CVB FINANCIAL CORP (CVBF) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of CVB Financial Corp. and its wholly owned subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with this Annual Report on Form 10-K, and the audited consolidated financial statements and accompanying notes presented elsewhere in this report.

IMPACT OF COVID-19

The spread of COVID-19 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 affected our customers and the communities we serve. In response to the anticipated effects of the pandemic on the U.S. economy, the Board of Governors of the Federal Reserve System (“FRB”) took significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and established a program of purchases of Treasury and mortgage-backed securities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contain substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a $349 billion program designed to aid small- and medium-sized businesses through 100% Small Business Administration (“SBA”) guaranteed loans distributed through banks. These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed. Legislation passed on April 24, 2020 provided additional PPP funds of $310 billion. During 2020, we originated and funded approximately 4,100 loans, totaling $1.1 billion. Greater than 99% of these loans have been granted forgiveness as of December 31, 2021. In response to the COVID-19 pandemic and the CARES Act, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications. On January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion was set aside for Second Draw (“round two”) PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, businesses with more than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses. As of December 31, 2021, we had originated approximately 1,900 round two loans totaling $420 million, with a remaining loan balance, at amortized cost, of $183.6 million at December 31, 2021. The Paycheck Protection Program officially ended on May 31, 2021. As of December 31, 2021, approximately 4,800 loans, representing approximately $1.3 billion in PPP loan balances were submitted to the SBA and granted forgiveness.

No recapture of provision for credit losses was recorded in the fourth quarter of 2021, compared to a recapture of $4.0 million of provision for credit losses in the third quarter of 2021. For the year ended December 31, 2021, a $25.5 million recapture of provision for credit losses was recorded as a result of the improvements in our economic forecast of certain macroeconomic variables. In comparison, the Company recorded a provision for credit losses of $23.5 million in 2020 due to the forecast of a severe economic downturn as a result of the onset of the COVID-19 pandemic. We continue to monitor the impact of COVID-19 closely. The extent to which the COVID-19 pandemic will impact our future operations and financial results is uncertain, but we may experience increased provision for credit losses if this pandemic results in future economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.

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CRITICAL ACCOUNTING POLICIES

The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact the results of operations.

Adoption of New Accounting Standard

Allowance for Credit Losses (“ACL”) — On January 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. We adopted this ASU using a modified retrospective approach, as required, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The adoption of ASU 2016-13, resulted in a reduction to our opening retained earnings of approximately $1.3 million, net of tax.

This ASU replaced the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the Current Expected Credit Loss (“CECL”) model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off balance sheet credit exposures. This includes, but is not limited to, loans, held-to-maturity (“HTM”) securities, loan commitments, and financial guarantees. For loans and HTM debt securities, this ASU requires a CECL measurement to estimate the allowance for credit losses (“ACL”) for the remaining contractual term, adjusted for prepayments, of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. This ASU also eliminated the existing guidance for purchased credit-impaired (“PCI”) loans, but requires an allowance for purchased financial assets with more than an insignificant deterioration of credit since origination. Purchase Credit Deteriorated (“PCD”) assets are recorded at their purchase price plus an ACL estimated at the time of acquisition. Under this ASU, there is no provision for credit losses recognized at acquisition; instead, there is a gross-up of the purchase price of the financial asset for the estimate of expected credit losses and a corresponding ACL recorded. Changes in estimates of expected credit losses after acquisition are recognized as provision for credit losses (or reversal of provision for credit losses) in subsequent periods. In addition, this ASU modifies the OTTI model for available-for-sale (“AFS”) debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. As a policy election, we excluded the accrued interest receivable balance from the amortized cost basis of financing receivables and HTM securities, as well as AFS securities, and disclose total accrued interest receivable separately on the condensed consolidated balance sheet.

For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation — Risk Management” and Note 3 — Summary of Significant Accounting Policies and Note 5 — Loans and Lease Finance Receivables and Allowance for Credit Losses of our consolidated financial statements presented elsewhere in this report.

Business Combinations — The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain would be recognized. Acquisition related costs are expensed as incurred.

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Valuation and Recoverability of Goodwill — Goodwill represented $663.7 million of our $15.88 billion in total assets as of December 31, 2021. The Company has one reportable segment. Goodwill has an indefinite useful life and is not amortized, but is tested for impairment at least annually, or more frequently, if events and circumstances exist that indicate that a goodwill impairment test should be performed. Such events and circumstances may include among others, a significant adverse change in legal factors or in the general business climate, significant decline in our stock price and market capitalization, unanticipated competition, the testing for recoverability of a significant asset group within the reporting unit, and an adverse action or assessment by a regulating body. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

Based on the results of our annual goodwill impairment test, we determined that no goodwill impairment charges were required as our single reportable segment’s fair value exceeded its carrying amount. As of December 31, 2021, we determined there were no events or circumstances which would more likely than not reduce the fair value of our reportable segment below its carrying amount. Note 3 — Summary of Significant Accounting Policies of our consolidated financial statements presented elsewhere in this report

Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings, the Company considers the future realization of these deferred tax assets more likely than not.

The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities.

For complete discussion and disclosure of other accounting policies see Note 3 — Summary of Significant Accounting Policies of the Company’s consolidated financial statements presented elsewhere in this report.

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

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OVERVIEW

For the year ended December 31, 2021, we reported net earnings of $212.5 million, compared with $177.2 million for 2020. This represented a $35.4 million, or 19.96%, increase from the prior year. Diluted earnings per share were $1.56 for 2021, compared to $1.30 for 2020.

The Company adopted ASU 2016-13, commonly referred to as CECL which replaced the “incurred loss” approach with an “expected loss” model over the life of the loan, effective on January 1, 2020. A $23.5 million provision for credit losses was recorded in 2020, due to the severe economic disruption and forecasted impact resulting from the initial onset of the COVID-19 pandemic. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our economic forecasts in 2021 reflected improvements in key macroeconomic variables and therefore lower projected loan losses, which resulted in a $25.5 million recapture of provision for credit losses for the year ended December 31, 2021. For the year ended December 31, 2021, we experienced charge-offs of $3.4 million and total recoveries of $198,000, resulting in net charge-offs of $3.2 million for the year. Of the approximately 4,100 SBA PPP loans we originated in 2020, $1.1 billion have been forgiven. As of December 31, 2021, the Company originated approximately 1,900 PPP loans in round two, with a remaining loan balance, at amortized cost, of $183.6 million at December 31, 2021. Interest and fee income from all PPP loans was approximately $30.5 million for 2021, compared to $28.5 million for 2020.

At December 31, 2021, total assets of $15.88 billion increased $1.46 billion, or 10.16%, from total assets of $14.42 billion at December 31, 2020. Interest-earning assets of $14.68 billion at December 31, 2021 increased $1.46 billion, or 11.04%, when compared with $13.22 billion at December 31, 2020. The increase in interest-earning assets includes a $2.13 billion increase in investment securities, partially offset by a $461.1 million decrease in total loans and a $193.3 million decrease in interest-earning balances due from the Federal Reserve. The decrease in total loans was due to a $696.4 million decrease in PPP loans. Excluding PPP loans, total loans increased by $235.3 million, or 3.15%, from December 31, 2020. Our tax equivalent yield on interest-earning assets was 3.02% for 2021, compared to 3.71% for 2020. This decline reflects the net impact of lower loan yields, lower yields on investment securities, and a reduction in average loans as a percentage of average earning assets from 69.02% in 2020 to 57.22% in 2021.

Total investment securities were $5.11 billion at December 31, 2021, an increase of $2.13 billion, or 71.61%, from $2.98 billion at December 31, 2020. We deployed some of our excess liquidity during 2021 by purchasing $3.16 billion of additional investment securities with a non-tax equivalent weighted average yield of approximately 1.61%. At December 31, 2021, investment securities HTM totaled $1.93 billion. At December 31, 2021, investment securities AFS totaled $3.18 billion, inclusive of a pre-tax net unrealized loss of $1.3 million, which decreased $56.1 million from December 31, 2020. HTM securities increased by $1.35 billion, or 232.85%, and AFS securities increased by $785.0 million, or 32.72%, from December 31, 2020. During the fourth quarter of 2021, we purchased approximately $452 million in new AFS securities with an average tax equivalent yield of approximately 1.61% and $259 million in new HTM securities with an expected average tax equivalent yield of approximately 1.84%. Our tax equivalent yield on investments was 1.56% for 2021, compared to 2.10% for 2020.

Total loans and leases, at amortized cost, of $7.89 billion at December 31, 2021, decreased by $461.1 million, or 5.52%, from $8.35 billion at December 31, 2020. The decrease in total loans included a $696.4 million decline in PPP loans. The $461.1 million decrease in loans also included decreases of $29.9 million in SFR mortgage loans, $22.9 million in construction loans, $15.3 million in SBA loans, and $11.3 million in consumer and other loans. Partially offsetting these declines were increases in commercial real estate loans of $288.2 million, as well as a $25.1 million increase in dairy & livestock and agribusiness loans. Our core loans, excluding PPP loans, grew by $235.3 million, or 3.15% from December 31, 2020. Our yield on loans was 4.42% for the year ended December 31, 2021, compared to 4.68% for 2020. Interest income for yield adjustments related to discount accretion on acquired loans was $12.3 million for 2021, compared to $17.4 million for 2020. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion, nonaccrual interest income and the impact from PPP loans (“core loan yield”), declined by 27 basis points for the year ended December 31, 2021 when compared to the same period of 2020.

Noninterest-bearing deposits were $8.10 billion at December 31, 2021, an increase of $648.7 million, or 8.70%, compared to $7.46 billion at December 31, 2020. The deposit growth in 2021 was partly due to our customers maintaining greater liquidity in their bank accounts. At December 31, 2021, noninterest-bearing deposits were 62.45% of total deposits, compared to 63.52% at December 31, 2020. Our average cost of total deposits for 2021 was 0.04%, compared to 0.12% for 2020.

Customer repurchase agreements totaled $642.4 million at December 31, 2021, compared to $439.4 million at December 31, 2020. Our average cost of total deposits including customer repurchase agreements was 0.05% for 2021, compared to 0.13% for 2020.

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At December 31, 2021, we had $2.3 million in overnight borrowings, compared to $5.0 million in short short-term borrowings with 0% cost, at December 31, 2020. We redeemed our $25.8 million junior subordinated debentures on June 15, 2021. The debentures, bearing interest at three-month LIBOR plus 1.38%, had an original maturity of 2036. These debentures had a borrowing cost of 2.10% for the year ended December 31, 2020. The Bank’s funding is now entirely core customer deposits and customer repurchase agreements. Our average cost of funds was 0.05% for 2021, compared to 0.13% for 2020.

The allowance for credit losses totaled $65.0 million at December 31, 2021, compared to $93.7 million at December 31, 2020. The allowance for credit losses was decreased by $25.5 million in 2021, due to the improved outlook in our forecast of certain macroeconomic variables that were influenced by the economic impact of the pandemic and government stimulus, and by $3.2 million in year-to-date net charge-offs. At December 31, 2021, ACL as a percentage of total loans and leases outstanding was 0.82%, or 0.84% when PPP loans are excluded. This compares to 1.12% at December 31, 2020, or 1.25% when PPP loans are excluded. As of December 31, 2021, total discounts remaining on acquired loans were $18.6 million.

The Company’s total equity was $2.08 billion at December 31, 2021. This represented an increase of $73.5 million, or 3.66%, from total equity of $2.01 billion at December 31, 2020. This increase was primarily due to net earnings of $212.5 million, partially offset by $97.8 million in cash dividends and a $39.3 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the third quarter of 2021, we repurchased 390,336 shares of common stock for $7.4 million, or an average repurchase price of $18.97. Our tangible book value per share at December 31, 2021 was $10.27.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of December 31, 2021, the Company’s Tier 1 leverage capital ratio totaled 9.18%, our common equity Tier 1 ratio totaled 14.86%, our Tier 1 risk-based capital ratio totaled 14.86%, and our total risk-based capital ratio totaled 15.63%. 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.

Acquisition Related

On January 7, 2022, the Company completed the previously announced merger transaction whereby Suncrest Bank (“Suncrest”) merged with and into the Company’s wholly-owned subsidiary Citizens Business Bank (“Citizens”), in accordance with the terms and conditions of that certain Agreement and Plan of Reorganization and Merger (“Merger Agreement”), dated as of July 27, 2021, by and among the Company, Citizens and Suncrest, in a stock and cash transaction valued at approximately $237 million in aggregate, or $18.63 per Suncrest share based on CVB Financial Corp.’s closing stock price of $22.87 on January 7, 2022. Under the terms of the Merger Agreement, the Company issued approximately 8.6 million shares of Company common stock and approximately $39.6 million in aggregate cash consideration, including cash paid out in settlement of outstanding incentive stock option awards at Suncrest.

Suncrest Bank, headquartered in Visalia, California, had approximately $1.4 billion in total assets, $0.8 billion in net loans, $1.2 billion in total deposits and $179.0 million in total equity as of December 31, 2021. Tangible book value per share was $11.16 at December 31, 2021. Suncrest’s seven branch locations and two loan production offices in California’s Central Valley and the Sacramento area opened as Citizens Business Bank locations on January 10, 2022. Citizens Business Bank will consolidate two of the former Suncrest branch locations during the second quarter of 2022.

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ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

Return on Average Tangible Common Equity Reconciliations (Non-GAAP)

The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company’s average stockholders’ equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.

(1)
Tax effected at respective statutory rates.

Net Interest Income

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the years ended December 31, 2021, 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

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proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset/Liability and Market Risk Management — Interest Rate Sensitivity Management included herein.

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

Interest-Earning Assets and Interest-Bearing Liabilities

(1)
Includes tax equivalent (TE) adjustments utilizing a federal statutory rate of 21% in effect for the years ended December 31, 2021, 2020 and 2019. The non TE rates for tax-advantaged HTM investment securities were 2.21%, 2.69% and 2.78% for the years ended December 31, 2021, 2020 and 2019, respectively. The non-tax equivalent (TE) rates for total investment securities was 1.53%, 2.04% and 2.43% for the years ended December 31, 2021, 2020 and 2019, respectively.

(2)
Includes loan fees of $27.5 million, $23.9 million and $3.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Prepayment penalty fees of $9.0 million, $8.2 million and $5.4 million are included in interest income for the years ended December 31, 2021, 2020 and 2019, respectively.

(3)
Includes interest-bearing demand and money market accounts.

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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 non TE interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in non TE 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

2021 Compared to 2020

Net interest income of $414.6 million for 2021 decreased $1.5 million, or 0.36%, compared to $416.1 million for 2020. Interest-earning assets increased on average by $2.41 billion, or 20.61%, from $11.69 billion for 2020 to $14.10 billion for 2021. Our net interest margin (TE) was 2.97% for 2021, compared to 3.59% for 2020.

Interest income for 2021 of $420.6 million declined by $9.7 million, or 2.26%, when compared to 2020, as interest income and fees on loans declined by $20.8 million, or 5.51%, year-over-year. Compared to 2020, average interest-earning assets increased by $2.41 billion and the yield on average earning assets was 3.02% for 2021, compared to 3.71% for 2020. The 69 basis point decrease in the interest-earning asset yield over 2020 resulted from a 26 basis point decrease in loan yields from 4.68% for 2020 to 4.42% for 2021, and a 51 basis point decline in the non-tax equivalent investment yields, as well as a change in mix of earning assets, resulting from an $857.5 million increase in average balances at the Federal Reserve. The decrease in earning asset yield was impacted by a change in asset mix with average loan balances declining to 57.22% of earning assets for 2021, compared to 69.02% for 2020, as well as lower loan and investment yields. Conversely the average balances at the Federal Reserve grew as a percentage of average earning assets to 13.64% for 2021, compared to 9.11% for 2020.

Interest income and fees on loans for 2021 of $356.6 million decreased $20.8 million, or 5.51% when compared to 2020. The average balance of loans was essentially the same in 2021 when compared to 2020, as core loans grew on average by $85.1 million, while PPP loans on average decreased $85.7 million. Loan yields decreased by 26 basis points from 2020. PPP loans resulted in approximately $24.3 million in fee income and $6.2 million in loan interest during 2021, compared to $21.4 million in fee income and $7.1 million in loan interest during 2020. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid decreased by $5.2 million compared to 2020. The decline in interest rates since the start

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of the pandemic has had a negative impact on loan yields, which, after excluding discount accretion, nonaccrual interest income and the impact from PPP loans, declined by 27 basis points compared to 2020. The decline in loan yields was due to lower rates on loans indexed to variable interest rates such as the Bank’s prime rate and lower yields on new loans in the low rate environment experienced for much of the last two years.

In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on nonaccrual loans at December 31, 2021 and 2020. As of December 31, 2021 and 2020, we had $6.9 million and $14.3 million of nonaccrual loans, respectively.

Interest income from investment securities was $60.4 million for 2021, a $10.2 million, or 20.23%, increase from $50.3 million for 2020. Investment income growth resulted from higher levels of investment securities as a result of purchases of investment securities funded by the growth in the Bank's deposits. This increase was the net result of a $1.55 billion increase in average investment securities, partially offset by a 51 basis point decline in the non TE yield on securities, compared to 2020. The significant decline in interest rates over the past two years decreased yields on investment securities due partly to higher levels of premium amortization, as well as lower yields on investments purchased during the past two years. We continued to maintain a significant amount of funds at the Federal Reserve. Our Federal Reserve balance averaged more than $1.9 billion for 2021, which was $857,000 greater than the average for 2020.

Interest expense of $6.1 million for 2021 decreased $8.2 million, or 57.43%, compared to $14.3 million for 2020. The average rate paid on interest-bearing liabilities decreased by 20 basis points, to 0.12% for 2021, from 0.32% for 2020. Average interest-bearing liabilities were $761.1 million higher for 2021 when compared to 2020. Noninterest-bearing deposits grew on average by $1.54 billion, or 24.45% compared to 2020, while interest-bearing deposits and customer repurchase agreements grew on average by $779.0 million for 2021. On average, noninterest-bearing deposits were 62.83% of our total deposits for 2021, compared to 61.24% for 2020. Total cost of funds was 0.05% for 2021, compared with 0.13% for 2020.

2020 Compared to 2019

Net interest income of $416.1 million for 2020 decreased $19.7 million, or 4.53%, compared to $435.8 million for 2019. Interest-earning assets increased on average by $1.66 billion, or 16.52%, from $10.03 billion for 2019 to $11.69 billion for 2020. Our net interest margin (TE) was 3.59% for 2020, compared to 4.36% for 2019.

Interest income for 2020 was $430.3 million, which represented a $27.5 million, or 6.01%, decrease when compared to 2019. Average interest-earning assets increased to $11.69 billion and the average earning asset yield was 3.71% for 2020, compared to 4.58% for 2019. The 87 basis point decrease in the interest-earning asset yield over 2019 was primarily due to a combination of a 58 basis point decrease in loan yields, a 39 basis point decline in the non-tax equivalent investment yields, and a change in mix of earning assets, with average balances at the Federal Reserve growing to 9.11% of earning assets for 2020, compared to 1.14% for 2019. The increase in balances at the Federal Reserve was impacted by $1.54 billion in average deposit growth for 2020. The net interest margin for 2020 would have been about 30 basis points higher without the $950.7 million year-over-year increase in average deposits at the Federal Reserve, earning just 10 basis points.

Interest income and fees on loans for 2020 of $377.4 million decreased $20.2 million, or 5.09% when compared to 2019 Average loans increased $514.0 million for 2020 when compared to 2019, primarily due to $702.1 million in average PPP loans originated in the second quarter of 2020. The PPP loans we originated resulted in approximately $21.4 million in fee income and $7.1 million in loan interest during 2020. Discount accretion on acquired loans and nonrecurring nonaccrual interest paid decreased by $12.6 million compared to 2019. Loan yields decreased by 58 basis points from 2019. The significant decline in interest rates since the start of the pandemic has had a negative impact on loan yields, which after excluding the impact from PPP loans, discount accretion and nonaccrual interest income, causing loan yields to decline by 36 basis points from 2019.

There was no interest income that was accrued and not reversed on nonaccrual loans at December 31, 2020 and 2019. As of December 31, 2020 and 2019, we had $14.3 million and $5.3 million of nonaccrual loans, respectively. Had these nonaccrual loans for which interest was no longer accruing complied with the original terms and conditions, interest income would have been approximately $843,000 and $526,000 greater for 2020 and 2019, respectively.

Interest income from investment securities was $50.3 million for 2020, a $6.4 million, or 11.36%, decrease from $56.7 million for 2019. The decrease was primarily the result of a 39 basis point decline in the non-tax equivalent yield on investments as the decline in interest rates over the past four quarters decreased yields on investment securities due to higher

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levels of premium amortization, as well as lower yields on investments purchased during 2020. Partially offsetting the decline from lower rates was a $164.5 million increase in the average investment securities for 2020 compared to 2019.

Interest expense of $14.3 million for 2020 decreased $7.8 million, or 35.30%, compared to $22.1 million for 2019. The average rate paid on interest-bearing liabilities decreased by 22 basis points, to 0.32% for 2020, from 0.54% for 2019. The rate on interest-bearing deposits for 2020 decreased by 16 basis points from 2019. Average interest-bearing liabilities were $414.0 million higher for 2020 when compared to 2019. On average, noninterest-bearing deposits were 61.24% of our total deposits for 2020, compared to 59.42% for 2019. In comparison to 2020, our overall cost of funds decreased 11 basis points, as our average noninterest-bearing deposits grew by $1.10 billion. Average interest-bearing deposits increased by $440.6 million for 2020, while the cost of interest-bearing deposits decreased by 16 basis points.

Provision for (Recapture of) Credit Losses

The provision for (recapture of) credit losses is a charge (credit) to earnings to reflect 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 replaced the “incurred loss” approach with an “expected loss” model over the life of the loan.

The allowance for credit losses totaled $65.0 million at December 31, 2021, compared to $93.7 million at December 31, 2020. Upon adoption of CECL, a transition adjustment of $1.8 million was added to the beginning balance of the allowance, with no impact on the consolidated statement of earnings, and was increased by $23.5 million in provision for credit losses in the first half of 2020, due to the severe economic disruption forecasted as a result of the onset of the COVID-19 pandemic. We recorded a recapture of provision for credit losses of $25.5 million in 2021, as our economic forecasts reflected continual improvements in key macroeconomic variables throughout the year, resulting in lower projected loan losses. For 2021, we experienced credit charge-offs of $3.4 million and total recoveries of $198,000, resulting in net charge-offs of $3.2 million. This compares to a $23.5 million loan loss provision and net charge-offs of $308,000 for 2020 and a $5.0 million loan loss provision and net recoveries of $47,000 for 2019. The ratio of the allowance for credit losses to total loans and leases outstanding, at amortized cost, as of December 31, 2021, was 0.82%. This compares to 1.12% and 0.91%, as of December 31, 2020 and 2019, respectively. When PPP loans are excluded, allowance for credit losses as a percentage of total adjusted loans and leases outstanding was 0.84% at December 31, 2021, compared to 1.25% at December 31, 2020 and 0.91%, at December 31, 2019, respectively. As of December 31, 2021, remaining discounts on acquired loans were $18.6 million.

No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will or will not be reflected in increased provisions for credit losses in the future, as the nature of this process requires considerable judgment. We may experience increases in the provision for credit losses, in future periods, due to further deterioration in economic conditions, including the impact of the COVID-19 pandemic. See “Allowance for Credit Losses” under Analysis of Financial Condition herein.

Noninterest Income

Noninterest income includes income derived from financial services offered to our customers, 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 when applicable, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.

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

2021 Compared to 2020

The $2.5 million decrease in noninterest income was primarily due to a $4.6 million decrease in swap fee income from 2020 due to lower volume of swap transactions. Partially offsetting the overall decrease in noninterest income was a $1.6 million increase in Trust and investment services income and a $591,000 year-over-year increase in service charges on deposit accounts. Noninterest income for 2021 also included $1.2 million in net gain on the sale of three OREO properties, while 2020 included $1.7 million net gain on the sale of one of our owned buildings and a $365,000 net gain on the sale of two OREO properties. The $373,000 increase in other income in 2021 included $890,000 for recovery of an acquired loan charged off prior to a previous acquisition.

The Bank enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of the swaps primarily offset each other resulting in swap fee income (refer to Note 20 — Derivative Financial Instruments of the notes to the consolidated financial statements of this report for additional information). Swap fee income decreased $4.6 million compared to 2020, due to lower volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $25.3 million for 2021, compared to $280.4 million for 2020. The volume of interest rate swaps can be impacted by competitive factors, as well as the current and forecasted interest rate environment.

CitizensTrust consists of Wealth Management and Investment Services income. The Wealth Management group provides a variety of services, which include asset management, financial planning, estate planning, retirement planning, private, and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At December 31, 2021, CitizensTrust had approximately $3.45 billion in assets under management and administration, including $2.50 billion in assets under management. CitizensTrust generated fees of $11.6 million for 2021, an increase of $1.6 million compared to $10.0 million for 2020, due to the growth in assets under management.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and the purchase of life insurance by the Bank on a selected group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. Income from our BOLI policies for 2021 included $3.9 million of death benefits that exceeded cash surrender values, compared to $2.8 million of death benefits for 2020.

2020 Compared to 2019

Noninterest income for 2019 included a $5.7 million net gain from the legal settlement of an eminent domain condemnation of one of our banking center buildings in Bakersfield and $4.8 million in net gains on the sale of bank owned buildings, compared with a $1.7 million net gain on the sale of one of our owned buildings in 2020. Service charges on deposit accounts decreased by $3.4 million from 2019. This decrease was primarily due to the higher earnings credits generated by the significant increase in our customer’s noninterest-bearing deposits held at the Bank. In addition, bankcard services decreased by approximately $1.3 million when compared to 2019, primarily due to the Durbin Amendment’s cap on debit card interchange fees. The $1.9 million decrease in other income in 2020 included decreases in dividend income from various equity investments, other banking fee income and SBA servicing income when compared to 2019.

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Swap fee income increased $3.2 million compared to 2019, due to higher volume of swap transactions. We executed on swap agreements related to new loan originations with a notional amount totaling $280.4 million for 2020, compared to $96.4 million for 2019.

At December 31, 2020, CitizensTrust had approximately $3.04 billion in assets under management and administration, including $2.18 billion in assets under management. CitizensTrust generated fees of $10.0 million for 2020, an increase of $453,000 compared to $9.5 million for 2019, due to the growth in assets under management.

Income from our BOLI policies for 2020 included $2.8 million of death benefits that exceeded cash surrender values, compared to $502,000 of death benefits for 2019.

Noninterest Expense

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

(1)
Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.

Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.24% for 2021, compared to 1.49% for 2020 and 1.76% for 2019, respectively. The decline in this ratio for 2021 reflects the $2.42 billion growth in average assets that resulted primarily from $2.18 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) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio was 41.09% for 2021, compared to 41.40% for 2020 and 40.16% for 2019.

2021 Compared to 2020

Noninterest expense of $189.8 million for the year ended December 31, 2021 was $3.1 million, or 1.62% lower than 2020. This year-over-year decrease included a $1.9 million decrease in salaries and employee benefits, partially due to a $1.1 million in additional bonus expense for “Thank You Awards” paid to all Bank employees during the third quarter of 2020. The year-over-year decrease also included a $1.5 million decrease in professional services expense, a $1.1 million decrease in Core Deposit Intangible ("CDI") amortization, a $1.2 million decrease in OREO expense primarily due to a $700,000 write-down of one OREO property in 2020, and a $1.0 million recapture of provision for unfunded loan commitments recorded in

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2021, compared to no recapture of provision in 2020. These decreases were partially offset by a $2.3 million increase in regulatory assessment expense compared to the prior year, which resulted from the final application of assessment credits provided by the FDIC at the end of the second quarter of 2020. Additionally, there were $962,000 in acquisition related expenses for the year ended December 31, 2021, compared to no merger related expenses for 2020.

2020 Compared to 2019

Noninterest expense of $192.9 million for the year ended December 31, 2020 was $5.8 million, or 2.9% lower than 2019. There were no merger related expenses related to the Community Bank acquisition for 2020, compared to $6.4 million for 2019 and the year-over-year decrease also included a $1.4 million decrease in CDI amortization. A decrease in marketing and promotion expense in 2020 of $1.4 million was primarily due to COVID-19 restrictions on travel and entertainment. These decreases were partially offset by a $1.7 million increase in professional services expense, related to legal, audit, and other professional services. OREO expense also increased in 2020 by $1.2 million primarily due to a $700,000 write-down of one OREO property.

Income Taxes

The Company’s effective tax rate for the year ended December 31, 2021 was 28.60%, compared with 29.00% and 28.60% for the year ended December 31, 2020 and 2019, respectively. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income as well as available tax credits. Refer to Note 10 — Income Taxes of the notes to consolidated financial statements for more information.

The effective tax rates are below the nominal combined Federal and State tax rate as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.

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ANALYSIS OF FINANCIAL CONDITION

Total assets of $15.88 billion at December 31, 2021 increased $1.46 billion, or 10.16%, from total assets of $14.42 billion at December 31, 2020. Interest-earning assets totaled $14.68 billion at December 31, 2021, an increase of $1.46 billion, or 11.04%, when compared with $13.22 billion at December 31, 2020. The increase in interest-earning assets includes a $2.13 billion increase in investment securities, that was partially offset by a $461.1 million decrease in total loans and a $193.3 million decrease in interest-earning balances due from the Federal Reserve. The decrease in total loans was due to a $696.4 million decrease in PPP loans with a remaining outstanding balance totaling $186.6 million as of December 31, 2021. Excluding PPP loans, total loans increased by $235.3 million, or 3.15%, from December 31, 2020.

Total liabilities were $13.80 billion at December 31, 2021, an increase of $1.39 billion, or 11.21%, from total liabilities of $12.41 billion at December 31, 2020. Total deposits grew by $1.24 billion, or 10.56%. Deposit growth in 2021 was partly due to our customers maintaining greater liquidity in their deposit accounts. Total equity increased $73.5 million, or 3.66%, to $2.08 billion at December 31, 2021, compared to total equity of $2.01 billion at December 31, 2020. The $73.5 million increase in equity was primarily due to net earnings of $212.5 million, partially offset by $97.8 million in cash dividends and a $39.3 million decrease in other comprehensive income from the tax effected impact of the decline in market value of available-for-sale securities. During the third quarter of 2021, we repurchased 390,336 shares of common stock for $7.4 million, or an average repurchase price of $18.97, under our 10b5-1 stock repurchase program.

Investment Securities

The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. At December 31, 2021, total investment securities were $5.11 billion. This represented an increase of $2.13 billion, or 71.61%, from total investment securities of $2.98 billion at December 31, 2020. The increase in investment securities was primarily due to new securities purchased exceeding the cash outflow from the portfolio in 2021. At December 31, 2021, investment securities HTM totaled $1.93 billion. At December 31, 2021, our AFS investment securities totaled $3.18 billion, inclusive of a pre-tax net unrealized loss of $1.3 million. The after-tax unrealized loss reported in AOCI on AFS investment securities was $934,000. The changes in the net unrealized holding gain (loss) resulted primarily from fluctuations in market interest rates. For the years ended December 31, 2021 and 2020, repayments/maturities of investment securities totaled $928.4 million and $798.7 million, respectively. The Company purchased additional investment securities totaling $3.16 billion and $1.28 billion for the years ended December 31, 2021 and 2020, respectively. We deployed some of our excess liquidity during 2021 by purchasing $3.16 billion of additional investment securities with a non-tax equivalent weighted average yield of approximately 1.61%. There were no investment securities sold during the years ended December 31, 2021 and 2020.

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

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The maturity distribution of the AFS and HTM portfolios consist of the following as of the date presented.

(1)
The weighted average yield for the portfolio is based on projected duration and is not tax-equivalent. The tax-equivalent yield at December 31, 2021 was 3.27%.

(1)
The weighted average yield for the portfolio is based on projected duration and is not tax-equivalent. The tax equivalent yield at December 31, 2021 was 2.72%.

The maturity of each security category is defined as the contractual maturity except for the categories of mortgage-backed securities and CMO/REMIC whose maturities are defined as the estimated average life. The final maturity of mortgage-backed securities and CMO/REMIC will differ from their contractual maturities because the underlying mortgages have the right to repay such obligations without penalty. The speed at which the underlying mortgages repay is influenced by many factors, one of which is interest rates. Mortgages tend to repay faster as interest rates fall and slower as interest rate rise. This will either shorten or extend the estimated average life. Also, the yield on mortgage-backed securities and CMO/REMIC are affected by the speed at which the underlying mortgages repay. This is caused by the change in the amount of amortization of premiums or accretion of discounts of each security as repayments increase or decrease. The Company obtains the estimated average life of each security from independent third parties.

The weighted-average yield on the total investment portfolio at December 31, 2021 was 1.71% with a weighted-average life of 5.5 years. This compares to a weighted-average yield of 1.92% at December 31, 2020 with a weighted-average life of 2.9 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

Approximately 95% of the securities in the total investment portfolio, at December 31, 2021, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2021, approximately $49.6 million in U.S. government agency bonds are callable.

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The Agency CMO/REMIC are backed by agency-pooled collateral. Municipal bonds, which represented approximately 5% of the total investment portfolio, are predominately AA or higher rated securities.

The Company held investment securities in excess of 10% of shareholders’ equity from the following issuers as of the dates presented.

Municipal securities held by the Company are issued by various states and their various local municipalities. The following tables present municipal securities by the top holdings by state as of the dates presented.

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We adopted ASU 2016-13 on January 1, 2020, on a prospective basis. Under this guidance, once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. Prior to adoption of this standard, when a decline in fair value of a debt security was determined to be other than temporary, an impairment charge for the credit component was recorded, and a new cost basis in the investment was established. As of December 31, 2021 and 2020, management determined that credit losses did not exist for securities in an unrealized loss position.

The following tables present the Company’s available-for-sale investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of December 31, 2021 and December 31, 2020.

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Once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. Management determined that credit losses did not exist for securities in an unrealized loss position as of December 31, 2021 and 2020.

Loans

Total loans and leases, at amortized cost, of $7.89 billion at December 31, 2021, decreased by $461.1 million, or 5.52%, from $8.35 billion at December 31, 2020. The decrease in total loans included $696.4 million in PPP loans, $29.9 million in SFR mortgage loans, $22.9 million in construction loans, $15.3 million in SBA loans, and $11.3 million in consumer and other loans. Partially offsetting these declines were increases in commercial real estate loans of $288.2 million and $25.1 million in dairy & livestock and agribusiness loans. Our core loans, excluding PPP loans, grew by $235.3 million, or 3.15%, from the end of the fourth quarter of 2020.

Total loans, at amortized cost, comprised 53.72% of our total earning assets as of December 31, 2021. The following table presents our loan portfolio by type as of the dates presented.

Distribution of Loan Portfolio by Type

(1)
Beginning with June 30, 2019, PCI loans were accounted for and combined with Non-PCI loans and were reflected in total loans and lease finance receivables.

(2)
Beginning with March 31, 2020, gross loans are presented net of deferred loan fees (at amortized cost) by respective class of financing receivables.

As of December 31, 2021, $364.4 million, or 6.29% of the total commercial real estate loans included loans secured by farmland, compared to $314.4 million, or 5.72%, at December 31, 2020. The loans secured by farmland included $134.9 million for loans secured by dairy & livestock land and $229.5 million for loans secured by agricultural land at December 31, 2021, compared to $132.9 million for loans secured by dairy & livestock land and $181.5 million for loans secured by agricultural land at December 31, 2020. As of December 31, 2021, dairy & livestock and agribusiness loans of $386.2 million were comprised of $351.7 million for dairy & livestock loans and $34.5 million for agribusiness loans, compared to $361.1 million for dairy & livestock loans and $41.0 million for agribusiness loans at December 31, 2020.

Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.

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As of December 31, 2021, the Company had $200.6 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of December 31, 2021, the Company had $88.0 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.

As an active participant in the SBA’s Paycheck Protection Program, we initially originated approximately 4,100 PPP loans totaling $1.1 billion ("round one"), with a remaining outstanding balance of $3.0 million as of December 31, 2021. We originated approximately 1,900 PPP loans in round two with a remaining outstanding balance of $183.6 million, as of December 31, 2021.

As of December 31, 2021, the Company had $62.3 million in construction loans. This represents 0.79% of total gross loans held-for-investment. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects in Los Angeles County, Orange County, and the Inland Empire region of Southern California. There were no nonperforming construction loans at December 31, 2021.

Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, by region as of December 31, 2021.

The table below breaks down our real estate portfolio.

(1)
Represents percentage of reported owner-occupied at origination in each real estate loan category.

(2)
The loans secured by farmland included $134.9 million for loans secured by dairy & livestock land and $229.5 million for loans secured by agricultural land at December 31, 2021.

(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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At December 31, 2021, commercial real estate loans on retail properties comprised $820.0 million and approximately 17.9% of total commercial real estate loans; none of these loans are on deferment and $3.6 million of these loans were classified. At origination, these loans on retail properties were underwritten with loan-to-values averaging approximately 48%. Approximately 36% of these loans were originated prior to 2017.

The table below provides the maturity distribution for held-for-investment total gross loans as of December 31, 2021. The loan amounts are based on contractual maturities although the borrowers have the ability to prepay the loans. Amounts are also classified according to repricing opportunities or rate sensitivity.

Loan Maturities and Interest Rate Category

As a normal practice in extending credit for commercial and industrial purposes, we may accept trust deeds on real property as collateral. In some cases, when the primary source of repayment for the loan is anticipated to come from the cash flow from normal operations of the borrower, and real property has been taken as collateral, the real property is considered a secondary source of repayment for the loan. Since we lend primarily in Southern and Central California, our real estate loan collateral is concentrated in this region.

Nonperforming Assets

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