 2017, was the result of an $899,000 increase in BOLI income, including $775,000 in tax free income on the death benefit of a former director included in our BOLI policies, $443,000 of recoveries on ASB loans that were charged off prior to the acquisition, and a $542,000 net gain on the sale of our former operations/technology center. The first nine months of 2016 included a $1.1 million net gain on the sale of loans during the first quarter of 2016 and a $272,000 net gain on the sale of our Porterville branch in the second quarter of 2016. The $3.2 million increase in noninterest expense for the first nine months of 2017 was primarily due to increases in salaries and employee benefits, increased occupancy costs, higher levels of professional service expense, and increased acquisition related costs.

The decline in average interest-bearing deposits was entirely due to maturing time deposits from the State of California that were not renewed in the latter half of 2016.

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ANALYSIS OF FINANCIAL CONDITION

The Company reported total assets of $8.30 billion at September 30, 2017. This represented an increase of $230.3 million, or 2.85%, from total assets of $8.07 billion at December 31, 2016. Interest-earning assets of $7.82 billion at September 30, 2017 increased $170.3 million, or 2.23%, when compared with interest-earning assets of $7.64 billion at December 31, 2016. The increase in interest-earning assets was primarily due to a $351.4 million increase in total loans. This was partially offset by a $158.1 million decrease in investment securities. The increase in total assets at September 30, 2017 included $405.9 million of acquired assets, including $309.7 million of acquired loans, from VBB in the first quarter of 2017. Total liabilities were $7.23 billion at September 30, 2017, an increase of $144.7 million, or 2.04%, from total liabilities of $7.08 billion at December 31, 2016. The $298.4 million increase in deposits at September 30, 2017 included $361.8 million of total deposits assumed from VBB during the first quarter of 2017, of which $172.5 million were noninterest-bearing deposits. Total equity increased $85.6 million, or 8.64%, to $1.08 billion at September 30, 2017, compared to total equity of $990.9 million at December 31, 2016. The $85.6 million increase in equity was due to $86.6 million in net earnings, $37.6 million for the issuance of common stock for the acquisition of VCBP, $3.8 million for various stock-based compensation items, and a $1.7 million increase in other comprehensive income, net of tax, resulting from the net change in fair value of our investment securities portfolio. This was offset by $44.1 million for cash dividends declared for the nine months ended September 30, 2017.

Investment Securities

The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At September 30, 2017, we reported total investment securities of $3.02 billion. This represented a decrease of $158.1 million, or 4.97%, from total investment securities of $3.18 billion at December 31, 2016. At September 30, 2017, investment securities HTM totaled $848.4 million. At September 30, 2017, our investment securities AFS totaled $2.18 billion, inclusive of a pre-tax unrealized gain of $20.3 million. The after-tax unrealized gain reported in AOCI on AFS investment securities was $11.8 million.

As of September 30, 2017, the Company had a pre-tax net unrealized holding gain on AFS investment securities of $20.3 million, compared to a pre-tax net unrealized holding gain of $14.6 million at December 31, 2016. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the nine months ended September 30, 2017 and 2016, repayments/maturities of investment securities totaled $438.0 million and $638.5 million, respectively. The Company purchased additional investment securities totaling $316.5 million and $470.0 million for the nine months ended September 30, 2017 and 2016, respectively. During the first nine months of 2017, we sold one investment security, realizing a gain of $402,000. This compares to two investment securities sold during the first nine months of 2016 with a recognized gain of $548,000.

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

|  | September 30, 2017
|  | 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 |  | $ | 1,799,972 |  |  | $ | 22,164 |  |  | $ | (4,102 | ) |  | $ | 1,818,034 |  |  |  | 83.57 | %
CMO/REMIC - residential |  |  | 291,984 |  |  |  | 2,665 |  |  |  | (867 | ) |  |  | 293,782 |  |  |  | 13.50 | %
Municipal bonds |  |  | 62,657 |  |  |  | 726 |  |  |  | (268 | ) |  |  | 63,115 |  |  |  | 2.90 | %
Other securities |  |  | 717 |  |  |  | - |  |  |  | - |  |  |  | 717 |  |  |  | 0.03 | %
Total available-for-sale securities |  | $ | 2,155,330 |  |  | $ | 25,555 |  |  | $ | (5,237 | ) |  | $ | 2,175,648 |  |  |  | 100.00 | %
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 164,886 |  |  | $ | 1,532 |  |  | $ | (1,489 | ) |  | $ | 164,929 |  |  |  | 19.44 | %
Residential mortgage-backed securities |  |  | 178,246 |  |  |  | 880 |  |  |  | (61 | ) |  |  | 179,065 |  |  |  | 21.01 | %
CMO |  |  | 229,885 |  |  |  | - |  |  |  | (6,865 | ) |  |  | 223,020 |  |  |  | 27.09 | %
Municipal bonds |  |  | 275,365 |  |  |  | 2,800 |  |  |  | (3,129 | ) |  |  | 275,036 |  |  |  | 32.46 | %
Total held-to-maturity securities |  | $ | 848,382 |  |  | $ | 5,212 |  |  | $ | (11,544 | ) |  | $ | 842,050 |  |  |  | 100.00 | %

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##### Table of Contents

|  | December 31, 2016
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent
|  |  |  | (Dollars in thousands) |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 2,750 |  |  | $ | 2 |  |  | $ | - |  |  | $ | 2,752 |  |  |  | 0.12 | %
Residential mortgage-backed securities |  |  | 1,822,168 |  |  |  | 18,812 |  |  |  | (6,232 | ) |  |  | 1,834,748 |  |  |  | 80.81 | %
CMO/REMIC - residential |  |  | 345,313 |  |  |  | 3,361 |  |  |  | (1,485 | ) |  |  | 347,189 |  |  |  | 15.29 | %
Municipal bonds |  |  | 80,137 |  |  |  | 889 |  |  |  | (955 | ) |  |  | 80,071 |  |  |  | 3.53 | %
Other securities |  |  | 5,506 |  |  |  | 200 |  |  |  | - |  |  |  | 5,706 |  |  |  | 0.25 | %
Total available-for-sale securities |  | $ | 2,255,874 |  |  | $ | 23,264 |  |  | $ | (8,672 | ) |  | $ | 2,270,466 |  |  |  | 100.00 | %
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 182,648 |  |  | $ | 362 |  |  | $ | (1,972 | ) |  | $ | 181,038 |  |  |  | 20.03 | %
Residential mortgage-backed securities |  |  | 193,699 |  |  |  | - |  |  |  | (1,892 | ) |  |  | 191,807 |  |  |  | 21.25 | %
CMO |  |  | 244,419 |  |  |  | - |  |  |  | (6,808 | ) |  |  | 237,611 |  |  |  | 26.81 | %
Municipal bonds |  |  | 290,910 |  |  |  | 776 |  |  |  | (4,768 | ) |  |  | 286,918 |  |  |  | 31.91 | %
Total held-to-maturity securities |  | $ | 911,676 |  |  | $ | 1,138 |  |  | $ | (15,440 | ) |  | $ | 897,374 |  |  |  | 100.00 | %

The weighted-average yield (TE) on the total investment portfolio at September 30, 2017 was 2.46% with a weighted-average life of 4.1 years. This compares to a weighted-average yield of 2.38% at December 31, 2016 with a weighted-average life of 4.5 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

Approximately 89% of the securities in the total investment portfolio, at September 30, 2017, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of September 30, 2017, approximately $104.0 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.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016. 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 and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“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.

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|  | September 30, 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 securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 352,129 |  |  | $ | (4,102 | ) |  | $ | - |  |  | $ | - |  |  | $ | 352,129 |  |  | $ | (4,102 | )
CMO/REMIC - residential |  |  | 42,017 |  |  |  | (463 | ) |  |  | 33,454 |  |  |  | (404 | ) |  |  | 75,471 |  |  |  | (867 | )
Municipal bonds |  |  | 15,008 |  |  |  | (267 | ) |  |  | 5,996 |  |  |  | (1 | ) |  |  | 21,004 |  |  |  | (268 | )
Total available-for-sale securities |  | $ | 409,154 |  |  | $ | (4,832 | ) |  | $ | 39,450 |  |  | $ | (405 | ) |  | $ | 448,604 |  |  | $ | (5,237 | )
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 39,929 |  |  | $ | (1,305 | ) |  | $ | 5,411 |  |  | $ | (184 | ) |  | $ | 45,340 |  |  | $ | (1,489 | )
Residential mortgage-backed securities |  |  | 62,677 |  |  |  | (61 | ) |  |  | - |  |  |  | - |  |  |  | 62,677 |  |  |  | (61 | )
CMO |  |  | 173,752 |  |  |  | (5,200 | ) |  |  | 49,268 |  |  |  | (1,665 | ) |  |  | 223,020 |  |  |  | (6,865 | )
Municipal bonds |  |  | 66,912 |  |  |  | (1,676 | ) |  |  | 32,921 |  |  |  | (1,453 | ) |  |  | 99,833 |  |  |  | (3,129 | )
Total held-to-maturity securities |  | $ | 343,270 |  |  | $ | (8,242 | ) |  | $ | 87,600 |  |  | $ | (3,302 | ) |  | $ | 430,870 |  |  | $ | (11,544 | )
|  | December 31, 2016
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
|  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses
|  |  |  |  |  | (Dollars in thousands) |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 583,143 |  |  | $ | (6,232 | ) |  | $ | - |  |  | $ | - |  |  | $ | 583,143 |  |  | $ | (6,232 | )
CMO/REMIC - residential |  |  | 128,595 |  |  |  | (1,485 | ) |  |  | - |  |  |  | - |  |  |  | 128,595 |  |  |  | (1,485 | )
Municipal bonds |  |  | 23,255 |  |  |  | (954 | ) |  |  | 5,981 |  |  |  | (1 | ) |  |  | 29,236 |  |  |  | (955 | )
Total available-for-sale securities |  | $ | 734,993 |  |  | $ | (8,671 | ) |  | $ | 5,981 |  |  | $ | (1 | ) |  | $ | 740,974 |  |  | $ | (8,672 | )
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 76,854 |  |  | $ | (1,972 | ) |  | $ | - |  |  | $ | - |  |  | $ | 76,854 |  |  | $ | (1,972 | )
Residential mortgage-backed securities |  |  | 191,807 |  |  |  | (1,892 | ) |  |  | - |  |  |  | - |  |  |  | 191,807 |  |  |  | (1,892 | )
CMO |  |  | 237,611 |  |  |  | (6,808 | ) |  |  | - |  |  |  | - |  |  |  | 237,611 |  |  |  | (6,808 | )
Municipal bonds |  |  | 145,804 |  |  |  | (3,711 | ) |  |  | 36,971 |  |  |  | (1,057 | ) |  |  | 182,775 |  |  |  | (4,768 | )
Total held-to-maturity securities |  | $ | 652,076 |  |  | $ | (14,383 | ) |  | $ | 36,971 |  |  | $ | (1,057 | ) |  | $ | 689,047 |  |  | $ | (15,440 | )

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##### Table of Contents

Loans

Total loans and leases, net of deferred fees and discounts, of $4.75 billion at September 30, 2017 increased by $351.4 million, or 7.99%, from December 31, 2016. The increase in total loans included $309.7 million of loans acquired from VBB in the first quarter of 2017. Excluding the acquired VBB loans, dairy & livestock and agribusiness loans decreased by $83.1 million, primarily due to seasonal pay-downs. Excluding the acquired VBB loans and the decrease in dairy & livestock and agribusiness loans, loans increased by $124.8 million, or 2.84% overall, for the first nine months of 2017.

Total loans and leases, net of deferred fees and discounts, of $4.75 billion at September 30, 2017 increased by $451.3 million, or 10.51%, from September 30, 2016. Excluding the $309.7 million of acquired VBB loans in the first quarter of 2017, overall loan growth was about $141.6 million, or 3.30%, year-over-year.

Distribution of Loan Portfolio by Type

|  | September 30, 2017 |  | December 31, 2016
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 528,659 |  |  | $ | 485,078 |
SBA |  |  | 124,091 |  |  |  | 97,184 |
Real estate: |  |  |  |  |  |  |  |
Commercial real estate |  |  | 3,332,517 |  |  |  | 2,930,141 |
Construction |  |  | 74,148 |  |  |  | 85,879 |
SFR mortgage |  |  | 244,662 |  |  |  | 250,605 |
Dairy & livestock and agribusiness |  |  | 270,482 |  |  |  | 338,631 |
Municipal lease finance receivables |  |  | 71,352 |  |  |  | 64,639 |
Consumer and other loans |  |  | 70,415 |  |  |  | 78,274 |
Gross loans, excluding PCI loans |  |  | 4,716,326 |  |  |  | 4,330,431 |
Less: Deferred loan fees, net |  |  | (6,450 | ) |  |  | (6,952 | )
Gross loans, excluding PCI loans, net of deferred loan fees |  |  | 4,709,876 |  |  |  | 4,323,479 |
Less: Allowance for loan losses |  |  | (60,200 | ) |  |  | (60,321 | )
Net loans, excluding PCI loans |  |  | 4,649,676 |  |  |  | 4,263,158 |
PCI Loans |  |  | 37,306 |  |  |  | 73,093 |
Discount on PCI loans |  |  | (758 | ) |  |  | (1,508 | )
Less: Allowance for loan losses |  |  | (431 | ) |  |  | (1,219 | )
PCI loans, net |  |  | 36,117 |  |  |  | 70,366 |
Total loans and lease finance receivables |  | $ | 4,685,793 |  |  | $ | 4,333,524 |

As of September 30, 2017, $180.2 million, or 5.41% of the total commercial real estate loans included loans secured by farmland, compared to $180.6 million, or 6.16%, at December 31, 2016. The loans secured by farmland included $102.0 million for loans secured by dairy & livestock land and $78.2 million for loans secured by agricultural land at September 30, 2017, compared to $127.1 million for loans secured by dairy & livestock land and $53.6 million for loans secured by agricultural land at December 31, 2016. As of September 30, 2017, dairy & livestock and agribusiness loans of $270.5 million was comprised of $235.2 million for dairy & livestock loans and $35.3 million for agribusiness loans, compared to $317.9 million for dairy & livestock loans and $20.7 million for agribusiness loans at December 31, 2016.

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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 September 30, 2017, the Company had $110.6 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the Borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the Borrower’s down payment of 10%. 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 September 30, 2017, the Company had $14.9 million of total SBA 7(a) loans. The SBA 7(a) loans include revolving lines of credit (SBA 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 September 30, 2017, the Company had $74.1 million in construction loans. This represents 1.56% of total gross loans held-for-investment. There were no PCI construction loans at September 30, 2017. 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 September 30, 2017, construction loans consisted of $44.7 million in SFR construction loans and $29.5 million in commercial construction loans. There were no nonperforming construction loans at September 30, 2017.

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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 expired for commercial loans on October 16, 2014 and will expire for single-family residential loans on October 16, 2019.

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.

The following table presents PCI loans by type for the periods presented.

Distribution of Loan Portfolio by Type (PCI)

|  | September 30, 2017 |  |  | December 31, 2016 |
|  | (Dollars in thousands) |
Commercial and industrial |  | $ | 1,002 |  |  | $ | 2,309 |
SBA |  |  | 1,410 |  |  |  | 327 |
Real estate: |  |  |  |  |  |  |  |
Commercial real estate |  |  | 33,799 |  |  |  | 67,594 |
Construction |  |  | - |  |  |  | - |
SFR mortgage |  |  | 166 |  |  |  | 178 |
Dairy & livestock and agribusiness |  |  | 335 |  |  |  | 1,216 |
Municipal lease finance receivables |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 594 |  |  |  | 1,469 |
Gross PCI loans |  |  | 37,306 |  |  |  | 73,093 |
Less: Purchase accounting discount |  |  | (758) |  |  |  | (1,508) |
Gross PCI loans, net of discount |  |  | 36,548 |  |  |  | 71,585 |
Less: Allowance for PCI loan losses |  |  | (431) |  |  |  | (1,219) |
Net PCI loans |  | $ | 36,117 |  |  | $ | 70,366 |

The excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. The accretable yield will change due to:

| • |  | estimate of the remaining life of acquired loans which may change the amount of future interest income;

| • |  | estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

| • |  | indices for acquired loans with variable rates of interest.

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##### Table of Contents

Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, excluding PCI loans, by region as of September 30, 2017.

|  | September 30, 2017 |
|  | Total Loans |  |  | Commercial Real Estate Loans |
|  | (Dollars in thousands) |
Los Angeles County |  | $ | 1,639,686 |  |  |  | 34.8% |  |  | $ | 1,146,854 |  |  |  | 34.4% |
Central Valley |  |  | 979,300 |  |  |  | 20.8% |  |  |  | 677,483 |  |  |  | 20.3% |
Inland Empire |  |  | 730,827 |  |  |  | 15.5% |  |  |  | 618,926 |  |  |  | 18.6% |
Orange County |  |  | 600,505 |  |  |  | 12.7% |  |  |  | 361,266 |  |  |  | 10.8% |
Central Coast |  |  | 349,482 |  |  |  | 7.4% |  |  |  | 281,533 |  |  |  | 8.5% |
San Diego |  |  | 112,220 |  |  |  | 2.4% |  |  |  | 78,490 |  |  |  | 2.4% |
Other California |  |  | 114,980 |  |  |  | 2.4% |  |  |  | 61,560 |  |  |  | 1.8% |
Out of State |  |  | 189,326 |  |  |  | 4.0% |  |  |  | 106,405 |  |  |  | 3.2% |
|  | $ | 4,716,326 |  |  |  | 100.0% |  |  | $ | 3,332,517 |  |  |  | 100.0% |

The following is the breakdown of total PCI held-for-investment commercial real estate loans by region as of September 30, 2017.

|  | September 30, 2017 |
|  | Total PCI Loans |  |  | Commercial Real Estate Loans |
|  | (Dollars in thousands) |
Central Valley |  | $ | 35,815 |  |  |  | 96.0% |  |  | $ | 33,655 |  |  |  | 99.6% |
Los Angeles County |  |  | 1,372 |  |  |  | 3.7% |  |  |  | 144 |  |  |  | 0.4% |
Central Coast |  |  | 119 |  |  |  | 0.3% |  |  |  | - |  |  |  | - |
|  | $ | 37,306 |  |  |  | 100.0% |  |  | $ | 33,799 |  |  |  | 100.0% |

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##### Table of Contents

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

|  | September 30, 2017 |  |
|  | Loan Balance |  | Percent |  | Percent Owner- Occupied (1) |  | Average Loan Balance |  |
|  | (Dollars in thousands) |  |
SFR mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SFR mortgage - Direct |  | $ | 214,053 |  |  |  | 6.0 | % |  |  | 100.0 | % |  | $ | 480 |  |  |
SFR mortgage - Mortgage pools |  |  | 30,609 |  |  |  | 0.9 | % |  |  | 100.0 | % |  |  | 158 |  |  |
Total SFR mortgage |  |  | 244,662 |  |  |  | 6.9 | % |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Multi-family |  |  | 311,585 |  |  |  | 8.7 | % |  |  | - |  |  |  | 1,304 |  |  |
Industrial |  |  | 965,724 |  |  |  | 27.0 | % |  |  | 39.5 | % |  |  | 1,197 |  |  |
Office |  |  | 600,016 |  |  |  | 16.8 | % |  |  | 27.4 | % |  |  | 1,274 |  |  |
Retail |  |  | 533,718 |  |  |  | 14.9 | % |  |  | 7.6 | % |  |  | 1,491 |  |  |
Medical |  |  | 253,228 |  |  |  | 7.1 | % |  |  | 37.5 | % |  |  | 1,994 |  |  |
Secured by farmland (2) |  |  | 180,182 |  |  |  | 5.0 | % |  |  | 100.0 | % |  |  | 1,897 |  |  |
Other (3) |  |  | 488,064 |  |  |  | 13.6 | % |  |  | 42.7 | % |  |  | 1,302 |  |  |
Total commercial real estate |  |  | 3,332,517 |  |  |  | 93.1 | % |  |  |  |  |  |  |  |  |  |
Total SFR mortgage and commercial real estate loans |  | $ | 3,577,179 |  |  |  | 100.0 | % |  |  | 36.8 | % |  |  | 1,149 |  |  |

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

| (2) | The loans secured by farmland included $102.0 million for loans secured by dairy & livestock land and $78.2 million for loans secured by agricultural land at September 30, 2017.

| (3) | Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans.

The SFR mortgage— Direct loans, excluding PCI loans, in the table above 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 defined loan-to-value, debt-to-income and other credit criteria, such as FICO credit scores, that we believe are appropriate for loans which are primarily intended for retention in our Bank’s loan portfolio. We originated loan volume in the aggregate principal amount of $12.1 million and $35.1 million under this program during the three and nine months ended September 30, 2017, 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 $30.6 million at September 30, 2017. These loans were purchased with average FICO scores predominantly ranging from 700 to over 800 and overall original loan-to-value ratios of 60% to 80%. These pools were purchased to diversify our loan portfolio. We have not purchased any mortgage pools since August 2007.

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##### Table of Contents

The table below breaks down our PCI real estate portfolio.

|  | September 30, 2017 |  |
|  | Loan Balance |  | Percent |  | Percent Owner- Occupied (1) |  | Average Loan Balance |  |
|  | (Dollars in thousands) |  |
SFR mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SFR mortgage - Direct |  | $ | 166 |  |  |  | 0.5 | % |  |  | 100.0 | % |  | $ | 166 |  |  |
SFR mortgage - Mortgage pools |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |
Total SFR mortgage |  |  | 166 |  |  |  | 0.5 | % |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Multi-family |  |  | 591 |  |  |  | 1.7 | % |  |  | - |  |  |  | 591 |  |  |
Industrial |  |  | 7,977 |  |  |  | 23.5 | % |  |  | 52.1 | % |  |  | 443 |  |  |
Office |  |  | 442 |  |  |  | 1.3 | % |  |  | 100.0 | % |  |  | 221 |  |  |
Retail |  |  | 5,132 |  |  |  | 15.1 | % |  |  | 33.4 | % |  |  | 467 |  |  |
Medical |  |  | 5,625 |  |  |  | 16.6 | % |  |  | 100.0 | % |  |  | 1,125 |  |  |
Secured by farmland |  |  | 1,461 |  |  |  | 4.3 | % |  |  | 100.0 | % |  |  | 292 |  |  |
Other (2) |  |  | 12,571 |  |  |  | 37.0 | % |  |  | 61.6 | % |  |  | 433 |  |  |
Total commercial real estate |  |  | 33,799 |  |  |  | 99.5 | % |  |  |  |  |  |  |  |  |  |
Total SFR mortgage and commercial real estate loans |  | $ | 33,965 |  |  |  | 100.0 | % |  |  | 62.7 | % |  |  | 472 |  |  |

| (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 75% of other loans.

Nonperforming Assets

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

|  | September 30, 2017 |  | December 31, 2016
|  | (Dollars in thousands)
Nonaccrual loans |  | $ | 7,263 |  |  | $ | 5,526 |
Troubled debt restructured loans (nonperforming) |  |  | 4,310 |  |  |  | 1,626 |
OREO, net |  |  | 4,527 |  |  |  | 4,527 |
Total nonperforming assets |  | $ | 16,100 |  |  | $ | 11,679 |
Troubled debt restructured performing loans |  | $ | 5,735 |  |  | $ | 19,233 |
Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO |  |  | 0.34% |  |  |  | 0.27% |
Percentage of nonperforming assets to total assets |  |  | 0.19% |  |  |  | 0.14% |

At September 30, 2017, loans classified as impaired, excluding PCI loans, totaled $17.3 million, or 0.36% of total gross loans, compared to $26.4 million, or 0.60% of total loans at December 31, 2016. At September 30, 2017, nonperforming loans of $11.6 million included $4.5 million of loans acquired from VBB in the first quarter of 2017. At September 30, 2017, impaired loans which were restructured in a troubled debt restructure represented $10.0 million, of which $4.3 million were nonperforming and $5.7 million were performing.

Of the $17.3 million total impaired loans as of September 30, 2017, $14.0 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 $3.3 million.

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Troubled Debt Restructurings

Total TDRs were $10.0 million at September 30, 2017, compared to $20.9 million at December 31, 2016. At September 30, 2017, we had $4.3 million in nonperforming TDR loans and $5.7 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.

|  | September 30, 2017 |  | December 31, 2016 |  |
|  | Balance |  | Number of Loans |  | Balance |  | Number of Loans |  |  |
|  | (Dollars in thousands) |  |
Performing TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 432 |  |  |  | 5 |  |  | $ | 745 |  |  |  | 5 |  |  |
SBA |  |  | 662 |  |  |  | 2 |  |  |  | 845 |  |  |  | 2 |  |  |
Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 1,440 |  |  |  | 3 |  |  |  | 13,445 |  |  |  | 6 |  |  |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |
SFR mortgage |  |  | 3,201 |  |  |  | 11 |  |  |  | 2,967 |  |  |  | 10 |  |  |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | 747 |  |  |  | 1 |  |  |
Consumer and other |  |  | - |  |  |  | - |  |  |  | 484 |  |  |  | 2 |  |  |
Total performing TDRs |  | $ | 5,735 |  |  |  | 21 |  |  | $ | 19,233 |  |  |  | 26 |  |  |
Nonperforming TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 59 |  |  |  | 1 |  |  | $ | 156 |  |  |  | 3 |  |  |
SBA |  |  | 289 |  |  |  | 2 |  |  |  | 312 |  |  |  | 2 |  |  |
Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 3,791 |  |  |  | 2 |  |  |  | 781 |  |  |  | 1 |  |  |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | 310 |  |  |  | 1 |  |  |
Dairy & livestock and agribusiness |  |  | 78 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |
Consumer and other |  |  | 93 |  |  |  | 2 |  |  |  | 67 |  |  |  | 2 |  |  |
Total nonperforming TDRs |  | $ | 4,310 |  |  |  | 8 |  |  | $ | 1,626 |  |  |  | 9 |  |  |
Total TDRs |  | $ | 10,045 |  |  |  | 29 |  |  | $ | 20,859 |  |  |  | 35 |  |  |

At September 30, 2017 and December 31, 2016, $5,000 and $141,000 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. Total charge-offs on TDRs for the nine months ended September 30, 2017 and 2016 were zero and $38,000, respectively.

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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.

|  | September 30, 2017 |  | June 30, 2017 |  | March 31, 2017 |  | December 31, 2016 |  | September 30, 2016
|  | (Dollars in thousands)
Nonperforming loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 313 |  |  | $ | 1,058 |  |  | $ | 506 |  |  | $ | 156 |  |  | $ | 543 |
SBA |  |  | 1,611 |  |  |  | 1,651 |  |  |  | 1,089 |  |  |  | 2,737 |  |  |  | 3,013 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 6,728 |  |  |  | 6,950 |  |  |  | 5,623 |  |  |  | 1,683 |  |  |  | 2,396 |
Construction |  |  | - |  |  |  | - |  |  |  | 384 |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 1,349 |  |  |  | 963 |  |  |  | 983 |  |  |  | 2,207 |  |  |  | 2,244 |
Dairy & livestock and agribusiness |  |  | 829 |  |  |  | 829 |  |  |  | 1,324 |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 743 |  |  |  | 771 |  |  |  | 438 |  |  |  | 369 |  |  |  | 470 |
Total |  | $ | 11,573 |  |  | $ | 12,222 |  |  | $ | 10,347 |  |  | $ | 7,152 |  |  | $ | 8,666 |
% of Total gross loans |  |  | 0.24% |  |  |  | 0.26% |  |  |  | 0.22% |  |  |  | 0.16% |  |  |  | 0.20% |
Past due 30-89 days: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 45 |  |  | $ | - |  |  | $ | 219 |  |  | $ | - |  |  | $ | - |
SBA |  |  | - |  |  |  | - |  |  |  | 329 |  |  |  | 352 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 220 |  |  |  | 218 |  |  |  | - |  |  |  | - |  |  |  | 228 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | 400 |  |  |  | 403 |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 6 |  |  |  | 1 |  |  |  | 429 |  |  |  | 84 |  |  |  | 294 |
Total |  | $ | 271 |  |  | $ | 619 |  |  | $ | 1,380 |  |  | $ | 436 |  |  | $ | 522 |
% of Total gross loans |  |  | 0.01% |  |  |  | 0.01% |  |  |  | 0.03% |  |  |  | 0.01% |  |  |  | 0.01% |
OREO: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  | 4,527 |  |  |  | 4,527 |  |  |  | 4,527 |  |  |  | 4,527 |  |  |  | 4,840 |
Total |  | $ | 4,527 |  |  | $ | 4,527 |  |  | $ | 4,527 |  |  | $ | 4,527 |  |  | $ | 4,840 |
Total nonperforming, past due, and OREO |  | $ | 16,371 |  |  | $ | 17,368 |  |  | $ | 16,254 |  |  | $ | 12,115 |  |  | $ | 14,028 |
% of Total gross loans |  |  | 0.34% |  |  |  | 0.37% |  |  |  | 0.35% |  |  |  | 0.28% |  |  |  | 0.33% |

Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $11.6 million at September 30, 2017, or 0.24% of total loans, and included $4.5 million of loans acquired from VBB in the first quarter of 2017. This compares to nonperforming loans of $12.2 million, or 0.26% of total loans, at June 30, 2017, $7.2 million, or 0.16% of total loans, at December 31, 2016, and $8.7 million, or 0.20% of total loans, at September 30, 2016. The $649,000 decrease in nonperforming loans quarter-over-quarter was primarily due to a $745,000 decrease in nonperforming commercial and industrial loans and a $222,000 decrease in commercial real estate loans. This was partially offset by a $386,000 increase in nonperforming SFR mortgage loans.

We had $4.5 million in OREO at both September 30, 2017 and December 31, 2016, compared to $4.8 million at September 30, 2016. As of September 30, 2017, we had one OREO property, compared with one OREO property at December 31, 2016 and two OREO properties at September 30, 2016. There were no additions or sales of OREO for the nine months ended September 30, 2017.

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 Form 10-K for the year ended December 31, 2016.

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Acquired SJB Assets

Loans acquired through the SJB acquisition are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). PCI loans accounted for under ASC 310-30 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 September 30, 2017, there were no PCI loans considered as nonperforming as described above.

There were no acquired SJB OREO properties remaining as of September 30, 2017 and December 31, 2016.

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 $60.6 million as of September 30, 2017, compared to $61.5 million as of December 31, 2016. The allowance for loan losses was reduced by a $7.0 million loan loss provision recapture and was increased by net recoveries on loans of $6.1 million for the nine months ended September 30, 2017. This compares to a $2.0 million loan loss provision recapture and net recoveries of $3.8 million for the same period of 2016.

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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. The table below also includes information on loans, excluding PCI loans, for all periods presented.

|  | As of and For the Nine Months Ended September 30
|  | 2017 |  | 2016
|  | (Dollars in thousands)
Allowance for loan losses at beginning of period |  | $ | 61,540 |  |  | $ | 59,156 |
Charge-offs: |  |  |  |  |  |  |  |
Commercial and industrial |  |  | (138 | ) |  |  | (85 | )
SBA |  |  | - |  |  |  | - |
Commercial real estate |  |  | - |  |  |  | - |
Construction |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | (102 | )
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |
Consumer and other loans |  |  | (11 | ) |  |  | (8 | )
Total charge-offs |  |  | (149 | ) |  |  | (195 | )
Recoveries: |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 106 |  |  |  | 253 |
SBA |  |  | 47 |  |  |  | 9 |
Commercial real estate |  |  | 154 |  |  |  | 791 |
Construction |  |  | 5,774 |  |  |  | 2,615 |
SFR mortgage |  |  | 64 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 19 |  |  |  | 206 |
Consumer and other loans |  |  | 76 |  |  |  | 166 |
Total recoveries |  |  | 6,240 |  |  |  | 4,040 |
Net recoveries |  |  | 6,091 |  |  |  | 3,845 |
Recapture of provision for loan losses |  |  | (7,000 | ) |  |  | (2,000 | )
Allowance for loan losses at end of period |  | $ | 60,631 |  |  | $ | 61,001 |
Summary of reserve for unfunded loan commitments: |  |  |  |  |  |  |  |
Reserve for unfunded loan commitments at beginning of period |  | $ | 6,706 |  |  | $ | 7,156 |
Provision for unfunded loan commitments |  |  | - |  |  |  | - |
Reserve for unfunded loan commitments at end of period |  | $ | 6,706 |  |  | $ | 7,156 |
Reserve for unfunded loan commitments to total unfunded loan |  |  |  |  |  |  |  |
commitments |  |  | 0.66% |  |  |  | 0.79% |
Amount of total loans at end of period (1) |  | $ | 4,746,424 |  |  | $ | 4,295,167 |
Average total loans outstanding (1) |  | $ | 4,579,054 |  |  | $ | 4,155,717 |
Net recoveries to average total loans |  |  | 0.13% |  |  |  | 0.09% |
Net recoveries to total loans at end of period |  |  | 0.13% |  |  |  | 0.09% |
Allowance for loan losses to average total loans |  |  | 1.32% |  |  |  | 1.47% |
Allowance for loan losses to total loans at end of period |  |  | 1.28% |  |  |  | 1.42% |
Net recoveries to allowance for loan losses |  |  | 10.05% |  |  |  | 6.30% |
Net recoveries to recapture of provision for loan losses |  |  | 87.01% |  |  |  | 192.25% |

(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 ASC 310-10. 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 $88,000 (0.15%), $141,000 (0.23%) and $548,000 (0.90%) of the total allowance as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively.

General allowance: The loan portfolio collectively evaluated for impairment under ASC 450-20 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 and non-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.

During the first quarter of 2017, no material changes were made to the Bank’s ALLL methodology other than to exclude the impact of the recent VBB acquisition from certain of the Bank’s qualitative factors that are otherwise designed to capture incremental risk in the legacy loan portfolio. The VBB acquired loans are also supported by a credit mark established through the determination of fair value for the acquired loan portfolio.

During the second quarter of 2017, no material changes were made to the Bank’s ALLL methodology. The Bank updated its Historical Loss Rates (HLRs) under its existing methodology, which continued to show moderate reductions across most loan segments compared to the prior period given the effect on loan loss rates of continued recoveries of prior loan losses. The metrics that drive the qualitative component of the allowance had nominal movements, but overall movement was in a generally increasing direction compared to last quarter reflecting (i) loan growth achieved during the quarter, (ii) a slight increase in the Bank’s loan concentrations, and (iii) declines in collateral market value of collateral dependent loans; the aggregate result of which were slightly higher, overall qualitative factors in the current period.

During the third quarter of 2017, the Bank reviewed its existing allowance methodology as part of its annual review of the components of the model. This review is to ensure that the model performs consistently and produces results that are supported and appropriate in addressing known and inherent risks in the loan portfolio. As part of this annual review, the Company evaluated its (i) loan segmentation, (ii) look-back period, (iii) loss emergence periods, (iv) historical loss rates, and (v) qualitative factors and their underlying structure. Based on this review, certain changes were made to key components, including a recalculation of the loss emergence periods and adjustments to certain qualitative factors. Adjustments made to qualitative factors reflect changes in certain economic and credit metrics to provide more relevant indicators of economic risk and credit performance. The net effect of this annual model update was not material to the overall results of the allowance. In addition, the Company performed its normal quarterly updates to the allowance model including historical loss rate calculations, which continue to result in modest reductions due to continued recoveries of prior loan losses. The metrics that impact the qualitative components of the allowance had nominal changes.

The Bank determined that an ALLL balance requirement of $60.6 million compared with $60.2 million at June 30, 2017 was appropriate, as a result of the increased effect on allowance balance requirements from loan growth during the current quarter. The increased requirement was net of lower HLRs of various loan segments within the portfolio, and improving loan risk ratings of certain lines of credit centered principally in the dairy and livestock portfolio.

While we believe that the allowance at September 30, 2017 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 $6.61 billion at September 30, 2017. This represented an increase of $298.4 million, or 4.73%, over total deposits of $6.31 billion at December 31, 2016. The increase in total deposits at September 30, 2017 included $361.8 million of total deposits assumed from VBB during the first quarter of 2017, of which $172.5 million were noninterest-bearing deposits. The composition of deposits is summarized for the periods presented in the table below.

|  | September 30, 2017 |  | December 31, 2016 |  |
|  | Balance |  | Percent |  | Balance |  | Percent |  |
|  | (Dollars in thousands) |  |
Noninterest-bearing deposits |  | $ | 3,908,809 |  |  |  | 59.15% |  |  | $ | 3,673,541 |  |  |  | 58.22% |  |  |
Interest-bearing deposits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment checking |  |  | 415,503 |  |  |  | 6.29% |  |  |  | 407,058 |  |  |  | 6.45% |  |  |
Money market |  |  | 1,502,057 |  |  |  | 22.73% |  |  |  | 1,504,021 |  |  |  | 23.84% |  |  |
Savings |  |  | 384,630 |  |  |  | 5.82% |  |  |  | 342,236 |  |  |  | 5.42% |  |  |
Time deposits |  |  | 397,097 |  |  |  | 6.01% |  |  |  | 382,824 |  |  |  | 6.07% |  |  |
Total deposits |  | $ | 6,608,096 |  |  |  | 100.00% |  |  | $ | 6,309,680 |  |  |  | 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 $3.91 billion at September 30, 2017, representing an increase of $235.3 million, or 6.40%, from noninterest-bearing deposits of $3.67 billion at December 31, 2016. Noninterest-bearing deposits represented 59.15% of total deposits for September 30, 2017, compared to 58.22% of total deposits for December 31, 2016.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $2.30 billion at September 30, 2017, representing an increase of $48.9 million, or 2.17%, from savings deposits of $2.25 billion at December 31, 2016. The increase was due to approximately $135.5 million of savings deposits assumed from VBB during the first quarter of 2017.

Time deposits totaled $397.1 million at September 30, 2017, representing an increase of $14.3 million, or 3.73%, from total time deposits of $382.8 million for December 31, 2016. The increase was due to approximately $53.8 million of time deposits assumed from VBB during the first quarter of 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 7.33% for the third quarter of 2017, compared to 8.20% for the same quarter of 2016.

At September 30, 2017, borrowed funds (customer repurchase agreements and other borrowings) totaled $518.1 million. This represented a decrease of $137.9 million, or 21.03%, from total borrowed funds of $656.0 million at December 31, 2016. This decrease was primarily due a decline in customer repurchase agreements.

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 a pre-determined balance in a demand deposit account, in order to earn interest. As of September 30, 2017 and December 31, 2016, total customer repurchases were $455.1 million and $603.0 million, respectively, with a weighted average interest rate of 0.27% and 0.26%, respectively.

At September 30, 2017, we had $63.0 million in short-term borrowings, an increase of $10.0 million, or 18.87%, from $53.0 million at December 31, 2016.

At September 30, 2017, $3.61 billion of loans and $1.88 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 September 30, 2017.

|  |  |  | 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) |  | $ | 6,608,096 |  |  | $ | 6,577,053 |  |  | $ | 16,791 |  |  | $ | 5,939 |  |  | $ | 8,313 |
Customer repurchase agreements (1) |  |  | 455,069 |  |  |  | 455,069 |  |  |  | - |  |  |  | - |  |  |  | - |
Junior subordinated debentures (1) |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 25,774 |
Deferred compensation |  |  | 18,024 |  |  |  | 1,616 |  |  |  | 1,795 |  |  |  | 1,292 |  |  |  | 13,321 |
Operating leases |  |  | 11,416 |  |  |  | 4,668 |  |  |  | 4,681 |  |  |  | 1,838 |  |  |  | 229 |
Affordable housing investment |  |  | 3,345 |  |  |  | 2,773 |  |  |  | 476 |  |  |  | 35 |  |  |  | 61 |
Advertising agreements |  |  | 1,261 |  |  |  | 1,261 |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 7,122,985 |  |  | $ | 7,042,440 |  |  | $ | 23,743 |  |  | $ | 9,104 |  |  | $ | 47,698 |

| (1) | Amounts exclude accrued interest.

Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.

Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.

At September 30, 2017 we had $63.0 million in short-term borrowings at a cost of 1.10%, compared to $53.0 million at a cost of 0.55% at December 31, 2016.

Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

Deferred compensation represents the amounts that are due to former employees’ based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans.

Operating leases represent the total minimum lease payments due under non-cancelable operating leases.

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Off-Balance Sheet Arrangements

The following table summarizes the off-balance sheet items at September 30, 2017.

‘ |  |  |  | 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 |  | $ | 461,751 |  |  | $ | 336,715 |  |  | $ | 98,519 |  |  | $ | 13,146 |  |  | $ | 13,371 |
SBA |  |  | 1,761 |  |  |  | 1,352 |  |  |  | - |  |  |  | 4 |  |  |  | 405 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 151,473 |  |  |  | 24,672 |  |  |  | 60,612 |  |  |  | 52,747 |  |  |  | 13,442 |
Construction |  |  | 101,063 |  |  |  | 77,438 |  |  |  | 22,988 |  |  |  | - |  |  |  | 637 |
SFR Mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness (1) |  |  | 177,006 |  |  |  | 89,036 |  |  |  | 87,970 |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 78,998 |  |  |  | 11,831 |  |  |  | 13,163 |  |  |  | 6,588 |  |  |  | 47,416 |
Total commitment to extend credit |  |  | 972,052 |  |  |  | 541,044 |  |  |  | 283,252 |  |  |  | 72,485 |  |  |  | 75,271 |
Obligations under letters of credit |  |  | 38,577 |  |  |  | 22,559 |  |  |  | 16,018 |  |  |  | - |  |  |  | - |
Total |  | $ | 1,010,629 |  |  | $ | 563,603 |  |  | $ | 299,270 |  |  | $ | 72,485 |  |  | $ | 75,271 |

| (1) | Total commitments to extend credit to agribusiness were $11.0 million at September 30, 2017.

As of September 30, 2017, we had commitments to extend credit of approximately $972.1 million, and obligations under letters of credit of $38.6 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 for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company had a reserve for unfunded loan commitments of $6.7 million as of September 30, 2017 and December 31, 2016 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 the Company’s capital plan.

The Company’s total equity was $1.08 billion at September 30, 2017. This represented an increase of $85.6 million, or 8.64%, from total equity of $990.9 million at December 31, 2016. The increase for the first nine months of 2017 resulted from $86.6 million in net earnings, $37.6 million for the issuance of common stock for the acquisition of VCBP, and $3.8 million for various stock based compensation items related to shares issued pursuant to our stock-based compensation plan, and a $1.7 million increase in other comprehensive income, net of tax, resulting from the net change in fair value of our investment securities portfolio. This was offset by $44.1 million for cash dividends declared on common stock for the nine months ended September 30, 2017.

During the third quarter of 2017, 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.

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On August 11, 2016, our Board of Directors authorized an increase in the Company’s common stock repurchase program originally announced in 2008 to 10,000,000 shares, or approximately 9.3% of the Company’s outstanding shares. During 2016, the Company repurchased 81,800 shares of our common stock outstanding under this program. As of September 30, 2017, 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 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 Common Equity Tier 1 (“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 September 30, 2017, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see Item 1. Business — Capital Adequacy Requirements as described in our Annual Report on Form 10-K for the year ended December 31, 2016.

At September 30, 2017, 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.

|  |  |  |  |  | September 30, 2017 |  | December 31, 2016
Capital Ratios |  | Adequately Capitalized Ratios |  | Well Capitalized Ratios |  | CVB Financial Corp. Consolidated |  | Citizens Business Bank |  | CVB Financial Corp. Consolidated |  | Citizens Business Bank
Tier 1 leverage capital ratio |  | 4.00% |  | 5.00% |  | 11.81% |  | 11.69% |  | 11.49% |  | 11.36%
Common equity Tier I capital ratio |  | 4.50% |  | 6.50% |  | 16.62% |  | 16.89% |  | 16.48% |  | 16.76%
Tier 1 risk-based capital ratio |  | 6.00% |  | 8.00% |  | 17.06% |  | 16.89% |  | 16.94% |  | 16.76%
Total risk-based capital ratio |  | 8.00% |  | 10.00% |  | 18.25% |  | 18.07% |  | 18.19% |  | 18.01%

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

We anticipate that the Company and the Bank will meet these requirements well in advance of the ultimate full phase-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 loans and deposits. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $6.61 billion at September 30, 2017 increased $298.4 million, or 4.73%, over total deposits of $6.31 billion at December 31, 2016.

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. 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 nine months ended September 30, 2017 and 2016. For further details see our “Interim Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report.

Consolidated Summary of Cash Flows

|  | For the Nine Months Ended September 30, 2017 |  |
|  | 2017 |  | 2016 |  |
|  | (Dollars in thousands) |  |
Average cash and cash equivalents |  | $ | 188,848 |  |  | $ | 408,963 |  |  |  |  |
Percentage of total average assets |  |  | 2.28% |  |  |  | 5.11% |  |  |  |  |
Net cash provided by operating activities |  | $ | 107,475 |  |  | $ | 98,216 |  |  |  |  |
Net cash provided by investing activities |  |  | 156,108 |  |  |  | 64,838 |  |  |  |  |
Net cash used in financing activities |  |  | (241,426 | ) |  |  | (9,992 | ) |  |  |  |
Net increase in cash and cash equivalents |  | $ | 22,157 |  |  | $ | 153,062 |  |  |  |  |

Average cash and cash equivalents decreased by $220.1 million, or 53.82%, to $188.8 million for the nine months ended September 30, 2017, compared to $409.0 million for the same period of 2016.

At September 30, 2017, cash and cash equivalents totaled $143.8 million. This represented a decrease of $115.4 million, or 44.52%, from $259.2 million at September 30, 2016.

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Interest Rate Sensitivity Management

During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability re-pricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities 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 the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities.

Our interest rate risk policy measures the sensitivity of our net interest income over both a one year and two year cumulative time horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the 12-month and 24-month time horizon.

The following depicts the Company’s net interest income sensitivity analysis as of September 30, 2017.

|  | Estimated Net Interest Income Sensitivity (1)
|  | September 30, 2017 |  | December 31, 2016
Interest Rate Scenario |  | 12-month Period |  | 24-month Period (Cumulative) |  | 12-month Period |  | 24-month Period (Cumulative)
+ 200 basis points |  | -1.15% |  | 1.16% |  | -1.18% |  | 1.16%
- 100 basis points |  | -2.59% |  | -5.37% |  | -2.05% |  | -4.19%

| (1) | Percentage change from base.

Based on our current models, we believe that the interest rate risk profile of the balance sheet is generally well matched with a slight asset sensitive bias over 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, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

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-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing

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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. At September 30, 2017, the EVE profile indicates a decline in net balance sheet value due to instantaneous upward changes in rates. EVE sensitivity is reported in both upward and downward rate shocks.

Economic Value of Equity Sensitivity

Instantaneous Rate Change |  | September 30, 2017 |  | December 31, 2016
100 bp decrease in interest rates |  | -10.7% |  | -9.1%
100 bp increase in interest rates |  | 1.4% |  | 0.8%
200 bp increase in interest rates |  | 1.4% |  | 0.2%
300 bp increase in interest rates |  | 0.5% |  | -1.5%
400 bp increase in interest rates |  | -1.2% |  | -3.7%

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 Form 10-K for the year ended December 31, 2016. 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 September 30, 2017, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. | LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and non-ordinary course of business, including but not limited to actions involving employment, wage-hour and labor law claims, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. These lawsuits frequently are similar in nature to other lawsuits pending against the Company’s competitors.

The Company has been involved in several related actions entitled Glenda Morgan v. Citizens Business Bank, et al., Case No. BC568004, in the Superior Court for Los Angeles County, and Jessica Osuna v. Citizens Business Bank, et al., Case No. CIVDS1501781, in the Superior Court for San Bernardino County, alleging wage and hour claims on behalf of the Company’s “exempt” and “non-exempt” hourly employees. These cases, which were consolidated in Los Angeles County Superior Court in April 2015, are styled as putative class action lawsuits and allege, among other things, that (i) the Company misclassified certain employees and managers as “exempt” employees, (ii) the Company violated California’s wage and hour, overtime, meal break and rest break rules and regulations, (iii) certain employees did not receive proper expense reimbursements, (iv) the Company did not maintain accurate and complete payroll records, and (v) the Company engaged in unfair business practices. Subsequently, related cases were filed by the same law firm representing Morgan and Osuna in the Superior Court for San Bernardino County, alleging (1) violations of the California Labor Code and seeking penalties under the California Private Attorney General Act of 2004 and (2) seeking a declaratory judgment that certain releases and arbitration agreements previously signed by CBB employees were invalid.

On November 28, 2016, the parties reached an agreement in principle to settle all of the related wage and hour class action lawsuits (“Wage-Hour Settlement”). Plaintiffs will dismiss all their lawsuits with prejudice in exchange for the payment of $1.5 million to the putative class members, including attorneys’ fees and costs, but not including credit for monies previously paid to certain employees in exchange for releases and arbitration agreements. The Wage-Hour Settlement received preliminary Court approval at a hearing on September 28, 2017, and the hearing for final Court approval is presently scheduled to take place on February 22, 2018. In the interim, a settlement administrator will conduct a process for notification to eligible class members, the filing of claims and any objections, and the reconciliation of amounts to be paid to individual claimants. We anticipate that the Wage-Hour Settlement will be finally concluded sometime in the first or second quarter of 2018. As of September 30, 2017, the Company maintained a litigation accrual of $1.5 million for the Wage-Hour Settlement, and at this time no further accrual is expected to be necessary.

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 these reasons, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss with respect to the remaining actions pending or threatened against the Company, or, where the Company has been able to make an estimate, the Company believes the amount is not material to the Company’s liquidity, consolidated financial position, and/or results of operations.

Our accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose the amount accrued if we believe it is material or if we believe such disclosure is necessary for our financial statements to not be misleading. If an exposure to loss exists in excess of an amount previously accrued, 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.

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ITEM 1A. | RISK FACTORS

There have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the year ended December 31, 2016. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K and any subsequent Form 10-Q or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

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 a 10b5-1 plan. There is no expiration date for this repurchase program. During the third quarter of 2017, the Company did not repurchase any shares of common stock under this program. The Company terminated its 10b5-1 plan in January 2017 in order to comply with Regulation M. A new 10b5-1 plan was approved by the Board of Directors effective as of May 2, 2017. As of September 30, 2017, 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: November 9, 2017 |  |  |  |  |  |
|  |  |  |  |  | /s/ E. Allen Nicholson
|  |  |  |  |  | E. Allen Nicholson
|  |  |  |  |  | Executive Vice President and Chief Financial Officer
|  |  |  |  |  | (Principal Financial Officer)

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