CVB FINANCIAL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (the “FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to -0- to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and medium-sized businesses through 100% SBA guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. The SBA exhausted the initial funding for this program on April 15, 2020, but legislation passed on April 24, 2020 to provide additional PPP funds of $310 billion. We obtained approvals for about 3,800 loans, totaling approximately $1.25 billion through May 3, 2020. In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest for 620 loans in the amount of $940 million, or approximately 13% of our total loan portfolio, at March 31, 2020. As significant uncertainties as to future economic conditions exist, we have taken deliberate actions in response, including the termination of our stock repurchases under our 10b5-1 repurchase plan. Additionally, the expected economic deterioration, coupled with the implementation of the expected loss methodology for determining our provision for credit losses, better known as CECL, have contributed to an increased provision for credit losses of $12 million for the first quarter of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act. The extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain, but we may experience increased provision for credit losses if the COVID-19 pandemic results in additional economic stress on our borrowers and loan portfolios. 36 Table of Contents CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations. • Allowance for Credit Losses (“ACL”) • Business Combinations • Valuation and Recoverability of Goodwill • Income Taxes Our significant accounting policies are described in greater detail in our 2019 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, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Adoption of Allowance for Credit Losses We adopted ASU 2016-13, commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU 2016-13, resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3— Summary of Significant Accounting Policies of the notes to the unaudited condensed consolidated financial statements. Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2020 Standard Description Adoption Timing Impact on Financial Statements ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. 1st Quarter 2020 through the 4th Quarter 2022 Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company's consolidated financial statements. Issued March 2020 ASU 2020-01 "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) The FASB issued ASU 2020-01 "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement. 1st Quarter 2021 The adoption of this ASU will not have an impact on our consolidated financial statements. Issued January 2020 37 Table of Contents OVERVIEW For the first quarter of 2020, we reported net earnings of $38.0 million, compared with $51.3 million for the fourth quarter of 2019 and $51.6 million for the first quarter of 2019. Diluted earnings per share were $0.27 for the first quarter, compared to $0.37 for the prior quarter and $0.37 for the same period last year. The implementation of CECL resulted in a beginning balance transition adjustment to our allowance for credit losses (“ACL”) of $1.8 million with a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax. A $12.0 million credit loss provision was recorded for the first quarter of 2020, due primarily to the forecasted economic disruption resulting from COVID-19. During the quarter, we experienced minimal credit charge-offs of $86,000 and total recoveries of $227,000, resulting in net recoveries of $141,000. At March 31, 2020, total assets of $11.61 billion increased $324.4 million, or 2.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $10.40 billion at March 31, 2020 increased $369.7 million, or 3.69%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $539.9 million increase in interest-earning balances due from the Federal Reserve, partially offset by a $98.4 million decrease in total loans and a $92.7 million decrease in investment securities. Total investment securities were $2.32 billion at March 31, 2020, a decrease of $92.7 million, or 3.84%, from $2.41 billion at December 31, 2019. At March 31, 2020, investment securities held-to-maturity (“HTM”) totaled $642.3 million. At March 31, 2020, investment securities available-for-sale (“AFS”) totaled $1.68 billion, inclusive of a pre-tax unrealized gain of $58.5 million, an increase of $36.6 million from December 31, 2019. HTM securities declined by $32.2 million, or 4.77%, and AFS securities declined by $60.5 million, or 3.48%, from December 31, 2019. Our tax equivalent yield on investments was 2.45% for the quarter ended March 31, 2020, compared to 2.43% for the fourth quarter of 2019 and 2.57% for the first quarter of 2019. Total loans and leases, net of deferred fees and discounts, of $7.47 billion at March 31, 2020 decreased by $98.4 million, or 1.30%, from December 31, 2019. The decrease in total loans included a $111.6 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The $13.2 million increase in loans included increases of $25.6 million in commercial and industrial loans, $11.1 million in construction loans, and $8.1 million in SBA loans, partially offset by a $26.7 million decrease in commercial real estate loans and collectively a $4.9 million decline in other loan segments. Our yield on loans was 4.95% for the quarter ended March 31, 2020, compared to 5.15% for the fourth quarter of 2019 and 5.27% for the first quarter of 2019. Interest income for yield adjustments related to discount accretion on acquired loans was $4.8 million for the quarter ended March 31, 2020, compared to $6.5 million for the fourth quarter of 2019 and $7.2 million for the first quarter of 2019. Noninterest-bearing deposits were $5.57 billion at March 31, 2020, an increase of $327.1 million, or 6.24%, when compared to December 31, 2019. At March 31, 2020, noninterest-bearing deposits were 61.15% of total deposits, compared to 60.26% at December 31, 2019. Given what is typically a seasonally low quarter for us, deposit growth for the first quarter of 2020 was strong, although some of this growth was inflated by approximately $100 million of short-term noninterest-bearing deposits at the end of the first quarter. Our average cost of total deposits was 0.19% for the quarter ended March 31, 2020, compared to 0.21% for the fourth quarter of 2019 and 0.18% for the first quarter of 2019. Customer repurchase agreements totaled $368.9 million at March 31, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.20% for the quarter ended March 31, 2020, 0.21% for the fourth quarter of 2019, and 0.20% for the first quarter of 2019. At March 31, 2020 and December 31, 2019, we had no short-term borrowings, compared to $153.0 million at March 31, 2019. At March 31, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.21% for the quarter ended March 31, 2020, 0.22% for the fourth quarter of 2019, and 0.25% for the first quarter of 2019. The allowance for credit losses totaled $82.6 million at March 31, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $12.0 million in provision for credit losses in the first quarter of 2020 due to the severe economic disruption forecasted to result from the coronavirus pandemic. The allowance for credit losses was 1.11% and 0.91% of total loans and leases outstanding, at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, total discounts on acquired loans were $43.4 million. 38 Table of Contents The Company’s total equity was $1.94 billion at March 31, 2020. This represented a decrease of $52.7 million, or 2.64%, from total equity of $1.99 billion at December 31, 2019. This decrease was primarily due to repurchase of common stock of $91.7 million under our 10b5-1 stock repurchase program, that was offset by a $25.8 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio. Equity also increased by $13.6 million in retained earnings for the quarter after $24.4 million in cash dividends were declared by the Company for the first quarter of 2020. Our tangible common equity ratio was 11.3% at March 31, 2020. Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of March 31, 2020, the Company’s Tier 1 leverage capital ratio totaled 11.60%, our common equity Tier 1 ratio totaled 14.13%, our Tier 1 risk-based capital ratio totaled 14.42%, and our total risk-based capital ratio totaled 15.49%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our Analysis of Financial Condition – Capital Resources . 39 Table of Contents ANALYSIS OF THE RESULTS OF OPERATIONS Financial Performance For the Three Months Ended March 31, Variance 2020 2019 $ % (Dollars in thousands, except per share amounts) Net interest income $ 102,306 $ 109,536 $ (7,230) -6.60% Provision for credit losses (12,000 ) (1,500 ) (10,500) -700.00% Noninterest income 11,640 16,303 (4,663) -28.60% Noninterest expense (48,641 ) (51,604 ) 2,963 5.74% Income taxes (15,325 ) (21,093 ) 5,768 27.35% Net earnings $ 37,980 $ 51,642 $ (13,662) -26.46% Earnings per common share: Basic $ 0.27 $ 0.37 $ (0.10) Diluted $ 0.27 $ 0.37 $ (0.10) Return on average assets 1.34% 1.84% -0.50% Return on average shareholders’ equity 7.61% 11.14% -3.53% Efficiency ratio 42.69% 41.01% 1.68% Noninterest expense to average assets 1.72% 1.83% -0.11% For the Three Months Ended Variance March 31, 2020 December 31, 2019 $ % (Dollars in thousands, except per share amounts) Net interest income $ 102,306 $ 107,020 $ (4,714) -4.40% Provision for credit losses (12,000 ) - (12,000) - Noninterest income 11,640 12,640 (1,000) -7.91% Noninterest expense (48,641 ) (49,073 ) 432 0.88% Income taxes (15,325 ) (19,306 ) 3,981 20.62% Net earnings $ 37,980 $ 51,281 $ (13,301) -25.94% Earnings per common share: Basic $ 0.27 $ 0.37 $ (0.10) Diluted $ 0.27 $ 0.37 $ (0.10) Return on average assets 1.34% 1.79% -0.45% Return on average shareholders’ equity 7.61% 10.21% -2.60% Efficiency ratio 42.69% 41.01% 1.68% Noninterest expense to average assets 1.72% 1.71% 0.01% 40 Table of Contents Return on Average Tangible Common Equity Reconciliation (Non-GAAP) The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity. Three Months Ended March 31, 2020 December 31, 2019 March 31, 2019 (Dollars in thousands) Net Income $ 37,980 $ 51,281 $ 51,642 Add: Amortization of intangible assets 2,445 2,460 2,857 Less: Tax effect of amortization of intangible assets (1) (723) (727) (845) Tangible net income $ 39,702 $ 53,014 $ 53,654 Average stockholders’ equity $ 2,006,464 $ 1,993,315 $ 1,879,685 Less: Average goodwill (663,707) (663,707) (666,539) Less: Average intangible assets (41,732) (44,185) (52,777) Average tangible common equity $ 1,301,025 $ 1,285,423 $ 1,160,369 Return on average equity, annualized 7.61 % 10.21 % 11.14 % Return on average tangible common equity, annualized 12.27 % 16.36 % 18.75 % (1) Tax effected at respective statutory rates. Net Interest Income The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three months ended March 31, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein. 41 Table of Contents The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. For the Three Months Ended March 31, 2020 2019 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable $ 1,659,394 $ 9,825 2.37% $ 1,654,324 $ 10,309 2.49% Tax-advantaged 38,086 224 3.36% 44,380 336 4.07% Held-to-maturity securities: Taxable 469,394 2,698 2.30% 509,608 2,910 2.30% Tax-advantaged 189,522 1,300 3.32% 227,908 1,615 3.43% Investment in FHLB stock 17,688 332 7.55% 17,688 332 7.61% Interest-earning deposits with other institutions 261,041 613 0.94% 18,695 94 2.04% Loans (2) 7,482,805 92,117 4.95% 7,662,573 99,687 5.27% Total interest-earning assets 10,117,930 107,109 4.27% 10,135,176 115,283 4.62% Total noninterest-earning assets 1,257,870 1,273,078 Total assets $ 11,375,800 $ 11,408,254 INTEREST-BEARING LIABILITIES Savings deposits (3) $ 3,056,743 3,111 0.41% $ 3,127,839 2,685 0.35% Time deposits 445,431 1,013 0.91% 524,822 1,186 0.92% Total interest-bearing deposits 3,502,174 4,124 0.47% 3,652,661 3,871 0.43% FHLB advances, other borrowings, and customer repurchase agreements 504,585 679 0.54% 691,965 1,876 1.09% Interest-bearing liabilities 4,006,759 4,803 0.48% 4,344,626 5,747 0.54% Noninterest-bearing deposits 5,247,025 5,085,764 Other liabilities 115,552 98,179 Stockholders’ equity 2,006,464 1,879,685 Total liabilities and stockholders’ equity $ 11,375,800 $ 11,408,254 Net interest income $ 102,306 $ 109,536 Net interest spread - tax equivalent 3.79% 4.08% Net interest margin 4.06% 4.37% Net interest margin - tax equivalent 4.08% 4.39% (1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended March 31, 2020 and 2019. The non TE rates were 2.38% and 2.49% for the three months ended March 31, 2020 and 2019, respectively. (2) Includes loan fees of $548,000 and $827,000 for the three months ended March 31, 2020 and 2019, respectively. Prepayment penalty fees of $1.5 million and $1.0 million are included in interest income for the three months ended March 31, 2020 and 2019, respectively. (3) Includes interest-bearing demand and money market accounts. 42 Table of Contents The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume. Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income Comparision of Three Months Ended March 31, 2020 Compared to 2019 Increase (Decrease) Due to Volume Rate Rate/ Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities $ 31 $ (514 ) $ (1 ) $ (484 ) Tax-advantaged investment securities (40 ) (63 ) (9 ) (112 ) Held-to-maturity securities: Taxable investment securities (214 ) 2 - (212 ) Tax-advantaged investment securities (258 ) (49 ) (8 ) (315 ) Investment in FHLB stock - - - - Interest-earning deposits with other institutions 1,231 (51 ) (661 ) 519 Loans (2,060 ) (5,384 ) (126 ) (7,570 ) Total interest income (1,310 ) (6,059 ) (805 ) (8,174 ) Interest expense: Savings deposits (65 ) 503 (12 ) 426 Time deposits (171 ) (2 ) - (173 ) FHLB advances, other borrowings, and customer repurchase agreements (354 ) (663 ) (180 ) (1,197 ) Total interest expense (590 ) (162 ) (192 ) (944 ) Net interest income $ (720 ) $ (5,897 ) $ (613 ) $ (7,230 ) First Quarter of 2020 Compared to the First Quarter of 2019 Net interest income, before provision for credit losses, of $102.3 million for the first quarter of 2020 decreased $7.2 million, or 6.60%, compared to $109.5 million for the first quarter of 2019. Interest-earning assets decreased on average by $17.2 million, or 0.17%, from $10.14 billion for the first quarter of 2019 to $10.12 billion for the first quarter of 2020. Our net interest margin (TE) was 4.08% for the first quarter of 2020, compared to 4.39% for the first quarter of 2019. Interest income for the first quarter of 2020 was $107.1 million, which represented an $8.2 million, or 7.09%, decrease when compared to the same period of 2019. Average interest-earning assets decreased by $17.2 million and the average interest-earning asset yield of 4.27%, compared to 4.62% for the first quarter of 2019. The 35 basis point decrease in the interest-earning asset yield over the first quarter of 2019 was primarily due to a 32 basis point decrease in loan yields. Interest income and fees on loans for the first quarter of 2020 of $92.1 million decreased $7.6 million, or 7.59%, when compared to the first quarter of 2019. Average loans decreased $179.8 million for the first quarter of 2020 when compared with the same period of 2019. Discount accretion on acquired loans was $4.8 million for the first quarter of 2020, compared to $7.2 million for the first quarter of 2019. The significant decline in interest rates over the past three quarters had a negative impact on loans yields, which after excluding discount accretion, declined by 18 basis points compared to the prior year. The Federal Reserve lowered short-term interest rates by 150 basis points in the first quarter of 2020, after having lowered them by 75 basis points in the second half of 2019. Interest income from investment securities was $14.0 million for the first quarter of 2020, a $1.1 million, or 7.40%, decrease from $15.2 million for the first quarter of 2019. This decrease was primarily the result of a $79.8 million decline in average investment securities for the first quarter of 2020, compared to the same period of 2019. The non tax-equivalent yield on investments decreased by 11 basis points compared to the first quarter of 2019. 43 Table of Contents Interest expense of $4.8 million for the first quarter of 2020, decreased $944,000, or 16.43%, compared to the first quarter of 2019. Total cost of funds declined to 0.21% for the first quarter of 2020 from 0.25% for the first quarter of 2019. On average, noninterest-bearing deposits were 59.97% of our total deposits for the first quarter of 2020, compared to 58.20% for the first quarter of 2019. In comparison to the first quarter of 2019, our overall cost of funds decreased by four basis points, as noninterest-bearing deposits grew by $161.3 million and overnight borrowings decreased by $159.0 million. Interest-bearing deposits declined by $150.5 million compared to the first quarter of 2019, while the cost of interest-bearing deposits increased by four basis points. Provision for Credit Losses The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU 2016-13, commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan. The allowance for credit losses on loans totaled $82.6 million at March 31, 2020, compared to $68.7 million at December 31, 2019 and $65.2 million as of March 31, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $12.0 million in provision for credit losses in the first quarter of 2020 due to the severe economic disruption forecasted as a result of the coronavirus pandemic. During the first quarter of 2020, we experienced minimal credit charge-offs of $86,000 and total recoveries of $227,000, resulting in net recoveries of $141,000. This compares to a $1.5 million loan loss provision and net recoveries of $88,000 for the same period of 2019. We believe the allowance is appropriate at March 31, 2020. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of March 31, 2020, December 31, 2019 and March 31, 2019 was 1.11%, 0.91% and 0.86%, respectively. As of March 31, 2020, remaining discounts on acquired loans were $43.4 million. Refer to the discussion of “Allowance for Credit Losses” in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the COVID-19 epidemic. See “Allowance for Credit Losses” under Analysis of Financial Condition herein. 44 Table of Contents Noninterest Income Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets. The following table sets forth the various components of noninterest income for the periods presented. For the Three Months Ended March 31, Variance 2020 2019 $ % (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 4,776 $ 5,141 $ (365 ) -7.10 % Trust and investment services 2,420 2,182 238 10.91 % Bankcard services 577 950 (373 ) -39.26 % BOLI income 2,059 1,336 723 54.12 % Gain on OREO, net 10 105 (95 ) -90.48 % Gain on sale of building, net - 4,545 (4,545 ) -100.00 % Other 1,798 2,044 (246 ) -12.04 % Total noninterest income $ 11,640 $ 16,303 $ (4,663 ) -28.60 % First Quarter of 2020 Compared to the First Quarter of 2019 The $4.7 million decrease in noninterest income was primarily due to a $4.5 million net gain on the sale of one of our bank owned buildings in the first quarter of 2019. Service charges on deposit accounts decreased by $365,000 from the first quarter of 2019. The Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $300,000 when compared to the first quarter of 2019. 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, 2020, CitizensTrust had approximately $2.70 billion in assets under management and administration, including $1.95 billion in assets under management. CitizensTrust generated fees of $2.4 million for the first quarter of 2020, an increase of $238,000 compared to the first quarter of 2019, due to the growth in assets under management. The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $715,000 were included in our BOLI policies for the first quarter of 2020. 45 Table of Contents Noninterest Expense The following table summarizes the various components of noninterest expense for the periods presented. For the Three Months Ended March 31, Variance 2020 2019 $ % (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 30,877 $ 29,302 $ 1,575 5.38% Occupancy 3,803 4,407 (604 ) -13.71% Equipment 1,034 1,017 17 1.67% Professional services 2,256 1,925 331 17.19% Computer software expense 2,816 2,613 203 7.77% Marketing and promotion 1,555 1,394 161 11.55% Amortization of intangible assets 2,445 2,857 (412 ) -14.42% Telecommunications expense 636 758 (122 ) -16.09% Regulatory assessments 148 924 (776 ) -83.98% Insurance 406 469 (63 ) -13.43% Loan expense 257 316 (59 ) -18.67% Directors’ expenses 315 287 28 9.76% Stationery and supplies 285 292 (7 ) -2.40% Acquisition related expenses - 3,149 (3,149 ) -100.00% Other 1,808 1,894 (86 ) -4.54% Total noninterest expense $ 48,641 $ 51,604 $ (2,963 ) -5.74% Noninterest expense to average assets 1.72% 1.83% Efficiency ratio (1) 42.69% 41.01% (1) Noninterest expense divided by net interest income before provision for credit losses plus noninterest income. First Quarter of 2020 Compared to the First Quarter of 2019 Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.72% for the first quarter of 2020, compared to 1.83% for the first quarter of 2019. Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 42.69% for the first quarter of 2020, compared to 41.01% for the first quarter of 2019. Noninterest expense of $48.6 million for the first quarter of 2020 was $3.0 million, or 5.74%, lower than the first quarter of 2020. There were no merger related expenses related to the Community Bank acquisition for the first quarter of 2020, compared to $3.1 million for the first quarter of 2019. The year-over-year decrease also included a $776,000 decrease in regulatory assessments, a $587,000 decrease in occupancy and equipment expense primarily due to the consolidation of banking centers, and a $412,000 decrease in Core Deposit Intangible (“CDI”) amortization. These decreases were partially offset by a $1.6 million increase in salaries and employee benefit costs. Income Taxes The Company’s effective tax rate for the three months ended March 31, 2020 was 28.75%, compared to 29.00% for the same periods of 2019. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income as well as available tax credits. The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 46 Table of Contents ANALYSIS OF FINANCIAL CONDITION Total assets of $11.61 billion at March 31, 2020 increased $324.4 million, or 2.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $10.40 billion at March 31, 2020, an increase of $369.7 million, or 3.69%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $539.9 million increase in interest-earning balances due from the Federal Reserve. Partially offsetting these increases was a $98.4 million decrease in total loans and a $92.7 million decrease in investment securities. The decrease in total loans included a $111.6 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The Company is well positioned to use the excess liquidity built-up during the quarter to fund customer loan requests under the SBA’s Paycheck Protection Program. The SBA exhausted the funding for these loans on April 15, 2020, but through that date we processed 911 loans, totaling $558 million. Total liabilities were $9.67 billion at March 31, 2020, an increase of $377.2 million, or 4.06%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $408.7 million, or 4.69%. Total equity decreased $52.7 million, or 2.67%, to $1.94 billion at March 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $52.7 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. We previously announced that we suspended this 10b5-1 stock repurchase program due to the uncertainty of the COVID-19 pandemic. We had $38.0 million in net earnings during the quarter, offset by $24.4 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $25.8 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our available-for-sale investment securities. 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, 2020, we reported total investment securities of $2.32 billion. This represented a decrease of $92.7 million, or 3.84%, from total investment securities of $2.41 billion at December 31, 2019. The decrease in investment securities was due to cash outflow from the portfolio exceeding new securities purchased in the first quarter of 2020, partially offset by an increase in the fair value of AFS investment securities as a result of declining interest rates. At March 31, 2020, investment securities HTM totaled $642.3 million. At March 31, 2020, our AFS investment securities totaled $1.68 billion, inclusive of a pre-tax net unrealized gain of $58.5 million. The after-tax unrealized gain reported in AOCI on AFS investment securities was $41.2 million. As of March 31, 2020, the Company had a pre-tax net unrealized holding gain on AFS investment securities of $58.5 million, compared to a pre-tax net unrealized holding gain of $21.9 million at December 31, 2019. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the three months ended March 31, 2020 and 2019, repayments/maturities of investment securities totaled $128.2 million and $107.5 million, respectively. The Company purchased additional investment securities totaling $1.5 million and $19.8 million for the first three months ended March 31, 2020 and 2019, respectively. No investment securities were sold during the first three months of 2020 and 2019. 47 Table of Contents The tables below set forth investment securities AFS and HTM as of the dates presented. March 31, 2020 Amortized Cost Gross Unrealized Holding Gain Gross Unrealized Holding Loss Fair Value Total Percent (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 1,118,385 $ 43,546 $ - $ 1,161,931 69.18% CMO/REMIC 466,033 14,060 - 480,093 28.58% Municipal bonds 36,119 913 - 37,032 2.20% Other securities 699 - - 699 0.04% Total available-for-sale securities $ 1,621,236 $ 58,519 $ - $ 1,679,755 100.00% Investment securities held-to-maturity: Government agency/GSE $ 111,452 $ 3,468 $ (207) $ 114,713 17.35% Mortgage-backed securities 161,983 8,182 - 170,165 25.22% CMO/REMIC 184,316 591 (98) 184,809 28.70% Municipal bonds 184,504 4,054 (426) 188,132 28.73% Total held-to-maturity securities $ 642,255 $ 16,295 $ (731) $ 657,819 100.00% December 31, 2019 Amortized Cost Gross Unrealized Holding Gain Gross Unrealized Holding Loss Fair Value Total Percent (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 1,185,757 $ 21,306 $ (750) $ 1,206,313 69.32% CMO/REMIC 493,214 1,392 (896) 493,710 28.37% Municipal bonds 38,506 850 (2) 39,354 2.26% Other securities 880 - - 880 0.05% Total available-for-sale securities $ 1,718,357 $ 23,548 $ (1,648) $ 1,740,257 100.00% Investment securities held-to-maturity: Government agency/GSE $ 117,366 $ 2,280 $ (657) $ 118,989 17.40% Mortgage-backed securities 168,479 2,083 (54) 170,508 24.98% CMO/REMIC 192,548 - (2,458) 190,090 28.55% Municipal bonds 196,059 3,867 (565) 199,361 29.07% Total held-to-maturity securities $ 674,452 $ 8,230 $ (3,734) $ 678,948 100.00% The weighted-average yield (TE) on the total investment portfolio at March 31, 2020 was 2.53% with a weighted-average life of 2.9 years. This compares to a weighted-average yield of 2.54% at December 31, 2019 with a weighted-average life of 3.6 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 90% of the securities in the total investment portfolio, at March 31, 2020, 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, 2020, approximately $71.8 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 10% of the total investment portfolio, are predominately AA or higher rated securities. The allowance for credit losses for held-to-maturity investment securities under the new CECL model was zero at March 31, 2020. 48 Table of Contents We adopted ASU 2016-13 on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. During the first quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position. As of March 31, 2020, there were no AFS investment securities with an unrealized loss position. 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 December 31, 2019, prior to adoption of ASU 2016-13. Management previously 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 interest 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. December 31, 2019 Less Than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 20,289 $ (6) $ 97,964 $ (744) $ 118,253 $ (750) CMO/REMIC 177,517 (705) 34,565 (191) 212,082 (896) Municipal bonds - - 563 (2) 563 (2) Total available-for-sale securities $ 197,806 $ (711) $ 133,092 $ (937) $ 330,898 $ (1,648) Investment securities held-to-maturity: Government agency/GSE $ 28,359 $ (252) $ 19,405 $ (405) $ 47,764 $ (657) Mortgage-backed securities 10,411 (54) - - 10,411 (54) CMO/REMIC 23,897 (104) 166,193 (2,354) 190,090 (2,458) Municipal bonds 7,583 (32) 29,981 (533) 37,564 (565) Total held-to-maturity securities $ 70,250 $ (442) $ 215,579 $ (3,292) $ 285,829 $ (3,734) 49 Table of Contents Loans Total loans and leases, net of deferred fees and discounts, of $7.47 billion at March 31, 2020 decreased by $98.4 million, or 1.30%, from $7.56 billion at December 31, 2019. The decrease in total loans included a $111.6 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans grew by $13.2 million, or 0.18%. The $13.2 million increase in loans included increases of $25.6 million in commercial and industrial loans, $11.1 million in construction loans, and $8.1 million in SBA loans, partially offset by a $26.7 million decrease in commercial real estate loans and collectively a $4.9 million decline in other loan segments. The following table presents our loan portfolio by type as of the dates presented. Distribution of Loan Portfolio by Type March 31, 2020 December 31, 2019 (Dollars in thousands) Commercial and industrial $ 960,761 $ 935,127 SBA 313,071 305,008 Real estate: Commercial real estate 5,347,925 5,374,617 Construction 128,045 116,925 SFR mortgage 278,743 283,468 Dairy & livestock and agribusiness 272,114 383,709 Municipal lease finance receivables 51,287 53,146 Consumer and other loans 114,206 116,319 Gross loans 7,466,152 7,568,319 Less: Deferred loan fees, net (1) - (3,742 ) Gross loans, net of deferred loan fees 7,466,152 7,564,577 Less: Allowance for credit losses (82,641 ) (68,660 ) Total loans and lease finance receivables $ 7,383,511 $ 7,495,917 (1) Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables. As of March 31, 2020, $248.2 million, or 4.64% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019. The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of March 31, 2020, dairy & livestock and agribusiness loans of $272.1 million were comprised of $218.0 million for dairy & livestock loans and $54.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019. Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers. As of March 31, 2020, the Company had $189.5 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% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of March 31, 2020, the Company had $123.6 million of total SBA 7(a) loans that include a guarantee of payment form the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate. 50 Table of Contents We have been an active participant in the SBA’s Paycheck Protection Program. Including the second round of funding after Legislation passed on April 24, 2020, we obtained approvals for about 3,800 loans, totaling approximately $1.25 billion as of May 3, 2020. As of March 31, 2020, the Company had $128.0 million in construction loans. This represents 1.72% of total gross loans held-for-investment. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at March 31, 2020. Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, by region as of March 31, 2020. March 31, 2020 Total Loans Commercial Real Estate Loans (Dollars in thousands) Los Angeles County $ 3,297,399 44.2% $ 2,214,541 41.4% Central Valley 1,120,563 15.0% 899,197 16.8% Orange County 968,575 13.0% 654,593 12.2% Inland Empire 987,534 13.2% 845,578 15.8% Central Coast 457,225 6.1% 361,910 6.8% San Diego 210,065 2.8% 128,828 2.4% Other California 139,860 1.9% 78,833 1.5% Out of State 284,931 3.8% 164,445 3.1% $ 7,466,152 100.0% $ 5,347,925 100.0% The table below breaks down our commercial real estate portfolio. March 31, 2020 Loan Balance Percent Percent Owner- Occupied (1) Average Loan Balance (Dollars in thousands) Commercial real estate: Industrial $ 1,848,941 34.6% 54.0% $ 1,377 Office 940,513 17.6% 25.3% 1,512 Retail 783,047 14.6% 11.8% 1,635 Multi-family 586,221 11.0% 0.5% 1,642 Medical 279,466 5.2% 45.7% 1,791 Secured by farmland (2) 248,172 4.6% 100.0% 2,034 Other (3) 661,565 12.4% 54.8% 1,402 Total commercial real estate $ 5,347,925 100.0% 38.7% $ 1,506 (1) Represents percentage of reported owner-occupied at origination in each real estate loan category. (2) The loans secured by farmland included $122.5 million for loans secured by dairy & livestock land and $125.7 million for loans secured by agricultural land at March 31, 2020. (3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans. At March 31, 2020, loans to customers in the hotel, restaurant, entertainment, or recreation industries represented approximately 3% of our loan portfolio and loans to customers in educational services were only 1% of the overall portfolio. Other retail related loans, primarily loans collateralized by commercial real estate, comprised approximately 12% of the loan portfolio at March 31, 2020. At origination, these loans were underwritten with loan-to-values averaging approximately 53%. 51 Table of Contents Nonperforming Assets The following table provides information on nonperforming assets as of the dates presented. March 31, 2020 December 31, 2019 (Dollars in thousands) Nonaccrual loans $ 6,428 $ 5,033 Troubled debt restructured loans (nonperforming) - 244 OREO, net 4,889 4,889 Total nonperforming assets $ 11,317 $ 10,166 Troubled debt restructured performing loans $ 2,813 $ 3,112 Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO 0.15% 0.13% Percentage of nonperforming assets to total assets 0.10% 0.09% At March 31, 2020, nonaccrual loans and performing TDR loans totaled $9.2 million, or 0.12% of total gross loans, compared to $8.4 million, or 0.11% of total loans at December 31, 2019. At March 31, 2020, total nonaccrual loans and performing TDR loans resulting from troubled debt restructures represented $2.8 million, all of which were performing. Of the $9.2 million total nonaccrual loans and performing TDR loans as of March 31, 2020, $8.5 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year). 52 Table of Contents Troubled Debt Restructurings (“TDRs”) Total TDRs were $2.8 million at March 31, 2020, compared to $3.4 million at December 31, 2019. At March 31, 2020, we had zero in nonperforming TDRs and $2.8 million of performing TDRs were accruing interest as restructured loans. Performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans and enter into loan modifications offered as a result of COVID-19, their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of COVID-19, we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of COVID-19, the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. Through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest for 90 days on 620 loans in the amount of $940 million, or approximately 13% of our total loan portfolio, at March 31, 2020. The following table provides a summary of TDRs as of the dates presented. March 31, 2020 December 31, 2019 Balance Number of Loans Balance Number of Loans (Dollars in thousands) Performing TDRs: Commercial and industrial $ 68 2 $ 78 2 SBA 524 1 536 1 Real Estate: Commercial real estate 377 1 397 1 Construction - - - - SFR mortgage 1,844 7 2,101 8 Dairy & livestock and agribusiness - - - - Consumer and other - - - - Total performing TDRs $ 2,813 11 $ 3,112 12 Nonperforming TDRs: Commercial and industrial $ - - $ - - SBA - - - - Real Estate: Commercial real estate - - - - Construction - - - - SFR mortgage - - - - Dairy & livestock and agribusiness - - - - Consumer and other - - 244 1 Total nonperforming TDRs $ - - $ 244 1 Total TDRs $ 2,813 11 $ 3,356 13 At March 31, 2020, there was no allowance for credit losses allocated to TDRs. At December 31, 2019, there was no allowance for credit losses specifically allocated to TDRs. 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, 2020 and 2019. 53 Table of Contents Nonperforming Assets and Delinquencies The table below provides trends in our nonperforming assets and delinquencies as of the dates presented. March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (Dollars in thousands) Nonperforming loans: Commercial and industrial $ 1,703 $ 1,266 $ 1,550 $ 1,993 $ 8,388 SBA 2,748 2,032 2,706 5,082 4,098 Real estate: Commercial real estate 947 724 1,083 1,095 1,134 Construction - - - - - SFR mortgage 864 878 888 2,720 2,894 Dairy & livestock and agribusiness - - - - - Consumer and other loans 166 377 385 397 477 Total $ 6,428 $ 5,277 $ 6,612 $ 11,287 $ 16,991 % of Total gross loans 0.09% 0.07% 0.09% 0.15% 0.22% Past due 30-89 days: Commercial and industrial $ 665 $ 2 $ 756 $ 310 $ 369 SBA 3,086 1,402 303 - 601 Real estate: Commercial real estate 210 - 368 - 124 Construction - - - - - SFR mortgage 233 249 - - - Dairy & livestock and agribusiness 166 - - - - Consumer and other loans - - - 22 101 Total $ 4,360 $ 1,653 $ 1,427 $ 332 $ 1,195 % of Total gross loans 0.06% 0.02% 0.02% 0.004% 0.02% OREO: SBA $ 797 $ 797 $ 444 $ - $ - Real estate: Commercial real estate 2,275 2,275 2,275 2,275 2,275 SFR mortgage 1,817 1,817 6,731 - - Total $ 4,889 $ 4,889 $ 9,450 $ 2,275 $ 2,275 Total nonperforming, past due, and OREO $ 15,677 $ 11,819 $ 17,489 $ 13,894 $ 20,461 % of Total gross loans 0.21% 0.16% 0.23% 0.18% 0.27% Nonperforming loans, defined as nonaccrual loans plus nonperforming TDR loans, were $6.4 million at March 31, 2020, or 0.09% of total loans. Total nonperforming loans at March 31, 2020 included $4.7 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of $5.3 million, or 0.07% of total loans, at December 31, 2019 and $17.0 million, or 0.22% of total loans, at March 31, 2019. The $1.2 million quarter-over-quarter increase in nonperforming loans was primarily due to $716,000 in nonperforming SBA loans, $437,000 in nonperforming commercial and industrial loans, and $223,000 in nonperforming commercial real estate loans. This was partially offset by a $211,000 decrease in nonperforming consumer and other loans. In response to the COVID-19 pandemic, we have implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. At March 31, 2020 and December 31, 2019, we had four OREO properties with a carrying value of $4.9 million, compared to one OREO property with a carrying value of $2.3 million at March 31, 2019. There were no additions to or sales of OREO properties during the first quarter of 2020. 54 Table of Contents Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific 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, 2019. Allowance for Credit Losses We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3— Summary of Significant Accounting Policies of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled $82.6 million as of March 31, 2020, compared to $68.7 million as of December 31, 2019 and $65.2 million as of March 31, 2019. Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by a $12.0 million credit loss provision in the first quarter of 2020 due to the severe forecasted economic disruption forecasted as a result of the coronavirus pandemic. Net recoveries were $141,000 for the three months ended March 31, 2020. This compares to a $1.5 million loan loss provision and $88,000 in net recoveries for the same period of 2019. Our modeling processes incorporate a lifetime historical loss rate methodology by different asset classes. These models use key loan attributes by asset class and macroeconomic variables. Macroeconomic variables include GDP, and unemployment rate, among others. Our economic forecast incorporates a weighting of multiple forecasts. The forecast includes a reasonable and supportable forecast period of two to three years for the macroeconomic variables, which revert to an historical mean based on an input reversion approach. We consider publicly published economic forecasts from multiple sources, including the Moody’s forecast from March 27, 2020 that reflected the most recent available information and forecast of evolving impacts on macroeconomic variables from the COVID-19 pandemic. This stressed economic forecast included a significant contraction in GDP approaching 20% in the second quarter of 2020 and the unemployment rate rising to more than 9% in the second quarter and sustaining at an elevated level through 2020 and into 2021. If the economic forecast deteriorates further due to the COVID-19 epidemic, we may experience increases in the allowance for credit losses in future periods. 55 Table of Contents The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented. As of and For the Three Months Ended March 31, 2020 2019 (Dollars in thousands) Allowance for credit losses at beginning of period $ 68,660 $ 63,613 Impact of adopting ASU 2016-13 1,840 - Charge-offs: Commercial and industrial - - SBA - (20 ) Commercial real estate - - Construction - - SFR mortgage - - Dairy & livestock and agribusiness - (78 ) Consumer and other loans (86 ) (1 ) Total charge-offs (86 ) (99 ) Recoveries: Commercial and industrial 2 110 SBA - 5 Commercial real estate - - Construction 3 3 SFR mortgage 206 68 Dairy & livestock and agribusiness - - Consumer and other loans 16 1 Total recoveries 227 187 Net recoveries 141 88 Provision for credit losses 12,000 1,500 Allowance for credit losses at end of period $ 82,641 $ 65,201 Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period $ 8,959 $ 8,959 Impact of adopting ASU 2016-13 41 - Provision for unfunded loan commitments - - Reserve for unfunded loan commitments at end of period $ 9,000 $ 8,959 Reserve for unfunded loan commitments to total unfunded loan commitments 0.56% 0.54% Amount of total loans at end of period (1) $ 7,466,152 $ 7,606,863 Average total loans outstanding (1) $ 7,482,805 $ 7,662,573 Net recoveries to average total loans 0.002% 0.001% Net recoveries to total loans at end of period 0.002% 0.001% Allowance for credit losses to average total loans 1.10% 0.85% Allowance for credit losses to total loans at end of period 1.11% 0.86% Net recoveries to allowance for credit losses 0.17% 0.13% Net recoveries to provision for credit losses 1.18% 5.87% (1) Includes PCI loans and is net of deferred loan origination fees, costs and discounts. 56 Table of Contents The ACL/Total Loan Coverage Ratio as of March 31, 2020 increased to 1.11%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resulted from the COVID-19 crisis. At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our off-balance sheet credit exposures. The Bank’s CECL methodology also produced an allowance of $9.0 million for our off-balance sheet credit exposures, which was unchanged from the allowance at January 1, 2020. While we believe that the allowance at March 31, 2020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), 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 credit losses in the future. 57 Table of Contents Deposits The primary source of funds to support earning assets (loans and investments) is the generation of deposits. Total deposits were $9.11 billion at March 31, 2020. This represented an increase of $408.7 million, or 4.69%, over total deposits of $8.70 billion at December 31, 2019. The composition of deposits is summarized as of the dates presented in the table below. March 31, 2020 December 31, 2019 Balance Percent Balance Percent (Dollars in thousands) Noninterest-bearing deposits $ 5,572,649 61.15% $ 5,245,517 60.26% Interest-bearing deposits Investment checking 454,153 4.98% 454,565 5.22% Money market 2,217,656 24.34% 2,158,161 24.79% Savings 417,708 4.58% 400,377 4.60% Time deposits 451,438 4.95% 446,308 5.13% Total deposits $ 9,113,604 100.00% $ 8,704,928 100.00% The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $5.57 billion at March 31, 2020, representing an increase of $327.1 million, or 6.24%, from noninterest-bearing deposits of $5.25 billion at December 31, 2019. Noninterest-bearing deposits represented 61.15% of total deposits for March 31, 2020, compared to 60.26% of total deposits for December 31, 2019. Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $3.09 billion at March 31, 2020, representing an increase of $76.4 million, or 2.54%, from savings deposits of $3.01 billion at December 31, 2019. Time deposits totaled $451.4 million at March 31, 2020, representing an increase of $5.1 million, or 1.15%, from total time deposits of $446.3 million for December 31, 2019. 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 5.19% for the first quarter of 2020, compared to 7.08% for the same period of 2019. We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of March 31, 2020 and December 31, 2019, total funds borrowed under these agreements were $368.9 million and $428.7 million, respectively, with a weighted average interest rate of 0.26% and 0.44%, respectively. We had no short-term borrowings at March 31, 2020 and December 31, 2019. At March 31, 2020, $6.06 billion of loans and $1.63 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. 58 Table of Contents Aggregate Contractual Obligations The following table summarizes the aggregate contractual obligations as of March 31, 2020. Maturity by Period Total Less Than One Year One Year Through Three Years Four Years Through Five Years Over Five Years (Dollars in thousands) Deposits (1) $ 9,113,604 $ 9,036,138 $ 66,253 $ 10,626 $ 587 Customer repurchase agreements (1) 368,915 368,915 - - - Junior subordinated debentures (1) 25,774 - - - 25,774 Deferred compensation 23,233 763 1,305 636 20,529 Operating leases 20,826 6,706 9,109 3,423 1,588 Affordable housing investment 3,159 2,285 814 47 13 Total $ 9,555,511 $ 9,414,807 $ 77,481 $ 14,732 $ 48,491 (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, 2020, we had no short-term borrowings, compared to zero at December 31, 2019, and $153.0 million at March 31, 2019. Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans. Operating leases represent the total minimum lease payments due under non-cancelable operating leases. Refer to Note 11 – Leases of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases. 59 Table of Contents Off-Balance Sheet Arrangements The following table summarizes the off-balance sheet items at March 31, 2020. Maturity by Period Total Less Than One Year One Year to Three Years Four Years to Five Years After Five Years (Dollars in thousands) Commitment to extend credit: Commercial and industrial $ 917,055 $ 614,928 $ 168,309 $ 5,196 $ 128,622 SBA 396 362 4 - 30 Real estate: Commercial real estate/ 247,308 42,254 74,850 121,004 9,200 Construction 52,545 35,972 13,373 - 3,200 SFR Mortgage 5,540 3,500 - - 2,040 Dairy & livestock and agribusiness (1) 208,932 113,190 94,949 393 400 Consumer and other loans 123,928 14,114 6,985 5,018 97,811 Total commitment to extend credit 1,555,704 824,320 358,470 131,611 241,303 Obligations under letters of credit 50,159 45,415 4,496 248 - Total $ 1,605,863 $ 869,735 $ 362,966 $ 131,859 $ 241,303 (1) Total commitments to extend credit to agribusiness were $19.5 million at March 31, 2020. As of March 31, 2020, we had commitments to extend credit of approximately $1.56 billion, and obligations under letters of credit of $50.2 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000 was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments for three months ended March 31, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of March 31, 2020 and December 31, 2019 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. 60 Table of Contents Capital Resources Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of capital. Total equity decreased $52.7 million, or 2.67%, to $1.94 billion at March 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $52.7 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. We previously announced that we suspended this 10b5-1 stock repurchase program due to the uncertainty of the COVID-19 pandemic. We had $38.0 million in net earnings during the quarter, offset by $24.4 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $25.8 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our available-for-sale investment securities. Our tangible common equity ratio was 11.3% at March 31, 2020. During the first quarter of 2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures. On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares may be repurchased from time to time under the Company’s current 10b5-1 plan originally adopted in November, 2018 and subsequently amended in July, 2019. On March 31, 2020, the Company announced that it suspended its 10b5-1 stock repurchase program due to the uncertainty of the COVID-19 pandemic. For the three months ended March 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of March 31, 2020, we have 4,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program. The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At March 31, 2020, 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, 2019. At March 31, 2020, 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. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented. March 31, 2020 December 31, 2019 Capital Ratios Adequately Capitalized Ratios Minimum Required Plus Capital Conservation Buffer Well Capitalized Ratios CVB Financial Corp. Consolidated Citizens Business Bank CVB Financial Corp. Consolidated Citizens Business Bank Tier 1 leverage capital ratio 4.00% 4.00% 5.00% 11.60% 11.44% 12.33% 12.19% Common equity Tier 1 capital ratio 4.50% 7.00% 6.50% 14.13% 14.23% 14.83% 14.94% Tier 1 risk-based capital ratio 6.00% 8.50% 8.00% 14.42% 14.23% 15.11% 14.94% Total risk-based capital ratio 8.00% 10.50% 10.00% 15.49% 15.30% 16.00% 15.83% 61 Table of Contents ASSET/LIABILITY AND MARKET RISK MANAGEMENT Liquidity and Cash Flow The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs. We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $9.11 billion at March 31, 2020 increased $408.7 million, or 4.69%, over total deposits of $8.70 billion at December 31, 2019. In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand and deposit fluctuations. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets. At quarter end, we had only $25.8 million in subordinated debt and no other borrowings. The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans. We are well positioned with a balance sheet that is highly liquid, funded almost entirely with core deposits and the availability of significant off-balance sheet sources of liquidity. CVB is a holding 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. 62 Table of Contents Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2020 and 2019. For further details see our “ Condensed Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report. Consolidated Summary of Cash Flows For the Three Months Ended March 31, 2020 2019 (Dollars in thousands) Average cash and cash equivalents $ 409,885 $ 186,473 Percentage of total average assets 3.60% 1.63% Net cash provided by operating activities $ 75,527 $ 54,487 Net cash provided by investing activities 205,990 253,841 Net cash provided by (used in) financing activities 238,704 (300,062 ) Net increase in cash and cash equivalents $ 520,221 $ 8,266 Average cash and cash equivalents increased by $223.4 million, or 119.81%, to $409.9 million for the three months ended March 31, 2020, compared to $186.5 million for the same period of 2019. At March 31, 2020, cash and cash equivalents totaled $705.7 million. This represented an increase of $533.5 million, or 309.80%, from $172.2 million at March 31, 2019. 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 or estimated durations and is considered a longer term measure. One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities. Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon. The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market 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. 63 Table of Contents The following depicts the Company’s net interest income sensitivity analysis as of the periods presented below. Estimated Net Interest Income Sensitivity (1) March 31, 2020 December 31, 2019 Interest Rate Scenario 12-month Period 24-month Period (Cumulative) Interest Rate Scenario 12-month Period 24-month Period (Cumulative) + 200 basis points 5.20% 10.01% + 200 basis points 5.20% 10.00% - 100 basis points -0.50% -1.60% - 100 basis points -2.10% -4.60% (1) Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero. Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a one-year and a two-year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.25%. We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At March 31, 2020 and December 31, 2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates. Economic Value of Equity Sensitivity Instantaneous Rate Change March 31, 2020 December 31, 2019 100 bp decrease in interest rates -28.3% -17.5% 100 bp increase in interest rates 19.5% 14.2% 200 bp increase in interest rates 34.5% 25.5% 300 bp increase in interest rates 39.7% 30.0% 400 bp increase in interest rates 46.8% 36.2% 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.