CVBF 10-Q Quarter ended June 30, 2018

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, 2018

or

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

For the transition period from _____ to _____

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

(909) 980-4030

(Registrant’s telephone number,

including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐     (Do not check if a smaller reporting company)		Smaller reporting company		☐
Emerging growth company		☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

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

TABLE OF CONTENTS

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

PART I –   FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

the effect of changes in laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, consumer, commercial or secured lending, securities and securities trading and hedging, compliance, fair lending, employment, executive compensation, insurance, vendor management and information privacy and security) with which we and our subsidiaries must comply or believe we should comply, including additional legal and regulatory requirements to which we may become subject in the event our total assets exceed $10 billion;

•

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

•

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

•

inflation, interest rate, securities market and monetary fluctuations;

•

changes in government interest rates or monetary or tax policies;

•

changes in the amount and availability of deposit insurance;

•

political developments, uncertainties or instability;

•

disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access, cyber incidents, terrorist and political activities, disease pandemics, catastrophic events, natural disasters such as earthquakes, extreme weather events, electrical, facilities, computer servers, and communications or other services we use, or that affect our employees or third parties with whom we conduct business;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

1

non-traditional providers including retail businesses and technology companies;

•

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

•

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

•

the effect of changes in accounting policies and practices, as may be adopted 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 board of directors;

•

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

•

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

•

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

•

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

•

all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2017, and particularly the discussion of risk factors within that document.

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

2

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements.

3

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements.

4

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended June 30, 2018 and 2017

(Dollars and shares in thousands)

(Unaudited)

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive
		Outstanding				Stock				Earnings				Income (Loss)				Total
Balance, January 1, 2017			108,252			$	531,192			$	449,499			$	10,171			$	990,862
Cumulative adjustment upon adoption of ASU 2016-09			-				116				(66	)			-				50
Repurchase of common stock			(37	)			(833	)			-				-				(833	)
Issuance of common stock for acquisition of Valley Commerce Bancorp			1,634				37,637				-				-				37,637
Exercise of stock options			257				2,389				-				-				2,389
Shares issued pursuant to stock-based compensation plan			43				1,457				-				-				1,457
Cash dividends declared on common stock ($0.26 per share)			-				-				(28,635	)			-				(28,635	)
Net earnings			-				-				56,877				-				56,877
Other comprehensive income			-				-				-				965				965
Balance, June 30, 2017			110,149			$	571,958			$	477,675			$	11,136			$	1,060,769
Balance, January 1, 2018			110,185			$	573,453			$	494,361			$	1,452			$	1,069,266
Cumulative adjustment upon adoption of 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 income			-				-				-				(27,306	)			(27,306	)
Balance, June 30, 2018			110,302			$	575,502			$	533,413			$	(25,498	)		$	1,083,417

See accompanying notes to the unaudited condensed consolidated financial statements.

5

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements.

6

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

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

See accompanying notes to the unaudited condensed consolidated financial statements.

7

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 51 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

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

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for 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, 2018 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification – Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

8

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, 2017 as filed with the SEC (“Form 10-K”).

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

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

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance in this ASU among other things, (i) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio at June 30, 2018 using an exit price notion. See Note 9 Fair Value Information .

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, and contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is

9

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

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU No. 2017-09 are effective for annual periods, and interim within those annual reporting periods, beginning after December 15, 2017; early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act (“Tax Reform Act”). The amendments in this update also require entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and the provisions of the amendment should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company elected to early adopt ASU 2018-02 in the first quarter of 2018 and reclassified $356,000 related to the stranded tax effects from accumulated other comprehensive income to retained earnings within our consolidated statements of stockholders’ equity.

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

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

In 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 recognized an impairment

10

loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued 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 does not expect this ASU to 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 Payment Accounting.” The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured 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, 2019 and is applied retrospectively. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

4.	BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

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

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

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

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

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

11

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, 2018
		Amortized Cost				Gross Unrealized Holding Gain				Gross Unrealized Holding Loss				Fair Value				Total Percent
		(Dollars in thousands)
Investment securities  available-for-sale:
Residential mortgage-backed securities		$	1,665,717			$	1,489			$	(30,322	)		$	1,636,884				84.81	%
CMO/REMIC - residential			244,227				357				(5,073	)			239,511				12.41	%
Municipal bonds			53,557				400				(1,108	)			52,849				2.74	%
Other securities			750				-				-				750				0.04	%
Total available-for-sale  securities		$	1,964,251			$	2,246			$	(36,503	)		$	1,929,994				100.00	%
Investment securities  held-to-maturity:
Government agency/GSE		$	149,693			$	406			$	(2,948	)		$	147,151				19.38	%
Residential mortgage-backed securities			164,914				-				(4,020	)			160,894				21.35	%
CMO			219,159				-				(12,773	)			206,386				28.37	%
Municipal bonds			238,703				574				(6,119	)			233,158				30.90	%
Total held-to-maturity  securities		$	772,469			$	980			$	(25,860	)		$	747,589				100.00	%
		December 31, 2017
		Amortized Cost				Gross Unrealized Holding Gain				Gross Unrealized Holding Loss				Fair Value				Total Percent
		(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities		$	1,747,780			$	11,231			$	(8,102	)		$	1,750,909				84.14	%
CMO/REMIC - residential			274,634				1,277				(2,082	)			273,829				13.16	%
Municipal bonds			54,966				774				(244	)			55,496				2.66	%
Other securities			751				-				-				751				0.04	%
Total available-for-sale securities		$	2,078,131			$	13,282			$	(10,428	)		$	2,080,985				100.00	%
Investment securities held-to-maturity:
Government agency/GSE		$	159,716			$	854			$	(2,134	)		$	158,436				19.25	%
Residential mortgage-backed securities			176,427				667				(382	)			176,712				21.26	%
CMO			225,072				-				(8,641	)			216,431				27.12	%
Municipal bonds			268,675				2,751				(3,790	)			267,636				32.37	%
Total held-to-maturity securities		$	829,890			$	4,272			$	(14,947	)		$	819,215				100.00	%

12

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

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

Approximately 89% of the total investment securities portfolio at June 30, 2018 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis 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 to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“OTTI”).

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

13

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

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

The amortized cost and fair value of debt securities at June 30, 2018, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

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

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

14