What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-10 · 310 added, 270 removed, 736 unchanged (44% of the section changed)

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businesses through 100% SBA guaranteed loans distributed through banks.

These loans are intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed.

These loans were intended to guarantee 24 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 originated and funded about 4,100 loans, totaling approximately $1.10 billion, through June, 30 2020.

We originated and funded about 4,100 loans, totaling approximately $1.10 billion, as of September 30, 2020.

In response to the COVID-19

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The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.

Through July 10, 2020, we have granted temporary payment deferments of principal, interest or of principal and interest (80% of the deferments have been for both principal and interest) for 820 loans with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio, at June 30, 2020.

As of July 10, 2020, 6% of the initial deferments have requested and been granted a second deferment, but it is likely that additional deferments will be granted in future periods.

Our allowance for credit losses increased in the second quarter as a result of our forecast of a greater decline in economic activity due to the COVID-19

We recorded a $12 million provision for credit losses for the first quarter of 2020 and recorded an additional $11.5 million in the second quarter.

As of October 9, 2020, we have remaining temporary payment deferments of principal, interest or of principal and interest in response to the CARES Act for 33 loans totaling $68.6 million.

These deferments were primarily for 90 days, with 89% of these loans being pass rated.

Of these loans, 27 have received a second deferment and the remaining six loans are first deferments.

The third quarter of 2020 did not include a provision for credit losses, as the economic outlook is generally consistent with the forecast from the prior quarter end.

In comparison, the Company recorded a provision for credit losses of $23.5 million in the first half of 2020, including $11.5 million in the second quarter.

We continue to monitor the impact of COVID-19

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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 this pandemic results in additional economic stress on our borrowers and loan portfolios.

pandemic will impact our operations and financial results during the fourth quarter of 2020 is highly uncertain, but we may experience increased provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.

CRITICAL ACCOUNTING POLICIES

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of the notes to the unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements but Not Adopted as of June 30, 2020

Recently Issued Accounting Pronouncements but Not Adopted as of September 30, 2020

Adoption Timing

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Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)

Issued January 2020

The FASB issued ASU 2020-01,

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The adoption of this ASU will not have an impact on our consolidated financial statements.

Issued January 2020

For the second quarter of 2020, we reported net earnings of $41.6 million, compared with $38.0 million for the first quarter of 2020 and $54.5 million for the second quarter of 2019.

Diluted earnings per share were $0.31 for the second quarter, compared to $0.27 for the prior quarter and $0.39 for the same period last year.

The allowance for credit losses for the second quarter of 2020 was increased by $11.5 million in provision for credit losses due to the severe economic disruption forecasted as a result of the COVID-19

During the quarter, we experienced minimal credit charge-offs of $167,000 and total recoveries of $9,000, resulting in net charge-offs of $158,000.

During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at June 30, 2020, resulting in recognition of approximately $8.5 million in loan interest and fee income during the second quarter of 2020.

At June 30, 2020, total assets of $13.75 billion increased $2.47 billion, or 21.88%, from total assets of $11.28 billion at December 31, 2019.

Interest-earning assets of $12.52 billion at June 30, 2020 increased $2.49 billion, or 24.83%, when compared with $10.03 billion at December 31, 2019.

The increase in interest-earning assets was primarily due to a $1.74 billion increase in interest-earning balances due from the Federal Reserve and an $838.0 million increase in total loans, partially offset by a $125.5 million decrease in investment securities.

Debt – Debt with Conversion and Other Options (Subtopic 470-20)

and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

Issued August 2020

The FASB issued ASU 2020-06,

Debt – Debt with Conversion and Other Options (Subtopic 470-20)

and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.

1st Quarter 2022

The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

For the third quarter of 2020, we reported net earnings of $47.5 million, compared with $41.6 million for the second quarter of 2020 and $50.4 million for the third quarter of 2019.

Diluted earnings per share were $0.35 for the third quarter, compared to $0.31 for the prior quarter and $0.36 for the same period last year.

No provision for credit losses was recorded for the third quarter of 2020.

The Company’s economic forecast of macro-economic variables was generally consistent with the forecast at the end of the second quarter.

A $23.5 million provision for credit losses was recorded in the first half of 2020, due to the economic disruption and forecasted impact resulting from COVID-19.

In comparison to the prior year, a $1.5 million loan loss provision was incurred for the third quarter of 2019.

During the third quarter of 2020, we experienced minimal credit charge-offs of $231,000 and total recoveries of $117,000, resulting in net charge-offs of $114,000.

During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at September 30, 2020.

Interest and fee income from PPP loans increased from approximately $8.5 million in the second quarter of 2020, to $9.5 million in the third quarter of 2020.

At September 30, 2020, total assets of $13.82 billion increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019.

Interest-earning assets of $12.59 billion at September 30, 2020 increased $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019.

The increase in interest-earning assets was primarily due to a $1.31 billion increase in interest-earning balances due from the Federal Reserve, an $843.3 million increase in total loans, and a $368.6 million increase in investment securities.

Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.

Total investment securities were $2.29 billion at June 30, 2020, a decrease of $125.5 million, or 5.20%, from $2.41 billion at December 31, 2019.

At June 30, 2020, investment securities held-to-maturity

Total investment securities were $2.78 billion at September 30, 2020, an increase of $368.6 million, or 15.27%, from $2.41 billion at December 31, 2019.

At September 30, 2020, investment securities held-to-maturity

(“HTM”) totaled $577.7 million.

At June 30, 2020, investment securities available-for-sale

At September 30, 2020, investment securities available-for-sale

(“AFS”) totaled $2.21 billion, inclusive of a net pre-tax

unrealized gain of $55.3 million, an increase of $33.4 million from December 31, 2019.

HTM securities declined by $61.3 million, or 9.09%, and AFS securities declined by $64.2 million, or 3.69%, from December 31, 2019.

Our tax equivalent yield on investments was 2.22% for the quarter ended June 30, 2020, compared to 2.45% for the first quarter of 2020 and 2.53% for the second quarter of 2019.

Total loans and leases, net of deferred fees and discounts, of $8.40 billion at June 30, 2020 increased by $838.0 million, or 11.08%, from December 31, 2019.

HTM securities declined by $96.8 million, or 14.35%, and AFS securities increased by $465.4 million, or 26.74%, from December 31, 2019.

Our tax equivalent yield on investments was 1.99% for the quarter ended September 30, 2020, compared to 2.22% for the second quarter of 2020 and 2.47% for the third quarter of 2019.

Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from December 31, 2019.

The increase in total loans included $1.10 billion in PPP loans and a $130.9 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 PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%.

The $127.3 million decrease in loans included decreases of $94.4 million in commercial and industrial (C&I) loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and collectively $4.4 million in other loan segments.

Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1 million, respectively.

Our yield on loans was 4.77% for the quarter ended June 30, 2020, compared to 4.95% for the first quarter of 2020 and 5.40% for the second quarter of 2019.

The $126.9 million decrease in loans included decreases of $118.1 million in commercial and industrial loans, $27.3 million in consumer and other loans, $15.1 million in municipal lease financings, $15.0 million in construction loans, and $8.7 million in SFR mortgage loans.

Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million.

Our yield on loans was 4.47% for the quarter ended September 30, 2020, compared to 4.77% for the second quarter of 2020 and 5.23% for the third quarter of 2019.

This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans.

Interest income for yield adjustments related to discount accretion on acquired loans was $4.1 million for the quarter ended June 30, 2020, compared to $4.8 million for the first quarter of 2020 and $8.0 million for the second quarter of 2019.

Noninterest-bearing deposits were $6.90 billion at June 30, 2020, an increase of $1.66 billion, or 31.57%, when compared to December 31, 2019.

The significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity.

At June 30, 2020, noninterest-bearing deposits were 62.83% of total deposits, compared to 60.26% at December 31, 2019.

Our average cost of total deposits was 0.12% for the quarter ended June 30, 2020, compared to 0.19% for the first quarter of 2020 and 0.19% for the second quarter of 2019.

Customer repurchase agreements totaled $468.2 million at June 30, 2020, compared to $428.7 million at December 31, 2019.

Our average cost of total deposits including customer repurchase agreements was 0.12% for the quarter ended June 30, 2020, compared to 0.20% for both the first quarter of 2020 and the second quarter of 2019.

At June 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and June 30, 2019.

At June 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019.

Our average cost of funds was 0.13% for the quarter ended June 30, 2020, 0.21% for the first quarter of 2020, and 0.25% for the second quarter of 2019.

The allowance for credit losses totaled $94.0 million at June 30, 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 $23.5 million in provision for credit losses in the first six months of 2020 due to the severe economic disruption forecasted to result from the COVID-19

At June 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.29% when PPP loans are excluded.

Interest income for yield adjustments related to discount accretion on acquired loans was $4.2 million for the quarter ended September 30, 2020, compared to $4.1 million for the second quarter of 2020 and $7.2 million for the third quarter of 2019.

Noninterest-bearing deposits were $6.92 billion at September 30, 2020, an increase of $1.67 billion, or 31.91%, when compared to December 31, 2019.

The significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity.

At September 30, 2020, noninterest-bearing deposits were 61.95% of total deposits, compared to 60.26% at December 31, 2019.

Our average cost of total deposits was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.21% for the third quarter of 2019.

Customer repurchase agreements totaled $483.4 million at September 30, 2020, compared to $428.7 million at December 31, 2019.

Our average cost of total deposits including customer repurchase agreements was 0.11% for the quarter ended September 30, 2020, compared to 0.12% for the second quarter of 2020 and 0.22% for the third quarter of 2019.

At September 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and September 30, 2019.

At September 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019.

Our average cost of funds was 0.11% for the quarter ended September 30, 2020, 0.13% for the second quarter of 2020, and 0.23% for the third quarter of 2019.

The allowance for credit losses totaled $93.9 million at September 30, 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 $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted to result from the COVID-19

At September 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.28% when PPP loans are excluded.

This compares to 0.91% at December 31, 2019.

As of June 30, 2020, total discounts on acquired loans were $39.4 million.

The Company’s total equity was $1.96 billion at June 30, 2020.

As of September 30, 2020, total discounts on acquired loans were $35.2 million.

The Company’s total equity was $1.98 billion at September 30, 2020.

This represented a decrease of $12.1 million, or 0.61%, from total equity of $1.99 billion at December 31, 2019.

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investment securities portfolio.

Our tangible common equity ratio was 9.6% at June 30, 2020.

Our tangible common equity ratio was 9.8% at September 30, 2020.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements.

As of June 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 10.59%, our common equity Tier 1 ratio totaled 14.47%, our Tier 1 risk-based capital ratio totaled 14.76%, and our total risk-based capital ratio totaled 15.97%.

As of September 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 9.88%, our common equity Tier 1 ratio totaled 14.60%, our Tier 1 risk-based capital ratio totaled 14.89%, and our total risk-based capital ratio totaled 16.08%.

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.

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Three Months Ended

September 30,

(Dollars in thousands, except per share amounts)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands, except per share amounts)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities.

Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three and six months ended June 30, 2020 and 2019.

Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions.

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

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in thousands)

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Net interest margin - tax equivalent

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended June 30, 2020 and 2019.

The non TE rates were 2.16% and 2.46% for the three months ended June 30, 2020 and 2019, respectively.

Includes loan fees of $7.3 million and $727,000 for the three months ended June 30, 2020 and 2019, respectively.

Prepayment penalty fees of $2.1 million and $1.3 million are included in interest income for the three months ended June 30, 2020 and 2019, respectively.

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 2020 and 2019.

The non TE rates were 1.93% and 2.40% for the three months ended September 30, 2020 and 2019, respectively.

Includes loan fees of $7.4 million and $782,000 for the three months ended September 30, 2020 and 2019, respectively.

Prepayment penalty fees of $1.8 million and $1.0 million are included in interest income for the three months ended September 30, 2020 and 2019, respectively.

Includes interest-bearing demand and money market accounts.

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

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Net interest margin - tax equivalent

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the six months ended June 30, 2020 and 2019.

The non TE rates were 2.28% and 2.48% for the six months ended June 30, 2020 and 2019, respectively.

Includes loan fees of $7.8 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively.

Prepayment penalty fees of $3.6 million and $2.3 million are included in interest income for the six months ended June 30, 2020 and 2019, respectively.

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 2020 and 2019.

The non TE rates were 2.16% and 2.45% for the nine months ended September 30, 2020 and 2019, respectively.

Includes loan fees of $15.3 million and $2.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Prepayment penalty fees of $5.4 million and $3.4 million are included in interest income for the nine months ended September 30, 2020 and 2019, respectively.

Includes interest-bearing demand and money market accounts.

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Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

Comparison of Three Months Ended June 30,

Comparison of Three Months Ended September 30,

2020 Compared to 2019

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Net interest income

Comparision of Six Months Ended June 30,

Comparision of Nine Months Ended September 30,

2020 Compared to 2019

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Net interest income

Second Quarter of 2020 Compared to the Second Quarter of 2019

Net interest income, before provision for credit losses, of $104.6 million for the second quarter of 2020 decreased $6.5 million, or 5.84%, compared to $111.1 million for the second quarter of 2019.

Interest-earning assets increased on average by $1.43 billion, or 14.39%, from $9.96 billion for the second quarter of 2019 to $11.39 billion for the second quarter of 2020.

Our net interest margin (TE) was 3.70% for the second quarter of 2020, compared to 4.49% for the second quarter of 2019.

Interest income for the second quarter of 2020 was $108.0 million, which represented an $8.8 million, or 7.56%, decrease when compared to the same period of 2019.

Average interest-earning assets increased by $1.43 billion and the average interest-earning asset yield of 3.82%, compared to 4.72% for the second quarter of 2019.

The 90 basis point decrease in the interest-earning asset yield over the second quarter of 2019 was primarily due to a combination of a 63 basis point decrease in loan yields, a 31 basis point decrease in investment yields and a change in mix of earnings assets with average balances at the Federal Reserve growing to 9.21% of earning asset for the second quarter of 2020, compared to 0.12% for the second quarter of 2019.

The increase in balances at the Federal Reserve resulted from $1.43 billion in average deposit growth during the second quarter.

Interest income and fees on loans for the second quarter of 2020 of $95.4 million decreased $6.5 million, or 6.37%, when compared to the second quarter of 2019.

Average loans increased $488.6 million for the second quarter of 2020 when compared with the same period of 2019, primarily due to $669.6 million in average PPP loans originated in the second quarter of 2020.

The PPP loans we originated resulted in the recognition of approximately $8.5 million in loan interest and fee income in the second quarter of 2020.

Discount accretion on acquired loans decreased by $3.9 million compared to the second quarter of 2019.

The Federal Reserve lowered short-term interest rates by 225 basis points when compared to the end of second quarter of 2019.

The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 42 basis points from the second quarter of 2019.

Interest income from investment securities was $12.1 million for the second quarter of 2020, a $2.4 million, or 16.74%, decrease from $14.5 million for the second quarter of 2019.

This decrease was primarily the result of a $118.5 million decline in average investment securities for the second quarter of 2020, compared to the same period of 2019.

As a result of the decline in interest rates over the past four quarters, the non tax-equivalent

yield on investments decreased by 30 basis points compared to the second quarter of 2019.

Interest expense of $3.4 million for the second quarter of 2020, decreased $2.3 million, or 40.83%, compared to the second quarter of 2019.

Total cost of funds declined to 0.13% for the second quarter of 2020 from 0.25% for the second quarter of 2019.

On average, noninterest-bearing deposits were 61.74% of our total deposits for the second quarter of 2020, compared to 59.14% for the second quarter of 2019.

In comparison to the second quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.11 billion and overnight borrowings decreased by $129.6 million.

Average interest-bearing deposits increased by $324.9 million compared to the second quarter of 2019, while the cost of interest-bearing deposits decreased by 16 basis points.

Six Months of 2020 Compared to the Six Months of 2019

Net interest income, before provision for credit losses, was $206.9 million for the six months ended June 30, 2020, a decrease of $13.7 million, or 6.22%, compared to $220.6 million for the same period of 2019.

Interest-earning assets increased on average by $708.1 million, or 7.05%, from $10.05 billion for the six months ended June 30, 2019 to $10.75 billion for the current year.

Our net interest margin (TE) was 3.88% during the first six months of 2020, compared to 4.44% for the same period of 2019.

Interest income for the six months ended June 30, 2020 was $215.1 million, which represented a $17.0 million, or 7.33%, decrease when compared to the same period of 2019.

Compared to the first six months of 2019, average interest-earning assets increased by $708.1 million primarily due to PPP loans, and the yield on interest-earning assets decreased by 64 basis points.

The 64 basis point decrease in the earning asset yield over the first six months of 2020, resulted from a 49 basis point decrease in loan yields from 5.34% for first six months of 2019 to 4.85% for the same period of 2020, and a 21 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from a $634.8 million increase in average balances at the Federal Reserve.

Average loans as a percentage of earning assets declined from 75.76% for the first six months of 2019 to 72.21% for the first six months of 2020.

Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.11% in the prior year to 6.01% for the first six months of 2020.

Interest income and fees on loans for the first six months of 2020 of $187.5 million decreased $14.1 million, or 6.98%, when compared to the same period of 2019.

Average loans increased $154.7 million for the first six months of 2020 when compared with the same period of 2019, primarily due to $334.8 million in average PPP loans.

The PPP loans we originated resulted in approximately $6.8 million in fee income and $1.7 million in loan interest during the second quarter of 2020.

The first six months of 2020 reflected a $6.9 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019.

Loan yields decreased by 49 basis points from the prior six month period, primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.

Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 30 basis points lower than the second quarter of 2019.

Interest income from investment securities was $26.2 million for the six months ended June 30, 2020, a $3.6 million decrease from $29.7 million for the first six months of 2019.

This decrease was the net result of a $99.0 million decrease in the average investment securities for the first six months of 2020 and a 20 basis point decline in the non tax-equivalent

yield on securities, compared to the same period of 2019.

Interest expense of $8.2 million for the six months ended June 30, 2020, decreased by $3.3 million from the same period of 2019.

The average rate paid on interest-bearing liabilities decreased by 15 basis points, to 0.40% for the first six months of 2020, from 0.55% for the same period of 2019.

The rate on interest-bearing deposits for the first six months of 2020 decreased by six basis points from the same period in 2019.

Average interest-bearing liabilities were $62.5 million lower for the first six months of 2020 when compared with the same period of 2019.

Average interest-bearing deposits grew by $87.6 million.

Average noninterest-bearing deposits represented 60.92% of our total deposits for the six months ended June 30, 2020, compared to 58.67% for the same period of 2019.

Total cost of funds for the first six months of 2019 was 0.17%, compared with 0.25% for the same period of 2019.

Third Quarter of 2020 Compared to the Third Quarter of 2019

Net interest income, before provision for credit losses, of $103.3 million for the third quarter of 2020 decreased $4.8 million, or 4.47%, compared to $108.2 million for the third quarter of 2019.

Interest-earning assets increased on average by $2.55 billion, or 25.65%, from $9.94 billion for the third quarter of 2019 to $12.50 billion for the third quarter of 2020.

Our net interest margin (TE) was 3.34% for the third quarter of 2020, compared to 4.34% for the third quarter of 2019.

Interest income for the third quarter of 2020 was $106.6 million, which represented a $6.9 million, or 6.11%, decrease when compared to the same period of 2019.

Average interest-earning assets increased to $12.50 billion and the average interest-earning asset yield of 3.45%, compared to 4.55% for the third quarter of 2019.

The 110 basis point decrease in the interest-earning asset yield over the third quarter of 2019 was primarily due to a combination of a 76 basis point decrease in loan yields, a 48 basis point decrease in investment yields and a change in mix of earning assets with average balances at the Federal Reserve growing to 11.62% of earning assets for the third quarter of 2020, compared to 1.69% for the third quarter of 2019.

The increase in balances at the Federal Reserve resulted from $2.22 billion in average deposit growth during the third quarter of 2020.

Interest income and fees on loans for the third quarter of 2020 of $94.2 million decreased $4.6 million, or 4.65%, when compared to the third quarter of 2019.

Average loans increased $887.0 million for the third quarter of 2020 when compared with the same period of 2019, primarily due to $1.10 billion in average PPP loans originated in the second quarter of 2020.

The PPP loans we originated resulted in the recognition of approximately $9.5 million in loan interest and fee income in the third quarter of 2020.

Discount accretion on acquired loans decreased by $2.9 million compared to the third quarter of 2019.

The Federal Reserve lowered short-term interest rates by 175 basis points when compared to the end of the third quarter of 2019.

Interest income from investment securities was $11.8 million for the third quarter of 2020, a $1.7 million, or 12.56%, decrease from $13.5 million for the third quarter of 2019.

This decrease was primarily the result of a 47 basis point decline in the non tax-equivalent

yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities.

Partially offsetting the decline from lower rates was a $344.1 million increase in average investment securities for the third quarter of 2020, compared to the same period of 2019.

Interest expense of $3.3 million for the third quarter of 2020, decreased $2.1 million, or 38.92%, compared to the third quarter of 2019.

The average rate paid on interest-bearing liabilities declined to 0.28% for the third quarter of 2020 from 0.55% for the third quarter of 2019.

On average, noninterest-bearing deposits were 61.67% of our total deposits for the third quarter of 2020, compared to 60.14% for the third quarter of 2019.

In comparison to the third quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.50 billion.

Average interest-bearing deposits increased by $720.0 million compared to the third quarter of 2019, while the cost of interest-bearing deposits decreased by 25 basis points.

Nine Months of 2020 Compared to the Nine Months of 2019

Net interest income, before provision for credit losses, was $310.2 million for the nine months ended September 30, 2020, a decrease of $18.6 million, or 5.64%, compared to $328.8 million for the same period of 2019.

Interest-earning assets increased on average by $1.33 billion, or 13.26%, from $10.01 billion for the nine months ended September 30, 2019 to $11.34 billion for the current year.

Our net interest margin (TE) was 3.68% during the first nine months of 2020, compared to 4.41% for the same period of 2019.

Interest income for the nine months ended September 30, 2020 was $321.7 million, which represented a $23.9 million, or 6.93%, decrease when compared to the same period of 2019.

Compared to the first nine months of 2019, average interest-earning assets increased by $1.33 billion primarily due to PPP loans, and the yield on interest-earning assets decreased by 81 basis points.

The 81 basis point decrease in the earning asset yield over the first nine months of 2020, resulted from a 58 basis point decrease in loan yields from 5.30% for first nine months of 2019 to 4.72% for the same period of 2020, and a 31 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from an $852.6 million increase in average balances at the Federal Reserve.

Average loans as a percentage of earning assets declined from 75.63% for the first nine months of 2019 to 70.31% for the first nine months of 2020.

Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.64% in the prior year to 8.09% for the first nine months of 2020.

Interest income and fees on loans for the first nine months of 2020 of $281.7 million decreased $18.7 million, or 6.21%, when compared to the same period of 2019.

Average loans increased $400.7 million for the first nine months of 2020 when compared with the same period of 2019, primarily due to $591.4 million in average PPP loans.

The PPP loans we originated resulted in approximately $13.5 million in fee income and $4.5 million in loan interest during the first nine months of 2020.

The first nine months of 2020 reflected a $9.3 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019.

Loan yields decreased by 58 basis points from the prior nine month period.

Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 33 basis points lower than the first nine months of 2019.

This decline in loan yields was primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate.

Interest income from investment securities was $38.0 million for the nine months ended September 30, 2020, a $5.3 million decrease from $43.2 million for the first nine months of 2019.

This decrease was the net result of a 29 basis point decline in the non tax-equivalent

yield on securities, compared to the first nine months of 2019, partially offset by a $50.0 million increase in the average investment securities for the first nine months of 2020.

Interest expense of $11.5 million for the nine months ended September 30, 2020, decreased by $5.4 million from the same period of 2019.

The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.35% for the first nine months of 2020, from 0.55% for the same period of 2019.

The rate on interest-bearing deposits for the first nine months of 2020 decreased by 12 basis points from the same period in 2019.

Average interest-bearing liabilities were $232.1 million higher for the first nine months of 2020 when compared with the same period of 2019.

Average interest-bearing deposits grew by $300.1 million when compared to the first nine months of 2019.

Average noninterest-bearing deposits represented 61.20% of our total deposits for the nine months ended September 30, 2020, compared to 59.17% for the same period of 2019.

Total cost of funds for the first nine months of 2020 was 0.15%, compared with 0.24% for the same period of 2019.

Provision for Credit Losses

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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 $94.0 million at June 30, 2020, compared to $68.7 million at December 31, 2019 and $67.1 million as of June 30, 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 $23.5 million in provision for credit losses in the first six months of 2020 due to the severe economic disruption forecasted as a result of the COVID-19

During the six months ended June 30, 2020, we experienced minimal credit charge-offs of $253,000 and total recoveries of $236,000, resulting in net charge-offs of $17,000.

The allowance for credit losses on loans totaled $93.9 million at September 30, 2020, compared to $68.7 million at December 31, 2019 and $68.7 million as of September 30, 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 $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted as a result of the COVID-19

For the nine months ended September 30, 2020, we experienced minimal credit charge-offs of $484,000 and total recoveries of $353,000, resulting in net charge-offs of $131,000.

This compares to a $5.0 million loan loss provision and net recoveries of $59,000 for the same period of 2019.

We believe the allowance is appropriate at June 30, 2020.

The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of June 30, 2020, was 1.12%, or 1.29% when PPP loans are excluded.

This compares to 0.91% and 0.89%, as of December 31, 2019 and June 30, 2019, respectively.

As of June 30, 2020, remaining discounts on acquired loans were $39.4 million.

The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of September 30, 2020, was 1.12%, or 1.28% when PPP loans are excluded.

This compares to 0.91% and 0.92%, as of December 31, 2019 and September 30, 2019, respectively.

As of September 30, 2020, remaining discounts on acquired loans were $35.2 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

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(Dollars in thousands)

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Bankcard services

Swap fee income

Gain on OREO, net

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Total noninterest income

Second Quarter of 2020 Compared to the Second Quarter of 2019

The $6.1 million decrease in noninterest income was primarily due to a $5.7 million net gain from the legal settlement of an eminent domain condemnation of one of our banking center buildings located in Bakersfield in the second quarter of 2019.

Third Quarter of 2020 Compared to the Third Quarter of 2019

The $1.3 million increase in noninterest income was primarily due to a $1.7 million net gain on the sale of one of our bank owned buildings, related to a banking center that was closed in September in the third quarter of 2020.

The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty.

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of the notes to the unaudited condensed consolidated financial statements of this report for additional information).

The second quarter of 2020 included higher swap fee income of $1.8 million compared to the second quarter of 2019, due to higher volume of swap transactions.

We executed on swap agreements related to new loan originations with a notional amount totaling $126.2 million for the second quarter of 2020, compared to $17.4 million for the second quarter of 2019.

Service charges on deposit accounts decreased by $1.3 million from the second quarter of 2019.

This decrease was partially due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.

The Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $400,000 when compared to the second quarter of 2019.

The third quarter of 2020 included higher swap fee income of $1.2 million compared to the third quarter of 2019, due to higher volume of swap transactions.

We executed on swap agreements related to new loan originations with a notional amount totaling $73.2 million for the third quarter of 2020, compared to $19.0 million for the third quarter of 2019.

Service charges on deposit accounts decreased by $863,000 from the third quarter of 2019.

This decrease was primarily due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers.

CitizensTrust consists of Wealth Management and Investment Services income.

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investment products.

At June 30, 2020, CitizensTrust had approximately $2.83 billion in assets under management and administration, including $2.02 billion in assets under management.

CitizensTrust generated fees of $2.5 million for both the second quarter of 2020 and the second quarter of 2019.

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.

At September 30, 2020, CitizensTrust had approximately $2.91 billion in assets under management and administration, including $2.08 billion in assets under management.

CitizensTrust generated fees of $2.4 million for the third quarter of 2020, compared to $2.3 million for the third quarter of 2019.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a select group of employees.

The Bank is the owner and beneficiary of these policies.

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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 $450,000 were included in our BOLI policies for the second quarter of 2020.

Six Months of 2020 Compared to the Six Months of 2019

The $10.7 million decrease in noninterest income for the six months ended June 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings in the first six months of 2019.

Service charges on deposit accounts decreased by $1.6 million from the first six months of 2019.

In addition, the Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $700,000 when compared to 2019.

The $1.1 million increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first six months of 2020.

The $929,000 increase in other income included $1.8 million in higher swap fee income, partially offset by decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the prior six month period.

Income from BOLI declined by $328,000 compared to the third quarter of 2019.

Nine Months of 2020 Compared to the Nine Months of 2019

The $9.5 million decrease in noninterest income for the nine months ended September 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield during the first nine month of 2019.

In addition, there was a $2.9 million decrease in net gains on sale of bank owned buildings between the first nine months of 2020 and the first nine months of 2019.

Service charges on deposit accounts decreased by $2.5 million from the first nine months of 2019.

This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank.

In addition, bankcard services decreased by approximately $1.2 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees.

Swap fee income increased $3.0 million compared to the third quarter of 2019, due to higher volume of swap transactions.

The $729,000 increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first nine months of 2020.

The $1.2 million decrease in other income in the first nine months of 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the same period of 2019.

Noninterest Expense

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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

Second Quarter of 2020 Compared to the Second Quarter of 2019

Third Quarter of 2020 Compared to the Third 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 1.48% for the second quarter of 2020, compared to 1.81% for the second quarter of 2019.

Noninterest expense as a percentage of average assets was 1.44% for the third quarter of 2020, compared to 1.68% for the third quarter of 2019.

This decline mostly reflects the $2.51 billion growth in average assets that resulted primarily from $2.22 billion in average deposit growth.

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 39.75% for the second quarter of 2020, compared to 39.09% for the second quarter of 2019.

Noninterest expense of $46.4 million for the second quarter of 2020 was $4.1 million, or 8.17%, lower than the second quarter of 2019.

There were no merger related expenses related to the Community Bank (“CB”) acquisition for the second quarter of 2020, compared to $2.6 million for the second quarter of 2019 primarily due to the consolidation of four banking centers.

Approximately $900,000, or a 4% increase in salary expense from the prior year was offset by an increase in net deferred loan costs of $1.2 million during the current quarter that were primarily related to the origination of PPP loans.

The year-over-year decrease also included a $567,000 decrease in regulatory assessments, a $396,000 decrease in occupancy and equipment expense primarily due to the consolidation of banking centers, and a $388,000 decrease in Core Deposit Intangible (“CDI”) amortization.

These decreases were partially offset by a $328,000 increase in professional services.

Six Months of 2020 Compared to the Six Months of 2019

Noninterest expense of $95.0 million for the first six months of 2020 was $7.1 million lower than the prior year period.

The decrease was primarily due to $5.8 million in merger related expenses for the six months ended June 30, 2019, compared to no merger related expense for the same period of 2020.

The year-over-year decrease also included a $1.3 million decrease in regulatory assessments, a $983,000 decrease in occupancy and equipment expense and an $800,000 decrease in amortization of CDI.

These decreases were partially offset by a $1.4 million increase in salaries and benefit costs, a $659,000 increase in professional services and a $201,000 increase in computer software expense.

Salary and benefit expense would have increased by $2.8 million, or approximately 5%, when a $1.3 million increase in net deferred loan costs is excluded.

As a percentage of average assets, noninterest expense was 1.59% for the six months ended June 30, 2020, compared to 1.82% for the same period of 2019.

For the six months ended 2020, the efficiency ratio was 41.20%, compared to 40.04% for the same period of 2019.

The Company’s effective tax rate for the three and six months ended June 30, 2020 was 29.23% and 29.00%, respectively, 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

The efficiency ratio was 42.57% for the third quarter of 2020, compared to 39.60% for the third quarter of 2019.

Noninterest expense of $49.6 million for the third quarter of 2020 was $2.1 million, or 4.32%, higher than the third quarter of 2019.

There were no merger related expenses related to the Community Bank (“CB”) acquisition for the third quarter of 2020, compared to $244,000 for the third quarter of 2019.

The $912,000 increase in salary expense from the prior year was primarily due to $1.1 million in additional bonus expense for “Thank You Awards” paid to all Bank employees during the third quarter of 2020.

The third quarter of 2020 also reflected an $833,000 increase in regulatory assessments resulting from final application of assessment credits provided by the FDIC at the end of the second quarter of 2020 and a $700,000 write-down of one OREO property.

These increases were partially offset by a $789,000 decrease in marketing and promotion expense.

Nine Months of 2020 Compared to the Nine Months of 2019

Noninterest expense of $144.6 million for the first nine months of 2020 was $5.0 million lower than the prior year period.

The decrease was primarily due to $6.0 million in merger related expenses for the nine months ended September 30, 2019, compared to no merger related expense for the same period of 2020.

The year-over-year decrease also included a $1.2 million decrease in amortization of CDI.

These decreases were partially offset by a $2.3 million increase in salaries and benefit costs.

Salary and benefit expense would have increased by $3.9 million, or approximately 4%, when a $1.6 million increase in net deferred loan costs, primarily related to the origination of PPP loans, is excluded for the nine months ended September 30, 2020.

This $3.9 million increase was primarily due to $3.0 million, or 3.93%, in higher salaries, payroll taxes and benefits when compared to the prior year period.

As a percentage of average assets, noninterest expense was 1.54% for the nine months ended September 30, 2020, compared to 1.77% for the same period of 2019.

For the nine months ended September 30, 2020, the efficiency ratio was 41.66%, compared to 39.89% for the same period of 2019.

The Company’s effective tax rate for the three and nine months ended September 30, 2020 was 29.00%, compared to 29.00% for the same periods of 2019.

Our estimated annual effective tax rate varies depending upon the level of tax-advantaged

income as well as available tax credits.

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ANALYSIS OF FINANCIAL CONDITION

Total assets of $13.75 billion at June 30, 2020 increased $2.47 billion, or 21.88%, from total assets of $11.28 billion at December 31, 2019.

Interest-earning assets totaled $12.52 billion at June 30, 2020, an increase of $2.49 billion, or 24.83%, when compared with $10.03 billion at December 31, 2019.

The increase in total loans was due to the origination of approximately 4,100 PPP loans, totaling $1.10 billion at June 30, 2020.

Total assets of $13.82 billion at September 30, 2020 increased $2.54 billion, or 22.48%, from total assets of $11.28 billion at December 31, 2019.

Interest-earning assets totaled $12.59 billion at September 30, 2020, an increase of $2.57 billion, or 25.59%, when compared with $10.03 billion at December 31, 2019.

The increase in total loans was due to the origination of approximately 4,100 PPP loans, totaling $1.10 billion at September 30, 2020.

Excluding PPP loans, total loans declined by $257.8 million from December 31, 2019.

Total liabilities were $11.79 billion at June 30, 2020, an increase of $2.50 billion, or 29.96%, from total liabilities of $9.29 billion at December 31, 2019.

Total liabilities were $11.84 billion at September 30, 2020, an increase of $2.55 billion, or 27.44%, from total liabilities of $9.29 billion at December 31, 2019.

Total deposits grew by $2.46 billion, or 28.30%.

This significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity.

Total equity decreased $35.0 million, or 1.76%, to $1.96 billion at June 30, 2020, compared to total equity of $1.99 billion at December 31, 2019.

This significant deposit growth in the first nine months of 2020 was primarily due to our customers maintaining greater liquidity.

Total equity decreased $12.1 million, or 0.61%, to $1.98 billion at September 30, 2020, compared to total equity of $1.99 billion at December 31, 2019.

The $12.1 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

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We previously announced that we suspended this 10b5-1

stock repurchase program due to the uncertainty of the COVID-19

We had $79.6 million in net earnings during the first six months of 2020, offset by $48.8 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.

stock repurchase program due to the Company’s outlook due to the uncertainty of the COVID-19

We had $127.1 million in net earnings during the first nine months of 2020, offset by $73.3 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 $23.5 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

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The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations.

At June 30, 2020, we reported total investment securities of $2.29 billion.

This represented a decrease of $125.5 million, or 5.20%, 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 six months of 2020, partially offset by an increase in the fair value of AFS investment securities as a result of declining interest rates.

At June 30, 2020, investment securities HTM totaled $613.2 million.

At June 30, 2020, our AFS investment securities totaled $1.68 billion, inclusive of a pre-tax

At September 30, 2020, total investment securities were $2.78 billion.

This represented an increase of $368.6 million, or 15.27%, from total investment securities of $2.41 billion at December 31, 2019.

The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first nine months of 2020.

At September 30, 2020, investment securities HTM totaled $577.7 million.

At September 30, 2020, our AFS investment securities totaled $2.21 billion, inclusive of a pre-tax

net unrealized gain of $55.3 million.

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The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates.

For the six months ended June 30, 2020 and 2019, repayments/maturities of investment securities totaled $318.5 million and $220.5 million, respectively.

The Company purchased additional investment securities totaling $163.6 million and $37.1 million for the six months ended June 30, 2020 and 2019, respectively.

There were no investment securities sold during the first six months of 2020 and 2019.

The average duration of our investment securities portfolio was approximately 2.8 years at June 30, 2020.

For the nine months ended September 30, 2020 and 2019, repayments/maturities of investment securities totaled $536.7 million and $355.8 million, respectively.

The Company purchased additional investment securities totaling $882.1 million and $268.3 million for the nine months ended September 30, 2020 and 2019, respectively.

There were no investment securities sold during the first nine months of 2020.

During the first nine months of 2019, we sold 14 investment securities at book value of approximately $152.6 million.

The average duration of our investment securities portfolio was approximately 2.7 years at September 30, 2020.

The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.

June 30, 2020

September 30, 2020

Total Percent

in thousands)

(Dollars in thousands)

Investment securities available-for-sale:

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Total held-to-maturity

As of June 30, 2020, approximately $69.3 million in U.S.

As of September 30, 2020, approximately $66.7 million in U.S.

government agency bonds are callable.

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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 second quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.

During the third quarter of 2020, management determined that credit losses did not exist for securities in an unrealized loss position.

The following table presents the Company’s available-for-sale

investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of June 30, 2020.

June 30, 2020

investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2020.

September 30, 2020

Less Than 12 Months

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of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio.

Total loans and leases, net of deferred fees and discounts, of $8.40 billion at June 30, 2020 increased by $838.0 million, or 11.08%, from $7.56 billion at December 31, 2019.

Total loans and leases, net of deferred fees and discounts, of $8.41 billion at September 30, 2020 increased by $843.3 million, or 11.15%, from $7.56 billion at December 31, 2019.

Excluding PPP loans and dairy & livestock and agribusiness loans, total loans declined by $126.9 million, or 1.77%.

The $127.3 million decrease in loans included decreases of $94.4 million in commercial and industrial loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and collectively $4.4 million in other loan segments.

Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1 million, respectively.

Partially offsetting these declines was an increase in commercial real estate loans of $53.6 million.

The following table presents our loan portfolio by type as of the dates presented.

Distribution of Loan Portfolio by Type

June 30, 2020

September 30, 2020

December 31, 2019

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Beginning with March 31, 2020, total loans are presented net of deferred loan fees by respective class of financing receivables.

As of June 30, 2020, 68.76% of the Company’s total loan portfolio consisted of real estate loans, with commercial real estate loans representing 63.85% of total loans.

As of June 30, 2020, $248.6 million, or 4.63% 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 $121.9 million for loans secured by dairy & livestock land and $126.7 million in loans secured by agricultural land at June 30, 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 June 30, 2020, dairy & livestock and agribusiness loans of $251.8 million were comprised of $201.7 million for dairy & livestock loans and $50.1 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.

As of September 30, 2020, 69.04% of the Company’s total gross loan portfolio consisted of real estate loans, with commercial real estate loans representing 64.56% of total loans.

As of September 30, 2020, $271.2 million, or 5.00% 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 $121.1 million for loans secured by dairy & livestock land and $150.2 million for loans secured by agricultural land at September 30, 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 September 30, 2020, dairy & livestock and agribusiness loans of $252.8 million were comprised of $210.4 million for dairy & livestock loans and $42.4 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.

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Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.

As of June 30, 2020, the Company had $181.2 million of total SBA 504 loans.

As of September 30, 2020, the Company had $185.5 million of total SBA 504 loans.

SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate.

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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 June 30, 2020, the Company had $119.0 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.

A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition.

As of September 30, 2020, the Company had $119.5 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default.

The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.

As an active participant in the SBA’s Paycheck Protection Program, we have originated approximately 4,100 PPP loans, totaling $1.10 billion as of June 30, 2020.

As of June 30, 2020, the Company had $125.8 million in construction loans.

As an active participant in the SBA’s Paycheck Protection Program, we have originated approximately 4,100 PPP loans, totaling $1.10 billion as of September 30, 2020.

As of September 30, 2020, the Company had $101.9 million in construction loans.

This represents 1.21% of total loans held-for-investment.

Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California.

There were no nonperforming construction loans at June 30, 2020.

There were no nonperforming construction loans at September 30, 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 June 30, 2020.

June 30, 2020

commercial real estate loans, by region as of September 30, 2020.

September 30, 2020

Commercial Real Estate

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The table below breaks down our commercial real estate portfolio.

June 30, 2020

September 30, 2020

(Dollars in thousands)

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

The loans secured by farmland included $121.9 million for loans secured by dairy & livestock land and $126.7 million for loans secured by agricultural land at June 30, 2020.

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

Commercial real estate loans on retail properties comprised approximately 15% of our CRE loan portfolio at June 30, 2020.

The loans secured by farmland included $121.1 million for loans secured by dairy & livestock land and $150.2 million for loans secured by agricultural land at September 30, 2020.

Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans at September 30, 2020.

The pandemic has had a greater impact on certain industries, such a retail, hospitality, and entertainment.

At September 30, 2020, commercial real estate loans on retail properties comprised $771.1 million and approximately 9% of total loans;

1% of these loans are on deferment and $7 million of these loans are classified.

At origination, these loans on retail properties were underwritten with loan-to-values

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Approximately 53% of these loans were originated prior to 2017.

At June 30, 2020, commercial and industrial loans to customers in the hotel, restaurant, entertainment, or recreation industries represented approximately 4% of our C&I loan portfolio and loans to customers in retail trade were approximately 2% of our C&I loans.

We also have $66.6 million of commercial real estate loans for hospitality properties, which is less than 1% of total loans;

none of these loans are classified, but 16% of these loans are on deferment.

At September 30, 2020, commercial and industrial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $96 million in loans, or approximately 1% of total loans;

$1.6 million of these loans are classified and $1.4 million are on deferment.

Nonperforming Assets

The following table provides information on nonperforming assets as of the dates presented.

June 30, 2020

September 30, 2020

December 31, 2019

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Percentage of nonperforming assets to total assets

Includes $7.2 million that were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within 1 year).

Troubled Debt Restructurings (“TDRs”)

Total TDRs were $2.8 million at June 30, 2020, compared to $3.4 million at December 31, 2019.

At June 30, 2020, all of our TDRs were performing and accruing interest as restructured loans.

Total TDRs were $2.2 million at September 30, 2020, compared to $3.4 million at December 31, 2019.

At September 30, 2020, all of our TDRs were performing and accruing interest as restructured loans.

Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties.

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Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program.

Through July 10, 2020, we have granted temporary payment deferments of principal, interest or of principal and interest for primarily 90 days on 820 loans with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio at June 30, 2020.

Principal and interest deferments represented 80% of the total deferred payments and approximately 6% were second deferment requests approved by the Bank as of July 10, 2020.

It is likely that additional deferments will be granted in future periods.

The majority of the loans with payment deferments were Commercial Real Estate loans, which represented approximately $1.10 billion of the $1.27 billion.

Approximately 7% of the loans with deferred payments are considered classified.

As of October 9, 2020, we have temporary payment deferments of principal, interest or of principal and interest on 33 loans in the amount of $68.6 million, or less than 1% of our total loan portfolio, at September 30, 2020.

These deferments were primarily for 90 days, with 89% of these loans being pass rated;

27 of these loans have received a second deferment and the remaining six loans are first deferments.

The majority of the loans with payment deferments were commercial real estate loans, which represented approximately $65.9 million of the $68.6 million.

The following table provides a summary of TDRs as of the dates presented.

June 30, 2020

September 30, 2020

December 31, 2019

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Total nonperforming TDRs

At June 30, 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.

At September 30, 2020, there was no ACL allocated to TDRs.

At December 31, 2019, there was no allowance for loan 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 six months ended June 30, 2020, compared to $78,000 for the six months ended June 30, 2019.

There were no charge-offs on TDRs for the nine months ended September 30, 2020, compared to $78,000 for the nine months ended September 30, 2019.

Nonperforming Assets and Delinquencies

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September 30,

(Dollars in thousands)

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As of June 30, 2020, nonperforming loans included $25,000 of commercial and industrial loans past due 90 days or more and still accruing interest.

Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $6.8 million at June 30, 2020, or 0.08% of total loans.

Total nonperforming loans at June 30, 2020 included $4.3 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 $11.3 million, or 0.15% of total loans, at June 30, 2019.

The $389,000 quarter-over-quarter increase in nonperforming loans was primarily due to increases of $1.7 million in nonperforming commercial real estate loans, $216,000 in nonperforming SFR mortgage loans, and $123,000 in nonperforming consumer and other loans.

This was partially offset by a $1.2 million decrease in nonperforming SBA loans and a $481,000 decrease in nonperforming commercial and industrial loans.

Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $11.8 million at September 30, 2020, or 0.14% of total loans.

Total nonperforming loans at September 30, 2020 included $9.3 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 $6.6 million, or 0.09% of total loans, at September 30, 2019.

The $5.0 million quarter-over-quarter increase in nonperforming loans was primarily due to increases of $3.9 million in nonperforming commercial real estate loans, $849,000 in nonperforming dairy & livestock and agribusiness loans, $600,000 in nonperforming commercial and industrial loans, and $126,000 in nonperforming SBA loans.

This was partially offset by a $405,000 decrease in nonperforming SFR mortgage loans and a $65,000 decrease in nonperforming consumer and other loans.

In response to the COVID-19

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The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan.

At June 30, 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 June 30, 2019.

There were no additions to or sales of OREO properties for the six months ended June 30, 2020.

At September 30, 2020, we had four OREO properties with a carrying value of $4.2 million, compared to four OREO properties with a carrying value of $4.9 million at December 31, 2019 and three OREO properties with a carrying value of $9.5 million at September 30, 2019.

We reflected a $700,000 write-down of one OREO property in the third quarter of 2020.

There were no additions to or sales of OREO properties for the nine months ended September 30, 2020.

Changes in economic and business conditions have had an impact on our market area and on our loan portfolio.

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of the notes to the unaudited condensed consolidated financial statements.

The allowance for credit losses totaled $94.0 million as of June 30, 2020, compared to $68.7 million as of December 31, 2019 and $67.1 million as of June 30, 2019.

Our allowance for credit losses at June 30, 2020 was 1.12%, or 1.29% of total loans when excluding the $1.10 billion in PPP loans.

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 $23.5 million credit loss provision in the first six months of 2020 due to the severe economic disruption forecasted as a result of the COVID-19

Net charge-offs were $17,000 for the six months ended June 30, 2020.

The allowance for credit losses totaled $93.9 million as of September 30, 2020, compared to $68.7 million as of December 31, 2019 and $68.7 million as of September 30, 2019.

Our allowance for credit losses at September 30, 2020 was 1.12%, or 1.28% of total loans when excluding the $1.10 billion in PPP loans.

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 $23.5 million credit loss provision in the first nine months of 2020 due to the severe economic disruption resulting from the COVID-19

Net charge-offs were $131,000 for the nine months ended September 30, 2020.

This compares to a $5.0 million loan loss provision and $59,000 in net recoveries for the same period of 2019.

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We consider publicly published economic forecasts from multiple sources, including Moody’s.

The forecast continues to reflect the most recent available information on the evolving impacts on macroeconomic variables from the COVID-19

The resulting stressed economic forecast includes a significant contraction in GDP of 30% in the second quarter of 2020, followed by an 18% rebound in GDP in the third quarter and economic growth not returning until the second half of 2021.

In addition, the unemployment rate is forecasted to rise to more than 14% in the second quarter and is expected to be at an elevated level through 2022.

Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s.

Moody’s baseline forecast continues to represent more than a 50% weighting in our multi-weighted forecast scenario.

baseline forecast assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5% in 2021 and 5% in 2022.

The unemployment rate in this baseline forecast is forecasted to be 8.9% in the third quarter of 2021, stay at an elevated level over 8% through 2021, before declining to 6.4% percent in 2022.

With California slowly re-opening

its economy and currently having an unemployment rate greater than 11% percent, our forecast includes a partial weighting of downside economic forecast scenarios from Moody’s.

If the economic forecast deteriorates further due to the COVID-19

epidemic, or the economic impact on our borrowers is more severe than we have forecasted, we may experience increases in the allowance for credit losses in future periods.

pandemic, or the economic impact on our borrowers is more severe than we have forecasted, we may experience increases in the allowance for credit losses in future periods.

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 Six Months

Ended June 30,

As of and For the

Nine Months Ended

September 30,

(Dollars in thousands)

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Net of deferred loan origination fees, costs and discounts.

The ACL/Total Loan Coverage Ratio as of June 30, 2020 increased to 1.12%, compared to 0.93% as of January 1, 2020 due to the more severe economic forecast that resulted from the COVID-19

The ACL/Total Loan Coverage Ratio as of September 30, 2020 increased to 1.12%, compared to 0.93% as of January 1, 2020 due to the forecasted impact on the economy from the COVID-19

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

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sheet credit exposures, which was unchanged from the allowance at January 1, 2020.

While we believe that the allowance at June 30, 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.

While we believe that the allowance at September 30, 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.

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

Total deposits were $10.98 billion at June 30, 2020.

Total deposits were $11.17 billion at September 30, 2020.

This represented an increase of $2.46 billion, or 28.30%, 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.

June 30, 2020

September 30, 2020

December 31, 2019

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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 $6.90 billion at June 30, 2020, representing an increase of $1.66 billion, or 31.57%, from noninterest-bearing deposits of $5.25 billion at December 31, 2019.

Noninterest-bearing deposits represented 62.83% of total deposits for June 30, 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 $3.62 billion at June 30, 2020, representing an increase of $609.4 million, or 20.23%, from savings deposits of $3.01 billion at December 31, 2019.

Time deposits totaled $459.7 million at June 30, 2020, representing an increase of $13.4 million, or 3.00%, from total time deposits of $446.3 million for December 31, 2019.

Noninterest-bearing deposits totaled $6.92 billion at September 30, 2020, representing an increase of $1.67 billion, or 31.91%, from noninterest-bearing deposits of $5.25 billion at December 31, 2019.

Noninterest-bearing deposits represented 61.95% of total deposits for September 30, 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 $3.80 billion at September 30, 2020, representing an increase of $791.2 million, or 26.26%, from savings deposits of $3.01 billion at December 31, 2019.

Time deposits totaled $445.1 million at September 30, 2020, representing a decrease of $1.2 million, or 0.26%, from total time deposits of $446.3 million for December 31, 2019.

We offer a repurchase agreement product to our customers.

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balance in a demand deposit account, in order to earn interest.

As of June 30 2020 and December 31, 2019, total funds borrowed under these agreements were $468.2 million and $428.7 million, respectively, with a weighted average interest rate of 0.20% and 0.44%, respectively.

At June 30, 2020, we had $10.0 million in short-term borrowings that are interest-free advances from the FHLB.

We had zero in short-term borrowings at December 31, 2019.

At June 30, 2020, $6.00 billion of loans and $1.87 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.

As of September 30, 2020 and December 31, 2019, total funds borrowed under these agreements were $483.4 million and $428.7 million, respectively, with a weighted average interest rate of 0.14% and 0.44%, respectively.

At September 30, 2020, we had $10.0 million in short-term borrowings that were interest-free advances from the FHLB.

We had no short-term borrowings at December 31, 2019.

At September 30, 2020, $6.00 billion of loans and $1.86 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.

Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of June 30, 2020.

The following table summarizes the aggregate contractual obligations as of September 30, 2020.

Maturity by Period

Less Than One

(Dollars in thousands)

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These amounts are due to customers.

At June 30, 2020, we had $10.0 million in FHLB short-term borrowings with a cost of 0.0%, compared to zero at December 31, 2019 and June 30, 2019.

At September 30, 2020, we had $10.0 million in FHLB short-term borrowings with a cost of 0.0%, compared to zero at December 31, 2019 and September 30, 2019.

Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III.

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The following table summarizes the off-balance

sheet items at June 30, 2020.

sheet items at September 30, 2020.

Maturity by Period

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Obligations under letters of credit

Total commitments to extend credit to agribusiness were $17.1 million at June 30, 2020.

As of June 30, 2020, we had commitments to extend credit of approximately $1.67 billion, and obligations under letters of credit of $46.7 million.

Total commitments to extend credit to agribusiness were $17.2 million at September 30, 2020.

As of September 30, 2020, we had commitments to extend credit of approximately $1.75 billion, and obligations under letters of credit of $48.8 million.

Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract.

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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 the three and six months ended June 30, 2020 and 2019.

The Company had a reserve for unfunded loan commitments of $9.0 million as of June 30, 2020 and December 31, 2019 included in other liabilities.

The Company recorded no provision or recapture of provision for unfunded loan commitments for the three and nine months ended September 30, 2020 and 2019.

The Company had a reserve for unfunded loan commitments of $9.0 million as of September 30, 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.

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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 $35.0 million, or 1.76%, to $1.96 billion at June 30, 2020, compared to total equity of $1.99 billion at December 31, 2019.

As part of this ongoing assessment, the Board of Directors reviews the various components of our capital.

Total equity decreased $12.1 million, or 0.61%, to $1.98 billion at September 30, 2020, compared to total equity of $1.99 billion at December 31, 2019.

The $12.1 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

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stock repurchase program due to the uncertainty of the COVID-19

Our equity also increased by $23.5 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 9.63% at June 30, 2020.

During the second quarter of 2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share.

Our tangible common equity ratio was 9.78% at September 30, 2020.

During the third 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.

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stock repurchase program due to the uncertainty of the COVID-19

For the six months ended June 30, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program.

As of June 30, 2020, we have 4,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.

For the nine months ended September 30, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program.

As of September 30, 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.

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To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%.

At June 30, 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.

At September 30, 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.

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for the year ended December 31, 2019.

At June 30, 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.

At September 30, 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.

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

June 30, 2020

September 30, 2020

December 31, 2019

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due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions.

Total deposits of $10.98 billion at June 30, 2020 increased $2.28 billion, or 26.18%, over total deposits of $8.70 billion at December 31, 2019.

This significant deposit growth was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity.

Total deposits of $11.17 billion at September 30, 2020 increased $2.46 billion, or 28.30%, over total deposits of $8.70 billion at December 31, 2019.

This significant deposit growth was primarily due to our customers maintaining greater liquidity.

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.

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We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets.

At June 30, 2020, we had only $25.8 million in subordinated debt and $10.0 million in FHLB short-term borrowings at 0% cost.

At September 30, 2020, we had $25.8 million in subordinated debt and $10.0 million in FHLB short-term borrowings at 0% cost.

The Bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans.

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Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.

Below is a summary of our average cash position and statement of cash flows for the three and six months ended June 30, 2020 and 2019.

Below is a summary of our average cash position and statement of cash flows for the nine months ended September 30, 2020 and 2019.

For further details see our “ Condensed Consolidated Statements of Cash Flows

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Consolidated Summary of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

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Net increase in cash and cash equivalents

Average cash and cash equivalents increased by $615.7 million, or 334.07%, to $800.0 million for the six months ended June 30, 2020, compared to $184.3 million for the same period of 2019.

At June 30, 2020, cash and cash equivalents totaled $1.93 billion.

This represented an increase of $1.75 billion, or 996.04%, from $175.8 million at June 30, 2019.

Average cash and cash equivalents increased by $834.1 million, or 351.60%, to $1.07 billion for the nine months ended September 30, 2020, compared to $237.2 million for the same period of 2019.

At September 30, 2020, cash and cash equivalents totaled $1.48 billion.

This represented an increase of $1.05 billion, or 239.38%, from $437.5 million at September 30, 2019.

Interest Rate Sensitivity Management

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Estimated Net Interest Income Sensitivity (1)

June 30, 2020

September 30, 2020

December 31, 2019

Interest Rate Scenario

24-month Period

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12-month Period

Interest Rate Scenario

12-month Period

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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.

Assumptions about the timing and variability of balance sheet cash flows are critical in the

EVE analysis.

Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios.

EVE sensitivity is reported in both upward and downward rate shocks.

At June 30, 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.

At September 30, 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

June 30, 2020

September 30, 2020

December 31, 2019

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis