What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-06 · 299 added, 482 removed, 564 unchanged (58% of the section changed)

8 unchanged sentences

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.

The pandemic has affected our customers and the communities we serve and depending on the duration of the crisis and government actions, the adverse impact on our financial position and results of operations could be significant.

In response to the 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

It contain substantial tax and spending provisions intended to address the impact of the COVID-19

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.

businesses through 100% Small Business Administration (“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.

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

Legislation passed on April 24, 2020 provided additional PPP funds of $310 billion.

During 2020, we originated and funded approximately 4,100 loans, totaling $1.10 billion.

In response to the COVID-19

pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications.

This program allows for a deferral of payments for 90 days.

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

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

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

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

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

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

pandemic and the CARES Act, 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.

There were six loans with approximately $10 million in outstanding loan amounts that remained on deferment, as of March 31, 2021.

These deferments of principal or principal and interest, are for 90-

days or less.

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 (“round two”) 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.

As of March 31, 2021, we have originated approximately 1,500 round two loans totaling $325 million in outstanding borrowings.

The Paycheck Protection Program is expected to end on May 31, 2021.

The first quarter of 2021 includes a $19.5 million recapture of provision for credit losses, as the economic outlook has improved markedly due to widely available vaccines and government economic stimulus.

In comparison, the Company recorded a provision for credit losses of $12.0 million in the first quarter of 2020, as well as $11.5 million in the second quarter of 2020, due to the initial forecasts of a severe economic downturn.

We continue to monitor the impact of COVID-19

closely, as well as any effects that may result from the CARES Act.

The extent to which the COVID-19

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

pandemic will impact our operations and financial results during 2021 is highly uncertain, but we may experience continued volatility in the provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.

CRITICAL ACCOUNTING POLICIES

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for the year ended December 31, 2020, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adoption of Allowance for Credit Losses

We adopted ASU 2016-13,

commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020.

We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance.

The adoption of ASU 2016-13,

resulted in a reduction to our opening retained earnings of approximately $1.3 million.

The ACL policy is described more fully in Note 3 – Summary of Significant Accounting Policies

of the notes to the unaudited condensed consolidated financial statements.

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

Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2021

Adoption Timing

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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

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.

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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.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(“HTM”) totaled $577.7 million.

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

For the first quarter of 2021, we reported net earnings of $63.9 million, compared with $50.1 million for the fourth quarter of 2020 and $38.0 million for the first quarter of 2020.

Diluted earnings per share were $0.47 for the first quarter, compared to $0.37 for the prior quarter and $0.27 for the same period last year.

The first quarter of 2021 included a $19.5 million recapture of provision for credit losses, due to the improvement in our economic forecast of certain macroeconomic variables, which were impacted by COVID-19.

In comparison, there was no provision for credit losses recorded in the fourth quarter of 2020, while the first quarter of 2020 included a $12.0 million provision for credit losses at the start of the pandemic.

During the first quarter of 2021, we experienced credit charge-offs of $2.5 million and total recoveries of $88,000, resulting in net charge-offs of $2.4 million.

Gross charge-offs during the first quarter include one commercial and industrial loan, previously rated substandard, that was charged-off

in total for approximately $2.5 million.

Of the 4,100 SBA PPP loans we originated in 2020, $582.8 million was outstanding at March 31, 2021.

During the first quarter of 2021, the Company originated, approximately 1,500 PPP loans in round two, with a loan balance, at amortized cost, of $314.9 million at March 31, 2021.

Interest and fee income from PPP loans was $10.4 million for the first quarter of 2021, compared to $10.5 million for the fourth quarter of 2020.

At March 31, 2021, total assets of $14.84 billion increased $421.1 million, or 2.92%, from total assets of $14.42 billion at December 31, 2020.

Interest-earning assets of $13.62 billion at March 31, 2021 increased $399.9 million, or 3.02%, when compared with $13.22 billion at December 31, 2020.

The increase in interest-earning assets was primarily due to a $921.8 million increase in investment securities, partially offset by a $450.3 million decrease in interest-earning balances due from the Federal Reserve, and a $55.8 million decrease in total loans.

Total investment securities were $3.90 billion at March 31, 2021, an increase of $921.8 million, or 30.96%, from $2.98 billion at December 31, 2020.

In the first quarter of 2021, we purchased $1.23 billion of securities, with an average expected yield of approximately 1.57%.

At March 31, 2021, investment securities held-to-maturity

(“HTM”) totaled $1.09 billion.

At March 31, 2021, investment securities available-for-sale

(“AFS”) totaled $2.81 billion, inclusive of a net pre-tax

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

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

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

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

The increase in total loans included $1.10 billion in PPP loans and a $130.9 million decline in dairy & livestock and agribusiness loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted to result from the COVID-19

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

This compares to 0.91% at December 31, 2019.

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

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

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

This decrease was primarily due to repurchase of common stock of $91.7 million under our 10b5-1

stock repurchase program, and $73.3 million in cash dividends, offset by net earnings of $127.1 million and a $23.5 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.

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

unrealized gain of $14.4 million, which decreased $40.4 million from December 31, 2020.

HTM securities increased by $508.4 million, or 87.86%, and AFS securities increased by $413.4 million, or 17.23%, from December 31, 2020.

Our tax equivalent yield on investments was 1.65% for the quarter ended March 31, 2021, compared to 1.81% for the fourth quarter of 2020 and 2.45% for the first quarter of 2020.

Total loans and leases, net of deferred fees and discounts (amortized cost), of $8.29 billion at March 31, 2021 decreased by $55.8 million, or 0.67%, from December 31, 2020.

The $55.8 million decrease in total loans included decreases of $100.1 million in dairy & livestock and agribusiness loans due to seasonal pay downs, $58.4 million in commercial and industrial loans, $15.1 million in SFR mortgage loans, and $7.3 million in other loans, partially offset by increases of $95.3 million in commercial real estate loans, $14.7 million in PPP loans, $11.2 million in construction loans, and $3.8 million in SBA loans.

After adjusting for seasonality and PPP loans, our loans grew by $29.6 million, or 0.42%, from the end of the fourth quarter of 2020.

Our yield on loans was 4.50% for the quarter ended March 31, 2021, compared to 4.56% for the fourth quarter of 2020 and 4.95% for the first quarter of 2020.

The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 15 basis points and 44 basis points compared to the fourth quarter and first quarter of 2020, respectively.

Interest income for yield adjustments related to discount accretion on acquired loans was $4.0 million for the quarter ended March 31, 2021, compared to $4.3 million for the fourth quarter of 2020 and $4.8 million for the first quarter of 2020.

Noninterest-bearing deposits were $7.58 billion at March 31, 2021, an increase of $122.5 million, or 1.64%, when compared to December 31, 2020.

At March 31, 2021, noninterest-bearing deposits were 62.74% of total deposits, compared to 63.52% at December 31, 2020.

Our average cost of total deposits was 0.06% for the quarter ended March 31, 2021, compared to 0.09% for the fourth quarter of 2020 and 0.19% for the first quarter of 2020.

Customer repurchase agreements totaled $506.3 million at March 31, 2021, compared to $439.4 million at December 31, 2020.

Our average cost of total deposits including customer repurchase agreements was 0.06% for the quarter ended March 31, 2021, compared to 0.09% for the fourth quarter of 2020 and 0.20% for the first quarter of 2020.

At March 31, 2021 and December 31, 2020, we had $5.0 million in short-term borrowings with 0% cost, compared to no borrowings at March 31, 2020.

At March 31, 2021, we had $25.8 million of junior subordinated debentures, bearing interest at three-month LIBOR plus 1.38% and mature in 2036, which was unchanged from December 31, 2020.

We plan to redeem these debentures, which had a cost of 1.60% during the first quarter of 2021, by the end of the second quarter of 2021.

Our average cost of funds was 0.07% for the quarter ended March 31, 2021, 0.09% for the fourth quarter of 2020, and 0.21% for the first quarter of 2020.

The allowance for credit losses totaled $71.8 million at March 31, 2021, compared to $93.7 million at December 31, 2020.

The allowance for credit losses for the first quarter of 2021 was decreased by $19.5 million due to the improved outlook in our forecast of certain macroeconomic variable that were influenced by the economic impact of the pandemic and government stimulus, and by $2.4 million in net charge-offs.

At March 31, 2021, ACL as a percentage of total loans and leases outstanding was 0.87% or 0.97% when PPP loans are excluded.

This compares to 1.12% at December 31, 2020, or 1.25% when PPP loans are excluded.

As of March 31, 2021, total discounts on acquired loans were $26.9 million.

The Company’s total equity was $2.02 billion at March 31, 2021.

This represented an increase of $12.7 million, or 0.63%, from total equity of $2.01 billion at December 31, 2020.

This increase was primarily due to net earnings of $63.9 million, partially offset by a $28.4 million decrease in other comprehensive income resulting from the tax-effected

impact of the decrease in market value of our available-for-sale

investment securities portfolio and $24.5 million in cash dividends.

Our tangible common equity ratio was 9.4% at March 31, 2021.

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

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

As of March 31, 2021, the Company’s Tier 1 leverage capital ratio totaled 9.83%, our common equity Tier 1 ratio totaled 14.87%, our Tier 1 risk-based capital ratio totaled 15.15%, and our total risk-based capital ratio totaled 16.05%.

We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S.

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Three Months Ended

September 30,

(Dollars in thousands, except per share amounts)

Net interest income

Provision for credit losses

Recapture of (provision for) credit losses

Noninterest income

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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands, except per share amounts)

Net interest income

Provision for credit losses

Recapture of credit losses

Noninterest income

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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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

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

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

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

Three Months Ended September 30,

(Dollars in thousands)

INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale

Tax-advantaged

Held-to-maturity

Tax-advantaged

Investment in FHLB stock

Interest-earning deposits with other institutions

Total interest-earning assets

Total noninterest-earning assets

INTEREST-BEARING LIABILITIES

Savings deposits (3)

Time deposits

Total interest-bearing deposits

FHLB advances, other borrowings, and customer repurchase agreements

Interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income

Net interest spread - tax equivalent

Net interest margin

Net interest margin - tax equivalent

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

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

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

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

Includes interest-bearing demand and money market accounts.

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Net interest margin—tax equivalent

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

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

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

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

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended March 31, 2021 and 2020.

The non TE rates were 1.62% and 2.38% for the three months ended March 31, 2021 and 2020, respectively.

Includes loan fees of $8.9 million and $548,000 for the three months ended March 31, 2021 and 2020, respectively.

Prepayment penalty fees of $1.6 million and $1.5 million are included in interest income for the three months ended March 31, 2021 and 2020, respectively.

Includes interest-bearing demand and money market accounts.

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

Comparison of Three Months Ended September 30,

2020 Compared to 2019

Increase (Decrease) Due to

(Dollars in thousands)

Interest income:

Available-for-sale

Taxable investment securities

Tax-advantaged

investment securities

Held-to-maturity

Taxable investment securities

Tax-advantaged

investment securities

Investment in FHLB stock

Interest-earning deposits with other institutions

Total interest income

Interest expense:

Savings deposits

Time deposits

FHLB advances, other borrowings, and customer repurchase agreements

Total interest expense

Net interest income

Comparision of Nine Months Ended September 30,

Comparison of Three Months Ended March 31,

2021 Compared to 2020

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Net interest income

Third Quarter of 2020 Compared to the Third Quarter of 2019

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

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

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

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

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

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

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

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

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

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

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

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

The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 44 basis points from the third quarter of 2019.

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

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

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

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

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

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

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

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

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

Nine Months of 2020 Compared to the Nine Months of 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First Quarter of 2021 Compared to the First Quarter of 2020

Net interest income, before provision for credit losses, of $103.5 million for the first quarter of 2021 increased $1.2 million, or 1.14%, compared to $102.3 million for the first quarter of 2020.

Interest-earning assets increased on average by $3.17 billion, or 31.31%, from $10.12 billion for the first quarter of 2020 to $13.29 billion for the first quarter of 2021.

Our net interest margin (TE) was 3.18% for the first quarter of 2021, compared to 4.08% for the first quarter of 2020.

Interest income for the first quarter of 2021 was $105.5 million, which represented a $1.6 million, or 1.48%, decrease when compared to the same period of 2020.

Average interest-earning assets increased to $13.29 billion and the average interest-earning asset yield was 3.24% for the first quarter of 2021, compared to 4.27% for the first quarter of 2020.

The 102 basis point decrease in the average interest-earning asset yield compared to the first quarter of 2020, was primarily due to a combination of a 45 basis point decrease in loan yields, a 76 basis point decrease in the non-tax

equivalent investment yields, and a change in mix of average earning assets, with average balances at the Federal Reserve growing to 12.21% of earning assets for the first quarter of 2021, compared to 2.40% for the first quarter of 2020.

The increase in balances at the Federal Reserve was impacted by $2.93 billion in average deposit growth compared to the first quarter of 2020.

The net interest margin for the first quarter of 2021 would have been approximately 35 basis points higher without the $1.38 billion year-over-year increase in average deposits at the Federal Reserve, earning 10 basis points.

Interest income and fees on loans for the first quarter of 2021 of $91.8 million decreased $322,000, or 0.35%, when compared to the first quarter of 2020.

Average loans increased $787.5 million for the first quarter of 2021 when compared with the same period of 2020, primarily due to $880.7 million in average PPP loans.

The PPP loans we originated resulted in the recognition of approximately $8.2 million in fee income and $2.2 million in loan interest during the first quarter of 2021.

Discount accretion on acquired loans decreased by $748,000 compared to the first quarter of 2020.

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, declined by 44 basis points from the first quarter of 2020.

Interest income from investment securities was $13.1 million for the first quarter of 2021, a $948,000, or 6.75%, decrease from $14.0 million for the first quarter of 2020.

This decrease was primarily the result of a 76 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 the past four quarters.

Partially offsetting the decline from lower rates was a $977.2 million increase in average investment securities for the first quarter of 2021, compared to the same period of 2020.

Interest expense of $2.1 million for the first quarter of 2021, decreased $2.7 million, or 57.19%, compared to the first quarter of 2020.

The average rate paid on interest-bearing liabilities decreased by 31 basis points, to 0.17% for the first quarter of 2021 from 0.48% for the first quarter of 2020.

Average interest-bearing liabilities were $1.02 billion higher for the first quarter of 2021 when compared to the first quarter of 2020.

On average, noninterest-bearing deposits were 62.02% of our total deposits for the first quarter of 2021, compared to 59.97% for the first quarter of 2020.

In comparison to the first quarter of 2020, our overall cost of funds decreased by 14 basis points, partially due to growth in average noninterest-bearing deposits of $1.99 billion, compared to the increase in average interest-bearing deposits of $932.1 million.

In addition, the cost of interest-bearing deposits decreased by 30 basis points for the first quarter of 2021 compared to the first quarter of 2020.

Provision for Credit Losses

The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio at the balance sheet date.

On January 1, 2020, we adopted ASU 2016-13,

commonly referred to as CECL, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan.

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

Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first nine months of 2020 due to the severe economic disruption forecasted as a result of the COVID-19

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

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

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

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

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

The allowance for credit losses on loans totaled $71.8 million at March 31, 2021, compared to $93.7 million at December 31, 2020 and $82.6 million as of March 31, 2020.

For the first quarter of 2021, we recaptured $19.5 million in provision for credit losses, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus.

For the first quarter of 2021, we experienced credit charge-offs of $2.5 million and total recoveries of $88,000, resulting in net charge-offs of $2.4 million.

This compares to a $12.0 million credit loss provision and net recoveries of $141,000 for the same period of 2020.

The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of March 31, 2021, was 0.87%, or 0.97% when PPP loans are excluded.

This compares to 1.12% and 1.11%, as of December 31, 2020 and March 31, 2020, respectively.

As of March 31, 2021, remaining discounts on acquired loans were $26.9 million.

Refer to the discussion of “Allowance for Credit Losses” in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.

No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment.

We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the COVID-19

No assurance can be given that economic conditions which affect the Company’s service areas or other circumstances will or will not be reflected in future changes in the level of our allowance for credit losses and the resulting provision or recapture of provision for credit losses.

The process to estimate the allowance for credit losses requires considerable judgment and our economic forecasts may continue to vary due to the uncertainty of the future impact of the pandemic on our business and customers.

See “Allowance for Credit Losses” under Analysis of Financial Condition

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(Dollars in thousands)

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Gain on OREO, net

Gain on sale of building, net

Gain on eminent domain condemnation, net

Total noninterest income

Third Quarter of 2020 Compared to the Third Quarter of 2019

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

First Quarter of 2021 Compared to the First Quarter of 2020

The $2.0 million increase in noninterest income was primarily due to a $2.6 million increase in BOLI income and a $399,000 gain on the sale of one OREO property in the first quarter of 2021, partially offset by a $791,000 decrease in service charges on deposit accounts.

This decrease was primarily due to the offset of fees due to higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank when compared to the first quarter of 2020.

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

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

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

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

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

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

The first quarter of 2021 included lower swap fee income of $158,000 compared to the first quarter of 2020, due to lower volume of swap transactions.

The steepening of the yield curve has made it less attractive for our customers to enter into interest rates swaps that convert floating rate loans to fixed rate instruments, compared to a conventional fixed rate loan.

We executed on swap agreements related to new loan originations with a notional amount totaling $15.4 million for the first quarter of 2021, compared to $23.3 million for the first quarter of 2020.

CitizensTrust consists of Wealth Management and Investment Services income.

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investment products.

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

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

At March 31, 2021, CitizensTrust had approximately $3.10 billion in assets under management and administration, including $2.29 billion in assets under management.

CitizensTrust generated fees of $2.6 million for the first quarter of 2021, compared to $2.4 million for the first quarter of 2020, due to the growth in assets under management and investment services.

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

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Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties.

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

Nine Months of 2020 Compared to the Nine Months of 2019

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

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

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

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

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

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

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

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

Income from our BOLI policies for the first quarter of 2021 included $3.5 million in death benefits that exceeded cash surrender values of certain BOLI policies, compared to $715,000 in death benefits for the first quarter of 2020.

Noninterest Expense

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Three Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

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Stationery and supplies

Acquisition related expenses

Total noninterest expense

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

Third Quarter of 2020 Compared to the Third Quarter of 2019

Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets.

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

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

Noninterest expense as a percentage of average assets was 1.32% for the first quarter of 2021, compared to 1.72% for the first quarter of 2020.

The decline in this ratio for 2021 reflects the $3.13 billion growth in average assets that resulted primarily from $2.93 billion in average deposit growth.

Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses.

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

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

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

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

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

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

Nine Months of 2020 Compared to the Nine Months of 2019

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

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

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

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

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

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

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

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

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

The efficiency ratio was 40.26% for the first quarter of 2021, compared to 42.69% for the first quarter of 2020.

First Quarter of 2021 Compared to the First Quarter of 2020

Noninterest expense of $47.2 million for the first quarter of 2021 was $1.5 million, or 3.04%, lower than the first quarter of 2020.

Salaries and employee benefits declined by $1.2 million from the first quarter of 2020, as deferred loan origination costs, which are a contra expense, increased by $1.0 million due primarily to the origination of more than 1,500 PPP loans in the first quarter of 2021.

Additionally, marketing and promotion expense declined by $830,000, partly due to restrictions resulting from the pandemic.

An increase of $911,000 in regulatory assessment expense in the first quarter of 2021, compared to the prior year quarter, resulted from the final application of assessment credits provided by the FDIC at the end of the second quarter of 2020.

The Company’s effective tax rate for the three months ended March 31, 2021 was 28.60%, compared to 28.75% for the same period of 2020.

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

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ANALYSIS OF FINANCIAL CONDITION

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

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

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

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

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

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

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

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

The $12.1 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1

stock repurchase program.

We previously announced that we suspended this 10b5-1

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

We had $127.1 million in net earnings during the first nine months of 2020, offset by $73.3 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020.

Our equity also increased by $23.5 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our available-for-sale

investment securities.

Total assets of $14.84 billion at March 31, 2021 increased $421.1 million, or 2.92%, from total assets of $14.42 billion at December 31, 2020.

Interest-earning assets totaled $13.62 billion at March 31, 2021, an increase of $399.9 million, or 3.02%, when compared with $13.22 billion at December 31, 2020.

During the first quarter of 2021, we originated approximately 1,500 SBA PPP loans in round two, with a loan balance, at amortized cost, of $314.9 million at March 31, 2021.

Of the 4,100 PPP loans we originated in 2020, $582.8 million remained outstanding at March 31, 2021.

Excluding PPP loans, total loans declined by $70.5 million, or 0.94%, from December 31, 2020.

Total liabilities were $12.82 billion at March 31, 2021, an increase of $408.4 million, or 3.29%, from total liabilities of $12.41 billion at December 31, 2020.

Total deposits grew by $342.2 million, or 2.92%.

Total equity increased $12.7 million, or 0.63%, to $2.02 billion at March 31, 2021, compared to total equity of $2.01 billion at December 31, 2020.

The $12.7 million increase in equity was primarily due to net earnings of $63.9 million during the first quarter of 2021, partially offset by a $28.4 million decrease in other comprehensive income from the tax-effected

impact of the decrease in market value of available-for-sale

securities and $24.5 million in cash dividends.

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

At March 31, 2021, total investment securities were $3.90 billion.

This represented an increase of $921.8 million, or 30.96%, from total investment securities of $2.98 billion at December 31, 2020.

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

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

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

The increase in investment securities was primarily due to new securities purchased exceeding cash outflow from the portfolio in the first quarter of 2021.

At March 31, 2021, investment securities HTM totaled $1.09 billion.

At March 31, 2021, our AFS investment securities totaled $2.81 billion, inclusive of a pre-tax

net unrealized gain of $14.4 million.

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

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

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

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

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

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

For the three months ended March 31, 2021 and 2020, repayments/maturities of investment securities totaled $259.9 million and $128.2 million, respectively.

The Company purchased additional investment securities totaling $1.23 billion and $1.5 million for the three months ended March 31, 2021 and 2020, respectively.

The current quarter purchases included $682.9 million in AFS securities that were comprised of MBS with average lives of less than five years that are expected to yield approximately 1.37%.

Additionally, we purchased $545.7 million dollars in HTM securities that were comprised of fixed rate agency and municipal bonds, with longer maturities that on average exceed ten years.

equivalent basis, these securities will generate a yield of approximately 1.81%.

There were no investment securities sold during the first three months of 2021 and 2020.

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

September 30, 2020

March 31, 2021

Total Percent

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Total held-to-maturity

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

As of March 31, 2021, approximately $60.6 million in U.S.

government agency bonds are callable.

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Municipal bonds, which represented approximately 6% of the total investment portfolio, are predominately AA or higher rated securities.

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

Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established.

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

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

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

September 30, 2020

investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of March 31, 2021 and December 31, 2020.

March 31, 2021

Less Than 12 Months

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Total available-for-sale

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 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, 2020

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Total available-for-sale

Investment securities held-to-maturity:

Government agency/GSE

Mortgage-backed securities

Municipal bonds

Total held-to-maturity

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

Management determined that credit losses did not exist for securities in an unrealized loss position as of March 31, 2021 and December 31, 2020.

Refer to Note 4 – Investment Securities

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

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

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

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

Total loans and leases, at amortized cost, of $8.29 billion at March 31, 2021 decreased by $55.8 million, or 0.67%, from December 31, 2020.

After adjusting for seasonality and PPP loans, our loans grew by $29.6 million or 0.42% from December 31, 2020.

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

Distribution of Loan Portfolio by Type

September 30, 2020

March 31, 2021

December 31, 2020

(Dollars in thousands)

Commercial and industrial

SBA - Paycheck Protection Program (PPP)

Commercial real estate

SBA - Paycheck Protection Program (PPP)

Commercial and industrial

Dairy & livestock and agribusiness

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Consumer and other loans

Deferred loan fees, net (1)

Total loans, net of deferred loan fees

Total loans, at amortized cost

Allowance for credit losses

Total loans and lease finance receivables, net

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

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

As of September 30, 2020, $271.2 million, or 5.00% of the total commercial real estate loans included loans secured by farmland, compared to $241.8 million, or 4.50%, at December 31, 2019.

The loans secured by farmland included $121.1 million for loans secured by dairy & livestock land and $150.2 million for loans secured by agricultural land at September 30, 2020, compared to $125.9 million for loans secured by dairy & livestock land and $115.9 million for loans secured by agricultural land at December 31, 2019.

As of September 30, 2020, dairy & livestock and agribusiness loans of $252.8 million were comprised of $210.4 million for dairy & livestock loans and $42.4 million for agribusiness loans, compared to $323.5 million for dairy & livestock loans and $60.2 million for agribusiness loans at December 31, 2019.

As of March 31, 2021, $327.4 million, or 5.85% of the total commercial real estate loans included loans secured by farmland, compared to $314.4 million, or 5.72%, at December 31, 2020.

The loans secured by farmland included $129.2 million for loans secured by dairy & livestock land and $198.1 million for loans secured by agricultural land at March 31, 2021, compared to $132.9 million for loans secured by dairy & livestock land and $181.5 million for loans secured by agricultural land at December 31, 2020.

As of March 31, 2021, dairy & livestock and agribusiness loans of $261.1 million were comprised of $229.1 million for dairy & livestock loans and $31.9 million for agribusiness loans, compared to $320.1 million for dairy & livestock loans and $41.0 million for agribusiness loans at December 31, 2020.

Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences.

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

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

As of March 31, 2021, the Company had $200.5 million of total SBA 504 loans.

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

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

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

As of March 31, 2021, the Company had $107.2 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default.

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

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

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

As an active participant in the SBA’s Paycheck Protection Program, we originated approximately 4,100 PPP loans totaling $1.10 billion, with a remaining outstanding balance of $582.8 million as of March 31, 2021.

As of March 31, 2021, we have originated approximately 1,500 PPP loans in round two with a loan balance, at amortized cost, of $314.9 million.

As of March 31, 2021, the Company had $96.4 million in construction loans.

This represents 1.16% of total loans held-for-investment.

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

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

There were no nonperforming construction loans at March 31, 2021.

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 September 30, 2020.

September 30, 2020

commercial real estate loans, by region as of March 31, 2021.

March 31, 2021

Commercial Real Estate

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Central Valley

Orange County

Inland Empire

Orange County

Central Coast

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The table below breaks down our commercial real estate portfolio.

September 30, 2020

March 31, 2021

(Dollars in thousands)

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

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

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

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

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

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

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

averaging approximately 53%.

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

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

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

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

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

The loans secured by farmland included $129.2 million for loans secured by dairy & livestock land and $198.1 million for loans secured by agricultural land at March 31, 2021.

Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans at March 31, 2021.

Nonperforming Assets

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

September 30, 2020

March 31, 2021

December 31, 2020

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Troubled Debt Restructurings (“TDRs”)

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

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

Total TDRs were $5.8 million at March 31, 2021, compared to $2.2 million at December 31, 2020.

At March 31, 2021, all of our TDRs were performing and accruing interest as restructured loans.

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

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

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

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

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

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

September 30, 2020

March 31, 2021

December 31, 2020

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Performing TDRs:

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

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Nonperforming TDRs:

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

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Total nonperforming TDRs

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

At December 31, 2019, there was no allowance for loan losses specifically allocated to TDRs.

Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined.

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

At March 31, 2021 and December 31, 2020, there was no ACL allocated to TDRs.

Impairment amounts identified are typically charged off against the allowance at the time the loan is considered uncollectible.

There were no charge-offs on TDRs for the three months ended March 31, 2021 and 2020.

Nonperforming Assets and Delinquencies

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September 30,

(Dollars in thousands)

Nonperforming loans (1):

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

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Past due 30-89

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

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

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

Total nonperforming loans at September 30, 2020 included $9.3 million of nonperforming loans acquired from CB in the third quarter of 2018.

This compares to nonperforming loans of $5.3 million, or 0.07% of total loans, at December 31, 2019 and $6.6 million, or 0.09% of total loans, at September 30, 2019.

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

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

In response to the COVID-19

pandemic, we have implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications.

This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis.

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

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

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

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

Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $13.8 million at March 31, 2021, or 0.17% of total loans.

This compares to nonperforming loans of $14.3 million, or 0.17% of total loans, at December 31, 2020 and $6.4 million, or 0.09% of total loans, at March 31, 2020.

The $578,000 quarter-over-quarter decrease in nonperforming loans was primarily due to decreases of $526,000 in nonperforming dairy & livestock and agribusiness loans, $168,000 in commercial real estate loans, and $162,000 in nonperforming commercial and industrial loans.

This was partially offset by a $145,000 increase in nonperforming consumer and other loans and a $139,000 increase in SBA loans.

At March 31, 2021, we had one OREO property with a carrying value of $1.6 million, compared to two OREO properties with a carrying value of $3.4 million at December 31, 2020 and four OREO properties with a carrying value of $4.9 million at March 31, 2020.

We recognized a $399,000 gain on the sale of one OREO property in the first quarter of 2021.

There were no additions to or sales of OREO properties for the three months ended March 31, 2021.

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

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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 $93.9 million as of September 30, 2020, compared to $68.7 million as of December 31, 2019 and $68.7 million as of September 30, 2019.

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

Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by a $23.5 million credit loss provision in the first nine months of 2020 due to the severe economic disruption resulting from the COVID-19

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

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

Our modeling processes incorporate a lifetime historical loss rate methodology by different asset classes.

These models use key loan attributes by asset class and macroeconomic variables.

Macroeconomic variables include GDP, and unemployment rate, among others.

Our economic forecast incorporates a weighting of multiple forecasts.

The forecast includes a reasonable and supportable forecast period of two to three years for the macroeconomic variables, which revert to a historical mean based on an input reversion approach.

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

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

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

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

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

With California slowly re-opening

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

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

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

of the notes contained in our Annual Report on Form 10-K

for the year ended December 31, 2020.

The allowance for credit losses totaled $71.8 million as of March 31, 2021, compared to $93.7 million as of December 31, 2020 and $82.6 million as of March 31, 2020.

Our allowance for credit losses at March 31, 2021 was 0.87%, or 0.97% of total loans when excluding the $897.7 million in PPP loans.

The first quarter of 2021 included a $19.5 million recapture of provision for credit losses as a result of the improvement in our economic forecast.

The Company previously recorded provision for credit losses totaling $23.5 million in 2020, due to the severe decline in economic forecasts associated with the pandemic.

Net charge-offs were $2.4 million for the three months ended March 31, 2021.

This compares to a $12.0 million credit loss provision and $141,000 in net recoveries for the same period of 2020.

The allowance for credit losses as of March 31, 2021 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.

Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast reflects improvements in key macroeconomic variables, particularly the commercial real estate price index and the unemployment rate.

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.

Our forecast at the end of the first quarter of 2021, assumes GDP will increase by 4.0% in 2021 and then grow by 3.2% in 2022 and 2.8% in 2023.

The forecast for the unemployment rate is 6.4% in 2021, 6.3% in 2022 and 5.5% in 2023.

Management believes that the ACL was appropriate at March 31, 2021 and December 31, 2020.

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 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 charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.

As of and For the

Nine Months Ended

September 30,

Three Months Ended

(Dollars in thousands)

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Impact of adopting ASU 2016-13

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

1 unchanged sentence

Total charge-offs

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness

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Net (charge-offs) recoveries

Provision for credit losses

(Recapture of) provision for credit losses

Allowance for credit losses at end of period

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Average total loans outstanding (1)

Net recoveries to average total loans

Net recoveries to total loans at end of period

Net (charge-offs) recoveries to average total loans

Net (charge-offs) recoveries to total loans at end of period

Allowance for credit losses to average total loans

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Net (charge-offs) recoveries to allowance for credit losses

Net (charge-offs) recoveries to provision for credit losses

Net of deferred loan origination fees, costs and discounts.

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

At implementation of CECL on January 1, 2020, the reserve for unfunded loan commitments included a transition adjustment of $41,000 for our off-balance

sheet credit exposures.

Net (charge-offs) recoveries to (recapature of ) provision for credit losses

Net of deferred loan origination fees, costs and discounts (amortized cost).

The ACL/Total Loan Coverage Ratio as of March 31, 2021 decreased to 0.87%, compared to 1.11% as of March 31, 2020 due to the forecasted impact of improved economic conditions on future life of loan.

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 September 30, 2020 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.

sheet credit exposures as of March 31, 2021, which was unchanged from the allowance at March 31, 2020.

While we believe that the allowance at March 31, 2021 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.

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

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

This represented an increase of $2.46 billion, or 28.30%, over total deposits of $8.70 billion at December 31, 2019.

Total deposits were $12.08 billion at March 31, 2021.

This represented an increase of $342.2 million, or 2.92%, over total deposits of $11.74 billion at December 31, 2020.

The composition of deposits is summarized as of the dates presented in the table below.

September 30, 2020

March 31, 2021

December 31, 2020

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The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds.

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

Noninterest-bearing deposits represented 61.95% of total deposits for September 30, 2020, compared to 60.26% of total deposits for December 31, 2019.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $3.80 billion at September 30, 2020, representing an increase of $791.2 million, or 26.26%, from savings deposits of $3.01 billion at December 31, 2019.

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

Noninterest-bearing deposits totaled $7.58 billion at March 31, 2021, representing an increase of $122.5 million, or 1.64%, from noninterest-bearing deposits of $7.46 billion at December 31, 2020.

Noninterest-bearing deposits represented 62.74% of total deposits at March 31, 2021, compared to 63.52% of total deposits at December 31, 2020.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $4.09 billion at March 31, 2021, representing an increase of $214.1 million, or 5.52%, from savings deposits of $3.88 billion at December 31, 2020.

Time deposits totaled $407.3 million at March 31, 2021, representing an increase of $5.6 million, or 1.40%, from total time deposits of $401.7 million for December 31, 2020.

We offer a repurchase agreement product to our customers.

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

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

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

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

At September 30, 2020, $6.00 billion of loans and $1.86 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

As of March 31, 2021 and December 31, 2020, total funds borrowed under these agreements were $506.3 million and $439.4 million, respectively, with a weighted average interest rate of 0.09% and 0.10%, respectively.

At March 31, 2021 and 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 March 31, 2020.

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.

At March 31, 2021, $6.07 billion of loans and $1.92 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

Aggregate Contractual Obligations

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

The following table summarizes the aggregate contractual obligations as of March 31, 2021.

Maturity by Period

Less Than One

(Dollars in thousands)

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These amounts are due to customers.

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

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

The debentures have the same maturity as the Trust Preferred Securities.

These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.

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

We plan to redeem our $25.8 million junior subordinated debentures, which had a cost of 1.60% during the first quarter of 2021, by the end of the second quarter of this year.

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

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The following table summarizes the off-balance

sheet items at September 30, 2020.

sheet items at March 31, 2021.

Maturity by Period

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Commitment to extend credit:

Commercial and industrial

Commercial real estate

Commercial and industrial

Dairy & livestock and agribusiness (1)

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Obligations under letters of credit

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

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

Total commitments to extend credit to agribusiness were $24.5 million at March 31, 2021.

As of March 31, 2021, we had commitments to extend credit of approximately $1.84 billion, and obligations under letters of credit of $50.8 million.

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

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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 three and nine months ended September 30, 2020 and 2019.

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

The Company recorded no provision or recapture of provision for unfunded loan commitments for the three months ended March 31, 2021 and 2020.

The Company had a reserve for unfunded loan commitments of $9.0 million as of March 31, 2021 and December 31, 2020 included in other liabilities.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party.

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

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

The $12.1 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our 10b5-1

stock repurchase program.

We previously announced that we suspended this 10b5-1

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

Our equity also increased by $23.5 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our available-for-sale

investment securities.

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

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

Total equity increased $12.7 million, or 0.63%, to $2.02 billion at March 31, 2021, compared to total equity of $2.01 billion at December 31, 2020.

The $12.7 million increase in equity was primarily due to $63.9 million in net earnings and $1.7 million for various stock based compensation items.

This was partially offset by a $28.4 million decrease in other comprehensive income resulting from the tax effected impact of the decrease in market value of our investment securities portfolio and $24.5 million in cash dividends declared.

Our tangible common equity ratio was 9.37% at March 31, 2021.

During the first quarter of 2021, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share.

Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future.

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There is no expiration date for this repurchase program.

Up to 9,577,917 of such shares were available for repurchase under the Company’s current 10b5-1

plan originally adopted in November, 2018 and subsequently amended in July, 2019.

On March 31, 2020, the Company announced that it suspended its 10b5-1

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

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

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

For the year ended December 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program.

As of March 31, 2021, we have 4,585,145 shares of CVB common stock remaining that are eligible for repurchase under the common stock repurchase program.

The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities.

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

At September 30, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes.

At March 31, 2021, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes.

For further information about capital requirements and our capital ratios, see “Item 1.

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for the year ended December 31, 2020.

At September 30, 2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes.

At March 31, 2021, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes.

We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S.

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

September 30, 2020

March 31, 2021

December 31, 2020

Capital Ratios

Minimum Required

Conservation Buffer

CVB Financial

Capital Ratios

Conservation Buffer

Tier 1 leverage capital ratio

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This committee analyzes the cash flows from loans, investments, deposits and borrowings.

In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position.

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.

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

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

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

Total deposits of $12.08 billion at March 31, 2021 increased $342.2 million, or 2.92%, over total deposits of $11.74 billion at December 31, 2020.

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

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

Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits.

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sheet sources of liquidity.

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

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 March 31, 2021, the Bank had $5.0 million in FHLB short-term borrowings at 0% cost that mature in May of 2021.

CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations.

At March 31, 2021, we had $25.8 million in subordinated debt at an interest rate of three month LIBOR plus 1.38%.

This subordinated debt is scheduled to be redeemed at par on June 15, 2021.

Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB.

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In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions.

For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds.

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

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

Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2021 and 2020.

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

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Consolidated Summary of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

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

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

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

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Average cash and cash equivalents increased by $1.36 billion, or 332.47%, to $1.77 billion for the three months ended March 31, 2021, compared to $409.9 million for the same period of 2020.

At March 31, 2021, cash and cash equivalents totaled $1.53 billion.

This represented an increase of $819.6 million, or 116.13%, from $705.7 million at March 31, 2020.

Interest Rate Sensitivity Management

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We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk.

Net interest income at risk sensitivity captures asset and liability re pricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure.

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.

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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.

horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 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

time horizon.

The following depicts the Company’s net interest income sensitivity analysis as of the periods presented below.

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)

September 30, 2020

March 31, 2021

December 31, 2020

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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%.

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 zero.

We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions.

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EVE uses instantaneous changes in rates, as shown in the table below.

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

EVE analysis.

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

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

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

At September 30, 2020 and December 31, 2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.

At March 31, 2021 and December 31, 2020, 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

September 30, 2020

March 31, 2021

December 31, 2020

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis