CVB FINANCIAL CORP - Quarter Report: 2018 March (Form 10-Q)

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, 2018

or

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

For the transition period from              to             

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

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

 

		(909) 980-4030
		(Registrant’s telephone number, including area code)

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

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

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

 

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

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

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

Number of shares of common stock of the registrant: 110,259,842 outstanding as of April 30, 2018.

TABLE OF CONTENTS

 

PART I –		FINANCIAL INFORMATION (UNAUDITED)		1
ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		3
		NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		8
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		38
		CRITICAL ACCOUNTING POLICIES		38
		OVERVIEW		38
		ANALYSIS OF THE RESULTS OF OPERATIONS		40
		RESULTS BY BUSINESS SEGMENTS		47
		ANALYSIS OF FINANCIAL CONDITION		50
		ASSET/LIABILITY AND MARKET RISK MANAGEMENT		66
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68
ITEM 4.		CONTROLS AND PROCEDURES		68
PART II –		OTHER INFORMATION		69
ITEM 1.		LEGAL PROCEEDINGS		69
ITEM 1A.		RISK FACTORS		70
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		70
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		70
ITEM 4.		MINE SAFETY DISCLOSURES		70
ITEM 5.		OTHER INFORMATION		70
ITEM 6.		EXHIBITS		70
SIGNATURES				71

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

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

 

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

inflation, interest rate, securities market and monetary fluctuations;

•

changes in government interest rates or monetary policies;

•

changes in the amount and availability of deposit insurance;

•

political developments, uncertainties or instability;

•

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

•

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

•

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

•

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

•

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

•

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

 

1

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

 

2

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

		March 31,       2018				December 31,   2017
Assets
Cash and due from banks		$	101,714			$	119,841
Interest-earning balances due from Federal Reserve			354,524				24,536
Total cash and cash equivalents			456,238				144,377
Interest-earning balances due from depository institutions			10,100				17,952
Investment securities available-for-sale, at fair value (with amortized cost of $1,970,076 at March 31, 2018, and $2,078,131 at December 31, 2017)			1,941,592				2,080,985
Investment securities held-to-maturity (with fair value of $776,130 at March 31, 2018, and $819,215 at December 31, 2017)			798,284				829,890
Total investment securities			2,739,876				2,910,875
Investment in stock of Federal Home Loan Bank (FHLB)			17,688				17,688
Loans and lease finance receivables			4,794,983				4,830,631
Allowance for loan losses			(59,935	)			(59,585	)
Net loans and lease finance receivables			4,735,048				4,771,046
Premises and equipment, net			45,542				46,166
Bank owned life insurance (BOLI)			146,702				146,486
Accrued interest receivable			21,722				22,704
Intangibles			6,507				6,838
Goodwill			116,564				116,564
Other real estate owned (OREO)			-				4,527
Income taxes			35,223				40,046
Other assets			24,950				25,317
Total assets		$	8,356,160			$	8,270,586
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	4,062,691			$	3,846,436
Interest-bearing			2,646,744				2,700,417
Total deposits			6,709,435				6,546,853
Customer repurchase agreements			487,277				553,773
Deferred compensation			18,861				18,223
Junior subordinated debentures			25,774				25,774
Other liabilities			47,955				56,697
Total liabilities			7,289,302				7,201,320
Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 110,259,046 at March 31, 2018, and 110,184,922 at December 31, 2017			574,225				573,453
Retained earnings			513,484				494,361
Accumulated other comprehensive income, net of tax			(20,851	)			1,452
Total stockholders’ equity			1,066,858				1,069,266
Total liabilities and stockholders’ equity		$	8,356,160			$	8,270,586

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

		For the Three Months Ended     March 31,
		2018				2017
Interest income:
Loans and leases, including fees		$	55,196			$	48,641
Investment securities:
Investment securities available-for-sale			11,868				12,640
Investment securities held-to-maturity			4,765				5,507
Total investment income			16,633				18,147
Dividends from FHLB stock			332				393
Interest-earning deposits with other institutions and federal funds sold			536				267
Total interest income			72,697				67,448
Interest expense:
Deposits			1,525				1,433
Borrowings and customer repurchase agreements			453				429
Junior subordinated debentures			198				153
Total interest expense			2,176				2,015
Net interest income before recapture of provision for loan losses			70,521				65,433
Recapture of provision for loan losses			(1,000	)			(4,500	)
Net interest income after recapture of provision for loan losses			71,521				69,933
Noninterest income:
Service charges on deposit accounts			4,045				3,727
Trust and investment services			2,157				2,296
Bankcard services			804				765
BOLI income			979				715
Gain on OREO, net			3,540				-
Other			1,391				1,219
Total noninterest income			12,916				8,722
Noninterest expense:
Salaries and employee benefits			22,314				21,575
Occupancy and equipment			4,192				3,684
Professional services			1,530				1,257
Software licenses and maintenance			1,760				1,561
Marketing and promotion			1,356				1,239
Acquisition related expenses			803				676
Other			3,991				4,125
Total noninterest expense			35,946				34,117
Earnings before income taxes			48,491				44,538
Income taxes			13,578				16,034
Net earnings		$	34,913			$	28,504
Other comprehensive income (loss):
Unrealized (loss) gain on securities arising during the period, before tax		$	(32,170	)		$	424
Less: Income tax benefit (expense) related to items of other comprehensive income			9,511				(178	)
Other comprehensive (loss) income, net of tax			(22,659	)			246
Comprehensive income		$	12,254			$	28,750
Basic earnings per common share		$	0.32			$	0.26
Diluted earnings per common share		$	0.32			$	0.26
Cash dividends declared per common share		$	0.14			$	0.12

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2018 and 2017

(Dollars and shares in thousands)

(Unaudited)

 

		Common Shares Outstanding				Common Stock				Retained Earnings				Accumulated Other Comprehensive Income				Total
Balance, January 1, 2017			108,252			$	531,192			$	449,499			$	10,171			$	990,862
Cumulative adjustment upon adoption of ASU 2016-09			-				116				(66	)			-				50
Repurchase of common stock			(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
Balance, January 1, 2018			110,185			$	573,453			$	494,361			$	1,452			$	1,069,266
Cumulative adjustment upon adoption of ASU 2018-02			-				-				(356	)			356				-
Repurchase of common stock			(34	)			(792	)			-				-				(792	)
Exercise of stock options			87				828				-				-				828
Shares issued pursuant to stock-based compensation plan			21				736				-				-				736
Cash dividends declared on common stock ($0.14 per share)			-				-				(15,434	)			-				(15,434	)
Net earnings			-				-				34,913				-				34,913
Other comprehensive income			-				-				-				(22,659	)			(22,659	)
Balance, March 31, 2018			110,259			$	574,225			$	513,484			$	(20,851	)		$	1,066,858

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		For the Three Months Ended March 31,
		2018				2017
Cash Flows from Operating Activities
Interest and dividends received		$	75,103			$	71,499
Service charges and other fees received			8,414				8,008
Interest paid			(2,172)				(2,047)
Net cash paid to vendors, employees and others			(41,509)				(20,026)
Income taxes			622				165
Payments to FDIC, loss share agreement			(39)				(450)
Net cash provided by operating activities			40,419				57,149
Cash Flows from Investing Activities
Net change in interest-earning balances from depository institutions			7,852				18,006
Proceeds from repayment of investment securities available-for-sale			95,018				102,426
Proceeds from maturity of investment securities available-for-sale			9,945				5,374
Purchases of investment securities available-for-sale			-				(134,572)
Proceeds from repayment and maturity of investment securities held-to-maturity			30,273				33,411
Purchases of investment securities held-to-maturity			-				(8,895)
Net decrease in loan and lease finance receivables			39,424				92,505
Proceeds from BOLI death benefit			882				-
Purchase of premises and equipment			(716)				(998)
Proceeds from sales of other real estate owned			8,067				-
Cash acquired from acquisition, net of cash paid			-				28,325
Net cash provided by investing activities			190,745				135,582
Cash Flows from Financing Activities
Net increase in other deposits			175,839				181,485
Net decrease in time deposits			(13,257)				(10,149)
Net decrease in other borrowings			-				(53,000)
Net decrease in customer repurchase agreements			(66,496)				(38,641)
Cash dividends on common stock			(15,425)				(12,991)
Repurchase of common stock			(792)				(817)
Proceeds from exercise of stock options			828				2,190
Net cash provided by financing activities			80,697				68,077
Net increase in cash and cash equivalents			311,861				260,808
Cash and cash equivalents, beginning of period			144,377				121,633
Cash and cash equivalents, end of period		$	456,238			$	382,441

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

 

		For the Three Months Ended March 31,
		2018				2017
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings		$	34,913			$	28,504
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of other real estate owned			(3,540)				-
Increase in BOLI			(1,098)				(849)
Net amortization of premiums and discounts on investment securities			3,839				4,614
Accretion of PCI discount			(1,012)				(253)
Recapture of provision for loan losses			(1,000)				(4,500)
Payments to FDIC, loss share agreement			(39)				(450)
Stock-based compensation			736				679
Depreciation and amortization, net			257				558
Change in other assets and liabilities			7,363				28,846
Total adjustments			5,506				28,645
Net cash provided by operating activities		$	40,419			$	57,149
Supplemental Disclosure of Non-cash Investing Activities
Issuance of common stock for acquisition		$	-			$	37,637

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

BUSINESS

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

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 51 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.

On February 26, 2018, we entered into a definitive agreement to merge Community Bank with and into Citizens Business Bank. As of December 31, 2017, Community Bank had approximately $3.75 billion in total assets, $2.74 billion in gross loans and $2.86 billion in total deposits. Under the terms of the merger, Community Bank shareholders will have the right to receive, in respect of each share of common stock of Community Bank, 9.4595 shares of CVB common stock and $56.00 per share in cash, subject to any adjustments set forth in the Merger Agreement. The merger transaction is valued at approximately $885.2 million based on CVB’s closing stock price of $23.60 on February 26, 2018. Consummation of the merger is subject to customary closing conditions, including, among others, shareholder and regulatory approvals. The merger is expected to close in the third quarter of 2018.

 

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

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

 

8

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3—Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC (“Form 10-K”).

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

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

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance in this ASU among other things, (i) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio at March 31, 2018 using an exit price notion. See Note 9 Fair Value Information.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, 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 adopted this ASU retrospectively effective January 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.

 

9

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

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

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

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

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognized an impairment 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.

 

10

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

 

4.	BUSINESS COMBINATIONS

Valley Commerce Bancorp Acquisition

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

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

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

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

For the three months ended March 31, 2018, the Company did not incur any merger related expenses associated with the VCBP acquisition and incurred $651,000 for the three months ended March 31, 2017.

 

11

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.

 

		March 31, 2018
		Amortized    Cost				Gross    Unrealized    Holding Gain				Gross    Unrealized    Holding Loss				Fair Value				Total      Percent
		(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities		$	1,655,742			$	2,158			$	(26,560)			$	1,631,340				84.02%
CMO/REMIC - residential			259,180				644				(4,178)				255,646				13.17%
Municipal bonds			54,416				445				(993)				53,868				2.77%
Other securities			738				-				-				738				0.04%
Total available-for-sale securities		$	1,970,076			$	3,247			$	(31,731)			$	1,941,592				100.00%
Investment securities held-to-maturity:
Government agency/GSE		$	154,194			$	473			$	(2,453)			$	152,214				19.32%
Residential mortgage-backed securities			170,573				-				(3,191)				167,382				21.36%
CMO			221,051				-				(11,522)				209,529				27.69%
Municipal bonds			252,466				760				(6,221)				247,005				31.63%
Total held-to-maturity securities		$	798,284			$	1,233			$	(23,387)			$	776,130				100.00%

 

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

 

12

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

 

		For the Three Months Ended
		March 31,
		2018				2017
		(Dollars in thousands)
Investment securities available-for-sale:
Taxable		$	11,445			$	11,926
Tax-advantaged			423				714
Total interest income from available-for-sale securities			11,868				12,640
Investment securities held-to-maturity:
Taxable			2,878				3,277
Tax-advantaged			1,887				2,230
Total interest income from held-to-maturity securities			4,765				5,507
Total interest income from investment securities		$	16,633			$	18,147

Approximately 89% of the total investment securities portfolio at March 31, 2018 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability 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”).

 

		March 31, 2018
		Less Than 12 Months								12 Months or Longer								Total
		Fair Value				Gross Unrealized Holding Losses				Fair Value				Gross Unrealized Holding Losses				Fair Value				Gross Unrealized Holding Losses
		(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities		$	1,131,944			$	(15,259)			$	286,313			$	(11,301)			$	1,418,257			$	(26,560)
CMO/REMIC - residential			132,728				(1,662)				67,578				(2,516)				200,306				(4,178)
Municipal bonds			9,363				(156)				13,357				(837)				22,720				(993)
Total available-for-sale securities		$	1,274,035			$	(17,077)			$	367,248			$	(14,654)			$	1,641,283			$	(31,731)
Investment securities held-to-maturity:
Government agency/GSE		$	53,538			$	(262)			$	42,693			$	(2,191)			$	96,231			$	(2,453)
Residential mortgage-backed securities			115,425				(1,649)				51,956				(1,542)				167,381				(3,191)
CMO			-				-				209,529				(11,522)				209,529				(11,522)
Municipal bonds			97,851				(1,714)				57,679				(4,507)				155,530				(6,221)
Total held-to-maturity securities		$	266,814			$	(3,625)			$	361,857			$	(19,762)			$	628,671			$	(23,387)

 

13

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

At March 31, 2018 and December 31, 2017, investment securities having a carrying value of approximately $1.90 billion and $1.91 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at March 31, 2018, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through 2057, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.

 

		March 31, 2018
		Available-for-sale								Held-to-maturity
		Amortized   Cost				Fair Value				Amortized   Cost				Fair Value
		(Dollars in thousands)
Due in one year or less		$	24,088			$	24,417			$	459			$	450
Due after one year through five years			1,718,590				1,694,629				148,566				144,099
Due after five years through ten years			192,161				188,031				283,808				276,367
Due after ten years			35,237				34,515				365,451				355,214
Total investment securities		$	1,970,076			$	1,941,592			$	798,284			$	776,130

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, 2018.

 

14

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, 2017. The acquisition has been accounted for under the purchase method of accounting. The assets and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition date. The acquired loans were accounted for as Purchase Credit Impaired (“PCI”) loans.

At March 31, 2018, the remaining discount associated with the PCI loans approximated $1.1 million. The loss sharing agreement for commercial loans expired October 16, 2014 and will expire for single-family residential loans on October 16, 2019.

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

 

		March 31, 2018				December 31, 2017
		(Dollars in thousands)
Commercial and industrial		$	908			$	934
SBA			1,356				1,383
Real estate:
Commercial real estate			24,275				27,431
Construction			-				-
SFR mortgage			158				162
Dairy & livestock and agribusiness			10				770
Municipal lease finance receivables			-				-
Consumer and other loans			228				228
Gross PCI loans			26,935				30,908
Less: Purchase accounting discount			(1,074)				(2,026)
Gross PCI loans, net of discount			25,861				28,882
Less: Allowance for PCI loan losses			(312)				(367)
Net PCI loans		$	25,549			$	28,515

Credit Quality Indicators

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

 

		March 31, 2018				December 31, 2017
		(Dollars in thousands)
Pass		$	22,892			$	26,439
Special mention			1,066				1,088
Substandard			2,977				3,381
Doubtful & loss			-				-
Total gross PCI loans		$	26,935			$	30,908

 

15

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

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

 

		March 31, 2018				December 31, 2017
		(Dollars in thousands)
Commercial and industrial		$	514,229			$	513,325
SBA			123,432				122,055
Real estate:
Commercial real estate			3,411,216				3,376,713
Construction			79,898				77,982
SFR mortgage			237,618				236,202
Dairy & livestock and agribusiness			276,379				347,289
Municipal lease finance receivables			67,892				70,243
Consumer and other loans			64,159				64,229
Gross loans, excluding PCI loans			4,774,823				4,808,038
Less: Deferred loan fees, net			(5,701	)			(6,289	)
Gross loans, excluding PCI loans, net of deferred loan fees			4,769,122				4,801,749
Less: Allowance for loan losses			(59,623	)			(59,218	)
Net loans, excluding PCI loans			4,709,499				4,742,531
PCI Loans			26,935				30,908
Discount on PCI loans			(1,074	)			(2,026	)
Less: Allowance for loan losses			(312	)			(367	)
PCI loans, net			25,549				28,515
Total loans and lease finance receivables		$	4,735,048			$	4,771,046

As of March 31, 2018, 78.09% of the Company’s total gross loan portfolio (excluding PCI loans) consisted of real estate loans, 71.44% 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, 2018, $203.4 million, or 5.96% of the total commercial real estate loans included loans secured by farmland, compared to $206.1 million, or 6.10%, at December 31, 2017. The loans secured by farmland included $117.1 million for loans secured by dairy & livestock land and $86.3 million for loans secured by agricultural land at March 31, 2018, compared to $118.2 million for loans secured by dairy & livestock land and $87.9 million for loans secured by agricultural land at December 31, 2017. As of March 31, 2018, dairy & livestock and agribusiness loans of $276.4 million were comprised of $245.3 million for dairy & livestock loans and $31.1 million for agribusiness loans, compared to $310.6 million for dairy & livestock loans and $36.7 million for agribusiness loans at December 31, 2017.

At March 31, 2018, the Company held approximately $2.18 billion of total fixed rate loans, including PCI loans.

At March 31, 2018 and December 31, 2017, loans totaling $3.62 billion and $3.68 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no outstanding loans held-for-sale as of March 31, 2018 and December 31, 2017.

 

16

Credit Quality Indicators

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

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

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

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

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

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

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

 

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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, 2018
		Pass				Special Mention				Substandard				Doubtful & Loss				Total
		(Dollars in thousands)
Commercial and industrial		$	486,079			$	17,312			$	10,838			$	-			$	514,229
SBA			114,632				5,294				3,506				-				123,432
Real estate:
Commercial real estate
Owner occupied			1,017,210				73,607				4,913				-				1,095,730
Non-owner occupied			2,291,202				18,337				5,947				-				2,315,486
Construction
Speculative			63,544				-				-				-				63,544
Non-speculative			16,354				-				-				-				16,354
SFR mortgage			230,517				3,100				4,001				-				237,618
Dairy & livestock and agribusiness			253,498				12,706				10,175				-				276,379
Municipal lease finance receivables			67,324				568				-				-				67,892
Consumer and other loans			62,225				1,113				821				-				64,159
Total gross loans, excluding PCI loans		$	4,602,585			$	132,037			$	40,201			$	-			$	4,774,823
		December 31, 2017
		Pass				Special Mention				Substandard				Doubtful & Loss				Total
		(Dollars in thousands)
Commercial and industrial		$	483,641			$	19,566			$	10,118			$	-			$	513,325
SBA			112,835				5,358				3,862				-				122,055
Real estate:
Commercial real estate
Owner occupied			1,009,199				76,111				10,970				-				1,096,280
Non-owner occupied			2,257,130				16,434				6,869				-				2,280,433
Construction
Speculative			60,042				-				-				-				60,042
Non-speculative			17,940				-				-				-				17,940
SFR mortgage			229,032				3,124				4,046				-				236,202
Dairy & livestock and agribusiness			321,413				9,047				16,829				-				347,289
Municipal lease finance receivables			69,644				599				-				-				70,243
Consumer and other loans			61,715				1,255				1,259				-				64,229
Total gross loans, excluding PCI loans		$	4,622,591			$	131,494			$	53,953			$	-			$	4,808,038

Allowance for Loan Losses (“ALLL”)

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

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers the Bank’s overall loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies of the 2017 Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion concerning the allowance for loan losses.

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

 

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