CVB FINANCIAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of CVB Financial Corp. and its wholly owned subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with this Annual Report on Form 10-K, and the audited consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (“FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and medium-sized businesses through 100% SBA guaranteed loans distributed through banks. These loans 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. During 2020, we originated and funded about 4,100 loans, totaling approximately $1.10 billion. In response to the COVID-19 pandemic, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of January 15, 2021, we had remaining temporary payment deferments of principal or of principal and interest in response to the CARES Act for six loans totaling $10 million. These deferments were primarily for 90 days, with 85% of these loans being rated special mention or classified. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion has been set aside for Second Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, businesses with more than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses. Recently, the Bank began accepting applications for the second round of PPP loans. As of January 25, 2021, we have received approximately 1,400 applications totaling $340 million. The fourth and third quarters of 2020 did not include a provision for credit losses, as the economic outlook was generally consistent with the forecast from the end of the second quarter. In comparison, the Company recorded a provision for credit losses of $23.5 million in the first half of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act. The extent to which the COVID-19 pandemic will impact our operations and financial results during 2021 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. 45 Table of Contents CRITICAL ACCOUNTING POLICIES The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact the results of operations. Adoption of New Accounting Standard Allowance for Credit Losses (“ACL”) — On January 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. We adopted this ASU using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU 2016-13, resulted in a reduction to our opening retained earnings of approximately $1.3 million, net of tax. This ASU replaces the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off balance sheet credit exposures. This includes, but is not limited to, loans, held-to-maturity (“HTM”) securities, loan commitments, and financial guarantees. For loans and HTM debt securities, this ASU requires a CECL measurement to estimate the allowance for credit losses (“ACL”) for the remaining contractual term, adjusted for prepayments, of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. This ASU also eliminated the existing guidance for purchased credit-impaired (“PCI”) loans, but requires an allowance for purchased financial assets with more than an insignificant deterioration of credit since origination. Purchase Credit Deteriorated (“PCD”) assets are recorded at their purchase price plus an ACL estimated at the time of acquisition. Under this ASU, there is no provision for credit losses recognized at acquisition; instead, there is a gross-up of the purchase price of the financial asset for the estimate of expected credit losses and a corresponding ACL recorded. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit losses (or reversal of provision for credit losses) in subsequent periods. In addition, this ASU modifies the OTTI model for available-for-sale (“AFS”) debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet. For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation — Risk Management ” and Note 3 — Summary of Significant Accounting Policies and Note 6 — Loans and Lease Finance Receivables and Allowance for Credit Losses of our consolidated financial statements presented elsewhere in this report. 46 Table of Contents Business Combinations — The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain would be recognized. Acquisition related costs are expensed as incurred. Refer to Note 4 — Business Combinations of our consolidated financial statements presented elsewhere in this report . Valuation and Recoverability of Goodwill — Goodwill represented $663.7 million of our $14.42 billion in total assets as of December 31, 2020. The Company has one reportable segment. Goodwill has an indefinite useful life and is not amortized, but is tested for impairment at least annually, or more frequently, if events and circumstances exist that indicate that a goodwill impairment test should be performed. Such events and circumstances may include among others, a significant adverse change in legal factors or in the general business climate, significant decline in our stock price and market capitalization, unanticipated competition, the testing for recoverability of a significant asset group within the reporting unit, and an adverse action or assessment by a regulating body. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements. Based on the results of our annual goodwill impairment test, we determined that no goodwill impairment charges were required as our single reportable segment’s fair value exceeded its carrying amount. As of December 31, 2020, we determined there were no events or circumstances which would more likely than not reduce the fair value of our reportable segment below its carrying amount. Note 3 — Summary of Significant Accounting Policies of our consolidated financial statements presented elsewhere in this report Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings, the Company considers the future realization of these deferred tax assets more likely than not. The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. For complete discussion and disclosure of other accounting policies see Note 3 — Summary of Significant Accounting Policies of the Company’s consolidated financial statements presented elsewhere in this report. 47 Table of Contents Recently Issued Accounting Pronouncements but Not Adopted as of December 31, 2020 Standard Description Adoption Timing Impact on Financial Statements ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020 The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. 1st Quarter 2020 through the 4th Quarter 2022 The Company established a LIBOR Transition Task Force in 2020, which has inventoried our instruments that reflect exposure to LIBOR, created a framework to manage the transition and established a timeline for key decisions and actions to complete the transition from LIBOR in 2021. Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s consolidated financial statements. ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” Issued December 2019 The FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes certain exceptions for: recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020; early adoption is permitted. 1st Quarter 2021 We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements. 48 Table of Contents Standard Description Adoption Timing Impact on Financial Statements ASU 2020-01, 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, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement. 1st Quarter 2021 The adoption of this ASU will not have an impact on our consolidated financial statements. 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 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. ASU 2020-08 Codification Improvements to Subtopic 310-20, Receivables — Nonrefundable Fees and Other Costs Issued October 2020 The FASB issued this amendment to clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is not permitted. 1st Quarter 2021 The adoption of this ASU is not expected to have a material impact on our consolidated financial statements. 49 Table of Contents OVERVIEW For the year ended December 31, 2020, we reported net earnings of $177.2 million, compared with $207.8 million for 2019. This represented a $30.7 million, or 14.76%, decrease from the prior year. Diluted earnings per share were $1.30 for 2020, compared to $1.48 for 2019. The Company adopted ASU 2016-13, commonly referred to as CECL which replaced the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. 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. No provision for credit losses was recorded in either the third or fourth quarter of 2020. The Company’s economic forecast of macro-economic variables was generally consistent, with modest changes, from the end of the second quarter of 2020 to December 31, 2020. In comparison to the prior year, a $5.0 million loan loss provision was incurred for 2019. For the year ended December 31, 2020, we experienced minimal credit charge-offs of $666,000 and total recoveries of $358,000, resulting in net charge-offs of $308,000. During 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $883.0 million was outstanding at December 31, 2020. Interest and fee income from PPP loans was approximately $28.5 million for 2020. At December 31, 2020, total assets of $14.4 billion increased $3.14 billion, or 27.80%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $13.22 billion at December 31, 2020 increased $3.20 billion, or 31.88%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets includes a $1.81 billion increase in interest-earning balances due from the Federal Reserve, a $784.2 million increase in total loans, and a $562.8 million increase in investment securities. The increase in total loans was due to the origination of approximately $1.1 billion in PPP loans with a remaining outstanding balance totaling $883.0 million at December 31, 2020. Excluding PPP loans, total loans declined by $98.8 million from December 31, 2019. Our tax equivalent yield on interest-earning assets was 3.71% for 2020, compared to 4.58% for 2019. Total investment securities were $2.98 billion at December 31, 2020, an increase of $562.8 million, or 23.31%, from $2.41 billion at December 31, 2019. At December 31, 2020, investment securities HTM totaled $578.6 million. At December 31, 2020, investment securities AFS totaled $2.40 billion, inclusive of a pre-tax unrealized gain of $54.7 million, an increase of $32.8 from December 31, 2019. HTM securities declined by $95.8 million, or 14.21%, and AFS securities increased by $658.7 million, or 37.85%, from December 31, 2019. Our tax equivalent yield on investments was 2.10% for 2020, compared to 2.50% for 2019. Total loans and leases, net of deferred fees and discount, of $8.35 billion at December 31, 2020, increased by $784.2 million, or 10.37%, from $7.56 billion at December 31, 2019. The increase in total loans included $883.0 million in PPP loans. Excluding PPP loans, total loans declined by $98.8 million, or 1.31%. The $98.8 million decrease in loans included decreases of $123.1 million in commercial and industrial loans, $31.8 million in construction loans, $30.3 million in consumer loans, $22.6 million in dairy & livestock and agribusiness loans, $13.0 million in SFR mortgage loans, and $4.9 million in other loans. Partially offsetting these declines was an increase in commercial real estate loans of $126.9 million. Our yield on loans was 4.68% for the year ended December 31, 2020, compared to 5.26% for 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 $17.4 million for 2020, compared to $28.8 million for 2019. Noninterest-bearing deposits were $7.46 billion at December 31, 2020, an increase of $2.21 billion, or 42.13%, compared to $5.25 billion at December 31, 2019. The significant deposit growth in 2020 was primarily due to our customers maintaining greater liquidity. At December 31, 2020, noninterest-bearing deposits were 63.52% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits for 2020 was 0.12%, compared to 0.20% for 2019. 50 Table of Contents Customer repurchase agreements totaled $439.4 million at December 31, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.13% for 2020, compared to 0.21% for 2019. At December 31, 2020, we had $5.0 million in short short-term borrowing with 0% cost, compared to no borrowings at December 31, 2019. At December 31, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Our average cost of funds was 0.13% for 2020, compared to 0.24% for 2019. The allowance for credit losses totaled $93.7 million at December 31, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in 2020 due to the severe economic disruption forecasted to result from the COVID-19 pandemic. At December 31, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.25% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of December 31, 2020, total discounts remaining on acquired loans were $30.9 million. The Company’s total equity was $2.01 billion at December 31, 2020. This represented an increase of $13.9 million, or 0.70%, from total equity of $1.99 billion at December 31, 2019. This increase was primarily due to net earnings of $177.2 million and a $22.7 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our available-for-sale investment securities portfolio, partially offset by repurchases of common stock of $91.7 million under our 10b5-1 stock repurchase program, and $97.7 million in cash dividends. Our tangible common equity ratio was 9.6% at December 31, 2020. Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of December 31, 2020, the Company’s Tier 1 leverage capital ratio totaled 9.90%, our common equity Tier 1 ratio totaled 14.77%, our Tier 1 risk-based capital ratio totaled 15.06%, and our total risk-based capital ratio totaled 16.24%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our Analysis of Financial Condition — Capital Resources. ANALYSIS OF THE RESULTS OF OPERATIONS Financial Performance Variance Year Ended December 31, 2020 2019 2020 2019 2018 $ % $ % (Dollars in thousands, except per share amounts) Net interest income $ 416,053 $ 435,772 $ 349,045 $ (19,719 ) -4.53% $ 86,727 24.85% Provision for credit losses (23,500 ) (5,000 ) (1,500 ) (18,500 ) -370.00% (3,500 ) -233.33% Noninterest income 49,870 59,042 43,481 (9,172 ) -15.53% 15,561 35.79% Noninterest expense (192,903 ) (198,740 ) (179,911 ) 5,837 2.94% (18,829 ) -10.47% Income taxes (72,361 ) (83,247 ) (59,112 ) 10,886 13.08% (24,135 ) -40.83% Net earnings $ 177,159 $ 207,827 $ 152,003 $ (30,668 ) -14.76% $ 55,824 36.73% Earnings per common share: Basic $ 1.30 $ 1.48 $ 1.25 $ (0.18 ) $ 0.23 Diluted $ 1.30 $ 1.48 $ 1.24 $ (0.18 ) $ 0.24 Return on average assets 1.37% 1.84% 1.60% -0.47% 0.24% Return on average shareholders’ equity 8.90% 10.71% 11.00% -1.81% -0.29% Efficiency ratio 41.40% 40.16% 45.83% 1.24% -5.67% Noninterest expense to average assets 1.49% 1.76% 1.89% -0.27% -0.13% 51 Table of Contents Return on Average Tangible Common Equity Reconciliations (Non-GAAP) The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity. Year Ended December 31, 2020 2019 2018 (Dollars in thousands) Net Income $ 177,159 $ 207,827 $ 152,003 Add: Amortization of intangible assets 9,352 10,798 5,254 Less: Tax effect of amortization of intangible assets (1) (2,765 ) (3,192 ) (1,553 ) Tangible net income $ 183,746 $ 215,433 $ 155,704 Average stockholders’ equity $ 1,991,664 $ 1,939,961 $ 1,382,392 Less: Average goodwill (663,707 ) (665,026 ) (330,613 ) Less: Average intangible assets (38,203 ) (48,296 ) (26,055 ) Average tangible common equity $ 1,289,754 $ 1,226,639 $ 1,025,724 Return on average equity, annualized 8.90% 10.71% 11.00% Return on average tangible common equity 14.25% 17.56% 15.18% (1) Tax effected at respective statutory rates. Net Interest Income The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the years ended December 31, 2020, 2019 and 2018. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset/Liability and Market Risk Management — Interest Rate Sensitivity Management included herein. 52 Table of Contents The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. Interest-Earning Assets and Interest-Bearing Liabilities Year Ended December 31, 2020 2019 2018 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable $ 1,854,964 $ 35,129 1.94% $ 1,580,850 $ 38,189 2.42% $ 1,869,842 $ 44,423 2.38% Tax-advantaged 37,110 923 3.50% 41,991 1,141 3.76% 52,550 1,565 3.98% Held-to-maturity securities: Taxable 438,190 9,542 2.18% 504,814 11,498 2.28% 534,642 11,848 2.22% Tax-advantaged 173,756 4,681 3.26% 211,899 5,890 3.36% 243,955 7,053 3.50% Investment in FHLB stock 17,688 978 5.53% 17,688 1,235 6.98% 19,441 2,045 (4) 10.52% Interest-earning deposits with other institutions 1,098,814 1,682 0.15% 120,247 2,269 1.89% 97,266 1,642 1.69% Loans (2) 8,066,483 377,402 4.68% 7,552,505 397,628 5.26% 5,905,674 293,284 4.97% Total interest-earning assets 11,687,005 430,337 3.71% 10,029,994 457,850 4.58% 8,723,370 361,860 4.17% Total noninterest-earning assets 1,242,808 1,272,907 789,299 Total assets $ 12,929,813 $ 11,302,901 $ 9,512,669 INTEREST-BEARING LIABILITIES Savings deposits (3) $ 3,530,606 8,803 0.25% $ 3,048,785 12,698 0.42% $ 2,656,660 7,250 0.27% Time deposits 445,962 3,799 0.85% 487,221 4,422 0.91% 453,031 2,575 0.57% Total interest-bearing deposits 3,976,568 12,602 0.32% 3,536,006 17,120 0.48% 3,109,691 9,825 0.32% FHLB advances, other borrowings, and customer repurchase agreements 511,404 1,682 0.33% 537,964 4,958 0.91% 499,526 2,990 0.60% Interest-bearing liabilities 4,487,972 14,284 0.32% 4,073,970 22,078 0.54% 3,609,217 12,815 0.35% Noninterest-bearing deposits 6,281,989 5,177,035 4,449,110 Other liabilities 168,188 111,935 71,950 Stockholders’ equity 1,991,664 1,939,961 1,382,392 Total liabilities and stockholders’ equity $ 12,929,813 $ 11,302,901 $ 9,512,669 Net interest income $ 416,053 $ 435,772 $ 349,045 Net interest spread - tax equivalent 3.39% 4.04% 3.82% Net interest margin 3.57% 4.35% 4.00% Net interest margin - tax equivalent 3.59% 4.36% 4.03% (1) Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 21% in effect for the years ended December 31, 2020, 2019 and 2018. Non-tax equivalent (TE) rate was 2.04%, 2.43% and 2.41% for the years ended December 31, 2020, 2019 and 2018, respectively. (2) Includes loan fees of $23.9 million, $3.1 million and $3.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Prepayment penalty fees of $8.2 million, $5.4 million and $3.0 million are included in interest income for the years ended December 31, 2020, 2019 and 2018, respectively. (3) Includes interest-bearing demand and money market accounts. (4) Includes a special dividend from the FHLB of $520,000. 53 Table of Contents The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume. Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income Comparision of Year Ended December 31, 2020 Compared to 2019 Increase (Decrease) Due to 2019 Compared to 2018 Increase (Decrease) Due to Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities $ 5,679 $ (7,608 ) $ (1,131 ) $ (3,060 ) $ (6,919 ) $ 811 $ (126 ) $ (6,234 ) Tax-advantaged investment securities (132 ) (97 ) 11 (218 ) (315 ) (137 ) 28 (424 ) Held-to-maturity securities: Taxable investment securities (1,499 ) (525 ) 68 (1,956 ) (706 ) 377 (21 ) (350 ) Tax-advantaged investment securities (1,061 ) (181 ) 33 (1,209 ) (927 ) (272 ) 36 (1,163 ) Investment in FHLB stock - (257 ) - (257 ) (184 ) (688 ) 62 (810 ) Interest-earning deposits with other institutions 18,465 (2,085 ) (16,967 ) (587 ) 388 193 46 627 Loans 27,060 (44,273 ) (3,013 ) (20,226 ) 81,775 17,648 4,921 104,344 Total interest income 48,512 (55,026 ) (20,999 ) (27,513 ) 73,112 17,932 4,946 95,990 Interest expense: Savings deposits 2,007 (5,097 ) (805 ) (3,895 ) 1,070 3,815 563 5,448 Time deposits (374 ) (272 ) 23 (623 ) 194 1,537 116 1,847 FHLB advances, other borrowings, and customer repurchase agreements (245 ) (3,188 ) 157 (3,276 ) 234 1,610 124 1,968 Total interest expense 1,388 (8,557 ) (625 ) (7,794 ) 1,498 6,962 803 9,263 Net interest income $ 47,124 $ (46,469 ) $ (20,374 ) $ (19,719 ) $ 71,614 $ 10,970 $ 4,143 $ 86,727 2020 Compared to 2019 Net interest income, before provision for credit losses, of $416.1 million for 2020 decreased $19.7 million, or 4.53%, compared to $435.8 million for 2019. Interest-earning assets increased on average by $1.66 billion, or 16.52%, from $10.03 billion for 2019 to $11.69 billion for 2020. Our net interest margin (TE) was 3.59% for 2020, compared to 4.36% for 2019. Interest income for 2020 was $430.3 million, which represented a $27.5 million, or 6.01%, decrease when compared to 2019. Average interest-earning assets increased to $11.69 billion and the average earning asset yield was 3.71% for 2020, compared to 4.58% for 2019. The 87 basis point decrease in the interest-earning asset yield over 2019 was primarily due to a combination of a 58 basis point decrease in loan yields, a 39 basis point decline in the non-tax equivalent investment yields, and a change in mix of earning assets, with average balances at the Federal Reserve growing to 9.11% of earning assets for 2020, compared to 1.14% for 2019. The increase in balances at the Federal Reserve was impacted by $1.54 billion in average deposit growth for 2020. The net interest margin for 2020 would have been about 30 basis points higher without the $950.7 million year-over-year increase in average deposits at the Federal Reserve, earning just 10 basis points. Interest income and fees on loans for 2020 of $377.4 million decreased $20.2 million, or 5.09% when compared to 2019 Average loans increased $514.0 million for 2020 when compared to 2019, primarily due to 54 Table of Contents $702.1 million in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in approximately $21.4 million in fee income and $7.1 million in loan interest during 2020. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid decreased by $12.6 million compared to 2019. Loan yields decreased by 58 basis points from 2019. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding the impact from PPP loans, discount accretion and nonaccrual interest income, causing loan yields to decline by 36 basis points from 2019. In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans at December 31, 2020 and 2019. As of December 31, 2020 and 2019, we had $14.3 million and $5.3 million of nonaccrual loans, respectively. Had these nonaccrual loans for which interest was no longer accruing complied with the original terms and conditions, interest income would have been approximately $843,000 and $526,000 greater for 2020 and 2019, respectively. Interest income from investment securities was $50.3 million for 2020, a $6.4 million, or 11.36%, decrease from $56.7 million for 2019. The decrease was primarily the result of a 39 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 due to higher levels of premium amortization, as well as lower yields on investments purchased during 2020. Partially offsetting the decline from lower rates was a $164.5 million increase in the average investment securities for 2020 compared to 2019. Interest expense of $14.3 million for 2020 decreased $7.8 million, or 35.30%, compared to $22.1 million for 2019. The average rate paid on interest-bearing liabilities decreased by 22 basis points, to 0.32% for 2020, from 0.54% for 2019. The rate on interest-bearing deposits for 2020 decreased by 16 basis points from 2019. Average interest-bearing liabilities were $414.0 million higher for 2020 when compared to 2019. On average, noninterest-bearing deposits were 61.24% of our total deposits for 2020, compared to 59.42% for 2019. In comparison to 2020, our overall cost of funds decreased 11 basis points, as our average noninterest-bearing deposits grew by $1.10 billion. Average interest-bearing deposits increased by $440.6 million for 2020, while the cost of interest-bearing deposits decreased by 16 basis points. 2019 Compared to 2018 Net interest income, before provision for loan losses, of $435.8 million for 2019 increased $86.7 million, or 24.85%, compared to $349.0 million for 2018. Interest-earning assets increased on average by $1.31 billion, or 14.98%, from $8.72 billion for 2018 to $10.03 billion for 2019. The growth in interest-earning assets was primarily the result of loan growth from the acquisition of Community Bank (“CB”). Our net interest margin (TE) was 4.36% for 2019, compared to 4.03% for 2018. Interest income for 2019 was $457.9 million, which represented a $96.0 million, or 26.53%, increase when compared to 2018. Average interest-earning assets increased by $1.31 billion and the average interest-earning asset yield of 4.58%, compared to 4.17% for 2018. The 41 basis point increase in the interest-earning asset yield over 2018 resulted from the combination of a 29 basis point increase in loan yields and the change in mix of earning assets. Average loans as a percentage of earning assets grew from 67.7% in 2018 to 75.3% in 2019. Conversely, average investment securities declined as a percentage of earning assets from 31.0% in the prior year to 23.3% in 2019. Interest income and fees on loans for 2019 of $397.6 million increased $104.3 million, or 35.58% when compared to 2018 primarily due to loans acquired from CB. Average loans increased $1.65 billion for 2019 when compared with 2018. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $30.8 million for 2019, compared to $16.9 million for 2018, which increased loan yields by nine basis points. In addition, loan yields increased by an additional 20 basis points from the prior year primarily due to higher rates on loans indexed to variable interest rates, such as the Bank’s prime rate. 55 Table of Contents There was no interest income that was accrued and not reversed on nonaccrual loans at December 31, 2019 and 2018. As of December 31, 2019 and 2018, we had $5.3 million and $20.0 million of nonaccrual loans, respectively. Had these nonaccrual loans for which interest was no longer accruing complied with the original terms and conditions, interest income would have been approximately $526,000 and $1.3 million greater for 2019 and 2018, respectively. Interest income from investment securities was $56.7 million for 2019, an $8.2 million, or 12.59%, decrease from $64.9 million for 2018. This decrease was the net result of a $361.4 million decrease in the average investment securities for 2019 compared to 2018, partially offset by a two basis point increase in the non tax-equivalent yield on securities. Dividend income from FHLB stock decreased by $810,000 from 2019, primarily due to a special dividend of $520,000 received from the FHLB in the fourth quarter of 2018. Interest expense of $22.1 million for 2019 increased $9.3 million, or 72.28%, compared to $12.8 million for 2018. The average rate paid on interest-bearing liabilities increased by 19 basis points, to 0.54% for 2019, from 0.35% for 2018. The rate on interest-bearing deposits for 2019 increased by 16 basis points from 2018, as a result of higher rates on deposits acquired from CB and competition from higher interest rates offered by our competitors. Average interest-bearing liabilities increased by $464.8 million when compared to 2018, primarily due to deposits assumed from CB. Average noninterest-bearing deposits represented 59.42% of our total deposits for 2019, compared to 58.86% for 2018. The overall cost of funds increased by only eight basis points due to the continued strength and growth of noninterest-bearing deposits, during a period of higher short-term interest rates. Provision for Credit Losses The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date. On January 1, 2020, we adopted ASU 2016-13, commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan. The allowance for credit losses totaled $93.7 million at December 31, 2020, compared to $68.7 million at December 31, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first half of 2020, due to the severe economic disruption forecasted as a result of the COVID-19 pandemic. No provision for credit losses was recorded in the third or fourth quarter of 2020. For 2020, we experienced minimal credit charge-offs of $666,000 and total recoveries of $358,000, resulting in net charge-offs of $308,000. This compares to a $5.0 million loan loss provision and net recoveries of $47,000 for 2019 and a $1.5 million loan loss provision and net recoveries of $2.5 million for 2018. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of December 31, 2020, was 1.12%, or 1.25% when PPP loans are excluded. This compares to 0.91% and 0.82%, as of December 31, 2019 and 2018, respectively. As of December 31, 2020, remaining discounts on acquired loans were $30.9 million. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the COVID-19 pandemic. See “Allowance for Credit Losses” under Analysis of Financial Condition herein. Noninterest Income Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets. 56 Table of Contents The following table sets forth the various components of noninterest income for the periods presented. Variance Year Ended December 31, 2020 2019 2020 2019 2018 $ % $ % (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 16,561 $ 20,010 $ 17,070 $ (3,449 ) -17.24% $ 2,940 17.22% Trust and investment services 9,978 9,525 8,774 453 4.76% 751 8.56% Bankcard services 1,886 3,163 3,485 (1,277 ) -40.37% (322 ) -9.24% BOLI income 8,100 5,798 4,018 2,302 39.70% 1,780 44.30% Swap fee income 5,025 1,806 340 3,219 178.24% 1,466 431.18% Gain on OREO, net 388 129 3,546 259 200.78% (3,417 ) -96.36% Gain on sale of building, net 1,680 4,776 - (3,096 ) -64.82% 4,776 - Gain on eminent domain condemnation, net - 5,685 - (5,685 ) -100.00% 5,685 - Other 6,252 8,150 6,248 (1,898 ) -23.29% 1,902 30.44% Total noninterest income $ 49,870 $ 59,042 $ 43,481 $ (9,172 ) -15.53% $ 15,561 35.79% 2020 Compared to 2019 Noninterest income for 2019 included a $5.7 million net gain from the legal settlement of an eminent domain condemnation of one of our banking center buildings in Bakersfield and $4.8 million in net gains on the sale of bank owned buildings, compared with a $1.7 million net gain on the sale of one of our owned buildings in 2020. Service charges on deposit accounts decreased by $3.4 million from 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 $1.3 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. The $1.9 million decrease in other income in 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to 2019. 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. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 20 — Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information). Swap fee income increased $3.2 million compared to 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $280.4 million for 2020, compared to $96.4 million for 2019. CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At December 31, 2020, CitizensTrust had approximately $3.04 billion in assets under management and administration, including $2.18 billion in assets under management. CitizensTrust generated fees of $10.0 million for 2020, an increase of $453,000 compared to $9.5 million for 2019, due to the growth in assets under management. The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from our BOLI policies for 2020 included $2.8 million of death benefits that exceeded cash surrender values, compared to $502,000 of death benefits for 2019. 57 Table of Contents 2019 Compared to 2018 The $15.6 million growth 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 business financial center buildings in Bakersfield and a $4.8 million net gain on the sale of our bank owned buildings, compared with a $3.5 million net gain on the sale of one OREO in 2018. Service charges on deposit accounts increased by $2.9 million from 2018, primarily due to growth in service charges on deposits assumed in the acquisition of CB. The $3.4 million increase in other income included increases of $1.5 million in swap fee income, $1.0 million increase in international banking fee income, and $1.1 million in SBA servicing income and dividend income from various equity investments. For 2019, the Durbin Amendment’s cap on interchange fees became effective for the Company, which reduced our debit card interchange fee income for bankcard services by approximately $600,000 when compared to 2018. At December 31, 2019, CitizensTrust had approximately $2.86 billion in assets under management and administration, including $2.01 billion in assets under management. CitizensTrust generated fees of $9.5 million for 2019, an increase of $751,000 compared to $8.8 million for 2018, due to the growth in assets under management. The $1.8 million increase in BOLI income included a $1.2 million increase in income from $70.9 million of BOLI policies acquired from CB in the third quarter of 2018. Death benefits of $502,000 were included in our BOLI policies for 2019. Noninterest Expense The following table summarizes the various components of noninterest expense for the periods presented. Variance Year Ended December 31, 2020 2019 2020 2019 2018 $ % $ % (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 119,759 $ 119,475 $ 100,601 $ 284 0.24% $ 18,874 18.76% Occupancy 16,677 16,565 16,386 112 0.68% 179 1.09% Equipment 3,945 3,892 3,767 53 1.36% 125 3.32% Professional services 9,460 7,752 6,477 1,708 22.03% 1,275 19.69% Computer software expense 11,302 10,658 9,343 644 6.04% 1,315 14.07% Marketing and promotion 4,488 5,890 5,302 (1,402 ) -23.80% 588 11.09% Amortization of intangible assets 9,352 10,798 5,254 (1,446 ) -13.39% 5,544 105.52% Telecommunications expense 2,566 2,785 2,564 (219 ) -7.86% 221 8.62% Regulatory assessments 2,375 1,958 3,218 417 21.30% (1,260 ) -39.15% Insurance 1,636 1,475 1,735 161 10.92% (260 ) -14.99% Loan expense 1,159 1,439 1,103 (280 ) -19.46% 336 30.46% OREO expense 1,247 64 7 1,183 1848.44% 57 814.29% Recapture of provision for unfunded loan commitments - - (250 ) - - 250 100.00% Directors’ expenses 1,420 1,230 1,073 190 15.45% 157 14.63% Stationery and supplies 1,172 1,179 1,207 (7 ) -0.59% (28 ) -2.32% Acquisition related expenses - 6,447 16,404 (6,447 ) -100.00% (9,957 ) -60.70% Other 6,345 7,133 5,720 (788 ) -11.05% 1,413 24.70% Total noninterest expense $ 192,903 $ 198,740 $ 179,911 $ (5,837 ) -2.94% $ 18,829 10.47% Noninterest expense to average assets 1.49% 1.76% 1.89% Efficiency ratio (1) 41.40% 40.16% 45.83% (1) Noninterest expense divided by net interest income before provision for credit losses plus noninterest income. 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 1.49% for 2020, compared to 1.76% and 1.89% for 2019 and 2018, respectively. The decrease in this ratio for 2020 was significantly impacted by the $950 million increase in average balances at the Federal Reserve. 58 Table of Contents 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) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 41.40% for 2020, compared to 40.16% for 2019 and 45.83% for 2018. 2020 Compared to 2019 Noninterest expense of $192.9 million for the year ended December 31, 2020 was $5.8 million, or 2.9% lower than 2019. There were no merger related expenses related to the Community Bank acquisition for 2020, compared to $6.4 million for 2019 and the year-over-year decrease also included a $1.4 million decrease in CDI amortization. A decrease in marketing and promotion expense in 2020 of $1.4 million was primarily due to COVID-19 restrictions on travel and entertainment. These decreases were partially offset by a $1.7 million increase in professional services expense, related to legal, audit, and other professional services. OREO expense also increased in 2020 by $1.2 million primarily due to a $700,000 write-down of one OREO property. 2019 Compared to 2018 Noninterest expense of $198.7 million for the year ended December 31, 2019 was $18.8 million higher than 2018. Salaries and employee benefit costs increased $18.9 million primarily due to additional compensation related to the newly hired and former CB employees who were retained after the merger and $1.9 million in higher stock related compensation expense. Higher expense for accelerated vesting of stock grants related to the amended employment agreement and additional stock grants related to the consulting agreement for the Company’s retiring Chief Executive Officer contributed to the increase in compensation costs for 2019. The year-over-year increase also included a $5.5 million increase in CDI amortization as a result of core deposits assumed from CB. Increases of $1.3 million in professional services, $1.2 million in software licenses and maintenance, and $1.5 million in other expense was primarily related to higher expenses related to the operations of a larger bank after the merger with CB. These increases were partially offset by a $10.0 million decrease in merger related expenses. Income Taxes The Company’s effective tax rate for the year ended December 31, 2020 was 29.00%, compared with 28.60% and 28.00% for the year ended December 31, 2019 and 2018, respectively. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income as well as available tax credits. Refer to Note 11 — Income Taxes of the notes to consolidated financial statements for more information. The effective tax rates are below the nominal combined Federal and State tax rate as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 59 Table of Contents ANALYSIS OF FINANCIAL CONDITION Total assets of $14.42 billion at December 31, 2020 increased $3.14 billion, or 27.80%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $13.22 billion at December 31, 2020, an increase of $3.20 billion, or 31.88%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets includes a $1.81 billion increase in interest-earning balances due from the Federal Reserve, a $784.2 million increase in total loans, and a $562.8 million increase in investment securities. The increase in total loans was due to the origination of approximately $1.10 billion in PPP loans with a remaining outstanding balance totaling $883.0 million as of December 31, 2020. Excluding PPP loans, total loans declined by $98.8 million from December 31, 2019. Total liabilities were $12.41 billion at December 31, 2020, an increase of $3.12 billion, or 33.62%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $3.03 billion, or 34.83%. This significant deposit growth in 2020 was primarily due to our customers maintaining greater liquidity in their deposit accounts. Total equity increased $13.9 million, or 0.70%, to $2.01 billion at December 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $13.9 million increase in equity was primarily due to net earnings of $177.2 million and a $22.7 million increase in other comprehensive income from the tax effected impact of the increase in market value of available-for-sale investment securities, partially offset by $97.7 million in cash dividends and the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. Our equity also decreased by $1.3 million as a result of a cumulative effect adjustment to beginning retained earnings, net of tax, due to the adoption of CECL on January 1, 2020. Investment Securities The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At December 31, 2020, total investment securities were $2.98 billion. This represented an increase of $562.8 million, or 23.31%, 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 2020. At December 31, 2020, investment securities HTM totaled $578.6 million. At December 31, 2020, our AFS investment securities totaled $2.40 billion, inclusive of a pre-tax net unrealized gain of $54.7 million. The after-tax unrealized gain reported in AOCI on AFS investment securities was $38.6 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the years ended December 31, 2020 and 2019, repayments/maturities of investment securities totaled $798.7 million and $485.8 million, respectively. The Company purchased additional investment securities totaling $1.28 billion and $540.6 million for the years ended December 31, 2020 and 2019, respectively. There were no investment securities sold during the year ended December 31, 2020. During 2019, we sold 14 investment securities at book value of approximately $152.6 million. The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented. December 31, 2020 2019 Fair Value Percent Fair Value Percent (Dollars in thousands) Investment securities available-for-sale Mortgage-backed securities $ 1,904,935 79.41% $ 1,206,313 69.32% CMO/REMIC 462,814 19.29% 493,710 28.37% Municipal bonds 30,285 1.26% 39,354 2.26% Other securities 889 0.04% 880 0.05% Total available-for-sale securities $ 2,398,923 100.00% $ 1,740,257 100.00% 60 Table of Contents December 31, 2020 2019 Amortized Cost Percent Amortized Cost Percent (Dollars in thousands) Investment securities held-to-maturity Government agency/GSE $ 98,663 17.05% $ 117,366 17.40% Mortgage-backed securities 146,382 25.30% 168,479 24.98% CMO/REMIC 145,309 25.11% 192,548 28.55% Municipal bonds 188,272 32.54% 196,059 29.07% Total held-to-maturity securities $ 578,626 100.00% $ 674,452 100.00% Fair Value $ 604,223 $ 678,948 The maturity distribution of the AFS and HTM portfolios consist of the following as of the date presented. December 31, 2020 One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Total Percent to Total (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 807 $ 1,903,307 $ 821 $ - $ 1,904,935 79.41% CMO/REMIC 8,803 350,905 81,052 22,054 462,814 19.29% Municipal bonds (1) - 1,088 12,922 16,275 30,285 1.26% Other securities 889 - - - 889 0.04% Total $ 10,499 $ 2,255,300 $ 94,795 $ 38,329 $ 2,398,923 100.00% Weighted average yield: Mortgage-backed securities 4.80% 1.83% 3.37% - 1.84% CMO/REMIC 0.48% 1.50% 2.26% 2.52% 1.66% Municipal bonds (1) - 4.03% 2.48% 2.55% 2.58% Other securities 2.74% - - - 2.74% Total 1.00% 1.78% 2.30% 2.53% 1.81% (1) The weighted average yield for the portfolio is based on projected duration and is not tax-equivalent. The tax-equivalent yield at December 31, 2020 was 3.26%. 61 Table of Contents December 31, 2020 One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Total Percent to Total (Dollars in thousands) Investment securities held-to-maturity: Government agency/GSE $ - $ - $ - $ 98,663 $ 98,663 17.05% Mortgage-backed securities 262 134,978 9,031 2,111 146,382 25.30% CMO/REMIC - 145,309 - - 145,309 25.11% Municipal bonds (1) 2,462 24,961 66,530 94,319 188,272 32.54% Total $ 2,724 $ 305,248 $ 75,561 $ 195,093 $ 578,626 100.00% Weighted average yield: Government agency/GSE - - - 1.92% 1.92% Mortgage-backed securities 3.16% 2.21% 2.43% 3.43% 2.25% CMO/REMIC - 2.26% - - 2.26% Municipal bonds (1) 3.11% 2.80% 2.64% 2.10% 2.40% Total 3.12% 2.29% 2.61% 2.02% 2.24% (1) The weighted average yield for the portfolio is based on projected duration and is not tax-equivalent. The tax equivalent yield at December 31, 2020 was 3.03%. The maturity of each security category is defined as the contractual maturity except for the categories of mortgage-backed securities and CMO/REMIC whose maturities are defined as the estimated average life. The final maturity of mortgage-backed securities and CMO/REMIC will differ from their contractual maturities because the underlying mortgages have the right to repay such obligations without penalty. The speed at which the underlying mortgages repay is influenced by many factors, one of which is interest rates. Mortgages tend to repay faster as interest rates fall and slower as interest rate rise. This will either shorten or extend the estimated average life. Also, the yield on mortgage-backed securities and CMO/REMIC are affected by the speed at which the underlying mortgages repay. This is caused by the change in the amount of amortization of premiums or accretion of discounts of each security as repayments increase or decrease. The Company obtains the estimated average life of each security from independent third parties. The weighted-average yield on the total investment portfolio at December 31, 2020 was 1.92% with a weighted-average life of 2.9 years. This compares to a weighted-average yield of 2.54% at December 31, 2019 with a weighted-average life of 3.6 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs. Approximately 93% of the securities in the total investment portfolio, at December 31, 2020, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2020, approximately $64.4 million in U.S. government agency bonds are callable. The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 7% of the total investment portfolio, are predominately AA or higher rated securities. 62 Table of Contents The Company held investment securities in excess of 10% of shareholders’ equity from the following issuers as of the dates presented. December 31, 2020 2019 Book Value Market Value Book Value Market Value (Dollars in thousands) Major issuer: Federal National Mortgage Association $ 1,133,321 $ 1,166,735 $ 963,002 $ 976,431 Federal Home Loan Mortgage Corporation 1,058,957 1,084,494 805,841 815,311 Government National Mortgage Association 413,991 421,025 271,154 268,879 Municipal securities held by the Company are issued by various states and their various local municipalities. The following tables present municipal securities by the top holdings by state as of the dates presented. December 31, 2020 Amortized Cost Percent of Total Fair Value Percent of Total (Dollars in thousands) Municipal Securities available-for-sale: Minnesota $ 11,055 38.5 % $ 11,588 38.3 % Connecticut 5,653 19.7 % 5,910 19.5 % Massachusetts 4,147 14.4 % 4,394 14.5 % Iowa 2,345 8.2 % 2,430 8.0 % Ohio 2,115 7.4 % 2,194 7.2 % Maine 1,506 5.2 % 1,598 5.3 % All other states (2 states) 1,886 6.6 % 2,171 7.2 % Total $ 28,707 100.0 % $ 30,285 100.0 % Municipal Securities held-to-maturity: Minnesota $ 44,820 23.8 % $ 46,243 23.7 % Massachusetts 22,361 11.9 % 23,573 12.1 % Ohio 17,781 9.4 % 18,502 9.5 % Texas 17,135 9.1 % 17,706 9.1 % Wisconsin 12,236 6.5 % 12,755 6.5 % Connecticut 8,759 4.7 % 9,001 4.6 % All other states (20 states) 65,180 34.6 % 67,398 34.5 % Total $ 188,272 100.0 % $ 195,178 100.0 % 63 Table of Contents December 31, 2019 Amortized Cost Percent of Total Fair Value Percent of Total (Dollars in thousands) Municipal Securities available-for-sale: Minnesota $ 11,067 28.7% $ 11,274 28.6% Connecticut 5,976 15.5% 6,103 15.5% Iowa 5,831 15.1% 5,907 15.0% California 5,675 14.7% 5,845 14.9% Massachusetts 4,150 10.8% 4,260 10.8% Ohio 2,125 5.5% 2,219 5.6% All other states (3 states) 3,682 9.7% 3,746 9.6% Total $ 38,506 100.0% $ 39,354 100.0% Municipal Securities held-to-maturity: Minnesota $ 47,999 24.5% $ 48,695 24.4% Massachusetts 24,700 12.6% 25,328 12.7% Texas 21,586 11.0% 21,758 10.9% Wisconsin 12,276 6.2% 12,416 6.2% Washington 11,680 6.0% 11,873 6.0% Ohio 9,523 4.9% 9,909 5.0% All other states (20 states) 68,295 34.8% 69,382 34.8% Total $ 196,059 100.0% $ 199,361 100.0% We adopted ASU 2016-13 on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. As of December 31, 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 December 31, 2020. December 31, 2020 Less Than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 72,219 $ (101 ) $ - $ - $ 72,219 $ (101 ) CMO/REMIC 96,974 (249 ) - - 96,974 (249 ) Municipal bonds - - - - - - Total available-for-sale securities $ 169,193 $ (350 ) $ - $ - $ 169,193 $ (350 ) The table below presents the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019, prior to adoption of ASU 2016-13. Management previously reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities 64 Table of Contents have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired. December 31, 2019 Less Than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 20,289 $ (6 ) $ 97,964 $ (744 ) $ 118,253 $ (750 ) CMO/REMIC 177,517 (705 ) 34,565 (191 ) 212,082 (896 ) Municipal bonds - - 563 (2 ) 563 (2 ) Total available-for-sale securities $ 197,806 $ (711 ) $ 133,092 $ (937 ) $ 330,898 $ (1,648 ) Investment securities held-to-maturity: Government agency/GSE $ 28,359 $ (252 ) $ 19,405 $ (405 ) $ 47,764 $ (657 ) Mortgage-backed securities 10,411 (54 ) - - 10,411 (54 ) CMO/REMIC 23,897 (104 ) 166,193 (2,354 ) 190,090 (2,458 ) Municipal bonds 7,583 (32 ) 29,981 (533 ) 37,564 (565 ) Total held-to-maturity securities $ 70,250 $ (442 ) $ 215,579 $ (3,292 ) $ 285,829 $ (3,734 ) The Company did not record any charges for other-than-temporary impairment losses for the year ended December 31, 2019. Loans Total loans and leases, net of deferred fees and discounts, of $8.35 billion at December 31, 2020, increased by $784.2 million, or 10.37%, from $7.56 billion at December 31, 2019. The increase in total loans included $883.0 million in PPP loans. Excluding PPP loans, total loans declined by $98.8 million, or 1.31%. The $98.8 million decrease in loans included decreases of $123.1 million in commercial and industrial loans, $31.8 million in construction loans, $26.5 million in consumer and other loans, $22.6 million in dairy & livestock and agribusiness loans, $13.0 million in SFR mortgage loans, $7.6 million in municipal lease financings, and $1.1 million in other SBA loans. Partially offsetting these declines was an increase in commercial real estate loans of $126.9 million. 65 Table of Contents Total loans, net of deferred loan fees, comprise 63.14% of our total earning assets as of December 31, 2020. The following table presents our loan portfolio by type for the periods presented. Distribution of Loan Portfolio by Type December 31, 2020 2019 (1) 2018 2017 2016 (Dollars in thousands) Commercial real estate $ 5,501,509 $ 5,374,617 $ 5,394,229 $ 3,376,713 $ 2,930,141 Construction 85,145 116,925 122,782 77,982 85,879 SBA 303,896 305,008 350,043 122,055 97,184 SBA - PPP 882,986 - - - - Commercial and industrial 812,062 935,127 1,002,209 513,325 485,078 Dairy & livestock and agribusiness 361,146 383,709 393,843 347,289 338,631 Municipal lease finance receivables 45,547 53,146 64,186 70,243 64,639 SFR mortgage 270,511 283,468 296,504 236,202 250,605 Consumer and other loans 86,006 116,319 128,429 64,229 78,274 Gross loans (Non-PCI) 8,348,808 7,568,319 7,752,225 4,808,038 4,330,431 Less: Deferred loan fees, net (2) - (3,742 ) (4,828 ) (6,289 ) (6,952 ) Gross loans, net of deferred loan fees (Non-PCI) 8,348,808 7,564,577 7,747,397 4,801,749 4,323,479 Less: Allowance for credit losses (93,692 ) (68,660 ) (63,409 ) (59,218 ) (60,321 ) Net loans (Non-PCI) $ 8,255,116 $ 7,495,917 7,683,988 4,742,531 4,263,158 PCI Loans 17,214 30,908 73,093 Discount on PCI loans - (2,026 ) (1,508 ) Less: Allowance for credit losses (204 ) (367 ) (1,219 ) PCI loans, net 17,010 28,515 70,366 Total loans and lease finance receivables $ 7,700,998 $ 4,771,046 $ 4,333,524 (1) Beginning with June 30, 2019, PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables. (2) Beginning with March 31, 2020, gross loans are presented net of deferred loan fees by respective class of financing receivables. As of December 31, 2020, $314.4 million, or 5.72% 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 $132.9 million for loans secured by dairy & livestock land and $181.5 million for loans secured by agricultural land at December 31, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019. As of December 31, 2020, dairy & livestock and agribusiness loans of $361.1 million were comprised of $320.1 million for dairy & livestock loans and $41.0 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019. Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers. As of December 31, 2020, the Company had $190.2 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with 66 Table of Contents the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of December 31, 2020, the Company had $113.7 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, with a remaining outstanding balance of $883.0 million as of December 31, 2020. As of December 31, 2020, the Company had $85.1 million in construction loans. This represents 1.02% of total gross loans held-for-investment. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at December 31, 2020. Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, by region as of December 31, 2020. December 31, 2020 Total Loans Commercial Real Estate Loans (Dollars in thousands) Los Angeles County $ 3,543,375 42.4 % $ 2,234,357 40.6 % Central Valley 1,401,683 16.8 % 997,819 18.1 % Inland Empire 1,150,925 13.8 % 833,012 15.2 % Orange County 1,072,852 12.8 % 658,303 12.0 % Central Coast 497,024 6.0 % 367,787 6.7 % San Diego 227,664 2.7 % 160,572 2.9 % Other California 131,998 1.6 % 77,418 1.4 % Out of State 323,287 3.9 % 172,241 3.1 % $ 8,348,808 100.0 % $ 5,501,509 100.0 % The table below breaks down our real estate portfolio. December 31, 2020 Loan Balance Percent Percent Owner- Occupied (1) Average Loan Balance Commercial real estate: (Dollars in thousands) Industrial $ 1,863,337 33.9% 53.0% $ 1,399 Office 998,673 18.1% 24.5% 1,608 Retail 784,402 14.3% 13.2% 1,702 Multi-family 618,333 11.2% 2.0% 1,627 Secured by farmland (2) 314,429 5.7% 98.0% 2,139 Medical 289,622 5.3% 44.8% 1,745 Other (3) 632,713 11.5% 56.5% 1,403 Total commercial real estate $ 5,501,509 100.0% 39.0% $ 1,546 (1) Represents percentage of reported owner-occupied at origination in each real estate loan category. (2) The loans secured by farmland included $132.9 million for loans secured by dairy & livestock land and $181.5 million for loans secured by agricultural land at December 31, 2020. (3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans. 67 Table of Contents The pandemic has had a greater impact on certain industries, such a retail, hospitality, and entertainment. At December 31, 2020, commercial real estate loans on retail properties comprised $784.4 million and approximately 14.3% of total loans; none of these loans are on deferment and $5 million of these loans are classified. At origination, these loans on retail properties were underwritten with loan-to-values averaging approximately 49%. Approximately 51% of these loans were originated prior to 2017. At December 31, 2020, commercial and industrial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $97 million in loans, or approximately 1% of total loans; $2.6 million of these loans are classified and $2.7 million are on deferment. The table below provides the maturity distribution for held-for-investment total gross loans as of December 31, 2020. The loan amounts are based on contractual maturities although the borrowers have the ability to prepay the loans. Amounts are also classified according to repricing opportunities or rate sensitivity. Loan Maturities and Interest Rate Category Within One Year After One But Within Five Years After Five Years Total (Dollars in thousands) Types of Loans: Commercial real estate $ 250,873 $ 1,654,783 $ 3,595,853 $ 5,501,509 Construction 76,453 8,692 - 85,145 SBA 11,522 23,002 269,372 303,896 SBA - PPP - 882,986 - 882,986 Commercial and industrial 288,070 346,151 177,841 812,062 Dairy & livestock and agribusiness 260,241 99,065 1,840 361,146 Municipal lease finance receivables 96 6,223 39,228 45,547 SFR mortgage 123 295 270,093 270,511 Consumer and other loans 9,903 16,757 59,346 86,006 Total gross loans $ 897,281 $ 3,037,954 $ 4,413,573 $ 8,348,808 Amount of Loans based upon: Fixed Rates $ 174,052 $ 2,408,735 $ 2,308,500 $ 4,891,287 Floating or adjustable rates 723,229 629,219 2,105,073 3,457,521 Total gross loans $ 897,281 $ 3,037,954 $ 4,413,573 $ 8,348,808 As a normal practice in extending credit for commercial and industrial purposes, we may accept trust deeds on real property as collateral. In some cases, when the primary source of repayment for the loan is anticipated to come from the cash flow from normal operations of the borrower, and real property has been taken as collateral, the real property is considered a secondary source of repayment for the loan. Since we lend primarily in Southern and Central California, our real estate loan collateral is concentrated in this region. 68 Table of Contents Nonperforming Assets The following table provides information on nonperforming assets as of the dates presented. December 31, 2020 2019 2018 (1) 2017 (1) 2016 (1) (Dollars in thousands) Nonaccrual loans $ 14,347 $ 5,033 $ 16,442 $ 6,516 $ 5,526 Loans past due 90 days or more and still accruing interest Nonperforming troubled debt restructured loans (TDRs - 244 3,509 4,200 1,626 Total nonperforming loans 14,347 5,277 19,951 10,716 7,152 OREO, net 3,392 4,889 420 4,527 4,527 Total nonperforming assets $ 17,739 $ 10,166 $ 20,371 $ 15,243 $ 11,679 Performing TDRs $ 2,159 $ 3,112 $ 3,594 $ 4,809 $ 19,233 Total nonperforming loans and performing TDRs $ 16,506 $ 8,389 $ 23,545 $ 15,525 $ 26,385 Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees 0.20 % 0.11 % 0.30 % 0.32 % 0.60 % Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO 0.21 % 0.13 % 0.26 % 0.32 % 0.27 % Percentage of nonperforming assets to total assets 0.12 % 0.09 % 0.18 % 0.18 % 0.14 % (1) Excludes PCI loans. Troubled Debt Restructurings Total TDRs were $2.2 million at December 31, 2020, compared to $3.4 million at December 31, 2019. At December 31, 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. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans and enter into loan modifications offered as a result of COVID-19, their loans generally continue to be considered performing loans and continue to accrue interest during the period of the loan modification. For borrowers who are 30 days or more past due when entering into loan modifications offered as a result of COVID-19, we evaluate the loan modifications under our existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. For all borrowers who enroll in these loan modification programs offered as a result of COVID-19, the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program. As of January 15, 2021, we had temporary payment deferments of principal, or of principal and interest on six loans in the amount of $10.0 million. These deferments were primarily for 90 days, with 85% of these loans being rated special mention or classified. 69 Table of Contents The following table provides a summary of TDRs as of the dates presented. December 31, 2020 2019 Balance Number of Loans Balance Number of Loans (Dollars in thousands) Performing TDRs: Commercial real estate $ 320 1 $ 397 1 Construction - - - - SBA - - 536 1 Commercial and industrial 43 1 78 2 Dairy & livestock and agribusiness - - - - SFR mortgage 1,796 7 2,101 8 Consumer and other - - - - Total performing TDRs $ 2,159 9 $ 3,112 12 Nonperforming TDRs: Commercial real estate $ - - $ - - Construction - - - - SBA - - - - Commercial and industrial - - - - Dairy & livestock and agribusiness - - - - SFR mortgage - - - - Consumer and other - - 244 1 Total nonperforming TDRs $ - - $ 244 1 Total TDRs $ 2,159 9 $ 3,356 13 At December 31, 2020 and 2019, there was no ACL 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 2020, compared to $78,000 for the same period of 2019. 70 Table of Contents Nonperforming Assets and Delinquencies The table below provides trends in our nonperforming assets and delinquencies as of the dates presented. December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 (Dollars in thousands) Nonperforming loans (1): Commercial real estate $ 7,563 $ 6,481 $ 2,628 $ 947 $ 724 Construction - - - - - SBA 2,273 1,724 1,598 2,748 2,032 Commercial and industrial 3,129 1,822 1,222 1,703 1,266 Dairy & livestock and agribusiness 785 849 - - - SFR mortgage 430 675 1,080 864 878 Consumer and other loans 167 224 289 166 377 Total $ 14,347 $ 11,775 $ 6,817 $ 6,428 $ 5,277 % of Total loans 0.17% 0.14% 0.08% 0.09% 0.07% Past due 30-89 days: Commercial real estate $ - $ - $ 4 $ 210 $ - Construction - - - - - SBA 1,965 66 214 3,086 1,402 Commercial and industrial 1,101 3,627 630 665 2 Dairy & livestock and agribusiness - - 882 166 - SFR mortgage - - 446 233 249 Consumer and other loans - 67 413 - - Total $ 3,066 $ 3,760 $ 2,589 $ 4,360 $ 1,653 % of Total loans 0.04% 0.04% 0.03% 0.06% 0.02% OREO: Commercial real estate $ 1,575 $ 1,575 $ 2,275 $ 2,275 $ 2,275 SBA - 797 797 797 797 SFR mortgage 1,817 1,817 1,817 1,817 1,817 Total $ 3,392 $ 4,189 $ 4,889 $ 4,889 $ 4,889 Total nonperforming, past due, and OREO $ 20,805 $ 19,724 $ 14,295 $ 15,677 $ 11,819 % of Total loans 0.25% 0.23% 0.17% 0.21% 0.16% (1) 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 $14.3 million at December 31, 2020, or 0.17% of total loans. Total nonperforming loans at December 31, 2020 included $11.0 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. The $9.1 million increase in nonperforming loans was primarily due to increases of $6.8 million in nonperforming commercial real estate loans, $1.9 million in nonperforming commercial and industrial loans, $785,000 in nonperforming dairy & livestock and agribusiness loans, and $241,000 in nonperforming SBA loans. This was partially offset by a $448,000 decrease in nonperforming SFR mortgage loans and a $210,000 decrease in nonperforming consumer and other loans. At December 31, 2020, we had two OREO properties with a carrying value of $3.4 million, compared to four properties with a carrying value of $4.9 million at December 31, 2019. We reflected a $700,000 write-down of one OREO property in the third quarter of 2020. During 2020, we sold two OREO properties, realizing a net gain on sale of $365,000. There were no additions to OREO for the year ended December 31, 2020. 71 Table of Contents Changes in economic and business conditions have had an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “ Risk Management – Credit Risk Management ” included herein. Allowance for Credit Losses We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3 – Summary of Significant Accounting Policies of the notes to the unaudited condensed consolidated financial statements. The allowance for credit losses totaled $93.7 million as of December 31, 2020, compared to $68.7 million as of December 31, 2019. Our allowance for credit losses at December 31, 2020 was 1.12%, or 1.25% of total loans when excluding the $883.0 million 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 for 2020 due to the severe economic disruption resulting from the COVID-19 pandemic. Net charge-offs were $308,000 for 2020. This compares to a $5.0 million loan loss provision and $47,000 in net recoveries for the same period of 2019. The allowance for credit losses as of December 31, 2020 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools: Commercial Real Estate, Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real estate loans include OLTV, origination year, loan seasoning, and macroeconomic variables that include GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans (excluding Payment Protection Program loans). The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of Small Business Administration (SBA) loans (excluding Payment Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes. For the year ended December 31, 2020, the ACL increased by $25.0 million, including a $1.8 million increase from the adoption of CECL on January 1, 2020. The increase in the ACL was primarily due to $23.5 million in provision for credit losses recorded in the first half of 2020 resulting from the forecasted changes in macroeconomic variables related to the COVID-19 pandemic. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s, including Moody’s baseline forecast, as well as upside and downside forecasts. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario, while due to economic uncertainty a greater weighting was placed on the downside economic forecast, relative to the upside forecast. Our forecast assumes GDP will increase by 2.5% in 2021 and then grow by 3.6% in 2022 and 2023. The unemployment rate is forecasted to be 7.7% in 2021, before declining to 7.2% percent in 2022 and 5.7% in 2023. Management believes that the ACL was appropriate at December 31, 2020 and 2019. As there is a high degree of uncertainty around the epidemiological assumptions and impact of government responses to the pandemic that impact our economic forecast, no assurance can be given that 72 Table of Contents economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in an increased allowance for credit losses in future periods. The table below presents a summary of net charge-offs and recoveries by type and the resulting allowance for loan losses and recapture of provision for credit losses for the periods presented. Year Ended December 31, 2020 2019 2018 2017 2016 (Dollars in thousands) Allowance for credit losses at beginning of period $ 68,660 $ 63,613 $ 59,585 $ 61,540 $ 59,156 Impact of adopting ASU 2016-13 1,840 - - - - Charge-offs: Commercial real estate - - - - - Construction - - - - - SBA (362) (321) (257) - - Commercial and industrial (195) (48) (10) (138) (120) Dairy & livestock and agribusiness - (78) - - - SFR mortgage - - (13) - (102) Consumer and other loans (109) (7) (11) (13) (16) Total charge-offs (666) (454) (291) (151) (238) Recoveries: Commercial real estate - - - 154 792 Construction 11 12 2,506 6,036 7,174 SBA 72 9 20 78 40 Commercial and industrial 10 255 82 118 630 Dairy & livestock and agribusiness - 19 19 19 216 SFR mortgage 206 196 51 212 - Consumer and other loans 59 10 141 79 170 Total recoveries 358 501 2,819 6,696 9,022 Net recoveries (308) 47 2,528 6,545 8,784 Provision for (recapture of) credit losses 23,500 5,000 1,500 (8,500) (6,400) Allowance for credit losses at end of period $ 93,692 $ 68,660 $ 63,613 $ 59,585 $ 61,540 Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period $ 8,959 $ 8,959 $ 6,306 $ 6,706 $ 7,156 Impact of adopting ASU 2016-13 41 Estimated fair value of reserve for unfunded loan commitment assumed from Community Bank - - 2,903 - - Recapture of provision for unfunded loan commitments - - (250) (400) (450) Reserve for unfunded loan commitments at end of period $ 9,000 $ 8,959 $ 8,959 $ 6,306 $ 6,706 Reserve for unfunded loan commitments to total unfunded loan commitments 0.54% 0.56% 0.51% 0.66% 0.76% Amount of total loans at end of period (1) $ 8,348,808 $ 7,564,577 $ 7,764,611 $ 4,830,631 $ 4,395,064 Average total loans outstanding (1) $ 8,066,483 $ 7,552,505 $ 5,905,674 $ 4,623,244 $ 4,195,129 Net (charge-offs) recoveries to average total loans -0.004% 0.00% 0.04% 0.14% 0.21% Net (charge-offs) recoveries to total loans at end of period -0.004% 0.00% 0.03% 0.14% 0.20% Allowance for credit losses to average total loans 1.16% 0.91% 1.08% 1.29% 1.47% Allowance for credit losses to total loans at end of period 1.12% 0.91% 0.82% 1.23% 1.40% Net (charge-offs) recoveries to allowance for credit losses -0.33% 0.07% 3.97% 10.98% 14.27% Net (charge-offs) recoveries to provision for (recapture of) credit losses -1.31% 0.94% 168.53% -77.00% -137.25% (1) Net of deferred loan origination fees, costs and discounts. 73 Table of Contents The ACL/Total Loan Coverage Ratio as of December 31, 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 crisis. At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our off-balance sheet credit exposures. The Bank’s ACL methodology also produced an allowance of $9.0 million for our off-balance sheet credit exposures, which was unchanged from the allowance at January 1, 2020. While we believe that the allowance at December 31, 2020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future. The following table provides a summary of the allocation of the allowance for credit losses for specific loan categories at the dates indicated for total loans. The allocations presented should not be interpreted as an indication that loans charged to the allowance for credit losses will occur in these amounts or proportions, or that the portion of the allowance allocated to each loan category, represents the total amount available for future losses that may occur within these categories. Allowance for Credit Losses by Loan Type December 31, 2020 2019 2018 2017 2016 Allowance Amount Loans as % of Total Loans Allowance Amount Loans as % of Total Loans Allowance Amount Loans as % of Total Loans Allowance Amount Loans as % of Total Loans Allowance Amount Loans as % of Total Loans (Dollars in thousands) Commercial real estate $ 75,439 65.9% $ 48,629 71.0% $ 44,934 69.4% $ 41,722 69.8% $ 37,443 66.6% Construction 1,934 1.0% 858 1.5% 981 1.6% 984 1.6% 1,096 1.9% SBA 2,992 3.6% 1,453 4.0% 1,062 4.5% 869 2.5% 871 2.2% SBA - PPP - 10.6% - - - - - - - - Commercial and industrial 7,142 9.7% 8,880 12.4% 7,520 12.9% 7,280 10.6% 8,154 11.0% Dairy & livestock and agribusiness 3,949 4.4% 5,255 5.1% 5,215 5.1% 4,647 7.2% 8,541 7.7% Municipal lease finance receivables 74 0.5% 623 0.7% 775 0.8% 851 1.5% 941 1.5% SFR mortgage 367 3.2% 2,339 3.8% 2,196 3.8% 2,112 4.9% 2,287 5.7% Consumer and other loans 1,795 1.1% 623 1.5% 726 1.7% 753 1.3% 988 1.8% PCI loans - - - - 204 0.2% 367 0.6% 1,219 1.6% Total $ 93,692 100.0% $ 68,660 100.0% $ 63,613 100.0% $ 59,585 100.0% $ 61,540 100.0% 74 Table of Contents Deposits The primary source of funds to support earning assets (loans and investments) is the generation of deposits. Total deposits were $11.74 billion at December 31, 2020. This represented an increase of $3.03 billion, or 34.83%, over total deposits of $8.70 billion at December 31, 2019. The average balance of deposits by category and the average effective interest rates paid on deposits is summarized for the periods presented in the table below. Year Ended December 31, 2020 2019 2018 Average Balance Rate Balance Rate Balance Rate (Dollars in thousands) Noninterest-bearing deposits $ 6,281,989 - $ 5,177,035 - $ 4,449,110 - Interest-bearing deposits Investment checking 478,458 0.08% 452,437 0.11% 438,112 0.08% Money market 2,599,553 0.31% 2,197,194 0.54% 1,834,540 0.36% Savings 452,595 0.09% 399,154 0.10% 384,008 0.10% Time deposits 445,962 0.85% 487,221 0.91% 453,031 0.57% Total deposits $ 10,258,557 $ 8,713,041 $ 7,558,801 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. Average noninterest-bearing deposits totaled $6.28 billion for 2020, representing an increase of $1.10 billion, or 21.34%, from average demand deposits of $5.18 billion for 2019. Average noninterest-bearing deposits represented 61.24% of total average deposits for 2020, compared to 59.42% of total average deposits for 2019. Average savings deposits, which include savings, interest-bearing demand, and money market accounts, were $3.53 billion for 2020, representing an increase of $481.8 million, or 15.80%, from average savings deposits of $3.05 billion for 2019. Average time deposits totaled $446.0 million for 2020, representing a decrease of $41.3 million, or 8.47%, from total average time deposits of $487.2 million for 2019. The following table provides the remaining maturities of large denomination ($250,000 or more) time deposits, including public funds, at December 31, 2020. Maturity Distribution of Large Denomination Time Deposits December 31, 2020 (Dollars in thousands) 3 months or less $ 35,384 Over 3 months through 6 months 15,277 Over 6 months through 12 months 27,685 Over 12 months 21,954 Total $ 100,300 Time deposits totaled $401.7 million at December 31, 2020, representing a decrease of $44.6 million, or 10.00%, from total time deposits of $446.3 million for December 31, 2019. 75 Table of Contents Borrowings The following table summarizes information about our term FHLB advances, repurchase agreements and other borrowings outstanding for the periods presented. Repurchase Agreements FHLB Advances Other Borrowings Total (Dollars in thousands) At December 31, 2020 Amount outstanding $ 439,406 $ - $ 5,000 $ 444,406 Weighted-average interest rate 0.10 % - - 0.10 % Year ended December 31, 2020 Highest amount at month-end $ 501,881 $ - $ 10,000 $ 511,881 Daily-average amount outstanding $ 479,956 $ - $ 5,674 $ 485,630 Weighted-average interest rate 0.24 % - 0.04 % 0.23 % At December 31, 2019 Amount outstanding $ 428,659 $ - $ - $ 428,659 Weighted-average interest rate 0.44 % - - 0.44 % Year ended December 31, 2019 Highest amount at month-end $ 547,730 $ - $ 295,000 $ 842,730 Daily-average amount outstanding $ 435,317 $ - $ 76,873 $ 512,190 Weighted-average interest rate 0.47 % - 2.51 % 0.77 % At December 31, 2018 Amount outstanding $ 442,255 $ - $ 280,000 $ 722,255 Weighted-average interest rate 0.39 % - 2.53 % 1.22 % Year ended December 31, 2018 Highest amount at month-end $ 556,356 $ - $ 280,000 $ 836,356 Daily-average amount outstanding $ 439,658 $ 2,446 $ 31,648 $ 473,752 Weighted-average interest rate 0.31 % 1.59 % 2.09 % 0.44 % At December 31, 2020, our borrowings included $439.4 million of repurchase agreements and $5.0 million in other short-term borrowing at an interest rate of 0%. At December 31, 2019, our borrowings included $428.7 million in repurchase agreements. We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price which reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of December 31, 2020, total funds borrowed under these agreements were $439.4 million with a weighted average interest rate of 0.10%, compared to $428.7 million with a weighted average rate of 0.44% as of December 31, 2019. At December 31, 2020, we had $5.0 million in short-term borrowings that were interest free advances from the FHLB, compared to no borrowings at December 31. 2019. At December 31, 2020, our junior subordinated debentures of $25.8 million represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Refer to Note 13 — Borrowings of the notes to the consolidated financial statements for a more detailed discussion. At December 31, 2020, $6.07 billion of loans and $1.81 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. 76 Table of Contents Aggregate Contractual Obligations The following table summarizes the aggregate contractual obligations as of December 31, 2020. Maturity by Period Total Less Than One Year One Year Through Three Years Four Years Through Five Years Over Five Years (Dollars in thousands) Deposits (1) $ 11,736,501 $ 11,697,276 $ 29,251 $ 9,362 $ 612 Customer repurchase agreements (1) 439,406 439,406 - - - Junior subordinated debentures (1) 25,774 - - - 25,774 Deferred compensation 22,142 689 1,098 619 19,736 Operating leases 22,382 6,800 9,389 4,472 1,721 Affordable housing investment 1,950 1,026 864 47 13 Total $ 12,248,155 $ 12,145,197 $ 40,602 $ 14,500 $ 47,856 (1) Amounts exclude accrued interest. Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank. Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers. Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current and retired employees under our deferred compensation plans. Operating leases represent the total minimum lease payments due under non-cancelable operating leases. Refer to Note 23 — Leases of the notes to the consolidated financial statements for a more detailed discussion about leases. 77 Table of Contents Off-Balance Sheet Arrangements The following table summarizes the off-balance sheet items at December 31, 2020. Maturity by Period Total Less Than One Year One Year to Three Years Four Years to Five Years After Five Years (Dollars in thousands) Commitment to extend credit: Commercial real estate $ 309,966 $ 50,755 $ 91,502 $ 136,108 $ 31,601 Construction 89,987 62,964 27,023 — — SBA 257 41 — — 216 SBA - PPP — — — — — Commercial and industrial 928,767 623,258 193,791 5,793 105,925 Dairy & livestock and agribusiness (1) 140,926 109,823 31,049 — 54 SFR Mortgage 3,786 — 500 — 3,286 Consumer and other loans 131,604 9,227 13,389 3,186 105,802 Total commitment to extend credit 1,605,293 856,068 357,254 145,087 246,884 Obligations under letters of credit 53,164 51,856 1,308 — — Total $ 1,658,457 $ 907,924 $ 358,562 $ 145,087 $ 246,884 (1) Total commitments to extend credit to agribusiness were $19.5 million at December 31, 2020. As of December 31, 2020, we had commitments to extend credit of approximately $1.61 billion, and obligations under letters of credit of $53.2 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000 was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments for the year December 31, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of December 31, 2020 and 2019 included in other liabilities. Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments. Capital Resources Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital. Total equity increased $13.9 million, or 0.70%, to $2.01 billion at December 31, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $13.9 million increase in equity was primarily due to $177.2 million in net earnings, a $22.7 million increase in other comprehensive income resulting from the tax 78 Table of Contents effected impact of the increase in market value of our investment securities portfolio, and $4.7 million for various stock based compensation items. This was offset by $91.7 million in stock repurchases under our 10b5-1 stock repurchase program, $97.7 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 tangible common equity ratio was 9.55% at December 31, 2020. During 2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.72 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures. On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. For the year ended December 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of December 31, 2020, we have 4,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program. The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At December 31, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1. Business—Regulation and Supervision—Capital Adequacy Requirements ”. At December 31, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented. Minimum Required Plus Capital Conservation Buffer December 31, 2020 December 31, 2019 Capital Ratios Adequately Capitalized Ratios Well Capitalized Ratios CVB Financial Corp. Consolidated Citizens Business Bank CVB Financial Corp. Consolidated Citizens Business Bank Tier 1 leverage capital ratio 4.00% 4.00% 5.00% 9.90% 9.58% 12.33% 12.19% Common equity Tier 1 capital ratio 4.50% 7.00% 6.50% 14.77% 14.57% 14.83% 14.94% Tier 1 risk-based capital ratio 6.00% 8.50% 8.00% 15.06% 14.57% 15.11% 14.94% Total risk-based capital ratio 8.00% 10.50% 10.00% 16.24% 15.75% 16.01% 15.83% 79 Table of Contents RISK MANAGEMENT All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Our Board of Directors (Board) and executive management team have overall and ultimate responsibility for management of these risks, which they carry out through committees with specific and well-defined risk management functions. The Risk Management Plan that we have adopted seeks to implement the proper control and management of key risk factors inherent in the operation of the Company and the Bank. Some of the key risks that we must manage are credit risks, asset/liability, interest rate and market risks, counterparty risk, transaction risk, compliance risk, strategic risk, cybersecurity risk, price risk and foreign exchange risk. These specific risk factors are not mutually exclusive. It is recognized that any product or service offered by us may expose the Bank to one or more of these risks. Our Risk Management Committee and Risk Management Division monitor these risks to minimize exposure to the Company. The Board and its committees work closely with management in overseeing risk. Each Board committee receives reports and information regarding risk issues directly from management. Credit Risk Management Loans represent the largest component of assets on our balance sheet and their related credit risk is among the most significant risks we manage. We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms). Credit risk is found in all activities where success depends on a counter party, issuer, or borrower performance. Credit risk arises through the extension of loans and leases, certain securities, and letters of credit. Natural disasters, such as storms, earthquakes, drought and other weather conditions, effects of pandemics, as well as natural disasters and problems related to possible climate changes, may from time-to-time cause or create the risk of damage to facilities, buildings, property or other assets of Bank customers, borrowers or municipal debt issuers. This could in turn affect their financial condition or results of operations and as a consequence their ability or capacity to repay debt or fulfill other obligations to the Bank. Credit risk in the investment portfolio and correspondent bank accounts is in part addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance the credit quality of the bond. Limitations on industry concentration, aggregate customer borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors’ Committees, and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Company. The Bank’s loan policy is updated annually and approved by the Board of Directors. It prescribes underwriting guidelines and procedures for all loan categories in which the Bank participates to establish risk tolerance and parameters that are communicated throughout the Bank to ensure consistent and uniform lending practices. The underwriting guidelines include, among other things, approval limitation and hierarchy, documentation standards, loan-to-value limits, debt coverage ratio, overall credit-worthiness of the borrower, guarantor support, etc. All loan requests considered by the Bank should be for a clearly defined legitimate purpose with a determinable primary source, as well as alternate sources of repayment. All loans should be supported by appropriate documentation including, current financial statements, credit reports, collateral information, guarantor asset verification, tax returns, title reports, appraisals (where appropriate), and other documents of quality that will support the credit. The major lending categories are commercial and industrial loans, SBA loans, owner-occupied and non owner-occupied commercial real estate loans, construction loans, dairy & livestock and agribusiness loans, residential real estate loans, and various consumer loan products. Loans underwritten to borrowers within these diverse categories require underwriting and documentation suited to the unique characteristics and inherent risks involved. 80 Table of Contents Commercial and industrial loans require credit structures that are tailored to the specific purpose of the business loan, involving a thorough analysis of the borrower’s business, cash flow, collateral, industry risks, economic risks, credit, character, and guarantor support. Owner-occupied real estate loans are primarily based upon the capacity and stability of the cash flow generated by the occupying business and the market value of the collateral, among other things. Non owner-occupied real estate is typically underwritten to the income produced by the subject property and many considerations unique to the various types of property (i.e. office, retail, warehouse, shopping center, medical, etc.), as well as, the financial support provided by sponsors in recourse transactions. Construction loans will often depend on the specific characteristics of the project, the market for the specific development, real estate values, and the equity and financial strength of the sponsors. Dairy & livestock and agribusiness loans are largely predicated on the revenue cycles and demand for milk and crops, commodity prices, collateral values of herd, feed, and income-producing dairies or croplands, and the financial support of the guarantors. Underwriting of residential real estate and consumer loans are generally driven by personal income and debt service capacity, credit history and scores, and collateral values. SBA loans require credit structures that conform to the various requirements of the SBA programs specific to the type of loan request and the Bank’s loan policy as it relates to these loans. The SBA 7(a) loans are similar to the commercial and industrial loans that are tailored to the specific purpose of the business loan, involving a thorough analysis of the borrower’s business, cash flow, collateral, industry risks, economic risks, credit, character, and guarantor support for both the Bank and the SBA. Once granted the SBA 7(a) loans require the Bank to follow SBA servicing guidelines to maintain the SBA guaranty which typically ranges from 75% to 90% depending on the type of 7(a) loan. SBA 504 loans are similar to the Bank’s Owner-occupied real estate loans. As such they are primarily based upon the capacity and stability of the cash flow generated by the occupying business and the market value of the collateral, among other things. When the Bank funds an SBA 504 transaction, which includes the 50% first trust deed loan and the 40% second trust deed loan, the initial risk is centered in completing the SBA’s requirements to provide for the payoff of the second trust deed loan from the subordinated debenture. Once the 504 second is paid off, the remaining first trust deed loan is then managed under the same requirements applied to the Bank’s owner-occupied commercial real estate loan. It should be noted that both the SBA 7(a) and 504 programs provide loans for commercial real estate acquisition. However, the terms and advances rates available under the 7(a) program are outside of the Bank’s standard loan programs and risk profile and therefore require a credit enhancement in the form of the SBA guaranty. Additionally, the interest rates for the 7(a) program are typically variable and can adjust as often as monthly with quarterly adjustment the most typical. SBA 504 loan interest rates for the first trust deed loan are at the Bank’s discretion and subject to competitive pressures from other banks. Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a provision for credit losses to earnings. Loans determined to be losses are charged against the allowance for credit losses. In this regard, it is important to note that the Bank’s practice with regard to these loans, including modified loans or troubled debt restructurings that are classified as impaired, is to generally charge off any loss amount against the ACL upon evaluating the loan at the time a probable loss becomes recognized. As such, the Bank’s specific allowance for loans, including troubled debt restructurings, is relatively low since any known loss amount will generally have been charged off. Central to our credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by credit management. The risk rating is based primarily on an analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Credit approvals are made based upon our evaluation of the inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings may be adjusted as necessary. Loans are risk rated into the following categories: Pass, Special Mention, Substandard, Doubtful, and Loss. Each of these groups is assessed and appropriate amounts used in determining the adequacy of our allowance for 81 Table of Contents losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount. The Company obtains a semi-annual independent credit review by engaging an outside party to review a sample of our loans and leases. The primary purpose of this review is to evaluate our existing loan ratings. Refer to additional discussion concerning loans, nonperforming assets, allowance for credit losses and related tables under the Analysis of Financial Condition contained herein. Transaction Risk Transaction risk is the risk to earnings or capital arising from problems in service, activity or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Company. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Company as transactions are processed. It pervades all divisions, departments and centers and is inherent in all products and services we offer. In general, transaction risk is defined as high, medium or low by the Company. The audit plan ensures that high risk areas are reviewed annually. We utilize internal auditors and independent audit firms to test key controls of operational processes and to audit information systems, compliance management programs, loan credit reviews and trust services. The key to monitoring transaction risk is in the design, documentation and implementation of well-defined procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Compliance Risk Management Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products or activities of the Bank’s customers, vendors or business partners may be ambiguous or untested. Compliance risk exposes us to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability. The Company utilizes independent compliance audits as a means of identifying weaknesses in the compliance program. There is no single or primary source of compliance risk. It is inherent in every activity. Frequently, it blends into operational risk and transaction risk. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional. Our Risk Management Policy and Program and the Code of Ethical Conduct are cornerstones for controlling compliance risk. An integral part of controlling this risk is the proper training of associates. The Chief Risk Officer is responsible for developing and executing a comprehensive compliance training program. The Chief Risk Officer, in consultation with our internal and external legal counsel, seeks to provide our associates with adequate training commensurate to their job functions to ensure compliance with banking laws and regulations. Our Risk Management Policy and Program includes a risk-based audit program aimed at identifying internal control deficiencies and weaknesses. The Compliance Management Program includes two levels of review. One is in-depth audits performed by our internal audit department under the direction of the Chief Auditor and supplemented by independent external firms, and the other is periodic monitoring performed by the Risk Management Division. Annually, an Audit Plan for the Company is developed and presented for approval to the Audit Committee of the Board. 82 Table of Contents The Risk Management Division conducts periodic monitoring of our compliance efforts with a special focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is to verify whether our associates are adhering to established policies and procedures. Any material exceptions identified are brought forward to the appropriate department head, the Audit Committee and the Risk Management Committee. We recognize that customer complaints can often identify weaknesses in our compliance program which could expose us to risk. Therefore, we attempt to ensure that all complaints are given prompt attention. Our Compliance Management Policy and Program include provisions on how customer complaints are to be addressed. The Chief Risk Officer reviews formal complaints to determine if a significant compliance risk exists and communicates those findings to the Compliance Management and Risk Management Committees. Strategic Risk Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the quality of implementation. Strategic risks are identified as part of the strategic planning process. Strategic planning sessions, with members of the Board of Directors and Executive Leadership, are held annually. The strategic review consists of results of strategic initiatives, an assessment of the economic outlook, competitive analysis, and an industry outlook, including a legislative and regulatory review. Cybersecurity Risk Cybersecurity and fraud risk refers to the risk of failures, interruptions of services, or breaches of security with respect to the Company’s or the Bank’s communication, information, operations, devices, financial control, customer internet banking, customer information, email, data processing systems, or other bank or third party applications. The ability of the Company’s customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches. In addition, the Company and the Bank rely primarily on third party providers to develop, manage, maintain and protect these systems and applications. Any such failures, interruptions or fraud or security breaches, depending on the scope, duration, affected system(s) or customers(s), could expose the Company and/or the Bank to financial loss, reputation damage, litigation, or regulatory action. We continue to invest in technologies and training to protect our associates, our clients and our assets. While we have implemented various detective and preventative measures which seek to protect our Company, our customers’ information and the Bank from the risk of fraud, data security breaches or service interruptions, there can be no assurance that these measures will be effective in preventing potential breaches or losses for us or our customers. 83 Table of Contents ASSET/LIABILITY AND MARKET RISK MANAGEMENT Liquidity and Cash Flow The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs. We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets quarterly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $11.74 billion at December 31, 2020 increased $3.03 billion, or 34.83%, 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. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities and other anticipated near term cash flows from investments. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. The sale of investment securities can also serve as a contingent source of funds. We can obtain additional liquidity from deposit growth by offering competitive interest rates on deposits from both our local and national wholesale markets. At December 31, 2020, we had $25.8 million in subordinated debt and $5.0 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. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant off-balance sheet sources of liquidity. CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses. 84 Table of Contents Below is a summary of our average cash position and statement of cash flows for the years ended December 31, 2020 and 2019. For further details, see our “ Consolidated Statements of Cash Flows ” under Part IV consolidated financial statements of this report. Consolidated Summary of Cash Flows Year Ended December 31, 2020 2019 (Dollars in thousands) Average cash and cash equivalents $ 1,226,262 $ 288,425 Percentage of total average assets 9.48% 2.55% Net cash provided by operating activities $ 185,096 $ 208,182 Net cash (used in) provided by investing activities (1,268,758 ) 325,323 Net cash provided by (used in) financing activities 2,856,304 (511,935 ) Net increase in cash and cash equivalents $ 1,772,642 $ 21,570 Average cash and cash equivalents increased by $937.8 million, or 325.16%, to $1.23 billion for the year ended December 31, 2020, compared to $288.4 million for 2019. At December 31, 2020, cash and cash equivalents totaled $1.96 billion. This represented an increase of $1.78 billion, or 955.51%, from $185.5 million at December 31, 2019. Market Risk In the normal course of its business activities, we are exposed to market risks, including price and liquidity risk. Market risk is the potential for loss from adverse changes in market rates and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility that we may not be able to satisfy current or future commitments or that we may be more reliant on alternative funding sources such as long-term debt. Financial products that expose us to market risk include securities, loans, deposits, debt, and derivative financial instruments. The table below provides the actual balances as of December 31, 2020 of interest-earning assets and interest-bearing liabilities, including the average rate earned or incurred for 2020, the projected contractual maturities over the next five years, and the estimated fair value of each category determined using available market information and appropriate valuation methodologies. Maturing December 31, 2020 Average Rate One Year Two Years Three Years Four Years Five Years and Beyond Estimated Fair Value (Dollars in thousands) Interest-earning assets: Investment securities available-for-sale (1) $ 2,398,923 1.97 % $ 12,694 $ 149,991 $ 613,608 $ 686,367 $ 936,263 $ 2,398,923 Investment securities held-to-maturity (1) 578,626 2.48 % 34,306 42,548 84,513 149,053 268,206 604,223 Investment in FHLB stock 17,688 5.53 % - - - - 17,688 17,688 Interest-earning deposits due from Federal 1,879,418 0.15 % 1,878,678 - 740 - - 1,879,455 Reserve and with other institutions Loans and lease finance receivables (2) 8,348,808 4.68 % 897,281 1,413,759 555,899 483,212 4,998,657 8,349,870 Total interest-earning assets $ 13,223,463 $ 2,822,959 $ 1,606,298 $ 1,254,760 $ 1,318,632 $ 6,220,814 $ 13,250,159 Interest-bearing liabilities: Interest-bearing deposits $ 4,281,114 0.32 % $ 4,241,889 $ 24,154 $ 5,096 $ 1,312 $ 8,663 $ 4,281,952 Borrowings 444,406 0.23 % 444,406 - - - - 444,349 Junior subordinated debentures 25,774 2.10 % - - - - 25,774 19,431 Total interest-bearing liabilities $ 4,751,294 $ 4,686,295 $ 24,154 $ 5,096 $ 1,312 $ 34,437 $ 4,745,732 (1) These include mortgage-backed securities which generally prepay before maturity. (2) Gross loans, net of deferred loan fees, costs and discounts. 85 Table of Contents Interest Rate Sensitivity Management During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability repricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure. One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities. Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon. The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the 12-month and 24-month time horizon. The following depicts the Company’s net interest income sensitivity analysis for the periods presented below, when rates are ramped up 200bps or ramped down 100bps over a 12-month time horizon. Estimated Net Interest Income Sensitivity (1) December 31, 2020 December 31, 2019 Interest Rate Scenario 12-month Period 24-month Period (Cumulative) Interest Rate Scenario 12-month Period 24-month Period (Cumulative) + 200 basis points 11.10% 19.60% + 200 basis points 5.20% 10.00% - 100 basis points -1.20% -2.40% - 100 basis points -2.10% -4.60% (1) Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero. Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a one-year and a two-year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These 86 Table of Contents estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.01%. We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At December 31, 2020 and December 31, 2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates. Economic Value of Equity Sensitivity Instantaneous Rate Change December 31, 2020 December 31, 2019 100 bp decrease in interest rates -21.0% -17.5% 100 bp increase in interest rates 16.1% 14.2% 200 bp increase in interest rates 28.4% 25.5% 300 bp increase in interest rates 34.4% 30.0% 400 bp increase in interest rates 41.6% 36.2% As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates. Counterparty Risk Recent developments in the financial markets have placed an increased awareness of Counterparty Risks. These risks occur when a financial institution has an indebtedness or potential for indebtedness to another financial institution. We have assessed our Counterparty Risk with the following results: • We do not have any investments in the preferred stock of any other company; • Most of our investment securities are either municipal securities or securities either issued or guaranteed by government, agencies, including Fannie Mae, Freddie Mac, SBA or FHLB; • All of our commercial line insurance policies are with companies with the highest AM Best ratings of A or above; • We have no significant exposure to our Cash Surrender Value of Life Insurance since the Cash Surrender Value balance is predominately supported by insurance companies that carry an AM Best rating of B+ or greater; • We have no significant Counterparty exposure related to derivatives such as interest rate swaps. Our Counterparty is a major financial institution and our agreement requires the Counterparty to post cash collateral for mark-to-market balances due to us; 87 Table of Contents • We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is generally mitigated as the loans with swaps are underwritten to take into account potential additional exposure; • As of December 31, 2020, we had $389.0 million in Fed Funds lines of credit with other major U.S. banks. These lines of credit are available for overnight borrowings; and • At December 31, 2020, we had $5.0 million in FHLB short-term borrowing at 0% cost. Our secured borrowing capacity with the FHLB was $4.29 billion, of which $4.29 billion was available as of December 31, 2020. Price and Foreign Exchange Risk Price risk arises from changes in market factors that affect the value of traded instruments. Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange rates. Our current exposure to price risk is nominal. We do not have trading accounts. Consequently, the level of price risk within the investment portfolio is limited to the need to sell securities for reasons other than trading. We maintain limited deposit accounts with various foreign banks. Our Interbank Liability Policy seeks to limit the balance in any of these accounts to an amount that does not in our judgment present a significant risk to our earnings from changes in the value of foreign currencies. Our asset liability model seeks to calculate the market value of the Bank’s equity. In addition, management prepares, on a monthly basis, a capital volatility report that compares changes in the market value of the investment portfolio. We have as our target to always be well-capitalized by regulatory standards.