UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM

10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, ~~2019~~

2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~_____~~

to ~~_____~~

Commission File Number:

000-10140

CVB FINANCIAL ~~CORP~~

.CORP.

(Exact name of registrant as specified in its charter)


California		95-3629339
(State or other jurisdiction of		~~(I.R.S. Employer~~
Incorporation or organization)		(I.R.S. Employer Identification No.)

701 North Haven Ave., Suite 350
Ontario, , California		91764
(Address of principal executive offices)		(Zip Code)

(

~~909~~

)

(909)

980-4030

(Registrant’s telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	CVBF	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,

non-accelerated

filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act. (Check one):


Large accelerated filer
~~Large accelerated filer~~	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock of the registrant:

~~140,143,607~~

135,519,143 outstanding as of July 31, ~~2019.~~2020.

Table of Contents

TABLE OF CONTENTS


PART I –	FINANCIAL INFORMATION (UNAUDITED)		3

ITEM 1. 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED)~~		5


	NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED)~~		10

ITEM 2. 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		37

	CRITICAL ACCOUNTING POLICIES			38
		~~CRITICAL ACCOUNTING POLICIES~~			37

	OVERVIEW		37

	~~ANALYSIS OF THE RESULTS OF OPERATIONS~~		39

	ANALYSIS OF THE RESULTS OF OPERATIONS			41

	ANALYSIS OF FINANCIAL CONDITION		50
			51

	ASSET/LIABILITY AND MARKET RISK MANAGEMENT		6665

ITEM 3. 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68

ITEM 4. 4.	CONTROLS AND PROCEDURES		68

PART II –	OTHER INFORMATION		69

ITEM 1. 1.	LEGAL PROCEEDINGS		69

ITEM 1A.	RISK FACTORS			70

ITEM 2. ~~1A.~~	~~RISK FACTORS~~		69

~~ITEM~~ 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		7071

ITEM 3. 3.	DEFAULTS UPON SENIOR SECURITIES		7071

ITEM 4.	MINE SAFETY DISCLOSURES		71

ITEM 5.	OTHER INFORMATION		72

ITEM 6. 4.	~~MINE SAFETY DISCLOSURES~~EXHIBITS		7072

~~ITEM~~ 5.	~~OTHER INFORMATION~~SIGNATURES		70

~~ITEM~~ 6.	~~EXHIBITS~~		70

~~SIGNATURES~~			7173

Table of Contents

PART I – FINANCIAL INFORMATION (UNAUDITED)

GENERAL

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations and our future financial position and operating results. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will”, “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to:

local, regional, national and international economic and market conditions and political events and the impact they may have on us, our customers and our assets and liabilities;

our ability to attract deposits and other sources of funding or liquidity;

supply and demand for commercial or residential real estate and periodic deterioration in real estate prices and/or values in California or other states where we lend;

a sharp or prolonged slowdown or decline in real estate construction, sales or leasing activities;

changes in the financial performance and/or condition of our borrowers, depositors, key vendors or counterparties;

changes in our levels of delinquent loans, nonperforming assets, allowance for ~~loan~~credit losses and charge-offs;

the costs or effects of mergers, acquisitions or dispositions we may make, ~~including the 2018 merger of Community Bank with and into Citizens Business Bank,~~ whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial or business benefits or cost savings associated with any such mergers, acquisitions or dispositions;

the effects of new laws, regulations and/or government programs, including those laws, regulations and programs enacted by federal, state or local governments in the geographic jurisdictions in which we do business in response to the recent national emergency declared in connection with the

COVID-19

pandemic;

the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;

the effects of the Company’s participation in one or more of the new lending programs recently established by the Federal Reserve, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility, and the impact of any related actions or decisions by the Federal Reserve Bank of Boston and its special purpose vehicle established pursuant to such lending programs;

the effect of changes in other pertinent laws, regulations and applicable judicial decisions (including laws, regulations and judicial decisions concerning financial reforms, taxes, bank capital levels, allowance for ~~loan~~credit losses, consumer, commercial or secured lending, securities and securities trading and hedging, bank operations, compliance, fair lending, the Community Reinvestment Act, employment, executive compensation, insurance, cybersecurity, vendor management and information security technology) with which we and our subsidiaries must comply or believe we should comply or which may otherwise impact us;

~~the effects of additional legal and regulatory requirements to which we have or will become subject as a result of our total assets exceeding $10~~

~~billion, which first occurred in the third quarter of 2018 due to the closing of our merger transaction with Community Bank;~~

changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting standards, including changes in the Basel Committee framework establishing capital standards for bank credit, operations and market risks;

the accuracy of the assumptions and estimates and the absence of technical error in implementation or calibration of models used to estimate the fair value of financial instruments or currently expected credit losses or delinquencies;

the sensitivity of our assets and liabilities to changes in market interest rates, or our current allowance for ~~loan~~credit losses;

inflation, changes in market interest rates, securities market and monetary fluctuations;

changes in government-established interest rates, reference rates ~~(including~~or monetary policies, including the possible imposition of negative interest rates on bank reserves;

the impact of the anticipated

phase-out

of ~~LIBOR) or monetary policies;~~the London Interbank Offered Rate (LIBOR) on interest rate indexes specified in certain of our customer loan agreements and in our interest rate swap arrangements, including any economic and compliance effects related to the expected change from LIBOR to an alternative reference rate;

changes in the amount, cost and availability of deposit insurance;

Table of Contents

disruptions in the infrastructure that supports our business and the communities where we are located, which are concentrated in California, involving or related to physical site access and/or communication facilities;

cyber incidents, attacks, infiltrations, exfiltrations, or theft or loss of Company or customer data or money;

political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, the effects of pandemic diseases, climate change or extreme weather events, that may affect electrical, environmental ~~computer servers,~~ and communications or other services, computer services or facilities we use, or that may affect our customers, employees or third parties with whom we conduct business;

our timely development and ~~acceptance~~implementation of new banking products and services and the perceived overall value of these products and services by customers and potential customers;

the Company’s relationships with and reliance upon outside vendors with respect to certain of the Company’s key internal and external systems, applications and controls;

changes in commercial or consumer spending, borrowing and savings preferences or behaviors;

~~Table of Contents~~

technological changes and the expanding use of technology in banking and financial services (including the adoption of mobile banking, funds transfer applications, electronic marketplaces for loans, ~~blockchain~~block-chain technology and other banking products, systems or services);

our ability to retain and increase market share, to retain and grow customers and to control expenses;

changes in the competitive environment among banks and other financial services and technology providers;

competition and innovation with respect to financial products and services by banks, financial institutions and

non-traditional

providers, including retail businesses and technology companies;

volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions or on the Company’s capital, assets, liabilities, or customers;

fluctuations in the price of the Company’s common stock or other securities, and the resulting impact on the Company’s ability to raise capital or make acquisitions;

the effect of changes in accounting policies and practices, as may be adopted from

time-to-time

by the principal regulatory agencies with jurisdiction over the Company, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting ~~standard setters;~~standard-setters;

changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our workforce, management team, key executive positions and/or our board of directors;

our ability to identify suitable and qualified replacements for any of our executive officers who may leave their employment with us, including our Chief Executive Officer;

the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings (including any securities, lender liability, bank operations, financial product or service, data privacy, consumer or employee class action ~~litigation and any litigation which we inherited from our 2018 merger with Community Bank)~~litigation);

regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;

our ongoing relations with our various federal and state regulators, including the SEC, Federal Reserve Board, FDIC and California DBO;

our success at managing the risks involved in the foregoing items; and

all other factors set forth in the Company’s public reports, including its Annual Report on Form

10-K

for the year ended December

31, ~~2018,~~2019, and particularly the discussion of risk factors within that document.

Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the Company’s business prospects. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact on the economy, our customers and our business partners, and actions taken by governmental authorities in response to the pandemic.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.

Table of Contents

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

      June 30,
2019

  December 31,
2018

Assets

Cash and due from banks
  $
170,387
  $
144,008

Interest-earning balances due from Federal Reserve

5,453

19,940

Total cash and cash equivalents

175,840

163,948

Interest-earning balances due from depository institutions

6,425

7,670

Investment securities
available-for-sale,
at fair value (with amortized cost of $1,584,687 at June 30, 2019, and $1,757,666 at December 31, 2018)

1,600,020

1,734,085

Investment securities
held-to-maturity
(with fair value of $729,032 at June 30, 2019, and $721,537 at December 31, 2018)

728,113

744,440

Total investment securities

2,328,133

2,478,525

Investment in stock of Federal Home Loan Bank (FHLB)

17,688

17,688

Loans and lease finance receivables

7,535,690

7,764,611

Allowance for loan losses

(67,132
)
(63,613
)
Net loans and lease finance receivables

7,468,558

7,700,998

Premises and equipment, net

54,163

58,193

Bank owned life insurance (BOLI)

224,172

220,758

Accrued interest receivable

29,481

30,649

Intangibles

48,094

53,784

Goodwill

663,707

666,539

Other real estate owned (OREO)

2,275

420

Income taxes

49,581

62,174

Other assets

103,466

67,807

Total assets
  $
11,171,583
  $
11,529,153

Liabilities and Stockholders’ Equity

Liabilities:

Deposits:

Noninterest-bearing
  $
5,250,235
  $
5,204,787

Interest-bearing

3,412,588

3,622,703

Total deposits

8,662,823

8,827,490

Customer repurchase agreements

421,271

442,255

Other borrowings
-

280,000

Deferred compensation

20,953

20,033

Junior subordinated debentures

25,774

25,774

Other liabilities

104,085

82,411

Total liabilities

9,234,906

9,677,963

Commitments and Contingencies

Stockholders’ Equity

Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,141,680 at June 30, 2019, and 140,000,017 at December 31, 2018

1,296,885

1,293,669

Retained earnings

631,512

575,805

Accumulated other comprehensive income (loss), net of tax

8,280

(18,284
)
Total stockholders’ equity

1,936,677

1,851,190

Total liabilities and stockholders’ equity
  $
11,171,583
  $
11,529,153


	June 30, 2020			December 31, 2019
Assets
Cash and due from banks	$	158,397		$	158,310
Interest-earning balances due from Federal Reserve		1,768,886			27,208

Total cash and cash equivalents		1,927,283			185,518

Interest-earning balances due from depository institutions		38,611			2,931
Investment securities available-for-sale, at fair value (with amortized cost of $1,618,811 at June 30, 2020, and $1,718,357 at December 31, 2019)		1,676,067			1,740,257
Investment securities held-to-maturity (with fair value of $638,950 at June 30, 2020, and $678,948 at December 31, 2019)		613,169			674,452

Total investment securities		2,289,236			2,414,709

Investment in stock of Federal Home Loan Bank (FHLB)		17,688			17,688
Loans and lease finance receivables		8,402,534			7,564,577
Allowance for credit losses		(93,983	)		(68,660	)

Net loans and lease finance receivables		8,308,551			7,495,917

Premises and equipment, net		51,766			53,978
Bank owned life insurance (BOLI)		226,330			226,281
Accrued interest receivable		29,842			28,122
Intangibles		38,096			42,986
Goodwill		663,707			663,707
Other real estate owned (OREO)		4,889			4,889
Income taxes		22,945			35,587
Other assets		132,353			110,137

Total assets	$	13,751,297		$	11,282,450


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	6,901,368		$	5,245,517
Interest-bearing		4,082,212			3,459,411

Total deposits		10,983,580			8,704,928
Customer repurchase agreements		468,156			428,659
Other borrowings		10,000			-
Deferred compensation		22,558			22,666
Junior subordinated debentures		25,774			25,774
Payable for securities purchased		162,090			-
Other liabilities		120,041			106,325

Total liabilities		11,792,199			9,288,352


Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 135,516,316 at June 30, 2020, and 140,102,480 at December 31, 2019		1,209,449			1,298,792
Retained earnings		712,145			682,692
Accumulated other comprehensive income, net of tax		37,504			12,614

Total stockholders’ equity		1,959,098			1,994,098

Total liabilities and stockholders’ equity	$	13,751,297		$	11,282,450

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

    For the Three Months Ended
June 30,

    For the Six Months Ended
June 30,

2019

2018

2019

2018

Interest income:

Loans and leases, including fees
  $
101,843
  $
57,368
  $
201,530
  $
112,564

Investment securities:

Investment securities
available-for-sale

10,118

11,697

20,763

23,565

Investment securities
held-to-maturity

4,426

4,807

8,951

9,572

Total investment income

14,544

16,504

29,714

33,137

Dividends from FHLB stock

298

298

630

630

Interest-earning deposits with other institutions

100

635

194

1,171

Total interest income

116,785

74,805

232,068

147,502

Interest expense:

Deposits

4,093

1,549

7,964

3,074

Borrowings and customer repurchase agreements

1,377

337

2,987

790

Junior subordinated debentures

258

231

524

429

Total interest expense

5,728

2,117

11,475

4,293

Net interest income before provision for (recapture of) loan losses

111,057

72,688

220,593

143,209

Provision for (recapture of) loan losses

2,000

(1,000
)
3,500

(2,000
)
Net interest income after provision for (recapture of) loan losses

109,057

73,688

217,093

145,209

Noninterest income:

Service charges on deposit accounts

5,065

4,091

10,206

8,136

Trust and investment services

2,452

2,399

4,634

4,556

Bankcard services

1,027

958

1,977

1,762

BOLI income

1,349

1,069

2,685

2,048

Gain on OREO, net

24

-

129

3,540

Gain on sale of building, net

-

-

4,545

-

Gain on eminent domain condemnation, net 5,685 - 5,685 -
Other

2,603

1,178

4,647

2,569

Total noninterest income

18,205

9,695

34,508

22,611

Noninterest expense:

Salaries and employee benefits

28,862

21,051

58,164

43,365

Occupancy and equipment

5,641

4,318

11,256

8,510

Professional services

2,040

1,690

3,965

3,220

Software licenses and maintenance

2,542

1,759

4,964

3,519

Marketing and promotion

1,238

1,148

2,632

2,504

Amortization of intangible assets

2,833

328

5,690

659

Acquisition related expenses

2,612

494

5,761

1,297

Other

4,760

3,466

9,700

7,126

Total noninterest expense

50,528

34,254

102,132

70,200

Earnings before income taxes

76,734

49,129

149,469

97,620

Income taxes

22,253

13,756

43,346

27,334

Net earnings
  $
54,481
  $
35,373
  $
106,123
  $
70,286

Other comprehensive income (loss):

Unrealized gain (loss) on securities arising during the period, before tax
  $
19,486
  $
(6,598
)   $
37,713
  $
(38,768
)
Less: Income tax (expense) benefit related to items of other comprehensive income

(5,761
)
1,951

(11,149
)
11,462

Other comprehensive income (loss), net of tax

13,725

(4,647
)
26,564

(27,306
)
Comprehensive income
  $
68,206
  $
30,726
  $
132,687
  $
42,980

Basic earnings per common share
  $
0.39
  $
0.32
  $
0.76
  $
0.64

Diluted earnings per common share
  $
0.39
  $
0.32
  $
0.76
  $
0.64


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Interest income:
Loans and leases, including fees	$	95,352		$	101,843		$	187,469		$	201,530
Investment securities:
Investment securities available-for-sale		8,449			10,118			18,498			20,763
Investment securities held-to-maturity		3,660			4,426			7,658			8,951

Total investment income		12,109			14,544			26,156			29,714

Dividends from FHLB stock		214			298			546			630
Interest-earning deposits with other institutions		283			100			896			194

Total interest income		107,958			116,785			215,067			232,068

Interest expense:
Deposits		2,995			4,093			7,119			7,964
Borrowings and customer repurchase agreements		261			1,377			740			2,987
Junior subordinated debentures		133			258			333			524

Total interest expense		3,389			5,728			8,192			11,475

Net interest income before provision for credit losses		104,569			111,057			206,875			220,593
Provision for credit losses		11,500			2,000			23,500			3,500

Net interest income after provision for credit losses		93,069			109,057			183,375			217,093

Noninterest income:
Service charges on deposit accounts		3,809			5,065			8,585			10,206
Trust and investment services		2,477			2,452			4,897			4,634
Bankcard services		405			1,027			982			1,977
BOLI income		1,683			1,349			3,742			2,685
Gain on OREO, net		-			24			10			129
Gain on sale of building, net		-			-			-			4,545
Gain on eminent domain condemnation, net		-			5,685			-			5,685
Other		3,778			2,603			5,576			4,647

Total noninterest income		12,152			18,205			23,792			34,508

Noninterest expense:
Salaries and employee benefits		28,706			28,862			59,583			58,164
Occupancy and equipment		5,031			5,427			9,868			10,851
Professional services		2,368			2,040			4,624			3,965
Computer software expense		2,754			2,756			5,570			5,369
Marketing and promotion		1,255			1,238			2,810			2,632
Amortization of intangible assets		2,445			2,833			4,890			5,690
Acquisition related expenses		-			2,612			-			5,761
Other		3,839			4,760			7,694			9,700

Total noninterest expense		46,398			50,528			95,039			102,132

Earnings before income taxes		58,823			76,734			112,128			149,469
Income taxes		17,192			22,253			32,517			43,346

Net earnings	$	41,631		$	54,481		$	79,611		$	106,123


Other comprehensive income:
Unrealized (loss) gain on securities arising during the period, before tax	$	(1,280	)	$	19,486		$	35,338		$	37,713
Less: Income tax benefit (expense) related to items of other comprehensive income		378			(5,761	)		(10,448	)		(11,149	)

Other comprehensive income (loss), net of tax		(902	)		13,725			24,890			26,564

Comprehensive income	$	40,729		$	68,206		$	104,501		$	132,687


Basic earnings per common share	$	0.31		$	0.39		$	0.58		$	0.76
Diluted earnings per common share	$	0.31		$	0.39		$	0.58		$	0.76

See accompanying notes to the unaudited condensed consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and shares in thousands)

(Unaudited)

~~For the~~ Three Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

Common
Shares
Outstanding

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

Balance, April 1, 2018

  110,259
  $
574,225
  $
  513,484
  $
  (20,851
)   $
  1,066,858

Repurchase of common stock

(2
)
(45
)
-

-

(45
)
Exercise of stock options

51

589

-

-

589

Shares issued pursuant to stock-based compensation plan

(6
)
733

-

-

733

Cash dividends declared on common stock ($0.14 per share)

-

-

(15,444
)
-

(15,444
)
Net earnings

-

-

35,373

-

35,373

Other comprehensive loss

-

-

-

(4,647
)
(4,647
)
Balance, June 30, 2018

110,302
  $
575,502
  $
533,413
  $
  (25,498
)   $
1,083,417

Balance, April 1, 2019

140,009
  $
  1,294,093
  $
602,279
  $
  (5,445
)   $
1,890,927

Repurchase of common stock

(3
)
(77
)
-

-

(77
)
Exercise of stock options

136

1,917

-

-

1,917

Shares issued pursuant to stock-based compensation plan

-

952

-

-

952

Cash dividends declared on common stock ($0.18 per share)

-

-

(25,248
)
-

(25,248
)
Net earnings

-

-

54,481

-

54,481

Other comprehensive income

-

-

-

13,725

13,725

Balance, June 30, 2019

140,142
  $
1,296,885
  $
631,512
  $
8,280
  $
1,936,677


	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, April 1, 2020		135,511		$	1,208,049		$	694,931		$	38,406		$	1,941,386
Repurchase of common stock		(1	)		(28	)		-			-			(28	)
Exercise of stock options		6			79			-			-			79
Shares issued pursuant to stock-based compensation plan		-			1,349			-			-			1,349
Cash dividends declared on common stock ($0.18 per share)		-			-			(24,417	)		-			(24,417	)
Net earnings		-			-			41,631			-			41,631
Other comprehensive income		-			-			-			(902	)		(902	)

Balance, June 30, 2020		135,516		$	1,209,449		$	712,145		$	37,504		$	1,959,098


Balance, April 1, 2019		140,009		$	1,294,093		$	602,279		$	(5,445	)	$	1,890,927
Repurchase of common stock		(3	)		(77	)		-			-			(77	)
Exercise of stock options		136			1,917			-			-			1,917
Shares issued pursuant to stock-based compensation plan		-			952			-			-			952
Cash dividends declared on common stock ($0.18 per share)		-			-			(25,248	)		-			(25,248	)
Net earnings		-			-			54,481			-			54,481
Other comprehensive income		-			-			-			13,725			13,725

Balance, June 30, 2019		140,142		$	1,296,885		$	631,512		$	8,280		$	1,936,677

~~For the Six Months Ended June 30, 2019 and 2018~~

Six Months Ended June 30, 2020 and 2019

Common
Shares
Outstanding

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

Balance, January 1, 2018

  110,185
  $
573,453
  $
  494,361
  $
1,452
  $
  1,069,266

Cumulative adjustment upon adoption of ASU
2018-02

-

-

(356
)
356

-

Repurchase of common stock

(36
)
(837
)
-

-

(837
)
Exercise of stock options

138

1,417

-

-

1,417

Shares issued pursuant to stock-based compensation plan

15

1,469

-

-

1,469

Cash dividends declared on common stock ($0.28 per share)

-

-

(30,878
)
-

(30,878
)
Net earnings

-

-

70,286

-

70,286

Other comprehensive loss

-

-

-

(27,306
)
(27,306
)
Balance, June 30, 2018

110,302
  $
575,502
  $
533,413
  $
  (25,498
)   $
1,083,417

Balance, January 1, 2019

140,000
  $
  1,293,669
  $
575,805
  $
  (18,284
)   $
1,851,190

Repurchase of common stock

(36
)
(812
)
-

-

(812
)
Exercise of stock options

145

2,057

-

-

2,057

Shares issued pursuant to stock-based compensation plan

33

1,971

-

-

1,971

Cash dividends declared on common stock ($0.36 per share)

-

-

(50,416
)
-

(50,416
)
Net earnings

-

-

106,123

-

106,123

Other comprehensive income

-

-

-

26,564

26,564

Balance, June 30, 2019

140,142
  $
1,296,885
  $
631,512
  $
8,280
  $
1,936,677


	Common Shares Outstanding			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2020		140,102		$	1,298,792		$	682,692		$	12,614		$	1,994,098
Cumulative adjustment upon adoption of ASU 2016-13		-			-			(1,325	)		-			(1,325	)
Repurchase of common stock		(4,989	)		(92,430	)		-			-			(92,430	)
Exercise of stock options		10			121			-			-			121
Shares issued pursuant to stock-based compensation plan		393			2,966			-			-			2,966
Cash dividends declared on common stock ($0.36 per share)		-			-			(48,833	)		-			(48,833	)
Net earnings		-			-			79,611			-			79,611
Other comprehensive income		-			-			-			24,890			24,890

Balance, June 30, 2020		135,516		$	1,209,449		$	712,145		$	37,504		$	1,959,098


Balance, January 1, 2019		140,000		$	1,293,669		$	575,805		$	(18,284	)	$	1,851,190
Repurchase of common stock		(36	)		(812	)		-			-			(812	)
Exercise of stock options		145			2,057			-			-			2,057
Shares issued pursuant to stock-based compensation plan		33			1,971			-			-			1,971
Cash dividends declared on common stock ($0.36 per share)		-			-			(50,416	)		-			(50,416	)
Net earnings		-			-			106,123			-			106,123
Other comprehensive income		-			-			-			26,564			26,564

Balance, June 30, 2019		140,142		$	1,296,885		$	631,512		$	8,280		$	1,936,677

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

    For the Six Months Ended
June 30,

2019

2018

Cash Flows from Operating Activities

Interest and dividends received
  $
  221,542
  $
150,590

Service charges and other fees received

21,368

17,032

Interest paid

(10,889
)
(4,288
)
Net cash paid to vendors, employees and others

(106,919
)
(68,564
)
Income taxes

(42,500
)
(26,379
)
Payments to FDIC, loss share agreement - (65 )
Net cash provided by operating activities

82,602

68,326

Cash Flows from Investing Activities

Net change in interest-earning balances from depository institutions

1,245

10,802

Proceeds from repayment of investment securities
available-for-sale

164,571

195,715

Proceeds from maturity of investment securities
available-for-sale

4,255

10,806

Purchases of investment securities
available-for-sale

-

(98,709
)
Proceeds from repayment and maturity of investment securities
held-to-maturity

51,690

55,021

Purchases of investment securities
held-to-maturity

(37,110
)
-

Net increase in equity investments

(2,811
)
(21,827
)
Net decrease in loan and lease finance receivables

247,450

20,802

Proceeds from BOLI death benefit

175

882

Proceeds on eminent domain condemnation, net 5,685 -
Proceeds from sale of building, net 5,487 -
Purchase of premises and equipment

(2,628
)
(1,225
)
Proceeds from sales of other real estate owned

523

8,067

Net cash provided by investing activities

438,532

180,334

Cash Flows from Financing Activities

Net (decrease) increase in other deposits

(112,317
)
11,299

Net decrease in time deposits

(52,350
)
(22,846
)
Net decrease in other borrowings

(280,000
)
-

Net decrease in customer repurchase agreements

(20,984
)
(169,719
)
Cash dividends on common stock

(44,836
)
(30,862
)
Repurchase of common stock

(812
)
(837
)
Proceeds from exercise of stock options

2,057

1,417

Net cash used in financing activities

(509,242
)
(211,548
)
Net increase in cash and cash equivalents

11,892

37,112

Cash and cash equivalents, beginning of period

163,948

144,377

Cash and cash equivalents, end of period
  $
175,840
  $
181,489


	Six Months Ended June 30,
	2020			2019
Cash Flows from Operating Activities
Interest and dividends received	$	202,574		$	221,542
Service charges and other fees received		19,935			21,368
Interest paid		(7,840	)		(10,889	)
Net cash paid to vendors, employees and others		(88,778	)		(106,919	)
Income taxes		(28,810	)		(42,500	)

Net cash provided by operating activities		97,081			82,602

Cash Flows from Investing Activities
Net change in interest-earning balances from depository institutions		(35,680	)		1,245
Proceeds from repayment of investment securities available-for-sale		243,397			164,571
Proceeds from maturity of investment securities available-for-sale		3,490			4,255
Proceeds from repayment and maturity of investment securities held-to-maturity		71,597			51,690
Purchases of investment securities held-to-maturity		(1,509	)		(37,110	)
Net increase in equity investments		(3,040	)		(2,811	)
Net (increase) decrease in loan and lease finance receivables		(821,352	)		247,450
Proceeds on eminent domain condemnation, net		-			5,685
Proceeds from sale of building, net		-			5,487
Purchase of premises and equipment		(1,550	)		(2,628	)
Proceeds from BOLI death benefit		3,159			175
Proceeds from sales of other real estate owned		-			523

Net cash (used in) provided by investing activities		(541,488	)		438,532

Cash Flows from Financing Activities
Net increase (decrease) in other deposits		2,265,270			(112,317	)
Net increase (decrease) in time deposits		13,382			(52,350	)
Net increase (decrease) in other borrowings		10,000			(280,000	)
Net increase (decrease) in customer repurchase agreements		39,497			(20,984	)
Cash dividends on common stock		(49,668	)		(44,836	)
Repurchase of common stock		(92,430	)		(812	)
Proceeds from exercise of stock options		121			2,057

Net cash provided by (used in) financing activities		2,186,172			(509,242	)

Net increase in cash and cash equivalents		1,741,765			11,892

Cash and cash equivalents, beginning of period		185,518			163,948

Cash and cash equivalents, end of period	$	1,927,283		$	175,840

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)

    For the Six Months Ended
June 30,

2019

2018

Reconciliation of Net Earnings to Net Cash Provided by Operating Activities

   Net earnings
  $
  106,123
  $
  70,286

   Adjustments to reconcile net earnings to net cash provided by operating activities:

Gain on eminent domain condemnation, net (5,685 ) -
Gain on sale of building, net

(4,545
)
-

Gain on sale of other real estate owned

(105
)
(3,540
)
Increase in BOLI

(3,589
)
(1,815
)
Net amortization of premiums and discounts on investment securities

5,054

7,302

Accretion of discount for acquired loans, net

(15,215
)
(2,137
)
Provision for (recapture of) loan losses

3,500

(2,000
)
Payments to FDIC, loss share agreement - (65 )
Stock-based compensation

1,971

1,469

Depreciation and amortization, net

7,832

354

Change in other assets and liabilities

(12,739
)
(1,528
)
     Total adjustments

(23,521
)
(1,960
)
    Net cash provided by operating activities
  $
82,602
  $
68,326

Supplemental Disclosure of
Non-cash
Investing Activities

   Transfer of loans to other real estate owned
  $
2,275
  $
-

   Issuance of common stock for acquisition
  $
-
  $
-


	Six Months Ended June 30,
	2020			2019
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Net earnings	$	79,611		$	106,123

Adjustments to reconcile net earnings to net cash provided by operating activities:

Gain on eminent domain condemnation, net		-			(5,685	)
Gain on sale of building, net		-			(4,545	)
Gain on sale of other real estate owned		-			(105	)
Increase in BOLI		(2,578	)		(3,589	)
Net amortization of premiums and discounts on investment securities		5,931			5,054
Accretion of discount for acquired loans, net		(8,795	)		(15,215	)
Provision for credit losses		23,500			3,500
Stock-based compensation		2,966			1,971
Depreciation and amortization, net		3,685			7,832
Change in other assets and liabilities		(7,239	)		(12,739	)

Total adjustments		17,470			(23,521	)

Net cash provided by operating activities	$	97,081		$	82,602


Supplemental Disclosure of Non-cash Investing Activities
Securities purchased and not settled	$	162,090		$	-
Transfer of loans to other real estate owned	$	-		$	2,275

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BUSINESS

The condensed consolidated financial statements include 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 subsidiary, Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has ~~one~~1 inactive subsidiary, Chino Valley Bancorp. The Company is also the common stockholder of CVB Statutory Trust III. CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, this trust does not meet the criteria for consolidation.

The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through ~~CitizensTrust.~~its CitizensTrust Division. The Bank’s customers consist primarily of small to

mid-sized

businesses and individuals located in the Inland Empire, Los Angeles County, Orange County, San Diego County, Ventura County, Santa Barbara County, and the Central Valley area of California. The Bank operates 58 banking centers, 1 loan production office in Modesto, California and ~~three~~3 trust office locations. The Company is headquartered in the city of Ontario, California.

On August 10, 2018, we completed the acquisition of Community Bank (“CB”), headquartered in Pasadena, California with 16 banking centers located throughout the greater Los Angeles and Orange County areas and total assets of approximately $4.09 billion. Our condensed consolidated financial statements for 2018 include CB operations, post-merger. See Note 4 –

~~Business Combinations~~

~~, included herein.~~

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form

10-Q

and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three and six months ended June 30, ~~2019~~2020 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form

10-K

for the fiscal year ended December 31, ~~2018,~~2019, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.

Reclassification

— Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity. The operating segments previously reported have been aggregated into one segment to conform to the current period’s presentation format. These reclassifications do not affect previously reported net earnings.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as discussed below, our accounting policies are described in Note 3 —–

Summary of Significant Accounting Policies

, of our audited consolidated financial statements included in our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 as filed with the SEC (“Form

~~10-K”~~

-K”).

Use of Estimates in the Preparation of Financial Statements

— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for ~~loan~~credit losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.

Table of Contents

Adoption of New Accounting ~~Standards~~Standard

~~— In August 2017, the FASB issued ASU No.~~

~~2017-12,~~

~~“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU~~

~~2017-12~~

changes the recognition and presentation requirements of hedge accounting and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this ASU better align an entity’s financial reporting and risk management activities for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both

~~non-financial~~

~~and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No.~~

~~2017-12~~

is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as qualifying hedging relationships, and therefore, does not utilize hedge accounting. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

~~In June 2018, the FASB issued ASU No.~~

~~2018-07,~~

~~“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Accounting.” The intention of ASU~~

~~2018-07~~

is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be

~~re-measured~~

~~through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU~~

~~2018-07~~

is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

~~In February 2016, FASB issued ASU No.~~

~~2016-02,~~

~~“Leases (Topic 842)”. ASU~~

~~2016-02~~

~~establishes a~~

~~right-of-use~~

(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU

~~2018-10,~~

~~“Codification Improvements to Topic 842, Leases”, which clarifies and corrects errors in ASC 842. The effective date and transition requirements of ASU~~

~~2018-10~~

~~are the same as the effective date and transition requirements of~~

~~2016-02.~~

~~In July 2018, the FASB issued ASU No.~~

~~2018-11,~~

~~“Leases (Topic 842): Targeted Improvements”, which creates a new optional transition method for implementing the new standard on leases, ASU No.~~

~~2016-02,~~

~~and provides lessors with a practical expedient for separating lease and~~

~~non-lease~~

~~components. Specifically, under the amendments in ASU~~

~~2018-11:~~

(1) the transition option allows entities to not apply the new leases standard in the comparative periods presented when transitioning to the new accounting standard for leases, and (2) lessors may elect not to separate lease and

~~non-lease~~

~~components when certain conditions are met. The amendments have the same effective date as ASU~~

~~2016-02.~~

~~Practical Expedients~~

Provision and Allowance for Credit Losses

— The Company elected several practical expedients made available by the FASB. The Company elected not to restate comparative financial statements upon adoption of the new accounting standard. In addition,On January 1, 2020, the Company elected the package of practical expedients whereby the Company did not reassess (i) whether existing contracts are, or contain, leases. and (ii) lease classification for existing leases. Lastly, the Company elected not to separate lease andadopted ASU

~~non-lease~~

~~components in determining the consideration in the lease agreement.~~

The Company’s leasing portfolio consists of real estate leases, which are used primarily for the banking operations of the Company. All leases in the current portfolio have been classified as operating leases, although this may change in the future. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. The adoption of this ASU during the first quarter of 2019 did not have a material impact on the Company’s consolidated financial statements. At adoption, the Company recognized a lease liability and a corresponding ROU asset of approximately $20 million on the consolidated balance sheet related to its future lease payments as a lessee under operating leases. See Note 13—

~~Leases~~

~~for more information.~~

~~Operating lease ROU assets and lease liabilities are included in~~

~~other assets~~

~~and~~

~~other liabilities~~

, respectively, on the consolidated balance sheet. The Company uses its incremental borrowing rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset, at adoption of this ASU, was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.

~~Table of Contents~~

~~Recent Accounting Pronouncements~~

~~— In June 2016, the FASB issued ASU~~ No. 2016-13, ~~“Financial~~

“Financial Instruments –— Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments.”~~Instruments”. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ~~The standard will replace~~This ASU replaces the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, ~~will apply~~applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain ~~off-balance~~off balance sheet credit exposures. This includes, but is not limited to, loans, ~~leases,~~

held-to-maturity

securities, loan commitments, and financial guarantees. The CECL model does not apply to ~~AFS~~

available-for-sale

(“AFS”) debt securities. For AFS debt securities with unrealized losses, ~~entities~~we will measure credit impairment in a manner similar to ~~what they do today,~~the approach used prior to the adoption of CECL, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, ~~entities~~we will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as ~~they do today.~~required prior to the adoption of CECL. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet. If accrued interest is not received, it is reversed against interest income, which was zero for the second quarter of 2020.

The Company adopted this ASU ~~No. 2016-13 is effective~~using the modified retrospective method for ~~interim~~all financial assets measured at amortized cost and ~~annual~~

off-balance

sheet credit exposures. Results for reporting periods beginning after ~~December 15, 2019. Entities will apply the standard’s provisions as~~January 1,

2020

are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a ~~cumulative-effect adjustment~~net decrease to beginning retained earnings of $1.3 million, net of tax as of January

2020

for the cumulative adjustment upon adoption of ASC

326

. The transition adjustment of $1.8 million was added to the beginning balance of the ~~first reporting period in which~~allowance for credit losses (“ACL”) for loans and $41,000 was added to the ~~guidance is effective (i.e., modified retrospective approach).~~ beginning balance of reserve for unfunded loan commitments. Upon adoption of CECL there was no impact on the accounting for AFS or HTM investment securities.

The Company developed a CECL allowance model that calculates reserves over the life of the loan and is ~~currently evaluating~~largely driven by portfolio characteristics, risk grading, macroeconomic variables and the ~~impact of adoption of this ASU on its consolidated financial statements. A cross-functional team, consisting of finance, credit management,~~associated economic outlook, as well as other key methodology assumptions. The allowance is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and ~~information technology is currently developing~~Industrial, Commercial Real Estate, and Consumer Retail. In addition to determining the ~~allowance methodology, models and assumptions that will be used under the new~~quantitative life of loan ~~methodology. In determining~~loss rate to be applied against the ~~appropriate~~portfolio segments, the ASU indicates management has the opportunity to layer on current conditions and forecast adjustments to ensure that the life of loan loss rate reflects both the current state of the portfolio, and expectations for macroeconomic changes in the near future. We utilize a single economic forecast that is based on probability weighted scenarios to incorporate macroeconomic uncertainty over a 2 or

3-year

forecast horizon. After the initial

year forecast horizon, we use an input reversion methodology in the ~~Company has reviewed portfolio segmentation,~~model structure to complete a reasonable and ~~data quality and its availability. The Company continues to review and update assumptions and models, as appropriate.~~supportable forecast period for the life of the loan.

~~In January 2017, the FASB issued ASU No.~~

~~2017-04,~~

~~“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU~~

~~2017-04~~

~~eliminates~~During the second ~~step~~half of March 2020 and through June 30, 2020, the broader economy experienced a significant deterioration in the ~~goodwill impairment test which requires an entity~~economic environment driven by the

COVID-19

pandemic resulting in adverse changes to ~~determine~~ the ~~implied fair value~~forecasted macroeconomic variables utilized in our modeling processes. This expected economic deterioration, coupled with the implementation of the ~~reporting unit’s goodwill. Instead,~~expected loss methodology for determining our provision for credit losses, have contributed to an ~~entity should recognize an impairment loss if the carrying value~~increased provision for credit losses of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard will be effective$23.5 million for the ~~Company beginning January 1,~~six months ended June 30, 2020. We continue to monitor the impact of

COVID-19

closely, as well as any effects that may result from the CARES Act. The extent to which the

COVID-19

pandemic will impact our operations and financial results during the remainder of 2020 ~~with early adoption permitted~~is highly uncertain, but we may experience increased provision for ~~goodwill impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact~~credit losses if the

COVID-19

pandemic results in additional economic stress on ~~the Company’s consolidated financial statements.~~our borrowers and loan portfolios.

~~In August 2018, the FASB issued ASU No.~~

~~2018-13,~~

“Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount

Table of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No.Contents

~~2018-13~~

is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

4.	~~BUSINESS COMBINATIONS~~ INVESTMENT SECURITIES

~~Community Bank Acquisition~~

~~August 10, 2018~~

, the Company completed the acquisition of CB, headquartered in Pasadena, California. The Company acquired all of the assets and assumed all of the liabilities of CB for $180.7 million in cash and $722.8 million in stock. As a result, CB was merged with the Bank, the principal subsidiary of CVB. The primary reason for the acquisition was to further strengthen the Company’s presence in Southern California. At close, CB had 16 banking centers located throughout the greater Los Angeles and Orange County areas. The systems integration of CB and CBB was completed in November 2018.

The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers that were in close proximity were consolidated. For the first six months of 2019, a total of 10 banking centers were consolidated, including nine former CB centers.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 10, 2018 acquisition date.

~~The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019.~~

The application of the acquisition method of accounting resulted in the recognition of goodwill of $547.1 million and a core deposit intangible (“CDI”) of $52.2 million, or 2.26% of core deposits. Goodwill represents the excess purchase price over the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.

~~Table of Contents~~

~~The table below summarizes the amounts recognized for the estimated fair value of assets acquired and the liabilities assumed as of the acquisition date.~~


	~~August 10, 2018~~
	~~(Dollars in thousands)~~
~~Merger Consideration~~
~~Cash paid~~	$	~~180,719~~
~~CVBF common stock issued~~		~~722,767~~

~~Total merger consideration~~			$	~~903,486~~

~~Identifiable net assets acquired, at fair value~~
~~Assets Acquired~~
~~Cash and cash equivalents~~		~~47,802~~
~~Investment securities~~		~~716,996~~
~~FHLB stock~~		~~17,250~~
~~Loans~~		~~2,738,100~~
~~Accrued interest receivable~~		~~7,916~~
~~Premises and equipment~~		~~14,632~~
~~BOLI~~		~~70,904~~
~~Core deposit intangible~~		~~52,200~~
~~Other assets~~		~~53,291~~

~~Total assets acquired~~				~~3,719,091~~
~~Liabilities assumed~~
~~Deposits~~		~~2,869,986~~
~~FHLB advances~~		~~297,571~~
~~Other borrowings~~		~~166,000~~
~~Other liabilities~~		~~29,192~~

~~Total liabilities assumed~~				~~3,362,749~~

~~Total fair value of identifiable net assets, at fair value~~				~~356,342~~

~~Goodwill~~			$	~~547,144~~

At the date of acquisition, the gross contractual loan amounts receivable, inclusive of all principal and interest, was approximately $3 billion. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected at the date of acquisition was approximately $4.5 million.

~~We have included the financial results of the business combination in the condensed consolidated statement of earnings and comprehensive income beginning on the acquisition date.~~

~~The Company incurred merger related expenses associated with the CB acquisition of $~~

~~2.6~~

~~million and $~~

~~5.8~~

~~million for the three and six months ended June 30, 2019,~~

~~respectively~~

~~, and $~~

~~494,000~~

~~and $~~

~~1.3~~

~~million for the three and six months ended June 30, 2018, respectively~~

For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and six months ended June 30, 2018. This unaudited estimated pro forma financial information was calculated as if CB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of CB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented.

~~Table of Contents~~

Unaudited Pro Forma

Three Months Ended

Six Months Ended

June 30, 2019

(Dollars in thousands, except per share amounts)

Total revenues (net interest income plus noninterest income)
  $
121,406


$
244,379

Net income
  $
46,960

$
93,651

Earnings per share - basic
  $
0.34

$
0.67

Earnings per share - diluted
  $
0.33

$
0.67

5.	~~INVESTMENT SECURITIES~~

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are

available-for-sale

securities with fair value based on quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. Estimated fair values were obtained from an independent pricing service based upon market quotes.

June 30, 2019

   Amortized
Cost

Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss

   Fair Value

   Total Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,348,415
  $
16,251
  $
(2,417
)   $
1,362,249

85.14%

CMO/REMIC - residential

194,094

1,216

(334
)
194,976

12.19%

Municipal bonds

41,369

658

(41
)
41,986

2.62%

Other securities

809

-

-

809

0.05%

Total
available-for-sale
securities
  $
1,584,687
  $
18,125
  $
(2,792
)   $
1,600,020

100.00%

Investment securities
held-to-maturity:

Government agency/GSE
  $
128,721
  $
2,627
  $
(414
)   $
130,934

17.68%

Residential mortgage-backed securities

175,552

1,480

(415
)
176,617

24.11%

CMO

211,436

5

(4,358
)
207,083

29.04%

Municipal bonds

212,404

3,245

(1,251
)
214,398

29.17%

Total
held-to-maturity
securities
$
728,113
  $
7,357
  $
(6,438
)   $
729,032

100.00%

December 31, 2018

   Amortized
Cost

Gross
   Unrealized
Holding
Gain

Gross
   Unrealized
Holding
Loss

   Fair Value

  Total Percent

(Dollars in thousands)
Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,494,106
  $
1,348
  $
(20,946
)   $
1,474,508

85.03%

CMO/REMIC - residential

217,223

353

(3,525
)
214,051

12.34%

Municipal bonds

45,621

332

(1,143
)
44,810

2.59%

Other securities

716

-

-

716

0.04%

Total
available-for-sale
securities
  $
1,757,666
  $
2,033
  $
(25,614
)   $
1,734,085

100.00%

Investment securities
held-to-maturity:

Government agency/GSE
  $
138,274
  $
572
  $
(2,622
)   $
136,224

18.57%

Residential mortgage-backed securities

153,874

-

(3,140
)
150,734

20.67%

CMO

215,336

-

(12,081
)
203,255

28.93%

Municipal bonds

236,956

556

(6,188
)
231,324

31.83%

Total
held-to-maturity
securities
  $
744,440
  $
1,128
  $
(24,031
)   $
721,537

100.00%


	June 30, 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	$	1,191,431	$	46,868	$	-	$	1,238,299		73.88%
CMO/REMIC		391,586		8,962		(12)		400,536		23.90%
Municipal bonds		35,015		1,438		-		36,453		2.17%
Other securities		779		-		-		779		0.05%

Total available-for-sale securities	$	1,618,811	$	57,268	$	(12)	$	1,676,067		100.00%

Investment securities held-to-maturity:
Government agency/GSE	$	106,981	$	6,285	$	-	$	113,266		17.45%
Mortgage-backed securities		164,174		8,135		-		172,309		26.77%
CMO/REMIC		171,821		5,283		-		177,104		28.02%
Municipal bonds		170,193		6,418		(340)		176,271		27.76%

Total held-to-maturity securities	$	613,169	$	26,121	$	(340)	$	638,950		100.00%


	December 31, 2019
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss		Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Mortgage-backed securities	$	1,185,757	$	21,306	$	(750)	$	1,206,313		69.32%
CMO/REMIC		493,214		1,392		(896)		493,710		28.37%
Municipal bonds		38,506		850		(2)		39,354		2.26%
Other securities		880		-		-		880		0.05%

Total available-for-sale securities	$	1,718,357	$	23,548	$	(1,648)	$	1,740,257		100.00%

Investment securities held-to-maturity:
Government agency/GSE	$	117,366	$	2,280	$	(657)	$	118,989		17.40%
Mortgage-backed securities		168,479		2,083		(54)		170,508		24.98%
CMO/REMIC		192,548		-		(2,458)		190,090		28.55%
Municipal bonds		196,059		3,867		(565)		199,361		29.07%

Total held-to-maturity securities	$	674,452	$	8,230	$	(3,734)	$	678,948		100.00%

Table of Contents

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2019

2018

     2019

2018

(Dollars in thousands)

Investment securities
available-for-sale:

Taxable
  $
9,821
  $
11,290
  $
20,130
  $
22,735

Tax-advantaged

297

407

633

830

Total interest income from
available-for-sale
securities

10,118

11,697

20,763

23,565

Investment securities
held-to-maturity:

Taxable

2,932

3,048

5,842

5,926

Tax-advantaged

1,494

1,759

3,109

3,646

Total interest income from
held-to-maturity
securities

4,426

4,807

8,951

9,572

Total interest income from investment securities
  $
14,544
  $
16,504
  $
29,714
  $
33,137


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Investment securities available-for-sale:
Taxable	$	8,244	$	9,821	$	18,069	$	20,130
Tax-advantaged		205		297		429		633

Total interest income from available-for-sale securities		8,449		10,118		18,498		20,763

Investment securities held-to-maturity:
Taxable		2,447		2,932		5,145		5,842
Tax-advantaged		1,213		1,494		2,513		3,109

Total interest income from held-to-maturity securities		3,660		4,426		7,658		8,951

Total interest income from investment securities	$	12,109	$	14,544	$	26,156	$	29,714

~~Approximately 89%~~The adoption of CECL did not have a material impact on the accounting for investment securities, as approximately 91% of the total investment securities portfolio at June 30, ~~2019~~2020 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. The remaining securities are predominately

AA-

or better general-obligation municipal bonds. The allowance for credit losses for

held-to-maturity

investment securities under the new CECL model was zero at June 30, 2020.

We adopted ASU

2016-13

on January 1, 2020, on a prospective basis. Under the new guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our

available-for-sale

and

held-to-maturity

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

t been recorded as of June 30, 2020.


	June 30, 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	$	-	$	-	$	-	$	-	$	-	$	-
CMO/REMIC		2,754		(12)		-		-		2,754		(12)
Municipal bonds		-		-		-		-		-		-

Total available-for-sale securities	$	2,754	$	(12)	$	-	$	-	$	2,754	$	(12)

The ~~tables~~table below ~~show~~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 ~~June 30, 2019 and~~ December 31, ~~2018.~~ 2019, prior to adoption of ASU

2016-13.

Management ~~has~~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 (“OTTI”).~~other-than-temporarily-impaired.

1513

Table of Contents

December 31, 2018

    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:

Residential mortgage-backed securities
$
692,311
  $
(4,864)
  $
593,367
  $
(16,082)
  $
1,285,678
  $
(20,946)

CMO/REMIC - residential

36,582

(365)

135,062

(3,160)

171,644

(3,525)

Municipal bonds

9,568

(188)

14,181

(955)

23,749

(1,143)

Total
available-for-sale
securities
  $
738,461
  $
(5,417)
  $
742,610
  $
(20,197)
  $
1,481,071
  $
(25,614)

Investment securities
held-to-maturity:

Government agency/GSE
  $
7,479
  $
(15)
  $
54,944
  $
(2,607)
  $
62,423
  $
(2,622)

Residential mortgage-backed securities

59,871

(484)

90,863

(2,656)

150,734

(3,140)

CMO

-

-

203,254

(12,081)

203,254

(12,081)

Municipal bonds

70,989

(778)

77,723

(5,410)

148,712

(6,188)

Total
held-to-maturity
securities
  $
138,339
  $
(1,277)
  $
426,784
  $
(22,754)
  $
565,123
  $
     (24,031)


	December 31, 2019
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Investment securities available-for-sale:
Mortgage-backed securities	$	20,289	$	(6)	$	97,964	$	(744)	$	118,253	$	(750)
CMO/REMIC		177,517		(705)		34,565		(191)		212,082		(896)
Municipal bonds		-		-		563		(2)		563		(2)

Total available-for-sale securities	$	197,806	$	(711)	$	133,092	$	(937)	$	330,898	$	(1,648)

Investment securities held-to-maturity:
Government agency/GSE	$	28,359	$	(252)	$	19,405	$	(405)	$	47,764	$	(657)
Mortgage-backed securities		10,411		(54)		-		-		10,411		(54)
CMO/REMIC		23,897		(104)		166,193		(2,354)		190,090		(2,458)
Municipal bonds		7,583		(32)		29,981		(533)		37,564		(565)

Total held-to-maturity securities	$	70,250	$	(442)	$	215,579	$	(3,292)	$	285,829	$	(3,734)

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, investment securities having a carrying value of approximately ~~$1.51~~$1.87 billion and ~~$1.66~~$1.64 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at June 30, ~~2019,~~2020, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have contractual maturities through ~~2057,~~2058, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives, which incorporate estimated prepayment speeds.

June 30, 2019

Available-for-sale

Held-to-maturity

  Amortized
Cost

  Fair Value

  Amortized
Cost

  Fair Value

(Dollars in thousands)
Due in one year or less
  $
14,715
  $
14,896
  $
500
  $
503

Due after one year through five years

1,427,215

1,441,490

315,591

311,769

Due after five years through ten years

114,977

115,535

187,726

189,711

Due after ten years

27,780

28,099

224,296

227,049

Total investment securities
  $
1,584,687
  $
1,600,020
  $
728,113
  $
729,032


	June 30, 2020
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	40,755	$	41,076	$	2,075	$	2,113
Due after one year through five years		1,224,722		1,275,526		341,272		354,456
Due after five years through ten years		154,864		159,124		96,738		100,064
Due after ten years		198,470		200,341		173,084		182,317

Total investment securities	$	1,618,811	$	1,676,067	$	613,169	$	638,950

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. NoNaN impairment losses have been recorded ~~through~~

as of

June 30, ~~2019.~~2020.

Table of Contents

LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

Prior to April 1, 2019, our loans and lease finance receivables consisted of purchase credit impaired (“PCI”) loans associated with the acquisition of San Joaquin Bank (“SJB”) on October 16, 2009, and loans and lease finance receivables excluding PCI loans (“Non-PCI loans”). The PCI loans are more fully discussed in Note 3 –

~~Summary of Significant Accounting Policies~~

, included in our Annual Report on Form 10-K for the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at June 30, 2019 and December 31, 2018. As of June 30, 2019, PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables.

~~Table of Contents~~

The following table provides a summary of ~~the Company’s~~ total loans and lease finance receivables by type.

    June 30, 2019

    December 31, 2018

  Total Loans
and Leases


Non-PCI
Loans
and Leases

  PCI Loans

  Total Loans
and Leases

(Dollars in thousands)
Commercial and industrial
  $
917,953
  $
1,002,209
  $
519
  $
1,002,728

SBA

327,606

350,043

1,258

351,301

Real estate:

Commercial real estate

5,417,351

5,394,229

14,407

5,408,636

Construction

116,457

122,782

-

122,782

SFR mortgage

278,285

296,504

145

296,649

Dairy & livestock and agribusiness

301,752

393,843

700

394,543

Municipal lease finance receivables

59,985

64,186

-

64,186

Consumer and other loans

120,779

128,429

185

128,614

Gross loans

7,540,168

7,752,225

17,214

7,769,439

Less: Deferred loan fees, net

(4,478
)
(4,828
)
-

(4,828
)
Gross loans, net of deferred loan fees

7,535,690

7,747,397

17,214

7,764,611

Less: Allowance for loan losses

(67,132
)
(63,409
)
(204
)
(63,613
)
Total loans and lease finance receivables
  $
7,468,558
  $
7,683,988
  $
17,010
  $
7,700,998


	June 30, 2020			December 31, 2019
	(Dollars in thousands)
Commercial and industrial	$	840,738		$	935,127
SBA		300,156			305,008
SBA - Paycheck Protection Program (PPP)		1,097,150			-
Real estate:
Commercial real estate		5,365,120			5,374,617
Construction		125,815			116,925
SFR mortgage		286,526			283,468
Dairy & livestock and agribusiness		251,821			383,709
Municipal lease finance receivables		49,876			53,146
Consumer and other loans		85,332			116,319

Total loans		8,402,534			7,568,319
Less: Deferred loan fees, net (1)		-			(3,742	)

Total loans, net of deferred loan fees		8,402,534			7,564,577
Less: Allowance for credit losses		(93,983	)		(68,660	)

Total loans and lease finance receivables, net	$	8,308,551		$	7,495,917

(1)

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

As of June 30, ~~2019, 77.08%~~2020, 68.76% of the Company’s total ~~gross~~ loan portfolio consisted of real estate loans, ~~71.85% of which consisted of~~with commercial real estate loans representing 63.85% of total loans. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. As of June 30, ~~2019, $225.6~~2020, $248.6 million, or ~~4.16%~~4.63% of the total commercial real estate loans included loans secured by farmland, compared to ~~$231.0~~$241.8 million, or ~~4.27%~~4.50%, at December 31, ~~2018.~~2019. The loans secured by farmland included ~~$122.7~~$121.9 million for loans secured by dairy & livestock land and ~~$102.9~~$126.7 million ~~for~~in loans secured by agricultural land at June 30, ~~2019,~~2020, compared to ~~$126.9~~$125.9 million for loans secured by dairy & livestock land and ~~$104.1~~$115.9 million for loans secured by agricultural land at December 31, ~~2018.~~2019. As of June 30, ~~2019,~~2020, dairy & livestock and agribusiness loans of ~~$301.8~~$251.8 million were comprised of ~~$245.7~~$201.7 million for dairy & livestock loans and ~~$56.1~~$50.1 million for agribusiness loans, compared to ~~$340.5~~$323.5 million for dairy & livestock loans and ~~$54.0~~$60.2 million for agribusiness loans at December 31, ~~2018.~~2019.

At June 30, ~~2019, the Company held approximately $3.81 billion of total fixed rate loans.~~

~~At June 30, 2019~~2020 and December 31, ~~2018,~~2019, loans totaling ~~$6.05~~$6.00 billion and ~~$5.71~~$6.03 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.

There were no0 outstanding loans

held-for-sale

as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Table of Contents

Credit Quality Indicators

An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel on an ongoing basis for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

~~Table of Contents~~

Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.

Table of Contents

The following table summarizes loans by type and origination year, according to our internal risk ratings as of the date presented.


	Origination Year												Revolving loans amortized cost basis		Revolving loans converted to term loans

June 30, 2020	2020		2019		2018		2017		2016		Prior						Total
	(Dollars in thousands)
Commercial and industrial loans:
Risk Rating:
Pass	$	58,626	$	166,910	$	75,223	$	67,777	$	43,833	$	79,031	$	299,536	$	9,139	$	800,075
Special Mention		2,013		240		5,074		563		401		4,647		5,531		1,459		19,928
Substandard		1,898		151		1,917		1,987		522		36		12,860		1,364		20,735
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Commercial and industrial loans:	$	62,537	$	167,301	$	82,214	$	70,327	$	44,756	$	83,714	$	317,927	$	11,962	$	840,738

SBA:
Risk Rating:
Pass	$	26,248	$	13,448	$	46,979	$	76,029	$	27,432	$	90,955	$	-	$	-	$	281,091
Special Mention		-		-		-		1,144		1,370		7,099		-		-		9,613
Substandard		-		-		1,042		2,627		1,411		4,372		-		-		9,452
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total SBA:	$	26,248	$	13,448	$	48,021	$	79,800	$	30,213	$	102,426	$	-	$	-	$	300,156

SBA- PPP
Risk Rating:
Pass	$	1,097,150	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	1,097,150
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total SBA- PPP :	$	1,097,150	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	1,097,150

Commercial real estate loans:
Risk Rating:
Pass	$	364,047	$	722,734	$	719,239	$	703,597	$	614,850	$	1,897,358	$	192,321	$	20,802	$	5,234,948
Special Mention		4,637		5,353		9,685		16,423		3,953		56,510		1,339		-		97,900
Substandard		-		-		4,437		7,341		1,327		18,633		231		303		32,272
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Commercial real estate loans:	$	368,684	$	728,087	$	733,361	$	727,361	$	620,130	$	1,972,501	$	193,891	$	21,105	$	5,365,120

Construction loans:
Risk Rating:
Pass	$	5,259	$	16,733	$	17,013	$	17,780	$	10,592	$	5	$	52,949	$	5,484	$	125,815
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Construction loans:	$	5,259	$	16,733	$	17,013	$	17,780	$	10,592	$	5	$	52,949	$	5,484	$	125,815

SFR mortgage loans:
Risk Rating:
Pass	$	30,749	$	65,948	$	36,731	$	26,637	$	33,192	$	89,651	$	-	$	-	$	282,908
Special Mention		-		-		-		-		-		1,925		-		-		1,925
Substandard		-		-		-		375		231		641		-		446		1,693
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total SFR mortgage loans:	$	30,749	$	65,948	$	36,731	$	27,012	$	33,423	$	92,217	$	-	$	446	$	286,526

Table of Contents

	Origination Year												Revolving loans amortized cost basis		Revolving loans converted to term loans

June 30, 2020	2020		2019		2018		2017		2016		Prior						Total
	(Dollars in thousands)
Dairy & livestock and agribusiness loans:
Risk Rating:
Pass	$	72	$	2,763	$	1,852	$	8,064	$	2,795	$	9,955	$	185,698	$	327	$	211,526
Special Mention		-		-		-		712		-		-		14,750		3,389		18,851
Substandard		-		-		882		-		3,635		-		4,562		12,365		21,444
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Dairy & livestock and agribusiness loans:	$	72	$	2,763	$	2,734	$	8,776	$	6,430	$	9,955	$	205,010	$	16,081	$	251,821

Municipal lease finance receivables loans:
Risk Rating:
Pass	$	135	$	-	$	2,557	$	10,766	$	7,856	$	28,115	$	-	$	-	$	49,429
Special Mention		-		-		-		-		-		447		-		-		447
Substandard		-		-		-		-		-		-		-		-		-
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Municipal lease finance receivables loans:	$	135	$	-	$	2,557	$	10,766	$	7,856	$	28,562	$	-	$	-	$	49,876

Consumer and other loans:
Risk Rating:
Pass	$	2,079	$	2,918	$	1,067	$	1,165	$	1,932	$	1,672	$	71,191	$	1,704	$	83,728
Special Mention		-		-		-		-		-		139		733		-		872
Substandard		-		-		4		-		4		177		6		541		732
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Consumer and other loans:	$	2,079	$	2,918	$	1,071	$	1,165	$	1,936	$	1,988	$	71,930	$	2,245	$	85,332

Gross loans:
Risk Rating:
Pass	$	1,584,365	$	991,454	$	900,661	$	911,815	$	742,482	$	2,196,742	$	801,695	$	37,456	$	8,166,670
Special Mention		6,650		5,593		14,759		18,842		5,724		70,767		22,353		4,848		149,536
Substandard		1,898		151		8,282		12,330		7,130		23,859		17,659		15,019		86,328
Doubtful & Loss		-		-		-		-		-		-		-		-		-

Total Gross loans:	$	1,592,913	$	997,198	$	923,702	$	942,987	$	755,336	$	2,291,368	$	841,707	$	57,323	$	8,402,534

Table of Contents

The following table summarizes loans by type, according to our internal risk ratings ~~for~~as of the ~~periods~~date presented.

June 30, 2019

Pass

Special
Mention

Substandard (1)

Doubtful &
Loss

Total

(Dollars in thousands)
Commercial and industrial $ 883,044 $ 28,611 $ 6,298 $ - $ 917,953
SBA 303,947 14,444 9,215 - 327,606
Real estate:
Commercial real estate
Owner occupied 1,985,951 87,246 20,446 - 2,093,643
Non-owner
occupied
3,310,103 12,850 755 - 3,323,708
Construction
Speculative 93,170 - - - 93,170
Non-speculative
23,287 - - - 23,287
SFR mortgage 272,767 2,158 3,360 - 278,285
Dairy & livestock and agribusiness 239,481 54,003 8,268 - 301,752
Municipal lease finance receivables 59,481 504 - - 59,985
Consumer and other loans 118,706 1,019 1,054 - 120,779
Total gross loans $ 7,289,937 $ 200,835 $ 49,396 $ - $ 7,540,168

~~(1)~~

~~Includes $~~

~~19.9~~

~~million of classified loans acquired from CB in the third quarter of 2018.~~


	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	895,234	$	35,473	$	4,420	$	-	$	935,127
SBA		283,430		11,032		10,546		-		305,008
Real estate:
Commercial real estate
Owner occupied		1,977,007		78,208		28,435		-		2,083,650
Non-owner occupied		3,280,580		10,005		382		-		3,290,967
Construction
Speculative		106,895		-		-		-		106,895
Non-speculative		10,030		-		-		-		10,030
SFR mortgage		280,010		1,957		1,501		-		283,468
Dairy & livestock and agribusiness		320,670		35,920		27,119		-		383,709
Municipal lease finance receivables		52,676		470		-		-		53,146
Consumer and other loans		114,870		421		1,028		-		116,319

Total gross loans	$	7,321,402	$	173,486	$	73,431	$	-	$	7,568,319

    December 31, 2018 (1)

  Pass

  Special
Mention

  Substandard (2)

  Doubtful &
Loss

  Total

(Dollars in thousands)
Commercial and industrial   $ 961,909   $ 29,358   $ 10,942   $ -   $ 1,002,209
SBA 336,033 7,375 6,635 - 350,043
Real estate:
Commercial real estate
Owner occupied 2,008,169 95,841 13,980 - 2,117,990
Non-owner
occupied
3,260,822 9,938 5,479 - 3,276,239
Construction
Speculative 118,233 - - - 118,233
Non-speculative
4,549 - - - 4,549
SFR mortgage 289,607 3,310 3,587 - 296,504
Dairy & livestock and agribusiness 350,044 34,586 9,213 - 393,843
Municipal lease finance receivables 63,650 536 - - 64,186
Consumer and other loans 126,085 1,263 1,081 - 128,429
Total gross loans   $ 7,519,101   $ 182,207   $ 50,917   $ -   $ 7,752,225

~~(1)~~

Excludes PCI loans of $17.2 million as of December 31, 2018, of which $15.8 million were rated pass, $1.2 million were rated special mention, $224,000 were rated substandard, and zero were rated doubtful & loss.

~~(2)~~

~~Includes $19.0 million of classified loans acquired from CB in the third quarter of 2018.~~

~~Table of Contents~~

Allowance for ~~Loan~~Credit Losses ~~(“ALLL”)~~

The ~~Bank’s Audit~~allowance for credit losses for 2020 is based upon historical lifetime loss rate models segregated by three loan segments: Commercial and ~~Director Loan Committees provide Board oversight of the ALLL process~~Industrial, Commercial Real Estate, and ~~approve the ALLL methodology on a quarterly basis.~~

Consumer Retail. Our methodology for assessing the appropriateness of the allowance is ~~conducted~~reviewed on a regular basis and considers overall risks in the Bank’s ~~overall~~ loan portfolio. Refer to Note 3 –

Summary of Significant Accounting Policies

~~of the 2018 Annual Report on Form~~

~~10-K~~

~~for the year ended December 31, 2018~~contained herein for a more detailed discussion concerning the allowance for ~~loan~~credit losses.

Our allowance for credit losses increased in the second quarter by $11.3 million, as a result of a $11.5 million provision for credit loss and net charge-offs of $158,000. Our allowance for credit losses at June 30, 2020 was $94.0 million or 1.12% of total loans. The provision for credit loss was primarily due to the estimated losses over the expected life of our loans that result from the current and forecasted economic downturn. During the second quarter, the economy in the areas we operate, as well as the broader economy, continued to reflect a significant decline in economic activity due to the

COVID-19

pandemic.

Our forecast of macroeconomic variables utilized in the estimate of future credit losses deteriorated from the end of the first quarter, due to both broader economic factors and the recent reversals in California’s phased approach to re-opening the economy. Our economic forecast is a blend of multiple forecasts produced by Moody’s. The resulting forecast at quarter end assumed the decline in GDP for the second quarter was

approximately

%, with GDP growth of

% in the third quarter, followed by a modest decline in GDP in the fourth quarter. For

2020

, as a whole, GDP is forecasted to decrease by almost

%. GDP is forecasted to rebound in the second half of

2021

, with full-year GDP growing in

2021

by approximately

%. In

2022

, GDP is forecasted to grow more robustly by approximately

6.4

%. The forecast also assumes heightened levels of unemployment, reflected by a

% unemployment rate in the second quarter and unemployment exceeding

% for the remainder of

2020

Unemployment is forecasted to stay elevated in

both

2021

and

2022

, at

9.7

% and

7.5

%, respectively. For the six months ended June

2020

, the allowance for credit losses increased by $

25.3

million due to a $

23.5

million provision for credit loss resulting from the forecasted downturn in macroeconomic variables related to the pandemic and a $

1.8

million increase from the adoption of CECL on January

2020

Management believes that the ~~ALLL~~ACL was appropriate at June 30, ~~2019~~2020 and December 31, ~~2018. No~~2019. There is a high degree of uncertainty around the epidemiological assumptions that impact our economic forecast, so no assurance can be given that economic conditions ~~which~~that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for ~~loan~~credit losses in the future.

Table of Contents

The following tables present the

balance

and activity related to the allowance for ~~loan~~credit losses for

held-for-investment

loans by type for the periods presented.

For the Three Months Ended June 30, 2019

Ending Balance
March 31,
2019


Charge-offs


  Recoveries

Provision for

  (Recapture of)
Loan Losses

Ending Balance
June 30, 2019

(Dollars in thousands)
Commercial and industrial   $ 7,608   $ (48 )   $ 49   $ 248   $ 7,857
SBA 1,294 (210 ) 4 31 1,119
Real estate:
Commercial real estate 46,227 -   -   2,060 48,287
Construction 864 -   3 4 871
SFR mortgage 2,189 -   115 19 2,323
Dairy & livestock and agribusiness 5,699 -   19 (377 ) 5,341
Municipal lease finance receivables 738 -   -   (12 ) 726
Consumer and other loans 582 (3 ) 2 27 608
  Total allowance for loan losses   $ 65,201   $ (261 )   $ 192   $ 2,000   $ 67,132

For the Three Months Ended June 30, 2018

Ending Balance
March 31,
2018


Charge-offs


   Recoveries

(Recapture of)
Provision for
Loan Losses

Ending Balance
June 30, 2018

(Dollars in thousands)
Commercial and industrial
$
7,499
$
-
$
27
$
(556
) $
6,970

SBA

884

-

5

(48
)
841

Real estate:

Commercial real estate

41,863

-

-

734

42,597

Construction

987

-

596

(580
)
1,003

SFR mortgage

2,202

-

-

(47
)
2,155

Dairy & livestock and agribusiness

4,666

-

19

(334
)
4,351

Municipal lease finance receivables

834

-

-

(26
)
808

Consumer and other loans

688

(2
)
3

(47
)
642

PCI loans

312

-

-

(96
)
216

Total allowance for loan losses
  $
59,935
  $
(2
)   $
650
  $
(1,000
)   $
59,583


	Three Months Ended June 30, 2020
	Ending Balance March 31, 2020		Charge-offs			Recoveries		Provision for (Recapture of) Credit Losses			Ending Balance June 30, 2020
	(Dollars in thousands)
Commercial and industrial	$	9,387	$	(11	)	$	3	$	(1,388	)	$	7,991
SBA		3,946		(156	)		3		(142	)		3,651
SBA - PPP		-		-			-		-			-
Real estate:
Commercial real estate		58,427		-			-		16,501			74,928
Construction		4,632		-			3		(2,345	)		2,290
SFR mortgage		281		-			-		(59	)		222
Dairy & livestock and agribusiness		4,266		-			-		(887	)		3,379
Municipal lease finance receivables		277		-			-		25			302
Consumer and other loans		1,425		-			-		(205	)		1,220

Total allowance for credit losses	$	82,641	$	(167	)	$	9	$	11,500		$	93,983


	Three Months Ended June 30, 2019
	Ending Balance March 31, 2019		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance June 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,608	$	(48	)	$	49	$	248		$	7,857
SBA		1,294		(210	)		4		31			1,119
Real estate:
Commercial real estate		46,227		-			-		2,060			48,287
Construction		864		-			3		4			871
SFR mortgage		2,189		-			115		19			2,323
Dairy & livestock and agribusiness		5,699		-			19		(377	)		5,341
Municipal lease finance receivables		738		-			-		(12	)		726
Consumer and other loans		582		(3	)		2		27			608

Total allowance for loan losses	$	65,201	$	(261	)	$	192	$	2,000		$	67,132

Table of Contents


	Six Months Ended June 30, 2020
	Ending Balance, prior to adoption of ASU 2016-13 December 31, 2019		Impact of Adoption ASU 2016-13			Charge-offs			Recoveries		Provision for (Recapture of) Credit Losses			Ending Balance June 30, 2020
	(Dollars in thousands)
Commercial and industrial	$	8,880	$	(2,442	)	$	(11	)	$	5	$	1,559		$	7,991
SBA		1,453		1,818			(156	)		3		533			3,651
SBA - PPP		-		-			-			-		-			-
Real estate:
Commercial real estate		48,629		3,547			-			-		22,752			74,928
Construction		858		655			-			6		771			2,290
SFR mortgage		2,339		(2,043	)		-			206		(280	)		222
Dairy & livestock and agribusiness		5,255		(186	)		-			-		(1,690	)		3,379
Municipal lease finance receivables		623		(416	)		-			-		95			302
Consumer and other loans		623		907			(86	)		16		(240	)		1,220

Total allowance for credit losses	$	68,660	$	1,840		$	(253	)	$	236	$	23,500		$	93,983

For the Six Months Ended June 30, 2019

Ending Balance
December 31,
2018

Charge-offs

Recoveries

Provision for
(Recapture of)
Loan Losses

Ending Balance
June 30, 2019

(Dollars in thousands)
Commercial and industrial
$
7,528
$
(48
) $
159
$
218
$
7,857

SBA

1,078

(230
)
9

262

1,119

Real estate:

Commercial real estate

45,097

-

-

3,190

48,287

Construction

981

-

6

(116
)
871

SFR mortgage

2,197

-

183

(57
)
2,323

Dairy & livestock and agribusiness

5,225

(78
)
19

175

5,341

Municipal lease finance receivables

775

-

-

(49
)
726

Consumer and other loans

732

(4
)
3

(123
)
608

Total allowance for loan losses
  $
63,613
  $
(360
)   $
379
  $
3,500
  $
67,132


	Six Months Ended June 30, 2019
	Ending Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance June 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,528	$	(48	)	$	159	$	218		$	7,857
SBA		1,078		(230	)		9		262			1,119
Real estate:
Commercial real estate		45,097		-			-		3,190			48,287
Construction		981		-			6		(116	)		871
SFR mortgage		2,197		-			183		(57	)		2,323
Dairy & livestock and agribusiness		5,225		(78	)		19		175			5,341
Municipal lease finance receivables		775		-			-		(49	)		726
Consumer and other loans		732		(4	)		3		(123	)		608

Total allowance for loan losses	$	63,613	$	(360	)	$	379	$	3,500		$	67,132

For the Six Months Ended June 30, 2018

Ending Balance
December 31,
2017

Charge-offs

Recoveries

(Recapture of)
Provision for
Loan Losses

Ending Balance
June 30, 2018

(Dollars in thousands)
Commercial and industrial
  $
7,280
  $
-
  $
37
  $
(347
)   $
6,970

SBA

869

-

10

(38
)
841

Real estate:

Commercial real estate

41,722

-

-

875

42,597

Construction

984

-

1,930

(1,911
)
1,003

SFR mortgage

2,112

-

-

43

2,155

Dairy & livestock and agribusiness

4,647

-

19

(315
)
4,351

Municipal lease finance receivables

851

-

-

(43
)
808

Consumer and other loans

753

(9
)
11

(113
)
642

PCI loans

367

-

-

(151
)
216

Total allowance for loan losses
  $
           59,585
  $
(9
)   $
       2,007
  $
(2,000
)   $
59,583

The following ~~tables present~~table presents the recorded investment in loans

held-for-investment

and the related ~~allowance for loan losses~~ACL by loan type, based on the Company’s methodology for determining the ~~allowance for loan losses~~ACL for the periods presented. ~~Acquired loans are also supported by a credit discount established through the determination of fair value for the acquired loan portfolio.~~


	June 30, 2019
	Recorded Investment in Loans				Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial	$	2,088	$	915,865	$	276	$	7,581
SBA		5,632		321,974		93		1,026
Real estate:
Commercial real estate		1,531		5,415,820		-		48,287
Construction		-		116,457		-		871
SFR mortgage		4,858		273,427		-		2,323
Dairy & livestock and agribusiness		-		301,752		-		5,341
Municipal lease finance receivables		-		59,985		-		726
Consumer and other loans		397		120,382		2		606

Total	$	14,506	$	7,525,662	$	371	$	66,761

June 30, 2019

Recorded Investment in Loans

Allowance for Loan Losses

Individually Evaluated
for Impairment

Collectively Evaluated
for Impairment

Individually Evaluated
for Impairment

Collectively Evaluated
for Impairment

(Dollars in thousands)
Commercial and industrial
  $
2,088
  $
915,865
  $
276
  $
7,581

SBA

5,632

321,974

93

1,026

Real estate:

  Commercial real estate

1,531

5,415,820

-

48,287

  Construction

-

116,457

-

871

  SFR mortgage

4,858

273,427

-

2,323

Dairy & livestock and agribusiness

-

301,752

-

5,341

Municipal lease finance receivables

-

59,985

-

726

Consumer and other loans

397

120,382

2

606

  Total
  $
14,506
  $
7,525,662
  $
371
  $
66,761

Table of Contents

June 30, 2018

Recorded Investment in Loans

Allowance for Loan Losses

Individually
Evaluated
for

Impairment

Collectively
Evaluated for
Impairment

Acquired with
Deterioriated
Credit Quality

Individually
  Evaluated for
Impairment

Collectively
  Evaluated for
Impairment

Acquired with
Deterioriated
Credit Quality

(Dollars in thousands)
Commercial and industrial
  $
355
  $
508,833
  $
-
  $
-
  $
6,970
  $
-

SBA

1,174

119,874

-

-

841

-

Real estate:

  Commercial real estate

7,741

3,446,289

-

-

42,597

-

  Construction

-

84,400

-

-

1,003

-

  SFR mortgage

4,133

233,021

-

13

2,142

-

Dairy & livestock and agribusiness

800

267,689

-

-

4,351

-

Municipal lease finance receivables

-

67,721

-

-

808

-

Consumer and other loans

509

60,366

-

3

639

-

PCI loans

-

-

19,426

-

-

216

  Total
  $
14,712
  $
4,788,193
  $
19,426
  $
16
  $
59,351
  $
216

Past Due and Nonperforming Loans

We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, and to determine the adequacy of the ~~allowance,~~ACL, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 –

Summary of Significant Accounting Policies

, included in our Annual Report on Form

10-K

for the year ended December 31, ~~2018,~~2019, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.

~~A loan is reported~~

The following table presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as a TDR when the Bank grants a concession(s) to a borrower experiencing financial difficulties that the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of one or more of these concessions, restructured loans are classified as impaired. Impairment reserves on

~~non-collateral~~

~~dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate~~ of the ~~original loan agreement to the carrying value of the loan. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.~~

When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, unless the loan is determined to be collateral dependent. In these cases, we use the current fair value of collateral, less selling costs. Generally, the determination of fair value is established through obtaining external appraisals of the collateral.

date presented.


	June 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	630	$	218	$	1,004	$	1,852	$	838,886	$	840,738
SBA		-		214		1,588		1,802		298,354		300,156
SBA - PPP		-		-		-		-		1,097,150		1,097,150
Real estate:
Commercial real estate
Owner occupied		-		-		232		232		2,074,233		2,074,465
Non-owner occupied		4		-		1,715		1,719		3,288,936		3,290,655
Construction
Speculative (1)		-		-		-		-		111,222		111,222
Non-speculative		-		-		-		-		14,593		14,593
SFR mortgage		-		446		704		1,150		285,376		286,526
Dairy & livestock and agribusiness		882		-		-		882		250,939		251,821
Municipal lease finance receivables		-		-		-		-		49,876		49,876
Consumer and other loans		409		52		220		681		84,651		85,332

Total gross loans	$	1,925	$	930	$	5,463	$	8,318	$	8,394,216	$	8,402,534

(1)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

Table of Contents

Following the adoption of CECL on January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance, are presented as of June 30, 2020 by type of loan.


	June 30, 2020
	Nonaccrual with No Allowance for Credit Losses		Total Nonaccrual (1) (3)		Loans Past Due Over 89 Days Still Accruing
	(Dollars in thousands)
Commercial and industrial	$	567	$	1,197	$	25
SBA		1,140		1,598		-
SBA - PPP		-		-		-
Real estate:
Commercial real estate
Owner occupied		534		684		-
Non-owner occupied		228		1,944		-
Construction
Speculative (2)		-		-		-
Non-speculative		-		-		-
SFR mortgage		1,079		1,080		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		289		289		-

Total gross loans	$	3,837	$	6,792	$	25

(1)

As of June 30, 2020, $1.1 million of nonaccruing loans were current, $267,000 were

60-89

days past due, and $5.5 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

(3)

Excludes $1.3 million of guaranteed portion of nonaccrual SBA loans that are in process of collection.

The following ~~tables present~~table presents the recorded investment in, and the aging of, past due and nonaccrual loans, by type of loans ~~for~~as of the ~~periods~~date presented.

June 30, 2019

30-59
Days
Past Due

60-89
Days
Past Due

Total Past Due
and Accruing

Nonaccrual
(1) (3)

Current

Total Loans
  and Financing
Receivables

(Dollars in thousands)

Commercial and industrial
  $
300
  $
10
  $
310
  $
1,993
  $
915,650
  $
917,953

SBA

-

-

-

5,082

322,524

327,606

Real estate:

Commercial real estate

  Owner occupied

-

-

-

502

2,093,141

2,093,643


Non-owner
occupied

-

-

-

593

3,323,115

3,323,708

Construction

  Speculative (2)

-

-

-

-

93,170

93,170


Non-speculative

-

-

-

-

23,287

23,287

SFR mortgage

-

-

-

2,720

275,565

278,285

Dairy & livestock and agribusiness

-

-

-

-

301,752

301,752

Municipal lease finance receivables

-

-

-

-

59,985

59,985

Consumer and other loans

22

-

22

397

120,360

120,779

Total gross loans
  $
322
  $


10
  $
332
  $
11,287
  $
7,528,549
  $
7,540,168


	December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1) (3)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	2	$	-	$	2	$	1,266	$	933,859	$	935,127
SBA		870		532		1,402		2,032		301,574		305,008
Real estate:
Commercial real estate
Owner occupied		-		-		-		479		2,083,171		2,083,650
Non-owner occupied		-		-		-		245		3,290,722		3,290,967
Construction
Speculative (2)		-		-		-		-		106,895		106,895
Non-speculative		-		-		-		-		10,030		10,030
SFR mortgage		6		243		249		878		282,341		283,468
Dairy & livestock and agribusiness		-		-		-		-		383,709		383,709
Municipal lease finance receivables		-		-		-		-		53,146		53,146
Consumer and other loans		-		-		-		377		115,942		116,319

Total gross loans	$	878	$	775	$	1,653	$	5,277	$	7,561,389	$	7,568,319

(1)

As of ~~June 30,~~December 31, 2019, ~~$2.8~~$1.2 million of nonaccruing loans were current, ~~$360,000~~$59,000 were

30-59

days past due, $

~~832,000~~

$1.1 million were

60-89

days past due and ~~$7.3~~$2.9 million were 90+ days past due.

(2)

Speculative construction loans are generally for properties where there is no identified buyer or renter.

(3)

~~Includes $8.4~~

Excludes $2.0 million of guaranteed portion of nonaccrual SBA loans ~~acquired from CB~~that are in ~~the third quarter~~process of ~~2018.~~collection.

December 31, 2018 (1)

30-59
Days
Past Due

60-89
Days
Past Due

Total Past Due
and Accruing

Nonaccrual
(2) (4)

Current

Total Loans
  and Financing
Receivables

(Dollars in thousands)
Commercial and industrial   $ 820   $ 89   $ 909   $ 7,490 $   993,810   $ 1,002,209
SBA 1,172 135 1,307 2,892 345,844 350,043
Real estate:
Commercial real estate
  Owner occupied 2,439 350 2,789 589 2,114,612 2,117,990

Non-owner
occupied
- - - 5,479 3,270,760 3,276,239
Construction
  Speculative (3) - - - - 118,233 118,233

Non-speculative
- - - - 4,549 4,549
SFR mortgage - 285 285 2,937 293,282 296,504
Dairy & livestock and agribusiness - - - 78 393,765 393,843
Municipal lease finance receivables - - - - 64,186 64,186
Consumer and other loans - - - 486 127,943 128,429
  Total gross loans   $          4,431   $          859   $          5,290   $          19,951   $          7,726,984   $          7,752,225

~~(1)~~

~~Excludes PCI loans.~~

~~(2)~~

~~As of December 31, 2018, $2.3 million of nonaccruing loans were current, $33,000 were~~

~~30-59~~

~~days past due, $57,000 were~~

~~60-89~~

~~days past due and $17.6 million were 90+ days past due.~~

~~(3)~~

~~Speculative construction loans are generally for properties where there is no identified buyer or renter.~~

~~(4)~~

~~Includes $12.3 million of nonaccrual loans acquired from CB in the third quarter of 2018.~~

Table of Contents

Impaired Loans (prior to adoption of CECL)

~~At June 30, 2019,~~Following the ~~Company had~~adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired ~~loans~~loan disclosures were removed

As a result of ~~$14.5 million. Impaired loans included $5.1 million of nonaccrual~~

~~Small Business Administration (“SBA”)~~

~~loans, $~~

~~2.7~~

~~million of nonaccrual single-family residential (“SFR”) mortgage loans, $~~

~~2.0~~

~~million of nonaccrual~~

~~commercial and industrial~~

~~loans, $~~

~~1.1~~

~~million of nonaccrual commercial real estate loans, and $~~

~~397,000~~

~~of nonaccrual consumer and other loans. These impaired loans included $~~

~~3.5~~

~~million of loans whose terms were modified in a troubled debt restructuring, of which $~~

~~263,000~~

~~were classified as nonaccrual. The remaining balance of $~~

~~3.2~~

~~million consisted of~~

~~loans performing according to~~ the ~~restructured terms. The impaired loans had a specific allowance of $~~

~~371,000~~

~~at June~~

~~2019~~

~~. At December~~

~~2018~~

,change, the ~~Company had classified as impaired, loans with a balance of $~~

~~23.5~~

~~million with a related allowance of $~~

~~561,000~~

~~The~~ following tables present information ~~for~~

~~held-for-investment~~

about our impaired loans and lease finance receivables, individually evaluated for impairment by type of loans, as of June 30, 2019 and ~~for~~December 31, 2019, prior to the ~~periods presented.~~date of adoption of the amendments to the credit loss standard.

As of and For the Six Months Ended
June 30, 2019

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
  $
898
  $
1,033
  $
-
  $
1,022
  $
2

SBA

4,369

5,714

-

3,703

21

Real estate:

Commercial real estate

  Owner occupied

502

616

-

515

-

  Non-owner
occupied

1,029

1,209

-

1,068

14

Construction

  Speculative

-

-

-

-

-

  Non-speculative

-

-

-

-

-

SFR mortgage

4,858

5,467

-

4,893

42

Dairy & livestock and agribusiness

-

-

-

-

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

395

518

-

407

-

Total

12,051

14,557

-

11,608

79

With a related allowance recorded:

Commercial and industrial

1,190

1,263

276

1,251

-

SBA

1,263

1,534

93

1,179

-

Real estate:

Commercial real estate

Owner occupied

-

-

-

-

-

Non-owner
occupied

-

-

-

-

-

Construction

Speculative

-

-

-

-

-

Non-speculative

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

-

-

-

-

-

Municipal lease finance receivables

-

-

-

-

-

Consumer and other loans

2

3

2

2

-

Total

2,455

2,800

371

2,432

-

Total impaired loans
  $
14,506
  $
17,357
  $
371
  $
14,040
  $
79


	Six Months Ended June 30, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	898	$	1,033	$	-	$	1,022	$	2
SBA		4,369		5,714		-		3,703		21
Real estate:
Commercial real estate
Owner occupied		502		616		-		515		-
Non-owner occupied		1,029		1,209		-		1,068		14
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		4,858		5,467		-		4,893		42
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		395		518		-		407		-

Total		12,051		14,557		-		11,608		79

With a related allowance recorded:
Commercial and industrial		1,190		1,263		276		1,251		-
SBA		1,263		1,534		93		1,179		-
Real estate:
Commercial real estate
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Construction
Speculative		-		-		-		-		-
Non-speculative		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Municipal lease finance receivables		-		-		-		-		-
Consumer and other loans		2		3		2		2		-

Total		2,455		2,800		371		2,432		-

Total impaired loans	$	14,506	$	17,357	$	371	$	14,040	$	79

~~Table of Contents~~

As of and For the Six Months Ended
June 30, 2018 (1)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial   $ 355   $ 864   $ -       $ 378   $ 4
SBA 1,174 1,302 -     1,204 23
Real estate:
Commercial real estate
Owner occupied 4,294 4,747 -     4,331 -
Non-owner
occupied
3,447 4,894 -     3,565 44
Construction
Speculative -     -     -     -     -
Non-speculative
-     -     -     -     -
SFR mortgage 4,120 4,860 -     4,159 55
Dairy & livestock and agribusiness 800 1,091 -     819 -
Municipal lease finance receivables -     -     -     -     -
Consumer and other loans 506 716 -     568 -

Total 14,696 18,474 -     15,024 126

With a related allowance recorded:

Commercial and industrial -     -     -     -     -
SBA -     -     -     -     -
Real estate:
Commercial real estate
Owner occupied -     -     -     -     -
Non-owner
occupied
-     -     -     -     -
Construction
Speculative -     -     -     -     -
Non-speculative
-     -     -     -     -
SFR mortgage 13 13 13 13 -
Dairy & livestock and agribusiness -     -     -     -     -
Municipal lease finance receivables -     -     -     -     -
Consumer and other loans 3 3 3 3 -

Total 16 16 16 16 -

Total impaired loans   $          14,712   $          18,490   $          16   $          15,040   $          126

~~(1)~~

~~Excludes PCI loans.~~

Table of Contents


	December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,091	$	1,261	$	-
SBA		2,243		2,734		-
Real estate:
Commercial real estate
Owner occupied		479		613		-
Non-owner occupied		642		643		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		2,979		3,310		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		377		514		-

Total		7,811		9,075		-

With a related allowance recorded:
Commercial and industrial		253		347		251
SBA		325		324		257
Real estate:
Commercial real estate
Owner occupied		-		-		-
Non-owner occupied		-		-		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		-		-		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		-		-		-

Total		578		671		508

Total impaired loans	$	8,389	$	9,746	$	508

As of December 31, 2018 (1)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

(Dollars in thousands)
With no related allowance recorded:

Commercial and industrial
  $
7,436
  $
11,457
  $
-

SBA

3,467

5,746

-

Real estate:

Commercial real estate

Owner occupied

589

705

-

Non-owner
occupied

2,808

4,324

-

Construction

Speculative

-

-

-

Non-speculative

-

-

-

SFR mortgage

5,349

6,270

-

Dairy & livestock and agribusiness

-

-

-

Municipal lease finance receivables

-

-

-

Consumer and other loans

418

526

-

Total

20,067

29,028

-

With a related allowance recorded:

Commercial and industrial

189

191

3

SBA

-

-

-

Real estate:

Commercial real estate

Owner occupied

-

-

-

Non-owner
occupied

3,143

3,144

478

Construction

Speculative

-

-

-

Non-speculative

-

-

-

SFR mortgage

-

-

-

Dairy & livestock and agribusiness

78

78

12

Municipal lease finance receivables

-

-

-

Consumer and other loans

68

100

68

Total

3,478

3,513

561

Total impaired loans
  $
     23,545
  $
     32,541
  $
     561

~~(1)~~

~~Excludes PCI loans.~~

~~The Company recognizes~~

Table of Contents

Collateral Dependent Loans

A loan is considered collateral-dependent when the

~~charge-off~~

borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the ~~impairment allowance on impaired~~collateral. The following table presents the recorded investment in collateral-dependent loans ~~in the period in which a loss is identified for collateral dependent loans. Therefore, the majority~~by type of ~~the nonaccrual~~ loans as of ~~June 30, 2019, December 31, 2018 and June 30, 2018 have already been written down to~~ the ~~estimated net realizable value. An allowance is recorded on impaired loans for the following: nonaccrual loans where a~~date presented.

~~charge-off~~

~~is not yet processed, nonaccrual SFR mortgage loans where there is a potential modification in process, or on smaller balance~~


	June 30, 2020						Number of Loans Dependent on Collateral
	Real Estate		Business Assets		Other		Number of Loans Dependent on Collateral
	(Dollars in thousands)
Commercial and industrial	$	231	$	828	$	189		15
SBA		997		583		8		12
SBA - PPP		-		-		-		-
Real estate:
Commercial real estate		2,998		-		-		6
Construction		-		-		-		-
SFR mortgage		1,080		-		-		4
Dairy & livestock and agribusiness		-		-		-		-
Municipal lease finance receivables		-		-		-		-
Consumer and other loans		268		-		21		5

Total collateral-dependent loans	$	5,574	$	1,411	$	218		42

~~non-collateral~~

~~dependent loans.~~

Reserve for Unfunded Loan Commitments

The allowance for

off-balance

sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the

off-balance

sheet loan commitments at the same time as it evaluates credit risk associated with the loan and lease portfolio. As a result of the adoption of ASU

2016-13,

the reserve for unfunded loan commitments included a transition adjustment of $41,000 as of January 1, 2020. There was

0 provision or recapture of provision for unfunded ~~loan~~ commitments for the ~~three and~~ six months ended June 30, ~~2019, and 2018.~~2020. As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the balance in this reserve was $9.0 million and was included in other liabilities.

~~Table of Contents~~

Troubled Debt Restructurings (“TDRs”)

Loans that are reported as TDRs are considered ~~impaired~~nonperforming and

charge-off

amounts are taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 –

Summary of Significant Accounting Policies,

, included in our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 for a more detailed discussion regarding TDRs.

As of June 30, ~~2019,~~2020, there were ~~$3.5~~ $2.8

million of loans classified as a TDR, all of which ~~$3.2 million~~ were ~~performing and $263,000 were nonperforming.~~performing. TDRs on accrual status are comprised of loans that were accruing interest at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. At June 30, ~~2019,~~2020, performing TDRs were comprised of ~~eight~~seven SFR mortgage loans

of ~~$2.1~~$

1.8

million, one SBA loan of ~~$550,000,~~$

517,000

, one commercial real estate loan of ~~$436,000,~~$

371,000

, and ~~two~~one commercial and industrial ~~loans~~loan of ~~$95,000.~~$

51,000

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have 0 allocated ~~zero and $490,000 of specific~~ allowance to TDRs as of June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019.

Table of Contents

The following table provides a summary of the activity related to TDRs for the periods presented.

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2019

2018 (1)

2019

2018 (1)

(Dollars in thousands)

Performing TDRs:

Beginning balance
  $
3,299
  $
4,285
  $
3,594
  $
4,809

New modifications

-

311

-

311

Payoffs/payments, net and other

(80
)
(66
)
(375
)
(590
)
TDRs returned to accrual status

-

-

-

-

TDRs placed on nonaccrual status

-

-

-

-

Ending balance
  $
3,219
  $
4,530
  $
3,219
  $
4,530

Nonperforming TDRs:

Beginning balance
  $
277
  $
3,909
  $
3,509
  $
4,200

New modifications

-

38

-

38

Charge-offs

-

-

(78
)
-

Transfer to OREO - - (2,275 ) -
Payoffs/payments, net and other

(14
)
(55
)
(893
)
(346
)
TDRs returned to accrual status

-

-

-

-

TDRs placed on nonaccrual status

-

-

-

-

Ending balance
  $
263
  $
3,892
  $
263
  $
3,892

Total TDRs
  $
3,482
  $
8,422
  $
3,482
  $
8,422


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	2,813		$	3,299		$	3,112		$	3,594
New modifications		-			-			-			-
Payoffs/payments, net and other		(42	)		(80	)		(341	)		(375	)
TDRs returned to accrual status		-			-			-			-
TDRs placed on nonaccrual status		-			-			-			-

Ending balance	$	2,771		$	3,219		$	2,771		$	3,219

Nonperforming TDRs:
Beginning balance	$	-		$	277		$	244		$	3,509
New modifications		-			-			-			-
Charge-offs		-			-			-			(78	)
Transfer to OREO		-			-			-			(2,275	)
Payoffs/payments, net and other		-			(14	)		(244	)		(893	)
TDRs returned to accrual status		-			-			-			-
TDRs placed on nonaccrual status		-			-			-			-

Ending balance	$	-		$	263		$	-		$	263

Total TDRs	$	2,771		$	3,482		$	2,771		$	3,482

~~(1)~~

~~Excludes PCI loans.~~

~~There~~As of June 30, 2020 and 2019, there were no loans that were modified as TDRs during the ~~three and~~ six months ended June 30, ~~2019.~~2020 and 2019, respectively.

~~Table of Contents~~

~~The following tables summarize loans modified as TDRs for the periods presented.~~

~~Modifications (1)~~

For the Three Months Ended June 30, 2018 (2)

Number of
Loans

Pre-Modification

Outstanding
Recorded
Investment

Post-Modification

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment at
June 30, 2018

Financial Effect
Resulting From
  Modifications (3)

(Dollars in thousands)
Commercial and industrial:

Interest rate reduction

-

  $
-
  $
-
  $
-
  $
-

Change in amortization period or maturity

1


38


38


31


-

Real estate:

Commercial real estate:

Owner occupied

Interest rate reduction

-


-

-

-

-

Change in amortization period or maturity

-


-

-

-

-

Non-owner
occupied

Interest rate reduction

-


-

-

-

-

Change in amortization period or maturity

-


-

-

-

-

SFR mortgage:

Interest rate reduction

-


-

-

-

-

Change in amortization period or maturity

1


311


311


307


-

Consumer:

Interest rate reduction

-


-

-

-

-

Change in amortization period or maturity

-


-

-

-

-

Total loans

2

  $
349

  $
349

  $
338

  $
-

For the Six Months Ended June 30, 2018 (2)

Number of
Loans

Pre-Modification

Outstanding
Recorded
Investment

Post-Modification

Outstanding
Recorded
Investment

Outstanding
Recorded
Investment at
June 30, 2018

Financial Effect
Resulting From
  Modifications (3)

(Dollars in thousands)
Commercial and industrial:

Interest rate reduction
-

  $ -       $
-

  $
-

  $ -
Change in amortization period or maturity
1


38


38


31

-
Real estate:

Commercial real estate:

Owner occupied
Interest rate reduction
-

-     -     -     -
Change in amortization period or maturity
-

-     -     -     -
Non-owner occupied
Interest rate reduction
-

-     -     -     -
Change in amortization period or maturity
-

-     -     -     -
SFR mortgage:

Interest rate reduction
-

-     -     -     -
Change in amortization period or maturity
1


311


311


307

-
Consumer:

Interest rate reduction
-

-     -     -     -
Change in amortization period or maturity
-

-     -     -     -

Total loans
2

  $
349

  $
349

  $
338

  $
-

~~(1)~~

~~The tables above exclude modified loans that were paid off prior to the end of the period.~~

~~(2)~~

~~Excludes PCI loans.~~

~~(3)~~

~~Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.~~

There were no0 loans that were previously modified as a TDR within the previous 12 months that subsequently defaulted during the ~~three and~~ six months ended June 30, 2020 and 2019.

In accordance with regulatory guidance, if borrowers are less than 30 days past due on their loans, upon implementation of the modification program, or as allowed under the CARES Act if borrowers are less than 30 days past due on their loans as of December 31, 2019, and ~~2018.~~enter into short-term 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.

Table of Contents

EARNINGS PER SHARE RECONCILIATION

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three and six months ended June 30, 2020, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 338,000 and 303,000, respectively. For the three and six months ended June 30, 2019, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 360,000 and 396,000, ~~respectively. For the three and six months ended June 30, 2018, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share were 14,000 and 13,000,~~ respectively.

The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

    2019

    2018

    2019

    2018

(In thousands, except per share amounts)

Earnings per common share:

Net earnings
  $
54,481
  $
35,373
  $
106,123
  $
70,286

  Less: Net earnings allocated to restricted stock

134

94

276

202

Net earnings allocated to common shareholders
  $
54,347
  $
35,279
  $
105,847
  $
70,084

Weighted average shares outstanding

139,748

109,983

139,682

109,921

Basic earnings per common share
  $
0.39
  $
0.32
  $
0.76
  $
0.64

Diluted earnings per common share:

Net income allocated to common shareholders

54,347

35,279

105,847

70,084

  Weighted average shares outstanding

139,748

109,983

139,682

109,921

  Incremental shares from assumed exercise of outstanding options

149

372

179

418

Diluted weighted average shares outstanding

139,897

110,355

139,861

110,339

Diluted earnings per common share
  $
0.39
  $
0.32
  $
0.76
  $
0.64


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands, except per share amounts)
Earnings per common share:
Net earnings	$	41,631	$	54,481	$	79,611	$	106,123
Less: Net earnings allocated to restricted stock		158		134		237		276

Net earnings allocated to common shareholders	$	41,473	$	54,347	$	79,374	$	105,847

Weighted average shares outstanding		134,998		139,748		137,052		139,682
Basic earnings per common share	$	0.31	$	0.39	$	0.58	$	0.76


Diluted earnings per common share:
Net income allocated to common shareholders		41,473		54,347		79,374		105,847

Weighted average shares outstanding		134,998		139,748		137,052		139,682
Incremental shares from assumed exercise of outstanding options		156		149		176		179

Diluted weighted average shares outstanding		135,154		139,897		137,228		139,861
Diluted earnings per common share	$	0.31	$	0.39	$	0.58	$	0.76

8.	FAIR VALUE INFORMATION

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The following disclosure provides the fair value information for financial assets and liabilities as of June 30, ~~2019.~~2020. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2 and Level 3).

~~Level~~

~~– Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.~~

Level

— Quoted prices in active markets for identical assets or liabilities in active markets that are accessible at the measurement date.

~~Level~~

– Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model derived

Level

— Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs or model-derived valuations that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.

~~Level~~

– Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.

~~Table of Contents~~

Level

— Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation.

~~There were~~

no28

~~transfers in and out~~

Table of ~~Level 1 and Level 2 during the six months ended June 30, 2019 and 2018.~~Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis ~~for~~as of the ~~periods~~dates presented.

  Carrying Value at

Quoted Prices in
  Active Markets for
Identical Assets

Significant Other
  Observable Inputs

Significant
Unobservable Inputs

June 30, 2019

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $
1,362,249
  $
-
  $
1,362,249
  $
-

CMO/REMIC - residential

194,976

-

194,976

-

Municipal bonds

41,986

-

41,986

-

Other securities

809

-

809

-

  Total investment securities - AFS

1,600,020

-

1,600,020

-

Interest rate swaps

10,744

-

10,744

-

Total assets
  $
1,610,764
  $
-
  $
1,610,764
  $
-

Description of liability

Interest rate swaps
  $
10,744
  $
-
  $
10,744
  $
-

Total liabilities
  $
10,744
  $
-
  $
10,744
  $
-

Carrying Value at

Quoted Prices in
Active Markets for
Identical Assets

Significant Other
Observable Inputs

Significant
Unobservable Inputs

December 31, 2018

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)
Description of assets

Investment securities - AFS:

Residential mortgage-backed securities
  $
1,474,508
  $
-
  $
1,474,508
  $
-

CMO/REMIC - residential

214,051

-

214,051

-

Municipal bonds

44,810

-

44,810

-

Other securities

716

-

716

-

  Total investment securities - AFS

1,734,085

-

1,734,085

-

Interest rate swaps

1,938

-

1,938

-

Total assets
  $
1,736,023
  $
-
  $
1,736,023
  $
-

Description of liability

Interest rate swaps
  $
1,938
  $
-
  $
1,938
  $
-

Total liabilities
  $
1,938
  $
-
  $
1,938
  $
-


	Carrying Value at June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Mortgage-backed securities	$	1,238,299	$	-	$	1,238,299	$	-
CMO/REMIC		400,536		-		400,536		-
Municipal bonds		36,453		-		36,453		-
Other securities		779		-		779		-

Total investment securities - AFS		1,676,067		-		1,676,067		-
Interest rate swaps		38,626		-		38,626		-

Total assets	$	1,714,693	$	-	$	1,714,693	$	-

Description of liability
Interest rate swaps	$	38,626	$	-	$	38,626	$	-

Total liabilities	$	38,626	$	-	$	38,626	$	-


	Carrying Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Mortgage-backed securities	$	1,206,313	$	-	$	1,206,313	$	-
CMO/REMIC		493,710		-		493,710		-
Municipal bonds		39,354		-		39,354		-
Other securities		880		-		880		-

Total investment securities - AFS		1,740,257		-		1,740,257		-
Interest rate swaps		11,502		-		11,502		-

Total assets	$	1,751,759	$	-	$	1,751,759	$	-

Description of liability
Interest rate swaps	$	11,502	$	-	$	11,502	$	-

Total liabilities	$	11,502	$	-	$	11,502	$	-

Table of Contents

Assets and Liabilities Measured at Fair Value on a

Non-Recurring

Basis

We may be required to measure certain assets at fair value on a

non-recurring

basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or impairment write-downs of individual assets.

For assets measured at fair value on a

non-recurring

basis that were held on the balance sheet at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.

Carrying Value at
June 30, 2019

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total Losses
For the Six
Months Ended
June 30, 2019

(Dollars in thousands)

Description of assets

Impaired loans, excluding PCI loans:
Commercial and industrial
  $
1,190
  $
-
  $
-
  $
1,190
  $
276

SBA

1,153

-

-

1,153

323

Real estate:

Commercial real estate

-

-

-

-

-

Construction

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

-

-

-

-

-

Consumer and other loans

2

-

-

2

2

Other real estate owned

-

-

-

-

-

Asset
held-for-sale

-

-

-

-

-

  Total assets
  $
2,345
  $
-
  $
-
  $
2,345
  $
601

Carrying Value at
December 31, 2018

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Total Losses For
the Year Ended
December 31, 2018

(Dollars in thousands)

Description of assets

Impaired loans, excluding PCI loans:

Commercial and industrial
  $
189
  $
-
  $
-
  $
189
  $
3

SBA

-

-

-

-

-

Real estate:

Commercial real estate

3,143

-

-

3,143

478

Construction

-

-

-

-

-

SFR mortgage

-

-

-

-

-

Dairy & livestock and agribusiness

78

-

-

78

12

Consumer and other loans

68

-

-

68

68

Other real estate owned

-

-

-

-

-

Asset
held-for-sale

-

-

-

-

-

  Total assets
  $
3,478
  $
-
  $
-
  $
3,478
  $
561


	Carrying Value at June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses For the Six Months Ended June 30, 2020
	(Dollars in thousands)
Description of assets
Loans:
Commercial and industrial	$	411	$	-	$	-��	$	411	$	305
SBA		-		-		-		-		-
Real estate:
Commercial real estate		1,715		-		-		1,715		432
Construction		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Other real estate owned		-		-		-		-		-
Asset held-for-sale		-		-		-		-		-

Total assets	$	2,126	$	-	$	-	$	2,126	$	737


	Carrying Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses For the Year Ended December 31, 2019
	(Dollars in thousands)
Description of assets
Impaired loans:
Commercial and industrial	$	253	$	-	$	-	$	253	$	251
SBA		359		-		-		359		513
Real estate:
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Other real estate owned		444		-		-		444		64
Asset held-for-sale		-		-		-		-		-

Total assets	$	1,056	$	-	$	-	$	1,056	$	828

Table of Contents

Fair Value of Financial Instruments

The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

June 30, 2019

Estimated Fair Value

Carrying
Amount

Level 1

Level 2

Level 3

Total

(Dollars in thousands)
Assets

Total cash and cash equivalents   $ 175,840   $ 175,840   $ -   $ -   $ 175,840
Interest-earning
balances due from depository
institutions
6,425 - 6,295 - 6,295
Investment securities
available-for-sale
1,600,020 - 1,600,020 - 1,600,020
Investment securities
held-to-maturity
728,113 - 729,032 - 729,032
Total loans, net of allowance for loan losses 7,468,558 - - 7,433,835 7,433,835
Swaps 10,744 - 10,744 - 10,744
Liabilities

Deposits:
Interest-bearing   $ 3,412,588   $ -   $ 3,409,516   $ -   $ 3,409,516
Borrowings 421,271 - 420,841 - 420,841
Junior subordinated debentures 25,774 - - 20,703 20,703
Swaps 10,744 - 10,744 - 10,744

December 31, 2018

Estimated Fair Value

Carrying
Amount

Level 1

Level 2

Level 3

Total

(Dollars in thousands)
Assets

Total cash and due from banks   $ 163,948   $ 163,948   $ -   $ -   $ 163,948
Interest-earning balances due from depository
institutions 7,670 - 7,339 - 7,339
Investment securities
available-for-sale
1,734,085 - 1,734,085 - 1,734,085
Investment securities
held-to-maturity
744,440 - 721,537 - 721,537
Total loans, net of allowance for loan losses 7,700,998 - - 7,514,964 7,514,964
Swaps 1,938 - 1,938 - 1,938
Liabilities

Deposits:
Interest-bearing   $ 3,622,703   $ -   $ 3,614,682   $ -   $ 3,614,682
Borrowings 722,255 - 721,601 - 721,601
Junior subordinated debentures 25,774 - - 21,176 21,176
Swaps 1,938 - 1,938 - 1,938


	June 30, 2020
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	1,927,283	$	1,927,283	$	-	$	-	$	1,927,283
Interest-earning balances due from depository institutions		38,611		-		38,667		-		38,667
Investment securities available-for-sale		1,676,067		-		1,676,067		-		1,676,067
Investment securities held-to-maturity		613,169		-		638,950		-		638,950
Total loans, net of allowance for credit losses		8,308,551		-		-		8,252,796		8,252,796
Swaps		38,626		-		38,626		-		38,626
Liabilities
Deposits:
Interest-bearing	$	4,082,212	$	-	$	4,083,910	$	-	$	4,083,910
Borrowings		478,156		-		478,056		-		478,056
Junior subordinated debentures		25,774		-		-		17,284		17,284
Swaps		38,626		-		38,626		-		38,626

	December 31, 2019
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets
Total cash and cash equivalents	$	185,518	$	185,518	$	-	$	-	$	185,518
Interest-earning balances due from depository institutions		2,931		-		2,938		-		2,938
Investment securities available-for-sale		1,740,257		-		1,740,257		-		1,740,257
Investment securities held-to-maturity		674,452		-		678,948		-		678,948
Total loans, net of allowance for loan losses		7,495,917		-		-		7,343,167		7,343,167
Swaps		11,502		-		11,502		-		11,502
Liabilities
Deposits:
Interest-bearing	$	3,459,411	$	-	$	3,457,922	$	-	$	3,457,922
Borrowings		428,659		-		428,330		-		428,330
Junior subordinated debentures		25,774		-		-		20,669		20,669
Swaps		11,502		-		11,502		-		11,502

The fair value estimates presented herein are based on pertinent information available to management as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

Table of Contents

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of June 30, ~~2019,~~2020, the Bank has entered into 77112 interest-rate swap agreements with ~~customers.~~customers with a notional amount totaling $389.4 million. The Bank then entered into identical offsetting swaps with a counterparty. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.

The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with the counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively.

As a result of the Bank exceeding $10 billion in assets, federal regulations require the Bank, beginning in January 2019, to clear most interest rate swaps through a clearing house (“centrally cleared”). These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral.

Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties.

~~None~~

NaNne of our derivative assets and liabilities are offset in the Company’s condensed consolidated balance sheet.

We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.

Balance Sheet Classification of Derivative Financial Instruments

As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the total notional amount of the Company’s swaps was ~~$224.8~~$389.4 million, and ~~$195.4~~$260.0 million, respectively. The location of the asset and liability, and their respective fair values, are summarized in the tables below.

June 30, 2019

Asset Derivatives

Liability Derivatives

    Balance Sheet
Location

Fair
    Value

    Balance Sheet
Location

Fair
    Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets
  $
10,744

Other liabilities
  $
10,744

Total derivatives
  $
10,744
  $
10,744

December 31, 2018

Asset Derivatives

Liability Derivatives

    Balance Sheet
Location

Fair
    Value

    Balance Sheet
Location

Fair
    Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets
  $
1,938

Other liabilities
  $
1,938

Total derivatives
  $
1,938
  $
1,938

June 30, 2020

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

38,626

Other liabilities

38,626

Total derivatives

38,626

December 31, 2019

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

(Dollars in thousands)

Derivatives not designated as hedging instruments:

Interest rate swaps

Other assets

11,502

Other liabilities

11,502

Total derivatives

11,502

Table of Contents

The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings

The following table summarizes the effect of derivative financial instruments on the condensed consolidated statement of earnings for the periods presented.

Derivatives Not Designated as
Hedging Instruments

Location of Gain Recognized in
  Income on Derivative Instruments

  Amount of Gain Recognized in Income on
Derivative Instruments

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2019

2018

2019

2018

(Dollars in thousands)

Interest rate swaps

Other income
$
  373
  $
  151
$
  757
  $
  267

Total
$
373
  $
151
$
757
  $
267


Derivatives Not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative Instruments		Amount of Gain Recognized in Income on Derivative Instruments
			Three Months Ended June 30,				Six Months Ended June 30,
			2020		2019		2020		2019
			(Dollars in thousands)
Interest rate swaps		Other income	$	2,185	$	373	$	2,558	$	757

Total			$	2,185	$	373	$	2,558	$	757

~~Table of Contents~~

~~10.~~

OTHER COMPREHENSIVE INCOME

The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.

For the Three Months Ended June 30,

2019

2018

Before-tax

Tax effect

After-tax

Before-tax

Tax effect

After-tax

(Dollars in thousands)

Investment securities:

Net change in fair value recorded in accumulated OCI
  $
  19,564
  $
  (5,784
)   $
  13,780
  $
  (5,773
)   $
1,707
  $
  (4,066
)
Amortization of unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity

(78
)
23

(55
)
(825
)
244

(581
)
    Net change
  $
19,486
     $
(5,761
)      $
13,725
   $
  (6,598
)      $
1,951
     $
  (4,647
)

For the Six Months Ended June 30,

2019

2018

Before-tax

Tax effect

After-tax

Before-tax

Tax effect

After-tax

(Dollars in thousands)

Investment securities:

Net change in fair value recorded in accumulated OCI
$
38,914
$
(11,504
) $
27,410
$
  (37,111
) $
10,972
$
  (26,139
)
Amortization of unrealized losses on securities transferred from
available-for-sale
to
held-to-maturity

(1,201
)
355

(846
)
(1,657
)
490

(1,167
)
    Net change
$
37,713
   $
(11,149
)    $
26,564
   $
  (38,768
)    $
  11,462
   $
  (27,306
)


	Three Months Ended June 30,
	2020									2019
	Before-tax			Tax effect			After-tax			Before-tax			Tax effect			After-tax
	(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	(1,263	)	$	373		$	(890	)	$	19,564		$	(5,784	)	$	13,780
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity		(17	)		5			(12	)		(78	)		23			(55	)

Net change	$	(1,280	)	$	378		$	(902	)	$	19,486		$	(5,761	)	$	13,725


	Six Months Ended June 30,
	2020									2019
	Before-tax			Tax effect			After-tax			Before-tax			Tax effect			After-tax
	(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	35,356		$	(10,453	)	$	24,903		$	38,914		$	(11,504	)	$	27,410
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity		(18	)		5			(13	)		(1,201	)		355			(846	)

Net change	$	35,338		$	(10,448	)	$	24,890		$	37,713		$	(11,149	)	$	26,564

Table of Contents

10.	BALANCE SHEET OFFSETTING

~~Table of Contents~~

~~11.~~

~~BALANCE SHEET OFFSETTING~~

Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject to master netting arrangements. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to counterparties continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the Company’s condensed consolidated balances.

Gross Amounts
Recognized in

Gross Amounts
Offset in the

Net Amounts
Presented

in the

Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets

the Condensed
Consolidated
Balance Sheets

Condensed
Consolidated
Balance Sheets

Condensed
Consolidated
Balance Sheets

Financial
Instruments

Collateral
Pledged

Net Amount

(Dollars in thousands)

June 30, 2019

Financial assets:

Derivatives not designated as hedging instruments
  $
   10,744
  $
-
  $
-
  $
10,744
  $
-
  $
10,744

Total
  $
   10,744
  $
  -
  $
-
  $
10,744
  $
-
  $
10,744

Financial liabilities:

Derivatives not designated as hedging instruments
  $
10,851
  $
(107
)   $
10,744
  $
107
  $
(14,962
)   $
(4,111
)
Repurchase agreements

421,271

-

421,271

-

(424,648
)
(3,377
)
Total
  $
432,122
  $
(107
)   $
432,015
  $
107
  $
(439,610
)   $
(7,488
)

December 31, 2018

Financial assets:

Derivatives not designated as hedging instruments
  $
1,938
  $
-
  $
-
  $
1,938
  $
-
  $
1,938

Total
  $
1,938
  $
-
  $
-
  $
1,938
  $
-
  $
1,938

Financial liabilities:

Derivatives not designated as hedging instruments
  $
4,203
  $
  (2,265
)   $
1,938
  $
  2,265
  $
-
  $
4,203

Repurchase agreements

442,255

-

442,255

-

(487,607
)
(45,352
)
Total
  $
  446,458
  $
  (2,265
)   $
  444,193
  $
2,265
  $
  (487,607
)   $
  (41,149
)


	Gross Amounts Recognized in		Gross Amounts Offset in the			Net Amounts of Assets Presented		Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	the Condensed Consolidated Balance Sheets		Condensed Consolidated Balance Sheets			in the Condensed Consolidated Balance Sheets		Financial Instruments		Collateral Pledged			Net Amount
	(Dollars in thousands)
June 30, 2020
Financial assets:
Derivatives not designated as hedging instruments	$	38,626	$	-		$	-	$	38,626	$	-		$	38,626

Total	$	38,626	$	-		$	-	$	38,626	$	-		$	38,626


Financial liabilities:
Derivatives not designated as hedging instruments	$	38,626	$	-		$	38,626	$	-	$	(64,863	)	$	(26,237	)
Repurchase agreements		468,156		-			468,156		-		(479,445	)		(11,289	)

Total	$	506,782	$	-		$	506,782	$	-	$	(544,308	)	$	(37,526	)


December 31, 2019
Financial assets:
Derivatives not designated as hedging instruments	$	11,502	$	-		$	-	$	11,502	$	-		$	11,502

Total	$	11,502	$	-		$	-	$	11,502	$	-		$	11,502


Financial liabilities:
Derivatives not designated as hedging instruments	$	11,619	$	(117	)	$	11,502	$	117	$	(23,312	)	$	(11,693	)
Repurchase agreements		428,659		-			428,659		-		(510,138	)		(81,479	)

Total	$	440,278	$	(117	)	$	440,161	$	117	$	(533,450	)	$	(93,172	)

Table of Contents

11. LEASES

~~12.~~

~~LEASES~~

The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings.

Right-of-use

(“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s condensed consolidated balance sheet.

While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.

The ~~following presents~~tables below present the components of lease costs and supplemental information related to leases as of ~~June 30, 2019~~ and for the ~~three and six months ended June 30, 2019.~~periods presented.


	~~As of June 30, 2019~~
	~~(Dollars in thousands)~~
~~Lease Assets and Liabilities~~
~~ROU assets~~	$	~~17,959~~
~~Total lease liabilities~~		~~21,157~~


	June 30, 2020		December 31, 2019
	(Dollars in thousands)
Lease Assets and Liabilities
ROU assets	$	17,269	$	18,522
Total lease liabilities		19,595		21,392

For the Three
Months Ended

For the Six
Months Ended

June 30, 2019

(Dollars in thousands)

Lease Cost

Operating lease expense (1)
  $
1,906
  $
4,006


Sublease income

-

-

Total lease expense
  $
1,906

  $
4,006

~~(1) Includes short-term leases and variable lease costs, which are immaterial.~~

Other Information

Cash paid for amounts included in the measurement of lease
liabilities:

Operating cash outflows from operating leases
$ 2,113 $
4,859


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)				(Dollars in thousands)
Lease Cost
Operating lease expense (1)	$	1,623	$	1,906	$	3,246	$	4,006
Sublease income		-		-		-		-

Total lease expense	$	1,623	$	1,906	$	3,246	$	4,006


(1) Includes short-term leases and variable lease costs, which are immaterial.

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases, net	$	1,869	$	2,113	$	3,804	$	4,859


	June 30, 2020		December 31, 2019
Lease Term and Discount Rate
Weighted average remaining lease term (years)		4.12		4.18
Weighted average discount rate		3.24%		3.34%


Table of Contents ~~Lease Term and Discount Rate~~
	~~As of June 30, 2019~~

~~Weighted average remaining lease term (years)~~		~~4.11~~

~~Weighted average discount rate~~		~~3.50~~	%

The Company’s lease arrangements that have not yet commenced as of June 30, ~~2019~~2020 and the Company’s short-term lease costs and variable lease costs, for the ~~three and~~ six months ended June 30, ~~2019~~2020 are not material to the consolidated financial statements.

The future lease payments required for leases that have initial or remaining

non-cancelable

~~non-cancelable~~ lease terms in excess of one year as of June 30, ~~2019,~~2020, excluding property taxes and insurance, are as follows:

As of June 30, 2019

(Dollars in thousands)

Year:

2019 (excluding the six months ended June 30, 2019)
  $
3,997


2020

6,604

2021

4,806

2022

3,622

2023

1,941

Thereafter

2,241

Total future lease payments

23,211

Less: Imputed interest

(2,054)

Present value of lease liabilities
  $
21,157


	June 30, 2020
	(Dollars in thousands)
Year:
2020 (excluding the six months ended June 30, 2020)	$	3,505
2021		5,811
2022		4,634
2023		2,805
2024		1,748
Thereafter		2,425

Total future lease payments		20,928
Less: Imputed interest		(1,333)

Present value of lease liabilities	$	19,595

12.	REVENUE RECOGNITION

~~Table of Contents~~

~~13.~~

~~REVENUE RECOGNITION~~

On January 1, 2018, the Company adopted ASU

No. 2014-09 ~~“Revenue~~

“Revenue from Contracts with Customers (Topic 606)” and all subsequent ASUs that modified Topic 606. Refer to Note 3 –

Summary of Significant Accounting Policies

and Note 24 –

Revenue Recognition

of the ~~2018~~2019 Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 for a more detailed discussion about noninterest revenue streams that are ~~in scope~~

in-scope

of Topic 606.

The following presents noninterest income, segregated by revenue streams

in-scope

and

out-of-scope

of Topic 606, for the periods indicated.


	For the Three Months Ended				For the Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(Dollars in thousands)								(Dollars in thousands)
Noninterest income:
In-scope of Topic 606:
Service charges on deposit accounts	$	5,065	$	4,091	$	10,206	$	8,136	$	3,809	$	5,065	$	8,585	$	10,206
Trust and investment services		2,452		2,399		4,634		4,556		2,477		2,452		4,897		4,634
Bankcard services		1,027		958		1,977		1,762		405		1,027		982		1,977
Gain on OREO, net		24		-		129		3,540		-		24		10		129
Other		2,603		1,178		4,647		2,569		3,778		2,603		5,576		4,647

Noninterest Income (in-scope of Topic 606)		11,171		8,626		21,593		20,563		10,469		11,171		20,050		21,593
Noninterest Income (out-of-scope of Topic 606)		7,034		1,069		12,915		2,048		1,683		7,034		3,742		12,915

Total noninterest income	$	18,205	$	9,695	$	34,508	$	22,611	$	12,152	$	18,205	$	23,792	$	34,508

Table of Contents

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, ~~2018,~~2019, and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

IMPACT OF

COVID-19

The spread of

COVID-19

has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve. The pandemic has already affected our customers and the communities we serve and depending on the duration of the crisis, the adverse impact on our financial position and results of operations could be significant. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (“FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the

COVID-19

pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and

medium-sized

businesses through 100% SBA guaranteed loans distributed through banks. These loans are intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. The SBA exhausted the initial funding for this program on April 15, 2020, but legislation passed on April 24, 2020 to provide additional PPP funds of $310 billion. We originated and funded about 4,100 loans, totaling approximately $1.10 billion, through June, 30 2020. In response to the

COVID-19

pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. This program allows for a deferral of payments for 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through July 10, 2020, we have granted temporary payment deferments of principal, interest or of principal and interest (80% of the deferments have been for both principal and interest) for 820 loans with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio, at June 30, 2020. As of July 10, 2020, 6% of the initial deferments have requested and been granted a second deferment, but it is likely that additional deferments will be granted in future periods.

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

COVID-19

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

COVID-19

closely, as well as any effects that may result from the CARES Act. The extent to which the

COVID-19

pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain, but we may experience increased provision for credit losses if this pandemic results in additional economic stress on our borrowers and loan portfolios.

Table of Contents

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon ~~its~~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 Loan Losses (“ALLL”)~~

Allowance for Credit Losses (“ACL”)

~~Business Combinations~~

Business Combinations

~~Valuation and Recoverability of Goodwill~~

Valuation and Recoverability of Goodwill

~~Income Taxes~~

Income Taxes

Our significant accounting policies are described in greater detail in our ~~2018~~2019 Annual Report on Form

10-K

in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 —

Summary of Significant Accounting Policies

, included in our Annual Report on Form

10-K

for the year ended December 31, ~~2018,~~2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adoption of Allowance for Credit Losses

We adopted ASU

2016-13,

commonly referred to as Current Expected Credit Losses (“CECL”), which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. We adopted the guidance using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU

2016-13,

resulted in a reduction to our opening retained earnings of approximately $1.3 million. The ACL policy is described more fully in Note 3 —

Summary of Significant Accounting Policies

of the notes to the unaudited condensed consolidated financial statements.

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


Standard	Description	Adoption Timing	Impact on Financial Statements
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020	The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.	1st Quarter 2020 through the 4th Quarter 2022	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 2020-01 “Investments - Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)	The FASB issued ASU 2020-01 “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.	1st Quarter 2021	The adoption of this ASU will not have an impact on our consolidated financial statements.
Issued January 2020

Table of Contents

OVERVIEW

For the second quarter of ~~2019,~~2020, we reported net earnings of ~~$54.5~~$41.6 million, compared with ~~$51.6~~$38.0 million for the first quarter of ~~2019~~2020 and ~~$35.4~~$54.5 million for the second quarter of ~~2018.~~2019. Diluted earnings per share were ~~$0.39~~$0.31 for the second quarter, compared to ~~$0.37~~$0.27 for the prior quarter and ~~$0.32~~$0.39 for the same period last year.

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

COVID-19

pandemic. During the quarter, we experienced minimal credit charge-offs of $167,000 and total recoveries of $9,000, resulting in net charge-offs of $158,000. During the second quarter of 2020, the Company originated, under the SBA Paycheck Protection Program, approximately 4,100 loans, of which $1.10 billion was outstanding at June 30, 2020, resulting in recognition of approximately $8.5 million in loan interest and fee income during the second quarter of 2020.

At June 30, ~~2019,~~2020, total assets of ~~$11.17~~$13.75 billion ~~decreased $357.6 million,~~increased $2.47 billion, or ~~3.10%~~21.88%, from total assets of ~~$11.53~~$11.28 billion at December 31, ~~2018.~~2019. Interest-earning assets of ~~$9.89~~$12.52 billion at June 30, ~~2019 decreased $395.0 million,~~2020 increased $2.49 billion, or ~~3.84%~~24.83%, when compared with ~~$10.29~~$10.03 billion at December 31, ~~2018.~~2019. The ~~decrease~~increase in interest-earning assets was primarily due to a ~~$228.9~~$1.74 billion increase in interest-earning balances due from the Federal Reserve and an $838.0 million ~~decrease~~increase in total loans, ~~and~~partially offset by a ~~$150.4~~$125.5 million decrease in investment securities. ~~Our tax equivalent yield on interest-earnings assets was 4.72% for the quarter ended June 30, 2019, compared to 4.62% for the first quarter of 2019 and 3.93% for the second quarter of 2018.~~Excluding PPP loans, total loans declined by $259.2 million from December 31, 2019.

Total investment securities were ~~$2.33~~$2.29 billion at June 30, ~~2019,~~2020, a decrease of ~~$150.4~~$125.5 million, or ~~6.07%~~5.20%, from ~~$2.48~~$2.41 billion at December 31, ~~2018.~~2019. At June 30, ~~2019,~~2020, investment securities

held-to-maturity

(“HTM”) totaled ~~$728.1~~$613.2 million. At June 30, ~~2019,~~2020, investment securities

available-for-sale

(“AFS”) totaled ~~$1.60~~$1.68 billion, inclusive of a net

pre-tax

unrealized gain of ~~$15.3 million.~~$57.3 million, an increase of $35.4 million from December 31, 2019. HTM securities declined by ~~$16.3~~$61.3 million, or ~~2.19%~~9.09%, and AFS securities declined by ~~$134.1~~$64.2 million, or ~~7.73%~~3.69%, from December 31, ~~2018.~~2019. Our tax equivalent yield on investments was ~~2.53%~~2.22% for the quarter ended June 30, ~~2019,~~2020, compared to ~~2.57%~~2.45% for the first quarter of ~~2019~~2020 and ~~2.48%~~2.53% for the second quarter of ~~2018.~~

~~Table of Contents~~

2019.

Total loans and leases, net of deferred fees and discounts, of ~~$7.54~~$8.40 billion at June 30, ~~2019 decreased~~2020 increased by ~~$228.9~~$838.0 million, or ~~2.95%~~11.08%, from December 31, ~~2018.~~2019. The ~~decrease~~increase in total loans included $1.10 billion in PPP loans and a ~~$94.8~~$131.9 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 ~~$134.1~~$127.3 million, or ~~1.81%~~1.77%. The $127.3 million decrease in ~~total~~ loans included ~~declines~~decreases of ~~$84.8~~$94.4 million in commercial and industrial (C&I) loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and ~~$23.7~~collectively $4.4 million in ~~Small Business Administration (“SBA”)~~other loan segments. Partially offsetting these declines were increases in construction loans and ~~$18.4 million in~~ SFR mortgage ~~loans.~~loans of $8.9 million and $3.1 million, respectively. Our yield on loans was ~~5.40%~~4.77% for the quarter ended June 30, ~~2019,~~2020, compared to ~~5.27%~~4.95% for the first quarter of ~~2019~~2020 and ~~4.81%~~5.40% for the second quarter of ~~2018.~~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 ~~and nonrecurring nonaccrual interest paid~~ was ~~$9.4~~$4.1 million for the quarter ended June 30, ~~2019,~~2020, compared to ~~$7.2~~$4.8 million for the first quarter of ~~2019~~2020 and ~~$2.1~~$8.0 million for the second quarter of ~~2018.~~2019.

Noninterest-bearing deposits were ~~$5.25~~$6.90 billion at June 30, ~~2019,~~2020, an increase of ~~$45.4 million,~~$1.66 billion, or ~~0.87%~~31.57%, when compared to December 31, ~~2018.~~2019. The significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity. At June 30, ~~2019,~~2020, noninterest-bearing deposits were ~~60.61%~~62.83% of total deposits, compared to ~~58.96%~~60.26% at December 31, ~~2018.~~2019. Our average cost of total deposits was ~~0.19%~~0.12% for the quarter ended June 30, ~~2019,~~2020, compared to ~~0.18%~~0.19% for the first quarter of ~~2019~~2020 and ~~0.09%~~0.19% for the second quarter of ~~2018.~~2019.

Customer repurchase agreements totaled ~~$421.3~~$468.2 million at June 30, ~~2019,~~2020, compared to ~~$442.3~~$428.7 million at December 31, ~~2018.~~2019. Our average cost of total deposits including customer repurchase agreements was ~~0.20%~~0.12% for the quarter ended June 30, ~~2019, unchanged from~~2020, compared to 0.20% for both the ~~prior~~first quarter of 2020 and ~~0.11% for~~ the second quarter of ~~2018.~~2019.

At June 30, ~~2019,~~2020, we had no$10.0 million in short-term borrowings with 0% cost, compared to ~~$280.0 million~~no borrowings at December 31, ~~2018.~~2019 and June 30, 2019. At June 30, ~~2019,~~2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, ~~2018. These debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.~~2019. Our average cost of funds was ~~0.25%~~0.13% for the quarter ended June 30, ~~2019, unchanged from~~2020, 0.21% for the ~~prior~~first quarter of 2020, and ~~0.12%~~0.25% for the second quarter of ~~2018.~~2019.

The allowance for ~~loan~~credit losses totaled ~~$67.1~~$94.0 million at June 30, ~~2019,~~2020, compared to ~~$63.6~~$68.7 million at December 31, ~~2018. The~~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 ~~loan~~credit losses ~~for~~in the first six months of ~~2019 was increased by $3.5 million in provision for loan losses and $19,000 in net recoveries. The allowance for loan losses was 0.89% and 0.82%~~2020 due to the severe economic disruption forecasted to result from the

COVID-19

pandemic. At June 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.29% when PPP loans are excluded. This compares to 0.91% at ~~June 30, 2019 and~~ December 31, 2018, respectively. The ratio as of the most recent three quarters was impacted by the $2.74 billion in loans acquired from Community Bank (“CB”) that are recorded at fair market value, without a corresponding loan loss allowance.2019. As of June 30, ~~2019, credit related~~2020, total discounts on acquired loans were ~~$41.4~~$39.4 million.

Table of Contents

The Company’s total equity was $1.96 billion at June 30, 2020. This represented a decrease of $35.0 million, or 1.76%, 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 $48.8 million in cash dividends, offset by net earnings of $79.6 million and a $24.9 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 9.6% at June 30, 2020.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory ~~standards.~~requirements. As of June 30, ~~2019,~~2020, the Company’s Tier 1 leverage capital ratio totaled ~~11.94%~~10.59%, our common equity Tier 1 ratio totaled ~~14.23%~~14.47%, our Tier 1 risk-based capital ratio totaled ~~14.51%~~14.76%, and our total risk-based capital ratio totaled ~~15.39%~~15.97%. 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

~~Recent Acquisition~~

On August 10, 2018, we completed the acquisition of CB with approximately $4.09 billion in total assets and 16 banking centers. The total assets acquired from CB included $2.74 billion of acquired loans, net of an $82.7 million discount, $717.0 million of investment securities, and $70.9 million in bank-owned life insurance. The acquisition resulted in approximately $547.1 million of goodwill and $52.2 million in core deposit premium. At the close of the merger, the entire CB security portfolio was liquidated at fair market value, as was $297.6 million of FHLB term advances and $166.0 million of overnight borrowings assumed from CB. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The change in goodwill resulted from finalizing the fair value of impaired loans. The purchase price allocation was finalized in the second quarter of 2019. The consolidation of banking centers was completed during the second quarter of 2019, in which four additional banking centers were consolidated into CBB banking centers.

~~We have included the financial results of the business combination in the consolidated statement of earnings and comprehensive income beginning on the acquisition date.~~

Table of Contents

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

For the Three Months Ended

Variance

June 30,
2019

March 31,
2019

$

%

(Dollars in thousands, except per share amounts)

Net interest income
  $
     111,057
  $
     109,536
  $
     1,521

1.39%

Provision for loan losses

(2,000
)
(1,500
)
(500)

-33.33%

Noninterest income

18,205

16,303

1,902

11.67%

Noninterest expense

(50,528
)
(51,604
)
1,076

2.09%

Income taxes

(22,253
)
(21,093
)
(1,160)

-5.50%

Net earnings
  $
54,481
  $
51,642
  $
2,839

5.50%

Earnings per common share:

Basic
  $
0.39
  $
0.37
  $
0.02

Diluted
  $
0.39
  $
0.37
  $
0.02

Return on average assets

1.95%

1.84%

0.11%

Return on average shareholders’ equity

11.38%

11.14%

0.24%

Efficiency ratio

39.09%

41.01%

-1.92%

Noninterest expense to average assets

1.81%

1.83%

-0.02%


	Three Months Ended				Variance
	June 30, 2020		March 31, 2020		$		%
	(Dollars in thousands, except per share amounts)

Net interest income	$	104,569	$	102,306	$	2,263		2.21%
Provision for credit losses		(11,500)		(12,000)		500		4.17%
Noninterest income		12,152		11,640		512		4.40%
Noninterest expense		(46,398)		(48,641)		2,243		4.61%
Income taxes		(17,192)		(15,325)		(1,867)		-12.18%

Net earnings	$	41,631	$	37,980	$	3,651		9.61%

Earnings per common share:
Basic	$	0.31	$	0.27	$	0.04
Diluted	$	0.31	$	0.27	$	0.04
Return on average assets		1.33%		1.34%		-0.01%
Return on average shareholders’ equity		8.51%		7.61%		0.90%
Efficiency ratio		39.75%		42.69%		-2.94%
Noninterest expense to average assets		1.48%		1.72%		-0.24%

For the Three Months Ended
June 30,

Variance

For the Six Months Ended
June 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands, except per share amounts)

Net interest income
  $
     111,057
  $
     72,688
  $
     38,369

52.79%
  $
  220,593
  $
  143,209
  $
77,384

54.04%

(Provision for) recapture of provision for loan losses

(2,000)

1,000

(3,000)

-300.00%

(3,500)

2,000

(5,500)

-275.00%

Noninterest income

18,205

9,695

8,510

87.78%

34,508

22,611

11,897

52.62%

Noninterest expense

(50,528)

(34,254)

(16,274)

-47.51%

(102,132)

(70,200)

(31,932)

-45.49%

Income taxes

(22,253)

(13,756)

(8,497)

-61.77%

(43,346)

(27,334)

(16,012)

-58.58%

Net earnings
  $
54,481
  $
35,373
  $
19,108

54.02%
  $
106,123
  $
70,286
  $
35,837

50.99%

Earnings per common share:

Basic
  $
0.39
  $
0.32
  $
0.07


  $
0.76
  $
0.64
  $
0.12

Diluted
  $
0.39
  $
0.32
  $
0.07


  $
0.76
  $
0.64
  $
0.12

Return on average assets

1.95%

1.73%

0.22%

1.89%

1.72%

0.17%

Return on average shareholders’ equity

11.38%

13.08%

-1.70%

11.26%

13.05%��

-1.79%

Efficiency ratio

39.09%

41.58%

-2.49%

40.04%

42.34%

-2.30%

Noninterest expense to average assets

1.81%

1.68%

0.13%

1.82%

1.72%

0.10%


	Three Months Ended June 30,						Variance				Six Months Ended June 30,						Variance
	2020			2019			$		%		2020			2019			$		%
							(Dollars in thousands, except per share amounts)

Net interest income	$	104,569		$	111,057		$	(6,488)		-5.84%	$	206,875		$	220,593		$	(13,718)		-6.22%
Provision for credit losses		(11,500	)		(2,000	)		(9,500)		-475.00%		(23,500	)		(3,500	)		(20,000)		-571.43%
Noninterest income		12,152			18,205			(6,053)		-33.25%		23,792			34,508			(10,716)		-31.05%
Noninterest expense		(46,398	)		(50,528	)		4,130		8.17%		(95,039	)		(102,132	)		7,093		6.94%
Income taxes		(17,192	)		(22,253	)		5,061		22.74%		(32,517	)		(43,346	)		10,829		24.98%

Net earnings	$	41,631		$	54,481		$	(12,850)		-23.59%	$	79,611		$	106,123		$	(26,512)		-24.98%

Earnings per common share:
Basic	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Diluted	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Return on average assets		1.33%			1.95%			-0.62%��				1.33%			1.89%			-0.56%
Return on average shareholders’ equity		8.51%			11.38%			-2.87%				8.06%			11.26%			-3.20%
Efficiency ratio		39.75%			39.09%			0.66%				41.20%			40.04%			1.16%
Noninterest expense to average assets		1.48%			1.81%			-0.33%				1.59%			1.82%			-0.23%

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
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

(Dollars in thousands)

Net Income
  $
54,481
  $
35,373
  $
106,123
  $
70,286

Add: Amortization of intangible assets

2,833

328

5,690

659

Less: Tax effect of amortization of intangible assets (1)

(838)

(97)

(1,682)

(195)

Tangible net income
  $
56,476
  $
35,604
  $
110,131
  $
70,750

Average stockholders’ equity
  $
1,919,888
  $
  1,085,053
  $
1,899,898
  $
  1,086,157

Less: Average goodwill

(666,196)

(116,564)

(666,366)

(116,564)

Less: Average intangible assets

(49,615)

(6,393)

(51,188)

(6,557)

Average tangible common equity
  $
  1,204,077
  $
962,096
  $
  1,182,344
  $
963,036

Return on average equity, annualized

11.38%

13.08%

11.26%

13.05%

Return on average tangible common equity, annualized

18.81%

14.84%

18.78%

14.81%


	Three Months Ended						Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
			(Dollars in thousands)
Net Income	$	41,631	$	37,980	$	54,481	$	79,611	$	106,123
Add: Amortization of intangible assets		2,445		2,445		2,833		4,890		5,690
Less: Tax effect of amortization of intangible assets (1)		(723)		(723)		(838)		(1,446)		(1,682)

Tangible net income	$	43,353	$	39,702	$	56,476	$	83,055	$	110,131


Average stockholders’ equity	$	1,966,600	$	2,006,464	$	1,919,888	$	1,986,532	$	1,899,898
Less: Average goodwill		(663,707)		(663,707)		(666,196)		(663,707)		(666,366)
Less: Average intangible assets		(39,287)		(41,732)		(49,615)		(40,510)		(51,188)

Average tangible common equity	$	1,263,606	$	1,301,025	$	1,204,077	$	1,282,315	$	1,182,344


Return on average equity, annualized		8.51%		7.61%		11.38%		8.06%		11.26%
Return on average tangible common equity, annualized		13.80%		12.27%		18.81%		13.03%		18.78%

(1)

Tax effected at respective statutory rates.

~~Table of Contents~~

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 and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 –

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management

included herein.

Table of Contents

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

For the Three Months Ended June 30,

2019

2018

Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate

(Dollars in thousands)
INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale
securities:

Taxable
  $
1,590,959
  $
9,821

2.47%
  $
1,921,638
  $
11,290

2.37%

Tax-advantaged

43,719

297

3.75%

53,399

407

4.06%

Held-to-maturity
securities:

Taxable

511,938

2,932

2.29%

540,692

3,048

2.25%

Tax-advantaged

215,366

1,494

3.35%

243,910

1,759

3.49%

Investment in FHLB stock

17,688

298

6.76%

17,688

298

6.76%

Interest-earning deposits with other institutions

18,022

100

2.23%

144,081

635

1.76%

Loans (2)

7,558,483

101,843

5.40%

4,780,347

57,368

4.81%

Total interest-earning assets

9,956,175

116,785

4.72%

7,701,755

74,805

3.93%

Total noninterest-earning assets

1,264,592

476,854

Total assets
  $
11,220,767
  $
8,178,609

INTEREST-BEARING LIABILITIES

Savings deposits (3)
  $
3,024,664

2,973

0.39%
  $
2,233,652

1,293

0.23%

Time deposits

494,507

1,120

0.91%

367,871

256

0.28%

Total interest-bearing deposits

3,519,171

4,093

0.47%

2,601,523

1,549

0.24%

FHLB advances, other borrowings, and customer repurchase agreements

585,550

1,635

1.11%

462,618

568

0.49%

Interest-bearing liabilities

4,104,721

5,728

0.56%

3,064,141

2,117

0.28%

Noninterest-bearing deposits

5,093,781

3,958,980

Other liabilities

102,377

70,435

Stockholders’ equity

1,919,888

1,085,053

Total liabilities and stockholders’ equity
  $
   11,220,767
  $
   8,178,609

Net interest income
  $
     111,057
  $
72,688

Net interest spread - tax equivalent

4.16%

3.65%

Net interest margin

4.47%

3.79%

Net interest margin - tax equivalent

4.49%

3.82%


	Three Months Ended June 30,
	2020						2019
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,580,483	$	8,244		2.09%	$	1,590,959	$	9,821		2.47%
Tax-advantaged		36,424		205		3.27%		43,719		297		3.75%
Held-to-maturity securities:
Taxable		448,667		2,447		2.18%		511,938		2,932		2.29%
Tax-advantaged		177,890		1,213		3.30%		215,366		1,494		3.35%
Investment in FHLB stock		17,688		214		4.87%		17,688		298		6.76%
Interest-earning deposits with other institutions		1,080,433		283		0.11%		18,022		100		2.23%
Loans (2)		8,047,054		95,352		4.77%		7,558,483		101,843		5.40%

Total interest-earning assets		11,388,639		107,958		3.82%		9,956,175		116,785		4.72%
Total noninterest-earning assets		1,222,416						1,264,592

Total assets	$	12,611,055					$	11,220,767


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,393,105		2,010		0.24%	$	3,024,664		2,973		0.39%
Time deposits		450,920		985		0.88%		494,507		1,120		0.91%

Total interest-bearing deposits		3,844,025		2,995		0.31%		3,519,171		4,093		0.47%
FHLB advances, other borrowings, and customer repurchase agreements		472,335		394		0.33%		585,550		1,635		1.11%

Interest-bearing liabilities		4,316,360		3,389		0.32%		4,104,721		5,728		0.56%

Noninterest-bearing deposits		6,204,329						5,093,781
Other liabilities		123,766						102,377
Stockholders’ equity		1,966,600						1,919,888

Total liabilities and stockholders’ equity	$	12,611,055					$	11,220,767


Net interest income			$	104,569					$	111,057


Net interest spread - tax equivalent						3.50%						4.16%
Net interest margin						3.69%						4.47%
Net interest margin - tax equivalent						3.70%						4.49%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended June 30, ~~2019~~2020 and ~~2018.~~2019. The non TE rates were ~~2.46%~~2.16% and ~~2.40%~~2.46% for the three months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(2)

Includes loan fees of ~~$727,000~~$7.3 million and ~~$855,000~~$727,000 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Prepayment penalty fees of ~~$1.3~~$2.1 million and ~~$912,000~~$1.3 million are included in interest income for the three months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(3)

Includes interest-bearing demand and money market accounts.

Table of Contents

For the Six Months Ended June 30,

2019

2018

Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate

(Dollars in thousands)

INTEREST-EARNING ASSETS

Investment securities (1)

Available-for-sale
securities:

Taxable
  $
1,622,465
  $
20,130

2.48
%   $
1,950,190
  $
22,735

2.34
%
Tax-advantaged

44,048

633

3.91
%
54,262

830

4.06
%
Held-to-maturity
securities:

Taxable

510,781

5,842

2.29
%
547,694

5,926

2.16
%
Tax-advantaged

221,602

3,109

3.39
%
250,507

3,646

3.52
%
Investment in FHLB stock

17,688

630

7.18
%
17,688

630

7.18
%
Interest-earning deposits with other institutions

18,356

194

2.13
%
141,443

1,171

1.66
%
Loans (2)

7,610,241

201,530

5.34
%
4,785,118

112,564

4.74
%

Total interest-earning assets

10,045,181

232,068

4.67
%
7,746,902

147,502

3.86
%
Total noninterest-earning assets

1,268,812

470,378

Total assets
  $
11,313,993
  $
8,217,280

INTEREST-BEARING LIABILITIES

Savings deposits (3)
  $
3,075,966

5,658

0.37
%   $
2,262,271

2,566

0.23
%
Time deposits

509,581

2,306

0.91
%
372,585

508

0.27
%

Total interest-bearing deposits

3,585,547

7,964

0.45
%
2,634,856

3,074

0.24
%
FHLB advances, other borrowings, and customer repurchase agreements

638,463

3,511

1.10
%
522,606

1,219

0.47
%

Interest-bearing liabilities

4,224,010

11,475

0.55
%
3,157,462

4,293

0.27
%

Noninterest-bearing deposits

5,089,795

3,907,901

Other liabilities

100,290

65,760

Stockholders’ equity

1,899,898

1,086,157

Total liabilities and stockholders’ equity
  $
   11,313,993
  $
   8,217,280

Net interest income
  $
220,593
  $
143,209

Net interest spread - tax equivalent

4.12
%
3.59
%
Net interest margin

4.42
%
3.72
%
Net interest margin - tax equivalent

4.44
%
3.75
%


	Six Months Ended June 30,
	2020							2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,619,929	$	18,069		2.23	%	$	1,622,465	$	20,130		2.48	%
Tax-advantaged		37,256		429		3.32	%		44,048		633		3.91	%
Held-to-maturity securities:
Taxable		459,039		5,145		2.24	%		510,781		5,842		2.29	%
Tax-advantaged		183,706		2,513		3.31	%		221,602		3,109		3.39	%
Investment in FHLB stock		17,688		546		6.21	%		17,688		630		7.18	%
Interest-earning deposits with other institutions		670,737		896		0.27	%		18,356		194		2.13	%
Loans (2)		7,764,930		187,469		4.85	%		7,610,241		201,530		5.34	%

Total interest-earning assets		10,753,285		215,067		4.03	%		10,045,181		232,068		4.67	%
Total noninterest-earning assets		1,240,143							1,268,812

Total assets	$	11,993,428						$	11,313,993


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,224,924		5,121		0.32	%	$	3,075,966		5,658		0.37	%
Time deposits		448,176		1,998		0.90	%		509,581		2,306		0.91	%

Total interest-bearing deposits		3,673,100		7,119		0.39	%		3,585,547		7,964		0.45	%
FHLB advances, other borrowings, and customer repurchase agreements		488,460		1,073		0.44	%		638,463		3,511		1.10	%

Interest-bearing liabilities		4,161,560		8,192		0.40	%		4,224,010		11,475		0.55	%

Noninterest-bearing deposits		5,725,677							5,089,795
Other liabilities		119,659							100,290
Stockholders’ equity		1,986,532							1,899,898

Total liabilities and stockholders’ equity	$	11,993,428						$	11,313,993


Net interest income			$	206,875						$	220,593


Net interest spread - tax equivalent						3.64	%						4.12	%
Net interest margin						3.87	%						4.42	%
Net interest margin - tax equivalent						3.88	%						4.44	%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. The non TE rates were ~~2.48%~~2.28% and ~~2.37%~~2.48% for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(2)

Includes loan fees of ~~$1.6~~$7.8 million and ~~$1.8~~$1.6 million for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Prepayment penalty fees of ~~$2.3~~$3.6 million and ~~$1.4~~$2.3 million are included in interest income for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

(3)

Includes interest-bearing demand and money market accounts.

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 June 30,

2019 Compared to 2018

Increase (Decrease) Due to

    Volume

    Rate

Rate/
    Volume

    Total

(Dollars in thousands)

Interest income:

Available-for-sale
securities:

Taxable investment securities
  $
(1,877
)   $
489
  $
(81
)   $
(1,469
)
Tax-advantaged
investment securities

(64
)
(39
)
(7
)
(110
)
Held-to-maturity
securities:

Taxable investment securities

(162
)
49

(3
)
(116
)
Tax-advantaged
investment securities

(195
)
(63
)
(7
)
(265
)
Investment in FHLB stock

-

-

-

-

Interest-earning deposits with other institutions

(556
)
167

(146
)
(535
)
Loans

33,339

7,043

4,093

44,475

Total interest income

30,485

7,646

3,849

41,980

Interest expense:

Savings deposits

458

902

320

1,680

Time deposits

88

577

199

864

FHLB advances, other borrowings, and customer repurchase agreements

153

722

192

1,067

Total interest expense

699

2,201

711

3,611

Net interest income
  $
29,786
  $
5,445
  $
3,138
  $
38,369

Comparison of Six Months Ended June 30,

2019 Compared to 2018

Increase (Decrease) Due to

    Volume

    Rate

Rate/
    Volume

    Total

(Dollars in thousands)

Interest income:

Available-for-sale
securities:

Taxable investment securities
  $
(3,754
)   $
1,376
  $
(227
)   $
(2,605
)
Tax-advantaged
investment securities

(157
)
(50
)
10

(197
)
Held-to-maturity
securities:

Taxable investment securities

(501
)
447

(30
)
(84
)
Tax-advantaged
investment securities

(421
)
(131
)
15

(537
)
Investment in FHLB stock

-

-

-

-

Interest-earning deposits with other institutions

(1,021
)
337

(293
)
(977
)
Loans

66,439

14,164

8,363

88,966

Total interest income

60,585

16,143

7,838

84,566

Interest expense:

Savings deposits

923

1,595

574

3,092

Time deposits

187

1,178

433

1,798

FHLB advances, other borrowings, and customer repurchase agreements

274

1,652

366

2,292

Total interest expense

1,384

4,425

1,373

7,182

Net interest income
  $
59,201
  $
11,718
  $
6,465
  $
77,384


	Comparison of Three Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(80	)	$	(1,485	)	$	(12	)	$	(1,577	)
Tax-advantaged investment securities		(42	)		(43	)		(7	)		(92	)
Held-to-maturity securities:
Taxable investment securities		(339	)		(130	)		(16	)		(485	)
Tax-advantaged investment securities		(252	)		(25	)		(4	)		(281	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		5,871			(95	)		(5,593	)		183
Loans		6,851			(12,532	)		(810	)		(6,491	)

Total interest income		12,009			(14,394	)		(6,442	)		(8,827	)


Interest expense:
Savings deposits		364			(1,183	)		(144	)		(963	)
Time deposits		(96	)		(36	)		(3	)		(135	)
FHLB advances, other borrowings, and customer repurchase agreements		(234	)		(844	)		(163	)		(1,241	)

Total interest expense		34			(2,063	)		(310	)		(2,339	)

Net interest income	$	11,975		$	(12,331	)	$	(6,132	)	$	(6,488	)


	Comparision of Six Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(48	)	$	(2,018	)	$	5		$	(2,061	)
Tax-advantaged investment securities		(97	)		(126	)		19			(204	)
Held-to-maturity securities:
Taxable investment securities		(580	)		(130	)		13			(697	)
Tax-advantaged investment securities		(532	)		(78	)		14			(596	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		6,917			(170	)		(6,045	)		702
Loans		3,954			(17,656	)		(359	)		(14,061	)

Total interest income		9,614			(20,262	)		(6,353	)		(17,001	)


Interest expense:
Savings deposits		267			(767	)		(37	)		(537	)
Time deposits		(273	)		(40	)		5			(308	)
FHLB advances, other borrowings, and customer repurchase agreements		(825	)		(2,108	)		495			(2,438	)

Total interest expense		(831	)		(2,915	)		463			(3,283	)

Net interest income	$	10,445		$	(17,347	)	$	(6,816	)	$	(13,718	)

Table of Contents

Second Quarter of ~~2019~~2020 Compared to the Second Quarter of ~~2018~~2019

Net interest income, before provision for ~~(recapture of) loan~~credit losses, of $104.6 million for the second quarter of 2020 decreased $6.5 million, or 5.84%, compared to $111.1 million for the second quarter of ~~2019 increased $38.4 million, or 52.79%, compared to $72.7 million for the second quarter of 2018.~~2019. Interest-earning assets increased on average by ~~$2.25~~$1.43 billion, or ~~29.27%~~14.39%, from ~~$7.70 billion for the second quarter of 2018 to~~ $9.96 billion for the second quarter of ~~2019. The growth in interest-earning assets was primarily~~2019 to $11.39 billion for the ~~result~~second quarter of ~~loan growth from the acquisition of CB.~~2020. Our net interest margin (TE) was 3.70% for the second quarter of 2020, compared to 4.49% for the second quarter of 2019, compared to 3.82% for the second quarter of 2018. The net interest margin for the second quarter of 2019 grew by 67 basis points over the second quarter of 2018. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid was $9.4 million for the second quarter of 2019, compared to $2.1 million for the second quarter of 2018. The increase in our adjusted net interest margin was primarily due to a 79 basis point increase in our average yield on interest-earning assets (TE), which resulted from a 59 basis point increase in our loan yield and an increase in loans as a percentage of our average earnings.2019.

Interest income for the second quarter of ~~2019~~2020 was ~~$116.8~~$108.0 million, which represented ~~a $42.0~~an $8.8 million, or ~~56.12%~~7.56%, ~~increase~~decrease when compared to the same period of ~~2018.~~2019. Average interest-earning assets increased by ~~$2.25~~$1.43 billion and the average interest-earning asset yield of ~~4.72%~~3.82%, compared to ~~3.93%~~4.72% for the second quarter of ~~2018.~~2019. The 7990 basis point ~~increase~~decrease in the interest-earning asset yield over the second quarter of ~~2018 resulted from the~~2019 was primarily due to a combination of a 5963 basis point ~~increase~~decrease in loan yields, a ~~six~~31 basis point ~~increase~~decrease in investment yields and ~~the~~a change in mix of ~~earning~~earnings assets ~~represented by an increase in~~with average ~~loans as a percentage~~balances at the Federal Reserve growing to 9.21% of earning ~~assets from 62.1% in~~asset for the second quarter of ~~2018~~2020, compared to ~~75.9% in~~0.12% for the second quarter of 2019. ~~Conversely,~~The increase in balances at the Federal Reserve resulted from $1.43 billion in average ~~investment securities declined as a percentage of earning assets from 35.8% in the prior year to 23.7% in~~deposit growth during the second ~~quarter of 2019.~~quarter.

Interest income and fees on loans for the second quarter of ~~2019~~2020 of ~~$101.8~~$95.4 million ~~increased $44.5~~decreased $6.5 million, or ~~77.53%~~6.37%, when compared to the second quarter of ~~2018 primarily due to loans acquired from CB.~~2019. Average loans increased ~~$2.78 billion~~$488.6 million for the second quarter of ~~2019~~2020 when compared with the same period of ~~2018. As a result~~2019, primarily due to $669.6 million in average PPP loans originated in the second quarter of ~~higher levels~~2020. The PPP loans we originated resulted in the recognition of ~~discount~~approximately $8.5 million in loan interest and fee income in the second quarter of 2020. Discount accretion on acquired CB loans ~~and nonaccrual interest paid, second quarter interest income increased~~decreased by ~~$6.1~~$3.9 million ~~in comparison~~compared to the second quarter of ~~2018. Also contributing to the 59 basis point increase in loan yield were increases in the rate on loans indexed to variable~~2019. The Federal Reserve lowered short-term interest rates ~~such as the Bank’s prime rate, which increased~~ by ~~0.50%~~225 basis points when compared to the end of second quarter of ~~2018.~~2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 42 basis points from the second quarter of 2019.

Interest income from investment securities was $12.1 million for the second quarter of 2020, a $2.4 million, or 16.74%, decrease from $14.5 million for the second quarter of ~~2019, a $2.0 million, or 11.88%, decrease from $16.5 million for the second quarter of 2018.~~2019. This decrease was primarily the result of a ~~$397.7~~$118.5 million decline in average investment securities for the second quarter of ~~2019,~~2020, compared to the same period of ~~2018. The~~ 2019. As a result of the decline in interest rates over the past four quarters, the non

tax-equivalent

yield on investments ~~increased~~decreased by ~~six~~30 basis points compared to the second quarter of ~~2018.~~

2019.

Interest expense of ~~$5.7~~$3.4 million for the second quarter of ~~2019, increased $3.6~~2020, decreased $2.3 million, or ~~170.57%~~40.83%, compared to the second quarter of 2018, as our average interest-bearing liabilities increased by $1.04 billion. The increase in interest-bearing liabilities was primarily due to growth in interest-bearing deposits assumed from CB. Our total2019. Total cost of funds declined to 0.13% for the second quarter of ~~2019 was~~2020 from 0.25%~~, compared to 0.12%~~ for the second quarter of ~~2018. The increase in cost of funds compared to the second quarter of 2018 was due to a nine basis point increase in cost of deposits and customer repurchases, and $130.2 million of growth in~~2019. On average, overnight borrowings at an average cost of 2.56%. Average interest-bearing deposits and customer repurchase agreements increased by $910.3 million, as we assumed $1.61 billion interest-bearing deposits from CB during the third quarter of 2018. Average noninterest-bearing deposits ~~represented 59.14%~~were 61.74% of our total deposits for the second quarter of ~~2019,~~2020, compared to ~~60.35%~~59.14% for the second quarter of ~~2018.~~2019. In comparison to the second quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.11 billion and overnight borrowings decreased by $129.6 million. Average interest-bearing deposits increased by $324.9 million compared to the second quarter of 2019, while the cost of interest-bearing deposits decreased by 16 basis points.

Six Months of ~~2019~~2020 Compared to the Six Months of ~~2018~~2019

Net interest income, before ~~recapture of~~ provision for ~~(recapture of) loan~~credit losses, was ~~$220.6~~$206.9 million for the six months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$77.4~~$13.7 million, or ~~54.04%~~6.22%, compared to ~~$143.2~~$220.6 million for the same period of ~~2018.~~2019. Interest-earning assets increased on average by ~~$2.30 billion,~~$708.1 million, or ~~29.67%~~7.05%, from ~~$7.75~~$10.05 billion for the six months ended June 30, ~~2018~~2019 to ~~$10.05~~$10.75 billion for the current year. Our net interest margin (TE) was ~~4.44%~~3.88% during the first six months of ~~2019,~~2020, compared to ~~3.75%~~4.44% for the same period of ~~2018.~~2019.

Interest income for the six months ended June 30, ~~2019~~2020 was ~~$232.1~~$215.1 million, which represented a ~~$84.6~~$17.0 million, or ~~57.33%~~7.33%, ~~increase~~decrease when compared to the same period of ~~2018.~~2019. Compared to the first six months of ~~2018,~~2019, average interest-earning assets increased by ~~$2.30 billion~~$708.1 million primarily due to PPP loans, ~~acquired from CB,~~ and the yield on interest-earning assets ~~increased~~decreased by 8164 basis points. The 8164 basis ~~points increase~~point decrease in the earning asset yield over the first six months of ~~2019,~~2020, resulted from a 6049 basis point ~~increase~~decrease in loan yields from 5.34% for first six months of 2019 to 4.85% for the same period of 2020, and a 21 basis point decline in investment yields, as well as a change in the mix of earning ~~assets.~~assets resulting from a $634.8 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets ~~grew~~declined from ~~61.8%~~75.76% for the first six months of ~~2018~~2019 to ~~75.8%~~72.21% for the first six months of ~~2019.~~2020. Conversely, average ~~investment securities declined~~balances at the Federal Reserve grew as a percentage of earning assets from ~~36.2%~~0.11% in the prior year to ~~23.9%~~6.01% for the first six months of ~~2019.~~2020.

Table of Contents

Interest income and fees on loans for the first six months of ~~2019~~2020 of ~~$201.5~~$187.5 million ~~increased $89.0~~decreased $14.1 million, or ~~79.04%~~6.98%, when compared to the same period of ~~2018.~~2019. Average loans increased ~~$2.83 billion~~$154.7 million for the first six months of ~~2019~~2020 when compared with the same period of ~~2018,~~2019, primarily due to $334.8 million in average PPP loans. The PPP loans ~~acquired from CB.~~we originated resulted in approximately $6.8 million in fee income and $1.7 million in loan interest during the second quarter of 2020. The first six months of ~~2019~~2020 reflected a ~~$13.0~~$6.9 million ~~increase~~decrease in discount accretion on acquired loans and nonaccrual interest ~~paid~~income when compared to the same period of ~~2018.~~2019. Loan yields decreased by 49 basis points from the prior six month period, primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 30 basis points lower than the second quarter of 2019.

Interest income from investment securities was ~~$29.7~~$26.2 million for the six months ended June 30, ~~2019,~~2020, a ~~$3.4~~$3.6 million decrease from ~~$33.1~~$29.7 million for the first six months of ~~2018.~~2019. This decrease was the net result of a ~~$403.8~~$99.0 million decrease in the average investment securities for the first six months of ~~2019,~~2020 and a 20 basis point decline in the non

tax-equivalent

yield on securities, compared to the same period of ~~2018, partially offset by an 11 basis points increase in the non tax-equivalent yield on securities.~~

2019.

Interest expense of ~~$11.5~~$8.2 million for the six months ended June 30, ~~2019, increased~~2020, decreased by ~~$7.2~~$3.3 million from the same period of ~~2018.~~2019. The average rate paid on interest-bearing liabilities ~~increased~~decreased by 2815 basis points, to ~~0.55%~~0.40% for the first six months of ~~2019,~~2020, from ~~0.27%~~0.55% for the same period of ~~2018.~~2019. The rate on interest-bearing deposits for the first six months of ~~2019 increased~~2020 decreased by 21six basis points from the same period in ~~2018.~~2019. Average interest-bearing liabilities were ~~$1.07 billion higher during~~$62.5 million lower for the first six months of ~~2019~~2020 when compared with the same period of ~~2018, primarily due to deposits assumed from CB.~~2019. Average interest-bearing ~~deposit growth of $950.7 million was partially offset~~deposits grew by ~~a $22.2 million decline in customer repurchase agreements.~~$87.6 million. Average noninterest-bearing deposits represented ~~58.67%~~60.92% of our total deposits for the six months ended June 30, ~~2019,~~2020, compared to ~~59.73%~~58.67% for the same period of ~~2018.~~2019. Total cost of funds for the first six months of 2019 was ~~0.25%~~0.17%, compared with ~~0.12%~~0.25% for the same period of ~~2018.~~2019.

Provision for ~~Loan~~Credit Losses

The allowance for loan losses is increased by the provision for loan losses and recoveries of prior losses, and is decreased by recapture of provisions and by charge-offs taken when management believes the uncollectability of any loan is confirmed. The provision for ~~loan~~credit losses is ~~determined by management as the amount~~a charge to ~~be added~~earnings to ~~(subtracted from)~~maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan ~~losses after net charge-offs have been deducted~~portfolio at the balance sheet date. On January 1, 2020, we adopted ASU

2016-13,

commonly referred to ~~bring~~as CECL, which replaces the ~~allowance to~~“incurred loss” approach with an ~~appropriate level which, in management’s best estimate, is necessary to absorb probable loan losses within~~“expected loss” model over the ~~existing loan portfolio.~~

life of the loan.

The allowance for ~~loan~~credit losses on loans totaled ~~$67.1~~$94.0 million at June 30, ~~2019,~~2020, compared to ~~$63.6~~$68.7 million at December 31, ~~2018~~2019 and ~~$59.6~~$67.1 million as of June 30, ~~2018. The~~2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, ~~for loan losses~~with no impact on the consolidated statement of earnings, and was increased by ~~$3.5~~$23.5 million in ~~loan loss~~ provision ~~and $19,000~~for credit losses in ~~net recoveries for~~the first six months of 2020 due to the severe economic disruption forecasted as a result of the

COVID-19

pandemic. During the six months ended June 30, ~~2019.~~2020, we experienced minimal credit charge-offs of $253,000 and total recoveries of $236,000, resulting in net charge-offs of $17,000. This compares to a ~~$2.0~~$3.5 million loan loss provision ~~recapture~~ and net recoveries of ~~$2.0 million~~$19,000 for the same period of 2018. The increase in provision for loan losses was primarily due to lower levels of net recoveries and additional provision due to loan growth during the period experienced within the commercial and industrial and commercial real estate segments of the

~~non-acquired~~

~~loan portfolio. We periodically assess the quality of our portfolio to determine whether additional provisions for loan losses are necessary. In addition to the growth in the~~

~~non-acquired~~

loan portfolio, the provision was the result of the net effect of modest increases in certain qualitative loss factors and reduced reserve requirements for moderate reductions in historical loss rates across the portfolio.2019. We believe the allowance is appropriate at June 30, ~~2019.~~2020. The ratio of the allowance for ~~loan~~credit losses to total loans and leases outstanding, net of deferred fees and discount, as of June 30, ~~2019,~~2020, was 1.12%, or 1.29% when PPP loans are excluded. This compares to 0.91% and 0.89%, as of December 31, ~~2018~~2019 and June ~~2018 was 0.89%, 0.82% and 1.24%,~~30, 2019, respectively. ~~The ratio as of the most recent four quarters was impacted by the $2.74 billion in loans acquired from CB that are recorded at fair market value, without a corresponding loan loss allowance.~~ As of June 30, ~~2019,~~2020, remaining ~~credit related~~ discounts on acquired loans were ~~$41.4~~$39.4 million. Refer to the discussion of “Allowance for ~~Loan~~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 ~~loan~~credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions from the

COVID-19

pandemic. See “Allowance for ~~Loan~~Credit Losses” under

Analysis of Financial Condition

herein.

Table of Contents

Noninterest Income

Noninterest income includes income derived from financial services offered, such as CitizensTrust, BankCard services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.

The following table sets forth the various components of noninterest income for the periods presented.

For the
Three Months Ended
June 30,

Variance

For the
Six Months Ended
June 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts
$
5,065
$
4,091
$
974

23.81%
$
10,206
$
8,136
$
2,070

25.44%

Trust and investment services

2,452

2,399

53

2.21%

4,634

4,556

78

1.71%

Bankcard services

1,027

958

69

7.20%

1,977

1,762

215

12.20%

BOLI income

1,349

1,069

280

26.19%

2,685

2,048

637

31.10%

Gain on OREO, net

24

-

24

-

129

3,540

(3,411
)
-96.36%

Gain on sale of building, net

-

-

-

-

4,545

-

4,545

-

Gain on eminent domain condemnation, net

5,685

-

5,685

-

5,685

-

5,685

-

Other

2,603

1,178

1,425

120.97%

4,647

2,569

2,078

80.89%

Total noninterest income
$
     18,205
$
     9,695
$
     8,510

87.78%
$
     34,508
$
     22,611
$
     11,897

52.62%


	Three Months Ended June 30,				Variance				Six Months Ended June 30,				Variance
	2020		2019		$		%		2020		2019		$		%
							(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	3,809	$	5,065	$	(1,256)		-24.80%	$	8,585	$	10,206	$	(1,621)		-15.88%
Trust and investment services		2,477		2,452		25		1.02%		4,897		4,634		263		5.68%
Bankcard services		405		1,027		(622)		-60.56%		982		1,977		(995)		-50.33%
BOLI income		1,683		1,349		334		24.76%		3,742		2,685		1,057		39.37%
Gain on OREO, net		-		24		(24)		-100.00%		10		129		(119)		-92.25%
Gain on sale of building, net		-		-		-		-		-		4,545		(4,545)		-100.00%
Gain on eminent domain condemnation, net		-		5,685		(5,685)		-100.00%		-		5,685		(5,685)		-100.00%
Other		3,778		2,603		1,175		45.14%		5,576		4,647		929		19.99%

Total noninterest income	$	12,152	$	18,205	$	(6,053)		-33.25%	$	23,792	$	34,508	$	(10,716)		-31.05%

Second Quarter of ~~2019~~2020 Compared to the Second Quarter of ~~2018~~

2019

The ~~second quarter of 2019 included~~$6.1 million decrease in noninterest income was primarily due to a $5.7 million of net gain from the legal settlement of an eminent domain condemnation of one of our ~~business financial~~banking center buildings located in ~~Bakersfield. We have since moved that banking center to another site approximately 0.5 miles away. Excluding this net gain on sale, noninterest income for~~Bakersfield in the second quarter of ~~2019 increased by $2.8~~2019.

The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 8 –

Derivative Financial Instruments

of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The second quarter of 2020 included higher swap fee income of $1.8 million ~~or 29.14%,~~ compared to the second quarter of ~~2018. The $1.0~~2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $126.2 million ~~increase in service~~for the second quarter of 2020, compared to $17.4 million for the second quarter of 2019.

Service charges on deposit accounts decreased by $1.3 million from the second quarter of ~~2018~~2019. This decrease was ~~primarily~~partially due to ~~service charges~~the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers. The Durbin Amendment’s cap on ~~deposits assumed in~~interchange fees reduced our debit card interchange fee income for bankcard services by approximately $400,000 when compared to the ~~acquisition~~second quarter of ~~CB.~~2019.

CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other

non-insured

investment products. At June 30, ~~2019,~~2020, CitizensTrust had approximately ~~$2.82~~$2.83 billion in assets under management and administration, including ~~$2.03~~$2.02 billion in assets under management. ~~The~~CitizensTrust generated fees ~~generated~~of $2.5 million for both the second quarter of ~~2019 were consistent with~~2020 and the second quarter of ~~2018.~~2019.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. 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. ~~The $1.4 million increase~~Death benefits of $450,000 were included in ~~other income included increases in international banking, swap fee income, SBA servicing income, and dividend income from various equity investments.~~our BOLI policies for the second quarter of 2020.

Table of Contents

Six Months of ~~2019~~2020 Compared to the Six Months of ~~2018~~2019

The ~~$11.9~~$10.7 million ~~increase~~decrease in noninterest income for the six months ended June 30, ~~2019,~~2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings ~~compared with a $3.5 million net gain on the sale of one OREO during~~in the first six months of ~~2018.~~2019. Service charges on deposit accounts ~~increased~~decreased by ~~$2.1~~$1.6 million from the first six months of ~~2018, primarily~~2019. This decrease was partially due to the ~~acquisition of CB.~~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. In addition, the Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $700,000 when compared to 2019. The ~~$637,000~~$1.1 million increase in BOLI income included ~~$1.0~~$1.2 million ~~in income from $70.9 million in BOLI policies acquired from CB in the third quarter~~ of ~~2018, offset by a $351,000~~ death ~~benefit~~benefits included in our BOLI policies for the first six months of ~~2018.~~2020. The ~~$2.1 million~~$929,000 increase in other income included ~~increases~~$1.8 million in ~~international banking,~~higher swap fee income, ~~SBA servicing income, and~~partially offset by decreases in dividend income from various equity ~~investments.~~

investments, other banking fee income and SBA servicing income when compared to the prior six month period.

~~Table of Contents~~

~~Noninterest Expense~~Income Taxes

~~The following table summarizes the various components of noninterest expense for the periods presented.~~

For the
Three Months Ended
June 30,

Variance

For the
Six Months Ended
June 30,

Variance

2019

2018

$

%

2019

2018

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and employee benefits
$
28,862
$
21,051
$
7,811

37.11%
$
58,164
$
43,365
$
14,799

34.13%

Occupancy

4,388

3,424

964

28.15%

8,795

6,756

2,039

30.18%

Equipment

1,253

894

359

40.16%

2,461

1,754

707

40.31%

Professional services

2,040

1,690

350

20.71%

3,965

3,220

745

23.14%

Software licenses and maintenance

2,542

1,759

783

44.51%

4,964

3,519

1,445

41.06%

Stationery and supplies

316

307

9

2.93%

608

544

64

11.76%

Telecommunications expense

712

561

151

26.92%

1,470

1,089

381

34.99%

Marketing and promotion

1,238

1,148

90

7.84%

2,632

2,504

128

5.11%

Amortization of intangible assets

2,833

328

2,505

763.72%

5,690

659

5,031

  763.43%

Regulatory assessments

734

666

68

10.21%

1,658

1,380

278

20.14%

Insurance

469

423

46

10.87%

938

846

92

10.87%

Loan expense

491

149

342

229.53%

807

404

403

99.75%

Directors’ expenses

320

270

50

18.52%

607

510

97

19.02%

Acquisition related expenses

2,612

494

2,118

  428.74%

5,761

1,297

4,464

344.18%

Other

1,718

1,090

628

57.61%

3,612

2,353

1,259

53.51%

Total noninterest expense
$
   50,528
$
   34,254
$
   16,274

47.51%
$
   102,132
$
   70,200
$
   31,932

45.49%

Noninterest expense to average assets

1.81%

1.68%

1.82%

1.72%

Efficiency ratio (1)

39.09%

41.58%

40.04%

42.34%

Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form

10-K

in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 —

Summary of Significant Accounting Policies

, included in our Annual Report on Form

10-K

for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adoption of Allowance for Credit Losses

We adopted ASU

2016-13,

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 June 30, 2020


Standard	Description	Adoption Timing	Impact on Financial Statements
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020	The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.	1st Quarter 2020 through the 4th Quarter 2022	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 2020-01 “Investments - Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)	The FASB issued ASU 2020-01 “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.	1st Quarter 2021	The adoption of this ASU will not have an impact on our consolidated financial statements.
Issued January 2020			~~(1)~~	~~Noninterest expense divided by net interest income before provision for loan losses plus noninterest income.~~

Table of Contents

OVERVIEW

For the second quarter of 2020, we reported net earnings of $41.6 million, compared with $38.0 million for the first quarter of 2020 and $54.5 million for the second quarter of 2019. Diluted earnings per share were $0.31 for the second quarter, compared to $0.27 for the prior quarter and $0.39 for the same period last year.

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

COVID-19

At June 30, 2020, total assets of $13.75 billion increased $2.47 billion, or 21.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets of $12.52 billion at June 30, 2020 increased $2.49 billion, or 24.83%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.74 billion increase in interest-earning balances due from the Federal Reserve and an $838.0 million increase in total loans, partially offset by a $125.5 million decrease in investment securities. Excluding PPP loans, total loans declined by $259.2 million from December 31, 2019.

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

held-to-maturity

(“HTM”) totaled $613.2 million. At June 30, 2020, investment securities

available-for-sale

(“AFS”) totaled $1.68 billion, inclusive of a net

pre-tax

unrealized gain of $57.3 million, an increase of $35.4 million from December 31, 2019. HTM securities declined by $61.3 million, or 9.09%, and AFS securities declined by $64.2 million, or 3.69%, from December 31, 2019. Our tax equivalent yield on investments was 2.22% for the quarter ended June 30, 2020, compared to 2.45% for the first quarter of 2020 and 2.53% for the second quarter of 2019.

Total loans and leases, net of deferred fees and discounts, of $8.40 billion at June 30, 2020 increased by $838.0 million, or 11.08%, from December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $131.9 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 $127.3 million, or 1.77%. The $127.3 million decrease in loans included decreases of $94.4 million in commercial and industrial (C&I) loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and collectively $4.4 million in other loan segments. Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1 million, respectively. Our yield on loans was 4.77% for the quarter ended June 30, 2020, compared to 4.95% for the first quarter of 2020 and 5.40% for the second quarter of 2019. This decline was primarily due to the impact of the Federal Reserve’s rate decreases and the decline in discount accretion income for acquired loans. Interest income for yield adjustments related to discount accretion on acquired loans was $4.1 million for the quarter ended June 30, 2020, compared to $4.8 million for the first quarter of 2020 and $8.0 million for the second quarter of 2019.

Noninterest-bearing deposits were $6.90 billion at June 30, 2020, an increase of $1.66 billion, or 31.57%, when compared to December 31, 2019. The significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity. At June 30, 2020, noninterest-bearing deposits were 62.83% of total deposits, compared to 60.26% at December 31, 2019. Our average cost of total deposits was 0.12% for the quarter ended June 30, 2020, compared to 0.19% for the first quarter of 2020 and 0.19% for the second quarter of 2019.

Customer repurchase agreements totaled $468.2 million at June 30, 2020, compared to $428.7 million at December 31, 2019. Our average cost of total deposits including customer repurchase agreements was 0.12% for the quarter ended June 30, 2020, compared to 0.20% for both the first quarter of 2020 and the second quarter of 2019.

At June 30, 2020, we had $10.0 million in short-term borrowings with 0% cost, compared to no borrowings at December 31, 2019 and June 30, 2019. At June 30, 2020, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2019. Our average cost of funds was 0.13% for the quarter ended June 30, 2020, 0.21% for the first quarter of 2020, and 0.25% for the second quarter of 2019.

The allowance for credit losses totaled $94.0 million at June 30, 2020, compared to $68.7 million at December 31, 2019. Due to the adoption of CECL, effective on January 1, 2020, a transition adjustment of $1.8 million was added to the beginning balance of the allowance and was increased by $23.5 million in provision for credit losses in the first six months of 2020 due to the severe economic disruption forecasted to result from the

COVID-19

pandemic. At June 30, 2020, ACL as a percentage of total loans and leases outstanding was 1.12%, or 1.29% when PPP loans are excluded. This compares to 0.91% at December 31, 2019. As of June 30, 2020, total discounts on acquired loans were $39.4 million.

Table of Contents

10b5-1

available-for-sale

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

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of June 30, 2020, the Company’s Tier 1 leverage capital ratio totaled 10.59%, our common equity Tier 1 ratio totaled 14.47%, our Tier 1 risk-based capital ratio totaled 14.76%, and our total risk-based capital ratio totaled 15.97%. 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

Table of Contents

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance


	Three Months Ended				Variance
	June 30, 2020		March 31, 2020		$		%
	(Dollars in thousands, except per share amounts)

Net interest income	$	104,569	$	102,306	$	2,263		2.21%
Provision for credit losses		(11,500)		(12,000)		500		4.17%
Noninterest income		12,152		11,640		512		4.40%
Noninterest expense		(46,398)		(48,641)		2,243		4.61%
Income taxes		(17,192)		(15,325)		(1,867)		-12.18%

Net earnings	$	41,631	$	37,980	$	3,651		9.61%

Earnings per common share:
Basic	$	0.31	$	0.27	$	0.04
Diluted	$	0.31	$	0.27	$	0.04
Return on average assets		1.33%		1.34%		-0.01%
Return on average shareholders’ equity		8.51%		7.61%		0.90%
Efficiency ratio		39.75%		42.69%		-2.94%
Noninterest expense to average assets		1.48%		1.72%		-0.24%


	Three Months Ended June 30,						Variance				Six Months Ended June 30,						Variance
	2020			2019			$		%		2020			2019			$		%
							(Dollars in thousands, except per share amounts)

Net interest income	$	104,569		$	111,057		$	(6,488)		-5.84%	$	206,875		$	220,593		$	(13,718)		-6.22%
Provision for credit losses		(11,500	)		(2,000	)		(9,500)		-475.00%		(23,500	)		(3,500	)		(20,000)		-571.43%
Noninterest income		12,152			18,205			(6,053)		-33.25%		23,792			34,508			(10,716)		-31.05%
Noninterest expense		(46,398	)		(50,528	)		4,130		8.17%		(95,039	)		(102,132	)		7,093		6.94%
Income taxes		(17,192	)		(22,253	)		5,061		22.74%		(32,517	)		(43,346	)		10,829		24.98%

Net earnings	$	41,631		$	54,481		$	(12,850)		-23.59%	$	79,611		$	106,123		$	(26,512)		-24.98%

Earnings per common share:
Basic	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Diluted	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Return on average assets		1.33%			1.95%			-0.62%��				1.33%			1.89%			-0.56%
Return on average shareholders’ equity		8.51%			11.38%			-2.87%				8.06%			11.26%			-3.20%
Efficiency ratio		39.75%			39.09%			0.66%				41.20%			40.04%			1.16%
Noninterest expense to average assets		1.48%			1.81%			-0.33%				1.59%			1.82%			-0.23%

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


	Three Months Ended						Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
			(Dollars in thousands)
Net Income	$	41,631	$	37,980	$	54,481	$	79,611	$	106,123
Add: Amortization of intangible assets		2,445		2,445		2,833		4,890		5,690
Less: Tax effect of amortization of intangible assets (1)		(723)		(723)		(838)		(1,446)		(1,682)

Tangible net income	$	43,353	$	39,702	$	56,476	$	83,055	$	110,131


Average stockholders’ equity	$	1,966,600	$	2,006,464	$	1,919,888	$	1,986,532	$	1,899,898
Less: Average goodwill		(663,707)		(663,707)		(666,196)		(663,707)		(666,366)
Less: Average intangible assets		(39,287)		(41,732)		(49,615)		(40,510)		(51,188)

Average tangible common equity	$	1,263,606	$	1,301,025	$	1,204,077	$	1,282,315	$	1,182,344


Return on average equity, annualized		8.51%		7.61%		11.38%		8.06%		11.26%
Return on average tangible common equity, annualized		13.80%		12.27%		18.81%		13.03%		18.78%

(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 and six months ended June 30, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. 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.

Table of Contents


	Three Months Ended June 30,
	2020						2019
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,580,483	$	8,244		2.09%	$	1,590,959	$	9,821		2.47%
Tax-advantaged		36,424		205		3.27%		43,719		297		3.75%
Held-to-maturity securities:
Taxable		448,667		2,447		2.18%		511,938		2,932		2.29%
Tax-advantaged		177,890		1,213		3.30%		215,366		1,494		3.35%
Investment in FHLB stock		17,688		214		4.87%		17,688		298		6.76%
Interest-earning deposits with other institutions		1,080,433		283		0.11%		18,022		100		2.23%
Loans (2)		8,047,054		95,352		4.77%		7,558,483		101,843		5.40%

Total interest-earning assets		11,388,639		107,958		3.82%		9,956,175		116,785		4.72%
Total noninterest-earning assets		1,222,416						1,264,592

Total assets	$	12,611,055					$	11,220,767


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,393,105		2,010		0.24%	$	3,024,664		2,973		0.39%
Time deposits		450,920		985		0.88%		494,507		1,120		0.91%

Total interest-bearing deposits		3,844,025		2,995		0.31%		3,519,171		4,093		0.47%
FHLB advances, other borrowings, and customer repurchase agreements		472,335		394		0.33%		585,550		1,635		1.11%

Interest-bearing liabilities		4,316,360		3,389		0.32%		4,104,721		5,728		0.56%

Noninterest-bearing deposits		6,204,329						5,093,781
Other liabilities		123,766						102,377
Stockholders’ equity		1,966,600						1,919,888

Total liabilities and stockholders’ equity	$	12,611,055					$	11,220,767


Net interest income			$	104,569					$	111,057


Net interest spread - tax equivalent						3.50%						4.16%
Net interest margin						3.69%						4.47%
Net interest margin - tax equivalent						3.70%						4.49%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended June 30, 2020 and 2019. The non TE rates were 2.16% and 2.46% for the three months ended June 30, 2020 and 2019, respectively.

(2)

~~Second Quarter~~Includes loan fees of ~~2019 Compared to the Second Quarter of 2018~~

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 1.81%$7.3 million and $727,000 for the ~~second quarter of~~three months ended June 30, 2020 and 2019, ~~compared to 1.68% for the second quarter of 2018. The increase is primarily the result of higher acquisition expense~~respectively. Prepayment penalty fees of $2.1 million and ~~a $2.5~~$1.3 million ~~increase~~are included in ~~amortization of core deposit intangible (“CDI”).~~

~~Our ability to control noninterest expenses in relation to the level of total revenue (net~~ interest income before provision for loan losses plus noninterest income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.09% for the ~~second quarter~~three months ended June 30, 2020 and 2019, respectively.

(3)

Includes interest-bearing demand and money market accounts.

Table of Contents


	Six Months Ended June 30,
	2020							2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,619,929	$	18,069		2.23	%	$	1,622,465	$	20,130		2.48	%
Tax-advantaged		37,256		429		3.32	%		44,048		633		3.91	%
Held-to-maturity securities:
Taxable		459,039		5,145		2.24	%		510,781		5,842		2.29	%
Tax-advantaged		183,706		2,513		3.31	%		221,602		3,109		3.39	%
Investment in FHLB stock		17,688		546		6.21	%		17,688		630		7.18	%
Interest-earning deposits with other institutions		670,737		896		0.27	%		18,356		194		2.13	%
Loans (2)		7,764,930		187,469		4.85	%		7,610,241		201,530		5.34	%

Total interest-earning assets		10,753,285		215,067		4.03	%		10,045,181		232,068		4.67	%
Total noninterest-earning assets		1,240,143							1,268,812

Total assets	$	11,993,428						$	11,313,993


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,224,924		5,121		0.32	%	$	3,075,966		5,658		0.37	%
Time deposits		448,176		1,998		0.90	%		509,581		2,306		0.91	%

Total interest-bearing deposits		3,673,100		7,119		0.39	%		3,585,547		7,964		0.45	%
FHLB advances, other borrowings, and customer repurchase agreements		488,460		1,073		0.44	%		638,463		3,511		1.10	%

Interest-bearing liabilities		4,161,560		8,192		0.40	%		4,224,010		11,475		0.55	%

Noninterest-bearing deposits		5,725,677							5,089,795
Other liabilities		119,659							100,290
Stockholders’ equity		1,986,532							1,899,898

Total liabilities and stockholders’ equity	$	11,993,428						$	11,313,993


Net interest income			$	206,875						$	220,593


Net interest spread - tax equivalent						3.64	%						4.12	%
Net interest margin						3.87	%						4.42	%
Net interest margin - tax equivalent						3.88	%						4.44	%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of ~~2019, compared to 41.58% for the second quarter of 2018.~~

~~The $16.3 million, or 47.51%, increase~~21% in noninterest expense for the second quarter of 2019 included a $7.8 million increase in salary and benefit expense principally due to additional compensation related expenses for the former CB employees who were retained. CDI amortization increased by $2.5 million as a result of core deposits assumed from CB. Occupancy and equipment expense increased by $1.3 million due to the banking centers acquired from CB. The second quarter of 2019 also included $2.6 million in merger related expenses mostly due to the consolidation of four banking centers. This compares to $494,000 in merger related expenses for the same period of 2018.

~~Six Months of 2019 Compared to the Six Months of 2018~~

Noninterest expense of $102.1 million for the first six months of 2019 was $31.9 million higher than the prior year period. Salaries and benefit costs increased by $14.8 million due to additional compensation related expenses for the newly hired and former CB employees who were retained. The year-over-year increase also included a $5.0 million increase in amortization of intangible assets due to core deposits assumed from CB and a $4.5 million increase in merger related expenses mostly due to the consolidation of 10 banking centers that occurred throughout the first six months of 2019. CB related expenses were the primary driver of a $2.7 million increase in occupancy and equipment expense and a $1.4 million increase in software licenses and maintenance. As a percentage of average assets, noninterest expense was 1.82%effect for the six months ended June 30, ~~2019, compared to 1.72%~~2020 and 2019. The non TE rates were 2.28% and 2.48% for ~~the same period of 2018. The increase is primarily the result of higher acquisition expense of $4.5 million and a $5.0 million increase in amortization of CDI. For~~ the six months ended June 30, 2020 and 2019, ~~the efficiency ratio was 40.04%, compared to 42.34%~~respectively.

(2)

Includes loan fees of $7.8 million and $1.6 million for the ~~same period~~six months ended June 30, 2020 and 2019, respectively. Prepayment penalty fees of ~~2018.~~$3.6 million and $2.3 million are included in interest income for the six months ended June 30, 2020 and 2019, respectively.

(3)

Includes interest-bearing demand and money market accounts.

Table of Contents

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


	Comparison of Three Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(80	)	$	(1,485	)	$	(12	)	$	(1,577	)
Tax-advantaged investment securities		(42	)		(43	)		(7	)		(92	)
Held-to-maturity securities:
Taxable investment securities		(339	)		(130	)		(16	)		(485	)
Tax-advantaged investment securities		(252	)		(25	)		(4	)		(281	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		5,871			(95	)		(5,593	)		183
Loans		6,851			(12,532	)		(810	)		(6,491	)

Total interest income		12,009			(14,394	)		(6,442	)		(8,827	)


Interest expense:
Savings deposits		364			(1,183	)		(144	)		(963	)
Time deposits		(96	)		(36	)		(3	)		(135	)
FHLB advances, other borrowings, and customer repurchase agreements		(234	)		(844	)		(163	)		(1,241	)

Total interest expense		34			(2,063	)		(310	)		(2,339	)

Net interest income	$	11,975		$	(12,331	)	$	(6,132	)	$	(6,488	)


	Comparision of Six Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(48	)	$	(2,018	)	$	5		$	(2,061	)
Tax-advantaged investment securities		(97	)		(126	)		19			(204	)
Held-to-maturity securities:
Taxable investment securities		(580	)		(130	)		13			(697	)
Tax-advantaged investment securities		(532	)		(78	)		14			(596	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		6,917			(170	)		(6,045	)		702
Loans		3,954			(17,656	)		(359	)		(14,061	)

Total interest income		9,614			(20,262	)		(6,353	)		(17,001	)


Interest expense:
Savings deposits		267			(767	)		(37	)		(537	)
Time deposits		(273	)		(40	)		5			(308	)
FHLB advances, other borrowings, and customer repurchase agreements		(825	)		(2,108	)		495			(2,438	)

Total interest expense		(831	)		(2,915	)		463			(3,283	)

Net interest income	$	10,445		$	(17,347	)	$	(6,816	)	$	(13,718	)

Table of Contents

Second Quarter of 2020 Compared to the Second Quarter of 2019

Net interest income, before provision for credit losses, of $104.6 million for the second quarter of 2020 decreased $6.5 million, or 5.84%, compared to $111.1 million for the second quarter of 2019. Interest-earning assets increased on average by $1.43 billion, or 14.39%, from $9.96 billion for the second quarter of 2019 to $11.39 billion for the second quarter of 2020. Our net interest margin (TE) was 3.70% for the second quarter of 2020, compared to 4.49% for the second quarter of 2019.

Interest income for the second quarter of 2020 was $108.0 million, which represented an $8.8 million, or 7.56%, decrease when compared to the same period of 2019. Average interest-earning assets increased by $1.43 billion and the average interest-earning asset yield of 3.82%, compared to 4.72% for the second quarter of 2019. The 90 basis point decrease in the interest-earning asset yield over the second quarter of 2019 was primarily due to a combination of a 63 basis point decrease in loan yields, a 31 basis point decrease in investment yields and a change in mix of earnings assets with average balances at the Federal Reserve growing to 9.21% of earning asset for the second quarter of 2020, compared to 0.12% for the second quarter of 2019. The increase in balances at the Federal Reserve resulted from $1.43 billion in average deposit growth during the second quarter.

Interest income and fees on loans for the second quarter of 2020 of $95.4 million decreased $6.5 million, or 6.37%, when compared to the second quarter of 2019. Average loans increased $488.6 million for the second quarter of 2020 when compared with the same period of 2019, primarily due to $669.6 million in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in the recognition of approximately $8.5 million in loan interest and fee income in the second quarter of 2020. Discount accretion on acquired loans decreased by $3.9 million compared to the second quarter of 2019. The Federal Reserve lowered short-term interest rates by 225 basis points when compared to the end of second quarter of 2019. The significant decline in interest rates over the past four quarters had a negative impact on loan yields, which after excluding discount accretion, nonaccrual interest income, and the impact from PPP loans, declined by 42 basis points from the second quarter of 2019.

Interest income from investment securities was $12.1 million for the second quarter of 2020, a $2.4 million, or 16.74%, decrease from $14.5 million for the second quarter of 2019. This decrease was primarily the result of a $118.5 million decline in average investment securities for the second quarter of 2020, compared to the same period of 2019. As a result of the decline in interest rates over the past four quarters, the non

tax-equivalent

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

Interest expense of $3.4 million for the second quarter of 2020, decreased $2.3 million, or 40.83%, compared to the second quarter of 2019. Total cost of funds declined to 0.13% for the second quarter of 2020 from 0.25% for the second quarter of 2019. On average, noninterest-bearing deposits were 61.74% of our total deposits for the second quarter of 2020, compared to 59.14% for the second quarter of 2019. In comparison to the second quarter of 2019, our overall cost of funds decreased by 12 basis points, as average noninterest-bearing deposits grew by $1.11 billion and overnight borrowings decreased by $129.6 million. Average interest-bearing deposits increased by $324.9 million compared to the second quarter of 2019, while the cost of interest-bearing deposits decreased by 16 basis points.

Six Months of 2020 Compared to the Six Months of 2019

Net interest income, before provision for credit losses, was $206.9 million for the six months ended June 30, 2020, a decrease of $13.7 million, or 6.22%, compared to $220.6 million for the same period of 2019. Interest-earning assets increased on average by $708.1 million, or 7.05%, from $10.05 billion for the six months ended June 30, 2019 to $10.75 billion for the current year. Our net interest margin (TE) was 3.88% during the first six months of 2020, compared to 4.44% for the same period of 2019.

Interest income for the six months ended June 30, 2020 was $215.1 million, which represented a $17.0 million, or 7.33%, decrease when compared to the same period of 2019. Compared to the first six months of 2019, average interest-earning assets increased by $708.1 million primarily due to PPP loans, and the yield on interest-earning assets decreased by 64 basis points. The 64 basis point decrease in the earning asset yield over the first six months of 2020, resulted from a 49 basis point decrease in loan yields from 5.34% for first six months of 2019 to 4.85% for the same period of 2020, and a 21 basis point decline in investment yields, as well as a change in the mix of earning assets resulting from a $634.8 million increase in average balances at the Federal Reserve. Average loans as a percentage of earning assets declined from 75.76% for the first six months of 2019 to 72.21% for the first six months of 2020. Conversely, average balances at the Federal Reserve grew as a percentage of earning assets from 0.11% in the prior year to 6.01% for the first six months of 2020.

Table of Contents

Interest income and fees on loans for the first six months of 2020 of $187.5 million decreased $14.1 million, or 6.98%, when compared to the same period of 2019. Average loans increased $154.7 million for the first six months of 2020 when compared with the same period of 2019, primarily due to $334.8 million in average PPP loans. The PPP loans we originated resulted in approximately $6.8 million in fee income and $1.7 million in loan interest during the second quarter of 2020. The first six months of 2020 reflected a $6.9 million decrease in discount accretion on acquired loans and nonaccrual interest income when compared to the same period of 2019. Loan yields decreased by 49 basis points from the prior six month period, primarily due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate. Excluding the impact of PPP loans, interest income related to purchase discount accretion and nonaccrual interest income, loan yields were 30 basis points lower than the second quarter of 2019.

Interest income from investment securities was $26.2 million for the six months ended June 30, 2020, a $3.6 million decrease from $29.7 million for the first six months of 2019. This decrease was the net result of a $99.0 million decrease in the average investment securities for the first six months of 2020 and a 20 basis point decline in the non

tax-equivalent

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

Interest expense of $8.2 million for the six months ended June 30, 2020, decreased by $3.3 million from the same period of 2019. The average rate paid on interest-bearing liabilities decreased by 15 basis points, to 0.40% for the first six months of 2020, from 0.55% for the same period of 2019. The rate on interest-bearing deposits for the first six months of 2020 decreased by six basis points from the same period in 2019. Average interest-bearing liabilities were $62.5 million lower for the first six months of 2020 when compared with the same period of 2019. Average interest-bearing deposits grew by $87.6 million. Average noninterest-bearing deposits represented 60.92% of our total deposits for the six months ended June 30, 2020, compared to 58.67% for the same period of 2019. Total cost of funds for the first six months of 2019 was 0.17%, compared with 0.25% for the same period of 2019.

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 $94.0 million at June 30, 2020, compared to $68.7 million at December 31, 2019 and $67.1 million as of June 30, 2019. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first six months of 2020 due to the severe economic disruption forecasted as a result of the

COVID-19

pandemic. During the six months ended June 30, 2020, we experienced minimal credit charge-offs of $253,000 and total recoveries of $236,000, resulting in net charge-offs of $17,000. This compares to a $3.5 million loan loss provision and net recoveries of $19,000 for the same period of 2019. We believe the allowance is appropriate at June 30, 2020. The ratio of the allowance for credit losses to total loans and leases outstanding, net of deferred fees and discount, as of June 30, 2020, was 1.12%, or 1.29% when PPP loans are excluded. This compares to 0.91% and 0.89%, as of December 31, 2019 and June 30, 2019, respectively. As of June 30, 2020, remaining discounts on acquired loans were $39.4 million. 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

pandemic. See “Allowance for Credit Losses” under

Analysis of Financial Condition

herein.

Table of Contents

Noninterest Income

The following table sets forth the various components of noninterest income for the periods presented.


	Three Months Ended June 30,				Variance				Six Months Ended June 30,				Variance
	2020		2019		$		%		2020		2019		$		%
							(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	3,809	$	5,065	$	(1,256)		-24.80%	$	8,585	$	10,206	$	(1,621)		-15.88%
Trust and investment services		2,477		2,452		25		1.02%		4,897		4,634		263		5.68%
Bankcard services		405		1,027		(622)		-60.56%		982		1,977		(995)		-50.33%
BOLI income		1,683		1,349		334		24.76%		3,742		2,685		1,057		39.37%
Gain on OREO, net		-		24		(24)		-100.00%		10		129		(119)		-92.25%
Gain on sale of building, net		-		-		-		-		-		4,545		(4,545)		-100.00%
Gain on eminent domain condemnation, net		-		5,685		(5,685)		-100.00%		-		5,685		(5,685)		-100.00%
Other		3,778		2,603		1,175		45.14%		5,576		4,647		929		19.99%

Total noninterest income	$	12,152	$	18,205	$	(6,053)		-33.25%	$	23,792	$	34,508	$	(10,716)		-31.05%

Second Quarter of 2020 Compared to the Second Quarter of 2019

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

Derivative Financial Instruments

of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The second quarter of 2020 included higher swap fee income of $1.8 million compared to the second quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $126.2 million for the second quarter of 2020, compared to $17.4 million for the second quarter of 2019.

Service charges on deposit accounts decreased by $1.3 million from the second quarter of 2019. This decrease was partially due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers. The Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $400,000 when compared to the second quarter of 2019.

non-insured

investment products. At June 30, 2020, CitizensTrust had approximately $2.83 billion in assets under management and administration, including $2.02 billion in assets under management. CitizensTrust generated fees of $2.5 million for both the second quarter of 2020 and the second quarter of 2019.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $450,000 were included in our BOLI policies for the second quarter of 2020.

Table of Contents

Six Months of 2020 Compared to the Six Months of 2019

The $10.7 million decrease in noninterest income for the six months ended June 30, 2020, was primarily due to a $5.7 million net gain from the legal settlement of an eminent condemnation of one of our business financial center buildings in Bakersfield and a $4.5 million net gain on the sale of one of our bank owned buildings in the first six months of 2019. Service charges on deposit accounts decreased by $1.6 million from the first six months of 2019. This decrease was partially due to the increase in noninterest-bearing deposits held at the Bank by our customers, which earn credits toward the fees associated with the products and services utilized by our business customers. In addition, the Durbin Amendment’s cap on interchange fees reduced our debit card interchange fee income for bankcard services by approximately $700,000 when compared to 2019. The $1.1 million increase in BOLI income included $1.2 million of death benefits included in our BOLI policies for the first six months of 2020. The $929,000 increase in other income included $1.8 million in higher swap fee income, partially offset by decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to the prior six month period.

Income Taxes

Our significant accounting policies are described in greater detail in our 2019 Annual Report on Form

10-K

in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 —

Summary of Significant Accounting Policies

, included in our Annual Report on Form

10-K

for the year ended December 31, 2019, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adoption of Allowance for Credit Losses

We adopted ASU

2016-13,

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 June 30, 2020


Standard	Description	Adoption Timing	Impact on Financial Statements
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020	The FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary, optional guidance to ease the potential burden in accounting for transitioning away from reference rates such as LIBOR. The amendments provide optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include relief related to contract modifications and hedging relationships, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022.	1st Quarter 2020 through the 4th Quarter 2022	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 ~~effective~~consolidated financial statements.

ASU 2020-01 “Investments - Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)	The FASB issued ASU 2020-01 “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This ASU clarifies the interactions between ASC 321, ASC 323 and ASC 815 and addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement.	1st Quarter 2021	The adoption of this ASU will not have an impact on our consolidated financial statements.
Issued January 2020

Table of Contents

OVERVIEW

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

COVID-19

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

held-to-maturity

(“HTM”) totaled $613.2 million. At June 30, 2020, investment securities

available-for-sale

(“AFS”) totaled $1.68 billion, inclusive of a net

pre-tax

COVID-19

Table of Contents

10b5-1

available-for-sale

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

Analysis of Financial Condition – Capital Resources

Table of Contents

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance


	Three Months Ended				Variance
	June 30, 2020		March 31, 2020		$		%
	(Dollars in thousands, except per share amounts)

Net interest income	$	104,569	$	102,306	$	2,263		2.21%
Provision for credit losses		(11,500)		(12,000)		500		4.17%
Noninterest income		12,152		11,640		512		4.40%
Noninterest expense		(46,398)		(48,641)		2,243		4.61%
Income taxes		(17,192)		(15,325)		(1,867)		-12.18%

Net earnings	$	41,631	$	37,980	$	3,651		9.61%

Earnings per common share:
Basic	$	0.31	$	0.27	$	0.04
Diluted	$	0.31	$	0.27	$	0.04
Return on average assets		1.33%		1.34%		-0.01%
Return on average shareholders’ equity		8.51%		7.61%		0.90%
Efficiency ratio		39.75%		42.69%		-2.94%
Noninterest expense to average assets		1.48%		1.72%		-0.24%


	Three Months Ended June 30,						Variance				Six Months Ended June 30,						Variance
	2020			2019			$		%		2020			2019			$		%
							(Dollars in thousands, except per share amounts)

Net interest income	$	104,569		$	111,057		$	(6,488)		-5.84%	$	206,875		$	220,593		$	(13,718)		-6.22%
Provision for credit losses		(11,500	)		(2,000	)		(9,500)		-475.00%		(23,500	)		(3,500	)		(20,000)		-571.43%
Noninterest income		12,152			18,205			(6,053)		-33.25%		23,792			34,508			(10,716)		-31.05%
Noninterest expense		(46,398	)		(50,528	)		4,130		8.17%		(95,039	)		(102,132	)		7,093		6.94%
Income taxes		(17,192	)		(22,253	)		5,061		22.74%		(32,517	)		(43,346	)		10,829		24.98%

Net earnings	$	41,631		$	54,481		$	(12,850)		-23.59%	$	79,611		$	106,123		$	(26,512)		-24.98%

Earnings per common share:
Basic	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Diluted	$	0.31		$	0.39		$	(0.08)			$	0.58		$	0.76		$	(0.18)
Return on average assets		1.33%			1.95%			-0.62%��				1.33%			1.89%			-0.56%
Return on average shareholders’ equity		8.51%			11.38%			-2.87%				8.06%			11.26%			-3.20%
Efficiency ratio		39.75%			39.09%			0.66%				41.20%			40.04%			1.16%
Noninterest expense to average assets		1.48%			1.81%			-0.33%				1.59%			1.82%			-0.23%

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


	Three Months Ended						Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
			(Dollars in thousands)
Net Income	$	41,631	$	37,980	$	54,481	$	79,611	$	106,123
Add: Amortization of intangible assets		2,445		2,445		2,833		4,890		5,690
Less: Tax effect of amortization of intangible assets (1)		(723)		(723)		(838)		(1,446)		(1,682)

Tangible net income	$	43,353	$	39,702	$	56,476	$	83,055	$	110,131


Average stockholders’ equity	$	1,966,600	$	2,006,464	$	1,919,888	$	1,986,532	$	1,899,898
Less: Average goodwill		(663,707)		(663,707)		(666,196)		(663,707)		(666,366)
Less: Average intangible assets		(39,287)		(41,732)		(49,615)		(40,510)		(51,188)

Average tangible common equity	$	1,263,606	$	1,301,025	$	1,204,077	$	1,282,315	$	1,182,344


Return on average equity, annualized		8.51%		7.61%		11.38%		8.06%		11.26%
Return on average tangible common equity, annualized		13.80%		12.27%		18.81%		13.03%		18.78%

(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 and six months ended June 30, 2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. 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.

Table of Contents


	Three Months Ended June 30,
	2020						2019
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,580,483	$	8,244		2.09%	$	1,590,959	$	9,821		2.47%
Tax-advantaged		36,424		205		3.27%		43,719		297		3.75%
Held-to-maturity securities:
Taxable		448,667		2,447		2.18%		511,938		2,932		2.29%
Tax-advantaged		177,890		1,213		3.30%		215,366		1,494		3.35%
Investment in FHLB stock		17,688		214		4.87%		17,688		298		6.76%
Interest-earning deposits with other institutions		1,080,433		283		0.11%		18,022		100		2.23%
Loans (2)		8,047,054		95,352		4.77%		7,558,483		101,843		5.40%

Total interest-earning assets		11,388,639		107,958		3.82%		9,956,175		116,785		4.72%
Total noninterest-earning assets		1,222,416						1,264,592

Total assets	$	12,611,055					$	11,220,767


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,393,105		2,010		0.24%	$	3,024,664		2,973		0.39%
Time deposits		450,920		985		0.88%		494,507		1,120		0.91%

Total interest-bearing deposits		3,844,025		2,995		0.31%		3,519,171		4,093		0.47%
FHLB advances, other borrowings, and customer repurchase agreements		472,335		394		0.33%		585,550		1,635		1.11%

Interest-bearing liabilities		4,316,360		3,389		0.32%		4,104,721		5,728		0.56%

Noninterest-bearing deposits		6,204,329						5,093,781
Other liabilities		123,766						102,377
Stockholders’ equity		1,966,600						1,919,888

Total liabilities and stockholders’ equity	$	12,611,055					$	11,220,767


Net interest income			$	104,569					$	111,057


Net interest spread - tax equivalent						3.50%						4.16%
Net interest margin						3.69%						4.47%
Net interest margin - tax equivalent						3.70%						4.49%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended June 30, ~~2019 was 29.00%, compared to 28.00%~~2020 and 2019. The non TE rates were 2.16% and 2.46% for the ~~same periods of 2018. The increase was due to higher income growth from~~three months ended June 30, 2020 and 2019, respectively.

~~non-tax~~

~~advantaged revenue sources. Our estimated annual effective tax rate also varies depending upon the level of~~

~~tax-advantaged~~

~~income as well as available tax credits.~~

~~The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of~~

~~tax-advantaged~~

~~income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.~~

(2)

~~Table~~Includes loan fees of ~~Contents~~

~~ANALYSIS OF FINANCIAL CONDITION~~

~~The Company reported total assets of $11.17 billion at~~$7.3 million and $727,000 for the three months ended June 30, ~~2019. This represented a decrease~~2020 and 2019, respectively. Prepayment penalty fees of ~~$357.6~~$2.1 million ~~or 3.10%, from total assets of $11.53 billion at December 31, 2018. Interest-earning assets of $9.89 billion at~~and $1.3 million are included in interest income for the three months ended June 30, 2020 and 2019, ~~decreased $395.0 million, or 3.84%, when compared with $10.29 billion at December 31, 2018. The decrease~~respectively.

(3)

Includes interest-bearing demand and money market accounts.

Table of Contents


	Six Months Ended June 30,
	2020							2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
Taxable	$	1,619,929	$	18,069		2.23	%	$	1,622,465	$	20,130		2.48	%
Tax-advantaged		37,256		429		3.32	%		44,048		633		3.91	%
Held-to-maturity securities:
Taxable		459,039		5,145		2.24	%		510,781		5,842		2.29	%
Tax-advantaged		183,706		2,513		3.31	%		221,602		3,109		3.39	%
Investment in FHLB stock		17,688		546		6.21	%		17,688		630		7.18	%
Interest-earning deposits with other institutions		670,737		896		0.27	%		18,356		194		2.13	%
Loans (2)		7,764,930		187,469		4.85	%		7,610,241		201,530		5.34	%

Total interest-earning assets		10,753,285		215,067		4.03	%		10,045,181		232,068		4.67	%
Total noninterest-earning assets		1,240,143							1,268,812

Total assets	$	11,993,428						$	11,313,993


INTEREST-BEARING LIABILITIES

Savings deposits (3)	$	3,224,924		5,121		0.32	%	$	3,075,966		5,658		0.37	%
Time deposits		448,176		1,998		0.90	%		509,581		2,306		0.91	%

Total interest-bearing deposits		3,673,100		7,119		0.39	%		3,585,547		7,964		0.45	%
FHLB advances, other borrowings, and customer repurchase agreements		488,460		1,073		0.44	%		638,463		3,511		1.10	%

Interest-bearing liabilities		4,161,560		8,192		0.40	%		4,224,010		11,475		0.55	%

Noninterest-bearing deposits		5,725,677							5,089,795
Other liabilities		119,659							100,290
Stockholders’ equity		1,986,532							1,899,898

Total liabilities and stockholders’ equity	$	11,993,428						$	11,313,993


Net interest income			$	206,875						$	220,593


Net interest spread - tax equivalent						3.64	%						4.12	%
Net interest margin						3.87	%						4.42	%
Net interest margin - tax equivalent						3.88	%						4.44	%

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in interest-earning assets was primarily due to a $228.9 million decrease in total loans and a $150.4 million decrease in investment securities. The decrease in total loans included a $94.8 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans declined by $134.1 million, or 1.81%, primarily due to increased payoffs, particularly from the former Community Bank loan portfolio. Total liabilities were $9.23 billion at June 30, 2019, a decrease of $443.1 million, or 4.58%, from total liabilities of $9.68 billion at December 31, 2018. Total deposits declined by $164.7 million, or 1.87%. Total equity increased $85.5 million, or 4.62%, to $1.94 billion at June 30, 2019, compared to total equity of $1.85 billion at December 31, 2018. The $85.5 million increase in equity was due to $106.1 million in net earnings, a $26.6 million increase in other comprehensive income, net of tax, resulting from the net increase in market value of our investment securities portfolio, and $3.2 millioneffect for ~~various stock based compensation items. This was offset by $50.4 million in cash dividends declared during the first six months of 2019.~~

~~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 June 30, 2019, we reported total investment securities of $2.33 billion. This represented a decrease of $150.4 million, or 6.07%, from total investment securities of $2.48 billion at December 31, 2018. The decrease in investment securities was primarily due to minimal reinvestment of principal payments received from the portfolio during the first six months of 2019. At June 30, 2019, investment securities HTM totaled $728.1 million. At June 30, 2019, our AFS investment securities totaled $1.60 billion, inclusive of a

~~pre-tax~~

~~unrealized gain of $15.3 million. The~~

~~after-tax~~

~~unrealized gain reported in AOCI on AFS investment securities was $10.8 million.~~

~~As of June 30, 2019, the Company had a~~

~~pre-tax~~

~~net unrealized holding gain on AFS investment securities of $15.3 million, compared to a~~

~~pre-tax~~

~~net unrealized holding loss of $23.6 million at December 31, 2018. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For~~ the six months ended June 30, ~~2019~~2020 and ~~2018, repayments/maturities of investment securities totaled $220.5 million~~2019. The non TE rates were 2.28% and ~~$261.5 million, respectively. The Company purchased additional investment securities totaling $37.1 million and $98.7 million~~2.48% for the ~~first~~ six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~No investment securities were sold during the first six months of 2019 and 2018.~~

~~The tables below set forth investment securities AFS and HTM for the periods presented.~~

(2)

~~Table~~Includes loan fees of ~~Contents~~

December 31, 2018

  Amortized
Cost

Gross
  Unrealized
Holding
Gain

Gross
  Unrealized
Holding
Loss

  Fair Value

Total Percent

(Dollars in thousands)

Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
1,494,106
  $
1,348
  $
(20,946)
  $
1,474,508

85.03%

CMO/REMIC - residential

217,223

353

(3,525)

214,051

12.34%

Municipal bonds

45,621

332

(1,143)

44,810

2.59%

Other securities

716

-

-

716

0.04%

Total
available-for-sale
securities
  $
1,757,666
  $
2,033
  $
(25,614)
  $
1,734,085

100.00%

Investment securities
held-to-maturity:

Government agency/GSE
  $
138,274
  $
572
  $
(2,622)
  $
136,224

18.57%

Residential mortgage-backed securities

153,874

-

(3,140)

150,734

20.67%

CMO

215,336

-

(12,081)

203,255

28.93%

Municipal bonds

236,956

556

(6,188)

231,324

31.83%

Total
held-to-maturity
securities
  $
744,440
  $
1,128
  $
(24,031)
  $
721,537

100.00%

~~The weighted-average yield (TE) on~~$7.8 million and $1.6 million for the ~~total investment portfolio at~~six months ended June 30, 2020 and 2019, ~~was 2.55% with a weighted-average life~~respectively. Prepayment penalty fees of ~~3.8 years. This compares to a weighted-average yield of 2.55% at December 31, 2018 with a weighted-average life of 4.3 years. The weighted average life is~~$3.6 million and $2.3 million are included in interest income for the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal

~~pay-downs.~~

~~Approximately 89% of the securities in the total investment portfolio, at~~six months ended June 30, 2020 and 2019, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of June 30, 2019, approximately $83.6 million in U.S. government agency bonds are callable. The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 11% of the total investment portfolio, are predominately AA or higher rated securities.respectively.

~~Table of Contents~~

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018. 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 rates have fluctuated. However, we have the ability to hold and do not have the intent to sell these securities. As such, management does not deem these securities to be other-than-temporarily-impaired (“OTTI”). A summary of our analysis of these securities and the unrealized losses is described more fully in Note 5 —

~~Investment Securities~~

~~of the notes to the unaudited condensed consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.~~

June 30, 2019

Less Than 12 Months

12 Months or Longer

Total

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

  Fair Value

Gross
  Unrealized
Holding
Losses

(Dollars in thousands)

Investment securities
available-for-sale:

Residential mortgage-backed securities
  $
-
  $
-
  $
228,518
  $
(2,417)
  $
228,518
  $
(2,417)

CMO/REMIC - residential

-

-

71,924

(334)

71,924

(334)

Municipal bonds

-

-

3,287

(41)

3,287

(41)

Total
available-for-sale
securities
  $
-
  $
-
$
303,729
  $
(2,792)
  $
303,729
  $
(2,792)

Investment securities
held-to-maturity:

Government agency/GSE
  $
-
  $
-
  $
39,016
  $
(414)
  $
39,016
  $
(414)

Residential mortgage-backed securities

10,722

(45)

75,536

(370)

86,258

(415)

CMO

-

-

201,974

(4,358)

201,974

(4,358)

Municipal bonds

-

-

49,102

(1,251)

49,102

(1,251)

Total
held-to-maturity
securities
  $
10,722
  $
(45)
$
365,628
  $
(6,393)
  $
376,350
  $
(6,438)

December 31, 2018

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:

Residential mortgage-backed securities
  $
692,311
  $
(4,864)
  $
593,367
  $
(16,082)
  $
1,285,678
  $
(20,946)

CMO/REMIC - residential

36,582

(365)

135,062

(3,160)

171,644

(3,525)

Municipal bonds

9,568

(188)

14,181

(955)

23,749

(1,143)

Total
available-for-sale
securities
  $
738,461
  $
(5,417)
  $
742,610
  $
(20,197)
  $
1,481,071
  $
(25,614)

Investment securities
held-to-maturity:

Government agency/GSE
  $
7,479
  $
(15)
  $
54,944
  $
(2,607)
  $
62,423
  $
(2,622)

Residential mortgage-backed securities

59,871

(484)

90,863

(2,656)

150,734

(3,140)

CMO

-

-

203,254

(12,081)

203,254

(12,081)

Municipal bonds

70,989

(778)

77,723

(5,410)

148,712

(6,188)

Total
held-to-maturity
securities
  $
138,339
  $
(1,277)
  $
426,784
  $
(22,754)
  $
565,123
  $
(24,031)

(3)

Includes interest-bearing demand and money market accounts.

~~Table of Contents~~

~~Loans~~

~~(“Non-PCI~~

~~loans”). The PCI loans are more fully discussed in Note 3 –~~

~~Summary of Significant Accounting Policies~~

~~, included in our Annual Report on Form~~

~~10-K~~

for the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, the remaining discount associated with the PCI loans was zero and our total gross PCI loan portfolio represented less than 0.2% of total gross loans and leases at June 30, 2019 and December 31, 2018. As of June 30, 2019, PCI loans were accounted for and combined with

~~Non-PCI~~

~~loans and were reflected in total loans and lease finance receivables.~~

Total loans and leases, net of deferred fees and discounts, of $7.54 billion at June 30, 2019 decreased by $228.9 million, or 2.95%, from December 31, 2018. The decrease in total loans included a $94.8 million decline in dairy & livestock loans primarily due to seasonal pay downs, which historically occur in the first quarter of each calendar year. The decrease in total loans included declines of $84.8 million in commercial and industrial loans, $23.7 million in SBA loans, and $18.4 million in SFR mortgage loans.

~~The following table presents our loan portfolio by type~~

Table of Contents

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


	Comparison of Three Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(80	)	$	(1,485	)	$	(12	)	$	(1,577	)
Tax-advantaged investment securities		(42	)		(43	)		(7	)		(92	)
Held-to-maturity securities:
Taxable investment securities		(339	)		(130	)		(16	)		(485	)
Tax-advantaged investment securities		(252	)		(25	)		(4	)		(281	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		5,871			(95	)		(5,593	)		183
Loans		6,851			(12,532	)		(810	)		(6,491	)

Total interest income		12,009			(14,394	)		(6,442	)		(8,827	)


Interest expense:
Savings deposits		364			(1,183	)		(144	)		(963	)
Time deposits		(96	)		(36	)		(3	)		(135	)
FHLB advances, other borrowings, and customer repurchase agreements		(234	)		(844	)		(163	)		(1,241	)

Total interest expense		34			(2,063	)		(310	)		(2,339	)

Net interest income	$	11,975		$	(12,331	)	$	(6,132	)	$	(6,488	)


	Comparision of Six Months Ended June 30, 2020 Compared to 2019 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total
				(Dollars in thousands)
Interest income:
Available-for-sale securities:
Taxable investment securities	$	(48	)	$	(2,018	)	$	5		$	(2,061	)
Tax-advantaged investment securities		(97	)		(126	)		19			(204	)
Held-to-maturity securities:
Taxable investment securities		(580	)		(130	)		13			(697	)
Tax-advantaged investment securities		(532	)		(78	)		14			(596	)
Investment in FHLB stock		-			(84	)		-			(84	)
Interest-earning deposits with other institutions		6,917			(170	)		(6,045	)		702
Loans		3,954			(17,656	)		(359	)		(14,061	)

Total interest income		9,614			(20,262	)		(6,353	)		(17,001	)


Interest expense:
Savings deposits		267			(767	)		(37	)		(537	)
Time deposits		(273	)		(40	)		5			(308	)
FHLB advances, other borrowings, and customer repurchase agreements		(825	)		(2,108	)		495			(2,438	)

Total interest expense		(831	)		(2,915	)		463			(3,283	)

Net interest income	$	10,445		$	(17,347	)	$	(6,816	)	$	(13,718	)

Table of Contents

Second Quarter of 2020 Compared to the Second Quarter of 2019

tax-equivalent

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

Six Months of 2020 Compared to the Six Months of 2019

Table of Contents

tax-equivalent

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

Provision for Credit Losses

2016-13,

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

COVID-19

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

pandemic. See “Allowance for Credit Losses” under

Analysis of Financial Condition

herein.

Table of Contents

Noninterest Income

The following table sets forth the various components of noninterest income for the periods presented.


	Three Months Ended June 30,				Variance				Six Months Ended June 30,				Variance
	2020		2019		$		%		2020		2019		$		%
							(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	3,809	$	5,065	$	(1,256)		-24.80%	$	8,585	$	10,206	$	(1,621)		-15.88%
Trust and investment services		2,477		2,452		25		1.02%		4,897		4,634		263		5.68%
Bankcard services		405		1,027		(622)		-60.56%		982		1,977		(995)		-50.33%
BOLI income		1,683		1,349		334		24.76%		3,742		2,685		1,057		39.37%
Gain on OREO, net		-		24		(24)		-100.00%		10		129		(119)		-92.25%
Gain on sale of building, net		-		-		-		-		-		4,545		(4,545)		-100.00%
Gain on eminent domain condemnation, net		-		5,685		(5,685)		-100.00%		-		5,685		(5,685)		-100.00%
Other		3,778		2,603		1,175		45.14%		5,576		4,647		929		19.99%

Total noninterest income	$	12,152	$	18,205	$	(6,053)		-33.25%	$	23,792	$	34,508	$	(10,716)		-31.05%

Second Quarter of 2020 Compared to the Second Quarter of 2019

Derivative Financial Instruments

of the notes to the unaudited condensed consolidated financial statements of this report for additional information). The second quarter of 2020 included higher swap fee income of $1.8 million compared to the second quarter of 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $126.2 million for the second quarter of 2020, compared to $17.4 million for the second quarter of 2019.

non-insured

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Death benefits of $450,000 were included in our BOLI policies for the second quarter of 2020.

Table of Contents

Six Months of 2020 Compared to the Six Months of 2019

Noninterest Expense

The following table summarizes the various components of noninterest expense for the periods presented.


	Three Months Ended June 30,				Variance				Six Months Ended June 30,				Variance
	2020		2019		$		%		2020		2019		$		%
							(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	28,706	$	28,862	$	(156)		-0.54%	$	59,583	$	58,164	$	1,419		2.44%
Occupancy		4,078		4,388		(310)		-7.06%		7,881		8,795		(914)		-10.39%
Equipment		953		1,039		(86)		-8.28%		1,987		2,056		(69)		-3.36%
Professional services		2,368		2,040		328		16.08%		4,624		3,965		659		16.62%
Computer software expense		2,754		2,756		(2)		-0.07%		5,570		5,369		201		3.74%
Marketing and promotion		1,255		1,238		17		1.37%		2,810		2,632		178		6.76%
Amortization of intangible assets		2,445		2,833		(388)		-13.70%		4,890		5,690		(800)		-14.06%
Telecommunications expense		650		712		(62)		-8.71%		1,286		1,470		(184)		-12.52%
Regulatory assessments		167		734		(567)		-77.25%		315		1,658		(1,343)		-81.00%
Insurance		386		469		(83)		-17.70%		792		938		(146)		-15.57%
Loan expense		369		491		(122)		-24.85%		626		807		(181)		-22.43%
Directors’ expenses		358		356		2		0.56%		709		679		30		4.42%
Stationery and supplies		382		316		66		20.89%		667		608		59		9.70%
Acquisition related expenses		-		2,612		(2,612)		-100.00%		-		5,761		(5,761)		-100.00%
Other		1,527		1,682		(155)		-9.22%		3,299		3,540		(241)		-6.81%

Total noninterest expense	$	46,398	$	50,528	$	(4,130)		-8.17%	$	95,039	$	102,132	$	(7,093)		-6.94%


Noninterest expense to average assets		1.48%		1.81%						1.59%		1.82%

Efficiency ratio (1)		39.75%		39.09%						41.20%		40.04%

(1)

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

Second Quarter of 2020 Compared to the Second Quarter of 2019

Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.48% for the second quarter of 2020, compared to 1.81% for the second quarter of 2019. This decline mostly reflects the $1.39 billion growth in average assets that resulted primarily from $1.43 billion in average deposit growth.

Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 39.75% for the second quarter of 2020, compared to 39.09% for the second quarter of 2019.

Table of Contents

Noninterest expense of $46.4 million for the second quarter of 2020 was $4.1 million, or 8.17%, lower than the second quarter of 2019. There were no merger related expenses related to the Community Bank (“CB”) acquisition for the second quarter of 2020, compared to $2.6 million for the second quarter of 2019 primarily due to the consolidation of four banking centers. Approximately $900,000, or a 4% increase in salary expense from the prior year was offset by an increase in net deferred loan costs of $1.2 million during the current quarter that were primarily related to the origination of PPP loans. The year-over-year decrease also included a $567,000 decrease in regulatory assessments, a $396,000 decrease in occupancy and equipment expense primarily due to the consolidation of banking centers, and a $388,000 decrease in Core Deposit Intangible (“CDI”) amortization. These decreases were partially offset by a $328,000 increase in professional services.

Six Months of 2020 Compared to the Six Months of 2019

Noninterest expense of $95.0 million for the first six months of 2020 was $7.1 million lower than the prior year period. The decrease was primarily due to $5.8 million in merger related expenses for the six months ended June 30, 2019, compared to no merger related expense for the same period of 2020. The year-over-year decrease also included a $1.3 million decrease in regulatory assessments, a $983,000 decrease in occupancy and equipment expense and an $800,000 decrease in amortization of CDI. These decreases were partially offset by a $1.4 million increase in salaries and benefit costs, a $659,000 increase in professional services and a $201,000 increase in computer software expense. Salary and benefit expense would have increased by $2.8 million, or approximately 5%, when a $1.3 million increase in net deferred loan costs is excluded. As a percentage of average assets, noninterest expense was 1.59% for the six months ended June 30, 2020, compared to 1.82% for the same period of 2019. For the six months ended 2020, the efficiency ratio was 41.20%, compared to 40.04% for the same period of 2019.

Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2020 was 29.23% and 29.00%, respectively, compared to 29.00% for the same periods of 2019. Our estimated annual effective tax rate also varies depending upon the level of

tax-advantaged

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.

Table of Contents

ANALYSIS OF FINANCIAL CONDITION

Total assets of $13.75 billion at June 30, 2020 increased $2.47 billion, or 21.88%, from total assets of $11.28 billion at December 31, 2019. Interest-earning assets totaled $12.52 billion at June 30, 2020, an increase of $2.49 billion, or 24.83%, when compared with $10.03 billion at December 31, 2019. The increase in interest-earning assets was primarily due to a $1.74 billion increase in interest-earning balances due from the Federal Reserve and an $838.0 million increase in total loans, partially offset by a $125.5 million decrease in investment securities. The increase in total loans was due to the origination of approximately 4,100 PPP loans, totaling $1.10 billion at June 30, 2020. Excluding PPP loans, total loans declined by $259.2 million from December 31, 2019.

Total liabilities were $11.79 billion at June 30, 2020, an increase of $2.50 billion, or 29.96%, from total liabilities of $9.29 billion at December 31, 2019. Total deposits grew by $2.28 billion, or 26.18%. This significant deposit growth in the second quarter of 2020 was primarily due to proceeds from PPP loans and our customers maintaining greater liquidity. Total equity decreased $35.0 million, or 1.76%, to $1.96 billion at June 30, 2020, compared to total equity of $1.99 billion at December 31, 2019. The $35.0 million decrease in equity was primarily due to the repurchase of 4.9 million shares of common stock for $91.7 million under our

10b5-1

stock repurchase program. We previously announced that we suspended this

10b5-1

stock repurchase program due to the uncertainty of the

COVID-19

pandemic. We had $79.6 million in net earnings during the first six months of 2020, offset by $48.8 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $24.9 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our

available-for-sale

investment securities.

Investment Securities

The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At June 30, 2020, we reported total investment securities of $2.29 billion. This represented a decrease of $125.5 million, or 5.20%, from total investment securities of $2.41 billion at December 31, 2019. The decrease in investment securities was due to cash outflow from the portfolio exceeding new securities purchased in the first six months of 2020, partially offset by an increase in the fair value of AFS investment securities as a result of declining interest rates. At June 30, 2020, investment securities HTM totaled $613.2 million. At June 30, 2020, our AFS investment securities totaled $1.68 billion, inclusive of a

pre-tax

net unrealized gain of $57.3 million. The

after-tax

unrealized gain reported in AOCI on AFS investment securities was $40.3 million. The changes in the net unrealized holding gain resulted primarily from fluctuations in market interest rates. For the six months ended June 30, 2020 and 2019, repayments/maturities of investment securities totaled $318.5 million and $220.5 million, respectively. The Company purchased additional investment securities totaling $163.6 million and $37.1 million for the six months ended June 30, 2020 and 2019, respectively. There were no investment securities sold during the first six months of 2020 and 2019. The average duration of our investment securities portfolio was approximately 2.8 years at June 30, 2020.

Table of Contents

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


	June 30, 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	$	1,191,431	$	46,868	$	-	$	1,238,299		73.88	%
CMO/REMIC		391,586		8,962		(12)		400,536		23.90	%
Municipal bonds		35,015		1,438		-		36,453		2.17	%
Other securities		779		-		-		779		0.05	%

Total available-for-sale securities	$	1,618,811	$	57,268	$	(12)	$	1,676,067		100.00	%

Investment securities held-to-maturity:
Government agency/GSE	$	106,981	$	6,285	$	-	$	113,266		17.45	%
Mortgage-backed securities		164,174		8,135		-		172,309		26.77	%
CMO/REMIC		171,821		5,283		-		177,104		28.02	%
Municipal bonds		170,193		6,418		(340)		176,271		27.76	%

Total held-to-maturity securities	$	613,169	$	26,121	$	(340)	$	638,950		100.00	%


	December 31, 2019
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss		Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Mortgage-backed securities	$	1,185,757	$	21,306	$	(750)	$	1,206,313		69.32%
CMO/REMIC		493,214		1,392		(896)		493,710		28.37%
Municipal bonds		38,506		850		(2)		39,354		2.26%
Other securities		880		-		-		880		0.05%

Total available-for-sale securities	$	1,718,357	$	23,548	$	(1,648)	$	1,740,257		100.00%

Investment securities held-to-maturity:
Government agency/GSE	$	117,366	$	2,280	$	(657)	$	118,989		17.40%
Mortgage-backed securities		168,479		2,083		(54)		170,508		24.98%
CMO/REMIC		192,548		-		(2,458)		190,090		28.55%
Municipal bonds		196,059		3,867		(565)		199,361		29.07%

Total held-to-maturity securities	$	674,452	$	8,230	$	(3,734)	$	678,948		100.00%

As of June 30, 2020, approximately $69.3 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 9% 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

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 June 30, 2020.


	June 30, 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	$	-	$	-		$	-	$	-	$	-	$	-
CMO/REMIC		2,754		(12	)		-		-		2,754		(12	)
Municipal bonds		-		-			-		-		-		-

Total available-for-sale securities	$	2,754	$	(12	)	$	-	$	-	$	2,754	$	(12	)

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, 2019
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses			Fair Value		Gross Unrealized Holding Losses
						(Dollars in thousands)
Investment securities available-for-sale:
Mortgage-backed securities	$	20,289	$	(6	)	$	97,964	$	(744	)	$	118,253	$	(750	)
CMO/REMIC		177,517		(705	)		34,565		(191	)		212,082		(896	)
Municipal bonds		-		-			563		(2	)		563		(2	)

Total available-for-sale securities	$	197,806	$	(711	)	$	133,092	$	(937	)	$	330,898	$	(1,648	)

Investment securities held-to-maturity:
Government agency/GSE	$	28,359	$	(252	)	$	19,405	$	(405	)	$	47,764	$	(657	)
Mortgage-backed securities		10,411		(54	)		-		-			10,411		(54	)
CMO/REMIC		23,897		(104	)		166,193		(2,354	)		190,090		(2,458	)
Municipal bonds		7,583		(32	)		29,981		(533	)		37,564		(565	)

Total held-to-maturity securities	$	70,250	$	(442	)	$	215,579	$	(3,292	)	$	285,829	$	(3,734	)

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.

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Loans

Total loans and leases, net of deferred fees and discounts, of $8.40 billion at June 30, 2020 increased by $838.0 million, or 11.08%, from $7.56 billion at December 31, 2019. The increase in total loans included $1.10 billion in PPP loans and a $131.9 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 $127.3 million, or 1.77%. The $127.3 million decrease in loans included decreases of $94.4 million in commercial and industrial loans, $31.0 million in consumer and other loans, $9.5 million in commercial real estate loans, and collectively $4.4 million in other loan segments. Partially offsetting these declines were increases in construction loans and SFR mortgage loans of $8.9 million and $3.1 million, respectively.

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

Distribution of Loan Portfolio by Type

June 30, 2019

  December 31, 2018

    Total Loans
and Leases

Non-PCI
Loans
and Leases

PCI Loans

Total Loans
and Leases

(Dollars in thousands)

Commercial and industrial
  $
917,953
  $
1,002,209
  $
519
  $
1,002,728

SBA

327,606

350,043

1,258

351,301

Real estate:

Commercial real estate

5,417,351

5,394,229

14,407

5,408,636

Construction

116,457

122,782

-

122,782

SFR mortgage

278,285

296,504

145

296,649

Dairy & livestock and agribusiness

301,752

393,843

700

394,543

Municipal lease finance receivables

59,985

64,186

-

64,186

Consumer and other loans

120,779

128,429

185

128,614

Gross loans

7,540,168

7,752,225

17,214

7,769,439

Less: Deferred loan fees, net

(4,478
)
(4,828
)
-

(4,828
)

Gross loans, net of deferred loan fees

7,535,690

7,747,397

17,214

7,764,611

Less: Allowance for loan losses

(67,132
)
(63,409
)
(204
)
(63,613
)

Total loans and lease finance receivables
  $
7,468,558
  $
7,683,988
  $
17,010
  $
7,700,998


	June 30, 2020			December 31, 2019
	(Dollars in thousands)

Commercial and industrial	$	840,738		$	935,127
SBA		300,156			305,008
SBA - Paycheck Protection Program (PPP)		1,097,150			-
Real estate:
Commercial real estate		5,365,120			5,374,617
Construction		125,815			116,925
SFR mortgage		286,526			283,468
Dairy & livestock and agribusiness		251,821			383,709
Municipal lease finance receivables		49,876			53,146
Consumer and other loans		85,332			116,319

Total loans		8,402,534			7,568,319
Less: Deferred loan fees, net (1)		-			(3,742	)

Total loans, net of deferred loan fees		8,402,534			7,564,577
Less: Allowance for credit losses		(93,983	)		(68,660	)

Total loans and lease finance receivables, net	$	8,308,551		$	7,495,917

(1)

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

As of June 30, ~~2019, $225.6~~2020, 68.76% of the Company’s total loan portfolio consisted of real estate loans, with commercial real estate loans representing 63.85% of total loans. As of June 30, 2020, $248.6 million, or ~~4.16%~~4.63% of the total commercial real estate loans included loans secured by farmland, compared to ~~$231.0~~$241.8 million, or ~~4.27%~~4.50%, at December 31, ~~2018.~~2019. The loans secured by farmland included ~~$122.7~~$121.9 million for loans secured by dairy & livestock land and ~~$102.9~~$126.7 million ~~for~~in loans secured by agricultural land at June 30, ~~2019,~~2020, compared to ~~$126.9~~$125.9 million for loans secured by dairy & livestock land and ~~$104.1~~$115.9 million for loans secured by agricultural land at December 31, ~~2018.~~2019. As of June 30, ~~2019,~~2020, dairy & livestock and agribusiness loans of ~~$301.8~~$251.8 million were comprised of ~~$245.7~~$201.7 million for dairy & livestock loans and ~~$56.1~~$50.1 million for agribusiness loans, compared to ~~$340.5~~$323.5 million for dairy & livestock loans and ~~$54.0~~$60.2 million for agribusiness loans at December 31, ~~2018.~~2019.

Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single-family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.

As of June 30, ~~2019,~~2020, the Company had ~~$170.9~~$181.2 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with 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 ~~representing~~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

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real estate acquisition. As of June 30, ~~2019,~~2020, the Company had ~~$156.7~~$119.0 million of total SBA 7(a) loans that include a guarantee of payment ~~from~~form the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance ~~long term~~long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.

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

As of June 30, ~~2019,~~2020, the Company had ~~$116.5~~$125.8 million in construction loans. This represents 1.50% of total ~~gross~~ loans

held-for-investment.

Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at June 30, ~~2019.~~2020.

Our loan portfolio is ~~from a variety of areas~~geographically disbursed throughout our marketplace. The following is the breakdown of our total

held-for-investment

commercial real estate loans, by region as of June 30, ~~2019.~~2020.


	June 30, 2019						June 30, 2020
	Total Loans			Commercial Real Estate Loans			Total Loans			Commercial Real Estate Loans
	(Dollars in thousands)						(Dollars in thousands)
Los Angeles County	$	3,356,850	44.5%	$	2,336,783	43.1%	$	3,634,362	43.3%	$	2,222,552	41.4%
Central Valley		1,081,432	14.3%		854,911	15.8%		1,271,770	15.1%		909,330	17.0%
Orange County								1,120,793	13.3%		658,092	12.3%
Inland Empire		1,001,398	13.3%		878,518	16.2%		1,188,132	14.2%		831,614	15.5%
Orange County		989,992	13.1%		651,925	12.0%
Central Coast		426,121	5.7%		339,141	6.3%		522,025	6.2%		359,920	6.7%
San Diego		224,599	3.0%		128,176	2.4%		238,460	2.8%		134,770	2.5%
Other California		146,573	1.9%		70,081	1.3%		131,686	1.6%		81,087	1.5%
Out of State		313,203	4.2%		157,816	2.9%		295,306	3.5%		167,755	3.1%

	$	7,540,168	100.0%	$	5,417,351	100.0%	$	8,402,534	100.0%	$	5,365,120	100.0%

The table below breaks down our commercial real estate portfolio.

June 30, 2019

  Loan Balance

  Percent

Percent
Owner-
    Occupied (1)

Average
Loan
    Balance

(Dollars in thousands)

Commercial real estate:

Multi-family
  $
572,908

10.6%

0.6%
  $
1,628

Industrial

1,903,504

35.1%

55.2%

1,429

Office

947,407

17.5%

26.7%

1,528

Retail

828,133

15.3%

13.6%

1,732

Medical

280,096

5.2%

44.8%

1,819

Secured by farmland (2)

225,553

4.1%

100.0%

2,032

Other (3)

659,750

12.2%

49.0%

1,416

Total commercial real estate
  $
5,417,351

100.0%


	June 30, 2020
	Loan Balance		Percent		Percent Owner- Occupied (1)		Average Loan Balance
			(Dollars in thousands)
Commercial real estate:
Industrial	$	1,844,152		34.4%		54.5%	$	1,373
Office		944,552		17.6%		25.1%		1,536
Retail		784,139		14.6%		13.1%		1,654
Multi-family		619,073		11.6%		0.5%		1,682
Medical		286,174		5.3%		45.8%		1,767
Secured by farmland (2)		248,558		4.6%		98.2%		2,005
Other (3)		638,472		11.9%		55.1%		1,373

Total commercial real estate	$	5,365,120		100.0%		38.7%	$	1,511

(1)

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

(2)

The loans secured by farmland included ~~$122.7~~$121.9 million for loans secured by dairy & livestock land and ~~$102.9~~$126.7 million for loans secured by agricultural land at June 30, ~~2019.~~2020.

(3)

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

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Commercial real estate loans on retail properties comprised approximately 15% of our CRE loan portfolio at June 30, 2020. At origination, these loans on retail properties were underwritten with

loan-to-values

averaging approximately 50%. Approximately 56% of these loans were originated prior to 2017.

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

Nonperforming Assets

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

    June 30, 2019


December
31, 2018
(1)

(Dollars in thousands)

Nonaccrual loans
  $
11,024
  $
16,442

Troubled debt restructured loans (nonperforming)

263

3,509

OREO, net

2,275

420

Total nonperforming assets
  $
13,562
  $
20,371

Troubled debt restructured performing loans
  $
3,219
  $
3,594

Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO

0.18%

0.26%

Percentage of nonperforming assets to total assets

0.12%

0.18%


	June 30, 2020		December 31, 2019
	(Dollars in thousands)
Nonaccrual loans	$	6,792	$	5,033
Loans past due 90 days or more and still accruing interest		25		-
Nonperforming troubled debt restructured loans (TDRs)		-		244

Total nonperforming loans		6,817		5,277
OREO, net		4,889		4,889

Total nonperforming assets	$	11,706	$	10,166

Performing TDRs	$	2,771	$	3,112

Total nonperforming loans and performing TDRs (1)	$	9,588	$	8,389
Percentage of nonperforming loans and performing TDRs to total loans, net of deferred fees		0.11%		0.11%
Percentage of nonperforming assets to total loans, net of deferred fees, and OREO		0.14%		0.13%
Percentage of nonperforming assets to total assets		0.09%		0.09%

(1)

~~Excludes PCI loans.~~

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

At June 30, 2019, loans classified as impaired totaled $14.5 million, or 0.19% of total gross loans, compared to $23.5 million, or 0.30% of total loans at December 31, 2018. At June 30, 2019, impaired loans resulting from troubled debt restructures represented $3.5 million, of which $263,000 were nonperforming and $3.2 million were performing.

Of the $14.5 million total impaired loans as of June 30, 2019, $11.5 million were considered collateral dependent and measured using the fair value of the collateral based on current appraisals (obtained within one year). The amount of impaired loans measured using the present value of expected future cash flows discounted at the loans effective rate was $3.0 million.

Troubled Debt Restructurings (“TDRs”)

Total TDRs were ~~$3.5~~$2.8 million at June 30, ~~2019,~~2020, compared to ~~$7.1~~$3.4 million at December 31, ~~2018.~~2019. At June 30, ~~2019, we had $263,000 in nonperforming TDR loans and $3.2 million~~2020, all of ~~performing~~our TDRs were performing and accruing interest as restructured loans. ~~Performing~~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 ~~impaired~~ 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. ~~We have~~

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,

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 ~~restructured loans into multiple loans~~accrue interest. For all borrowers who enroll in ~~what~~these loan modification programs offered as a result of

COVID-19,

the delinquency status of the borrowers is ~~typically referred to as an “A/B” note structure,~~frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where ~~normally the “A” note meets current underwriting standards and the “B” note is typically immediately charged~~it had left off upon ~~restructuring.~~entry into the program. Through July 10, 2020, we have granted temporary payment deferments of principal, interest or of principal and interest for primarily 90 days on 820 loans with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio at June 30, 2020. Principal and interest deferments represented 80% of the total deferred payments and approximately 6% were second deferment requests approved by the Bank as of July 10, 2020. It is likely that additional deferments will be granted in future periods. The majority of the loans with payment deferments were Commercial Real Estate loans, which represented approximately $1.10 billion of the $1.27 billion. Approximately 7% of the loans with deferred payments are considered classified.

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

June 30, 2019

December 31, 2018

Balance

Number of
Loans

Balance

Number of
Loans

(Dollars in thousands)

Performing TDRs:

Commercial and industrial
  $
95

2
  $
135

2

SBA

550

1

575

1

Real Estate:

Commercial real estate

436

1

472

1

Construction

-

-

-

-

SFR mortgage

2,138

8

2,412

9

Dairy & livestock and agribusiness

-

-

-

-

Consumer and other

-

-

-

-

Total performing TDRs
  $
     3,219

        12
  $
     3,594

        13

Nonperforming TDRs:

Commercial and industrial
  $
9

1
  $
21

1

SBA

-

-

-

-

Real Estate:

Commercial real estate

-

-

3,143

1

Construction

-

-

-

-

SFR mortgage

-

-

-

-

Dairy & livestock and agribusiness

-

-

78

1

Consumer and other

254

1

267

1

Total nonperforming TDRs
  $
263

2
  $
3,509

4

Total TDRs
  $
3,482

14
  $
7,103

17


	June 30, 2020				December 31, 2019
	Balance		Number of Loans		Balance		Number of Loans
	(Dollars in thousands)
Performing TDRs:
Commercial and industrial	$	51		1	$	78		2
SBA		517		1		536		1
Real Estate:
Commercial real estate		371		1		397		1
Construction		-		-		-		-
SFR mortgage		1,832		7		2,101		8
Dairy & livestock and agribusiness		-		-		-		-
Consumer and other		-		-		-		-

Total performing TDRs	$	2,771		10	$	3,112		12


Nonperforming TDRs:
Commercial and industrial	$	-		-	$	-		-
SBA		-		-		-		-
Real Estate:
Commercial real estate		-		-		-		-
Construction		-		-		-		-
SFR mortgage		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-
Consumer and other		-		-		244		1

Total nonperforming TDRs	$	-		-	$	244		1

Total TDRs	$	2,771		10	$	3,356		13

At June 30, 2020, there was no allowance for credit losses allocated to TDRs. At December 31, 2019, there was no allowance for ~~loan~~credit losses ~~specifically allocated to TDRs. At December 31, 2018, $490,000 of the allowance for loan losses was~~ specifically allocated to TDRs. Impairment amounts identified are typically charged off against the allowance at the time a probable loss is determined. ~~Total~~There were no charge-offs on TDRs for the six months ended June 30, ~~2019 were $78,000,~~2020, compared to ~~no charge-offs~~$78,000 for the ~~same period of 2018.~~six months ended June 30, 2019.

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Nonperforming Assets and Delinquencies

The table below provides trends in our nonperforming assets and delinquencies ~~for~~as of the ~~periods~~dates presented.

June 30,
2019

March 31,
2019

December 31,
2018

September 30,
2018

June 30,
2018

(Dollars in thousands)
Nonperforming loans:

Commercial and industrial
$
1,993
$
8,388
$
7,490
$
3,026
$
204

SBA

5,082

4,098

2,892

3,005

574

Real estate:

Commercial real estate

1,095

1,134

6,068

5,856

6,517

Construction

-

-

-

-

-

SFR mortgage

2,720

2,894

2,937

2,961

1,578

Dairy & livestock and agribusiness

-

-

78

775

800

Consumer and other loans

397

477

486

807

509

Total

$
         11,287

$
       16,991

$
       19,951

$
       16,430

$
       10,182

% of Total gross loans

0.15%

0.22%

0.26%

0.22%

0.21%

Past due 30-89 days:

Commercial and industrial
$
310
$
369
$
909
$
274
$
-

SBA

-

601

1,307

123

-

Real estate:

Commercial real estate

-

124

2,789

-

-

Construction

-

-

-

-

-

SFR mortgage

-

-

285

-

-

Dairy & livestock and agribusiness

-

-

-

-

-

Consumer and other loans

22

101

-

98

47

Total

$
332

$
1,195

$
5,290

$
495

$
47

% of Total gross loans

0.004%

0.02%

0.07%

0.01%

0.001%

OREO:

Real estate:

Commercial real estate
$
2,275
$
2,275
$
-
$
-
$
-

SFR mortgage

-

-

420

420

-

Total

$
2,275

$
2,275

$
420

$
420

$
-

Total nonperforming, past due, and OREO

$
13,894

$
20,461

$
25,661

$
17,345

$
10,229

% of Total gross loans

0.18%

0.27%

0.33%

0.23%

0.21%


	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
	(Dollars in thousands)
Nonperforming loans (1) :
Commercial and industrial	$	1,222	$	1,703	$	1,266	$	1,550	$	1,993
SBA		1,598		2,748		2,032		2,706		5,082
Real estate:
Commercial real estate		2,628		947		724		1,083		1,095
Construction		-		-		-		-		-
SFR mortgage		1,080		864		878		888		2,720
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		289		166		377		385		397

Total	$	6,817	$	6,428	$	5,277	$	6,612	$	11,287

% of Total loans		0.08%		0.09%		0.07%		0.09%		0.15%

Past due 30-89 days:
Commercial and industrial	$	630	$	665	$	2	$	756	$	310
SBA		214		3,086		1,402		303		-
Real estate:
Commercial real estate		4		210		-		368		-
Construction		-		-		-		-		-
SFR mortgage		446		233		249		-		-
Dairy & livestock and agribusiness		882		166		-		-		-
Consumer and other loans		413		-		-		-		22

Total	$	2,589	$	4,360	$	1,653	$	1,427	$	332

% of Total loans		0.03%		0.06%		0.02%		0.02%		0.004%

OREO:
SBA	$	797	$	797	$	797	$	444	$	-
Real estate:
Commercial real estate		2,275		2,275		2,275		2,275		2,275
SFR mortgage		1,817		1,817		1,817		6,731		-

Total	$	4,889	$	4,889	$	4,889	$	9,450	$	2,275

Total nonperforming, past due, and OREO	$	14,295	$	15,677	$	11,819	$	17,489	$	13,894

% of Total loans		0.17%		0.21%		0.16%		0.23%		0.18%

(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, ~~plus~~ nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were ~~$11.3~~$6.8 million at June 30, ~~2019,~~2020, or ~~0.15%~~0.08% of total loans.

Total nonperforming loans at June 30, ~~2019~~2020 included ~~$8.4~~$4.3 million of nonperforming loans acquired from CB in the third quarter of 2018. This compares to nonperforming loans of ~~$20.0~~$5.3 million, or ~~0.26%~~0.07% of total loans, at December 31, ~~2018~~2019 and ~~$10.2~~$11.3 million, or ~~0.21%,~~0.15% of total loans, at June 30, ~~2018.~~2019. The ~~$5.7~~$389,000 quarter-over-quarter increase in nonperforming loans was primarily due to increases of $1.7 million in nonperforming commercial real estate loans, $216,000 in nonperforming SFR mortgage loans, and $123,000 in nonperforming consumer and other loans. This was partially offset by a $1.2 million decrease in nonperforming SBA loans ~~quarter-over-quarter was primarily due to~~and a ~~$6.4 million~~$481,000 decrease in nonperforming commercial and industrial ~~loans, partially offset by~~loans.

In response to the

COVID-19

pandemic, we have implemented a ~~$1.0 million increase in nonperforming SBA loans.~~

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 June 30, 2020 and December 31, 2019, we had ~~one~~four OREO ~~property~~properties with a carrying value of ~~$2.3~~$4.9 million, compared to one OREO property with a carrying value of ~~$420,000 at December 31, 2018 and none~~$2.3 million at June 30, ~~2018. During the first quarter~~2019. There were no additions to or sales of ~~2019, we sold one~~ OREO ~~property, realizing a net gain on sale of $105,000. There was one addition to OREO~~properties for the six months ended June 30, ~~2019.~~2020.

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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, ~~2018.~~

~~Table of Contents~~

2019.

Allowance for ~~Loan~~Credit Losses

We adopted CECL on January 1, 2020, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 3—

Summary of Significant Accounting Policies

of the notes to the unaudited condensed consolidated financial statements. The allowance for loan losses is established as management’s estimate of probable losses inherent in the loan and lease receivables portfolio. The allowance is increased (decreased) by the provision for losses and decreased by charge-offs when management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are added to the allowance. The determination of the balance in the allowance for loan losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is appropriate to provide for probable credit losses ~~inherent in the portfolio, after giving consideration~~totaled $94.0 million as of June 30, 2020, compared to ~~the character~~$68.7 million as of ~~the loan portfolio, current economic conditions, past loan loss experience,~~December 31, 2019 and ~~such other factors that are considered in estimating inherent credit losses.~~

~~The allowance for loan losses totaled~~ $67.1 million as of June 30, ~~2019, compared to $63.6 million as of December 31, 2018 and $59.6 million as of~~2019. Our allowance for credit losses at June 30, ~~2018. The~~2020 was 1.12%, or 1.29% of total loans when excluding the $1.10 billion in PPP loans. Upon implementation of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance ~~for loan losses~~and was increased by a $23.5 million credit loss provision in the first six months of 2020 due to the severe economic disruption forecasted as a result of the

COVID-19

pandemic. Net charge-offs were $17,000 for the six months ended June 30, 2020. This compares to a $3.5 million loan loss provision and $19,000 in net recoveries for the ~~six months ended June 30, 2019. This compares to a $2.0 million loan loss provision recapture, offset by net recoveries of $2.0 million for the~~ same period of ~~2018.~~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. The forecast continues to reflect the most recent available information on the evolving impacts on macroeconomic variables from the

COVID-19

pandemic. The resulting stressed economic forecast includes a significant contraction in GDP of 30% in the second quarter of 2020, followed by an 18% rebound in GDP in the third quarter and economic growth not returning until the second half of 2021. In addition, the unemployment rate is forecasted to rise to more than 14% in the second quarter and is expected to be at an elevated level through 2022. If the economic forecast deteriorates further due to the

COVID-19

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

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The table below presents a summary of ~~net~~ charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for ~~loan losses and recapture of provision for loan~~credit losses for the periods presented.

As of and For the
Six Months Ended June 30,

2019

2018

(Dollars in thousands)
Allowance for loan losses at beginning of period
$
63,613
$
59,585

Charge-offs:

Commercial and industrial

(48
)
-

SBA

(230
)
-

Commercial real estate

-

-

Construction

-

-

SFR mortgage

-

-

Dairy & livestock and agribusiness

(78
)
-

Consumer and other loans

(4
)
(9
)

Total charge-offs

(360
)
(9
)

Recoveries:

Commercial and industrial

159

37

SBA

9

10

Commercial real estate

-

-

Construction

6

1,930

SFR mortgage

183

-

Dairy & livestock and agribusiness

19

19

Consumer and other loans

3

11

Total recoveries

379

2,007

Net recoveries

19

1,998

Provision for (recapture of) loan losses

3,500

(2,000
)

Allowance for loan losses at end of period
$
67,132
$
59,583

Summary of reserve for unfunded loan commitments:

Reserve for unfunded loan commitments at beginning of period
$
8,959
$
6,306

Provision for unfunded loan commitments

-

-

Reserve for unfunded loan commitments at end of period
$
8,959
$
6,306

Reserve for unfunded loan commitments to total unfunded loan commitments

0.53%

0.59%

Amount of total loans at end of period (1)
$
7,535,690
$
4,816,956

Average total loans outstanding (1)
$
7,610,241
$
4,785,118

Net recoveries to average total loans

0.00%

0.04%

Net recoveries to total loans at end of period

0.00%

0.04%

Allowance for loan losses to average total loans

0.88%

1.25%

Allowance for loan losses to total loans at end of period

0.89%

1.24%

Net recoveries to allowance for loan losses

0.03%

3.35%

Net recoveries to provision for (recapture of) loan losses

0.54%

-99.90%


	As of and For the Six Months Ended June 30,
	2020			2019
	(Dollars in thousands)
Allowance for credit losses at beginning of period	$	68,660		$	63,613
Impact of adopting ASU 2016-13		1,840			-
Charge-offs:
Commercial and industrial		(11	)		(48	)
SBA		(156	)		(230	)
Commercial real estate		-			-
Construction		-			-
SFR mortgage		-			-
Dairy & livestock and agribusiness		-			(78	)
Consumer and other loans		(86	)		(4	)

Total charge-offs		(253	)		(360	)

Recoveries:
Commercial and industrial		5			159
SBA		3			9
Commercial real estate		-			-
Construction		6			6
SFR mortgage		206			183
Dairy & livestock and agribusiness		-			19
Consumer and other loans		16			3

Total recoveries		236			379

Net (charge-offs) recoveries		(17	)		19
Provision for credit losses		23,500			3,500

Allowance for credit losses at end of period	$	93,983		$	67,132

Summary of reserve for unfunded loan commitments:
Reserve for unfunded loan commitments at beginning of period	$	8,959		$	8,959
Impact of adopting ASU 2016-13		41			-
Provision for unfunded loan commitments		-			-

Reserve for unfunded loan commitments at end of period	$	9,000		$	8,959

Reserve for unfunded loan commitments to total unfunded loan commitments		0.52%			0.53%

Amount of total loans at end of period (1)	$	8,402,534		$	7,535,690
Average total loans outstanding (1)	$	7,764,930		$	7,610,241

Net recoveries to average total loans		-0.0002%			0.0002%
Net recoveries to total loans at end of period		-0.0002%			0.0003%
Allowance for credit losses to average total loans		1.21%			0.88%
Allowance for credit losses to total loans at end of period		1.12%			0.89%
Net (charge-offs) recoveries to allowance for credit losses		-0.02%			0.03%
Net (charge-offs) recoveries to provision for credit losses		-0.07%			0.54%

(1)

~~Includes PCI loans and is net~~

Net of deferred loan origination fees, costs and discounts.

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~~Specific allowance:~~

~~For impaired loans, we incorporate specific allowances based on loans individually evaluated utilizing one of three valuation methods, as prescribed under ASC~~

~~310-10.~~

If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the ALLL or, alternatively, a specific allocation will be established and included in the overall ALLL balance. The ~~specific allocation represents $371,000 (0.55%), $561,000 (0.88%) and $16,000 (0.03%) of the total allowance~~ACL/Total Loan Coverage Ratio as of June 30, ~~2019, December 31, 2018 and June 30, 2018, respectively.~~

~~General allowance:~~

~~The remaining loan portfolio is collectively evaluated for impairment under ASC~~

~~450-20~~

~~and is divided into risk rating classes~~2020 increased to 1.12%, compared to 0.93% as of loan receivables between “classified” loans (including substandard and doubtful loans) “Special Mention” loans and “Pass” loans, and is further disaggregated into loan segments by loan type with similar risk characteristics. BothJanuary 1, 2020 due to the ~~classified and~~

~~non-classified~~

~~loan categories are divided into eight (8) specific loan segments. An allowance is provided for each segment based upon~~more severe economic forecast that ~~segment’s average historical loss experience over an established look back period, adjusted for the applicable loss emergence periods (i.e., the amount of time~~resulted from the ~~point at~~

COVID-19

crisis.

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

off-balance

sheet credit exposures. The Bank’s ACL methodology also produced an allowance of $9.0 million for our

off-balance

sheet credit exposures, which ~~a loss is incurred to the point at which the loss is confirmed). For each segment,~~was unchanged from the allowance is adjusted further for current conditions based on our analysis of specific environmental or qualitative loss factors (as prescribed in the 2006 Interagency Policy Statement on ALLL) affecting the collectability of our loan portfolio that may cause actual loss rates to differ from historical loss experience.

There have been no material changes to the Bank’s ALLL methodology during the first six months of 2019. The ALLL balance increased during the first six months of 2019 by $3.5 million in provision for loan losses and a net recovery of loans of $19,000. The Bank determined that the ALLL balance of $67.1 million was appropriate and the result of the net effect of additional requirements related to loan growth experienced during the six month period within the commercial and industrial and commercial real estate segments of the

~~non-acquired~~

loan portfolio, modest increase in certain qualitative loss factors and reduced reserve requirements for the continued, but moderate reductions in the historical loss rates for predominately all portfolio segments.at January 1, 2020.

While we believe that the allowance at June 30, ~~2019~~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 ~~loan~~credit losses in the future.

~~Table of Contents~~

Deposits

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

Total deposits were ~~$8.66~~$10.98 billion at June 30, ~~2019.~~2020. This represented ~~a decrease~~an increase of ~~$164.7 million,~~$2.28 billion, or ~~1.87%~~26.18%, over total deposits of ~~$8.83~~$8.70 billion at December 31, ~~2018.~~2019. The composition of deposits is summarized ~~for~~as of the ~~periods~~dates presented in the table below.

June 30, 2019

December 31, 2018

Balance

Percent

Balance

Percent

(Dollars in thousands)

Noninterest-bearing deposits
$
5,250,235

60.61%
$
5,204,787

58.96%

Interest-bearing deposits

Investment checking

436,090

5.03%

460,972

5.22%

Money market

2,099,751

24.24%

2,236,018

25.33%

Savings

397,153

4.58%

393,769

4.46%

Time deposits

479,594

5.54%

531,944

6.03%

Total deposits
$
8,662,823

100.00%
$
8,827,490

100.00%


	June 30, 2020					December 31, 2019

	Balance		Percent			Balance		Percent

	(Dollars in thousands)

Noninterest-bearing deposits	$	6,901,368		62.83	%	$	5,245,517		60.26	%
Interest-bearing deposits
Investment checking		472,509		4.30	%		454,565		5.22	%
Money market		2,681,962		24.42	%		2,158,161		24.79	%
Savings		468,051		4.26	%		400,377		4.60	%
Time deposits		459,690		4.19	%		446,308		5.13	%

Total deposits	$	10,983,580		100.00	%	$	8,704,928		100.00	%

The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Noninterest-bearing deposits totaled ~~$5.25~~$6.90 billion at June 30, ~~2019,~~2020, representing an increase of ~~$45.4 million,~~$1.66 billion, or ~~0.87%~~31.57%, from noninterest-bearing deposits of ~~$5.20~~$5.25 billion at December 31, ~~2018.~~2019. Noninterest-bearing deposits represented ~~60.61%~~62.83% of total deposits for June 30, ~~2019,~~2020, compared to ~~58.96%~~60.26% of total deposits for December 31, ~~2018.~~2019.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled ~~$2.93~~$3.62 billion at June 30, ~~2019,~~2020, representing ~~a decrease~~an increase of ~~$157.8~~$609.4 million, or ~~5.10%~~20.23%, from savings deposits of ~~$3.09~~$3.01 billion at December 31, ~~2018.~~2019.

Time deposits totaled ~~$479.6~~$459.7 million at June 30, ~~2019,~~2020, representing ~~a decrease~~an increase of ~~$52.4~~$13.4 million, or ~~9.84%~~3.00%, from total time deposits of ~~$531.9~~$446.3 million for December 31, ~~2018.~~2019.

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Borrowings

In order to enhance the Bank’s spread between its cost of funds and interest-earning assets, we first seek noninterest-bearing deposits (the lowest cost of funds to the Bank). Next, we pursue growth in interest-bearing deposits, and finally, we supplement the growth in deposits with borrowed funds (borrowings and customer repurchase agreements). Average borrowed funds, as a percent of total funding (total deposits plus borrowed funds), was 6.10% for the second quarter of 2019, compared to 6.24% for the same period of 2018.

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 June 30 ~~2019~~2020 and December 31, ~~2018,~~2019, total funds borrowed under these agreements were ~~$421.3~~$468.2 million and ~~$442.3~~$428.7 million, respectively, with a weighted average interest rate of ~~0.57%~~0.20% and ~~0.39%~~0.44%, respectively.

At June 30, 2020, we had $10.0 million in short-term borrowings that are interest-free advances from the FHLB. We had nozero in short-term borrowings at ~~June 30, 2019, compared to $280.0 million at~~ December 31, ~~2018.~~2019.

At June 30, ~~2019, $6.05~~2020, $6.00 billion of loans and ~~$1.51~~$1.87 billion of investment securities, at carrying value, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

~~Table of Contents~~

Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of June 30, ~~2019.~~2020.

Maturity by Period

Total

Less Than
One
Year

One Year
Through
Three Years

Four Years
Through
Five Years

Over Five
Years

(Dollars in thousands)
Deposits (1)
$
  8,662,823
$
  8,539,629
$
  111,359
$
  3,514
$
   8,321

Customer repurchase agreements (1)

        421,271

        421,271

-

-

-

Junior subordinated debentures (1)

25,774

-

-

-

        25,774

Deferred compensation

20,953

745

1,359

876

17,973

Operating leases

23,211

7,556

        9,845

        4,180

1,630

Affordable housing investment

6,736

4,661

1,984

55

36

Total
$
  9,160,768
$
  8,973,862
$
  124,547
$
  8,625
$
  53,734


			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)	$	10,983,580	$	10,942,750	$	30,610	$	9,626	$	594
Customer repurchase agreements (1)		468,156		468,156		-		-		-
Junior subordinated debentures (1)		25,774		-		-		-		25,774
Deferred compensation		23,241		678		1,245		622		20,696
Operating leases		20,928		6,619		8,958		3,443		1,908
Affordable housing investment		3,159		2,285		814		47		13

Total	$	11,524,838	$	11,420,488	$	41,627	$	13,738	$	48,985

(1)

Amounts exclude accrued interest.

Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.

Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.

At June 30, ~~2019,~~2020, we had no$10.0 million in FHLB short-term borrowings with a cost of 0.0%, compared to ~~$280.0 million~~zero at December 31, ~~2018,~~2019 and ~~zero at~~ June 30, ~~2018.~~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’~~employees based on salary continuation agreements as a result of acquisitions and amounts due to current employees under our deferred compensation plans.

Operating leases represent the total minimum lease payments due under

non-cancelable

operating leases. Refer to Note ~~13 —~~11 –

Leases

of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.

Table of Contents

Off-Balance

Sheet Arrangements

The following table summarizes the

off-balance

sheet items at June 30, ~~2019.~~2020.

Maturity by Period

Total

Less Than
One
Year

One Year
to Three
Years

Four Years
to Five
Years

After
Five
Years

(Dollars in thousands)

Commitment to extend credit:

Commercial and industrial
  $
975,463
  $
705,376
  $
212,341
  $
14,211
  $
43,535

SBA

585

60

4

-

521

Real estate:

Commercial real estate

244,242

46,984

82,328

96,632

18,298

Construction

79,736

53,419

23,117

-

3,200

SFR Mortgage

7,638

2,106

3,500

-

2,032

Dairy & livestock and agribusiness (1)

180,983

159,352

21,231

400

-

Consumer and other loans

146,470

17,756

7,199

4,423

117,092

Total commitment to extend credit

1,635,117

985,053

349,720

115,666

184,678

Obligations under letters of credit

50,411

43,031

7,132

248

-

Total
  $
1,685,528
  $
1,028,084
  $
356,852
  $
115,914
  $
184,678


			Maturity by Period
	Total		Less Than One Year		One Year to Three Years		Four Years to Five Years		After Five Years
	(Dollars in thousands)
Commitment to extend credit:
Commercial and industrial	$	949,212	$	647,113	$	193,588	$	9,023	$	99,488
SBA		221		187		4		-		30
SBA - PPP		-		-		-		-		-
Real estate:
Commercial real estate		284,860		52,947		81,256		141,025		9,632
Construction		82,734		53,625		29,109		-		-
SFR Mortgage		1,885		-		-		-		1,885
Dairy & livestock and agribusiness (1)		218,722		126,287		91,357		378		700
Consumer and other loans		136,150		10,558		10,391		5,833		109,368

Total commitment to extend credit		1,673,784		890,717		405,705		156,259		221,103
Obligations under letters of credit		46,705		37,325		9,332		48		-

Total	$	1,720,489	$	928,042	$	415,037	$	156,307	$	221,103

(1)

Total commitments to extend credit to agribusiness were $17.1 million at June 30, ~~2019.~~2020.

As of June 30, ~~2019,~~2020, we had commitments to extend credit of approximately ~~$1.64~~$1.67 billion, and obligations under letters of credit of ~~$50.4~~$46.7 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for

on-balance

sheet instruments, which consist of evaluating customers’ creditworthiness individually. Due to the adoption of CECL on January 1, 2020, a transition adjustment of $41,000 was added to the beginning balance of the reserve for unfunded loan commitments. The Company recorded no provision or recapture of provision for unfunded loan commitments for the three and six months ended June 30, 2020 and 2019. The Company had a reserve for unfunded loan commitments of $9.0 million as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 included in other liabilities.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.

~~Table of Contents~~

Capital Resources

Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of ~~the Company’s~~ capital.

~~The Company’s total~~Total equity ~~was $1.94~~decreased $35.0 million, or 1.76%, to $1.96 billion at June 30, ~~2019. This represented an increase of $85.5 million, or 4.62%, from~~2020, compared to total equity of ~~$1.85~~$1.99 billion at December 31, ~~2018. This increase~~2019. The $35.0 million decrease in equity was primarily due to ~~$106.1~~the repurchase of 4.9 million shares of common stock for $91.7 million under our

10b5-1

stock repurchase program. We previously announced that we suspended this

10b5-1

stock repurchase program due to the uncertainty of the

COVID-19

pandemic. We had $79.6 million in net earnings a $26.6 million increase in other comprehensive income resulting from the tax effected impact of the increase in market value of our investment securities portfolio, and $3.2 million for various stock based compensation items. This was offset by $50.4 million in cash dividends declared by the Company during the first six months of ~~2019.~~2020, offset by $48.8 million in cash dividends declared and a cumulative effect adjustment to beginning retained earnings of $1.3 million, net of tax, due to the adoption of CECL on January 1, 2020. Our equity also increased by $24.9 million as a result of an increase in other comprehensive income from the increase in our tax adjusted market value of our

available-for-sale

investment securities. Our tangible common equity ratio was 9.63% at June 30, 2020.

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During the second quarter of ~~2019,~~2020, the Board of Directors of CVB declared quarterly cash dividends totaling $0.18 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.

On August 11, 2016, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations. There is no expiration date for this repurchase program. Up to 9,577,917 of such shares ~~may be repurchased from time to time~~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

pandemic. For the six months ended June 30, ~~2019,~~2020, the Company ~~did not repurchase any~~repurchased 4,944,290 shares of CVB common stock outstanding under this program. As of June 30, ~~2019,~~2020, we have ~~9,577,917~~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 June 30, ~~2019,~~2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1.

Business —– Capital Adequacy Requirements

” as described in our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~2019.

At June 30, ~~2019,~~2020, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies.

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

June 30, 2019

December 31, 2018

Capital Ratios

  Adequately
Capitalized
Ratios

Well
  Capitalized
Ratios

CVB Financial
Corp.
Consolidated

Citizens
  Business
Bank

CVB Financial
Corp.
Consolidated

Citizens
  Business
Bank

Tier 1 leverage capital ratio

4.00%

  5.00%

11.94%

11.80%

10.98%

10.90%

Common equity Tier I capital ratio

4.50%

  6.50%

14.23%

14.34%

13.04%

13.22%

Tier 1 risk-based capital ratio

6.00%

  8.00%

14.51%

14.34%

13.32%

13.22%

Total risk-based capital ratio

8.00%

10.00%

15.39%

15.22%

14.13%

14.03%


										June 30, 2020						December 31, 2019
Capital Ratios	Adequately Capitalized Ratios			Minimum Required Plus Capital Conservation Buffer			Well Capitalized Ratios			CVB Financial Corp. Consolidated			Citizens Business Bank			CVB Financial Corp. Consolidated			Citizens Business Bank

Tier 1 leverage capital ratio		4.00	%		4.00	%		5.00	%		10.59	%		10.45	%		12.33	%		12.19	%
Common equity Tier 1 capital ratio		4.50	%		7.00	%		6.50	%		14.47	%		14.58	%		14.83	%		14.94	%
Tier 1 risk-based capital ratio		6.00	%		8.50	%		8.00	%		14.76	%		14.58	%		15.11	%		14.94	%
Total risk-based capital ratio		8.00	%		10.50	%		10.00	%		15.97	%		15.79	%		16.00	%		15.83	%

Basel III also introduces a new “capital conservation buffer,” composed entirely of CET1, on top of minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum requirement but below the capital conservation

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buffer will face constraints on dividends, equity repurchases and payment of discretionary bonuses based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and has been fully phased in over a four-year period reaching 2.5% on January 1, 2019. The Company and the Bank are now required to maintain minimum capital ratios as follows:

Equity

Tier 1

Total

Leverage

  Tier 1 Ratio

  Capital Ratio

  Capital Ratio

        Ratio

Regulatory minimum ratio

4.5%

6.0%

8.0%

4.0%

Plus: Capital conservation buffer requirement

2.5%

2.5%

2.5%

-

Regulatory minimum ratio plus capital conservation buffer

7.0%

8.5%

10.5%

4.0%

It is possible that further increases in regulatory capital may be required in response to the implementation of the Basel III final rule. The exact amount, however, will depend upon regulatory determinations and our prevailing risk profile under various stress scenarios.

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ASSET/LIABILITY AND MARKET RISK MANAGEMENT

Liquidity and Cash Flow

The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.

We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets monthly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.

Our primary sources and uses of funds for the Company are deposits and loans. Our deposit levels and cost of deposits may fluctuate from

period-to-period

due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. Total deposits of ~~$8.66~~$10.98 billion at June 30, ~~2019 decreased $164.7 million,~~2020 increased $2.28 billion, or ~~1.87%~~26.18%, over total deposits of ~~$8.83~~$8.70 billion at December 31, ~~2018.~~2019. This significant deposit growth was primarily due to proceeds from PPP loans and 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 June 30, 2020, we had only $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. Furthermore, we have significant

off-balance

sheet sources of liquidity.

CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions. For the Bank, sources of funds include principal payments on loans and investments, growth in deposits, FHLB advances, and other borrowed funds. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and noninterest expenses.

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Below is a summary of our average cash position and statement of cash flows for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. For further details see our “

Condensed Consolidated Statements of Cash Flows

(Unaudited)” under Part I, Item 1 of this report.

Consolidated Summary of Cash Flows

For the Six Months Ended June 30,

2019

2018

(Dollars in thousands)

Average cash and cash equivalents
  $
184,301
  $
255,226

Percentage of total average assets

1.63%

3.11%

Net cash provided by operating activities
  $
82,602
  $
68,326

Net cash provided by investing activities

438,532

180,334

Net cash used in financing activities

(509,242)

(211,548)

Net increase in cash and cash equivalents
  $
11,892
  $
37,112


	Six Months Ended June 30,
	2020			2019
	(Dollars in thousands)

Average cash and cash equivalents	$	799,989		$	184,301
Percentage of total average assets		6.67%			1.63%

Net cash provided by operating activities	$	97,081		$	82,602
Net cash (used in) provided by investing activities		(541,488	)		438,532
Net cash provided by (used in) financing activities		2,186,172			(509,242	)

Net increase in cash and cash equivalents	$	1,741,765		$	11,892

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Average cash and cash equivalents ~~decreased~~increased by ~~$70.9~~$615.7 million, or ~~27.79%~~334.07%, to ~~$184.3~~$800.0 million for the six months ended June 30, ~~2019,~~2020, compared to ~~$255.2~~$184.3 million for the same period of ~~2018.~~2019.

At June 30, ~~2019,~~2020, cash and cash equivalents totaled ~~$175.8 million.~~$1.93 billion. This represented ~~a decrease~~an increase of ~~$5.6 million,~~$1.75 billion, or ~~3.11%~~996.04%, from ~~$181.5~~$175.8 million at June 30, ~~2018.~~2019.

Interest Rate Sensitivity Management

During periods of changing interest rates, the ability to

re-price

interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability

~~re-pricing~~

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

One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the

re-pricing

characteristics and balance fluctuations of deposits with indeterminate or

non-contractual

maturities, and prepayment of loans and securities.

Our interest rate risk policy measures the sensitivity of our net interest income over both a

one-year

and

two-year

cumulative time horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a

one-year

horizon assuming no balance sheet growth, given a 200 basis point upward and either a 100 or 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over the

12-month

and

24-month

time horizon.

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

Estimated Net Interest Income Sensitivity (1)

June 30, 2019

December 31, 2018

24-month
Period

24-month
Period

Interest Rate Scenario

12-month
Period

(Cumulative)

Interest Rate Scenario

12-month
Period

(Cumulative)

+ 200 basis points

3.80%

7.59%

+ 200 basis points

3.80%

7.40%

- 200 basis points

-4.63%

-9.24%

- 200 basis points

-5.29%

-10.26%


Estimated Net Interest Income Sensitivity (1)
	June 30, 2020			December 31, 2019
Interest Rate Scenario	12-month Period	24-month Period (Cumulative)	Interest Rate Scenario	12-month Period	24-month Period (Cumulative)
+ 200 basis points	5.80%	11.30%	+ 200 basis points	5.20%	10.00%
- 100 basis points	-0.90%	-2.00%	- 100 basis points	-2.10%	-4.60%

(1)

Percentage change from ~~base.~~base scenario, but the current low interest rate environment limits the absolute decline in rates as the model does not assume rates go below zero.

Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is asset sensitive over both a

one-year

and a

two-year

horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape,

re-pricing

characteristics and balance fluctuations of deposits with indeterminate or

non-contractual

maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Our exposure in the rates down scenario is impacted by the current low interest rate environment and the model does not assume that rates go below 0.25%.

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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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.

Economic Value of Equity Sensitivity

Instantaneous Rate Change

June 30, 2019

December 31, 2018

200 bp decrease in interest rates

-39.3%

-24.4%

100 bp decrease in interest rates

-15.2%

-10.2%

100 bp increase in interest rates

9.4%

5.8%

200 bp increase in interest rates

16.5%

10.3%

300 bp increase in interest rates

22.0%

13.8%

400 bp increase in interest rates

26.5%

16.6%


Instantaneous Rate Change	June 30, 2020	December 31, 2019

100 bp decrease in interest rates	-20.3%	-17.5%
100 bp increase in interest rates	11.7%	14.2%
200 bp increase in interest rates	21.1%	25.5%
300 bp increase in interest rates	24.1%	30.0%
400 bp increase in interest rates	28.8%	36.2%

As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

LIBOR is expected to be phased out after 2021, as such 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. For further quantitative and qualitative disclosures about market risks in our portfolio, see “

Asset/Liability Management and Interest Rate Sensitivity Management

” included in Item 2 “

Management’s Discussion and Analysis of Financial Condition and Results of Operations

” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~2019. Our analysis of market risk and market-sensitive financial information ~~contain~~contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

During the fiscal quarter ended June 30, ~~2019,~~2020, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the ordinary and

non-ordinary

course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer claims, regulatory compliance claims, data privacy claims, lender liability claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.

The Company was a defendant and cross-complainant in an action entitled Edward A. Dunagan et al v. Citizens Business Bank, as successor to American Security Bank (ASB), Case No. CVDS1408287, filed in the Superior Court for San Bernardino County. The complaint was initially filed in May, 2014 against ASB, which was acquired during the same month by CBB. The case arose out of a number of defaulted commercial real estate loans originally made by ASB to the Dunagans and various entities owned by the Dunagans (Dunagan Parties), and the complaint included claims by the Dunagans (1) contesting their liabilities under their personal guarantees for deficiencies on certain of the defaulted loans, (2) attacking the validity of ASB’s foreclosures on certain properties owned by the Dunagan Parties, and (3) claiming emotional distress caused by ASB’s allegedly wrongful actions in connection with such foreclosures. At a bench trial conducted in July and August, 2018, the judge found in favor of the Dunagans on all three claims and awarded damages and attorney’s fees and costs to the Dunagans in an aggregate amount of approximately $1.34 million. During the period while the Company’s appeal of this judgment was pending, the parties participated in a court-sponsored mediation, and on June 24, 2019, the parties executed a full and final settlement of the case for a substantially reduced aggregate damages amount, all of which was paid by the insurer under a bankers professional liability insurance policy previously obtained by ASB.

For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws and regulations applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.

Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.

We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.

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ITEM 1A. RISK FACTORS

~~There~~Except as discussed below there have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~2019. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form

10-K

and any subsequent Form

10-Q

or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “

Management’s Discussion and Analysis of Financial Condition and Results of Operations

” in this Quarterly Report on Form

10-Q.

The

COVID-19

pandemic has significantly impacted the banking industry and our business. The ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic

The

COVID-19

pandemic has negatively impacted the global, U.S., California and local economies, disrupted supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and sharply increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including in California and the principal counties and cities in which our banking centers are located. Our operations, like those of other financial institutions that operate in our markets, are significantly influenced by economic conditions in California, including the strength of the real estate market and business conditions in the industries to which we lend or from which we gather deposits. The

COVID-19

pandemic has resulted in a substantial decline in the revenues of many business sectors as well as in commercial and residential property sales and construction activities. As a result, the demand for our products and services has been, and may continue to be, significantly impacted.

Furthermore, the pandemic could further influence the recognition of credit losses in our loan portfolios and further increase our allowance for credit losses, particularly as businesses remain closed and as more of our customers are expected to draw on their lines of credit or seek deferments of scheduled loan payments to help mitigate the effects of lost revenues. As previously noted, we have already increased our allowance for expected credit losses by $23.5 million for the six months ended June 30, 2020, due to the continuing anticipated impact of

COVID-19-related

economic distress on our loan portfolios, coupled with the implementation of CECL for determining our overall provision for credit losses in the first quarter of 2020. In addition, as also noted above, through July 10, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 820 loans, with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio at June 30, 2020. Depending on the scope and duration of the

COVID-19

pandemic, we believe there is a high likelihood that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for future calendar quarters in 2020.

Similarly, because of changing economic and market conditions affecting bond issuers, we may be required to recognize credit losses in future periods on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant or critical portions of our workforce or managers are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, and to comply with or follow various government recommendations or mandates, we have also suspended certain real property foreclosure actions and sales, and in certain instances, we are providing fee waivers, payment deferrals, and other expanded assistance for our business and mortgage customers. The extent to which the

COVID-19

pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Our bank has elected to participate as a lender in the Small Business Administration’s Paycheck Protection Program (PPP) and to register as an Eligible Lender under the Federal Reserve’s Main Street Lending Program (MSLP), and has accordingly become subject to a number of significant risks applicable to lenders under the PPP and MSLP, respectively.

As one set of responses to the

COVID-19

pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate. One such program is the Paycheck Protection Program (PPP) enacted under the federal CARES Act. This program is designed, among other things, to provide employee payroll maintenance support for small and

medium-sized

businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA). Because the Company is an authorized SBA lender and our primary customer base consists of small

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and

medium-sizedbusinesses,

the Company has actively participated in the PPP. Including the second round of funding after Legislation passed on April 24, 2020, we have originated and funded approximately 4,100 PPP loans from our customers and, through two separate rounds of authorized funding for the PPP, totaling $1.10 billion as of June 30, 2020.

Under interim final regulations promulgated by the SBA, PPP lenders are entitled to rely on borrower certifications with respect to issues such as program eligibility and eligible loan amounts, and PPP loans are designed to be subsequently forgivable, in whole or part, if certain additional criteria are met by the borrower with respect to employee payroll maintenance. However, in view of the fact that the PPP was by design intended to support economically distressed businesses, the SBA’s guarantee of PPP loan amounts to participating lenders is a critical feature of the program. In this regard, because the PPP was quickly implemented into operation and the SBA’s interim regulations have been repeatedly revised and are continuing to evolve, there are significant risks to the Company’s participation in the PPP, including whether certain borrowers will ultimately be found to have been eligible for PPP loans, whether eligible PPP loan amounts for certain borrowers were correctly calculated, whether certain PPP loans will ultimately be determined to be forgivable, and if not, whether the SBA’s guarantee will continue to apply to any unforgiven PPP loan amounts.

Another program enacted pursuant to the federal CARES Act and designed to help provide support to small and

medium-sized

business and their employees throughout the U.S., including California, is the Federal Reserve’s Main Street Lending Program (MSLP). The Company has elected to participate as an Eligible Lender under at least three

sub-facilities

of the MSLP, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility. Each of these lending facilities offers different terms and conditions, including with respect to borrower eligibility criteria, maximum loan amounts, whether loan proceeds can be utilized to refinance borrower indebtedness to other lenders, contractual priority,

non-subordination

and collateralization requirements, etc. Eligible Lenders may extend new MSLP loans to eligible borrowers and sell a 95% participation in each MSLP loan to a special purpose vehicle established by the Federal Reserve Bank of Boston (Main Street SPV), subject to numerous borrower and lender certifications and covenants and the terms of a Loan Participation Agreement and a Servicing Agreement.

In contrast to the PPP, loans under the MSLP are not forgivable, carry an adjustable rate of interest at LIBOR (one or three month) plus 300 basis points, require the payment of specified fees, and must be repaid in full at the end of a five year maturity period, with principal repayment commencing after a deferment period consisting of the first two years following loan origination. In addition, eligible lenders must retain five percent of each MSLP loan and continue to service such loan until it matures or the Main Street SPV sells all of its 95% participation interest. In this regard, because the MSLP is a newly constituted program without any established operating history, there are significant risks to the Company’s participation in the MSLP, including whether certain borrowers will ultimately be found to have been eligible for MSLP loans, whether the numerous required lender and borrower certifications will be found to have been made in good faith, whether the borrower will remain in compliance with the terms and conditions of its MSLP loan throughout its applicable term, whether any given lender or MSLP loan will be found to have been in compliance with the terms of the Main Street SPV’s Loan Participation Agreement and/or Servicing Agreement, and whether any individual MSLP loan will be repaid by the borrower on schedule, and, if not, whether the Main Street SPV will seek recourse against the originating lender.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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.~~transactions. There is no expiration date for this repurchase program. ~~Up to 9,577,917 of such shares may be repurchased from time to time under~~On March 31, 2020, the ~~Company’s current~~Company announced that it suspended its

10b5-1

~~plan originally adopted in November, 2018 and subsequently amended in July, 2019. For~~stock repurchase program. During the three months ended June 30, ~~2019,~~2020, the Company did not repurchase any shares of CVB common stock outstanding under this program. As of June 30, ~~2019,~~2020, we have ~~9,577,917~~4,585,145 shares of CVB common stock ~~remaining that are eligible~~available for repurchase under the common stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

Table of Contents

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS


Exhibit No.		Description of Exhibits

31.1
	~~10.1~~		~~Retirement and Consulting Agreement for Christopher D. Myers, dated July 17, 2019† (1)~~
	~~10.2~~		~~Amendment to Employment Agreement for Christopher D. Myers, dated July 17, 2019† (2)~~
	~~31.1~~		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002*
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002*
	32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002**
	32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002**
	101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
	101.SCH		Inline XBRL Taxonomy Extension Schema Document
	101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
	101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

†

~~Indicates a management contract or compensation plan.~~The cover page from the Company’s Quarterly Report on Form

10-Q

for the quarter ended June 30, 2020, has been formatted in Inline XBRL.

~~(1)~~

~~Incorporated herein by reference to Exhibit 10.1 to our Form~~

~~8-K~~

~~filed with the SEC on July 19, 2019.~~

~~(2)~~

~~Incorporated herein by reference to Exhibit 10.2 to our Form~~

~~8-K~~

~~filed with the SEC on July 19, 2019.~~

*	Filed herewith

**	Furnished herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				CVB FINANCIAL CORP.
				(Registrant)
Date: August ~~9, 2019~~ 10, 2020

				/s/ E. Allen Nicholson
				E. Allen Nicholson
				Executive Vice President and Chief Financial Officer
				(Principal Financial Officer)


	June 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	170,387		$	144,008
Interest-earning balances due from Federal Reserve		5,453			19,940
Total cash and cash equivalents		175,840			163,948
Interest-earning balances due from depository institutions		6,425			7,670
Investment securities available-for-sale, at fair value (with amortized cost of $1,584,687 at June 30, 2019, and $1,757,666 at December 31, 2018)		1,600,020			1,734,085
Investment securities held-to-maturity (with fair value of $729,032 at June 30, 2019, and $721,537 at December 31, 2018)		728,113			744,440
Total investment securities		2,328,133			2,478,525
Investment in stock of Federal Home Loan Bank (FHLB)		17,688			17,688
Loans and lease finance receivables		7,535,690			7,764,611
Allowance for loan losses		(67,132	)		(63,613	)
Net loans and lease finance receivables		7,468,558			7,700,998
Premises and equipment, net		54,163			58,193
Bank owned life insurance (BOLI)		224,172			220,758
Accrued interest receivable		29,481			30,649
Intangibles		48,094			53,784
Goodwill		663,707			666,539
Other real estate owned (OREO)		2,275			420
Income taxes		49,581			62,174
Other assets		103,466			67,807
Total assets	$	11,171,583		$	11,529,153

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	5,250,235		$	5,204,787
Interest-bearing		3,412,588			3,622,703
Total deposits		8,662,823			8,827,490
Customer repurchase agreements		421,271			442,255
Other borrowings		-			280,000
Deferred compensation		20,953			20,033
Junior subordinated debentures		25,774			25,774
Other liabilities		104,085			82,411
Total liabilities		9,234,906			9,677,963

Commitments and Contingencies
Stockholders’ Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 140,141,680 at June 30, 2019, and 140,000,017 at December 31, 2018		1,296,885			1,293,669
Retained earnings		631,512			575,805
Accumulated other comprehensive income (loss), net of tax		8,280			(18,284	)
Total stockholders’ equity		1,936,677			1,851,190
Total liabilities and stockholders’ equity	$	11,171,583		$	11,529,153


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Interest income:
Loans and leases, including fees	$	101,843		$	57,368		$	201,530		$	112,564
Investment securities:
Investment securities available-for-sale		10,118			11,697			20,763			23,565
Investment securities held-to-maturity		4,426			4,807			8,951			9,572
Total investment income		14,544			16,504			29,714			33,137
Dividends from FHLB stock		298			298			630			630
Interest-earning deposits with other institutions		100			635			194			1,171
Total interest income		116,785			74,805			232,068			147,502
Interest expense:
Deposits		4,093			1,549			7,964			3,074
Borrowings and customer repurchase agreements		1,377			337			2,987			790
Junior subordinated debentures		258			231			524			429
Total interest expense		5,728			2,117			11,475			4,293
Net interest income before provision for (recapture of) loan losses		111,057			72,688			220,593			143,209
Provision for (recapture of) loan losses		2,000			(1,000	)		3,500			(2,000	)
Net interest income after provision for (recapture of) loan losses		109,057			73,688			217,093			145,209
Noninterest income:
Service charges on deposit accounts		5,065			4,091			10,206			8,136
Trust and investment services		2,452			2,399			4,634			4,556
Bankcard services		1,027			958			1,977			1,762
BOLI income		1,349			1,069			2,685			2,048
Gain on OREO, net		24			-			129			3,540
Gain on sale of building, net		-			-			4,545			-
Gain on eminent domain condemnation, net		5,685			-			5,685			-
Other		2,603			1,178			4,647			2,569
Total noninterest income		18,205			9,695			34,508			22,611
Noninterest expense:
Salaries and employee benefits		28,862			21,051			58,164			43,365
Occupancy and equipment		5,641			4,318			11,256			8,510
Professional services		2,040			1,690			3,965			3,220
Software licenses and maintenance		2,542			1,759			4,964			3,519
Marketing and promotion		1,238			1,148			2,632			2,504
Amortization of intangible assets		2,833			328			5,690			659
Acquisition related expenses		2,612			494			5,761			1,297
Other		4,760			3,466			9,700			7,126
Total noninterest expense		50,528			34,254			102,132			70,200
Earnings before income taxes		76,734			49,129			149,469			97,620
Income taxes		22,253			13,756			43,346			27,334
Net earnings	$	54,481		$	35,373		$	106,123		$	70,286

Other comprehensive income (loss):
Unrealized gain (loss) on securities arising during the period, before tax	$	19,486		$	(6,598	)	$	37,713		$	(38,768	)
Less: Income tax (expense) benefit related to items of other comprehensive income		(5,761	)		1,951			(11,149	)		11,462
Other comprehensive income (loss), net of tax		13,725			(4,647	)		26,564			(27,306	)
Comprehensive income	$	68,206		$	30,726		$	132,687		$	42,980

Basic earnings per common share	$	0.39		$	0.32		$	0.76		$	0.64
Diluted earnings per common share	$	0.39		$	0.32		$	0.76		$	0.64


	Unaudited Pro Forma
	Three Months Ended		Six Months Ended
	June 30, 2019
	(Dollars in thousands, except per share amounts)

Total revenues (net interest income plus noninterest income)	$	121,406	$	244,379
Net income	$	46,960	$	93,651
Earnings per share - basic	$	0.34	$	0.67
Earnings per share - diluted	$	0.33	$	0.67


	June 30, 2019
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities	$	1,348,415	$	16,251	$	(2,417	)	$	1,362,249		85.14%
CMO/REMIC - residential		194,094		1,216		(334	)		194,976		12.19%
Municipal bonds		41,369		658		(41	)		41,986		2.62%
Other securities		809		-		-			809		0.05%
Total available-for-sale securities	$	1,584,687	$	18,125	$	(2,792	)	$	1,600,020		100.00%
Investment securities held-to-maturity:
Government agency/GSE	$	128,721	$	2,627	$	(414	)	$	130,934		17.68%
Residential mortgage-backed securities		175,552		1,480		(415	)		176,617		24.11%
CMO		211,436		5		(4,358	)		207,083		29.04%
Municipal bonds		212,404		3,245		(1,251	)		214,398		29.17%
Total held-to-maturity securities	$	728,113	$	7,357	$	(6,438	)	$	729,032		100.00%

	December 31, 2018
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Residential mortgage-backed securities	$	1,494,106	$	1,348	$	(20,946	)	$	1,474,508		85.03%
CMO/REMIC - residential		217,223		353		(3,525	)		214,051		12.34%
Municipal bonds		45,621		332		(1,143	)		44,810		2.59%
Other securities		716		-		-			716		0.04%
Total available-for-sale securities	$	1,757,666	$	2,033	$	(25,614	)	$	1,734,085		100.00%
Investment securities held-to-maturity:
Government agency/GSE	$	138,274	$	572	$	(2,622	)	$	136,224		18.57%
Residential mortgage-backed securities		153,874		-		(3,140	)		150,734		20.67%
CMO		215,336		-		(12,081	)		203,255		28.93%
Municipal bonds		236,956		556		(6,188	)		231,324		31.83%
Total held-to-maturity securities	$	744,440	$	1,128	$	(24,031	)	$	721,537		100.00%


	June 30, 2019			December 31, 2018
	Total Loans and Leases			Non-PCI Loans and Leases			PCI Loans			Total Loans and Leases
	(Dollars in thousands)
Commercial and industrial	$	917,953		$	1,002,209		$	519		$	1,002,728
SBA		327,606			350,043			1,258			351,301
Real estate:
Commercial real estate		5,417,351			5,394,229			14,407			5,408,636
Construction		116,457			122,782			-			122,782
SFR mortgage		278,285			296,504			145			296,649
Dairy & livestock and agribusiness		301,752			393,843			700			394,543
Municipal lease finance receivables		59,985			64,186			-			64,186
Consumer and other loans		120,779			128,429			185			128,614
Gross loans		7,540,168			7,752,225			17,214			7,769,439
Less: Deferred loan fees, net		(4,478	)		(4,828	)		-			(4,828	)
Gross loans, net of deferred loan fees		7,535,690			7,747,397			17,214			7,764,611
Less: Allowance for loan losses		(67,132	)		(63,409	)		(204	)		(63,613	)
Total loans and lease finance receivables	$	7,468,558		$	7,683,988		$	17,010		$	7,700,998


	December 31, 2018 (1)
	Pass		Special Mention		Substandard (2)		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	961,909	$	29,358	$	10,942	$	-	$	1,002,209
SBA		336,033		7,375		6,635		-		350,043
Real estate:
Commercial real estate
Owner occupied		2,008,169		95,841		13,980		-		2,117,990
Non-owner occupied		3,260,822		9,938		5,479		-		3,276,239
Construction
Speculative		118,233		-		-		-		118,233
Non-speculative		4,549		-		-		-		4,549
SFR mortgage		289,607		3,310		3,587		-		296,504
Dairy & livestock and agribusiness		350,044		34,586		9,213		-		393,843
Municipal lease finance receivables		63,650		536		-		-		64,186
Consumer and other loans		126,085		1,263		1,081		-		128,429
Total gross loans	$	7,519,101	$	182,207	$	50,917	$	-	$	7,752,225


	For the Three Months Ended June 30, 2019
	Ending Balance March 31, 2019		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance June 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,608	$	(48	)	$	49	$	248		$	7,857
SBA		1,294		(210	)		4		31			1,119
Real estate:
Commercial real estate		46,227		-			-		2,060			48,287
Construction		864		-			3		4			871
SFR mortgage		2,189		-			115		19			2,323
Dairy & livestock and agribusiness		5,699		-			19		(377	)		5,341
Municipal lease finance receivables		738		-			-		(12	)		726
Consumer and other loans		582		(3	)		2		27			608
Total allowance for loan losses	$	65,201	$	(261	)	$	192	$	2,000		$	67,132

	For the Three Months Ended June 30, 2018
	Ending Balance March 31, 2018		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2018
	(Dollars in thousands)
Commercial and industrial	$	7,499	$	-		$	27	$	(556	)	$	6,970
SBA		884		-			5		(48	)		841
Real estate:
Commercial real estate		41,863		-			-		734			42,597
Construction		987		-			596		(580	)		1,003
SFR mortgage		2,202		-			-		(47	)		2,155
Dairy & livestock and agribusiness		4,666		-			19		(334	)		4,351
Municipal lease finance receivables		834		-			-		(26	)		808
Consumer and other loans		688		(2	)		3		(47	)		642
PCI loans		312		-			-		(96	)		216
Total allowance for loan losses	$	59,935	$	(2	)	$	650	$	(1,000	)	$	59,583


	For the Six Months Ended June 30, 2019
	Ending Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Recapture of) Loan Losses			Ending Balance June 30, 2019
	(Dollars in thousands)
Commercial and industrial	$	7,528	$	(48	)	$	159	$	218		$	7,857
SBA		1,078		(230	)		9		262			1,119
Real estate:
Commercial real estate		45,097		-			-		3,190			48,287
Construction		981		-			6		(116	)		871
SFR mortgage		2,197		-			183		(57	)		2,323
Dairy & livestock and agribusiness		5,225		(78	)		19		175			5,341
Municipal lease finance receivables		775		-			-		(49	)		726
Consumer and other loans		732		(4	)		3		(123	)		608
Total allowance for loan losses	$	63,613	$	(360	)	$	379	$	3,500		$	67,132


	For the Six Months Ended June 30, 2018
	Ending Balance December 31, 2017		Charge-offs			Recoveries		(Recapture of) Provision for Loan Losses			Ending Balance June 30, 2018
	(Dollars in thousands)
Commercial and industrial	$	7,280	$	-		$	37	$	(347	)	$	6,970
SBA		869		-			10		(38	)		841
Real estate:
Commercial real estate		41,722		-			-		875			42,597
Construction		984		-			1,930		(1,911	)		1,003
SFR mortgage		2,112		-			-		43			2,155
Dairy & livestock and agribusiness		4,647		-			19		(315	)		4,351
Municipal lease finance receivables		851		-			-		(43	)		808
Consumer and other loans		753		(9	)		11		(113	)		642
PCI loans		367		-			-		(151	)		216
Total allowance for loan losses	$	59,585	$	(9	)	$	2,007	$	(2,000	)	$	59,583


	June 30, 2018
	Recorded Investment in Loans						Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deterioriated Credit Quality
	(Dollars in thousands)
Commercial and industrial	$	355	$	508,833	$	-	$	-	$	6,970	$	-
SBA		1,174		119,874		-		-		841		-
Real estate:
Commercial real estate		7,741		3,446,289		-		-		42,597		-
Construction		-		84,400		-		-		1,003		-
SFR mortgage		4,133		233,021		-		13		2,142		-
Dairy & livestock and agribusiness		800		267,689		-		-		4,351		-
Municipal lease finance receivables		-		67,721		-		-		808		-
Consumer and other loans		509		60,366		-		3		639		-
PCI loans		-		-		19,426		-		-		216
Total	$	14,712	$	4,788,193	$	19,426	$	16	$	59,351	$	216


	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		Total Past Due and Accruing		Nonaccrual (1) (3)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	300	$	10	$	310	$	1,993	$	915,650	$	917,953
SBA		-		-		-		5,082		322,524		327,606
Real estate:
Commercial real estate
Owner occupied		-		-		-		502		2,093,141		2,093,643
Non-owner occupied		-		-		-		593		3,323,115		3,323,708
Construction
Speculative (2)		-		-		-		-		93,170		93,170
Non-speculative		-		-		-		-		23,287		23,287
SFR mortgage		-		-		-		2,720		275,565		278,285
Dairy & livestock and agribusiness		-		-		-		-		301,752		301,752
Municipal lease finance receivables		-		-		-		-		59,985		59,985
Consumer and other loans		22		-		22		397		120,360		120,779
Total gross loans	$	322	$	10	$	332	$	11,287	$	7,528,549	$	7,540,168


	As of December 31, 2018 (1)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	7,436	$	11,457	$	-
SBA		3,467		5,746		-
Real estate:
Commercial real estate
Owner occupied		589		705		-
Non-owner occupied		2,808		4,324		-
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		5,349		6,270		-
Dairy & livestock and agribusiness		-		-		-
Municipal lease finance receivables		-		-		-
Consumer and other loans		418		526		-
Total		20,067		29,028		-
With a related allowance recorded:
Commercial and industrial		189		191		3
SBA		-		-		-
Real estate:
Commercial real estate
Owner occupied		-		-		-
Non-owner occupied		3,143		3,144		478
Construction
Speculative		-		-		-
Non-speculative		-		-		-
SFR mortgage		-		-		-
Dairy & livestock and agribusiness		78		78		12
Municipal lease finance receivables		-		-		-
Consumer and other loans		68		100		68
Total		3,478		3,513		561
Total impaired loans	$	23,545	$	32,541	$	561


	For the Three Months Ended June 30, 2018 (2)
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2018		Financial Effect Resulting From Modifications (3)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		-	$	-	$	-	$	-	$	-
Change in amortization period or maturity		1		38		38		31		-
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
Non-owner occupied
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-
SFR mortgage:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		1		311		311		307		-
Consumer:
Interest rate reduction		-		-		-		-		-
Change in amortization period or maturity		-		-		-		-		-

Total loans		2	$	349	$	349	$	338	$	-


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands, except per share amounts)
Earnings per common share:
Net earnings	$	54,481	$	35,373	$	106,123	$	70,286
Less: Net earnings allocated to restricted stock		134		94		276		202

Net earnings allocated to common shareholders	$	54,347	$	35,279	$	105,847	$	70,084

Weighted average shares outstanding		139,748		109,983		139,682		109,921
Basic earnings per common share	$	0.39	$	0.32	$	0.76	$	0.64


Diluted earnings per common share:
Net income allocated to common shareholders		54,347		35,279		105,847		70,084

Weighted average shares outstanding		139,748		109,983		139,682		109,921
Incremental shares from assumed exercise of outstanding options		149		372		179		418

Diluted weighted average shares outstanding		139,897		110,355		139,861		110,339
Diluted earnings per common share	$	0.39	$	0.32	$	0.76	$	0.64


	Carrying Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	June 30, 2019		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Residential mortgage-backed securities	$	1,362,249	$	-	$	1,362,249	$	-
CMO/REMIC - residential		194,976		-		194,976		-
Municipal bonds		41,986		-		41,986		-
Other securities		809		-		809		-

Total investment securities - AFS		1,600,020		-		1,600,020		-
Interest rate swaps		10,744		-		10,744		-

Total assets	$	1,610,764	$	-	$	1,610,764	$	-

Description of liability
Interest rate swaps	$	10,744	$	-	$	10,744	$	-

Total liabilities	$	10,744	$	-	$	10,744	$	-


	Carrying Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	December 31, 2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Description of assets
Investment securities - AFS:
Residential mortgage-backed securities	$	1,474,508	$	-	$	1,474,508	$	-
CMO/REMIC - residential		214,051		-		214,051		-
Municipal bonds		44,810		-		44,810		-
Other securities		716		-		716		-

Total investment securities - AFS		1,734,085		-		1,734,085		-
Interest rate swaps		1,938		-		1,938		-

Total assets	$	1,736,023	$	-	$	1,736,023	$	-

Description of liability
Interest rate swaps	$	1,938	$	-	$	1,938	$	-

Total liabilities	$	1,938	$	-	$	1,938	$	-


	Carrying Value at June 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses For the Six Months Ended June 30, 2019
	(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial	$	1,190	$	-	$	-	$	1,190	$	276
SBA		1,153		-		-		1,153		323
Real estate:
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		2		-		-		2		2
Other real estate owned		-		-		-		-		-
Asset held-for-sale		-		-		-		-		-

Total assets	$	2,345	$	-	$	-	$	2,345	$	601


	Carrying Value at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses For the Year Ended December 31, 2018
	(Dollars in thousands)
Description of assets
Impaired loans, excluding PCI loans:
Commercial and industrial	$	189	$	-	$	-	$	189	$	3
SBA		-		-		-		-		-
Real estate:
Commercial real estate		3,143		-		-		3,143		478
Construction		-		-		-		-		-
SFR mortgage		-		-		-		-		-
Dairy & livestock and agribusiness		78		-		-		78		12
Consumer and other loans		68		-		-		68		68
Other real estate owned		-		-		-		-		-
Asset held-for-sale		-		-		-		-		-

Total assets	$	3,478	$	-	$	-	$	3,478	$	561


	For the Three Months Ended June 30,
	2019									2018
	Before-tax			Tax effect			After-tax			Before-tax			Tax effect		After-tax
	(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	19,564		$	(5,784	)	$	13,780		$	(5,773	)	$	1,707	$	(4,066	)
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity		(78	)		23			(55	)		(825	)		244		(581	)
Net change	$	19,486		$	(5,761	)	$	13,725		$	(6,598	)	$	1,951	$	(4,647	)

	For the Six Months Ended June 30,
	2019									2018
	Before-tax			Tax effect			After-tax			Before-tax			Tax effect		After-tax
	(Dollars in thousands)
Investment securities:
Net change in fair value recorded in accumulated OCI	$	38,914		$	(11,504	)	$	27,410		$	(37,111	)	$	10,972	$	(26,139	)
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity		(1,201	)		355			(846	)		(1,657	)		490		(1,167	)
Net change	$	37,713		$	(11,149	)	$	26,564		$	(38,768	)	$	11,462	$	(27,306	)


	Gross Amounts Recognized in		Gross Amounts Offset in the			Net Amounts Presented in the		Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
	the Condensed Consolidated Balance Sheets		Condensed Consolidated Balance Sheets			Condensed Consolidated Balance Sheets		Financial Instruments		Collateral Pledged			Net Amount
	(Dollars in thousands)
June 30, 2019
Financial assets:
Derivatives not designated as hedging instruments	$	10,744	$	-		$	-	$	10,744	$	-		$	10,744
Total	$	10,744	$	-		$	-	$	10,744	$	-		$	10,744

Financial liabilities:
Derivatives not designated as hedging instruments	$	10,851	$	(107	)	$	10,744	$	107	$	(14,962	)	$	(4,111	)
Repurchase agreements		421,271		-			421,271		-		(424,648	)		(3,377	)
Total	$	432,122	$	(107	)	$	432,015	$	107	$	(439,610	)	$	(7,488	)

December 31, 2018
Financial assets:
Derivatives not designated as hedging instruments	$	1,938	$	-		$	-	$	1,938	$	-		$	1,938
Total	$	1,938	$	-		$	-	$	1,938	$	-		$	1,938

Financial liabilities:
Derivatives not designated as hedging instruments	$	4,203	$	(2,265	)	$	1,938	$	2,265	$	-		$	4,203
Repurchase agreements		442,255		-			442,255		-		(487,607	)		(45,352	)
Total	$	446,458	$	(2,265	)	$	444,193	$	2,265	$	(487,607	)	$	(41,149	)



	For the Three Months Ended		For the Six Months Ended
	June 30, 2019
	(Dollars in thousands)
Lease Cost

Operating lease expense (1)	$	1,906	$	4,006
Sublease income		-		-

Total lease expense	$	1,906	$	4,006

	As of June 30, 2019
	(Dollars in thousands)
Year:
2019 (excluding the six months ended June 30, 2019)	$	3,997
2020		6,604
2021		4,806
2022		3,622
2023		1,941
Thereafter		2,241

Total future lease payments		23,211
Less: Imputed interest		(2,054)

Present value of lease liabilities	$	21,157


	For the Three Months Ended June 30,				Variance				For the Six Months Ended June 30,				Variance
	2019		2018		$		%		2019		2018		$			%
							(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	5,065	$	4,091	$	974		23.81%	$	10,206	$	8,136	$	2,070			25.44%
Trust and investment services		2,452		2,399		53		2.21%		4,634		4,556		78			1.71%
Bankcard services		1,027		958		69		7.20%		1,977		1,762		215			12.20%
BOLI income		1,349		1,069		280		26.19%		2,685		2,048		637			31.10%
Gain on OREO, net		24		-		24		-		129		3,540		(3,411	)		-96.36%
Gain on sale of building, net		-		-		-		-		4,545		-		4,545			-
Gain on eminent domain condemnation, net		5,685		-		5,685		-		5,685		-		5,685			-
Other		2,603		1,178		1,425		120.97%		4,647		2,569		2,078			80.89%

Total noninterest income	$	18,205	$	9,695	$	8,510		87.78%	$	34,508	$	22,611	$	11,897			52.62%


	June 30, 2019		December 31, 2018 (1)
	(Dollars in thousands)
Nonaccrual loans	$	11,024	$	16,442
Troubled debt restructured loans (nonperforming)		263		3,509
OREO, net		2,275		420

Total nonperforming assets	$	13,562	$	20,371

Troubled debt restructured performing loans	$	3,219	$	3,594

Percentage of nonperforming assets to total loans outstanding, net of deferred fees, and OREO		0.18%		0.26%
Percentage of nonperforming assets to total assets		0.12%		0.18%


	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
	(Dollars in thousands)
Nonperforming loans:
Commercial and industrial	$	1,993	$	8,388	$	7,490	$	3,026	$	204
SBA		5,082		4,098		2,892		3,005		574
Real estate:
Commercial real estate		1,095		1,134		6,068		5,856		6,517
Construction		-		-		-		-		-
SFR mortgage		2,720		2,894		2,937		2,961		1,578
Dairy & livestock and agribusiness		-		-		78		775		800
Consumer and other loans		397		477		486		807		509

Total	$	11,287	$	16,991	$	19,951	$	16,430	$	10,182

% of Total gross loans		0.15%		0.22%		0.26%		0.22%		0.21%

Past due 30-89 days:
Commercial and industrial	$	310	$	369	$	909	$	274	$	-
SBA		-		601		1,307		123		-
Real estate:
Commercial real estate		-		124		2,789		-		-
Construction		-		-		-		-		-
SFR mortgage		-		-		285		-		-
Dairy & livestock and agribusiness		-		-		-		-		-
Consumer and other loans		22		101		-		98		47

Total	$	332	$	1,195	$	5,290	$	495	$	47

% of Total gross loans		0.004%		0.02%		0.07%		0.01%		0.001%

OREO:
Real estate:
Commercial real estate	$	2,275	$	2,275	$	-	$	-	$	-
SFR mortgage		-		-		420		420		-

Total	$	2,275	$	2,275	$	420	$	420	$	-

Total nonperforming, past due, and OREO	$	13,894	$	20,461	$	25,661	$	17,345	$	10,229

% of Total gross loans		0.18%		0.27%		0.33%		0.23%		0.21%


			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)	$	8,662,823	$	8,539,629	$	111,359	$	3,514	$	8,321
Customer repurchase agreements (1)		421,271		421,271		-		-		-
Junior subordinated debentures (1)		25,774		-		-		-		25,774
Deferred compensation		20,953		745		1,359		876		17,973
Operating leases		23,211		7,556		9,845		4,180		1,630
Affordable housing investment		6,736		4,661		1,984		55		36

Total	$	9,160,768	$	8,973,862	$	124,547	$	8,625	$	53,734


	Equity		Tier 1		Total		Leverage
	Tier 1 Ratio		Capital Ratio		Capital Ratio		Ratio
Regulatory minimum ratio		4.5%		6.0%		8.0%		4.0%
Plus: Capital conservation buffer requirement		2.5%		2.5%		2.5%		-
Regulatory minimum ratio plus capital conservation buffer		7.0%		8.5%		10.5%		4.0%