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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number:
000-10140
CVB FINANCIAL CORP
.
(Exact name of registrant as specified in its charter)

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

(
909
)
980-4030
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,
non-accelerated
filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock of the registrant:
140,143,607
outstanding as of July 31, 2019.
Table of Contents

PART I – |  | FINANCIAL INFORMATION (UNAUDITED) |  |  | 3 |
ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |  |  | 5 |
|  | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |  |  | 10 |
ITEM 2. |  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |  | 37 |
|  | CRITICAL ACCOUNTING POLICIES |  |  | 37 |
|  | OVERVIEW |  |  | 37 |
|  | ANALYSIS OF THE RESULTS OF OPERATIONS |  |  | 39 |
|  | ANALYSIS OF FINANCIAL CONDITION |  |  | 50 |
|  | ASSET/LIABILITY AND MARKET RISK MANAGEMENT |  |  | 66 |
ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |  |  | 68 |
ITEM 4. |  | CONTROLS AND PROCEDURES |  |  | 68 |
PART II – |  | OTHER INFORMATION |  |  | 69 |
ITEM 1. |  | LEGAL PROCEEDINGS |  |  | 69 |
ITEM 1A. |  | RISK FACTORS |  |  | 69 |
ITEM 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |  |  | 70 |
ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES |  |  | 70 |
ITEM 4. |  | MINE SAFETY DISCLOSURES |  |  | 70 |
ITEM 5. |  | OTHER INFORMATION |  |  | 70 |
ITEM 6. |  | EXHIBITS |  |  | 70 |
SIGNATURES |  |  |  |  | 71 |

2
Table of Contents
PART I – FINANCIAL INFORMATION (UNAUDITED)
GENERAL
Cautionary Note Regarding Forward-Looking Statements
Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3
Table of Contents

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

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

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

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

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

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

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

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

| • | our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;

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

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

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

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

| • | all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2018, and particularly the discussion of risk factors within that document.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.
4
Table of Contents
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)

|  | June 30, 2019 |  | December 31, 2018 |
Assets |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 170,387 |  |  | $ | 144,008 |
Interest-earning balances due from Federal Reserve |  |  | 5,453 |  |  |  | 19,940 |
Total cash and cash equivalents |  |  | 175,840 |  |  |  | 163,948 |
Interest-earning balances due from depository institutions |  |  | 6,425 |  |  |  | 7,670 |
Investment securities available-for-sale, at fair value (with amortized cost of $1,584,687 at June 30, 2019, and $1,757,666 at December 31, 2018) |  |  | 1,600,020 |  |  |  | 1,734,085 |
Investment securities held-to-maturity (with fair value of $729,032 at June 30, 2019, and $721,537 at December 31, 2018) |  |  | 728,113 |  |  |  | 744,440 |
Total investment securities |  |  | 2,328,133 |  |  |  | 2,478,525 |
Investment in stock of Federal Home Loan Bank (FHLB) |  |  | 17,688 |  |  |  | 17,688 |
Loans and lease finance receivables |  |  | 7,535,690 |  |  |  | 7,764,611 |
Allowance for loan losses |  |  | (67,132 | ) |  |  | (63,613 | )
Net loans and lease finance receivables |  |  | 7,468,558 |  |  |  | 7,700,998 |
Premises and equipment, net |  |  | 54,163 |  |  |  | 58,193 |
Bank owned life insurance (BOLI) |  |  | 224,172 |  |  |  | 220,758 |
Accrued interest receivable |  |  | 29,481 |  |  |  | 30,649 |
Intangibles |  |  | 48,094 |  |  |  | 53,784 |
Goodwill |  |  | 663,707 |  |  |  | 666,539 |
Other real estate owned (OREO) |  |  | 2,275 |  |  |  | 420 |
Income taxes |  |  | 49,581 |  |  |  | 62,174 |
Other assets |  |  | 103,466 |  |  |  | 67,807 |
Total assets |  | $ | 11,171,583 |  |  | $ | 11,529,153 |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 5,250,235 |  |  | $ | 5,204,787 |
Interest-bearing |  |  | 3,412,588 |  |  |  | 3,622,703 |
Total deposits |  |  | 8,662,823 |  |  |  | 8,827,490 |
Customer repurchase agreements |  |  | 421,271 |  |  |  | 442,255 |
Other borrowings |  |  | - |  |  |  | 280,000 |
Deferred compensation |  |  | 20,953 |  |  |  | 20,033 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | 25,774 |
Other liabilities |  |  | 104,085 |  |  |  | 82,411 |
Total liabilities |  |  | 9,234,906 |  |  |  | 9,677,963 |
Commitments and Contingencies |  |  |  |  |  |  |  |
Stockholders’ Equity |  |  |  |  |  |  |  |
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,141,680 at June 30, 2019, and 140,000,017 at December 31, 2018 |  |  | 1,296,885 |  |  |  | 1,293,669 |
Retained earnings |  |  | 631,512 |  |  |  | 575,805 |
Accumulated other comprehensive income (loss), net of tax |  |  | 8,280 |  |  |  | (18,284 | )
Total stockholders’ equity |  |  | 1,936,677 |  |  |  | 1,851,190 |
Total liabilities and stockholders’ equity |  | $ | 11,171,583 |  |  | $ | 11,529,153 |

See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)

|  | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans and leases, including fees |  | $ | 101,843 |  |  | $ | 57,368 |  |  | $ | 201,530 |  |  | $ | 112,564 |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale |  |  | 10,118 |  |  |  | 11,697 |  |  |  | 20,763 |  |  |  | 23,565 |
Investment securities held-to-maturity |  |  | 4,426 |  |  |  | 4,807 |  |  |  | 8,951 |  |  |  | 9,572 |
Total investment income |  |  | 14,544 |  |  |  | 16,504 |  |  |  | 29,714 |  |  |  | 33,137 |
Dividends from FHLB stock |  |  | 298 |  |  |  | 298 |  |  |  | 630 |  |  |  | 630 |
Interest-earning deposits with other institutions |  |  | 100 |  |  |  | 635 |  |  |  | 194 |  |  |  | 1,171 |
Total interest income |  |  | 116,785 |  |  |  | 74,805 |  |  |  | 232,068 |  |  |  | 147,502 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 4,093 |  |  |  | 1,549 |  |  |  | 7,964 |  |  |  | 3,074 |
Borrowings and customer repurchase agreements |  |  | 1,377 |  |  |  | 337 |  |  |  | 2,987 |  |  |  | 790 |
Junior subordinated debentures |  |  | 258 |  |  |  | 231 |  |  |  | 524 |  |  |  | 429 |
Total interest expense |  |  | 5,728 |  |  |  | 2,117 |  |  |  | 11,475 |  |  |  | 4,293 |
Net interest income before provision for (recapture of) loan losses |  |  | 111,057 |  |  |  | 72,688 |  |  |  | 220,593 |  |  |  | 143,209 |
Provision for (recapture of) loan losses |  |  | 2,000 |  |  |  | (1,000 | ) |  |  | 3,500 |  |  |  | (2,000 | )
Net interest income after provision for (recapture of) loan losses |  |  | 109,057 |  |  |  | 73,688 |  |  |  | 217,093 |  |  |  | 145,209 |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 5,065 |  |  |  | 4,091 |  |  |  | 10,206 |  |  |  | 8,136 |
Trust and investment services |  |  | 2,452 |  |  |  | 2,399 |  |  |  | 4,634 |  |  |  | 4,556 |
Bankcard services |  |  | 1,027 |  |  |  | 958 |  |  |  | 1,977 |  |  |  | 1,762 |
BOLI income |  |  | 1,349 |  |  |  | 1,069 |  |  |  | 2,685 |  |  |  | 2,048 |
Gain on OREO, net |  |  | 24 |  |  |  | - |  |  |  | 129 |  |  |  | 3,540 |
Gain on sale of building, net |  |  | - |  |  |  | - |  |  |  | 4,545 |  |  |  | - |
Gain on eminent domain condemnation, net |  |  | 5,685 |  |  |  | - |  |  |  | 5,685 |  |  |  | - |
Other |  |  | 2,603 |  |  |  | 1,178 |  |  |  | 4,647 |  |  |  | 2,569 |
Total noninterest income |  |  | 18,205 |  |  |  | 9,695 |  |  |  | 34,508 |  |  |  | 22,611 |
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 28,862 |  |  |  | 21,051 |  |  |  | 58,164 |  |  |  | 43,365 |
Occupancy and equipment |  |  | 5,641 |  |  |  | 4,318 |  |  |  | 11,256 |  |  |  | 8,510 |
Professional services |  |  | 2,040 |  |  |  | 1,690 |  |  |  | 3,965 |  |  |  | 3,220 |
Software licenses and maintenance |  |  | 2,542 |  |  |  | 1,759 |  |  |  | 4,964 |  |  |  | 3,519 |
Marketing and promotion |  |  | 1,238 |  |  |  | 1,148 |  |  |  | 2,632 |  |  |  | 2,504 |
Amortization of intangible assets |  |  | 2,833 |  |  |  | 328 |  |  |  | 5,690 |  |  |  | 659 |
Acquisition related expenses |  |  | 2,612 |  |  |  | 494 |  |  |  | 5,761 |  |  |  | 1,297 |
Other |  |  | 4,760 |  |  |  | 3,466 |  |  |  | 9,700 |  |  |  | 7,126 |
Total noninterest expense |  |  | 50,528 |  |  |  | 34,254 |  |  |  | 102,132 |  |  |  | 70,200 |
Earnings before income taxes |  |  | 76,734 |  |  |  | 49,129 |  |  |  | 149,469 |  |  |  | 97,620 |
Income taxes |  |  | 22,253 |  |  |  | 13,756 |  |  |  | 43,346 |  |  |  | 27,334 |
Net earnings |  | $ | 54,481 |  |  | $ | 35,373 |  |  | $ | 106,123 |  |  | $ | 70,286 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on securities arising during the period, before tax |  | $ | 19,486 |  |  | $ | (6,598 | ) |  | $ | 37,713 |  |  | $ | (38,768 | )
Less: Income tax (expense) benefit related to items of other comprehensive income |  |  | (5,761 | ) |  |  | 1,951 |  |  |  | (11,149 | ) |  |  | 11,462 |
Other comprehensive income (loss), net of tax |  |  | 13,725 |  |  |  | (4,647 | ) |  |  | 26,564 |  |  |  | (27,306 | )
Comprehensive income |  | $ | 68,206 |  |  | $ | 30,726 |  |  | $ | 132,687 |  |  | $ | 42,980 |
Basic earnings per common share |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.76 |  |  | $ | 0.64 |
Diluted earnings per common share |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.76 |  |  | $ | 0.64 |

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
(Dollars and shares in thousands)
(Unaudited)
For the Three Months Ended June 30, 2019 and 2018

|  | Common Shares Outstanding |  | Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Total |
Balance, April 1, 2018 |  |  | 110,259 |  |  | $ | 574,225 |  |  | $ | 513,484 |  |  | $ | (20,851 | ) |  | $ | 1,066,858 |
Repurchase of common stock |  |  | (2 | ) |  |  | (45 | ) |  |  | - |  |  |  | - |  |  |  | (45 | )
Exercise of stock options |  |  | 51 |  |  |  | 589 |  |  |  | - |  |  |  | - |  |  |  | 589 |
Shares issued pursuant to stock-based compensation plan |  |  | (6 | ) |  |  | 733 |  |  |  | - |  |  |  | - |  |  |  | 733 |
Cash dividends declared on common stock ($0.14 per share) |  |  | - |  |  |  | - |  |  |  | (15,444 | ) |  |  | - |  |  |  | (15,444 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 35,373 |  |  |  | - |  |  |  | 35,373 |
Other comprehensive loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,647 | ) |  |  | (4,647 | )
Balance, June 30, 2018 |  |  | 110,302 |  |  | $ | 575,502 |  |  | $ | 533,413 |  |  | $ | (25,498 | ) |  | $ | 1,083,417 |
Balance, April 1, 2019 |  |  | 140,009 |  |  | $ | 1,294,093 |  |  | $ | 602,279 |  |  | $ | (5,445 | ) |  | $ | 1,890,927 |
Repurchase of common stock |  |  | (3 | ) |  |  | (77 | ) |  |  | - |  |  |  | - |  |  |  | (77 | )
Exercise of stock options |  |  | 136 |  |  |  | 1,917 |  |  |  | - |  |  |  | - |  |  |  | 1,917 |
Shares issued pursuant to stock-based compensation plan |  |  | - |  |  |  | 952 |  |  |  | - |  |  |  | - |  |  |  | 952 |
Cash dividends declared on common stock ($0.18 per share) |  |  | - |  |  |  | - |  |  |  | (25,248 | ) |  |  | - |  |  |  | (25,248 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 54,481 |  |  |  | - |  |  |  | 54,481 |
Other comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13,725 |  |  |  | 13,725 |
Balance, June 30, 2019 |  |  | 140,142 |  |  | $ | 1,296,885 |  |  | $ | 631,512 |  |  | $ | 8,280 |  |  | $ | 1,936,677 |

For the Six Months Ended June 30, 2019 and 2018

|  | Common Shares Outstanding |  | Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Total |
Balance, January 1, 2018 |  |  | 110,185 |  |  | $ | 573,453 |  |  | $ | 494,361 |  |  | $ | 1,452 |  |  | $ | 1,069,266 |
Cumulative adjustment upon adoption of ASU 2018-02 |  |  | - |  |  |  | - |  |  |  | (356 | ) |  |  | 356 |  |  |  | - |
Repurchase of common stock |  |  | (36 | ) |  |  | (837 | ) |  |  | - |  |  |  | - |  |  |  | (837 | )
Exercise of stock options |  |  | 138 |  |  |  | 1,417 |  |  |  | - |  |  |  | - |  |  |  | 1,417 |
Shares issued pursuant to stock-based compensation plan |  |  | 15 |  |  |  | 1,469 |  |  |  | - |  |  |  | - |  |  |  | 1,469 |
Cash dividends declared on common stock ($0.28 per share) |  |  | - |  |  |  | - |  |  |  | (30,878 | ) |  |  | - |  |  |  | (30,878 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 70,286 |  |  |  | - |  |  |  | 70,286 |
Other comprehensive loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (27,306 | ) |  |  | (27,306 | )
Balance, June 30, 2018 |  |  | 110,302 |  |  | $ | 575,502 |  |  | $ | 533,413 |  |  | $ | (25,498 | ) |  | $ | 1,083,417 |
Balance, January 1, 2019 |  |  | 140,000 |  |  | $ | 1,293,669 |  |  | $ | 575,805 |  |  | $ | (18,284 | ) |  | $ | 1,851,190 |
Repurchase of common stock |  |  | (36 | ) |  |  | (812 | ) |  |  | - |  |  |  | - |  |  |  | (812 | )
Exercise of stock options |  |  | 145 |  |  |  | 2,057 |  |  |  | - |  |  |  | - |  |  |  | 2,057 |
Shares issued pursuant to stock-based compensation plan |  |  | 33 |  |  |  | 1,971 |  |  |  | - |  |  |  | - |  |  |  | 1,971 |
Cash dividends declared on common stock ($0.36 per share) |  |  | - |  |  |  | - |  |  |  | (50,416 | ) |  |  | - |  |  |  | (50,416 | )
Net earnings |  |  | - |  |  |  | - |  |  |  | 106,123 |  |  |  | - |  |  |  | 106,123 |
Other comprehensive income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 26,564 |  |  |  | 26,564 |
Balance, June 30, 2019 |  |  | 140,142 |  |  | $ | 1,296,885 |  |  | $ | 631,512 |  |  | $ | 8,280 |  |  | $ | 1,936,677 |

See accompanying notes to the unaudited condensed consolidated financial statements.
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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

|  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |
Cash Flows from Operating Activities |  |  |  |  |  |  |  |
Interest and dividends received |  | $ | 221,542 |  |  | $ | 150,590 |
Service charges and other fees received |  |  | 21,368 |  |  |  | 17,032 |
Interest paid |  |  | (10,889 | ) |  |  | (4,288 | )
Net cash paid to vendors, employees and others |  |  | (106,919 | ) |  |  | (68,564 | )
Income taxes |  |  | (42,500 | ) |  |  | (26,379 | )
Payments to FDIC, loss share agreement |  |  | - |  |  |  | (65 | )
Net cash provided by operating activities |  |  | 82,602 |  |  |  | 68,326 |
Cash Flows from Investing Activities |  |  |  |  |  |  |  |
Net change in interest-earning balances from depository institutions |  |  | 1,245 |  |  |  | 10,802 |
Proceeds from repayment of investment securities available-for-sale |  |  | 164,571 |  |  |  | 195,715 |
Proceeds from maturity of investment securities available-for-sale |  |  | 4,255 |  |  |  | 10,806 |
Purchases of investment securities available-for-sale |  |  | - |  |  |  | (98,709 | )
Proceeds from repayment and maturity of investment securities held-to-maturity |  |  | 51,690 |  |  |  | 55,021 |
Purchases of investment securities held-to-maturity |  |  | (37,110 | ) |  |  | - |
Net increase in equity investments |  |  | (2,811 | ) |  |  | (21,827 | )
Net decrease in loan and lease finance receivables |  |  | 247,450 |  |  |  | 20,802 |
Proceeds from BOLI death benefit |  |  | 175 |  |  |  | 882 |
Proceeds on eminent domain condemnation, net |  |  | 5,685 |  |  |  | - |
Proceeds from sale of building, net |  |  | 5,487 |  |  |  | - |
Purchase of premises and equipment |  |  | (2,628 | ) |  |  | (1,225 | )
Proceeds from sales of other real estate owned |  |  | 523 |  |  |  | 8,067 |
Net cash provided by investing activities |  |  | 438,532 |  |  |  | 180,334 |
Cash Flows from Financing Activities |  |  |  |  |  |  |  |
Net (decrease) increase in other deposits |  |  | (112,317 | ) |  |  | 11,299 |
Net decrease in time deposits |  |  | (52,350 | ) |  |  | (22,846 | )
Net decrease in other borrowings |  |  | (280,000 | ) |  |  | - |
Net decrease in customer repurchase agreements |  |  | (20,984 | ) |  |  | (169,719 | )
Cash dividends on common stock |  |  | (44,836 | ) |  |  | (30,862 | )
Repurchase of common stock |  |  | (812 | ) |  |  | (837 | )
Proceeds from exercise of stock options |  |  | 2,057 |  |  |  | 1,417 |
Net cash used in financing activities |  |  | (509,242 | ) |  |  | (211,548 | )
Net increase in cash and cash equivalents |  |  | 11,892 |  |  |  | 37,112 |
Cash and cash equivalents, beginning of period |  |  | 163,948 |  |  |  | 144,377 |
Cash and cash equivalents, end of period |  | $ | 175,840 |  |  | $ | 181,489 |

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 Six Months Ended June 30,
|  | 2019 |  | 2018 |
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities |  |  |  |  |  |  |  |
Net earnings |  | $ | 106,123 |  |  | $ | 70,286 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |  |  |  |  |  |
Gain on eminent domain condemnation, net |  |  | (5,685 | ) |  |  | - |
Gain on sale of building, net |  |  | (4,545 | ) |  |  | - |
Gain on sale of other real estate owned |  |  | (105 | ) |  |  | (3,540 | )
Increase in BOLI |  |  | (3,589 | ) |  |  | (1,815 | )
Net amortization of premiums and discounts on investment securities |  |  | 5,054 |  |  |  | 7,302 |
Accretion of discount for acquired loans, net |  |  | (15,215 | ) |  |  | (2,137 | )
Provision for (recapture of) loan losses |  |  | 3,500 |  |  |  | (2,000 | )
Payments to FDIC, loss share agreement |  |  | - |  |  |  | (65 | )
Stock-based compensation |  |  | 1,971 |  |  |  | 1,469 |
Depreciation and amortization, net |  |  | 7,832 |  |  |  | 354 |
Change in other assets and liabilities |  |  | (12,739 | ) |  |  | (1,528 | )
Total adjustments |  |  | (23,521 | ) |  |  | (1,960 | )
Net cash provided by operating activities |  | $ | 82,602 |  |  | $ | 68,326 |
Supplemental Disclosure of Non-cash Investing Activities |  |  |  |  |  |  |  |
Transfer of loans to other real estate owned |  | $ | 2,275 |  |  | $ | - |
Issuance of common stock for acquisition |  | $ | - |  |  | $ | - |

See accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. | BUSINESS

The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.
The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through CitizensTrust. The Bank’s customers consist primarily of small to
mid-sized
businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 58 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.
On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 –
Business Combinations
, included herein.

2. | BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form
10-Q
and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2018, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Reclassification
— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity. The operating segments previously reported have been aggregated into one segment to conform to the current period’s presentation format. These reclassifications do not affect previously reported net earnings.

3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3 —
Summary of Significant Accounting Policies
, of our audited consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2018 as filed with the SEC (“Form
10-K”).
Use of Estimates in the Preparation of Financial Statements
— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.
10
Table of Contents
Adoption of New Accounting Standards
— In August 2017, the FASB issued ASU No.
2017-12,
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU
2017-12
changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both
non-financial
and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No.
2017-12
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No.
2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Accounting.” The intention of ASU
2018-07
is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be
re-measured
through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU
2018-07
is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU No.
2016-02,
“Leases (Topic 842)”. ASU
2016-02
establishes a
right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU
2018-10,
“Codification Improvements to Topic 842, Leases”, which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU
2018-10
are the same as the effective date and transition requirements of
2016-02.
In July 2018, the FASB issued ASU No.
2018-11,
“Leases (Topic 842): Targeted Improvements”, which creates a new optional transition method for implementing the new standard on leases, ASU No.
2016-02,
and provides lessors with a practical expedient for separating lease and
non-lease
components. Specifically, under the amendments in ASU
2018-11:
(1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and
non-lease
components when certain conditions are met. The amendments have the same effective date as ASU
2016-02.
Practical Expedients
— The Company elected several practical expedients made available by the FASB. The Company elected not to restate comparative financial statements upon adoption of the new accounting standard. In addition, the Company elected the package of practical expedients whereby the Company did not reassess (i) whether existing contracts are, or contain, leases. and (ii) lease classification for existing leases. Lastly, the Company elected not to separate lease and
non-lease
components in determining the consideration in the lease agreement.
The Company’s leasing portfolio consists of real estate leases, which are used primarily for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The adoption of this ASU during the first quarter of 2019 did not have a material impact on the Company’s consolidated financial statements. At adoption, the Company recognized a lease liability and a corresponding ROU asset of approximately $20 million on the consolidated balance sheet related to its future lease payments as a lessee under operating leases. See Note 13—
Leases
for more information.
Operating lease ROU assets and lease liabilities are included in
other assets
and
other liabilities
, respectively, on the consolidated balance sheet. The Company uses its incremental borrowing rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset, at adoption of this ASU, was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.
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Recent Accounting Pronouncements
— 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 AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit impairment in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements. A cross-functional team, consisting of finance, credit management, and information technology is currently developing the allowance methodology, models and assumptions that will be used under the new life of loan methodology. In determining the appropriate methodology, the Company has reviewed portfolio segmentation, and data quality and its availability. The Company continues to review and update assumptions and models, as appropriate.
In January 2017, the FASB issued ASU No.
2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU
2017-04
eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No.
2018-13
is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

4. | BUSINESS COMBINATIONS

Community Bank Acquisition
On
August 10, 2018
, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas. The systems integration of CB and CBB was completed in November 2018.
The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers that were in close proximity were consolidated. For the first six months of 2019, a total of 10 banking centers were consolidated, including nine former CB centers.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 10, 2018 acquisition date.
The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019.
The application of the acquisition method of accounting resulted in the recognition of goodwill of $547.1 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.
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The table below summarizes the amounts recognized for the estimated fair value of assets acquired and the liabilities assumed as of the acquisition date.

|  | August 10, 2018 |
|  | (Dollars in thousands) |
Merger Consideration |  |  |  |  |  |  |  |
Cash paid |  | $ | 180,719 |  |  |  |  |
CVBF common stock issued |  |  | 722,767 |  |  |  |  |
Total merger consideration |  |  |  |  |  | $ | 903,486 |
Identifiable net assets acquired, at fair value |  |  |  |  |  |  |  |
Assets Acquired |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 47,802 |  |  |  |  |
Investment securities |  |  | 716,996 |  |  |  |  |
FHLB stock |  |  | 17,250 |  |  |  |  |
Loans |  |  | 2,738,100 |  |  |  |  |
Accrued interest receivable |  |  | 7,916 |  |  |  |  |
Premises and equipment |  |  | 14,632 |  |  |  |  |
BOLI |  |  | 70,904 |  |  |  |  |
Core deposit intangible |  |  | 52,200 |  |  |  |  |
Other assets |  |  | 53,291 |  |  |  |  |
Total assets acquired |  |  |  |  |  |  | 3,719,091 |
Liabilities assumed |  |  |  |  |  |  |  |
Deposits |  |  | 2,869,986 |  |  |  |  |
FHLB advances |  |  | 297,571 |  |  |  |  |
Other borrowings |  |  | 166,000 |  |  |  |  |
Other liabilities |  |  | 29,192 |  |  |  |  |
Total liabilities assumed |  |  |  |  |  |  | 3,362,749 |
Total fair value of identifiable net assets, at fair value |  |  |  |  |  |  | 356,342 |
Goodwill |  |  |  |  |  | $ | 547,144 |

At the date of acquisition, the gross contractual loan amounts receivable, inclusive of all principal and interest, was approximately $3 billion. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected at the date of acquisition was approximately $4.5 million.
We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.
The Company incurred merger related expenses associated with the CB acquisition of $
2.6
million and $
5.8
million for the three and six months ended June 30, 2019,
respectively
, and $
494,000
and $
1.3
million for the three and six months ended June 30, 2018, respectively
.
For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and six months ended June 30, 2018. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented.
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|  | Unaudited Pro Forma |
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, 2019 |
|  | (Dollars in thousands, except per share amounts) |
Total revenues (net interest income plus noninterest income) |  | $ | 121,406 |  |  | $ | 244,379 |
Net income |  | $ | 46,960 |  |  | $ | 93,651 |
Earnings per share - basic |  | $ | 0.34 |  |  | $ | 0.67 |
Earnings per share - diluted |  | $ | 0.33 |  |  | $ | 0.67 |

5. | INVESTMENT SECURITIES

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

|  | June 30, 2019
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent |
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,348,415 |  |  | $ | 16,251 |  |  | $ | (2,417 | ) |  | $ | 1,362,249 |  |  |  | 85.14% |
CMO/REMIC - residential |  |  | 194,094 |  |  |  | 1,216 |  |  |  | (334 | ) |  |  | 194,976 |  |  |  | 12.19% |
Municipal bonds |  |  | 41,369 |  |  |  | 658 |  |  |  | (41 | ) |  |  | 41,986 |  |  |  | 2.62% |
Other securities |  |  | 809 |  |  |  | - |  |  |  | - |  |  |  | 809 |  |  |  | 0.05% |
Total available-for-sale securities |  | $ | 1,584,687 |  |  | $ | 18,125 |  |  | $ | (2,792 | ) |  | $ | 1,600,020 |  |  |  | 100.00% |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 128,721 |  |  | $ | 2,627 |  |  | $ | (414 | ) |  | $ | 130,934 |  |  |  | 17.68% |
Residential mortgage-backed securities |  |  | 175,552 |  |  |  | 1,480 |  |  |  | (415 | ) |  |  | 176,617 |  |  |  | 24.11% |
CMO |  |  | 211,436 |  |  |  | 5 |  |  |  | (4,358 | ) |  |  | 207,083 |  |  |  | 29.04% |
Municipal bonds |  |  | 212,404 |  |  |  | 3,245 |  |  |  | (1,251 | ) |  |  | 214,398 |  |  |  | 29.17% |
Total held-to-maturity securities |  | $ | 728,113 |  |  | $ | 7,357 |  |  | $ | (6,438 | ) |  | $ | 729,032 |  |  |  | 100.00% |
|  | December 31, 2018
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent |
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,494,106 |  |  | $ | 1,348 |  |  | $ | (20,946 | ) |  | $ | 1,474,508 |  |  |  | 85.03% |
CMO/REMIC - residential |  |  | 217,223 |  |  |  | 353 |  |  |  | (3,525 | ) |  |  | 214,051 |  |  |  | 12.34% |
Municipal bonds |  |  | 45,621 |  |  |  | 332 |  |  |  | (1,143 | ) |  |  | 44,810 |  |  |  | 2.59% |
Other securities |  |  | 716 |  |  |  | - |  |  |  | - |  |  |  | 716 |  |  |  | 0.04% |
Total available-for-sale securities |  | $ | 1,757,666 |  |  | $ | 2,033 |  |  | $ | (25,614 | ) |  | $ | 1,734,085 |  |  |  | 100.00% |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 138,274 |  |  | $ | 572 |  |  | $ | (2,622 | ) |  | $ | 136,224 |  |  |  | 18.57% |
Residential mortgage-backed securities |  |  | 153,874 |  |  |  | - |  |  |  | (3,140 | ) |  |  | 150,734 |  |  |  | 20.67% |
CMO |  |  | 215,336 |  |  |  | - |  |  |  | (12,081 | ) |  |  | 203,255 |  |  |  | 28.93% |
Municipal bonds |  |  | 236,956 |  |  |  | 556 |  |  |  | (6,188 | ) |  |  | 231,324 |  |  |  | 31.83% |
Total held-to-maturity securities |  | $ | 744,440 |  |  | $ | 1,128 |  |  | $ | (24,031 | ) |  | $ | 721,537 |  |  |  | 100.00% |

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

|  | For the Three Months Ended June 30, |  |  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  | (Dollars in thousands) |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 9,821 |  |  | $ | 11,290 |  |  | $ | 20,130 |  |  | $ | 22,735 |
Tax-advantaged |  |  | 297 |  |  |  | 407 |  |  |  | 633 |  |  |  | 830 |
Total interest income from available-for-sale securities |  |  | 10,118 |  |  |  | 11,697 |  |  |  | 20,763 |  |  |  | 23,565 |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2,932 |  |  |  | 3,048 |  |  |  | 5,842 |  |  |  | 5,926 |
Tax-advantaged |  |  | 1,494 |  |  |  | 1,759 |  |  |  | 3,109 |  |  |  | 3,646 |
Total interest income from held-to-maturity securities |  |  | 4,426 |  |  |  | 4,807 |  |  |  | 8,951 |  |  |  | 9,572 |
Total interest income from investment securities |  | $ | 14,544 |  |  | $ | 16,504 |  |  | $ | 29,714 |  |  | $ | 33,137 |

Approximately 89% of the total investment securities portfolio at June 30, 2019 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market 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”).

|  | June 30, 2019
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
|  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | - |  |  | $ | - |  |  | $ | 228,518 |  |  | $ | (2,417 | ) |  | $ | 228,518 |  |  | $ | (2,417 | )
CMO/REMIC - residential |  |  | - |  |  |  | - |  |  |  | 71,924 |  |  |  | (334 | ) |  |  | 71,924 |  |  |  | (334 | )
Municipal bonds |  |  | - |  |  |  | - |  |  |  | 3,287 |  |  |  | (41 | ) |  |  | 3,287 |  |  |  | (41 | )
Total available-for-sale securities |  | $ | - |  |  | $ | - |  |  | $ | 303,729 |  |  | $ | (2,792 | ) |  | $ | 303,729 |  |  | $ | (2,792 | )
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | - |  |  | $ | - |  |  | $ | 39,016 |  |  | $ | (414 | ) |  | $ | 39,016 |  |  | $ | (414 | )
Residential mortgage-backed securities |  |  | 10,722 |  |  |  | (45 | ) |  |  | 75,536 |  |  |  | (370 | ) |  |  | 86,258 |  |  |  | (415 | )
CMO |  |  | - |  |  |  | - |  |  |  | 201,974 |  |  |  | (4,358 | ) |  |  | 201,974 |  |  |  | (4,358 | )
Municipal bonds |  |  | - |  |  |  | - |  |  |  | 49,102 |  |  |  | (1,251 | ) |  |  | 49,102 |  |  |  | (1,251 | )
Total held-to-maturity securities |  | $ | 10,722 |  |  | $ | (45 | ) |  | $ | 365,628 |  |  | $ | (6,393 | ) |  | $ | 376,350 |  |  | $ | (6,438 | )

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Table of Contents

|  | December 31, 2018
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
|  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |  | Fair Value |  | Gross Unrealized Holding Losses |
|  | (Dollars in thousands)
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 692,311 |  |  | $ | (4,864) |  |  | $ | 593,367 |  |  | $ | (16,082) |  |  | $ | 1,285,678 |  |  | $ | (20,946) |
CMO/REMIC - residential |  |  | 36,582 |  |  |  | (365) |  |  |  | 135,062 |  |  |  | (3,160) |  |  |  | 171,644 |  |  |  | (3,525) |
Municipal bonds |  |  | 9,568 |  |  |  | (188) |  |  |  | 14,181 |  |  |  | (955) |  |  |  | 23,749 |  |  |  | (1,143) |
Total available-for-sale securities |  | $ | 738,461 |  |  | $ | (5,417) |  |  | $ | 742,610 |  |  | $ | (20,197) |  |  | $ | 1,481,071 |  |  | $ | (25,614) |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 7,479 |  |  | $ | (15) |  |  | $ | 54,944 |  |  | $ | (2,607) |  |  | $ | 62,423 |  |  | $ | (2,622) |
Residential mortgage-backed securities |  |  | 59,871 |  |  |  | (484) |  |  |  | 90,863 |  |  |  | (2,656) |  |  |  | 150,734 |  |  |  | (3,140) |
CMO |  |  | - |  |  |  | - |  |  |  | 203,254 |  |  |  | (12,081) |  |  |  | 203,254 |  |  |  | (12,081) |
Municipal bonds |  |  | 70,989 |  |  |  | (778) |  |  |  | 77,723 |  |  |  | (5,410) |  |  |  | 148,712 |  |  |  | (6,188) |
Total held-to-maturity securities |  | $ | 138,339 |  |  | $ | (1,277) |  |  | $ | 426,784 |  |  | $ | (22,754) |  |  | $ | 565,123 |  |  | $ | (24,031) |

At June 30, 2019 and December 31, 2018, investment securities having a carrying value of approximately $1.51 billion and $1.66 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at June 30, 2019, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

|  | June 30, 2019
|  | Available-for-sale |  | Held-to-maturity
|  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value |
|  | (Dollars in thousands)
Due in one year or less |  | $ | 14,715 |  |  | $ | 14,896 |  |  | $ | 500 |  |  | $ | 503 |
Due after one year through five years |  |  | 1,427,215 |  |  |  | 1,441,490 |  |  |  | 315,591 |  |  |  | 311,769 |
Due after five years through ten years |  |  | 114,977 |  |  |  | 115,535 |  |  |  | 187,726 |  |  |  | 189,711 |
Due after ten years |  |  | 27,780 |  |  |  | 28,099 |  |  |  | 224,296 |  |  |  | 227,049 |
Total investment securities |  | $ | 1,584,687 |  |  | $ | 1,600,020 |  |  | $ | 728,113 |  |  | $ | 729,032 |

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

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

Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans (“Non-PCI loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form 10-K for the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at June 30, 2019 and December 31, 2018. As of June 30, 2019, PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables.
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Table of Contents
The following table provides a summary of the Company’s total loans and lease finance receivables by type.

|  | June 30, 2019 |  | December 31, 2018
|  | Total Loans and Leases |  | Non-PCI Loans and Leases |  | PCI Loans |  | Total Loans and Leases |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 917,953 |  |  | $ | 1,002,209 |  |  | $ | 519 |  |  | $ | 1,002,728 |
SBA |  |  | 327,606 |  |  |  | 350,043 |  |  |  | 1,258 |  |  |  | 351,301 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 5,417,351 |  |  |  | 5,394,229 |  |  |  | 14,407 |  |  |  | 5,408,636 |
Construction |  |  | 116,457 |  |  |  | 122,782 |  |  |  | - |  |  |  | 122,782 |
SFR mortgage |  |  | 278,285 |  |  |  | 296,504 |  |  |  | 145 |  |  |  | 296,649 |
Dairy & livestock and agribusiness |  |  | 301,752 |  |  |  | 393,843 |  |  |  | 700 |  |  |  | 394,543 |
Municipal lease finance receivables |  |  | 59,985 |  |  |  | 64,186 |  |  |  | - |  |  |  | 64,186 |
Consumer and other loans |  |  | 120,779 |  |  |  | 128,429 |  |  |  | 185 |  |  |  | 128,614 |
Gross loans |  |  | 7,540,168 |  |  |  | 7,752,225 |  |  |  | 17,214 |  |  |  | 7,769,439 |
Less: Deferred loan fees, net |  |  | (4,478 | ) |  |  | (4,828 | ) |  |  | - |  |  |  | (4,828 | )
Gross loans, net of deferred loan fees |  |  | 7,535,690 |  |  |  | 7,747,397 |  |  |  | 17,214 |  |  |  | 7,764,611 |
Less: Allowance for loan losses |  |  | (67,132 | ) |  |  | (63,409 | ) |  |  | (204 | ) |  |  | (63,613 | )
Total loans and lease finance receivables |  | $ | 7,468,558 |  |  | $ | 7,683,988 |  |  | $ | 17,010 |  |  | $ | 7,700,998 |

As of June 30, 2019, 77.08% of the Company’s total gross loan portfolio consisted of real estate loans, 71.85% of which consisted of commercial real estate loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, 2019, $225.6 million, or 4.16% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December 31, 2018. The loans secured by farmland included $122.7 million for loans secured by dairy & livestock land and $102.9 million for loans secured by agricultural land at June 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $104.1 million for loans secured by agricultural land at December 31, 2018. As of June 30, 2019, dairy & livestock and agribusiness loans of $301.8 million were comprised of $245.7 million for dairy & livestock loans and $56.1 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $54.0 million for agribusiness loans at December 31, 2018.
At June 30, 2019, the Company held approximately $3.81 billion of total fixed rate loans.
At June 30, 2019 and December 31, 2018, loans totaling $6.05 billion and $5.71 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no outstanding loans
held-for-sale
as of June 30, 2019 and December 31, 2018.
Credit Quality Indicators
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
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Table of Contents
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
The following table summarizes loans by type, according to our internal risk ratings for the periods presented.

|  | June 30, 2019
|  | Pass |  | Special Mention |  | Substandard (1) |  | Doubtful & Loss |  | Total |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 883,044 |  |  | $ | 28,611 |  |  | $ | 6,298 |  |  | $ | - |  |  | $ | 917,953 |
SBA |  |  | 303,947 |  |  |  | 14,444 |  |  |  | 9,215 |  |  |  | - |  |  |  | 327,606 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 1,985,951 |  |  |  | 87,246 |  |  |  | 20,446 |  |  |  | - |  |  |  | 2,093,643 |
Non-owner occupied |  |  | 3,310,103 |  |  |  | 12,850 |  |  |  | 755 |  |  |  | - |  |  |  | 3,323,708 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | 93,170 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 93,170 |
Non-speculative |  |  | 23,287 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23,287 |
SFR mortgage |  |  | 272,767 |  |  |  | 2,158 |  |  |  | 3,360 |  |  |  | - |  |  |  | 278,285 |
Dairy & livestock and agribusiness |  |  | 239,481 |  |  |  | 54,003 |  |  |  | 8,268 |  |  |  | - |  |  |  | 301,752 |
Municipal lease finance receivables |  |  | 59,481 |  |  |  | 504 |  |  |  | - |  |  |  | - |  |  |  | 59,985 |
Consumer and other loans |  |  | 118,706 |  |  |  | 1,019 |  |  |  | 1,054 |  |  |  | - |  |  |  | 120,779 |
Total gross loans |  | $ | 7,289,937 |  |  | $ | 200,835 |  |  | $ | 49,396 |  |  | $ | - |  |  | $ | 7,540,168 |

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

|  | December 31, 2018 (1)
|  | Pass |  | Special Mention |  | Substandard (2) |  | Doubtful & Loss |  | Total |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 961,909 |  |  | $ | 29,358 |  |  | $ | 10,942 |  |  | $ | - |  |  | $ | 1,002,209 |
SBA |  |  | 336,033 |  |  |  | 7,375 |  |  |  | 6,635 |  |  |  | - |  |  |  | 350,043 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 2,008,169 |  |  |  | 95,841 |  |  |  | 13,980 |  |  |  | - |  |  |  | 2,117,990 |
Non-owner occupied |  |  | 3,260,822 |  |  |  | 9,938 |  |  |  | 5,479 |  |  |  | - |  |  |  | 3,276,239 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | 118,233 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 118,233 |
Non-speculative |  |  | 4,549 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,549 |
SFR mortgage |  |  | 289,607 |  |  |  | 3,310 |  |  |  | 3,587 |  |  |  | - |  |  |  | 296,504 |
Dairy & livestock and agribusiness |  |  | 350,044 |  |  |  | 34,586 |  |  |  | 9,213 |  |  |  | - |  |  |  | 393,843 |
Municipal lease finance receivables |  |  | 63,650 |  |  |  | 536 |  |  |  | - |  |  |  | - |  |  |  | 64,186 |
Consumer and other loans |  |  | 126,085 |  |  |  | 1,263 |  |  |  | 1,081 |  |  |  | - |  |  |  | 128,429 |
Total gross loans |  | $ | 7,519,101 |  |  | $ | 182,207 |  |  | $ | 50,917 |  |  | $ | - |  |  | $ | 7,752,225 |

| (1) | Excludes PCI loans of $17.2 million as of December 31, 2018, of which $15.8 million were rated pass, $1.2 million were rated special mention, $224,000 were rated substandard, and zero were rated doubtful & loss.

| (2) | Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018.

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Table of Contents
Allowance for Loan Losses (“ALLL”)
The Bank’s Audit and Director Loan Committees provide Board oversight of the ALLL process and approve the ALLL methodology on a quarterly basis.
Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 –
Summary of Significant Accounting Policies
of the 2018 Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion concerning the allowance for loan losses.
Management believes that the ALLL was appropriate at June 30, 2019 and December 31, 2018. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.
The following tables present the balance and activity related to the allowance for loan losses for held-for-investment loans by type for the periods presented.

|  | For the Three Months Ended June 30, 2019
|  | Ending Balance March 31, 2019 |  | Charge-offs |  | Recoveries |  | Provision for (Recapture of) Loan Losses |  | Ending Balance June 30, 2019 |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 7,608 |  |  | $ | (48 | ) |  | $ | 49 |  |  | $ | 248 |  |  | $ | 7,857 |
SBA |  |  | 1,294 |  |  |  | (210 | ) |  |  | 4 |  |  |  | 31 |  |  |  | 1,119 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 46,227 |  |  |  | - |  |  |  | - |  |  |  | 2,060 |  |  |  | 48,287 |
Construction |  |  | 864 |  |  |  | - |  |  |  | 3 |  |  |  | 4 |  |  |  | 871 |
SFR mortgage |  |  | 2,189 |  |  |  | - |  |  |  | 115 |  |  |  | 19 |  |  |  | 2,323 |
Dairy & livestock and agribusiness |  |  | 5,699 |  |  |  | - |  |  |  | 19 |  |  |  | (377 | ) |  |  | 5,341 |
Municipal lease finance receivables |  |  | 738 |  |  |  | - |  |  |  | - |  |  |  | (12 | ) |  |  | 726 |
Consumer and other loans |  |  | 582 |  |  |  | (3 | ) |  |  | 2 |  |  |  | 27 |  |  |  | 608 |
Total allowance for loan losses |  | $ | 65,201 |  |  | $ | (261 | ) |  | $ | 192 |  |  | $ | 2,000 |  |  | $ | 67,132 |

|  | For the Three Months Ended June 30, 2018
|  | Ending Balance March 31, 2018 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance June 30, 2018 |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 7,499 |  |  | $ | - |  |  | $ | 27 |  |  | $ | (556 | ) |  | $ | 6,970 |
SBA |  |  | 884 |  |  |  | - |  |  |  | 5 |  |  |  | (48 | ) |  |  | 841 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 41,863 |  |  |  | - |  |  |  | - |  |  |  | 734 |  |  |  | 42,597 |
Construction |  |  | 987 |  |  |  | - |  |  |  | 596 |  |  |  | (580 | ) |  |  | 1,003 |
SFR mortgage |  |  | 2,202 |  |  |  | - |  |  |  | - |  |  |  | (47 | ) |  |  | 2,155 |
Dairy & livestock and agribusiness |  |  | 4,666 |  |  |  | - |  |  |  | 19 |  |  |  | (334 | ) |  |  | 4,351 |
Municipal lease finance receivables |  |  | 834 |  |  |  | - |  |  |  | - |  |  |  | (26 | ) |  |  | 808 |
Consumer and other loans |  |  | 688 |  |  |  | (2 | ) |  |  | 3 |  |  |  | (47 | ) |  |  | 642 |
PCI loans |  |  | 312 |  |  |  | - |  |  |  | - |  |  |  | (96 | ) |  |  | 216 |
Total allowance for loan losses |  | $ | 59,935 |  |  | $ | (2 | ) |  | $ | 650 |  |  | $ | (1,000 | ) |  | $ | 59,583 |

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Table of Contents

|  | For the Six Months Ended June 30, 2019
|  | Ending Balance December 31, 2018 |  | Charge-offs |  | Recoveries |  | Provision for (Recapture of) Loan Losses |  | Ending Balance June 30, 2019 |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 7,528 |  |  | $ | (48 | ) |  | $ | 159 |  |  | $ | 218 |  |  | $ | 7,857 |
SBA |  |  | 1,078 |  |  |  | (230 | ) |  |  | 9 |  |  |  | 262 |  |  |  | 1,119 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 45,097 |  |  |  | - |  |  |  | - |  |  |  | 3,190 |  |  |  | 48,287 |
Construction |  |  | 981 |  |  |  | - |  |  |  | 6 |  |  |  | (116 | ) |  |  | 871 |
SFR mortgage |  |  | 2,197 |  |  |  | - |  |  |  | 183 |  |  |  | (57 | ) |  |  | 2,323 |
Dairy & livestock and agribusiness |  |  | 5,225 |  |  |  | (78 | ) |  |  | 19 |  |  |  | 175 |  |  |  | 5,341 |
Municipal lease finance receivables |  |  | 775 |  |  |  | - |  |  |  | - |  |  |  | (49 | ) |  |  | 726 |
Consumer and other loans |  |  | 732 |  |  |  | (4 | ) |  |  | 3 |  |  |  | (123 | ) |  |  | 608 |
Total allowance for loan losses |  | $ | 63,613 |  |  | $ | (360 | ) |  | $ | 379 |  |  | $ | 3,500 |  |  | $ | 67,132 |

|  | For the Six Months Ended June 30, 2018
|  | Ending Balance December 31, 2017 |  | Charge-offs |  | Recoveries |  | (Recapture of) Provision for Loan Losses |  | Ending Balance June 30, 2018 |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 7,280 |  |  | $ | - |  |  | $ | 37 |  |  | $ | (347 | ) |  | $ | 6,970 |
SBA |  |  | 869 |  |  |  | - |  |  |  | 10 |  |  |  | (38 | ) |  |  | 841 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 41,722 |  |  |  | - |  |  |  | - |  |  |  | 875 |  |  |  | 42,597 |
Construction |  |  | 984 |  |  |  | - |  |  |  | 1,930 |  |  |  | (1,911 | ) |  |  | 1,003 |
SFR mortgage |  |  | 2,112 |  |  |  | - |  |  |  | - |  |  |  | 43 |  |  |  | 2,155 |
Dairy & livestock and agribusiness |  |  | 4,647 |  |  |  | - |  |  |  | 19 |  |  |  | (315 | ) |  |  | 4,351 |
Municipal lease finance receivables |  |  | 851 |  |  |  | - |  |  |  | - |  |  |  | (43 | ) |  |  | 808 |
Consumer and other loans |  |  | 753 |  |  |  | (9 | ) |  |  | 11 |  |  |  | (113 | ) |  |  | 642 |
PCI loans |  |  | 367 |  |  |  | - |  |  |  | - |  |  |  | (151 | ) |  |  | 216 |
Total allowance for loan losses |  | $ | 59,585 |  |  | $ | (9 | ) |  | $ | 2,007 |  |  | $ | (2,000 | ) |  | $ | 59,583 |

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

| June 30, 2019
|  | Recorded Investment in Loans |  | Allowance for Loan Losses
|  | Individually Evaluated for Impairment |  | Collectively Evaluated for Impairment |  |  | Individually Evaluated for Impairment |  | Collectively Evaluated for Impairment |
| (Dollars in thousands)
Commercial and industrial |  | $ | 2,088 |  |  | $ | 915,865 |  |  |  | $ | 276 |  |  | $ | 7,581 |
SBA |  |  | 5,632 |  |  |  | 321,974 |  |  |  |  | 93 |  |  |  | 1,026 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 1,531 |  |  |  | 5,415,820 |  |  |  |  | - |  |  |  | 48,287 |
Construction |  |  | - |  |  |  | 116,457 |  |  |  |  | - |  |  |  | 871 |
SFR mortgage |  |  | 4,858 |  |  |  | 273,427 |  |  |  |  | - |  |  |  | 2,323 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | 301,752 |  |  |  |  | - |  |  |  | 5,341 |
Municipal lease finance receivables |  |  | - |  |  |  | 59,985 |  |  |  |  | - |  |  |  | 726 |
Consumer and other loans |  |  | 397 |  |  |  | 120,382 |  |  |  |  | 2 |  |  |  | 606 |
Total |  | $ | 14,506 |  |  | $ | 7,525,662 |  |  |  | $ | 371 |  |  | $ | 66,761 |

20
Table of Contents

|  | June 30, 2018
|  | Recorded Investment in Loans |  | Allowance for Loan Losses
|  | Individually Evaluated for Impairment |  | Collectively Evaluated for Impairment |  | Acquired with Deterioriated Credit Quality |  | Individually Evaluated for Impairment |  | Collectively Evaluated for Impairment |  | Acquired with Deterioriated Credit Quality |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 355 |  |  | $ | 508,833 |  |  | $ | - |  |  | $ | - |  |  | $ | 6,970 |  |  | $ | - |
SBA |  |  | 1,174 |  |  |  | 119,874 |  |  |  | - |  |  |  | - |  |  |  | 841 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 7,741 |  |  |  | 3,446,289 |  |  |  | - |  |  |  | - |  |  |  | 42,597 |  |  |  | - |
Construction |  |  | - |  |  |  | 84,400 |  |  |  | - |  |  |  | - |  |  |  | 1,003 |  |  |  | - |
SFR mortgage |  |  | 4,133 |  |  |  | 233,021 |  |  |  | - |  |  |  | 13 |  |  |  | 2,142 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 800 |  |  |  | 267,689 |  |  |  | - |  |  |  | - |  |  |  | 4,351 |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | 67,721 |  |  |  | - |  |  |  | - |  |  |  | 808 |  |  |  | - |
Consumer and other loans |  |  | 509 |  |  |  | 60,366 |  |  |  | - |  |  |  | 3 |  |  |  | 639 |  |  |  | - |
PCI loans |  |  | - |  |  |  | - |  |  |  | 19,426 |  |  |  | - |  |  |  | - |  |  |  | 216 |
Total |  | $ | 14,712 |  |  | $ | 4,788,193 |  |  | $ | 19,426 |  |  | $ | 16 |  |  | $ | 59,351 |  |  | $ | 216 |

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

|  | June 30, 2019 |
|  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | Total Past Due and Accruing |  |  | Nonaccrual (1) (3) |  |  | Current |  |  | Total Loans and Financing Receivables |
|  | (Dollars in thousands) |
Commercial and industrial |  | $ | 300 |  |  | $ | 10 |  |  | $ | 310 |  |  | $ | 1,993 |  |  | $ | 915,650 |  |  | $ | 917,953 |
SBA |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,082 |  |  |  | 322,524 |  |  |  | 327,606 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 502 |  |  |  | 2,093,141 |  |  |  | 2,093,643 |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 593 |  |  |  | 3,323,115 |  |  |  | 3,323,708 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative (2) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 93,170 |  |  |  | 93,170 |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23,287 |  |  |  | 23,287 |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,720 |  |  |  | 275,565 |  |  |  | 278,285 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 301,752 |  |  |  | 301,752 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 59,985 |  |  |  | 59,985 |
Consumer and other loans |  |  | 22 |  |  |  | - |  |  |  | 22 |  |  |  | 397 |  |  |  | 120,360 |  |  |  | 120,779 |
Total gross loans |  | $ | 322 |  |  | $ | 10 |  |  | $ | 332 |  |  | $ | 11,287 |  |  | $ | 7,528,549 |  |  | $ | 7,540,168 |

| (1) | As of June 30, 2019, $2.8 million of nonaccruing loans were current, $360,000 were 30-59 days past due, $ 832,000 were 60-89 days past due and $7.3 million were 90+ days past due.

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

| (3) | Includes $8.4 million of nonaccrual loans acquired from CB in the third quarter of 2018.

|  | December 31, 2018 (1)
|  | 30-59 Days Past Due |  | 60-89 Days Past Due |  | Total Past Due and Accruing |  | Nonaccrual (2) (4) |  | Current |  | Total Loans and Financing Receivables |
|  | (Dollars in thousands)
Commercial and industrial |  | $ | 820 |  |  | $ | 89 |  |  | $ | 909 |  |  | $ | 7,490 |  |  | $ | 993,810 |  |  | $ | 1,002,209 |
SBA |  |  | 1,172 |  |  |  | 135 |  |  |  | 1,307 |  |  |  | 2,892 |  |  |  | 345,844 |  |  |  | 350,043 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 2,439 |  |  |  | 350 |  |  |  | 2,789 |  |  |  | 589 |  |  |  | 2,114,612 |  |  |  | 2,117,990 |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,479 |  |  |  | 3,270,760 |  |  |  | 3,276,239 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative (3) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 118,233 |  |  |  | 118,233 |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,549 |  |  |  | 4,549 |
SFR mortgage |  |  | - |  |  |  | 285 |  |  |  | 285 |  |  |  | 2,937 |  |  |  | 293,282 |  |  |  | 296,504 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 78 |  |  |  | 393,765 |  |  |  | 393,843 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 64,186 |  |  |  | 64,186 |
Consumer and other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 486 |  |  |  | 127,943 |  |  |  | 128,429 |
Total gross loans |  | $ | 4,431 |  |  | $ | 859 |  |  | $ | 5,290 |  |  | $ | 19,951 |  |  | $ | 7,726,984 |  |  | $ | 7,752,225 |

| (1) | Excludes PCI loans.

| (2) | As of December 31, 2018, $2.3 million of nonaccruing loans were current, $33,000 were 30-59 days past due, $57,000 were 60-89 days past due and $17.6 million were 90+ days past due.

| (3) | Speculative construction loans are generally for properties where there is no identified buyer or renter.

| (4) | Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018.

22
Table of Contents
Impaired Loans
At June 30, 2019, the Company had impaired loans of $14.5 million. Impaired loans included $5.1 million of nonaccrual
Small Business Administration (“SBA”)
loans, $
2.7
million of nonaccrual single-family residential (“SFR”) mortgage loans, $
2.0
million of nonaccrual
commercial and industrial
loans, $
1.1
million of nonaccrual commercial real estate loans, and $
397,000
of nonaccrual consumer and other loans. These impaired loans included $
3.5
million of loans whose terms were modified in a troubled debt restructuring, of which $
263,000
were classified as nonaccrual. The remaining balance of $
3.2
million consisted of
12
loans performing according to the restructured terms. The impaired loans had a specific allowance of $
371,000
at June
30
,
2019
. At December
31
,
2018
, the Company had classified as impaired, loans with a balance of $
23.5
million with a related allowance of $
561,000
.
The following tables present information for
held-for-investment
loans, individually evaluated for impairment by type of loans, as and for the periods presented.

|  | As of and For the Six Months Ended June 30, 2019
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized |
|  | (Dollars in thousands)
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 898 |  |  | $ | 1,033 |  |  | $ | - |  |  | $ | 1,022 |  |  | $ | 2 |
SBA |  |  | 4,369 |  |  |  | 5,714 |  |  |  | - |  |  |  | 3,703 |  |  |  | 21 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 502 |  |  |  | 616 |  |  |  | - |  |  |  | 515 |  |  |  | - |
Non-owner occupied |  |  | 1,029 |  |  |  | 1,209 |  |  |  | - |  |  |  | 1,068 |  |  |  | 14 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 4,858 |  |  |  | 5,467 |  |  |  | - |  |  |  | 4,893 |  |  |  | 42 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 395 |  |  |  | 518 |  |  |  | - |  |  |  | 407 |  |  |  | - |
Total |  |  | 12,051 |  |  |  | 14,557 |  |  |  | - |  |  |  | 11,608 |  |  |  | 79 |
With a related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 1,190 |  |  |  | 1,263 |  |  |  | 276 |  |  |  | 1,251 |  |  |  | - |
SBA |  |  | 1,263 |  |  |  | 1,534 |  |  |  | 93 |  |  |  | 1,179 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 2 |  |  |  | 3 |  |  |  | 2 |  |  |  | 2 |  |  |  | - |
Total |  |  | 2,455 |  |  |  | 2,800 |  |  |  | 371 |  |  |  | 2,432 |  |  |  | - |
Total impaired loans |  | $ | 14,506 |  |  | $ | 17,357 |  |  | $ | 371 |  |  | $ | 14,040 |  |  | $ | 79 |

23

Table of Contents

|  | As of and For the Six Months Ended June 30, 2018 (1)
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized |
|  | (Dollars in thousands)
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 355 |  |  | $ | 864 |  |  | $ | - |  |  | $ | 378 |  |  | $ | 4 |
SBA |  |  | 1,174 |  |  |  | 1,302 |  |  |  | - |  |  |  | 1,204 |  |  |  | 23 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 4,294 |  |  |  | 4,747 |  |  |  | - |  |  |  | 4,331 |  |  |  | - |
Non-owner occupied |  |  | 3,447 |  |  |  | 4,894 |  |  |  | - |  |  |  | 3,565 |  |  |  | 44 |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 4,120 |  |  |  | 4,860 |  |  |  | - |  |  |  | 4,159 |  |  |  | 55 |
Dairy & livestock and agribusiness |  |  | 800 |  |  |  | 1,091 |  |  |  | - |  |  |  | 819 |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 506 |  |  |  | 716 |  |  |  | - |  |  |  | 568 |  |  |  | - |
Total |  |  | 14,696 |  |  |  | 18,474 |  |  |  | - |  |  |  | 15,024 |  |  |  | 126 |
With a related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SBA |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 13 |  |  |  | 13 |  |  |  | 13 |  |  |  | 13 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 3 |  |  |  | 3 |  |  |  | 3 |  |  |  | 3 |  |  |  | - |
Total |  |  | 16 |  |  |  | 16 |  |  |  | 16 |  |  |  | 16 |  |  |  | - |
Total impaired loans |  | $ | 14,712 |  |  | $ | 18,490 |  |  | $ | 16 |  |  | $ | 15,040 |  |  | $ | 126 |

| (1) | Excludes PCI loans.

24
Table of Contents

|  | As of December 31, 2018 (1)
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |
|  | (Dollars in thousands)
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 7,436 |  |  | $ | 11,457 |  |  | $ | - |
SBA |  |  | 3,467 |  |  |  | 5,746 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | 589 |  |  |  | 705 |  |  |  | - |
Non-owner occupied |  |  | 2,808 |  |  |  | 4,324 |  |  |  | - |
Construction |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 5,349 |  |  |  | 6,270 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 418 |  |  |  | 526 |  |  |  | - |
Total |  |  | 20,067 |  |  |  | 29,028 |  |  |  | - |
With a related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 189 |  |  |  | 191 |  |  |  | 3 |
SBA |  |  | - |  |  |  | - |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  | 3,143 |  |  |  | 3,144 |  |  |  | 478 |
Construction |  |  |  |  |  |  |  |  |  |  |  |
Speculative |  |  | - |  |  |  | - |  |  |  | - |
Non-speculative |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 78 |  |  |  | 78 |  |  |  | 12 |
Municipal lease finance receivables |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 68 |  |  |  | 100 |  |  |  | 68 |
Total |  |  | 3,478 |  |  |  | 3,513 |  |  |  | 561 |
Total impaired loans |  | $ | 23,545 |  |  | $ | 32,541 |  |  | $ | 561 |

| (1) | Excludes PCI loans.

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 June 30, 2019, December 31, 2018 and June 30, 2018 have already been written down to the estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a
charge-off
is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance
non-collateral
dependent loans.
Reserve for Unfunded Loan Commitments
The allowance for
off-balance
sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the
off-balance
sheet loan commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. There was
no
provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2019, and 2018. As of June 30, 2019 and December 31, 2018, the balance in this reserve was $9.0 million and was included in other liabilities.
25
Table of Contents
Troubled Debt Restructurings (“TDRs”)
Loans that are reported as TDRs are considered impaired and
charge-off
amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018 for a more detailed discussion regarding TDRs.
As of June 30, 2019, there were $3.5 million of loans classified as a TDR, of which $3.2 million were performing and $263,000 were nonperforming. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, 2019, performing TDRs were comprised of eight SFR mortgage loans of $2.1 million, one SBA loan of $550,000, one commercial real estate loan of $436,000, and two commercial and industrial loans of $95,000.
The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated zero and $490,000 of specific allowance to TDRs as of June 30, 2019 and December 31, 2018, respectively.
The following table provides a summary of the activity related to TDRs for the periods presented.

|  | For the Three Months Ended June 30, |  |  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 (1) |  |  | 2019 |  |  | 2018 (1) |
|  | (Dollars in thousands) |
Performing TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,299 |  |  | $ | 4,285 |  |  | $ | 3,594 |  |  | $ | 4,809 |
New modifications |  |  | - |  |  |  | 311 |  |  |  | - |  |  |  | 311 |
Payoffs/payments, net and other |  |  | (80 | ) |  |  | (66 | ) |  |  | (375 | ) |  |  | (590 | )
TDRs returned to accrual status |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
TDRs placed on nonaccrual status |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Ending balance |  | $ | 3,219 |  |  | $ | 4,530 |  |  | $ | 3,219 |  |  | $ | 4,530 |
Nonperforming TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 277 |  |  | $ | 3,909 |  |  | $ | 3,509 |  |  | $ | 4,200 |
New modifications |  |  | - |  |  |  | 38 |  |  |  | - |  |  |  | 38 |
Charge-offs |  |  | - |  |  |  | - |  |  |  | (78 | ) |  |  | - |
Transfer to OREO |  |  | - |  |  |  | - |  |  |  | (2,275 | ) |  |  | - |
Payoffs/payments, net and other |  |  | (14 | ) |  |  | (55 | ) |  |  | (893 | ) |  |  | (346 | )
TDRs returned to accrual status |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
TDRs placed on nonaccrual status |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Ending balance |  | $ | 263 |  |  | $ | 3,892 |  |  | $ | 263 |  |  | $ | 3,892 |
Total TDRs |  | $ | 3,482 |  |  | $ | 8,422 |  |  | $ | 3,482 |  |  | $ | 8,422 |

| (1) | Excludes PCI loans.

There were no loans that were modified as TDRs during the three and six months ended June 30, 2019.
26
Table of Contents
The following tables summarize loans modified as TDRs for the periods presented.
Modifications (1)

|  | For the Three Months Ended June 30, 2018 (2)
|  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Outstanding Recorded Investment at June 30, 2018 |  | Financial Effect Resulting From Modifications (3) |
|  | (Dollars in thousands)
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 38 |  |  |  | 38 |  |  |  | 31 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 311 |  |  |  | 311 |  |  |  | 307 |  |  |  | - |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total loans |  |  | 2 |  |  | $ | 349 |  |  | $ | 349 |  |  | $ | 338 |  |  | $ | - |

|  | For the Six Months Ended June 30, 2018 (2)
|  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Outstanding Recorded Investment at June 30, 2018 |  | Financial Effect Resulting From Modifications (3) |
|  | (Dollars in thousands)
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 38 |  |  |  | 38 |  |  |  | 31 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Non-owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | 1 |  |  |  | 311 |  |  |  | 311 |  |  |  | 307 |  |  |  | - |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate reduction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Change in amortization period or maturity |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total loans |  |  | 2 |  |  | $ | 349 |  |  | $ | 349 |  |  | $ | 338 |  |  | $ | - |

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

| (2) | Excludes PCI loans.

| (3) | Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

There were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2019 and 2018.
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7. | EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and six months ended June 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 360,000 and 396,000, respectively. For the three and six months ended June 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 14,000 and 13,000, respectively.
The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.

|  | For the Three Months Ended June 30, |  |  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  | (In thousands, except per share amounts) |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 54,481 |  |  | $ | 35,373 |  |  | $ | 106,123 |  |  | $ | 70,286 |
Less: Net earnings allocated to restricted stock |  |  | 134 |  |  |  | 94 |  |  |  | 276 |  |  |  | 202 |
Net earnings allocated to common shareholders |  | $ | 54,347 |  |  | $ | 35,279 |  |  | $ | 105,847 |  |  | $ | 70,084 |
Weighted average shares outstanding |  |  | 139,748 |  |  |  | 109,983 |  |  |  | 139,682 |  |  |  | 109,921 |
Basic earnings per common share |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.76 |  |  | $ | 0.64 |
Diluted earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income allocated to common shareholders |  |  | 54,347 |  |  |  | 35,279 |  |  |  | 105,847 |  |  |  | 70,084 |
Weighted average shares outstanding |  |  | 139,748 |  |  |  | 109,983 |  |  |  | 139,682 |  |  |  | 109,921 |
Incremental shares from assumed exercise of outstanding options |  |  | 149 |  |  |  | 372 |  |  |  | 179 |  |  |  | 418 |
Diluted weighted average shares outstanding |  |  | 139,897 |  |  |  | 110,355 |  |  |  | 139,861 |  |  |  | 110,339 |
Diluted earnings per common share |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.76 |  |  | $ | 0.64 |

8. | FAIR VALUE INFORMATION

Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The following disclosure provides the fair value information for financial assets and liabilities as of June 30, 2019. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

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

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

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

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There were
no
transfers in and out of Level 1 and Level 2 during the six mon​​​​​​​ths ended June 30, 2019 and 2018.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.

|  | Carrying Value at |  | Quoted Prices in Active Markets for Identical Assets |  |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs |
|  | June 30, 2019 |  | (Level 1) |  |  | (Level 2) |  | (Level 3) |
|  | (Dollars in thousands)
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,362,249 |  |  | $ | - |  |  | $ | 1,362,249 |  |  | $ | - |
CMO/REMIC - residential |  |  | 194,976 |  |  |  | - |  |  |  | 194,976 |  |  |  | - |
Municipal bonds |  |  | 41,986 |  |  |  | - |  |  |  | 41,986 |  |  |  | - |
Other securities |  |  | 809 |  |  |  | - |  |  |  | 809 |  |  |  | - |
Total investment securities - AFS |  |  | 1,600,020 |  |  |  | - |  |  |  | 1,600,020 |  |  |  | - |
Interest rate swaps |  |  | 10,744 |  |  |  | - |  |  |  | 10,744 |  |  |  | - |
Total assets |  | $ | 1,610,764 |  |  | $ | - |  |  | $ | 1,610,764 |  |  | $ | - |
Description of liability |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 10,744 |  |  | $ | - |  |  | $ | 10,744 |  |  | $ | - |
Total liabilities |  | $ | 10,744 |  |  | $ | - |  |  | $ | 10,744 |  |  | $ | - |
|  | Carrying Value at |  | Quoted Prices in Active Markets for Identical Assets |  |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs |
|  | December 31, 2018 |  | (Level 1) |  |  | (Level 2) |  | (Level 3) |
|  | (Dollars in thousands)
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities - AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,474,508 |  |  | $ | - |  |  | $ | 1,474,508 |  |  | $ | - |
CMO/REMIC - residential |  |  | 214,051 |  |  |  | - |  |  |  | 214,051 |  |  |  | - |
Municipal bonds |  |  | 44,810 |  |  |  | - |  |  |  | 44,810 |  |  |  | - |
Other securities |  |  | 716 |  |  |  | - |  |  |  | 716 |  |  |  | - |
Total investment securities - AFS |  |  | 1,734,085 |  |  |  | - |  |  |  | 1,734,085 |  |  |  | - |
Interest rate swaps |  |  | 1,938 |  |  |  | - |  |  |  | 1,938 |  |  |  | - |
Total assets |  | $ | 1,736,023 |  |  | $ | - |  |  | $ | 1,736,023 |  |  | $ | - |
Description of liability |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 1,938 |  |  | $ | - |  |  | $ | 1,938 |  |  | $ | - |
Total liabilities |  | $ | 1,938 |  |  | $ | - |  |  | $ | 1,938 |  |  | $ | - |

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

|  | Carrying Value at June 30, 2019 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Losses For the Six Months Ended June 30, 2019 |
|  | (Dollars in thousands) |
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans, excluding PCI loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 1,190 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,190 |  |  | $ | 276 |
SBA |  |  | 1,153 |  |  |  | - |  |  |  | - |  |  |  | 1,153 |  |  |  | 323 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | 2 |
Other real estate owned |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Asset held-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total assets |  | $ | 2,345 |  |  | $ | - |  |  | $ | - |  |  | $ | 2,345 |  |  | $ | 601 |
|  | Carrying Value at December 31, 2018 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Losses For the Year Ended December 31, 2018 |
|  | (Dollars in thousands) |
Description of assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans, excluding PCI loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 189 |  |  | $ | - |  |  | $ | - |  |  | $ | 189 |  |  | $ | 3 |
SBA |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 3,143 |  |  |  | - |  |  |  | - |  |  |  | 3,143 |  |  |  | 478 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 78 |  |  |  | - |  |  |  | - |  |  |  | 78 |  |  |  | 12 |
Consumer and other loans |  |  | 68 |  |  |  | - |  |  |  | - |  |  |  | 68 |  |  |  | 68 |
Other real estate owned |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Asset held-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total assets |  | $ | 3,478 |  |  | $ | - |  |  | $ | - |  |  | $ | 3,478 |  |  | $ | 561 |

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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 June 30, 2019 and December 31, 2018, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

|  | June 30, 2019
|  |  |  | Estimated Fair Value
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
|  | (Dollars in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total cash and cash equivalents |  | $ | 175,840 |  |  | $ | 175,840 |  |  | $ | - |  |  | $ | - |  |  | $ | 175,840 |
Interest-earning balances due from depository institutions |  |  | 6,425 |  |  |  | - |  |  |  | 6,295 |  |  |  | - |  |  |  | 6,295 |
Investment securities available-for-sale |  |  | 1,600,020 |  |  |  | - |  |  |  | 1,600,020 |  |  |  | - |  |  |  | 1,600,020 |
Investment securities held-to-maturity |  |  | 728,113 |  |  |  | - |  |  |  | 729,032 |  |  |  | - |  |  |  | 729,032 |
Total loans, net of allowance for loan losses |  |  | 7,468,558 |  |  |  | - |  |  |  | - |  |  |  | 7,433,835 |  |  |  | 7,433,835 |
Swaps |  |  | 10,744 |  |  |  | - |  |  |  | 10,744 |  |  |  | - |  |  |  | 10,744 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing |  | $ | 3,412,588 |  |  | $ | - |  |  | $ | 3,409,516 |  |  | $ | - |  |  | $ | 3,409,516 |
Borrowings |  |  | 421,271 |  |  |  | - |  |  |  | 420,841 |  |  |  | - |  |  |  | 420,841 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | 20,703 |  |  |  | 20,703 |
Swaps |  |  | 10,744 |  |  |  | - |  |  |  | 10,744 |  |  |  | - |  |  |  | 10,744 |
|  | December 31, 2018
|  |  |  | Estimated Fair Value
|  | Carrying Amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
|  | (Dollars in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total cash and due from banks |  | $ | 163,948 |  |  | $ | 163,948 |  |  | $ | - |  |  | $ | - |  |  | $ | 163,948 |
Interest-earning balances due from depository institutions |  |  | 7,670 |  |  |  | - |  |  |  | 7,339 |  |  |  | - |  |  |  | 7,339 |
Investment securities available-for-sale |  |  | 1,734,085 |  |  |  | - |  |  |  | 1,734,085 |  |  |  | - |  |  |  | 1,734,085 |
Investment securities held-to-maturity |  |  | 744,440 |  |  |  | - |  |  |  | 721,537 |  |  |  | - |  |  |  | 721,537 |
Total loans, net of allowance for loan losses |  |  | 7,700,998 |  |  |  | - |  |  |  | - |  |  |  | 7,514,964 |  |  |  | 7,514,964 |
Swaps |  |  | 1,938 |  |  |  | - |  |  |  | 1,938 |  |  |  | - |  |  |  | 1,938 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing |  | $ | 3,622,703 |  |  | $ | - |  |  | $ | 3,614,682 |  |  | $ | - |  |  | $ | 3,614,682 |
Borrowings |  |  | 722,255 |  |  |  | - |  |  |  | 721,601 |  |  |  | - |  |  |  | 721,601 |
Junior subordinated debentures |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | 21,176 |  |  |  | 21,176 |
Swaps |  |  | 1,938 |  |  |  | - |  |  |  | 1,938 |  |  |  | - |  |  |  | 1,938 |

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

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of June 30, 2019, the Bank has entered into 77 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.
The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively.
As a result of the Bank exceeding $10 billion in assets, federal regulations require the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral.
Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties.
None
of our derivative assets and liabilities are offset in the balance sheet.
We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.
Balance Sheet Classification of Derivative Financial Instruments
As of June 30, 2019 and December 31, 2018, the total notional amount of the Company’s swaps was $224.8 million, and $195.4 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

|  | June 30, 2019 |
|  | 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 |  |  | $ | 10,744 |  |  |  | Other liabilities |  |  | $ | 10,744 |
Total derivatives |  |  |  |  |  | $ | 10,744 |  |  |  |  |  |  | $ | 10,744 |
|  | December 31, 2018 |
|  | Asset Derivatives |  |  | Liability Derivatives |
|  | Balance Sheet Location |  |  | Fair Value |  |  | Balance Sheet Location |  |  | Fair Value |
|  | (Dollars in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | Other assets |  |  | $ | 1,938 |  |  |  | Other liabilities |  |  | $ | 1,938 |
Total derivatives |  |  |  |  |  | $ | 1,938 |  |  |  |  |  |  | $ | 1,938 |

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

Derivatives Not Designated as Hedging Instruments |  | Location of Gain Recognized in Income on Derivative Instruments |  |  | Amount of Gain Recognized in Income on Derivative Instruments |
|  |  |  |  | For the Three Months Ended June 30, |  |  | For the Six Months Ended June 30, |
|  |  |  |  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  |  |  |  | (Dollars in thousands) |
Interest rate swaps |  |  | Other income |  |  | $ | 373 |  |  | $ | 151 |  |  | $ | 757 |  |  | $ | 267 |
Total |  |  |  |  |  | $ | 373 |  |  | $ | 151 |  |  | $ | 757 |  |  | $ | 267 |

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10. | OTHER COMPREHENSIVE INCOME

The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.

|  | For the Three Months Ended June 30, |
|  | 2019 |  |  | 2018 |
|  | Before-tax |  |  | Tax effect |  |  | After-tax |  |  | Before-tax |  |  | Tax effect |  |  | After-tax |
|  | (Dollars in thousands) |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net change in fair value recorded in accumulated OCI |  | $ | 19,564 |  |  | $ | (5,784 | ) |  | $ | 13,780 |  |  | $ | (5,773 | ) |  | $ | 1,707 |  |  | $ | (4,066 | )
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity |  |  | (78 | ) |  |  | 23 |  |  |  | (55 | ) |  |  | (825 | ) |  |  | 244 |  |  |  | (581 | )
Net change |  | $ | 19,486 |  |  | $ | (5,761 | ) |  | $ | 13,725 |  |  | $ | (6,598 | ) |  | $ | 1,951 |  |  | $ | (4,647 | )
|  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |
|  | Before-tax |  |  | Tax effect |  |  | After-tax |  |  | Before-tax |  |  | Tax effect |  |  | After-tax |
|  | (Dollars in thousands) |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net change in fair value recorded in accumulated OCI |  | $ | 38,914 |  |  | $ | (11,504 | ) |  | $ | 27,410 |  |  | $ | (37,111 | ) |  | $ | 10,972 |  |  | $ | (26,139 | )
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity |  |  | (1,201 | ) |  |  | 355 |  |  |  | (846 | ) |  |  | (1,657 | ) |  |  | 490 |  |  |  | (1,167 | )
Net change |  | $ | 37,713 |  |  | $ | (11,149 | ) |  | $ | 26,564 |  |  | $ | (38,768 | ) |  | $ | 11,462 |  |  | $ | (27,306 | )

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11. | BALANCE SHEET OFFSETTING

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

|  | Gross Amounts Recognized in |  |  | Gross Amounts Offset in the |  |  | Net Amounts Presented in the |  |  | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets |  |  |  |  |
|  | the Condensed Consolidated Balance Sheets |  |  | Condensed Consolidated Balance Sheets |  |  | Condensed Consolidated Balance Sheets |  |  | Financial Instruments |  |  | Collateral Pledged |  |  | Net Amount |
|  | (Dollars in thousands) |
June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 10,744 |  |  | $ | - |  |  | $ | - |  |  | $ | 10,744 |  |  | $ | - |  |  | $ | 10,744 |
Total |  | $ | 10,744 |  |  | $ | - |  |  | $ | - |  |  | $ | 10,744 |  |  | $ | - |  |  | $ | 10,744 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 10,851 |  |  | $ | (107 | ) |  | $ | 10,744 |  |  | $ | 107 |  |  | $ | (14,962 | ) |  | $ | (4,111 | )
Repurchase agreements |  |  | 421,271 |  |  |  | - |  |  |  | 421,271 |  |  |  | - |  |  |  | (424,648 | ) |  |  | (3,377 | )
Total |  | $ | 432,122 |  |  | $ | (107 | ) |  | $ | 432,015 |  |  | $ | 107 |  |  | $ | (439,610 | ) |  | $ | (7,488 | )
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 1,938 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,938 |  |  | $ | - |  |  | $ | 1,938 |
Total |  | $ | 1,938 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,938 |  |  | $ | - |  |  | $ | 1,938 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 4,203 |  |  | $ | (2,265 | ) |  | $ | 1,938 |  |  | $ | 2,265 |  |  | $ | - |  |  | $ | 4,203 |
Repurchase agreements |  |  | 442,255 |  |  |  | - |  |  |  | 442,255 |  |  |  | - |  |  |  | (487,607 | ) |  |  | (45,352 | )
Total |  | $ | 446,458 |  |  | $ | (2,265 | ) |  | $ | 444,193 |  |  | $ | 2,265 |  |  | $ | (487,607 | ) |  | $ | (41,149 | )

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12. | LEASES

The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The following presents the components of lease costs and supplemental information related to leases as of June 30, 2019 and for the three and six months ended June 30, 2019.

|  |  |  |  | As of June 30, 2019 |
|  |  |  |  | (Dollars in thousands) |
Lease Assets and Liabilities |  |  |  |  |  |  |  |
ROU assets |  |  |  |  |  | $ | 17,959 |
Total lease liabilities |  |  |  |  |  |  | 21,157 |

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, 2019 |
|  | (Dollars in thousands) |
Lease Cost |  |  |  |  |  |  |  |
Operating lease expense (1) |  | $ | 1,906 |  |  | $ | 4,006 |
Sublease income |  |  | - |  |  |  | - |
Total lease expense |  | $ | 1,906 |  |  | $ | 4,006 |

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

Other Information |  |  |  |  |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |  |
Operating cash outflows from operating leases |  | $ | 2,113 |  |  | $ | 4,859 |

Lease Term and Discount Rate |  |  |  |
|  | As of June 30, 2019 |
Weighted average remaining lease term (years) |  |  | 4.11 |
Weighted average discount rate |  |  | 3.50 | %

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

|  | As of June 30, 2019 |
|  | (Dollars in thousands) |
Year: |  |  |  |
2019 (excluding the six months ended June 30, 2019) |  | $ | 3,997 |
2020 |  |  | 6,604 |
2021 |  |  | 4,806 |
2022 |  |  | 3,622 |
2023 |  |  | 1,941 |
Thereafter |  |  | 2,241 |
Total future lease payments |  |  | 23,211 |
Less: Imputed interest |  |  | (2,054) |
Present value of lease liabilities |  | $ | 21,157 |

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13. | REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –
Summary of Significant Accounting Policies
and Note 24 –
Revenue Recognition
of the 2018 Annual Report on Form 10-K for the year ended December 31, 2018 for a more detailed discussion about noninterest revenue streams that are in scope of Topic 606.
The following presents noninterest income, segregated by revenue streams
in-scope
and
out-of-scope
of Topic 606, for the periods indicated.

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  | (Dollars in thousands) |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
In-scope of Topic 606: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 5,065 |  |  | $ | 4,091 |  |  | $ | 10,206 |  |  | $ | 8,136 |
Trust and investment services |  |  | 2,452 |  |  |  | 2,399 |  |  |  | 4,634 |  |  |  | 4,556 |
Bankcard services |  |  | 1,027 |  |  |  | 958 |  |  |  | 1,977 |  |  |  | 1,762 |
Gain on OREO, net |  |  | 24 |  |  |  | - |  |  |  | 129 |  |  |  | 3,540 |
Other |  |  | 2,603 |  |  |  | 1,178 |  |  |  | 4,647 |  |  |  | 2,569 |
Noninterest Income (in-scope of Topic 606) |  |  | 11,171 |  |  |  | 8,626 |  |  |  | 21,593 |  |  |  | 20,563 |
Noninterest Income (out-of-scope of Topic 606) |  |  | 7,034 |  |  |  | 1,069 |  |  |  | 12,915 |  |  |  | 2,048 |
Total noninterest income |  | $ | 18,205 |  |  | $ | 9,695 |  |  | $ | 34,508 |  |  | $ | 22,611 |

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2018, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.

| • | Allowance for Loan Losses (“ALLL”)

| • | Business Combinations

| • | Valuation and Recoverability of Goodwill

| • | Income Taxes

Our significant accounting policies are described in greater detail in our 2018 Annual Report on Form
10-K
in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 —
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
For the second quarter of 2019, we reported net earnings of $54.5 million, compared with $51.6 million for the first quarter of 2019 and $35.4 million for the second quarter of 2018. Diluted earnings per share were $0.39 for the second quarter, compared to $0.37 for the prior quarter and $0.32 for the same period last year.
At June 30, 2019, total assets of $11.17 billion decreased $357.6 million, or 3.10%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $9.89 billion at June 30, 2019 decreased $395.0 million, or 3.84%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $228.9 million decrease in total loans and a $150.4 million decrease in investment securities. Our tax equivalent yield on interest-earnings assets was 4.72% for the quarter ended June 30, 2019, compared to 4.62% for the first quarter of 2019 and 3.93% for the second quarter of 2018.
Total investment securities were $2.33 billion at June 30, 2019, a decrease of $150.4 million, or 6.07%, from $2.48 billion at December 31, 2018. At June 30, 2019, investment securities
held-to-maturity
(“HTM”) totaled $728.1 million. At June 30, 2019, investment securities
available-for-sale
(“AFS”) totaled $1.60 billion, inclusive of a
pre-tax
unrealized gain of $15.3 million. HTM securities declined by $16.3 million, or 2.19%, and AFS securities declined by $134.1 million, or 7.73%, from December 31, 2018. Our tax equivalent yield on investments was 2.53% for the quarter ended June 30, 2019, compared to 2.57% for the first quarter of 2019 and 2.48% for the second quarter of 2018.
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Total loans and leases, net of deferred fees and discounts, of $7.54 billion at June 30, 2019 decreased by $228.9 million, or 2.95%, from December 31, 2018. The decrease in total loans included a $94.8 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy & livestock loans, total loans declined by $134.1 million, or 1.81%. The decrease in total loans included declines of $84.8 million in commercial and industrial loans and $23.7 million in Small Business Administration (“SBA”) loans and $18.4 million in SFR mortgage loans. Our yield on loans was 5.40% for the quarter ended June 30, 2019, compared to 5.27% for the first quarter of 2019 and 4.81% for the second quarter of 2018. Interest income for yield adjustments related to discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $9.4 million for the quarter ended June 30, 2019, compared to $7.2 million for the first quarter of 2019 and $2.1 million for the second quarter of 2018.
Noninterest-bearing deposits were $5.25 billion at June 30, 2019, an increase of $45.4 million, or 0.87%, when compared to December 31, 2018. At June 30, 2019, noninterest-bearing deposits were 60.61% of total deposits, compared to 58.96% at December 31, 2018. Our average cost of total deposits was 0.19% for the quarter ended June 30, 2019, compared to 0.18% for the first quarter of 2019 and 0.09% for the second quarter of 2018.
Customer repurchase agreements totaled $421.3 million at June 30, 2019, compared to $442.3 million at December 31, 2018. Our average cost of total deposits including customer repurchase agreements was 0.20% for the quarter ended June 30, 2019, unchanged from the prior quarter, and 0.11% for the second quarter of 2018.
At June 30, 2019, we had no short-term borrowings compared to $280.0 million at December 31, 2018. At June 30, 2019, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2018. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Our average cost of funds was 0.25% for the quarter ended June 30, 2019, unchanged from the prior quarter, and 0.12% for the second quarter of 2018.
The allowance for loan losses totaled $67.1 million at June 30, 2019, compared to $63.6 million at December 31, 2018. The allowance for loan losses for the first six months of 2019 was increased by $3.5 million in provision for loan losses and $19,000 in net recoveries. The allowance for loan losses was 0.89% and 0.82% of total loans and leases outstanding, at June 30, 2019 and December 31, 2018, respectively. The ratio as of the most recent three quarters was impacted by the $2.74 billion in loans acquired from Community Bank (“CB”) that are recorded at fair market value, without a corresponding loan loss allowance. As of June 30, 2019, credit related discounts on acquired loans were $41.4 million.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of June 30, 2019, the Company’s Tier 1 leverage capital ratio totaled 11.94%, our common equity Tier 1 ratio totaled 14.23%, our Tier 1 risk-based capital ratio totaled 14.51%, and our total risk-based capital ratio totaled 15.39%. Refer to our
Analysis of Financial Condition – Capital Resources
.
Recent Acquisition
On August 10, 2018, we completed the acquisition of CB with approximately $4.09 billion in total assets and 16 banking centers. The total assets acquired from CB included $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $547.1 million of goodwill and $52.2 million in core deposit premium. At the close of the merger, the entire CB security portfolio was liquidated at fair market value, as was $297.6 million of FHLB term advances and $166.0 million of overnight borrowings assumed from CB. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019. The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers were consolidated into CBB banking centers.
We have included the financial results of the business combination in the consolidated statement of earnings and comprehensive income beginning on the acquisition date.
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ANALYSIS OF THE RESULTS OF OPERATIONS
Financial Performance

|  | For the Three Months Ended |  | Variance |
|  | June 30, 2019 |  | March 31, 2019 |  | $ |  |  | % |
|  | (Dollars in thousands, except per share amounts)
Net interest income |  | $ | 111,057 |  |  | $ | 109,536 |  |  | $ | 1,521 |  |  |  | 1.39% |
Provision for loan losses |  |  | (2,000 | ) |  |  | (1,500 | ) |  |  | (500) |  |  |  | -33.33% |
Noninterest income |  |  | 18,205 |  |  |  | 16,303 |  |  |  | 1,902 |  |  |  | 11.67% |
Noninterest expense |  |  | (50,528 | ) |  |  | (51,604 | ) |  |  | 1,076 |  |  |  | 2.09% |
Income taxes |  |  | (22,253 | ) |  |  | (21,093 | ) |  |  | (1,160) |  |  |  | -5.50% |
Net earnings |  | $ | 54,481 |  |  | $ | 51,642 |  |  | $ | 2,839 |  |  |  | 5.50% |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.39 |  |  | $ | 0.37 |  |  | $ | 0.02 |  |  |  |  |
Diluted |  | $ | 0.39 |  |  | $ | 0.37 |  |  | $ | 0.02 |  |  |  |  |
Return on average assets |  |  | 1.95% |  |  |  | 1.84% |  |  |  | 0.11% |  |  |  |  |
Return on average shareholders’ equity |  |  | 11.38% |  |  |  | 11.14% |  |  |  | 0.24% |  |  |  |  |
Efficiency ratio |  |  | 39.09% |  |  |  | 41.01% |  |  |  | -1.92% |  |  |  |  |
Noninterest expense to average assets |  |  | 1.81% |  |  |  | 1.83% |  |  |  | -0.02% |  |  |  |  |

|  | For the Three Months Ended June 30, |  |  | Variance |  |  | For the Six Months Ended June 30, |  |  | Variance |
|  | 2019 |  |  | 2018 |  |  | $ |  |  | % |  |  | 2019 |  |  | 2018 |  |  | $ |  |  | % |
|  | (Dollars in thousands, except per share amounts) |
Net interest income |  | $ | 111,057 |  |  | $ | 72,688 |  |  | $ | 38,369 |  |  |  | 52.79% |  |  | $ | 220,593 |  |  | $ | 143,209 |  |  | $ | 77,384 |  |  |  | 54.04% |
(Provision for) recapture of provision for loan losses |  |  | (2,000) |  |  |  | 1,000 |  |  |  | (3,000) |  |  |  | -300.00% |  |  |  | (3,500) |  |  |  | 2,000 |  |  |  | (5,500) |  |  |  | -275.00% |
Noninterest income |  |  | 18,205 |  |  |  | 9,695 |  |  |  | 8,510 |  |  |  | 87.78% |  |  |  | 34,508 |  |  |  | 22,611 |  |  |  | 11,897 |  |  |  | 52.62% |
Noninterest expense |  |  | (50,528) |  |  |  | (34,254) |  |  |  | (16,274) |  |  |  | -47.51% |  |  |  | (102,132) |  |  |  | (70,200) |  |  |  | (31,932) |  |  |  | -45.49% |
Income taxes |  |  | (22,253) |  |  |  | (13,756) |  |  |  | (8,497) |  |  |  | -61.77% |  |  |  | (43,346) |  |  |  | (27,334) |  |  |  | (16,012) |  |  |  | -58.58% |
Net earnings |  | $ | 54,481 |  |  | $ | 35,373 |  |  | $ | 19,108 |  |  |  | 54.02% |  |  | $ | 106,123 |  |  | $ | 70,286 |  |  | $ | 35,837 |  |  |  | 50.99% |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.07 |  |  |  |  |  |  | $ | 0.76 |  |  | $ | 0.64 |  |  | $ | 0.12 |  |  |  |  |
Diluted |  | $ | 0.39 |  |  | $ | 0.32 |  |  | $ | 0.07 |  |  |  |  |  |  | $ | 0.76 |  |  | $ | 0.64 |  |  | $ | 0.12 |  |  |  |  |
Return on average assets |  |  | 1.95% |  |  |  | 1.73% |  |  |  | 0.22% |  |  |  |  |  |  |  | 1.89% |  |  |  | 1.72% |  |  |  | 0.17% |  |  |  |  |
Return on average shareholders’ equity |  |  | 11.38% |  |  |  | 13.08% |  |  |  | -1.70% |  |  |  |  |  |  |  | 11.26% |  |  |  | 13.05% |  |  |  | -1.79% |  |  |  |  |
Efficiency ratio |  |  | 39.09% |  |  |  | 41.58% |  |  |  | -2.49% |  |  |  |  |  |  |  | 40.04% |  |  |  | 42.34% |  |  |  | -2.30% |  |  |  |  |
Noninterest expense to average assets |  |  | 1.81% |  |  |  | 1.68% |  |  |  | 0.13% |  |  |  |  |  |  |  | 1.82% |  |  |  | 1.72% |  |  |  | 0.10% |  |  |  |  |

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Table of Contents
Return on Average Tangible Common Equity Reconciliation
(Non-GAAP)
The return on average tangible common equity is a
non-GAAP
disclosure. The Company uses certain
non-GAAP
financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for
tax-effected
amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
|  | (Dollars in thousands) |
Net Income |  | $ | 54,481 |  |  | $ | 35,373 |  |  | $ | 106,123 |  |  | $ | 70,286 |
Add: Amortization of intangible assets |  |  | 2,833 |  |  |  | 328 |  |  |  | 5,690 |  |  |  | 659 |
Less: Tax effect of amortization of intangible assets (1) |  |  | (838) |  |  |  | (97) |  |  |  | (1,682) |  |  |  | (195) |
Tangible net income |  | $ | 56,476 |  |  | $ | 35,604 |  |  | $ | 110,131 |  |  | $ | 70,750 |
Average stockholders’ equity |  | $ | 1,919,888 |  |  | $ | 1,085,053 |  |  | $ | 1,899,898 |  |  | $ | 1,086,157 |
Less: Average goodwill |  |  | (666,196) |  |  |  | (116,564) |  |  |  | (666,366) |  |  |  | (116,564) |
Less: Average intangible assets |  |  | (49,615) |  |  |  | (6,393) |  |  |  | (51,188) |  |  |  | (6,557) |
Average tangible common equity |  | $ | 1,204,077 |  |  | $ | 962,096 |  |  | $ | 1,182,344 |  |  | $ | 963,036 |
Return on average equity, annualized |  |  | 11.38% |  |  |  | 13.08% |  |  |  | 11.26% |  |  |  | 13.05% |
Return on average tangible common equity, annualized |  |  | 18.81% |  |  |  | 14.84% |  |  |  | 18.78% |  |  |  | 14.81% |

| (1) | Tax effected at respective statutory rates.

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Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and six months ended June 30, 2019 and 2018. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management
included herein.
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The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.

|  | For the Three Months Ended June 30,
|  | 2019 |  | 2018
|  | Average Balance |  | Interest |  | Yield/ Rate |  | Average Balance |  | Interest |  | Yield/ Rate |
|  | (Dollars in thousands)
INTEREST-EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 1,590,959 |  |  | $ | 9,821 |  |  |  | 2.47% |  |  | $ | 1,921,638 |  |  | $ | 11,290 |  |  |  | 2.37% |
Tax-advantaged |  |  | 43,719 |  |  |  | 297 |  |  |  | 3.75% |  |  |  | 53,399 |  |  |  | 407 |  |  |  | 4.06% |
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 511,938 |  |  |  | 2,932 |  |  |  | 2.29% |  |  |  | 540,692 |  |  |  | 3,048 |  |  |  | 2.25% |
Tax-advantaged |  |  | 215,366 |  |  |  | 1,494 |  |  |  | 3.35% |  |  |  | 243,910 |  |  |  | 1,759 |  |  |  | 3.49% |
Investment in FHLB stock |  |  | 17,688 |  |  |  | 298 |  |  |  | 6.76% |  |  |  | 17,688 |  |  |  | 298 |  |  |  | 6.76% |
Interest-earning deposits with other institutions |  |  | 18,022 |  |  |  | 100 |  |  |  | 2.23% |  |  |  | 144,081 |  |  |  | 635 |  |  |  | 1.76% |
Loans (2) |  |  | 7,558,483 |  |  |  | 101,843 |  |  |  | 5.40% |  |  |  | 4,780,347 |  |  |  | 57,368 |  |  |  | 4.81% |
Total interest-earning assets |  |  | 9,956,175 |  |  |  | 116,785 |  |  |  | 4.72% |  |  |  | 7,701,755 |  |  |  | 74,805 |  |  |  | 3.93% |
Total noninterest-earning assets |  |  | 1,264,592 |  |  |  |  |  |  |  |  |  |  |  | 476,854 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 11,220,767 |  |  |  |  |  |  |  |  |  |  | $ | 8,178,609 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits (3) |  | $ | 3,024,664 |  |  |  | 2,973 |  |  |  | 0.39% |  |  | $ | 2,233,652 |  |  |  | 1,293 |  |  |  | 0.23% |
Time deposits |  |  | 494,507 |  |  |  | 1,120 |  |  |  | 0.91% |  |  |  | 367,871 |  |  |  | 256 |  |  |  | 0.28% |
Total interest-bearing deposits |  |  | 3,519,171 |  |  |  | 4,093 |  |  |  | 0.47% |  |  |  | 2,601,523 |  |  |  | 1,549 |  |  |  | 0.24% |
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 585,550 |  |  |  | 1,635 |  |  |  | 1.11% |  |  |  | 462,618 |  |  |  | 568 |  |  |  | 0.49% |
Interest-bearing liabilities |  |  | 4,104,721 |  |  |  | 5,728 |  |  |  | 0.56% |  |  |  | 3,064,141 |  |  |  | 2,117 |  |  |  | 0.28% |
Noninterest-bearing deposits |  |  | 5,093,781 |  |  |  |  |  |  |  |  |  |  |  | 3,958,980 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 102,377 |  |  |  |  |  |  |  |  |  |  |  | 70,435 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 1,919,888 |  |  |  |  |  |  |  |  |  |  |  | 1,085,053 |  |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 11,220,767 |  |  |  |  |  |  |  |  |  |  | $ | 8,178,609 |  |  |  |  |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 111,057 |  |  |  |  |  |  |  |  |  |  | $ | 72,688 |  |  |  |  |
Net interest spread - tax equivalent |  |  |  |  |  |  |  |  |  |  | 4.16% |  |  |  |  |  |  |  |  |  |  |  | 3.65% |
Net interest margin |  |  |  |  |  |  |  |  |  |  | 4.47% |  |  |  |  |  |  |  |  |  |  |  | 3.79% |
Net interest margin - tax equivalent |  |  |  |  |  |  |  |  |  |  | 4.49% |  |  |  |  |  |  |  |  |  |  |  | 3.82% |

| (1) | Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended June 30, 2019 and 2018. The non TE rates were 2.46% and 2.40% for the three months ended June 30, 2019 and 2018, respectively.

| (2) | Includes loan fees of $727,000 and $855,000 for the three months ended June 30, 2019 and 2018, respectively. Prepayment penalty fees of $1.3 million and $912,000 are included in interest income for the three months ended June 30, 2019 and 2018, respectively.

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

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|  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |
|  | Average Balance |  |  | Interest |  |  | Yield/ Rate |  |  | Average Balance |  |  | Interest |  |  | Yield/ Rate |
|  | (Dollars in thousands) |
INTEREST-EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | $ | 1,622,465 |  |  | $ | 20,130 |  |  |  | 2.48 | % |  | $ | 1,950,190 |  |  | $ | 22,735 |  |  |  | 2.34 | %
Tax-advantaged |  |  | 44,048 |  |  |  | 633 |  |  |  | 3.91 | % |  |  | 54,262 |  |  |  | 830 |  |  |  | 4.06 | %
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 510,781 |  |  |  | 5,842 |  |  |  | 2.29 | % |  |  | 547,694 |  |  |  | 5,926 |  |  |  | 2.16 | %
Tax-advantaged |  |  | 221,602 |  |  |  | 3,109 |  |  |  | 3.39 | % |  |  | 250,507 |  |  |  | 3,646 |  |  |  | 3.52 | %
Investment in FHLB stock |  |  | 17,688 |  |  |  | 630 |  |  |  | 7.18 | % |  |  | 17,688 |  |  |  | 630 |  |  |  | 7.18 | %
Interest-earning deposits with other institutions |  |  | 18,356 |  |  |  | 194 |  |  |  | 2.13 | % |  |  | 141,443 |  |  |  | 1,171 |  |  |  | 1.66 | %
Loans (2) |  |  | 7,610,241 |  |  |  | 201,530 |  |  |  | 5.34 | % |  |  | 4,785,118 |  |  |  | 112,564 |  |  |  | 4.74 | %
Total interest-earning assets |  |  | 10,045,181 |  |  |  | 232,068 |  |  |  | 4.67 | % |  |  | 7,746,902 |  |  |  | 147,502 |  |  |  | 3.86 | %
Total noninterest-earning assets |  |  | 1,268,812 |  |  |  |  |  |  |  |  |  |  |  | 470,378 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 11,313,993 |  |  |  |  |  |  |  |  |  |  | $ | 8,217,280 |  |  |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits (3) |  | $ | 3,075,966 |  |  |  | 5,658 |  |  |  | 0.37 | % |  | $ | 2,262,271 |  |  |  | 2,566 |  |  |  | 0.23 | %
Time deposits |  |  | 509,581 |  |  |  | 2,306 |  |  |  | 0.91 | % |  |  | 372,585 |  |  |  | 508 |  |  |  | 0.27 | %
Total interest-bearing deposits |  |  | 3,585,547 |  |  |  | 7,964 |  |  |  | 0.45 | % |  |  | 2,634,856 |  |  |  | 3,074 |  |  |  | 0.24 | %
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 638,463 |  |  |  | 3,511 |  |  |  | 1.10 | % |  |  | 522,606 |  |  |  | 1,219 |  |  |  | 0.47 | %
Interest-bearing liabilities |  |  | 4,224,010 |  |  |  | 11,475 |  |  |  | 0.55 | % |  |  | 3,157,462 |  |  |  | 4,293 |  |  |  | 0.27 | %
Noninterest-bearing deposits |  |  | 5,089,795 |  |  |  |  |  |  |  |  |  |  |  | 3,907,901 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 100,290 |  |  |  |  |  |  |  |  |  |  |  | 65,760 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 1,899,898 |  |  |  |  |  |  |  |  |  |  |  | 1,086,157 |  |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 11,313,993 |  |  |  |  |  |  |  |  |  |  | $ | 8,217,280 |  |  |  |  |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 220,593 |  |  |  |  |  |  |  |  |  |  | $ | 143,209 |  |  |  |  |
Net interest spread - tax equivalent |  |  |  |  |  |  |  |  |  |  | 4.12 | % |  |  |  |  |  |  |  |  |  |  | 3.59 | %
Net interest margin |  |  |  |  |  |  |  |  |  |  | 4.42 | % |  |  |  |  |  |  |  |  |  |  | 3.72 | %
Net interest margin - tax equivalent |  |  |  |  |  |  |  |  |  |  | 4.44 | % |  |  |  |  |  |  |  |  |  |  | 3.75 | %

| (1) | Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the six months ended June 30, 2019 and 2018. The non TE rates were 2.48% and 2.37% for the six months ended June 30, 2019 and 2018, respectively.

| (2) | Includes loan fees of $1.6 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively. Prepayment penalty fees of $2.3 million and $1.4 million are included in interest income for the six months ended June 30, 2019 and 2018, respectively.

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

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

|  | Comparison of Three Months Ended June 30, 2019 Compared to 2018 Increase (Decrease) Due to |
|  | Volume |  |  | Rate |  |  | Rate/ Volume |  |  | Total |
|  |  |  |  | (Dollars in thousands) |  |  |  |
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  | $ | (1,877 | ) |  | $ | 489 |  |  | $ | (81 | ) |  | $ | (1,469 | )
Tax-advantaged investment securities |  |  | (64 | ) |  |  | (39 | ) |  |  | (7 | ) |  |  | (110 | )
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  |  | (162 | ) |  |  | 49 |  |  |  | (3 | ) |  |  | (116 | )
Tax-advantaged investment securities |  |  | (195 | ) |  |  | (63 | ) |  |  | (7 | ) |  |  | (265 | )
Investment in FHLB stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Interest-earning deposits with other institutions |  |  | (556 | ) |  |  | 167 |  |  |  | (146 | ) |  |  | (535 | )
Loans |  |  | 33,339 |  |  |  | 7,043 |  |  |  | 4,093 |  |  |  | 44,475 |
Total interest income |  |  | 30,485 |  |  |  | 7,646 |  |  |  | 3,849 |  |  |  | 41,980 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits |  |  | 458 |  |  |  | 902 |  |  |  | 320 |  |  |  | 1,680 |
Time deposits |  |  | 88 |  |  |  | 577 |  |  |  | 199 |  |  |  | 864 |
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 153 |  |  |  | 722 |  |  |  | 192 |  |  |  | 1,067 |
Total interest expense |  |  | 699 |  |  |  | 2,201 |  |  |  | 711 |  |  |  | 3,611 |
Net interest income |  | $ | 29,786 |  |  | $ | 5,445 |  |  | $ | 3,138 |  |  | $ | 38,369 |
|  | Comparison of Six Months Ended June 30, 2019 Compared to 2018 Increase (Decrease) Due to |
|  | Volume |  |  | Rate |  |  | Rate/ Volume |  |  | Total |
|  |  |  |  | (Dollars in thousands) |  |  |  |
Interest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  | $ | (3,754 | ) |  | $ | 1,376 |  |  | $ | (227 | ) |  | $ | (2,605 | )
Tax-advantaged investment securities |  |  | (157 | ) |  |  | (50 | ) |  |  | 10 |  |  |  | (197 | )
Held-to-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable investment securities |  |  | (501 | ) |  |  | 447 |  |  |  | (30 | ) |  |  | (84 | )
Tax-advantaged investment securities |  |  | (421 | ) |  |  | (131 | ) |  |  | 15 |  |  |  | (537 | )
Investment in FHLB stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Interest-earning deposits with other institutions |  |  | (1,021 | ) |  |  | 337 |  |  |  | (293 | ) |  |  | (977 | )
Loans |  |  | 66,439 |  |  |  | 14,164 |  |  |  | 8,363 |  |  |  | 88,966 |
Total interest income |  |  | 60,585 |  |  |  | 16,143 |  |  |  | 7,838 |  |  |  | 84,566 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings deposits |  |  | 923 |  |  |  | 1,595 |  |  |  | 574 |  |  |  | 3,092 |
Time deposits |  |  | 187 |  |  |  | 1,178 |  |  |  | 433 |  |  |  | 1,798 |
FHLB advances, other borrowings, and customer repurchase agreements |  |  | 274 |  |  |  | 1,652 |  |  |  | 366 |  |  |  | 2,292 |
Total interest expense |  |  | 1,384 |  |  |  | 4,425 |  |  |  | 1,373 |  |  |  | 7,182 |
Net interest income |  | $ | 59,201 |  |  | $ | 11,718 |  |  | $ | 6,465 |  |  | $ | 77,384 |

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Second Quarter of 2019 Compared to the Second Quarter of 2018
Net interest income, before provision for (recapture of) loan losses, of $111.1 million for the second quarter of 2019 increased $38.4 million, or 52.79%, compared to $72.7 million for the second quarter of 2018. Interest-earning assets increased on average by $2.25 billion, or 29.27%, from $7.70 billion for the second quarter of 2018 to $9.96 billion for the second quarter of 2019. The growth in interest-earning assets was primarily the result of loan growth from the acquisition of CB. Our net interest margin (TE) was 4.49% for the second quarter of 2019, compared to 3.82% for the second quarter of 2018. The net interest margin for the second quarter of 2019 grew by 67 basis points over the second quarter of 2018. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $9.4 million for the second quarter of 2019, compared to $2.1 million for the second quarter of 2018. The increase in our adjusted net interest margin was primarily due to a 79 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 59 basis point increase in our loan yield and an increase in loans as a percentage of our average earnings.
Interest income for the second quarter of 2019 was $116.8 million, which represented a $42.0 million, or 56.12%, increase when compared to the same period of 2018. Average interest-earning assets increased by $2.25 billion and the average interest-earning asset yield of 4.72%, compared to 3.93% for the second quarter of 2018. The 79 basis point increase in the interest-earning asset yield over the second quarter of 2018 resulted from the combination of a 59 basis point increase in loan yields, a six basis point increase in investment yields and the change in mix of earning assets, represented by an increase in average loans as a percentage of earning assets from 62.1% in the second quarter of 2018 to 75.9% in the second quarter of 2019. Conversely, average investment securities declined as a percentage of earning assets from 35.8% in the prior year to 23.7% in the second quarter of 2019.
Interest income and fees on loans for the second quarter of 2019 of $101.8 million increased $44.5 million, or 77.53%, when compared to the second quarter of 2018 primarily due to loans acquired from CB. Average loans increased $2.78 billion for the second quarter of 2019 when compared with the same period of 2018. As a result of higher levels of discount accretion on acquired CB loans and nonaccrual interest paid, second quarter interest income increased by $6.1 million in comparison to the second quarter of 2018. Also contributing to the 59 basis point increase in loan yield were increases in the rate on loans indexed to variable interest rates, such as the Bank’s prime rate, which increased by 0.50% when compared to the end of second quarter of 2018.
Interest income from investment securities was $14.5 million for the second quarter of 2019, a $2.0 million, or 11.88%, decrease from $16.5 million for the second quarter of 2018. This decrease was primarily the result of a $397.7 million decline in average investment securities for the second quarter of 2019, compared to the same period of 2018. The yield on investments increased by six basis points compared to the second quarter of 2018.
Interest expense of $5.7 million for the second quarter of 2019, increased $3.6 million, or 170.57%, compared to the second quarter of 2018, as our average interest-bearing liabilities increased by $1.04 billion. The increase in interest-bearing liabilities was primarily due to growth in interest-bearing deposits assumed from CB. Our total cost of funds for the second quarter of 2019 was 0.25%, compared to 0.12% for the second quarter of 2018. The increase in cost of funds compared to the second quarter of 2018 was due to a nine basis point increase in cost of deposits and customer repurchases, and $130.2 million of growth in average overnight borrowings at an average cost of 2.56%. Average interest-bearing deposits and customer repurchase agreements increased by $910.3 million, as we assumed $1.61 billion interest-bearing deposits from CB during the third quarter of 2018. Average noninterest-bearing deposits represented 59.14% of our total deposits for the second quarter of 2019, compared to 60.35% for the second quarter of 2018.
Six Months of 2019 Compared to the Six Months of 2018
Net interest income, before recapture of provision for (recapture of) loan losses, was $220.6 million for the six months ended June 30, 2019, an increase of $77.4 million, or 54.04%, compared to $143.2 million for the same period of 2018. Interest-earning assets increased on average by $2.30 billion, or 29.67%, from $7.75 billion for the six months ended June 30, 2018 to $10.05 billion for the current year. Our net interest margin (TE) was 4.44% during the first six months of 2019, compared to 3.75% for the same period of 2018.
Interest income for the six months ended June 30, 2019 was $232.1 million, which represented a $84.6 million, or 57.33%, increase when compared to the same period of 2018. Compared to the first six months of 2018, average interest-earning assets increased by $2.30 billion primarily due to loans acquired from CB, and the yield on interest-earning assets increased by 81 basis points. The 81 basis points increase in the earning asset yield over the first six months of 2019, resulted from a 60 basis point increase in loan yields and a change in the mix of earning assets. Average loans as a percentage of earning assets grew from 61.8% for the first six months of 2018 to 75.8% for the first six months of 2019. Conversely, average investment securities declined as a percentage of earning assets from 36.2% in the prior year to 23.9% for the first six months of 2019.
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Interest income and fees on loans for the first six months of 2019 of $201.5 million increased $89.0 million, or 79.04%, when compared to the same period of 2018. Average loans increased $2.83 billion for the first six months of 2019 when compared with the same period of 2018, primarily due to loans acquired from CB. The first six months of 2019 reflected a $13.0 million increase in discount accretion on acquired loans and nonaccrual interest paid when compared to the same period of 2018.
Interest income from investment securities was $29.7 million for the six months ended June 30, 2019, a $3.4 million decrease from $33.1 million for the first six months of 2018. This decrease was the net result of a $403.8 million decrease in the average investment securities for the first six months of 2019, compared to the same period of 2018, partially offset by an 11 basis points increase in the non tax-equivalent yield on securities.
Interest expense of $11.5 million for the six months ended June 30, 2019, increased by $7.2 million from the same period of 2018. The average rate paid on interest-bearing liabilities increased by 28 basis points, to 0.55% for the first six months of 2019, from 0.27% for the same period of 2018. The rate on interest-bearing deposits for the first six months of 2019 increased by 21 basis points from the same period in 2018. Average interest-bearing liabilities were $1.07 billion higher during the first six months of 2019 when compared with the same period of 2018, primarily due to deposits assumed from CB. Average interest-bearing deposit growth of $950.7 million was partially offset by a $22.2 million decline in customer repurchase agreements. Average noninterest-bearing deposits represented 58.67% of our total deposits for the six months ended June 30 2019, compared to 59.73% for the same period of 2018. Total cost of funds for the first six months of 2019 was 0.25%, compared with 0.12% for the same period of 2018.
Provision for Loan Losses
The allowance for loan losses is increased by the provision for loan losses and recoveries of prior losses, and is decreased by recapture of provisions and by charge-offs taken when management believes the uncollectability of any loan is confirmed. The provision for loan losses is determined by management as the amount to be added to (subtracted from) the allowance for loan losses after net charge-offs have been deducted to bring the allowance to an appropriate level which, in management’s best estimate, is necessary to absorb probable loan losses within the existing loan portfolio.
The allowance for loan losses totaled $67.1 million at June 30, 2019, compared to $63.6 million at December 31, 2018 and $59.6 million as of June 30, 2018. The allowance for loan losses was increased by $3.5 million in loan loss provision and $19,000 in net recoveries for the six months ended June 30, 2019. This compares to a $2.0 million loan loss provision recapture and net recoveries of $2.0 million for the same period of 2018. The increase in provision for loan losses was primarily due to lower levels of net recoveries and additional provision due to loan growth during the period experienced within the commercial and industrial and commercial real estate segments of the
non-acquired
loan portfolio. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. In addition to the growth in the
non-acquired
loan portfolio, the provision was the result of the net effect of modest increases in certain qualitative loss factors and reduced reserve requirements for moderate reductions in historical loss rates across the portfolio. We believe the allowance is appropriate at June 30, 2019. The ratio of the allowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of June 30, 2019, December 31, 2018 and June, 2018 was 0.89%, 0.82% and 1.24%, respectively. The ratio as of the most recent four quarters was impacted by the $2.74 billion in loans acquired from CB that are recorded at fair market value, without a corresponding loan loss allowance. As of June 30, 2019, remaining credit related discounts on acquired loans were $41.4 million. Refer to the discussion of “Allowance for Loan Losses” in Item 2 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations
contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for loan losses in the future, as the nature of this process requires considerable judgment. See “Allowance for Loan Losses” under
Analysis of Financial Condition
herein.
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Noninterest Income
Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.

|  | For the Three Months Ended June 30, |  | Variance |  | For the Six Months Ended June 30, |  | Variance
|  | 2019 |  | 2018 |  | $ |  | % |  | 2019 |  | 2018 |  | $ |  | % |
|  |  |  |  |  |  |  | (Dollars in thousands) |  |  |  |  |  |  |
Noninterest income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 5,065 |  |  | $ | 4,091 |  |  | $ | 974 |  |  |  | 23.81% |  |  | $ | 10,206 |  |  | $ | 8,136 |  |  | $ | 2,070 |  |  |  | 25.44% |
Trust and investment services |  |  | 2,452 |  |  |  | 2,399 |  |  |  | 53 |  |  |  | 2.21% |  |  |  | 4,634 |  |  |  | 4,556 |  |  |  | 78 |  |  |  | 1.71% |
Bankcard services |  |  | 1,027 |  |  |  | 958 |  |  |  | 69 |  |  |  | 7.20% |  |  |  | 1,977 |  |  |  | 1,762 |  |  |  | 215 |  |  |  | 12.20% |
BOLI income |  |  | 1,349 |  |  |  | 1,069 |  |  |  | 280 |  |  |  | 26.19% |  |  |  | 2,685 |  |  |  | 2,048 |  |  |  | 637 |  |  |  | 31.10% |
Gain on OREO, net |  |  | 24 |  |  |  | - |  |  |  | 24 |  |  |  | - |  |  |  | 129 |  |  |  | 3,540 |  |  |  | (3,411 | ) |  |  | -96.36% |
Gain on sale of building, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,545 |  |  |  | - |  |  |  | 4,545 |  |  |  | - |
Gain on eminent domain condemnation, net |  |  | 5,685 |  |  |  | - |  |  |  | 5,685 |  |  |  | - |  |  |  | 5,685 |  |  |  | - |  |  |  | 5,685 |  |  |  | - |
Other |  |  | 2,603 |  |  |  | 1,178 |  |  |  | 1,425 |  |  |  | 120.97% |  |  |  | 4,647 |  |  |  | 2,569 |  |  |  | 2,078 |  |  |  | 80.89% |
Total noninterest income |  | $ | 18,205 |  |  | $ | 9,695 |  |  | $ | 8,510 |  |  |  | 87.78% |  |  | $ | 34,508 |  |  | $ | 22,611 |  |  | $ | 11,897 |  |  |  | 52.62% |

Second Quarter of 2019 Compared to the Second Quarter of 2018
The second quarter of 2019 included $5.7 million of net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings located in Bakersfield. We have since moved that banking center to another site approximately 0.5 miles away. Excluding this net gain on sale, noninterest income for the second quarter of 2019 increased by $2.8 million, or 29.14%, compared to the second quarter of 2018. The $1.0 million increase in service charges on deposit accounts from the second quarter of 2018 was primarily due to service charges on deposits assumed in the acquisition of CB.
CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other
non-insured
investment products. At June 30, 2019, CitizensTrust had approximately $2.82 billion in assets under management and administration, including $2.03 billion in assets under management. The fees generated for the second quarter of 2019 were consistent with the second quarter of 2018.
The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. The $1.4 million increase in other income included increases in international banking, swap fee income, SBA servicing income, and dividend income from various equity investments.
Six Months of 2019 Compared to the Six Months of 2018
The $11.9 million increase in noninterest income for the six months ended June 30, 2019, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings, compared with a $3.5 million net gain on the sale of one OREO during the first six months of 2018. Service charges on deposit accounts increased by $2.1 million from the first six months of 2018, primarily due to the acquisition of CB. The $637,000 increase in BOLI income included $1.0 million in income from $70.9 million in BOLI policies acquired from CB in the third quarter of 2018, offset by a $351,000 death benefit included in our BOLI policies for the first six months of 2018. The $2.1 million increase in other income included increases in international banking, swap fee income, SBA servicing income, and dividend income from various equity investments.
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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 June 30, |  |  | Variance |  |  | For the Six Months Ended June 30, |  |  | Variance |
|  | 2019 |  |  | 2018 |  |  | $ |  |  | % |  |  | 2019 |  |  | 2018 |  |  | $ |  |  | % |
|  |  |  |  |  |  |  |  |  |  | (Dollars in thousands) |  |  |  |  |  |  |  |  |  |
Noninterest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | $ | 28,862 |  |  | $ | 21,051 |  |  | $ | 7,811 |  |  |  | 37.11% |  |  | $ | 58,164 |  |  | $ | 43,365 |  |  | $ | 14,799 |  |  |  | 34.13% |
Occupancy |  |  | 4,388 |  |  |  | 3,424 |  |  |  | 964 |  |  |  | 28.15% |  |  |  | 8,795 |  |  |  | 6,756 |  |  |  | 2,039 |  |  |  | 30.18% |
Equipment |  |  | 1,253 |  |  |  | 894 |  |  |  | 359 |  |  |  | 40.16% |  |  |  | 2,461 |  |  |  | 1,754 |  |  |  | 707 |  |  |  | 40.31% |
Professional services |  |  | 2,040 |  |  |  | 1,690 |  |  |  | 350 |  |  |  | 20.71% |  |  |  | 3,965 |  |  |  | 3,220 |  |  |  | 745 |  |  |  | 23.14% |
Software licenses and maintenance |  |  | 2,542 |  |  |  | 1,759 |  |  |  | 783 |  |  |  | 44.51% |  |  |  | 4,964 |  |  |  | 3,519 |  |  |  | 1,445 |  |  |  | 41.06% |
Stationery and supplies |  |  | 316 |  |  |  | 307 |  |  |  | 9 |  |  |  | 2.93% |  |  |  | 608 |  |  |  | 544 |  |  |  | 64 |  |  |  | 11.76% |
Telecommunications expense |  |  | 712 |  |  |  | 561 |  |  |  | 151 |  |  |  | 26.92% |  |  |  | 1,470 |  |  |  | 1,089 |  |  |  | 381 |  |  |  | 34.99% |
Marketing and promotion |  |  | 1,238 |  |  |  | 1,148 |  |  |  | 90 |  |  |  | 7.84% |  |  |  | 2,632 |  |  |  | 2,504 |  |  |  | 128 |  |  |  | 5.11% |
Amortization of intangible assets |  |  | 2,833 |  |  |  | 328 |  |  |  | 2,505 |  |  |  | 763.72% |  |  |  | 5,690 |  |  |  | 659 |  |  |  | 5,031 |  |  |  | 763.43% |
Regulatory assessments |  |  | 734 |  |  |  | 666 |  |  |  | 68 |  |  |  | 10.21% |  |  |  | 1,658 |  |  |  | 1,380 |  |  |  | 278 |  |  |  | 20.14% |
Insurance |  |  | 469 |  |  |  | 423 |  |  |  | 46 |  |  |  | 10.87% |  |  |  | 938 |  |  |  | 846 |  |  |  | 92 |  |  |  | 10.87% |
Loan expense |  |  | 491 |  |  |  | 149 |  |  |  | 342 |  |  |  | 229.53% |  |  |  | 807 |  |  |  | 404 |  |  |  | 403 |  |  |  | 99.75% |
Directors’ expenses |  |  | 320 |  |  |  | 270 |  |  |  | 50 |  |  |  | 18.52% |  |  |  | 607 |  |  |  | 510 |  |  |  | 97 |  |  |  | 19.02% |
Acquisition related expenses |  |  | 2,612 |  |  |  | 494 |  |  |  | 2,118 |  |  |  | 428.74% |  |  |  | 5,761 |  |  |  | 1,297 |  |  |  | 4,464 |  |  |  | 344.18% |
Other |  |  | 1,718 |  |  |  | 1,090 |  |  |  | 628 |  |  |  | 57.61% |  |  |  | 3,612 |  |  |  | 2,353 |  |  |  | 1,259 |  |  |  | 53.51% |
Total noninterest expense |  | $ | 50,528 |  |  | $ | 34,254 |  |  | $ | 16,274 |  |  |  | 47.51% |  |  | $ | 102,132 |  |  | $ | 70,200 |  |  | $ | 31,932 |  |  |  | 45.49% |
Noninterest expense to average assets |  |  | 1.81% |  |  |  | 1.68% |  |  |  |  |  |  |  |  |  |  |  | 1.82% |  |  |  | 1.72% |  |  |  |  |  |  |  |  |
Efficiency ratio (1) |  |  | 39.09% |  |  |  | 41.58% |  |  |  |  |  |  |  |  |  |  |  | 40.04% |  |  |  | 42.34% |  |  |  |  |  |  |  |  |

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

Second Quarter of 2019 Compared to the Second Quarter of 2018
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.81% for the second quarter of 2019, compared to 1.68% for the second quarter of 2018. The increase is primarily the result of higher acquisition expense of $2.1 million and a $2.5 million increase in amortization of core deposit intangible (“CDI”).
Our ability to control noninterest expenses in relation to the level of total revenue (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. The efficiency ratio was 39.09% for the second quarter of 2019, compared to 41.58% for the second quarter of 2018.
The $16.3 million, or 47.51%, increase in noninterest expense for the second quarter of 2019 included a $7.8 million increase in salary and benefit expense principally due to additional compensation related expenses for the former CB employees who were retained. CDI amortization increased by $2.5 million as a result of core deposits assumed from CB. Occupancy and equipment expense increased by $1.3 million due to the banking centers acquired from CB. The second quarter of 2019 also included $2.6 million in merger related expenses mostly due to the consolidation of four banking centers. This compares to $494,000 in merger related expenses for the same period of 2018.
Six Months of 2019 Compared to the Six Months of 2018
Noninterest expense of $102.1 million for the first six months of 2019 was $31.9 million higher than the prior year period. Salaries and benefit costs increased by $14.8 million due to additional compensation related expenses for the newly hired and former CB employees who were retained. The year-over-year increase also included a $5.0 million increase in amortization of intangible assets due to core deposits assumed from CB and a $4.5 million increase in merger related expenses mostly due to the consolidation of 10 banking centers that occurred throughout the first six months of 2019. CB related expenses were the primary driver of a $2.7 million increase in occupancy and equipment expense and a $1.4 million increase in software licenses and maintenance. As a percentage of average assets, noninterest expense was 1.82% for the six months ended June 30, 2019, compared to 1.72% for the same period of 2018. The increase is primarily the result of higher acquisition expense of $4.5 million and a $5.0 million increase in amortization of CDI. For the six months ended 2019, the efficiency ratio was 40.04%, compared to 42.34% for the same period of 2018.
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Income Taxes
The Company’s effective tax rate for the three and six months ended June 30, 2019 was 29.00%, compared to 28.00% for the same periods of 2018. The increase was due to higher income growth from
non-tax
advantaged revenue sources. Our estimated annual effective tax rate also varies depending upon the level of
tax-advantaged
income as well as available tax credits.
The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of
tax-advantaged
income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.
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ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $11.17 billion at June 30, 2019. This represented a decrease of $357.6 million, or 3.10%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $9.89 billion at June 30, 2019 decreased $395.0 million, or 3.84%, when compared with $10.29 billion at December 31, 2018. The decrease in interest-earning assets was primarily due to a $228.9 million decrease in total loans and a $150.4 million decrease in investment securities. The decrease in total loans included a $94.8 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans declined by $134.1 million, or 1.81%, primarily due to increased payoffs, particularly from the former Community Bank loan portfolio. Total liabilities were $9.23 billion at June 30, 2019, a decrease of $443.1 million, or 4.58%, from total liabilities of $9.68 billion at December 31, 2018. Total deposits declined by $164.7 million, or 1.87%. Total equity increased $85.5 million, or 4.62%, to $1.94 billion at June 30, 2019, compared to total equity of $1.85 billion at December 31, 2018. The $85.5 million increase in equity was due to $106.1 million in net earnings, a $26.6 million increase in other comprehensive income, net of tax, resulting from the net increase in market value of our investment securities portfolio, and $3.2 million for various stock based compensation items. This was offset by $50.4 million in cash dividends declared during the first six months of 2019.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At June 30, 2019, we reported total investment securities of $2.33 billion. This represented a decrease of $150.4 million, or 6.07%, from total investment securities of $2.48 billion at December 31, 2018. The decrease in investment securities was primarily due to minimal reinvestment of principal payments received from the portfolio during the first six months of 2019. At June 30, 2019, investment securities HTM totaled $728.1 million. At June 30, 2019, our AFS investment securities totaled $1.60 billion, inclusive of a
pre-tax
unrealized gain of $15.3 million. The
after-tax
unrealized gain reported in AOCI on AFS investment securities was $10.8 million.
As of June 30, 2019, the Company had a
pre-tax
net unrealized holding gain on AFS investment securities of $15.3 million, compared to a
pre-tax
net unrealized holding loss of $23.6 million at December 31, 2018. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the six months ended June 30, 2019 and 2018, repayments/maturities of investment securities totaled $220.5 million and $261.5 million, respectively. The Company purchased additional investment securities totaling $37.1 million and $98.7 million for the first six months ended June 30, 2019 and 2018, respectively. No investment securities were sold during the first six months of 2019 and 2018.
The tables below set forth investment securities AFS and HTM for the periods presented.

|  | June 30, 2019
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent |
|  |  |  | (Dollars in thousands) |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,348,415 |  |  | $ | 16,251 |  |  | $ | (2,417) |  |  | $ | 1,362,249 |  |  |  | 85.14% |
CMO/REMIC - residential |  |  | 194,094 |  |  |  | 1,216 |  |  |  | (334) |  |  |  | 194,976 |  |  |  | 12.19% |
Municipal bonds |  |  | 41,369 |  |  |  | 658 |  |  |  | (41) |  |  |  | 41,986 |  |  |  | 2.62% |
Other securities |  |  | 809 |  |  |  | - |  |  |  | - |  |  |  | 809 |  |  |  | 0.05% |
Total available-for-sale securities |  | $ | 1,584,687 |  |  | $ | 18,125 |  |  | $ | (2,792) |  |  | $ | 1,600,020 |  |  |  | 100.00% |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 128,721 |  |  | $ | 2,627 |  |  | $ | (414) |  |  | $ | 130,934 |  |  |  | 17.68% |
Residential mortgage-backed securities |  |  | 175,552 |  |  |  | 1,480 |  |  |  | (415) |  |  |  | 176,617 |  |  |  | 24.11% |
CMO |  |  | 211,436 |  |  |  | 5 |  |  |  | (4,358) |  |  |  | 207,083 |  |  |  | 29.04% |
Municipal bonds |  |  | 212,404 |  |  |  | 3,245 |  |  |  | (1,251) |  |  |  | 214,398 |  |  |  | 29.17% |
Total held-to-maturity securities |  | $ | 728,113 |  |  | $ | 7,357 |  |  | $ | (6,438) |  |  | $ | 729,032 |  |  |  | 100.00% |

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|  | December 31, 2018
|  | Amortized Cost |  | Gross Unrealized Holding Gain |  | Gross Unrealized Holding Loss |  | Fair Value |  | Total Percent |
|  |  |  | (Dollars in thousands) |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 1,494,106 |  |  | $ | 1,348 |  |  | $ | (20,946) |  |  | $ | 1,474,508 |  |  |  | 85.03% |
CMO/REMIC - residential |  |  | 217,223 |  |  |  | 353 |  |  |  | (3,525) |  |  |  | 214,051 |  |  |  | 12.34% |
Municipal bonds |  |  | 45,621 |  |  |  | 332 |  |  |  | (1,143) |  |  |  | 44,810 |  |  |  | 2.59% |
Other securities |  |  | 716 |  |  |  | - |  |  |  | - |  |  |  | 716 |  |  |  | 0.04% |
Total available-for-sale securities |  | $ | 1,757,666 |  |  | $ | 2,033 |  |  | $ | (25,614) |  |  | $ | 1,734,085 |  |  |  | 100.00% |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 138,274 |  |  | $ | 572 |  |  | $ | (2,622) |  |  | $ | 136,224 |  |  |  | 18.57% |
Residential mortgage-backed securities |  |  | 153,874 |  |  |  | - |  |  |  | (3,140) |  |  |  | 150,734 |  |  |  | 20.67% |
CMO |  |  | 215,336 |  |  |  | - |  |  |  | (12,081) |  |  |  | 203,255 |  |  |  | 28.93% |
Municipal bonds |  |  | 236,956 |  |  |  | 556 |  |  |  | (6,188) |  |  |  | 231,324 |  |  |  | 31.83% |
Total held-to-maturity securities |  | $ | 744,440 |  |  | $ | 1,128 |  |  | $ | (24,031) |  |  | $ | 721,537 |  |  |  | 100.00% |

The weighted-average yield (TE) on the total investment portfolio at June 30, 2019 was 2.55% with a weighted-average life of 3.8 years. This compares to a weighted-average yield of 2.55% at December 31, 2018 with a weighted-average life of 4.3 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
pay-downs.
Approximately 89% of the securities in the total investment portfolio, at June 30, 2019, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of June 30, 2019, approximately $83.6 million in U.S. government agency bonds are callable. The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 11% of the total investment portfolio, are predominately AA or higher rated securities.
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The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be other-than-temporarily-impaired (“OTTI”). A summary of our analysis of these securities and the unrealized losses is described more fully in Note 5 —
Investment Securities
of the notes to the unaudited condensed consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

|  | June 30, 2019 |
|  | Less Than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair Value |  |  | Gross Unrealized Holding Losses |  |  | Fair Value |  |  | Gross Unrealized Holding Losses |  |  | Fair Value |  |  | Gross Unrealized Holding Losses |
|  |  |  |  |  |  |  | (Dollars in thousands) |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | - |  |  | $ | - |  |  | $ | 228,518 |  |  | $ | (2,417) |  |  | $ | 228,518 |  |  | $ | (2,417) |
CMO/REMIC - residential |  |  | - |  |  |  | - |  |  |  | 71,924 |  |  |  | (334) |  |  |  | 71,924 |  |  |  | (334) |
Municipal bonds |  |  | - |  |  |  | - |  |  |  | 3,287 |  |  |  | (41) |  |  |  | 3,287 |  |  |  | (41) |
Total available-for-sale securities |  | $ | - |  |  | $ | - |  |  | $ | 303,729 |  |  | $ | (2,792) |  |  | $ | 303,729 |  |  | $ | (2,792) |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | - |  |  | $ | - |  |  | $ | 39,016 |  |  | $ | (414) |  |  | $ | 39,016 |  |  | $ | (414) |
Residential mortgage-backed securities |  |  | 10,722 |  |  |  | (45) |  |  |  | 75,536 |  |  |  | (370) |  |  |  | 86,258 |  |  |  | (415) |
CMO |  |  | - |  |  |  | - |  |  |  | 201,974 |  |  |  | (4,358) |  |  |  | 201,974 |  |  |  | (4,358) |
Municipal bonds |  |  | - |  |  |  | - |  |  |  | 49,102 |  |  |  | (1,251) |  |  |  | 49,102 |  |  |  | (1,251) |
Total held-to-maturity securities |  | $ | 10,722 |  |  | $ | (45) |  |  | $ | 365,628 |  |  | $ | (6,393) |  |  | $ | 376,350 |  |  | $ | (6,438) |
|  | December 31, 2018 |
|  | Less Than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair Value |  |  | Gross Unrealized Holding Losses |  |  | Fair Value |  |  | Gross Unrealized Holding Losses |  |  | Fair Value |  |  | Gross Unrealized Holding Losses |
|  |  |  |  |  |  |  | (Dollars in thousands) |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed securities |  | $ | 692,311 |  |  | $ | (4,864) |  |  | $ | 593,367 |  |  | $ | (16,082) |  |  | $ | 1,285,678 |  |  | $ | (20,946) |
CMO/REMIC - residential |  |  | 36,582 |  |  |  | (365) |  |  |  | 135,062 |  |  |  | (3,160) |  |  |  | 171,644 |  |  |  | (3,525) |
Municipal bonds |  |  | 9,568 |  |  |  | (188) |  |  |  | 14,181 |  |  |  | (955) |  |  |  | 23,749 |  |  |  | (1,143) |
Total available-for-sale securities |  | $ | 738,461 |  |  | $ | (5,417) |  |  | $ | 742,610 |  |  | $ | (20,197) |  |  | $ | 1,481,071 |  |  | $ | (25,614) |
Investment securities held-to-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agency/GSE |  | $ | 7,479 |  |  | $ | (15) |  |  | $ | 54,944 |  |  | $ | (2,607) |  |  | $ | 62,423 |  |  | $ | (2,622) |
Residential mortgage-backed securities |  |  | 59,871 |  |  |  | (484) |  |  |  | 90,863 |  |  |  | (2,656) |  |  |  | 150,734 |  |  |  | (3,140) |
CMO |  |  | - |  |  |  | - |  |  |  | 203,254 |  |  |  | (12,081) |  |  |  | 203,254 |  |  |  | (12,081) |
Municipal bonds |  |  | 70,989 |  |  |  | (778) |  |  |  | 77,723 |  |  |  | (5,410) |  |  |  | 148,712 |  |  |  | (6,188) |
Total held-to-maturity securities |  | $ | 138,339 |  |  | $ | (1,277) |  |  | $ | 426,784 |  |  | $ | (22,754) |  |  | $ | 565,123 |  |  | $ | (24,031) |

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Loans
Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans
(“Non-PCI
loans”). The PCI loans are more fully discussed in Note 3 –
Summary of Significant Accounting Policies
, included in our Annual Report on Form
10-K
for the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at June 30, 2019 and December 31, 2018. As of June 30, 2019, PCI loans were accounted for and combined with
Non-PCI
loans and were reflected in total loans and lease finance receivables.
Total loans and leases, net of deferred fees and discounts, of $7.54 billion at June 30, 2019 decreased by $228.9 million, or 2.95%, from December 31, 2018. The decrease in total loans included a $94.8 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. The decrease in total loans included declines of $84.8 million in commercial and industrial loans, $23.7 million in SBA loans, and $18.4 million in SFR mortgage loans.
The following table presents our loan portfolio by type for the periods presented.
Distribution of Loan Portfolio by Type

|  | June 30, 2019 |  |  | December 31, 2018 |
|  | Total Loans and Leases |  |  | Non-PCI Loans and Leases |  |  | PCI Loans |  |  | Total Loans and Leases |
|  |  |  |  | (Dollars in thousands) |  |  |  |
Commercial and industrial |  | $ | 917,953 |  |  | $ | 1,002,209 |  |  | $ | 519 |  |  | $ | 1,002,728 |
SBA |  |  | 327,606 |  |  |  | 350,043 |  |  |  | 1,258 |  |  |  | 351,301 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 5,417,351 |  |  |  | 5,394,229 |  |  |  | 14,407 |  |  |  | 5,408,636 |
Construction |  |  | 116,457 |  |  |  | 122,782 |  |  |  | - |  |  |  | 122,782 |
SFR mortgage |  |  | 278,285 |  |  |  | 296,504 |  |  |  | 145 |  |  |  | 296,649 |
Dairy & livestock and agribusiness |  |  | 301,752 |  |  |  | 393,843 |  |  |  | 700 |  |  |  | 394,543 |
Municipal lease finance receivables |  |  | 59,985 |  |  |  | 64,186 |  |  |  | - |  |  |  | 64,186 |
Consumer and other loans |  |  | 120,779 |  |  |  | 128,429 |  |  |  | 185 |  |  |  | 128,614 |
Gross loans |  |  | 7,540,168 |  |  |  | 7,752,225 |  |  |  | 17,214 |  |  |  | 7,769,439 |
Less: Deferred loan fees, net |  |  | (4,478 | ) |  |  | (4,828 | ) |  |  | - |  |  |  | (4,828 | )
Gross loans, net of deferred loan fees |  |  | 7,535,690 |  |  |  | 7,747,397 |  |  |  | 17,214 |  |  |  | 7,764,611 |
Less: Allowance for loan losses |  |  | (67,132 | ) |  |  | (63,409 | ) |  |  | (204 | ) |  |  | (63,613 | )
Total loans and lease finance receivables |  | $ | 7,468,558 |  |  | $ | 7,683,988 |  |  | $ | 17,010 |  |  | $ | 7,700,998 |

As of June 30, 2019, $225.6 million, or 4.16% of the total commercial real estate loans included loans secured by farmland, compared to $231.0 million, or 4.27%, at December 31, 2018. The loans secured by farmland included $122.7 million for loans secured by dairy & livestock land and $102.9 million for loans secured by agricultural land at June 30, 2019, compared to $126.9 million for loans secured by dairy & livestock land and $104.1 million for loans secured by agricultural land at December 31, 2018. As of June 30, 2019, dairy & livestock and agribusiness loans of $301.8 million were comprised of $245.7 million for dairy & livestock loans and $56.1 million for agribusiness loans, compared to $340.5 million for dairy & livestock loans and $54.0 million for agribusiness loans at December 31, 2018.
Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.
As of June 30, 2019, the Company had $170.9 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment representing 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial
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real estate acquisition. As of June 30, 2019, the Company had $156.7 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
As of June 30, 2019, the Company had $116.5 million in construction loans. This represents 1.50% of total gross loans
held-for-investment.
Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at June 30, 2019.
Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total
held-for-investment
commercial real estate loans, by region as of June 30, 2019.

|  | June 30, 2019
|  | Total Loans |  | Commercial Real Estate Loans
|  | (Dollars in thousands)
Los Angeles County |  | $ | 3,356,850 |  |  |  | 44.5% |  |  | $ | 2,336,783 |  |  |  | 43.1% |
Central Valley |  |  | 1,081,432 |  |  |  | 14.3% |  |  |  | 854,911 |  |  |  | 15.8% |
Inland Empire |  |  | 1,001,398 |  |  |  | 13.3% |  |  |  | 878,518 |  |  |  | 16.2% |
Orange County |  |  | 989,992 |  |  |  | 13.1% |  |  |  | 651,925 |  |  |  | 12.0% |
Central Coast |  |  | 426,121 |  |  |  | 5.7% |  |  |  | 339,141 |  |  |  | 6.3% |
San Diego |  |  | 224,599 |  |  |  | 3.0% |  |  |  | 128,176 |  |  |  | 2.4% |
Other California |  |  | 146,573 |  |  |  | 1.9% |  |  |  | 70,081 |  |  |  | 1.3% |
Out of State |  |  | 313,203 |  |  |  | 4.2% |  |  |  | 157,816 |  |  |  | 2.9% |
|  | $ | 7,540,168 |  |  |  | 100.0% |  |  | $ | 5,417,351 |  |  |  | 100.0% |

The table below breaks down our commercial real estate portfolio.

|  | June 30, 2019
|  | Loan Balance |  | Percent |  | Percent Owner- Occupied (1) |  | Average Loan Balance |
|  |  |  | (Dollars in thousands) |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Multi-family |  | $ | 572,908 |  |  |  | 10.6% |  |  |  | 0.6% |  |  | $ | 1,628 |
Industrial |  |  | 1,903,504 |  |  |  | 35.1% |  |  |  | 55.2% |  |  |  | 1,429 |
Office |  |  | 947,407 |  |  |  | 17.5% |  |  |  | 26.7% |  |  |  | 1,528 |
Retail |  |  | 828,133 |  |  |  | 15.3% |  |  |  | 13.6% |  |  |  | 1,732 |
Medical |  |  | 280,096 |  |  |  | 5.2% |  |  |  | 44.8% |  |  |  | 1,819 |
Secured by farmland (2) |  |  | 225,553 |  |  |  | 4.1% |  |  |  | 100.0% |  |  |  | 2,032 |
Other (3) |  |  | 659,750 |  |  |  | 12.2% |  |  |  | 49.0% |  |  |  | 1,416 |
Total commercial real estate |  | $ | 5,417,351 |  |  |  | 100.0% |  |  |  |  |  |  |  |  |

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

| (2) | The loans secured by farmland included $122.7 million for loans secured by dairy & livestock land and $102.9 million for loans secured by agricultural land at June 30, 2019.

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

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Nonperforming Assets
The following table provides information on nonperforming assets for the periods presented.

|  | June 30, 2019 |  |  | December 31, 2018 (1) |
|  | (Dollars in thousands) |
Nonaccrual loans |  | $ | 11,024 |  |  | $ | 16,442 |
Troubled debt restructured loans (nonperforming) |  |  | 263 |  |  |  | 3,509 |
OREO, net |  |  | 2,275 |  |  |  | 420 |
Total nonperforming assets |  | $ | 13,562 |  |  | $ | 20,371 |
Troubled debt restructured performing loans |  | $ | 3,219 |  |  | $ | 3,594 |
Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO |  |  | 0.18% |  |  |  | 0.26% |
Percentage of nonperforming assets to total assets |  |  | 0.12% |  |  |  | 0.18% |

| (1) | Excludes PCI loans.

At June 30, 2019, loans classified as impaired totaled $14.5 million, or 0.19% of total gross loans, compared to $23.5 million, or 0.30% of total loans at December 31, 2018. At June 30, 2019, impaired loans resulting from troubled debt restructures represented $3.5 million, of which $263,000 were nonperforming and $3.2 million were performing.
Of the $14.5 million total impaired loans as of June 30, 2019, $11.5 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within one year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate was $3.0 million.
Troubled Debt Restructurings
Total TDRs were $3.5 million at June 30, 2019, compared to $7.1 million at December 31, 2018. At June 30, 2019, we had $263,000 in nonperforming TDR loans and $3.2 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only impaired loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. We have not restructured loans into multiple loans in what is typically referred to as an “A/B” note structure, where normally the “A” note meets current underwriting standards and the “B” note is typically immediately charged off upon restructuring.
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The following table provides a summary of TDRs for the periods presented.

|  | June 30, 2019 |  | December 31, 2018
|  | Balance |  | Number of Loans |  | Balance |  | Number of Loans |
|  |  |  | (Dollars in thousands) |  |  |
Performing TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 95 |  |  |  | 2 |  |  | $ | 135 |  |  |  | 2 |
SBA |  |  | 550 |  |  |  | 1 |  |  |  | 575 |  |  |  | 1 |
Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 436 |  |  |  | 1 |  |  |  | 472 |  |  |  | 1 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 2,138 |  |  |  | 8 |  |  |  | 2,412 |  |  |  | 9 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total performing TDRs |  | $ | 3,219 |  |  |  | 12 |  |  | $ | 3,594 |  |  |  | 13 |
Nonperforming TDRs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 9 |  |  |  | 1 |  |  | $ | 21 |  |  |  | 1 |
SBA |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | 3,143 |  |  |  | 1 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | 78 |  |  |  | 1 |
Consumer and other |  |  | 254 |  |  |  | 1 |  |  |  | 267 |  |  |  | 1 |
Total nonperforming TDRs |  | $ | 263 |  |  |  | 2 |  |  | $ | 3,509 |  |  |  | 4 |
Total TDRs |  | $ | 3,482 |  |  |  | 14 |  |  | $ | 7,103 |  |  |  | 17 |

At June 30, 2019, there was no allowance for loan losses specifically allocated to TDRs. At December 31, 2018, $490,000 of the allowance for loan losses was specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. Total charge-offs on TDRs for the six months ended June 30, 2019 were $78,000, compared to no charge-offs for the same period of 2018.
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Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies for the periods presented.

|  | June 30, 2019 |  | March 31, 2019 |  | December 31, 2018 |  | September 30, 2018 |  | June 30, 2018 |
|  | (Dollars in thousands)
Nonperforming loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 1,993 |  |  | $ | 8,388 |  |  | $ | 7,490 |  |  | $ | 3,026 |  |  | $ | 204 |
SBA |  |  | 5,082 |  |  |  | 4,098 |  |  |  | 2,892 |  |  |  | 3,005 |  |  |  | 574 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 1,095 |  |  |  | 1,134 |  |  |  | 6,068 |  |  |  | 5,856 |  |  |  | 6,517 |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | 2,720 |  |  |  | 2,894 |  |  |  | 2,937 |  |  |  | 2,961 |  |  |  | 1,578 |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | 78 |  |  |  | 775 |  |  |  | 800 |
Consumer and other loans |  |  | 397 |  |  |  | 477 |  |  |  | 486 |  |  |  | 807 |  |  |  | 509 |
Total |  | $ | 11,287 |  |  | $ | 16,991 |  |  | $ | 19,951 |  |  | $ | 16,430 |  |  | $ | 10,182 |
% of Total gross loans |  |  | 0.15% |  |  |  | 0.22% |  |  |  | 0.26% |  |  |  | 0.22% |  |  |  | 0.21% |
Past due 30-89 days: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 310 |  |  | $ | 369 |  |  | $ | 909 |  |  | $ | 274 |  |  | $ | - |
SBA |  |  | - |  |  |  | 601 |  |  |  | 1,307 |  |  |  | 123 |  |  |  | - |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | - |  |  |  | 124 |  |  |  | 2,789 |  |  |  | - |  |  |  | - |
Construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | 285 |  |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer and other loans |  |  | 22 |  |  |  | 101 |  |  |  | - |  |  |  | 98 |  |  |  | 47 |
Total |  | $ | 332 |  |  | $ | 1,195 |  |  | $ | 5,290 |  |  | $ | 495 |  |  | $ | 47 |
% of Total gross loans |  |  | 0.004% |  |  |  | 0.02% |  |  |  | 0.07% |  |  |  | 0.01% |  |  |  | 0.001% |
OREO: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 2,275 |  |  | $ | 2,275 |  |  | $ | - |  |  | $ | - |  |  | $ | - |
SFR mortgage |  |  | - |  |  |  | - |  |  |  | 420 |  |  |  | 420 |  |  |  | - |
Total |  | $ | 2,275 |  |  | $ | 2,275 |  |  | $ | 420 |  |  | $ | 420 |  |  | $ | - |
Total nonperforming, past due, and OREO |  | $ | 13,894 |  |  | $ | 20,461 |  |  | $ | 25,661 |  |  | $ | 17,345 |  |  | $ | 10,229 |
% of Total gross loans |  |  | 0.18% |  |  |  | 0.27% |  |  |  | 0.33% |  |  |  | 0.23% |  |  |  | 0.21% |

Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $11.3 million at June 30, 2019, or 0.15% of total loans.
Total nonperforming loans at June 30, 2019 included $8.4 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $20.0 million, or 0.26% of total loans, at December 31, 2018 and $10.2 million, or 0.21%, of total loans, at June 30, 2018. The $5.7 million decrease in nonperforming loans quarter-over-quarter was primarily due to a $6.4 million decrease in nonperforming commercial and industrial loans, partially offset by a $1.0 million increase in nonperforming SBA loans.
At June 30, 2019, we had one OREO property with a carrying value of $2.3 million, compared to one OREO property with a carrying value of $420,000 at December 31, 2018 and none at June 30, 2018. During the first quarter of 2019, we sold one OREO property, realizing a net gain on sale of $105,000. There was one addition to OREO for the six months ended June 30, 2019.
Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a borrower’s ability to pay or the value of our collateral. See “
Risk Management – Credit Risk Management
” contained in our Annual Report on Form
10-K
for the year ended December 31, 2018.
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Allowance for Loan Losses
The allowance for loan losses is established as management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased (decreased) by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are added to the allowance. The determination of the balance in the allowance for loan losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is appropriate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past loan loss experience, and such other factors that are considered in estimating inherent credit losses.
The allowance for loan losses totaled $67.1 million as of June 30, 2019, compared to $63.6 million as of December 31, 2018 and $59.6 million as of June 30, 2018. The allowance for loan losses was increased by a $3.5 million loan loss provision and $19,000 in net recoveries for the six months ended June 30, 2019. This compares to a $2.0 million loan loss provision recapture, offset by net recoveries of $2.0 million for the same period of 2018.
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The table below presents a summary of net charge-offs and recoveries by type and the resulting allowance for loan losses and recapture of provision for loan losses for the periods presented.

|  | As of and For the Six Months Ended June 30,
|  | 2019 |  | 2018 |
|  | (Dollars in thousands)
Allowance for loan losses at beginning of period |  | $ | 63,613 |  |  | $ | 59,585 |
Charge-offs: |  |  |  |  |  |  |  |
Commercial and industrial |  |  | (48 | ) |  |  | - |
SBA |  |  | (230 | ) |  |  | - |
Commercial real estate |  |  | - |  |  |  | - |
Construction |  |  | - |  |  |  | - |
SFR mortgage |  |  | - |  |  |  | - |
Dairy & livestock and agribusiness |  |  | (78 | ) |  |  | - |
Consumer and other loans |  |  | (4 | ) |  |  | (9 | )
Total charge-offs |  |  | (360 | ) |  |  | (9 | )
Recoveries: |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 159 |  |  |  | 37 |
SBA |  |  | 9 |  |  |  | 10 |
Commercial real estate |  |  | - |  |  |  | - |
Construction |  |  | 6 |  |  |  | 1,930 |
SFR mortgage |  |  | 183 |  |  |  | - |
Dairy & livestock and agribusiness |  |  | 19 |  |  |  | 19 |
Consumer and other loans |  |  | 3 |  |  |  | 11 |
Total recoveries |  |  | 379 |  |  |  | 2,007 |
Net recoveries |  |  | 19 |  |  |  | 1,998 |
Provision for (recapture of) loan losses |  |  | 3,500 |  |  |  | (2,000 | )
Allowance for loan losses at end of period |  | $ | 67,132 |  |  | $ | 59,583 |
Summary of reserve for unfunded loan commitments: |  |  |  |  |  |  |  |
Reserve for unfunded loan commitments at beginning of period |  | $ | 8,959 |  |  | $ | 6,306 |
Provision for unfunded loan commitments |  |  | - |  |  |  | - |
Reserve for unfunded loan commitments at end of period |  | $ | 8,959 |  |  | $ | 6,306 |
Reserve for unfunded loan commitments to total unfunded loan commitments |  |  | 0.53% |  |  |  | 0.59% |
Amount of total loans at end of period (1) |  | $ | 7,535,690 |  |  | $ | 4,816,956 |
Average total loans outstanding (1) |  | $ | 7,610,241 |  |  | $ | 4,785,118 |
Net recoveries to average total loans |  |  | 0.00% |  |  |  | 0.04% |
Net recoveries to total loans at end of period |  |  | 0.00% |  |  |  | 0.04% |
Allowance for loan losses to average total loans |  |  | 0.88% |  |  |  | 1.25% |
Allowance for loan losses to total loans at end of period |  |  | 0.89% |  |  |  | 1.24% |
Net recoveries to allowance for loan losses |  |  | 0.03% |  |  |  | 3.35% |
Net recoveries to provision for (recapture of) loan losses |  |  | 0.54% |  |  |  | -99.90% |

| (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 $371,000 (0.55%), $561,000 (0.88%) and $16,000 (0.03%) of the total allowance as of June 30, 2019, December 31, 2018 and June 30, 2018, respectively.
General allowance:
The remaining loan portfolio is collectively evaluated for impairment under ASC
450-20
and is divided into risk rating classes of loan receivables between “classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and is further disaggregated into loan segments by loan type with similar risk characteristics. Both the classified and
non-classified
loan categories are divided into eight (8) specific loan segments. An allowance is provided for each segment based upon that segment’s average historical loss experience over an established look back period, adjusted for the applicable loss emergence periods (i.e., the amount of time from the point at which a loss is incurred to the point at which the loss is confirmed). For each segment, the allowance is adjusted further for current conditions based on our analysis of specific environmental or qualitative loss factors (as prescribed in the 2006 Interagency Policy Statement on ALLL) affecting the collectability of our loan portfolio that may cause actual loss rates to differ from historical loss experience.
There have been no material changes to the Bank’s ALLL methodology during the first six months of 2019. The ALLL balance increased during the first six months of 2019 by $3.5 million in provision for loan losses and a net recovery of loans of $19,000. The Bank determined that the ALLL balance of $67.1 million was appropriate and the result of the net effect of additional requirements related to loan growth experienced during the six month period within the commercial and industrial and commercial real estate segments of the
non-acquired
loan portfolio, modest increase in certain qualitative loss factors and reduced reserve requirements for the continued, but moderate reductions in the historical loss rates for predominately all portfolio segments.
While we believe that the allowance at June 30, 2019 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers, 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 $8.66 billion at June 30, 2019. This represented a decrease of $164.7 million, or 1.87%, over total deposits of $8.83 billion at December 31, 2018. The composition of deposits is summarized for the periods presented in the table below.

|  | June 30, 2019 |  | December 31, 2018
|  | Balance |  | Percent |  | Balance |  | Percent |
|  | (Dollars in thousands)
Noninterest-bearing deposits |  | $ | 5,250,235 |  |  |  | 60.61% |  |  | $ | 5,204,787 |  |  |  | 58.96% |
Interest-bearing deposits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment checking |  |  | 436,090 |  |  |  | 5.03% |  |  |  | 460,972 |  |  |  | 5.22% |
Money market |  |  | 2,099,751 |  |  |  | 24.24% |  |  |  | 2,236,018 |  |  |  | 25.33% |
Savings |  |  | 397,153 |  |  |  | 4.58% |  |  |  | 393,769 |  |  |  | 4.46% |
Time deposits |  |  | 479,594 |  |  |  | 5.54% |  |  |  | 531,944 |  |  |  | 6.03% |
Total deposits |  | $ | 8,662,823 |  |  |  | 100.00% |  |  | $ | 8,827,490 |  |  |  | 100.00% |

The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $5.25 billion at June 30, 2019, representing an increase of $45.4 million, or 0.87%, from noninterest-bearing deposits of $5.20 billion at December 31, 2018. Noninterest-bearing deposits represented 60.61% of total deposits for June 30, 2019, compared to 58.96% of total deposits for December 31, 2018.
Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $2.93 billion at June 30, 2019, representing a decrease of $157.8 million, or 5.10%, from savings deposits of $3.09 billion at December 31, 2018.
Time deposits totaled $479.6 million at June 30, 2019, representing a decrease of $52.4 million, or 9.84%, from total time deposits of $531.9 million for December 31, 2018.
Borrowings
In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was 6.10% for the second quarter of 2019, compared to 6.24% for the same period of 2018.
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a
pre-determined
balance in a demand deposit account, in order to earn interest. As of June 30, 2019 and December 31, 2018, total funds borrowed under these agreements were $421.3 million and $442.3 million, respectively, with a weighted average interest rate of 0.57% and 0.39%, respectively.
We had no short-term borrowings at June 30, 2019, compared to $280.0 million at December 31, 2018.
At June 30, 2019, $6.05 billion of loans and $1.51 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.
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Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of June 30, 2019.

|  |  |  | Maturity by Period
|  | Total |  | Less Than One Year |  | One Year Through Three Years |  | Four Years Through Five Years |  | Over Five Years |
|  | (Dollars in thousands)
Deposits (1) |  | $ | 8,662,823 |  |  | $ | 8,539,629 |  |  | $ | 111,359 |  |  | $ | 3,514 |  |  | $ | 8,321 |
Customer repurchase agreements (1) |  |  | 421,271 |  |  |  | 421,271 |  |  |  | - |  |  |  | - |  |  |  | - |
Junior subordinated debentures (1) |  |  | 25,774 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 25,774 |
Deferred compensation |  |  | 20,953 |  |  |  | 745 |  |  |  | 1,359 |  |  |  | 876 |  |  |  | 17,973 |
Operating leases |  |  | 23,211 |  |  |  | 7,556 |  |  |  | 9,845 |  |  |  | 4,180 |  |  |  | 1,630 |
Affordable housing investment |  |  | 6,736 |  |  |  | 4,661 |  |  |  | 1,984 |  |  |  | 55 |  |  |  | 36 |
Total |  | $ | 9,160,768 |  |  | $ | 8,973,862 |  |  | $ | 124,547 |  |  | $ | 8,625 |  |  | $ | 53,734 |

| (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 June 30, 2019, we had no short-term borrowings compared to $280.0 million at December 31, 2018, and zero at June 30, 2018.
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.
Deferred compensation represents the amounts that are due to former employees’ based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under
non-cancelable
operating leases. Refer to Note 13 —
Leases
of the notes to the unaudited condensed consolidated financial statements for a more detailed discussion about leases.
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Off-Balance
Sheet Arrangements
The following table summarizes the
off-balance
sheet items at June 30, 2019.

|  |  |  |  | Maturity by Period |
|  | Total |  |  | Less Than One Year |  |  | One Year to Three Years |  |  | Four Years to Five Years |  |  | After Five Years |
|  | (Dollars in thousands) |
Commitment to extend credit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 975,463 |  |  | $ | 705,376 |  |  | $ | 212,341 |  |  | $ | 14,211 |  |  | $ | 43,535 |
SBA |  |  | 585 |  |  |  | 60 |  |  |  | 4 |  |  |  | - |  |  |  | 521 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  | 244,242 |  |  |  | 46,984 |  |  |  | 82,328 |  |  |  | 96,632 |  |  |  | 18,298 |
Construction |  |  | 79,736 |  |  |  | 53,419 |  |  |  | 23,117 |  |  |  | - |  |  |  | 3,200 |
SFR Mortgage |  |  | 7,638 |  |  |  | 2,106 |  |  |  | 3,500 |  |  |  | - |  |  |  | 2,032 |
Dairy & livestock and agribusiness (1) |  |  | 180,983 |  |  |  | 159,352 |  |  |  | 21,231 |  |  |  | 400 |  |  |  | - |
Consumer and other loans |  |  | 146,470 |  |  |  | 17,756 |  |  |  | 7,199 |  |  |  | 4,423 |  |  |  | 117,092 |
Total commitment to extend credit |  |  | 1,635,117 |  |  |  | 985,053 |  |  |  | 349,720 |  |  |  | 115,666 |  |  |  | 184,678 |
Obligations under letters of credit |  |  | 50,411 |  |  |  | 43,031 |  |  |  | 7,132 |  |  |  | 248 |  |  |  | - |
Total |  | $ | 1,685,528 |  |  | $ | 1,028,084 |  |  | $ | 356,852 |  |  | $ | 115,914 |  |  | $ | 184,678 |

| (1) | Total commitments to extend credit to agribusiness were $17.1 million at June 30, 2019.

As of June 30, 2019, we had commitments to extend credit of approximately $1.64 billion, and obligations under letters of credit of $50.4 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for
on-balance
sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company had a reserve for unfunded loan commitments of $9.0 million as of June 30, 2019 and December 31, 2018 included in other liabilities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
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Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of the Company’s capital.
The Company’s total equity was $1.94 billion at June 30, 2019. This represented an increase of $85.5 million, or 4.62%, from total equity of $1.85 billion at December 31, 2018. This increase was due to $106.1 million in net earnings, a $26.6 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio, and $3.2 million for various stock based compensation items. This was offset by $50.4 million in cash dividends declared by the Company during the first six months of 2019.
During the second quarter of 2019, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current
10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. For the six months ended June 30, 2019, the Company did not repurchase any shares of CVB common stock outstanding under this program. As of June 30, 2019, we have 9,577,917 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.
The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At June 30, 2019, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.
Business — Capital Adequacy Requirements
” as described in our Annual Report on Form
10-K
for the year ended December 31, 2018.
At June 30, 2019, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes.
The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.

|  |  |  |  |  |  |  | June 30, 2019 |  |  | December 31, 2018 |
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% |  |  |  | 11.94% |  |  |  | 11.80% |  |  |  | 10.98% |  |  |  | 10.90% |
Common equity Tier I capital ratio |  |  | 4.50% |  |  |  | 6.50% |  |  |  | 14.23% |  |  |  | 14.34% |  |  |  | 13.04% |  |  |  | 13.22% |
Tier 1 risk-based capital ratio |  |  | 6.00% |  |  |  | 8.00% |  |  |  | 14.51% |  |  |  | 14.34% |  |  |  | 13.32% |  |  |  | 13.22% |
Total risk-based capital ratio |  |  | 8.00% |  |  |  | 10.00% |  |  |  | 15.39% |  |  |  | 15.22% |  |  |  | 14.13% |  |  |  | 14.03% |

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

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

It is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III final rule. The exact amount, however, will depend upon regulatory determinations and our prevailing risk profile under various stress scenarios.
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ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Liquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.
Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from
period-to-period
due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $8.66 billion at June 30, 2019 decreased $164.7 million, or 1.87%, over total deposits of $8.83 billion at December 31, 2018.
In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.
CVB is a company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.
Below is a summary of our average cash position and statement of cash flows for the six months ended June 30, 2019 and 2018. For further details see our “
Condensed Consolidated Statements of Cash Flows
(Unaudited)” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows

|  | For the Six Months Ended June 30, |
|  | 2019 |  |  | 2018 |
|  | (Dollars in thousands) |
Average cash and cash equivalents |  | $ | 184,301 |  |  | $ | 255,226 |
Percentage of total average assets |  |  | 1.63% |  |  |  | 3.11% |
Net cash provided by operating activities |  | $ | 82,602 |  |  | $ | 68,326 |
Net cash provided by investing activities |  |  | 438,532 |  |  |  | 180,334 |
Net cash used in financing activities |  |  | (509,242) |  |  |  | (211,548) |
Net increase in cash and cash equivalents |  | $ | 11,892 |  |  | $ | 37,112 |

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Average cash and cash equivalents decreased by $70.9 million, or 27.79%, to $184.3 million for the six months ended June 30, 2019, compared to $255.2 million for the same period of 2018.
At June 30, 2019, cash and cash equivalents totaled $175.8 million. This represented a decrease of $5.6 million, or 3.11%, from $181.5 million at June 30, 2018.
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to
re-price
interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability
re-pricing
mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities and is considered a longer term measure.
One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a
one-year
and
two-year
cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a
one-year
horizon assuming no balance sheet growth, given a 200 basis point upward and a 200 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 the periods presented below.

|  | Estimated Net Interest Income Sensitivity (1) |
|  | June 30, 2019 |  |  |  |  |  | December 31, 2018 |
|  |  |  |  | 24-month Period |  |  |  |  |  |  |  |  | 24-month Period |
Interest Rate Scenario |  | 12-month Period |  |  | (Cumulative) |  |  | Interest Rate Scenario |  |  | 12-month Period |  |  | (Cumulative) |
+ 200 basis points |  |  | 3.80% |  |  |  | 7.59% |  |  |  | + 200 basis points |  |  |  | 3.80% |  |  |  | 7.40% |
- 200 basis points |  |  | -4.63% |  |  |  | -9.24% |  |  |  | - 200 basis points |  |  |  | -5.29% |  |  |  | -10.26% |

| (1) | Percentage change from base.

Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a
one-year
and a
two-year
horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape,
re-pricing
characteristics and balance fluctuations of deposits with indeterminate or
non-contractual
maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
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We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term
re-pricing
risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At June 30, 2019 and December 31, 2018, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.
Economic Value of Equity Sensitivity

Instantaneous Rate Change |  | June 30, 2019 |  |  |  |  |  | December 31, 2018 |
200 bp decrease in interest rates |  |  | -39.3% |  |  |  |  |  |  |  | -24.4% |
100 bp decrease in interest rates |  |  | -15.2% |  |  |  |  |  |  |  | -10.2% |
100 bp increase in interest rates |  |  | 9.4% |  |  |  |  |  |  |  | 5.8% |
200 bp increase in interest rates |  |  | 16.5% |  |  |  |  |  |  |  | 10.3% |
300 bp increase in interest rates |  |  | 22.0% |  |  |  |  |  |  |  | 13.8% |
400 bp increase in interest rates |  |  | 26.5% |  |  |  |  |  |  |  | 16.6% |

As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “
Asset/Liability Management and Interest Rate Sensitivity Management
” included in Item 2 “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2018. Our analysis of market risk and market-sensitive financial information contain forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the fiscal quarter ended June 30, 2019, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and
non-ordinary
course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.
The Company was a defendant and cross-complainant in an action entitled Edward A. Dunagan et al v. Citizens Business Bank, as successor to American Security Bank (ASB), Case No. CVDS1408287, filed in the Superior Court for San Bernardino County. The complaint was initially filed in May, 2014 against ASB, which was acquired during the same month by CBB. The case arose out of a number of defaulted commercial real estate loans originally made by ASB to the Dunagans and various entities owned by the Dunagans (Dunagan Parties), and the complaint included claims by the Dunagans (1) contesting their liabilities under their personal guarantees for deficiencies on certain of the defaulted loans, (2) attacking the validity of ASB’s foreclosures on certain properties owned by the Dunagan Parties, and (3) claiming emotional distress caused by ASB’s allegedly wrongful actions in connection with such foreclosures. At a bench trial conducted in July and August, 2018, the judge found in favor of the Dunagans on all three claims and awarded damages and attorney’s fees and costs to the Dunagans in an aggregate amount of approximately $1.34 million. During the period while the Company’s appeal of this judgment was pending, the parties participated in a court-sponsored mediation, and on June 24, 2019, the parties executed a full and final settlement of the case for a substantially reduced aggregate damages amount, all of which was paid by the insurer under a bankers professional liability insurance policy previously obtained by ASB.
For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.
Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.
We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form
10-K
for the year ended December 31, 2018. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form
10-K
and any subsequent Form
10-Q
or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” in this Quarterly Report on Form
10-Q.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current
10b5-1
plan originally adopted in November, 2018 and subsequently amended in July, 2019. For the three months ended June 30, 2019, the Company did not repurchase any shares of CVB common stock outstanding under this program. As of June 30, 2019, we have 9,577,917 shares of CVB 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
| 10.1 |  |  | Retirement and Consulting Agreement for Christopher D. Myers, dated July 17, 2019† (1)
| 10.2 |  |  | Amendment to Employment Agreement for Christopher D. Myers, dated July 17, 2019† (2)
| 31.1 |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| 31.2 |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| 32.1 |  |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| 32.2 |  |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| 101.INS |  |  | 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

| † | Indicates a management contract or compensation plan.

| (1) | Incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on July 19, 2019.

| (2) | Incorporated herein by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on July 19, 2019.

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

|  |  |  | CVB FINANCIAL CORP.
|  |  |  | (Registrant)
Date: August 9, 2019 |  |  |  |
|  |  |  | /s/ E. Allen Nicholson
|  |  |  | E. Allen Nicholson
|  |  |  | Executive Vice President and Chief Financial Officer
|  |  |  | (Principal Financial Officer)

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