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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

or

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

For the transition period from              to             

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

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

(909) 980-4030

(Registrant’s telephone number,

including area code)

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

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

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

 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of common stock of the registrant: 110,138,557 outstanding as of April 30, 2017.

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TABLE OF CONTENTS

 

PART I –		FINANCIAL INFORMATION (UNAUDITED)			3
ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			5
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			10
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS			41
		CRITICAL ACCOUNTING POLICIES			41
		OVERVIEW			41
		ANALYSIS OF THE RESULTS OF OPERATIONS			43
		RESULTS BY BUSINESS SEGMENTS			50
		ANALYSIS OF FINANCIAL CONDITION			53
		ASSET/LIABILITY AND MARKET RISK MANAGEMENT			70
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			72
ITEM 4.		CONTROLS AND PROCEDURES			72
PART II –		OTHER INFORMATION			73
ITEM 1.		LEGAL PROCEEDINGS			73
ITEM 1A.		RISK FACTORS			73
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			74
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			74
ITEM 4.		MINE SAFETY DISCLOSURES			74
ITEM 5.		OTHER INFORMATION			74
ITEM 6.		EXHIBITS			74
SIGNATURES					75

 

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PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

inflation, changes in interest rate, securities market and monetary fluctuations;

•

changes in government interest rates or monetary policies;

•

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

•

the 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 the operation of certain of the Company’s key internal and external systems and applications;

•

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

•

technological changes and the expanding use of technology in banking (including the adoption of mobile banking and funds transfer applications);

•

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

•

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

 

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•

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;

•

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),

•

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

•

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

•

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

•

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

•

all other factors set forth in the Company’s public reports including its Annual Report on Form 10-K for the year ended December 31, 2016, and particularly the discussion of risk factors within that document.

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

 

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ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

		March 31,				December 31,
		2017				2016
Assets
Cash and due from banks		$	118,772			$	119,445
Interest-earning balances due from Federal Reserve and federal funds sold			263,669				2,188
Total cash and cash equivalents			382,441				121,633
Interest-earning balances due from depository institutions			30,321				47,848
Investment securities available-for-sale, at fair value (with amortized cost of $2,255,904 at March 31, 2017, and $2,255,874 at December 31, 2016)			2,271,703				2,270,466
Investment securities held-to-maturity (with fair value of $871,755 at March 31, 2017, and $897,374 at December 31, 2016)			885,057				911,676
Total investment securities			3,156,760				3,182,142
Investment in stock of Federal Home Loan Bank (FHLB)			19,640				17,688
Loans and lease finance receivables			4,615,497				4,395,064
Allowance for loan losses			(59,212	)			(61,540	)
Net loans and lease finance receivables			4,556,285				4,333,524
Premises and equipment, net			47,262				42,086
Bank owned life insurance			145,056				134,785
Accrued interest receivable			21,886				22,259
Intangibles			7,892				5,010
Goodwill			119,193				89,533
Other real estate owned (OREO)			4,527				4,527
Income taxes			40,832				45,429
Asset held-for-sale			3,411				3,411
Other assets			23,615				23,832
Total assets		$	8,559,121			$	8,073,707
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing		$	3,999,107			$	3,673,541
Interest-bearing			2,843,706				2,636,139
Total deposits			6,842,813				6,309,680
Customer repurchase agreements			564,387				603,028
Other borrowings			-				53,000
Deferred compensation			18,168				12,361
Junior subordinated debentures			25,774				25,774
Payable for securities purchased			-				23,777
Other liabilities			61,646				55,225
Total liabilities			7,512,788				7,082,845
Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,108,757 at March 31, 2017, and 108,251,981 at December 31, 2016			570,997				531,192
Retained earnings			464,919				449,499
Accumulated other comprehensive income, net of tax			10,417				10,171
Total stockholders’ equity			1,046,333				990,862
Total liabilities and stockholders’ equity		$	8,559,121			$	8,073,707

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

		For the Three Months Ended   March 31,
		2017				2016
Interest income:
Loans and leases, including fees		$	48,641			$	45,770
Investment securities:
Investment securities available-for-sale			12,640				12,799
Investment securities held-to-maturity			5,507				5,348
Total investment income			18,147				18,147
Dividends from FHLB stock			393				368
Interest-earning deposits with other institutions and federal funds sold			267				215
Total interest income			67,448				64,500
Interest expense:
Deposits			1,433				1,437
Borrowings and customer repurchase agreements			429				423
Junior subordinated debentures			153				124
Total interest expense			2,015				1,984
Net interest income before recapture of provision for loan losses			65,433				62,516
Recapture of provision for loan losses			(4,500	)			-
Net interest income after recapture of provision for loan losses			69,933				62,516
Noninterest income:
Service charges on deposit accounts			3,727				3,747
Trust and investment services			2,296				2,203
Bankcard services			765				555
BOLI income			715				547
Gain on sale of loans			-				1,101
Other			1,219				530
Total noninterest income			8,722				8,683
Noninterest expense:
Salaries and employee benefits			21,575				21,198
Occupancy and equipment			3,684				3,713
Professional services			1,257				1,248
Software licenses and maintenance			1,561				1,274
Marketing and promotion			1,239				1,427
Acquisition related expenses			676				849
Other			4,125				4,655
Total noninterest expense			34,117				34,364
Earnings before income taxes			44,538				36,835
Income taxes			16,034				13,444
Net earnings		$	28,504			$	23,391
Other comprehensive income:
Unrealized gain on securities arising during the period, before tax		$	424			$	27,270
Less: Income tax expense related to items of other comprehensive income			(178	)			(11,453	)
Other comprehensive income, net of tax			246				15,817
Comprehensive income		$	28,750			$	39,208
Basic earnings per common share		$	0.26			$	0.22
Diluted earnings per common share		$	0.26			$	0.22
Cash dividends declared per common share		$	0.12			$	0.12

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

Three months ended March 31, 2017 and 2016

(Dollars and shares in thousands)

(Unaudited)

 

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive
		Outstanding				Stock				Earnings				Income				Total
Balance, January 1, 2016			106,385			$	502,571			$	399,919			$	20,909			$	923,399
Repurchase of common stock			(31	)			(392	)			-				-				(392	)
Issuance of common stock for acquisition of County Commerce Bank			1,394				21,642				-				-				21,642
Exercise of stock options			25				285				-				-				285
Tax benefit from exercise of stock options			-				-				-				-				-
Shares issued pursuant to stock-based compensation plan			13				654				-				-				654
Cash dividends declared on common stock ($0.12 per share)			-				-				(12,934	)			-				(12,934	)
Net earnings			-				-				23,391				-				23,391
Other comprehensive income			-				-				-				15,817				15,817
Balance, March 31, 2016			107,786			$	524,760			$	410,376			$	36,726			$	971,862
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			(36	)			(817	)			-				-				(817	)
Issuance of common stock for acquisition of Valley Commerce Bancorp			1,634				37,637				-				-				37,637
Exercise of stock options			240				2,190				-				-				2,190
Shares issued pursuant to stock-based compensation plan			19				679				-				-				679
Cash dividends declared on common stock ($0.12 per share)			-				-				(13,018	)			-				(13,018	)
Net earnings			-				-				28,504				-				28,504
Other comprehensive income			-				-				-				246				246
Balance, March 31, 2017			110,109			$	570,997			$	464,919			$	10,417			$	1,046,333

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 Three Months Ended
		March 31,
		2017				2016
Cash Flows from Operating Activities
Interest and dividends received		$	71,499			$	68,927
Service charges and other fees received			8,008				8,081
Interest paid			(2,047	)			(1,980	)
Net cash paid to vendors, employees and others			(20,026	)			(43,524	)
Income taxes			165				-
Payments to FDIC, loss share agreement			(450	)			(174	)
Net cash provided by operating activities			57,149				31,330
Cash Flows from Investing Activities
Proceeds from redemption of FHLB stock			-				610
Net change in interest-earning balances from depository institutions			18,006				4,309
Proceeds from repayment of investment securities available-for-sale			102,426				95,004
Proceeds from maturity of investment securities available-for-sale			5,374				16,505
Purchases of investment securities available-for-sale			(134,572	)			(9,888	)
Proceeds from repayment and maturity of investment securities held-to-maturity			33,411				37,032
Purchases of investment securities held-to-maturity			(8,895	)			-
Net decrease in loan and lease finance receivables			92,505				8,331
Proceeds from sale of loans			-				6,417
Purchase of premises and equipment			(998	)			(911	)
Proceeds from sales of other real estate owned			-				200
Cash acquired from acquisition, net of cash paid			28,325				(7,504	)
Net cash provided by investing activities			135,582				150,105
Cash Flows from Financing Activities
Net increase in other deposits			181,485				101,042
Net decrease in time deposits			(10,149	)			(26,271	)
Net decrease in other borrowings			(53,000	)			(46,000	)
Net decrease in customer repurchase agreements			(38,641	)			(63,844	)
Cash dividends on common stock			(12,991	)			(12,766	)
Repurchase of common stock			(817	)			(392	)
Proceeds from exercise of stock options			2,190				285
Net cash provided by (used in) financing activities			68,077				(47,946	)
Net increase in cash and cash equivalents			260,808				133,489
Cash and cash equivalents, beginning of period			121,633				106,097
Cash and cash equivalents, end of period		$	382,441			$	239,586

 

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 Three Months Ended
		March 31,
		2017				2016
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings		$	28,504			$	23,391
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of loans			-				(1,101	)
Increase in bank owned life insurance			(849	)			(638	)
Net amortization of premiums and discounts on investment securities			4,614				5,177
Accretion of PCI discount			(253	)			(800	)
Recapture of provision for loan losses			(4,500	)			-
Valuation adjustment on other real estate owned			-				248
Payments to FDIC, loss share agreement			(450	)			(174	)
Stock-based compensation			679				654
Depreciation and amortization, net			558				137
Change in other assets and liabilities			28,846				4,436
Total adjustments			28,645				7,939
Net cash provided by operating activities		$	57,149			$	31,330
Supplemental Disclosure of Non-cash Investing Activities
Securities purchased and not settled		$	-			$	4,152
Issuance of common stock for acquistion		$	37,637			$	21,642

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

BUSINESS

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

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 54 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

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

 

2.	BASIS OF PRESENTATION

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

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

 

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3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3—Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC (“Form 10-K”).

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

Adoption of New Accounting Standard— In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for the fiscal years beginning after December 15, 2016, and interim periods within those years. The Company adopted this standard during the first quarter of 2017. The primary impact of the adoption of the standard on the Company’s condensed consolidated financial statements was the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which reduced income tax expense by approximately $1.3 million for the three months ended March 31, 2017. We also elected to account for forfeitures as they occur, rather than to estimate forfeitures over the vesting period. The remaining provisions of this accounting standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements— In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. This update to the ASC requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In applying the revenue model to contracts within its scope, an entity should apply the following steps: (1) Identify the contract(s) with a customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. The standard applies to all contracts with customers except those that are within the scope of other topics in the FASB Codification. The standard also requires significantly expanded disclosures about revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date”, which deferred the effective date for us of ASU No. 2014-09 to January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company has not yet selected a transition method. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements as substantially all of the Company’s revenues are excluded from the scope of the new standard.

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

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, will apply

 

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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 August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and will require application using a retrospective transition method. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements.

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

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

 

4.	BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

On March 10, 2017, 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.

Goodwill of $29.7 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 $406.1 million, which included $51.5 million in cash and cash equivalents, $2.0 million in FHLB stock, $309.7 million in loans and lease finance receivables, $5.3 million in fixed assets, $9.4 million in Bank-Owned Life Insurance (“BOLI”), $3.2 million in core deposit intangible assets acquired and $18.5 million in other assets. The total fair value of liabilities assumed was $368.5 million, which included $361.8 million in deposits, and $6.7 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of March 10, 2017. The assets acquired and liabilities assumed have been accounted for under the acquisition method accounting. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

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.

 

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For the three months ended March 31, 2017, the Company incurred non-recurring merger related expenses associated with the VCBP acquisition of $651,000.

County Commerce Bank Acquisition

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

Goodwill of $15.3 million from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

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

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

For the three months ended March 31, 2016, the Company incurred non-recurring merger related expenses associated with the CCB acquisition of $849,000.

 

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5.	INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are traded in markets where similar assets are actively traded. Estimated fair values were obtained from an independent pricing service based upon market quotes.

 

 

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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 March 31,
		2017				2016
		(Dollars in thousands)
Investment securities available-for-sale:
Taxable		$	11,926			$	11,380
Tax-advantaged			714				1,419
Total interest income from available-for-sale securities			12,640				12,799
Investment securities held-to-maturity:
Taxable			3,277				2,620
Tax-advantaged			2,230				2,728
Total interest income from held-to-maturity securities			5,507				5,348
Total interest income from investment securities		$	18,147			$	18,147

Approximately 88% of the total investment securities portfolio at March 31, 2017 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale Collateralized Mortgage Obligations (“CMO”)/Real Estate Mortgage Investment Conduit (“REMIC”) issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2017 and December 31, 2016. At March 31, 2017, the Bank had $5,000 in total CMO backed by whole loans issued by private-label companies (nongovernment sponsored).

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

 

 

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At March 31, 2017 and December 31, 2016, investment securities having a carrying value of approximately $2.15 billion and $2.19 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at March 31, 2017, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

 

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 March 31, 2017.

 

6.	ACQUIRED SJB ASSETS AND FDIC LOSS SHARING ASSET

FDIC Assisted Acquisition

On October 16, 2009, the Bank acquired San Joaquin Bank (“SJB”) and entered into loss sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) that is more fully discussed in Note 3—Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans.

At March 31, 2017, the remaining discount associated with the PCI loans approximated $1.3 million. The loss sharing agreement for commercial loans expired October 16, 2014.

 

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

 

Credit Quality Indicators

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

 

		March 31, 2017				December 31, 2016
		(Dollars in thousands)
Pass		$	45,205			$	59,409
Special mention			383				1,162
Substandard			12,197				12,522
Doubtful & loss			-				-
Total gross PCI loans		$	57,785			$	73,093

 

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

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

 

		March 31, 2017				December 31, 2016
		(Dollars in thousands)
Commercial and industrial		$	528,945			$	485,078
SBA			112,690				97,184
Real estate:
Commercial real estate			3,219,299				2,930,141
Construction			72,782				85,879
SFR mortgage			245,362				250,605
Dairy & livestock and agribusiness			244,264				338,631
Municipal lease finance receivables			62,416				64,639
Consumer and other loans			80,163				78,274
Gross loans, excluding PCI loans			4,565,921				4,330,431
Less: Deferred loan fees, net			(6,951	)			(6,952	)
Gross loans, excluding PCI loans, net of deferred loan fees			4,558,970				4,323,479
Less: Allowance for loan losses			(58,487	)			(60,321	)
Net loans, excluding PCI loans			4,500,483				4,263,158
PCI Loans			57,785				73,093
Discount on PCI loans			(1,258	)			(1,508	)
Less: Allowance for loan losses			(725	)			(1,219	)
PCI loans, net			55,802				70,366
Total loans and lease finance receivables		$	4,556,285			$	4,333,524

As of March 31, 2017, 77.47% of the total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 70.51% 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 March 31, 2017, $164.9 million, or 5.12% of the total commercial real estate loans included loans secured by farmland, compared to $180.6 million, or 6.16%, at December 31, 2016. The loans secured by farmland included $111.6 million for loans secured by dairy & livestock land and $53.3 million for loans secured by agricultural land at March 31, 2017, compared to $127.1 million for loans secured by dairy & livestock land and $53.6 million for loans secured by agricultural land at December 31, 2016. As of March 31, 2017, dairy & livestock and agribusiness loans of $244.3 million were comprised of $216.3 million for dairy & livestock loans and $28.0 million for agribusiness loans, compared to $317.9 million for dairy & livestock loans and $20.7 million for agribusiness loans at December 31, 2016.

At March 31, 2017, the Company held approximately $2.07 billion of total fixed rate loans, including PCI loans.

At March 31, 2017 and December 31, 2016, loans totaling $3.12 billion and $3.11 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loans held-for-sale as of March 31, 2017 and December 31, 2016.

 

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Credit Quality Indicators

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

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

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

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

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

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

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

 

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

 

		March 31, 2017
		Pass				Special Mention				Substandard				Doubtful & Loss				Total
		(Dollars in thousands)
Commercial and industrial		$	491,534			$	25,393			$	12,018			$	-			$	528,945
SBA			97,795				10,098				4,788				9				112,690
Real estate:
Commercial real estate
Owner occupied			939,031				85,700				22,700				-				1,047,431
Non-owner occupied			2,132,104				22,541				17,223				-				2,171,868
Construction
Speculative			53,305				-				384				-				53,689
Non-speculative			19,093				-				-				-				19,093
SFR mortgage			239,390				4,989				983				-				245,362
Dairy & livestock and agribusiness			137,440				75,054				31,770				-				244,264
Municipal lease finance receivables			58,088				4,328				-				-				62,416
Consumer and other loans			75,864				2,198				2,098				3				80,163
Total gross loans, excluding PCI loans		$	4,243,644			$	230,301			$	91,964			$	12			$	4,565,921
		December 31, 2016
		Pass				Special Mention				Substandard				Doubtful & Loss				Total
		(Dollars in thousands)
Commercial and industrial		$	449,658			$	21,610			$	13,809			$	1			$	485,078
SBA			80,138				10,553				6,482				11				97,184
Real estate:
Commercial real estate
Owner occupied			842,992				87,781				19,046				-				949,819
Non-owner occupied			1,941,203				23,534				15,585				-				1,980,322
Construction
Speculative			48,841				-				-				-				48,841
Non-speculative			37,038				-				-				-				37,038
SFR mortgage			243,374				4,930				2,301				-				250,605
Dairy & livestock and agribusiness			187,819				114,106				36,706				-				338,631
Municipal lease finance receivables			60,102				4,537				-				-				64,639
Consumer and other loans			74,328				2,123				1,819				4				78,274
Total gross loans, excluding PCI loans		$	3,965,493			$	269,174			$	95,748			$	16			$	4,330,431

Allowance for Loan Losses

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

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

Management believes that the ALLL was appropriate at March 31, 2017 and December 31, 2016. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future.

 

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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 March 31, 2017
		Ending Balance December 31, 2016				Charge-offs				Recoveries				(Recapture of) Provision for Loan Losses				Ending Balance March 31, 2017
		(Dollars in thousands)
Commercial and industrial		$	8,154			$	-			$	52			$	(250	)		$	7,956
SBA			871				-				4				(4	)			871
Real estate:
Commercial real estate			37,443				-				-				1,543				38,986
Construction			1,096				-				2,025				(2,301	)			820
SFR mortgage			2,287				-				64				(165	)			2,186
Dairy & livestock and agribusiness			8,541				-				-				(2,699	)			5,842
Municipal lease finance receivables			941				-				-				(52	)			889
Consumer and other loans			988				(2	)			29				(78	)			937
PCI loans			1,219				-				-				(494	)			725
Total allowance for loan losses		$	61,540			$	(2	)		$	2,174			$	(4,500	)		$	59,212
		For the Three Months Ended March 31, 2016
		Ending Balance December 31, 2015				Charge-offs				Recoveries				(Recapture of) Provision for Loan Losses				Ending Balance March 31, 2016
		(Dollars in thousands)
Commercial and industrial		$	8,588			$	(61	)		$	63			$	141			$	8,731
SBA			993				-				1				242				1,236
Real estate:
Commercial real estate			36,995				-				139				1,152				38,286
Construction			2,389				-				9				(1,247	)			1,151
SFR mortgage			2,103				(102	)			-				201				2,202
Dairy & livestock and agribusiness			6,029				-				99				(952	)			5,176
Municipal lease finance receivables			1,153				-				-				12				1,165
Consumer and other loans			906				-				32				451				1,389
PCI loans			-				-				-				-				-
Total allowance for loan losses		$	59,156			$	(163	)		$	343			$	-			$	59,336

 

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

 

		March 31, 2017
		Recorded Investment in Loans												Allowance for Loan Losses
		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Acquired with Deterioriated Credit Quality				Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Acquired with Deterioriated Credit Quality
		(Dollars in thousands)
Commercial and industrial		$	1,150			$	527,795			$	-			$	88			$	7,868			$	-
SBA			1,926				110,764				-				9				862				-
Real estate:
Commercial real estate			20,216				3,199,083				-				-				38,986				-
Construction			384				72,398				-				-				820				-
SFR mortgage			4,248				241,114				-				-				2,186				-
Dairy & livestock and agribusiness			1,324				242,940				-				-				5,842				-
Municipal lease finance receivables			-				62,416				-				-				889				-
Consumer and other loans			801				79,362				-				-				937				-
PCI loans			-				-				56,527				-				-				725
Total		$	30,049			$	4,535,872			$	56,527			$	97			$	58,390			$	725
		March 31, 2016
		Recorded Investment in Loans												Allowance for Loan Losses
		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Acquired with Deterioriated Credit Quality				Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Acquired with Deterioriated Credit Quality
		(Dollars in thousands)
Commercial and industrial		$	1,477			$	465,484			$	-			$	575			$	8,156			$	-
SBA			3,304				110,399				-				55				1,181				-
Real estate:
Commercial real estate			35,577				2,783,542				-				-				38,286				-
Construction			7,651				81,997				-				48				1,103				-
SFR mortgage			5,874				227,091				-				16				2,186				-
Dairy & livestock and agribusiness			714				226,996				-				-				5,176				-
Municipal lease finance receivables			-				73,098				-				-				1,165				-
Consumer and other loans			868				75,235				-				-				1,389				-
PCI loans			-				-				81,850				-				-				-
Total		$	55,465			$	4,043,842			$	81,850			$	694			$	58,642			$	-

 

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Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

A loan is reported as a TDR when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

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

 

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

 

(1)    As of March 31, 2017, $6.2 million of nonaccruing loans were current, $2.2 million were 30-59 days past due, $81,000 were 60-89 days past due and $1.9 million were 90+ days past due. (2)    Speculative construction loans are generally for properties where there is no identified buyer or renter.

 

(1)

As of December 31, 2016, $4.7 million of nonaccruing loans were current, $514,000 were 30-59 days past due, $435,000 were 60-89 days past due and $1.5 million were 90+ days past due.

(2)

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

 

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Impaired Loans

At March 31, 2017, the Company had impaired loans, excluding PCI loans, of $30.0 million and included $6.4 million of loans acquired from VBB in the first quarter of 2017. Of this amount, there was $5.6 million of nonaccrual commercial real estate loans, $1.3 million of nonaccrual dairy & livestock and agribusiness loans, $1.1 million of nonaccrual Small Business Administration (“SBA”) loans, $983,000 of nonaccrual single-family residential (“SFR”) mortgage loans, $506,000 of nonaccrual commercial and industrial loans, $438,000 of nonaccrual consumer and other loans, and $384,000 of nonaccrual construction loans. These impaired loans included $21.1 million of loans whose terms were modified in a troubled debt restructuring, of which $1.4 million were classified as nonaccrual. The remaining balance of $19.7 million consisted of 25 loans performing according to the restructured terms. The impaired loans had a specific allowance of $97,000 at March 31, 2017. At December 31, 2016, the Company had classified as impaired, loans, excluding PCI loans, with a balance of $26.4 million with a related allowance of $141,000.

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

 

		As of and For the Three Months Ended March 31, 2017
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial		$	1,015			$	1,985			$	-			$	1,045			$	6
SBA			1,917				2,272				-				1,960				16
Real estate:
Commercial real estate
Owner occupied			6,669				7,081				-				6,434				32
Non-owner occupied			13,547				16,198				-				13,479				401
Construction
Speculative			384				402				-				384				-
Non-speculative			-				-				-				-				-
SFR mortgage			4,248				5,024				-				4,259				34
Dairy & livestock and agribusiness			1,324				1,610				-				1,839				1
Municipal lease finance receivables			-				-				-				-				-
Consumer and other loans			801				1,379				-				809				5
Total			29,905				35,951				-				30,209				495
With a related allowance recorded:
Commercial and industrial			135				136				88				152				2
SBA			9				25				9				10				-
Real estate:
Commercial real estate
Owner occupied			-				-				-				-				-
Non-owner occupied			-				-				-				-				-
Construction
Speculative			-				-				-				-				-
Non-speculative			-				-				-				-				-
SFR mortgage			-				-				-				-				-
Dairy & livestock and agribusiness			-				-				-				-				-
Municipal lease finance receivables			-				-				-				-				-
Consumer and other loans			-				-				-				-				-
Total			144				161				97				162				2
Total impaired loans		$	30,049			$	36,112			$	97			$	30,371			$	497

 

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		As of and For the Three Months Ended March 31, 2016
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
With no related allowance recorded
Commercial and industrial		$	805			$	1,677			$	-			$	831			$	7
SBA			3,050				3,765				-				3,089				13
Real estate:
Commercial real estate
Owner occupied			5,315				6,507				-				5,095				51
Non-owner occupied			30,262				33,368				-				30,400				343
Construction
Speculative			-				-				-				-				-
Non-speculative			-				-				-				-				-
SFR mortgage			5,499				6,406				-				5,512				27
Dairy & livestock and agribusiness			714				714				-				710				8
Municipal lease finance receivables			-				-				-				-				-
Consumer and other loans			868				1,420				-				888				4
Total			46,513				53,857				-				46,525				453
With a related allowance recorded
Commercial and industrial			672				741				575				687				3
SBA			254				274				55				254				2
Real estate:
Commercial real estate
Owner occupied			-				-				-				-				-
Non-owner occupied			-				-				-				-				-
Construction
Speculative			7,651				7,651				48				7,651				97
Non-speculative			-				-				-				-				-
SFR mortgage			375				426				16				515				2
Dairy & livestock and agribusiness			-				-				-				-				-
Municipal lease finance receivables			-				-				-				-				-
Consumer and other loans			-				-				-				-				-
Total			8,952				9,092				694				9,107				104
Total impaired loans		$	55,465			$	62,949			$	694			$	55,632			$	557

 

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

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

 

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Reserve for Unfunded Loan Commitments

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

Troubled Debt Restructurings (“TDRs”)

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

As of March 31, 2017, there were $21.1 million of loans classified as a TDR, of which $1.4 million were nonperforming and $19.7 million were performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At March 31, 2017, performing TDRs were comprised of six commercial real estate loans of $14.6 million, 11 SFR mortgage loans of $3.3 million, two SBA loans of $837,000, five commercial and industrial loans of $644,000, and one consumer loan of $363,000.

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 $97,000 and $141,000 of specific allowance to TDRs as of March 31, 2017 and December 31, 2016, respectively.

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

 

		For the Three Months Ended   March 31,
		2017				2016
		(Dollars in thousands)
Performing TDRs:
Beginning balance		$	19,233			$	42,687
New modifications			3,143				1,006
Payoffs and payments, net			(3,003	)			(6,372	)
TDRs returned to accrual status			329				-
TDRs placed on nonaccrual status			-				-
Ending balance		$	19,702			$	37,321
Nonperforming TDRs:
Beginning balance		$	1,626			$	12,622
New modifications			2,066				82
Charge-offs			-				(38	)
Payoffs and payments, net			(1,956	)			(306	)
TDRs returned to accrual status			(329	)			-
TDRs placed on nonaccrual status			-				-
Ending balance		$	1,407			$	12,360
Total TDRs		$	21,109			$	49,681

 

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

Modifications (1)

 

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(1)

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

(2)

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

As of March 31, 2017, there were no loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2017.

 

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8.	EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three months ended March 31, 2017 and 2016, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 1,000 and 262,000, 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 March 31,
		2017				2016
		(In thousands, except per share amounts)
Earnings per common share:
Net earnings		$	28,504			$	23,391
Less: Net earnings allocated to restricted stock			112				104
Net earnings allocated to common shareholders		$	28,392			$	23,287
Weighted average shares outstanding			108,339				106,392
Basic earnings per common share		$	0.26			$	0.22
Diluted earnings per common share:
Net income allocated to common shareholders		$	28,392			$	23,287
Weighted average shares outstanding			108,339				106,392
Incremental shares from assumed exercise of outstanding options			467				392
Diluted weighted average shares outstanding			108,806				106,784
Diluted earnings per common share		$	0.26			$	0.22

 

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9.	FAIR VALUE INFORMATION

Fair Value Hierarchy

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

The following disclosure provides the fair value information for financial assets and liabilities as of March 31, 2017. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

 

•

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

 

•

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

 

•

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

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

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

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

There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2017 and 2016.

 

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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.

 

 

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

We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets. There were no assets outstanding at March 31, 2017 that were measured at fair value on a non-recurring basis and that had losses during the three months ended March 31, 2017. For assets measured at fair value on a non-recurring basis that were held on the balance sheet at December 31, 2016, the following table provides 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 December 31, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Losses For the Year Ended December 31, 2016
		(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial		$	65			$	-			$	-			$	65			$	8
SBA			196				-				-				196				27
Real estate:
Commercial real estate			-				-				-				-				-
Construction			-				-				-				-				-
SFR mortgage			-				-				-				-				-
Dairy & livestock and agribusiness			-				-				-				-				-
Consumer and other loans			-				-				-				-				-
Other real estate owned			-				-				-				-				-
Asset held-for-sale			3,411												3,411				2,558
Total assets		$	3,672			$	-			$	-			$	3,672			$	2,593

 

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Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2017 and December 31, 2016, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

 

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10.	BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers (“Centers”) and Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. The Bank has 54 Banking Centers organized in geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating departments within the Bank which is the basis for determining the Bank’s reportable segments. The chief operating decision maker (currently our CEO) regularly reviews the financial information of these two segments in deciding how to allocate resources and to assess performance. Our two principal reporting segments, Centers and Dairy & Livestock and Agribusiness, are aggregated into separate operating segments as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. In 2016, Dairy & Livestock and Agribusiness was reflected as our second reportable segment. All other operating departments have been aggregated and included in “Other” for reporting purposes. Recapture of provision for loan losses was allocated by segment based on loan type in 2016. Prior period information has been conformed to the current presentation. In addition, the Company allocates internal funds to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in the “Other” category.

The following tables represent the selected financial information for these two business segments. GAAP does not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and disclosed in Note 3 — Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2016. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees included in the Centers category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the condensed consolidated financial statements. All income and expense items not directly associated with the Centers’ business segment are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

 

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

 

		For the Three Months Ended March 31, 2017
		Centers				Dairy & livestock and agribusiness				Other (1)				Total
		(Dollars in thousands)
Net interest income		$	45,578			$	2,144			$	17,711			$	65,433
(Recapture of) provision for loan losses			511				(2,699	)			(2,312	)			(4,500	)
Net interest income after (recapture of) provision for loan losses			45,067				4,843				20,023				69,933
Noninterest income			5,207				55				3,460				8,722
Noninterest expense			12,438				501				21,178				34,117
Segment pre-tax profit		$	37,836			$	4,397			$	2,305			$	44,538
Goodwill		$	119,193			$	-			$	-			$	119,193
Segment assets as of March 31, 2017		$	7,399,909			$	363,029			$	796,183			$	8,559,121

 

(1)

Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

 

		For the Three Months Ended March 31, 2016
		Centers				Dairy & livestock and agribusiness				Other (1)				Total
		(Dollars in thousands)
Net interest income		$	42,234			$	1,933			$	18,349			$	62,516
(Recapture of) provision for loan losses			2,200				(952	)			(1,248	)			-
Net interest income after (recapture of) provision for loan losses			40,034				2,885				19,597				62,516
Noninterest income			4,827				53				3,803				8,683
Noninterest expense			12,610				479				21,275				34,364
Segment pre-tax profit		$	32,251			$	2,459			$	2,125			$	36,835
Goodwill		$	88,174			$	-			$	-			$	88,174
Segment assets as of March 31, 2016		$	6,586,237			$	386,804			$	947,795			$	7,920,836

 

(1)

Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

 

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11.	DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of March 31, 2017, the Bank has entered into 80 interest-rate swap agreements with customers. The Bank then entered into identical offsetting swaps with a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with the customer fixed rate swaps. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. Our interest rate swap derivatives are subject to a master netting arrangement with one counterparty bank. None of our derivative assets and liabilities are offset in the balance sheet.

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of March 31, 2017 and December 31, 2016, the total notional amount of the Company’s swaps was $207.0 million, and $202.7 million, respectively. The location of the asset and liability, and their respective fair values are summarized in the tables below.

 

March 31, 2017

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

$

4,985

Other liabilities

$

4,985

Total derivatives

$

4,985

$

4,985

December 31, 2016

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

$

5,783

Other liabilities

$

5,783

Total derivatives

$

5,783

$

5,783

 

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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 March 31,
						2017				2016
						(Dollars in thousands)
Interest rate swaps			Other income			$	323			$	58
Total						$	323			$	58

 

12.	OTHER COMPREHENSIVE INCOME

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

 

		For the Three Months Ended March 31,
		2017												2016
		Before-tax				Tax effect				After-tax				Before-tax				Tax effect				After-tax
		(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI		$	1,207			$	507			$	700			$	28,044			$	11,778			$	16,266
Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity			-				-				-				-				-				-
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity			(783	)			(329	)			(454	)			(774	)			(325	)			(449	)
Net realized (gain)/loss reclassified into earnings			-				-				-				-				-				-
Net Change		$	424			$	178			$	246			$	27,270			$	11,453			$	15,817

 

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13.	BALANCE SHEET OFFSETTING

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

 

		Gross Amounts Recognized in				Gross Amounts offset in the				Net Amounts of Assets Presented				Gross Amounts Not Offset in the   Condensed Consolidated Balance Sheets								Net Amount
		the Condensed Consolidated Balance Sheets				Condensed Consolidated Balance Sheets				in the Condensed Consolidated Balance Sheets				Financial Instruments				Collateral Pledged
		(Dollars in thousands)
March 31, 2017
Financial assets:
Derivatives not designated as hedging instruments		$	4,985			$	-			$	-			$	4,985			$	-			$	4,985
Total		$	4,985			$	-			$	-			$	4,985			$	-			$	4,985
Financial liabilities:
Derivatives not designated as hedging instruments		$	6,231			$	(1,246	)		$	4,985			$	1,246			$	(12,756	)		$	(6,525	)
Repurchase agreements			564,387				-				564,387				-				(674,122	)			(109,735	)
Total		$	570,618			$	(1,246	)		$	569,372			$	1,246			$	(686,878	)		$	(116,260	)
December 31, 2016
Financial assets:
Derivatives not designated as hedging instruments		$	5,783			$	-			$	-			$	5,783			$	-			$	5,783
Total		$	5,783			$	-			$	-			$	5,783			$	-			$	5,783
Financial liabilities:
Derivatives not designated as hedging instruments		$	6,855			$	(1,072	)		$	5,783			$	1,072			$	(12,800	)		$	(5,945	)
Repurchase agreements			603,028				-				603,028				-				(683,413	)			(80,385	)
Total		$	609,883			$	(1,072	)		$	608,811			$	1,072			$	(696,213	)		$	(86,330	)

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. and its wholly owned subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.

 

●

Allowance for Loan Losses (“ALLL”)

●

Troubled Debt Restructurings (“TDRs”)

●

Investment Securities

●

Goodwill Impairment

●

Acquired Loans

●

Purchase Credit Impaired (“PCI”) Loans

●

Fair Value of Financial Instruments

●

Income Taxes

●

Stock-Based Compensation

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

OVERVIEW

For the first quarter of 2017, we reported net earnings of $28.5 million, compared with $27.1 million for the fourth quarter of 2016 and $23.4 million for the first quarter of 2016. This represents an increase of $1.4 million over the prior quarter and an increase of $5.1 million from the first quarter of 2016. Diluted earnings per share were $0.26 for the first quarter, compared to $0.25 for the prior quarter and $0.22 for the same period last year.

At March 31, 2017, total assets of $8.56 billion increased $485.4 million, or 6.01%, from total assets of $8.07 billion at December 31, 2016. Interest-earning assets of $8.09 billion at March 31, 2017 increased $441.0 million, or 5.77%, when compared with $7.64 billion at December 31, 2016. The increase in interest-earning assets was primarily due to a $220.4 million increase in total loans and a $261.5 million increase in total interest-earning balances due from the Federal Reserve and federal funds sold. This was partially offset by a $25.4 million decrease in investment securities and a $17.5 million decrease in interest-earning balances due from depository institutions.

Total investment securities were $3.16 billion at March 31, 2017, a decrease of $25.4 million from $3.18 billion at December 31, 2016.

At March 31, 2017, held-to-maturity (“HTM”) investment securities totaled $885.1 million. At March 31, 2017, investment securities available-for-sale (“AFS”) totaled $2.27 billion, inclusive of a pre-tax unrealized gain of $15.8 million. AFS securities grew by $1.2 million, or 0.05%, from December 31, 2016.

 

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Total loans and leases, net of deferred fees and discounts, were $4.62 billion at March 31, 2017, compared to $4.40 billion at December 31, 2016 and $4.17 billion at March 31, 2016. Total loans and leases, net of deferred fees and discounts increased $220.4 million, or 5.02%, from December 31, 2016. The increase in total loans included $309.7 million of loans acquired from VBB in the first quarter of 2017. Excluding the acquired Valley Business Bank (“VBB”) loans, dairy & livestock and agribusiness loans decreased by $109.2 million, primarily due to seasonal paydowns. Excluding the acquired VBB loans and the decrease in dairy & livestock and agribusiness loans, overall loan growth was about $19.7 million, or 0.49%, for the first quarter of 2017. Total loans and leases, net of deferred fees and discounts, of $4.62 billion at March 31, 2017 increased by $442.1 million, or 10.59%, from March 31, 2016. Excluding the acquired VBB loans, overall loan growth year-over-year was approximately $129.8 million, or 3.10%.

Noninterest-bearing deposits were $4.00 billion at March 31 2017, an increase of $325.6 million, or 8.86%, compared to $3.67 billion at December 31, 2016 and an increase of $647.0 million, or 19.30%, when compared to March 31, 2016. The increase in noninterest-bearing deposits at March 31, 2017 included $172.5 million of noninterest-bearing deposits assumed from VBB during the first quarter of 2017. At March 31, 2017, noninterest-bearing deposits were 58.44% of total deposits, compared to 58.22% at December 31, 2016 and 53.93% at March 31, 2016. Our average cost of total deposits was 0.09% for the quarter ended March 31, 2017, compared to 0.10% for the same period last year. Our cost of total deposits including customer repurchase agreements was 0.11% for the quarter ended March 31, 2017 and 2016.

Customer repurchase agreements totaled $564.4 million at March 31, 2017, compared to $603.0 million and $626.9 million at December 31, 2016 and March 31, 2016, respectively. At March 31, 2017, there were no short-term borrowings, compared to $53.0 million at December 31, 2016 and zero at March 31, 2016.

At March 31, 2017, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2016 and March 31, 2016. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

The allowance for loan losses totaled $59.2 million at March 31, 2017, compared to $61.5 million at December 31, 2016. The allowance for loan losses was reduced by $4.5 million for the first quarter of 2017, offset by net recoveries of $2.2 million. The allowance for loan losses was 1.28%, 1.40% and 1.42% of total loans and leases outstanding, at March 31, 2017, December 31, 2016 and March 31, 2016, respectively. The ratio as of the most recent quarter was partially impacted by the $309.7 million loans acquired from Valley Business Bank that are recorded at fair market value, without a corresponding loan loss allowance.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory standards. As of March 31, 2017, the Company’s Tier 1 leverage capital ratio totaled 11.73%, our common equity Tier 1 ratio totaled 16.24%, our Tier 1 risk-based capital ratio totaled 16.69%, and our total risk-based capital ratio totaled 17.86%. Refer to our Analysis of Financial Condition – Capital Resources for discussion of the new capital rules which were effective beginning with the first quarter ended March 31, 2015.

Recent Acquisition

On March 10, 2017, we completed the acquisition of Valley Commerce Bancorp (“VCBP”), the holding company for VBB. Our financial statements for the first quarter include 21 days of VBB operations, post-merger. At close, Citizens Business Bank acquired $309.7 million of loans, assumed $172.5 million of noninterest-bearing deposits and $361.8 million of total deposits.

 

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ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

 

		For the Three Months Ended								Variance
		March 31,				December 31,
		2017				2016				$				%
		(Dollars in thousands, except per share amounts)
Net interest income		$	65,433			$	65,441			$	(8	)			-0.01	%
Recapture of provision for loan losses			4,500				4,400				100				2.27	%
Noninterest income			8,722				8,412				310				3.69	%
Noninterest expense			34,117				34,932				(815	)			-2.33	%
Income taxes			16,034				16,245				(211	)			-1.30	%
Net earnings		$	28,504			$	27,076			$	1,428				5.27	%
Earnings per common share:
Basic		$	0.26			$	0.25			$	0.01
Diluted		$	0.26			$	0.25			$	0.01
Return on average assets			1.42%				1.33%				0.09%
Return on average shareholders’ equity			11.39%				10.60%				0.79%
Efficiency ratio			46.01%				47.30%				-1.29%
Noninterest expense to average assets			1.70%				1.72%				-0.02%
		For the Three Months Ended March 31,								Variance
		2017				2016				$				%
		(Dollars in thousands, except per share amounts)
Net interest income		$	65,433			$	62,516			$	2,917				4.67	%
Recapture of provision for loan losses			4,500				-				4,500				-
Noninterest income			8,722				8,683				39				0.45	%
Noninterest expense			34,117				34,364				(247	)			-0.72	%
Income taxes			16,034				13,444				2,590				19.27	%
Net earnings		$	28,504			$	23,391			$	5,113				21.86	%
Earnings per common share:
Basic		$	0.26			$	0.22			$	0.04
Diluted		$	0.26			$	0.22			$	0.04
Return on average assets			1.42%				1.22%				0.20%
Return on average shareholders’ equity			11.39%				9.96%				1.43%
Efficiency ratio			46.01%				48.26%				-2.25%
Noninterest expense to average assets			1.70%				1.79%				-0.09%

Net Interest Income

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rate of 35%. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national

 

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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.

The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.

Interest-Earning Assets and Interest-Bearing Liabilities

 

 

 

 

(1)

Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 35%. Non TE rate was 2.32% for the three months ended March 31, 2017 and 2016.

(2)

Includes loan fees of $900 and $909 for the three months ended March 31, 2017 and 2016, respectively. Prepayment penalty fees of $787 and $919 are included in interest income for the three months ended March 31, 2017 and 2016, 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

 

 

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Net interest income, before recapture of provision for loan losses, of $65.4 million for the first quarter of 2017 increased $2.9 million, or 4.67%, compared to $62.5 million for the first quarter of 2016. Average interest-earning assets of $7.65 billion grew by $343.2 million, or 4.69%, from $7.31 billion for the first quarter of 2016. Our net interest margin (TE) was 3.51% for the first quarter of 2017, compared to 3.52% for the first quarter of 2016.

Interest income of $67.4 million for the first quarter of 2017 grew by $2.9 million, or 4.57%, when compared to the same period of 2016, as average interest earning assets were higher by $343.2 million. Interest income and fees on loans for the first quarter of 2017 totaled $48.6 million which represented a $2.9 million, or 6.27%, increase when compared to the first quarter of 2016. Excluding interest recaptured on non-accrual loans and discount accretion on purchase credit impaired loans, interest income grew by about $3.5 million, or 5.5%, year-over-year. Average loans increased $351.5 million for the first quarter of 2017 when compared with the same period of 2016 and included approximately $75.5 million of acquired VBB loans.

In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans at March 31, 2017 and 2016. As of March 31, 2017 and 2016, we had $10.3 million and $18.1 million of nonaccrual loans (excluding PCI loans), respectively.

Interest income from total investments was $18.1 million for the first quarter of 2017, unchanged from the first quarter of 2016. Average investment securities increased by $11.0 million for the first quarter of 2017, compared to the same period of 2016.

Interest expense of $2.0 million for the first quarter of 2017, increased $31,000, or 1.56%, when compared to the first quarter of 2016. The average rate paid on interest-bearing liabilities increased two basis points, to 0.25% for the first quarter of 2017, from 0.23% for the first quarter of 2016. Average interest-bearing liabilities were $72.3 million lower during the first quarter of 2017, compared to the first quarter of 2016.

Provision for Loan Losses

The allowance for loan losses is increased by the provision for loan losses and recoveries of prior losses, and is decreased by recapture of provisions and by charge-offs taken when management believes the uncollectability of any loan is confirmed. The provision for loan losses is determined by management as the amount to be added to (subtracted from) the allowance for loan losses after net charge-offs have been deducted to bring the allowance to an appropriate level which, in management’s best estimate, is necessary to absorb probable loan losses within the existing loan portfolio.

The allowance for loan losses totaled $59.2 million at March 31, 2017, compared to $61.5 million at December 31, 2016. The allowance for loan losses was reduced by a $4.5 million loan loss provision recapture for the first quarter of 2017, offset by net recoveries of $2.2 million. This compares to no loan loss provision recapture and net recoveries of $180,000 for the same period of 2016. We believe the allowance is appropriate at March 31, 2017. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. The ratio of the allowance for loan losses to total loans and leases outstanding, net of deferred fees and discount, as of March 31, 2017 and December 31, 2016 was 1.28% and 1.40%, respectively. The ratio as of the most recent quarter was partially impacted by the $309.7 million loans acquired from Valley Business Bank that are recorded at fair market value, without a corresponding loan loss allowance. Refer to the discussion of “Allowance for Loan Losses” in Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.

No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for loan losses in the future, as the nature of this process requires considerable judgment. Net recoveries totaled $2.2 million for the three months ended March 31, 2017, compared to $180,000 for the same period of 2016. See “Allowance for Loan Losses” under Analysis of Financial Condition herein.

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

 

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Noninterest Income

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

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

 

		For the Three Months Ended March 31,								Variance
		2017				2016				$				%
		(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts		$	3,727			$	3,747			$	(20	)			-0.53	%
Trust and investment services			2,296				2,203				93				4.22	%
Bankcard services			765				555				210				37.84	%
BOLI income			715				547				168				30.71	%
Swap fee income			323				58				265				456.90	%
Gain on sale of loans			-				1,101				(1,101	)			-100.00	%
Other			896				472				424				89.83	%
Total noninterest income		$	8,722			$	8,683			$	39				0.45	%

First Quarter of 2017 Compared to the First Quarter of 2016

The $39,000 increase in interest income was primarily due to increases of $265,000 in swap fee income, $210,000 in bankcard services fees, $168,000 in BOLI income, and $93,000 in trust and investment services. These increases were offset by a $1.1 million net gain on the sale of loans in the first quarter of 2016.

CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At March 31, 2017, CitizensTrust had approximately $2.76 billion in assets under management and administration, including $2.13 billion in assets under management. CitizensTrust generated fees of $2.3 million for the first quarter of 2017, an increase of $93,000 compared to the first quarter of 2016.

The Bank invests in Bank-Owned Life Insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. BOLI income of $715,000 for the first quarter of 2017 increased $168,000, or 30.71%, from $547,000 for the first quarter of 2016.

 

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Noninterest Expense

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

 

		For the Three Months Ended March 31,								Variance
		2017				2016				$				%
		(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits		$	21,575			$	21,198			$	377				1.78	%
Occupancy			2,908				2,848				60				2.11	%
Equipment			776				865				(89	)			-10.29	%
Professional services			1,257				1,248				9				0.72	%
Software licenses and maintenance			1,561				1,274				287				22.53	%
Stationery and supplies			276				270				6				2.22	%
Telecommunications expense			557				442				115				26.02	%
Marketing and promotion			1,239				1,427				(188	)			-13.17	%
Amortization of intangible assets			275				235				40				17.02	%
Regulatory assessments			783				1,157				(374	)			-32.32	%
Insurance			460				451				9				2.00	%
Loan expense			190				390				(200	)			-51.28	%
OREO expense			57				318				(261	)			-82.08	%
Directors’ expenses			208				173				35				20.23	%
Acquisition related expenses			676				849				(173	)			-20.38	%
Other			1,319				1,219				100				8.20	%
Total noninterest expense		$	34,117			$	34,364			$	(247	)			-0.72	%
Noninterest expense to average assets			1.70%				1.79%
Efficiency ratio (1)			46.01%				48.26%

 

(1)

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

First Quarter of 2017 Compared to the First Quarter of 2016

Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense measured as a percentage of average assets was 1.70% for the first quarter of 2017, compared to 1.79% for the first quarter of 2016.

Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for loan losses plus noninterest income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For the first quarter of 2017, the efficiency ratio was 46.01%, compared to 48.26% for the first quarter of 2016.

The $247,000 decrease in noninterest expense for the first quarter of 2017 included a decrease of $374,000 in regulatory assessments resulting from lower assessment rates. In addition, OREO expense declined by $261,000 and out-of-pocket loan expense declined by $200,000. Merger related expenses for the acquisition of VCBP in 2017 were $173,000 lower than the acquisition related expenses for CCB in the first quarter of 2016. These decreases were partially offset by increases of $377,000 in salary and benefit expense principally due to additional costs for the former VBB employees and annual increases in group health insurance costs. Year-over-year increases also included $287,000 in software licenses and maintenance expense.

 

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Income Taxes

The Company’s effective tax rate for the quarter ended March 31, 2017 was 36.00%, compared to 36.50% for the three months ended March 31, 2016. The decline in the effective tax rate for the first quarter of 2017 was due to the tax effects related to the adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which resulted in the recognition of excess tax benefits of approximately $1.3 million in our provision for income taxes rather than as an adjustment of paid-in capital. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income as well as available tax credits.

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

 

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RESULTS BY BUSINESS SEGMENTS

We have two reportable business segments: (i) Business Financial and Commercial Banking Centers (“Centers”) and (ii) Dairy & Livestock and Agribusiness. All other operations have been aggregated in “Other”. Our Centers and Dairy & Livestock and Agribusiness are the focal points for customer sales and services and the primary focus of management of the Company. In 2016, Dairy & Livestock and Agribusiness was reflected as our second reportable segment. All other operating departments have been aggregated and included in the “Other” category for reporting purposes. Recapture of provision for loan losses was allocated by segment based on loan type in 2016. Prior period information has been conformed to the current presentation. In addition, the Company allocates internal funds to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in the “Other” category. Taxes are not included in the segments as this is accounted for at the corporate level. The results of these two segments are included in the reconciliation between business segment totals and our consolidated total. Refer to Note 3—Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2016 and Note 10—Business Segments of the unaudited condensed consolidated financial statements.

Key measures we use to evaluate the segments’ performance are included in the following table for the three months ended March 31, 2017 and 2016. These tables also provide additional segment measures useful to understanding the performance of these segments.

Business Financial and Commercial Banking Centers

 

 

(1)

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

For the first quarter of 2017, the Centers’ segment pre-tax profit increased by $5.6 million, or 17.32%, primarily due to an increase in interest income of $3.9 million, or 8.59%, compared to the first quarter of 2016. The $3.9 million increase in interest income for the first quarter of 2017 was principally due to a $390.3 million increase in average loans offset by a 9 basis point drop in the loan yield to 4.52% for the first quarter of 2017, compared to 4.61% for the first quarter of 2016. The year-over-year increase in interest income was offset by a $540,000 increase in interest expense for the first quarter of 2017 compared to the first quarter of 2016, principally due to a $152.5 million increase in average interest-bearing deposits and customer repurchase agreements. In addition, the first quarter of 2017 included a loan loss provision of $511,000, compared to $2.2 million for the same period of 2016.

 

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Dairy & Livestock and Agribusiness

 

For the first quarter of 2017, the dairy & livestock and agribusiness segment pre-tax profit increased by $1.9 million, or 78.81%, primarily due to a $1.7 million increase in the loan loss provision recapture for the first quarter of 2017, compared to the first quarter of 2016.

 

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Other

 

 

(1)

Includes the elimination of certain items that are included in more than one department, most of which represents products and services for Centers’ customers.

For the first quarter of 2017, the Company’s other operating departments, including treasury and administration, reported a pre-tax profit of $2.3 million, compared to $2.1 million for the first quarter of 2016. The $180,000 increase in pre-tax profit was primarily due to a $1.1 million increase in the loan loss provision recapture for the first quarter of 2017, compared to the first quarter of 2016. This was offset by a $638,000 decrease in net interest income principally due to a $36.5 million decrease in average loans and an 18 basis point drop in the loan yield, as well as a $342,000 decrease in noninterest income. The decline in average interest-bearing deposits was entirely due to maturing time deposits from the State of California that were not renewed in the latter half of 2016.

 

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ANALYSIS OF FINANCIAL CONDITION

The Company reported total assets of $8.56 billion at March 31, 2017. This represented an increase of $485.4 million, or 6.01%, from total assets of $8.07 billion at December 31, 2016. Interest-earning assets of $8.09 billion at March 31, 2017 increased $441.0 million, or 5.77%, when compared with interest-earning assets of $7.64 billion at December 31, 2016. The increase in interest-earning assets was primarily due to a $220.4 million increase in total loans and a $261.5 million increase in interest-earning balances due from the Federal Reserve and federal funds sold. This was partially offset by a $25.4 million decrease in investment securities and a $17.5 million decrease in interest-earning balances due from depository institutions. The increase in total assets at March 31, 2017 included $309.7 million of acquired loans and $51.5 million of acquired cash and cash equivalents from VBB in the first quarter of 2017. Total liabilities were $7.51 billion at March 31, 2017, an increase of $429.9 million, or 6.07%, from total liabilities of $7.08 billion at December 31, 2016. The increase in deposits at March 31, 2017 included $361.8 million of total deposits assumed from VBB during the first quarter of 2017, of which $172.5 million were noninterest-bearing deposits. Total equity increased $55.5 million, or 5.60%, to $1.05 billion at March 31, 2017, compared to total equity of $990.9 million at December 31, 2016. The quarter-over-quarter increase in equity was due to $28.5 million in net earnings, $37.6 million for the issuance of common stock for the acquisition of VCBP, and $2.1 million for various stock-based compensation items. This was offset by $13.0 million in cash dividends declared for the first quarter of 2017.

Investment Securities

The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At March 31, 2017, we reported total investment securities of $3.16 billion. This represented a decrease of $25.4 million, or 0.80%, from total investment securities of $3.18 billion at December 31, 2016. At March 31, 2017, investment securities HTM totaled $885.1 million. At March 31, 2017, our investment securities AFS totaled $2.27 billion, inclusive of a pre-tax unrealized gain of $15.8 million. The after-tax unrealized gain reported in AOCI on AFS investment securities was $9.2 million.

As of March 31, 2017, the Company had a pre-tax net unrealized holding gain on total investment securities of $17.1 million, compared to a pre-tax net unrealized holding gain of $16.3 million at December 31, 2016. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the three months ended March 31, 2017 and 2016, repayments/maturities of investment securities totaled $141.2 million and $148.5 million, respectively. The Company purchased additional investment securities totaling $143.5 million and $9.9 million for the three months ended March 31, 2017 and 2016, respectively. No investments securities were sold during the first three months of 2017 and 2016.

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

 

 

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The weighted-average yield on the total investment portfolio at March 31, 2017 was 2.52% with a weighted-average life of 4.3 years. This compares to a weighted-average yield of 2.38% at December 31, 2016 with a weighted-average life of 4.5 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

Approximately 88% of the securities in the total investment portfolio, at March 31, 2017, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of March 31, 2017, approximately $109.8 million in U.S. government agency bonds are callable.

The Agency CMO/REMIC are backed by agency-pooled collateral. All non-agency AFS CMO/REMIC securities held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2017 and December 31, 2016. We had one and three non-agency AFS CMO/REMIC securities with a carrying value of $5,000 and $84,000 at March 31, 2017 and December 31, 2016, respectively.

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 March 31, 2017 and December 31, 2016. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be Other-Than-Temporarily-Impaired (“OTTI”). A summary of our analysis of these securities and the unrealized losses is described more fully in Note 5 — Investment Securities of the notes to the unaudited condensed consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

 

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Loans

Total loans and leases, net of deferred fees and discounts, of $4.62 billion at March 31, 2017 increased by $220.4 million, or 5.02%, from December 31, 2016. The increase in total loans included $309.7 million of loans acquired from VBB in the first quarter of 2017. Excluding the acquired VBB loans, dairy & livestock and agribusiness loans decreased by $109.2 million due to seasonal paydowns. Excluding the acquired VBB loans and the decrease in dairy & livestock and agribusiness loans, overall loan growth was about $19.7 million, or 0.49%, for the quarter.

Total loans and leases, net of deferred fees and discounts, of $4.62 billion at March 31, 2017 increased by $442.1 million, or 10.59%, from March 31, 2016. Excluding the $309.7 million of acquired VBB loans in the first quarter of 2017, overall loan growth was about $129.8 million, or 3.10%, year-over-year.

Distribution of Loan Portfolio by Type

 

As of March 31, 2017, $164.9 million, or 5.12% of the total commercial real estate loans included loans secured by farmland, compared to $180.6 million, or 6.16%, at December 31, 2016. The loans secured by farmland included $111.6 million for loans secured by dairy & livestock land and $53.3 million for loans secured by agricultural land at March 31, 2017, compared to $127.1 million for loans secured by dairy & livestock land and $53.6 million for loans secured by agricultural land at December 31, 2016. As of March 31, 2017, dairy & livestock and agribusiness loans of $244.3 million was comprised of $216.3 million for dairy & livestock loans and $28.0 million for agribusiness loans, compared to $317.9 million for dairy & livestock loans and $20.7 million for agribusiness loans at December 31, 2016.

 

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PCI Loans from the SJB Acquisition

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

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

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

Distribution of Loan Portfolio by Type (PCI)

 

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

 

•

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

 

•

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

 

•

indices for acquired loans with variable rates of interest.

 

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Commercial and industrial loans are loans to commercial entities to finance capital purchases or improvements, or to provide cash flow for operations. SBA loans are loans, which are guaranteed in whole or in part by the SBA, to commercial entities and/or their principals to finance capital purchases or improvements, to provide cash flow for operations for both short and long term working capital needs to finance sales growth or expansion, and commercial real estate loans to acquire or refinance the entities commercial real estate. 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. Consumer loans include auto and equipment leases, installment loans to consumers as well as home equity loans and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers.

Our SBA loans are comprised of SBA 504 loans and SBA 7(a) loans. As of March 31, 2017, the Company had $28.4 million of total SBA 7(a) loans. The SBA 7(a) loans include revolving lines of credit (SBA Express), term loans to finance long term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate. SBA 7(a) loans are guaranteed by the SBA at various percentages typically ranging from 50% to 75% of the loan, depending on the type of loan and when it was granted. SBA 7(a) loans are typically granted with a variable interest rate adjusting quarterly along with the monthly payment. The SBA 7(a) term loans can provide financing for up to 100% of the project costs associated with the installation of equipment and/or commercial real estate which can exceed the value of the collateral related to the transaction. These loans also provide extended terms not provided by the Bank’s standard equipment and CRE loan programs.

As of March 31, 2017, the Company had $85.9 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 of 10%. When the loans are funded the Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition.

Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland.

Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, excluding PCI loans, by region as of March 31, 2017.

 

The following is the breakdown of total PCI held-for-investment commercial real estate loans by region as of March 31, 2017.

 

 

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The table below breaks down our real estate portfolio, excluding PCI loans, with the exception of construction loans which are addressed separately.

 

 

(1)

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

(2)

The loans secured by farmland included $111.6 million for loans secured by dairy & livestock land and $53.3 million for loans secured by agricultural land at March 31, 2017.

(3)

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

The SFR mortgage— Direct loans, excluding PCI loans, in the table above include SFR mortgage loans which are currently generated through an internal program in our Centers. This program is focused on owner-occupied SFR’s with defined loan-to-value, debt-to-income and other credit criteria, such as FICO credit scores, that we believe are appropriate for loans which are primarily intended for retention in our Bank’s loan portfolio. We originated loan volume in the aggregate principal amount of $11.8 million under this program during the three months ended March 31, 2017.

In addition, we previously purchased pools of owner-occupied single-family loans from real estate lenders, SFR mortgage— Mortgage Pools, with a remaining balance totaling $38.0 million at March 31, 2017. These loans were purchased with average FICO scores predominantly ranging from 700 to over 800 and overall original loan-to-value ratios of 60% to 80%. These pools were purchased to diversify our loan portfolio. We have not purchased any mortgage pools since August 2007.

 

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The table below breaks down our PCI real estate portfolio with the exception of construction loans which are addressed separately.

 

 

(1)

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

(2)

Includes loans associated with hospitality, churches, gas stations, and hospitals, which represents approximately 84% of other loans.

Construction Loans

As of March 31, 2017, the Company had $72.8 million in construction loans. This represents 1.57% of total gross loans held-for-investment. There were no PCI construction loans at March 31, 2017. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles, Orange County, and the Inland Empire region of Southern California. At March 31, 2017, construction loans consisted of $39.4 million in SFR construction loans and $33.4 million in commercial construction loans. As of March 31, 2017, there was one nonperforming construction loan of $384,000.

Nonperforming Assets

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

 

At March 31, 2017, loans classified as impaired, excluding PCI loans, totaled $30.0 million, or 0.65% of total gross loans, compared to $26.4 million, or 0.60% of total loans at December 31, 2016. At March 31, 2017, nonperforming loans of $10.3 million included $6.4 million of loans acquired from VBB in the first quarter of 2017. At March 31, 2017, impaired loans which were restructured in a troubled debt restructure represented $21.1 million, of which $1.4 million were nonperforming and $19.7 million were performing.

 

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Of the $30.0 million total impaired loans as of March 31, 2017, $26.2 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate were $3.8 million.

Troubled Debt Restructurings

Total TDRs were $21.1 million at March 31, 2017, compared to $20.9 million at December 31, 2016. Of the $1.4 million in nonperforming TDRs at March 31, 2017, all were paying in accordance with the modified terms at March 31, 2017. At March 31, 2017, $19.7 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were granted in response to borrower financial difficulty and generally provide for a modification of loan repayment terms. The performing restructured loans represent the only impaired loans accruing interest at each respective reporting date. A performing restructured loan is reasonably assured of repayment and is performing in accordance with the modified terms. We have not restructured loans into multiple loans in what is typically referred to as an “A/B” note structure, where normally the “A” note meets current underwriting standards and the “B” note is typically immediately charged off upon restructuring.

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

 

At March 31, 2017 and December 31, 2016, $97,000 and $141,000 of the allowance for loan losses was specifically allocated to TDRs, respectively. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. There were no charge-offs on TDRs for the three months ended March 31, 2017 and 2016.

 

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Nonperforming Assets and Delinquencies

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

 

Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $10.3 million at March 31, 2017, or 0.22% of total loans, and included $6.4 million of loans acquired from VBB in the first quarter of 2017. This compares to nonperforming loans of $7.2 million, or 0.16% of total loans, at December 31, 2016 and $18.1 million, or 0.43% of total loans, at March 31, 2016. The $3.2 million increase in nonperforming loans quarter-over-quarter was primarily due to a $3.9 million increase in nonperforming commercial real estate loans and a $1.3 million increase in dairy & livestock and agribusiness loans, partially offset by a $1.6 million decrease in nonperforming SBA loans.

We had $4.5 million in OREO at both March 31, 2017 and December 31, 2016, compared to $6.5 million at March 31, 2016. As of March 31, 2017, we had one OREO property, compared with one OREO property at December 31, 2016 and four OREO properties at March 31, 2016. There were no additions or sales of OREO for the three months ended March 31, 2017.

Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, increases in general rates of interest and changes in the financial conditions or business of a borrower, and drought conditions in California may adversely affect a borrower’s ability to pay or the value of our collateral. See “Risk Management — Credit Risk Management” contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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Acquired SJB Assets

Loans acquired through the SJB acquisition are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). PCI loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonperforming loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of March 31, 2017, there were no PCI loans considered as nonperforming as described above.

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

Allowance for Loan Losses

The allowance for loan losses is established as management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased (decreased) by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed which is charged against operating results. 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 would deserve current recognition in estimating inherent credit losses.

The allowance for loan losses totaled $59.2 million as of March 31, 2017, compared to $61.5 million as of December 31, 2016. The allowance for loan losses was reduced by a $4.5 million loan loss provision recapture, offset by net recoveries of $2.2 million for the three months ended March 31, 2017. This compares to no loan loss provision recapture and net recoveries of $180,000 for the same period of 2016.

 

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The table below presents a summary of net charge-offs and recoveries by type and the resulting allowance for loan losses and (recapture of) provision for loan losses for the periods presented. The table below also includes information on loans, excluding PCI loans, for all periods presented.

 

 

(1)

Net of deferred loan origination fees, costs and discounts.

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 $97,000 (0.16%), $141,000 (0.23%) and $694,000 (1.17%) of the total allowance as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively.

 

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General allowance: The loan portfolio collectively evaluated for impairment under ASC 450-20 is divided into risk rating classes of loan receivables between “classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and are further disaggregated into loan segments by loan type with similar risk characteristics. Both the classified and non-classified loan categories are divided into eight (8) specific loan segments. The allowance is provided for each segment based upon that segment’s average historical loss experience over an established look back period, adjusted for applicable loss emergence periods (i.e., the amount of time from the point at which a loss is incurred to the point at which the loss is confirmed), and further adjusted for current conditions based on our analysis of specific environmental or qualitative loss factors, as prescribed in the 2006 Interagency Policy Statement on ALLL, affecting the collectability of our loan portfolio that may cause actual loss rates to differ from historical loss experience. The above description reflects certain changes made to the Bank’s ALLL methodology in the current period described further below.

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

The Bank updated its Historical Loss Rates (HLRs) under its existing methodology, which showed moderate reductions compared to the prior period given the effect on loan loss rates of continued recoveries of prior loan losses. The metrics that drive the qualitative component of the allowance had nominal movements in a generally positive direction reflecting continued improvement in economic and credit metrics compared to last quarter and which resulted in slightly lower, overall qualitative factors.

Thus, as a result of the net effect of (i) reductions in the HLRs of various segments within the portfolio, (ii) improving qualitative factors, and (iii) improving loan risk ratings as well as reductions in balances of certain lines of credit centered in the dairy and livestock portfolio, the Bank determined that a reduced ALLL balance requirement of $59.2 million was appropriate. Due to the reduction of reserve requirements for the reasons noted above, the allowance for loan losses was reduced by a $4.5 million loan loss provision recapture, offset by net recoveries of $2.2 million for the three months ended March 31, 2017.

While we believe that the allowance at March 31, 2017 was appropriate to absorb losses from any known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers, or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for loan losses in the future.

 

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Deposits

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

Total deposits were $6.84 billion at March 31, 2017. This represented an increase of $533.1 million, or 8.45%, over total deposits of $6.31 billion at December 31, 2016. The increase in total deposits at March 31, 2017 included $361.8 million of total deposits assumed from VBB during the first quarter of 2017, of which $172.5 million were noninterest-bearing deposits. The composition of deposits is summarized for the periods presented in the table below.

 

The amount of noninterest-bearing deposits in relation to total deposits is an integral element in achieving a low cost of funds. Noninterest-bearing deposits totaled $4.00 billion at March 31, 2017, representing an increase of $325.6 million, or 8.86%, from noninterest-bearing deposits of $3.67 billion at December 31, 2016. Noninterest-bearing deposits represented 58.44% of total deposits for March 31, 2017, compared to 58.22% of total deposits for December 31, 2016.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $2.42 billion at March 31, 2017, representing an increase of $164.0 million, or 7.28%, from savings deposits of $2.25 billion at December 31, 2016. The increase was due to approximately $135.5 million of savings deposits assumed from VBB during the first quarter of 2017.

Time deposits totaled $426.4 million at March 31, 2017, representing an increase of $43.6 million, or 11.39%, from total time deposits of $382.8 million for December 31, 2016. The increase was due to approximately $53.8 million of time deposits assumed from VBB during the first quarter of 2017.

Borrowings

In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was 8.89% for the first quarter of 2017, compared to 10.35% for the same quarter of 2016.

At March 31, 2017, borrowed funds (customer repurchase agreements, FHLB advances and other borrowings) totaled $564.4 million. This represented a decrease of $91.6 million, or 13.97%, from total borrowed funds of $656.0 million at December 31, 2016.

We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price which reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of March 31, 2017 and December 31, 2016, total customer repurchases were $564.4 million and $603.0 million, respectively, with a weighted average interest rate of 0.26% and 0.26%, respectively.

At March 31, 2017, we had no short-term borrowings, compared to $53.0 million at December 31, 2016.

At March 31, 2017, $3.12 billion of loans and $2.15 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 March 31, 2017.

 

 

(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 March 31, 2017 we had no short-term borrowings with the FHLB, compared to $53.0 million at a cost of 55 basis points at December 31, 2016.

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

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

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

 

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Off-Balance Sheet Arrangements

The following table summarizes the off-balance sheet items at March 31, 2017.

 

 

(1)

Total commitments to extend credit to agribusiness were $17.1 million at March 31, 2017.

As of March 31, 2017, we had commitments to extend credit of approximately $984.1 million, and obligations under letters of credit of $41.9 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company had a reserve for unfunded loan commitments of $6.7 million as of March 31, 2017 and December 31, 2016 included in other liabilities.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.

Capital Resources

Our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of the Company’s capital plan.

The Company’s total equity was $1.05 billion at March 31, 2017. This represented an increase of $55.5 million, or 5.60%, from total equity of $990.9 million at December 31, 2016. The increase for the first three months of 2017 resulted from $28.5 million in net earnings, $37.6 million for the issuance of common stock for the acquisition of VCBP, and $2.1 million for various stock based compensation items related to shares issued pursuant to our stock-based compensation plan, and a $246,000 increase in other comprehensive income, net of tax, resulting from the net change in fair value of our investment securities portfolio. This was offset by $13.0 million for cash dividends declared on common stock.

During the first quarter of 2017, the Board of Directors of CVB declared quarterly cash dividend totaling $0.12 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.

 

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On August 11, 2016, our Board of Directors authorized an increase in the Company’s common stock repurchase program originally announced in 2008 to 10,000,000 shares, or approximately 9.3% of the Company’s outstanding shares. During 2016, the Company repurchased 81,800 shares of our common stock outstanding. As of March 31, 2017, we have 9,918,200 shares of our common stock remaining that are eligible for repurchase under the common stock repurchase program.

The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a Common Equity Tier 1 (“CET1”) capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At March 31, 2017, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see Item 1. Business — Capital Adequacy Requirements as described in our Annual Report on Form 10-K for the year ended December 31, 2016.

At March 31, 2017, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes.

The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.

 

						March 31, 2017				December 31, 2016
Capital Ratios		Adequately   Capitalized   Ratios		Well   Capitalized   Ratios		CVB Financial Corp. Consolidated		Citizens Business Bank		CVB Financial Corp. Consolidated		Citizens Business Bank
Tier 1 leverage capital ratio		4.00%		5.00%		11.73%		11.60%		11.49%		11.36%
Common equity Tier I capital ratio		4.50%		6.50%		16.24%		16.50%		16.48%		16.76%
Tier 1 risk-based capital ratio		6.00%		8.00%		16.69%		16.50%		16.94%		16.76%
Total risk-based capital ratio		8.00%		10.00%		17.86%		17.67%		18.19%		18.01%

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

 

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

We anticipate that the Company and the Bank will meet these requirements well in advance of the ultimate full phase-in date. However, it is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III final rule. The exact amount, however, will depend upon our prevailing risk profile under various stress scenarios.

 

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ASSET/LIABILITY AND MARKET RISK MANAGEMENT

Liquidity and Cash Flow

The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.

We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has a Liquidity Committee that meets quarterly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.

Our primary sources and uses of funds for the Company are loans and deposits. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $6.84 billion at March 31, 2017 increased $533.1 million, or 8.45%, over total deposits of $6.31 billion at December 31, 2016.

In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve. The sale of securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.

CVB is a company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.

Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2017 and 2016. For further details see our “Interim Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report.

Consolidated Summary of Cash Flows

 

		For the Three Months Ended         March  31, 2017
		2017				2016
		(Dollars in thousands)
Average cash and cash equivalents		$	199,831			$	205,586
Percentage of total average assets			2.46%				2.66%
Net cash provided by operating activities		$	57,149			$	31,330
Net cash provided by investing activities			135,582				150,105
Net cash provided by (used in) financing activities			68,077				(47,946	)
Net increase in cash and cash equivalents		$	260,808			$	133,489

Average cash and cash equivalents decreased by $5.8 million, or 2.80%, to $199.8 million for the three months ended March 31, 2017, compared to $205.6 million for the same period of 2016.

At March 31, 2017, cash and cash equivalents totaled $382.4 million. This represented an increase of $142.9 million, or 59.63%, from $239.6 million at March 31, 2016.

 

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Interest Rate Sensitivity Management

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

One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve twists. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities.

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

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

The following depicts the Company’s net interest income sensitivity analysis as of March 31, 2017.

 

		Estimated Net Interest Income Sensitivity (1)
		March 31, 2017				December 31, 2016
Interest Rate Scenario		12-month Period		24-month Period (Cumulative)		12-month Period		24-month Period (Cumulative)
+ 200 basis points		-1.05%		1.36%		-1.18%		1.16%
- 100 basis points		-2.63%		-5.17%		-2.05%		-4.19%

 

(1)

Percentage change from base.

Based on our current models, we believe that the interest rate risk profile of the balance sheet is generally well matched with a slight asset sensitive bias over a two year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

We also perform valuation analysis which incorporates all cash flows over the estimated remaining life of all balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing

 

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and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. At March 31, 2017, the EVE profile indicates a decline in net balance sheet value due to instantaneous upward changes in rates. EVE sensitivity is reported in both upward and downward rate shocks.

Economic Value of Equity Sensitivity

 

Instantaneous Rate Change		March 31, 2017		December 31, 2016
100 bp decrease in interest rates		-11.4%		-9.1%
100 bp increase in interest rates		2.3%		0.8%
200 bp increase in interest rates		3.2%		0.2%
300 bp increase in interest rates		3.0%		-1.5%
400 bp increase in interest rates		2.1%		-3.7%

As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risks in our portfolio, see “Asset/Liability Management and Interest Rate Sensitivity Management” included in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016. Our analysis of market risk and market-sensitive financial information contain forward looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.

 

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

During the fiscal quarter ended March 31, 2017, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

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

A purported shareholder class action complaint alleging securities law violations captioned Lloyd v. CVB Financial Corp., et al. was filed on August 23, 2010, Case No. CV 10-06256- MMM, in the United States District Court for the Central District of California, naming the Company, Christopher D. Myers (our President and Chief Executive Officer) and Edward J. Biebrich, Jr. (our former Chief Financial Officer). On March 13, 2017, the previously-announced settlement of the Lloyd action and other consolidated cases based on the same set of facts, received final court approval and the matters are no longer pending against the Company. The settlement costs were funded solely with insurance proceeds.

The Company is also involved in several related actions entitled Glenda Morgan v. Citizens Business Bank, et al., Case No. BC568004, in the Superior Court for Los Angeles County, and Jessica Osuna v. Citizens Business Bank, et al., Case No. CIVDS1501781, in the Superior Court for San Bernardino County, alleging wage and hour claims on behalf of the Company’s “exempt” and “non-exempt” hourly employees. These cases, which were consolidated in Los Angeles County Superior Court in April 2015, are styled as putative class action lawsuits and allege, among other things, that (i) the Company misclassified certain employees and managers as “exempt” employees, (ii) the Company violated California’s wage and hour, overtime, meal break and rest break rules and regulations, (iii) certain employees did not receive proper expense reimbursements, (iv) the Company did not maintain accurate and complete payroll records, and (v) the Company engaged in unfair business practices. Subsequently, related cases were filed by the same law firm representing Morgan and Osuna in the Superior Court for San Bernardino County, alleging (1) violations of the Labor Code and seeking penalties under the California Private Attorney General Act of 2004 and (2) seeking a declaratory judgment that certain releases signed by CBB employees were invalid. On November 28, 2016, the parties reached an agreement in principal to settle all of the related wage and hour class action lawsuits (“Wage-Hour Settlement”). Plaintiffs will dismiss all their lawsuits with prejudice in exchange for the payment of $1,500,000 to the putative class members, after attorneys’ fees and costs. As of March 31, 2017, the Company maintained a litigation accrual of $1.5 million for the Wage-Hour Settlement. The Wage-Hour Settlement is subject to court approval. The parties are preparing the Wage-Hour Settlement documents and will seek preliminary approval from the court during the second quarter of 2017. We anticipate that the Wage-Hour Settlement will be concluded sometime in the third quarter of 2017.

For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of ambiguities and inconsistencies in the myriad laws applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For these reasons, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss with respect to the remaining actions pending or threatened against the Company, or, where the Company has been able to make an estimate, the Company believes the amount is not material to the Company’s liquidity, consolidated financial position, and/or results of operations.

Our accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose the amount accrued if we believe it is material or if we believe such disclosure is necessary for our financial statements to not be misleading. If an exposure to loss exists in excess of an amount previously accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.

 

ITEM 1A.

RISK FACTORS

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

 

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ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 16, 2008, our Board of Directors approved a program to repurchase up to 10,000,000 shares of our common stock (such number will not be adjusted for stock splits, stock dividends, and the like) in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. As a result of various repurchases made under the 2008 repurchase program, on August 11, 2016, our Board of Directors authorized an increase in the Company’s common stock repurchase program back to 10,000,000 shares, or approximately 9.3% of the Company’s currently outstanding shares at the time of authorization, and adopted a 10b5-1 plan. There is no expiration date for this repurchase program. During the first quarter of 2017, the Company did not repurchase any shares of common stock. The Company terminated its 10b5-1 plan in January 2017 in order to comply with Regulation M. A new 10b5-1 plan was approved by the Board of Directors effective as of May 2, 2017. As of March 31, 2017, we have 9,918,200 shares of our common stock remaining that are eligible for repurchase under the common stock repurchase program.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5.

OTHER INFORMATION

None

 

ITEM 6.

EXHIBITS

 

Exhibit No.		Description of Exhibits
10.1		Amendment No. 4 to 2008 Equity Incentive Plan †
10.2		Amendment No. 5 to 2008 Equity Incentive Plan †
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.

 

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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:     May 10, 2017
		/s/ E. Allen Nicholson
		Executive Vice President and
		Chief Financial Officer (Principal Financial Officer)

 

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