CVB FINANCIAL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report. IMPACT OF COVID-19 The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has 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 contain substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and medium-sized businesses through 100% 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. 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 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. The extent to which the COVID-19 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. 36 Table of Contents CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations. · Allowance for Credit Losses (“ACL”) · Business Combinations · Valuation and Recoverability of Goodwill · Income Taxes Our significant accounting policies are described in greater detail in our 2020 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 – Summary of Significant Accounting Policies , included in our Annual Report on Form 10-K for the year ended December 31, 2020, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2021 Standard Description Adoption Timing Impact on Financial Statements ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020 The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. 1st Quarter 2020 through the 4th Quarter 2022 The Company established a LIBOR Transition Task Force in 2020, which has inventoried our instruments that reflect exposure to LIBOR, created a framework to manage the transition and established a timeline for key decisions and actions to complete the transition from LIBOR in 2021. Although the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR for various financial instruments, primarily related to our variable-rate loans, our subordinated debentures, and interest rate swap derivatives that are indexed to LIBOR, we do not expect this ASU to have a material impact on the Company’s consolidated financial statements. ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity Issued August 2020 The FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification. 1st Quarter 2022 The adoption of this ASU is not expected to have a material impact on our consolidated financial statements. 37 Table of Contents OVERVIEW 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 $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. 38 Table of Contents 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 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. banking agencies. Refer to our Analysis of Financial Condition – Capital Resources . 39 Table of Contents ANALYSIS OF THE RESULTS OF OPERATIONS Financial Performance Three Months Ended March 31, Variance 2021 2020 $ % (Dollars in thousands, except per share amounts) Net interest income $ 103,468 $ 102,306 $ 1,162 1.14 % Recapture of (provision for) credit losses 19,500 (12,000 ) 31,500 262.50 % Noninterest income 13,681 11,640 2,041 17.53 % Noninterest expense (47,163 ) (48,641 ) 1,478 3.04 % Income taxes (25,593 ) (15,325 ) (10,268) -67.00 % Net earnings $ 63,893 $ 37,980 $ 25,913 68.23 % Earnings per common share: Basic $ 0.47 $ 0.27 $ 0.20 Diluted $ 0.47 $ 0.27 $ 0.20 Return on average assets 1.79 % 1.34 % 0.45% Return on average shareholders’ equity 12.75 % 7.61 % 5.14% Efficiency ratio 40.26 % 42.69 % -2.43% Noninterest expense to average assets 1.32 % 1.72 % -0.40% Three Months Ended Variance March 31, 2021 December 31, 2020 $ % (Dollars in thousands, except per share amounts) Net interest income $ 103,468 $ 105,853 $ (2,385) -2.25 % Recapture of credit losses 19,500 - 19,500 - Noninterest income 13,681 12,925 756 5.85 % Noninterest expense (47,163 ) (48,276 ) 1,113 2.31 % Income taxes (25,593 ) (20,446 ) (5,147) -25.17 % Net earnings $ 63,893 $ 50,056 $ 13,837 27.64 % Earnings per common share: Basic $ 0.47 $ 0.37 $ 0.10 Diluted $ 0.47 $ 0.37 $ 0.10 Return on average assets 1.79 % 1.42 % 0.37% Return on average shareholders’ equity 12.75 % 9.92 % 2.83% Efficiency ratio 40.26 % 40.64 % -0.38% Noninterest expense to average assets 1.32 % 1.37 % -0.05% 40 Table of Contents Return on Average Tangible Common Equity Reconciliation (Non-GAAP) The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity. Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 (Dollars in thousands) Net Income $ 63,893 $ 50,056 $ 37,980 Add: Amortization of intangible assets 2,167 2,170 2,445 Less: Tax effect of amortization of intangible assets (1) (641 ) (642 ) (723 ) Tangible net income $ 65,419 $ 51,584 $ 39,702 Average stockholders’ equity $ 2,032,676 $ 2,007,640 $ 2,006,464 Less: Average goodwill (663,707 ) (663,707 ) (663,707 ) Less: Average intangible assets (32,590 ) (34,711 ) (41,732 ) Average tangible common equity $ 1,336,379 $ 1,309,222 $ 1,301,025 Return on average equity, annualized 12.75% 9.92% 7.61% Return on average tangible common equity, annualized 19.85% 15.67% 12.27% (1) Tax effected at respective statutory rates. Net Interest Income The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three months ended March 31, 2021 and 2020. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein. 41 Table of Contents The table below presents the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods. Three Months Ended March 31, 2021 2020 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (Dollars in thousands) INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: Taxable $ 2,523,609 $ 8,968 1.47% $ 1,659,394 $ 9,825 2.37% Tax-advantaged 30,158 191 3.02% 38,086 224 3.36% Held-to-maturity securities: Taxable 580,478 2,811 1.95% 469,394 2,698 2.30% Tax-advantaged 199,348 1,129 2.74% 189,522 1,300 3.32% Investment in FHLB stock 17,688 217 4.98% 17,688 332 7.55% Interest-earning deposits with other institutions 1,664,193 413 0.10% 261,041 613 0.94% Loans (2) 8,270,282 91,795 4.50% 7,482,805 92,117 4.95% Total interest-earning assets 13,285,756 105,524 3.24% 10,117,930 107,109 4.27% Total noninterest-earning assets 1,220,899 1,257,870 Total assets $ 14,506,655 $ 11,375,800 INTEREST-BEARING LIABILITIES Savings deposits (3) $ 4,026,248 1,198 0.12% $ 3,056,743 3,111 0.41% Time deposits 408,034 614 0.61% 445,431 1,013 0.91% Total interest-bearing deposits 4,434,282 1,812 0.17% 3,502,174 4,124 0.47% FHLB advances, other borrowings, and customer repurchase agreements 590,170 244 0.17% 504,585 679 0.54% Interest-bearing liabilities 5,024,452 2,056 0.17% 4,006,759 4,803 0.48% Noninterest-bearing deposits 7,240,494 5,247,025 Other liabilities 209,033 115,552 Stockholders’ equity 2,032,676 2,006,464 Total liabilities and stockholders’ equity $ 14,506,655 $ 11,375,800 Net interest income $ 103,468 $ 102,306 Net interest spread—tax equivalent 3.07% 3.79% Net interest margin 3.17% 4.06% Net interest margin—tax equivalent 3.18% 4.08% (1) 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. (2) 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. (3) Includes interest-bearing demand and money market accounts. 42 Table of Contents The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume. Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income Comparison of Three Months Ended March 31, 2021 Compared to 2020 Increase (Decrease) Due to Volume Rate Rate/ Volume Total (Dollars in thousands) Interest income: Available-for-sale securities: Taxable investment securities $ 4,541 $ (3,674 ) $ (1,724 ) $ (857 ) Tax-advantaged investment securities (46 ) 17 (4 ) (33 ) Held-to-maturity securities: Taxable investment securities 609 (404 ) (92 ) 113 Tax-advantaged investment securities 65 (224 ) (12 ) (171 ) Investment in FHLB stock - (115 ) - (115 ) Interest-earning deposits with other institutions 3,266 (543 ) (2,923 ) (200 ) Loans 9,232 (8,644 ) (910 ) (322 ) Total interest income 17,667 (13,587 ) (5,665 ) (1,585 ) Interest expense: Savings deposits 972 (2,191 ) (694 ) (1,913 ) Time deposits (63 ) (250 ) (86 ) (399 ) FHLB advances, other borrowings, and customer repurchase agreements 113 (469 ) (79 ) (435 ) Total interest expense 1,022 (2,910 ) (859 ) (2,747 ) Net interest income $ 16,645 $ (10,677 ) $ (4,806 ) $ 1,162 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. 43 Table of Contents 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. 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 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 herein. 44 Table of Contents Noninterest Income Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets. The following table sets forth the various components of noninterest income for the periods presented. Three Months Ended March 31, Variance 2021 2020 $ % (Dollars in thousands) Noninterest income: Service charges on deposit accounts $ 3,985 $ 4,776 $ (791 ) -16.56% Trust and investment services 2,611 2,420 191 7.89% Bankcard services 350 577 (227 ) -39.34% BOLI income 4,624 2,059 2,565 124.58% Swap fee income 215 373 (158 ) -42.36% Gain on OREO, net 429 10 419 4190.00% Other 1,467 1,425 42 2.95% Total noninterest income $ 13,681 $ 11,640 $ 2,041 17.53% 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. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 – Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information). 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. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At March 31, 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. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from our BOLI policies for 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. 45 Table of Contents Noninterest Expense The following table summarizes the various components of noninterest expense for the periods presented. Three Months Ended March 31, Variance 2021 2020 $ % (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 29,706 $ 30,877 $ (1,171) -3.79% Occupancy 4,107 3,803 304 7.99% Equipment 756 1,034 (278) -26.89% Professional services 2,168 2,256 (88) -3.90% Computer software expense 2,844 2,816 28 0.99% Marketing and promotion 725 1,555 (830) -53.38% Amortization of intangible assets 2,167 2,445 (278) -11.37% Telecommunications expense 552 636 (84) -13.21% Regulatory assessments 1,059 148 911 615.54% Insurance 453 406 47 11.58% Loan expense 238 257 (19) -7.39% OREO expense 9 258 (249) -96.51% Directors’ expenses 379 351 28 7.98% Stationery and supplies 244 285 (41) -14.39% Other 1,756 1,514 242 15.98% Total noninterest expense $ 47,163 $ 48,641 $ (1,478) -3.04% Noninterest expense to average assets 1.32% 1.72% Efficiency ratio (1) 40.26% 42.69% (1) Noninterest expense divided by net interest income before provision for credit losses plus noninterest income. Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.32% 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 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. Income Taxes 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 income as well as available tax credits. The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period. 46 Table of Contents ANALYSIS OF FINANCIAL CONDITION Total assets of $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. 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. 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 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 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. The after-tax unrealized gain reported in AOCI on AFS investment securities was $10.1 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. 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. On a non-tax 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. 47 Table of Contents The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented. March 31, 2021 Amortized Cost Gross Unrealized Holding Gain Gross Unrealized Holding Loss Fair Value Total Percent (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 2,175,414 $ 38,333 $ (22,409 ) $ 2,191,338 77.92% CMO/REMIC 592,915 4,072 (6,821 ) 590,166 20.99% Municipal bonds 28,703 1,183 - 29,886 1.06% Other securities 958 - - 958 0.03% Total available-for-sale securities $ 2,797,990 $ 43,588 $ (29,230 ) $ 2,812,348 100.00% Investment securities held-to-maturity: Government agency/GSE $ 601,142 $ 3,860 $ (16,289 ) $ 588,713 55.30% Mortgage-backed securities 135,137 5,348 (255 ) 140,230 12.43% CMO/REMIC 133,556 2,832 - 136,388 12.29% Municipal bonds 217,149 5,095 (2,094 ) 220,150 19.98% Total held-to-maturity securities $ 1,086,984 $ 17,135 $ (18,638 ) $ 1,085,481 100.00% December 31, 2020 Amortized Cost Gross Unrealized Holding Gain Gross Unrealized Holding Loss Fair Value Total Percent (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 1,857,030 $ 48,006 $ (101 ) $ 1,904,935 79.41% CMO/REMIC 457,548 5,515 (249 ) 462,814 19.29% Municipal bonds 28,707 1,578 - 30,285 1.26% Other securities 889 - - 889 0.04% Total available-for-sale securities $ 2,344,174 $ 55,099 $ (350 ) $ 2,398,923 100.00% Investment securities held-to-maturity: Government agency/GSE $ 98,663 $ 5,877 $ - $ 104,540 17.05% Mortgage-backed securities 146,382 7,644 (32 ) 153,994 25.30% CMO/REMIC 145,309 5,202 - 150,511 25.11% Municipal bonds 188,272 6,980 (74 ) 195,178 32.54% Total held-to-maturity securities $ 578,626 $ 25,703 $ (106 ) $ 604,223 100.00% As of March 31, 2021, approximately $60.6 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 6% of the total investment portfolio, are predominately AA or higher rated securities. . 48 Table of Contents 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 March 31, 2021 and December 31, 2020. March 31, 2021 Less Than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 1,327,126 $ (22,409 ) $ - $ - $ 1,327,126 $ (22,409 ) CMO/REMIC 422,765 (6,821 ) - - 422,765 (6,821 ) Municipal bonds - - - - - - Total available-for-sale securities $ 1,749,891 $ (29,230 ) $ - $ - $ 1,749,891 $ (29,230 ) December 31, 2020 Less Than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses Fair Value Gross Unrealized Holding Losses (Dollars in thousands) Investment securities available-for-sale: Mortgage-backed securities $ 72,219 $ (101 ) $ - $ - $ 72,219 $ (101 ) CMO/REMIC 96,974 (249 ) - - 96,974 (249 ) Municipal bonds - - - - - - Total available-for-sale securities $ 169,193 $ (350 ) $ - $ - $ 169,193 $ (350 ) Once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. 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. 49 Table of Contents Loans 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. 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 SBA loans. 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 March 31, 2021 December 31, 2020 (Dollars in thousands) Commercial real estate $ 5,596,781 $ 5,501,509 Construction 96,356 85,145 SBA 307,727 303,896 SBA - Paycheck Protection Program (PPP) 897,724 882,986 Commercial and industrial 753,708 812,062 Dairy & livestock and agribusiness 261,088 361,146 Municipal lease finance receivables 42,349 45,547 SFR mortgage 255,400 270,511 Consumer and other loans 81,924 86,006 Total loans, at amortized cost 8,293,057 8,348,808 Less: Allowance for credit losses (71,805 ) (93,692 ) Total loans and lease finance receivables, net $ 8,221,252 $ 8,255,116 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. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers. As of March 31, 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. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of March 31, 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 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. 50 Table of Contents 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 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 March 31, 2021. March 31, 2021 Total Loans Commercial Real Estate Loans (Dollars in thousands) Los Angeles County $ 3,549,896 42.8% $ 2,232,034 39.9% Central Valley 1,344,718 16.2% 1,028,703 18.4% Inland Empire 1,168,494 14.1% 865,648 15.5% Orange County 1,083,075 13.1% 679,585 12.1% Central Coast 492,532 5.9% 366,547 6.5% San Diego 232,277 2.8% 170,091 3.0% Other California 137,582 1.7% 87,463 1.6% Out of State 284,483 3.4% 166,710 3.0% $ 8,293,057 100.0% $ 5,596,781 100.0% The table below breaks down our commercial real estate portfolio. March 31, 2021 Loan Balance Percent Percent Owner- Occupied (1) Average Loan Balance (Dollars in thousands) Commercial real estate: Industrial $ 1,915,437 34.2% 52.4% $ 1,434 Office 1,025,167 18.3% 24.2% 1,635 Retail 793,485 14.2% 13.0% 1,714 Multi-family 605,110 10.8% 2.0% 1,548 Secured by farmland (2) 327,363 5.8% 96.6% 2,154 Medical 293,909 5.3% 42.6% 1,729 Other (3) 636,310 11.4% 57.4% 1,398 Total commercial real estate $ 5,596,781 100.0% 38.8% $ 1,557 (1) Represents percentage of reported owner-occupied at origination in each real estate loan category. (2) 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. (3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans at March 31, 2021. 51 Table of Contents Nonperforming Assets The following table provides information on nonperforming assets as of the dates presented. March 31, 2021 December 31, 2020 (Dollars in thousands) Nonaccrual loans $ 13,769 $ 14,347 Loans past due 90 days or more and still accruing interest - - Nonperforming troubled debt restructured loans (TDRs) - - Total nonperforming loans 13,769 14,347 OREO, net 1,575 3,392 Total nonperforming assets $ 15,344 $ 17,739 Performing TDRs $ 5,813 $ 2,159 Total nonperforming loans and performing TDRs $ 19,582 $ 16,506 Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees 0.24 % 0.20 % Percentage of nonperforming assets to total loans, net of deferred fees, and OREO 0.18 % 0.21 % Percentage of nonperforming assets to total assets 0.10 % 0.12 % Troubled Debt Restructurings (“TDRs”) 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. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms. The following table provides a summary of TDRs as of the dates presented. March 31, 2021 December 31, 2020 Balance Number of Loans Balance Number of Loans (Dollars in thousands) Performing TDRs: Commercial real estate $ 294 1 $ 320 1 Construction - - - - SBA - - - - Commercial and industrial 4,482 3 43 1 Dairy & livestock and agribusiness - - - - SFR mortgage 1,037 5 1,796 7 Consumer and other - - - - Total performing TDRs $ 5,813 9 $ 2,159 9 Nonperforming TDRs: Commercial real estate $ - - $ - - Construction - - - - SBA - - - - Commercial and industrial - - - - Dairy & livestock and agribusiness - - - - SFR mortgage - - - - Consumer and other - - - - Total nonperforming TDRs $ - - $ - - Total TDRs $ 5,813 9 $ 2,159 9 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. 52 Table of Contents Nonperforming Assets and Delinquencies The table below provides trends in our nonperforming assets and delinquencies as of the dates presented. March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 (Dollars in thousands) Nonperforming loans (1): Commercial real estate $ 7,395 $ 7,563 $ 6,481 $ 2,628 $ 947 Construction - - - - - SBA 2,412 2,273 1,724 1,598 2,748 Commercial and industrial 2,967 3,129 1,822 1,222 1,703 Dairy & livestock and agribusiness 259 785 849 - - SFR mortgage 424 430 675 1,080 864 Consumer and other loans 312 167 224 289 166 Total $ 13,769 $ 14,347 $ 11,775 $ 6,817 $ 6,428 % of Total loans 0.17% 0.17% 0.14% 0.08% 0.09% Past due 30-89 days: Commercial real estate $ 178 $ - $ - $ 4 $ 210 Construction - - - - - SBA 258 1,965 66 214 3,086 Commercial and industrial 952 1,101 3,627 630 665 Dairy & livestock and agribusiness - - - 882 166 SFR mortgage 266 - - 446 233 Consumer and other loans 21 - 67 413 - Total $ 1,675 $ 3,066 $ 3,760 $ 2,589 $ 4,360 % of Total loans 0.02% 0.04% 0.04% 0.03% 0.06% OREO: Commercial real estate $ 1,575 $ 1,575 $ 1,575 $ 2,275 $ 2,275 SBA - - 797 797 797 SFR mortgage - 1,817 1,817 1,817 1,817 Total $ 1,575 $ 3,392 $ 4,189 $ 4,889 $ 4,889 Total nonperforming, past due, and OREO $ 17,019 $ 20,805 $ 19,724 $ 14,295 $ 15,677 % of Total loans 0.21% 0.25% 0.23% 0.17% 0.21% (1) As of June 30, 2020, nonperforming loans included $25,000 of commercial and industrial loans past due 90 days or more and still accruing interest. Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $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. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “ Risk Management – Credit Risk Management ” contained in our Annual Report on Form 10-K for the year ended December 31, 2020. 53 Table of Contents Allowance for Credit Losses We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3— Summary of Significant Accounting Policies of the notes 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. 54 Table of Contents The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented. As of and For the Three Months Ended March 31, 2021 2020 (Dollars in thousands) Allowance for credit losses at beginning of period $ 93,692 $ 68,660 Impact of adopting ASU 2016-13 - 1,840 Charge-offs: Commercial real estate - - Construction - - SBA - - Commercial and industrial (2,475) - Dairy & livestock and agribusiness - - SFR mortgage - - Consumer and other loans - (86) Total charge-offs (2,475) (86) Recoveries: Commercial real estate - - Construction 3 3 SBA 4 - Commercial and industrial 2 2 Dairy & livestock and agribusiness - - SFR mortgage 79 206 Consumer and other loans - 16 Total recoveries 88 227 Net (charge-offs) recoveries (2,387) 141 (Recapture of) provision for credit losses (19,500) 12,000 Allowance for credit losses at end of period $ 71,805 $ 82,641 Summary of reserve for unfunded loan commitments: Reserve for unfunded loan commitments at beginning of period $ 9,000 $ 8,959 Impact of adopting ASU 2016-13 - 41 Provision for unfunded loan commitments - - Reserve for unfunded loan commitments at end of period $ 9,000 $ 9,000 Reserve for unfunded loan commitments to total unfunded loan commitments 0.48% 0.56% Amount of total loans at end of period (1) $ 8,293,057 $ 7,466,152 Average total loans outstanding (1) $ 8,270,282 $ 7,482,805 Net (charge-offs) recoveries to average total loans -0.029% 0.002% Net (charge-offs) recoveries to total loans at end of period -0.029% 0.002% Allowance for credit losses to average total loans 0.87% 1.10% Allowance for credit losses to total loans at end of period 0.87% 1.11% Net (charge-offs) recoveries to allowance for credit losses -3.32% 0.17% Net (charge-offs) recoveries to (recapature of ) provision for credit losses 12.24% 1.18% (1) Net of deferred loan origination fees, costs and discounts (amortized cost). 55 Table of Contents 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 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. Deposits The primary source of funds to support earning assets (loans and investments) is the generation of deposits. 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. March 31, 2021 December 31, 2020 Balance Percent Balance Percent (Dollars in thousands) Noninterest-bearing deposits $ 7,577,839 62.74% $ 7,455,387 63.52% Interest-bearing deposits Investment checking 567,062 4.69% 517,976 4.42% Money market 2,996,378 24.81% 2,869,348 24.45% Savings 530,046 4.39% 492,096 4.19% Time deposits 407,330 3.37% 401,694 3.42% Total deposits $ 12,078,655 100.00% $ 11,736,501 100.00% The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled $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. 56 Table of Contents Borrowings We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of March 31, 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 March 31, 2021. Maturity by Period Total Less Than One Year One Year Through Three Years Four Years Through Five Years Over Five Years (Dollars in thousands) Deposits (1) $ 12,078,655 $ 12,041,777 $ 26,966 $ 9,293 $ 619 Customer repurchase agreements (1) 506,346 506,346 - - - Junior subordinated debentures (1) 25,774 - - - 25,774 Deferred compensation 22,482 674 956 622 20,230 Operating leases 23,491 6,757 9,555 5,173 2,006 Affordable housing investment 1,950 1,859 55 30 6 Total $ 12,658,698 $ 12,557,413 $ 37,532 $ 15,118 $ 48,635 (1) Amounts exclude accrued interest. Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank. Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers. Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust III. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036. 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 operating leases. Refer to Note 11 – Leases of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases. 57 Table of Contents Off-Balance Sheet Arrangements The following table summarizes the off-balance sheet items at March 31, 2021. Maturity by Period Less Than One Year Four Years After One to Three to Five Five Total Year Years Years Years (Dollars in thousands) Commitment to extend credit: Commercial real estate $ 329,913 $ 56,821 $ 110,606 $ 136,422 $ 26,064 Construction 110,133 43,477 66,656 - - SBA 98 28 - - 70 SBA - PPP - - - - - Commercial and industrial 1,047,807 736,354 212,758 8,095 90,600 Dairy & livestock and agribusiness (1) 219,510 148,395 71,115 - - SFR Mortgage 3,877 - 500 - 3,377 Consumer and other loans 127,634 10,231 11,628 3,697 102,078 Total commitment to extend credit 1,838,972 995,306 473,263 148,214 222,189 Obligations under letters of credit 50,835 46,971 3,864 - - Total $ 1,889,807 $ 1,042,277 $ 477,127 $ 148,214 $ 222,189 (1) 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. 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. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments. Capital Resources Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital. Total equity increased $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. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures. 58 Table of Contents On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. For the year ended December 31, 2020, the Company repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of 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. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At March 31, 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. Business – Capital Adequacy Requirements ” as described in our Annual Report on Form 10-K for the year ended December 31, 2020. 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. banking agencies. The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented. March 31, 2021 December 31, 2020 Adequately Minimum Required Well CVB Financial Citizens CVB Financial Citizens Capitalized Plus Capital Capitalized Corp. Business Corp. Business Capital Ratios Ratios Conservation Buffer Ratios Consolidated Bank Consolidated Bank Tier 1 leverage capital ratio 4.00 % 4.00 % 5.00 % 9.83 % 9.45 % 9.90 % 9.58 % Common equity Tier 1 capital ratio 4.50 % 7.00 % 6.50 % 14.87 % 14.55 % 14.77 % 14.57 % Tier 1 risk-based capital ratio 6.00 % 8.50 % 8.00 % 15.15 % 14.55 % 15.06 % 14.57 % Total risk-based capital ratio 8.00 % 10.50 % 10.00 % 16.05 % 15.46 % 16.24 % 15.75 % 59 Table of Contents ASSET/LIABILITY AND MARKET RISK MANAGEMENT Liquidity and Cash Flow The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs. We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets quarterly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of $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. Our balance sheet has significant liquidity and our assets are funded almost entirely with core deposits. Furthermore, we have significant off-balance sheet sources of liquidity. 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 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. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. 60 Table of Contents 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 (Unaudited)” under Part I, Item 1 of this report. Consolidated Summary of Cash Flows Three Months Ended March 31, 2021 2020 (Dollars in thousands) Average cash and cash equivalents $ 1,772,635 $ 409,885 Percentage of total average assets 12.22% 3.60% Net cash provided by operating activities $ 46,938 $ 75,527 Net cash (used in) provided by investing activities (864,874) 205,990 Net cash provided by financing activities 385,075 238,704 Net (decrease) increase in cash and cash equivalents $ (432,861) $ 520,221 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 During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability repricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure. One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities. Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon. The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and 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 and 24-month time horizon. 61 Table of Contents 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) March 31, 2021 December 31, 2020 24-month Period 24-month Period Interest Rate Scenario 12-month Period (Cumulative) Interest Rate Scenario 12-month Period (Cumulative) + 200 basis points 9.99% 18.97% + 200 basis points 11.10% 19.60% - 100 basis points -4.64% -5.79% - 100 basis points -1.20% -2.40% (1) Percentage change from base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero. Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a one-year and a two-year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below zero. We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At March 31, 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 March 31, 2021 December 31, 2020 100 bp decrease in interest rates -11.1% -21.0% 100 bp increase in interest rates 9.7% 16.1% 200 bp increase in interest rates 18.6% 28.4% 300 bp increase in interest rates 23.4% 34.4% 400 bp increase in interest rates 29.8% 41.6% As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates. 62 Table of Contents