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Item 2. Management’s Discussion and Analysis

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
 Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; (14) the rapidly changing uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) 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. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company. 
 When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 
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 The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The Internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. 
 
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 
 
 Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments. 
 There have been no material changes to the Company’s critical accounting policies during the nine months ended September 30, 2020. Please refer to the Company’s 2019 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies. 
 This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report. 
 
 OVERVIEW 
 
 
 Central Valley Community Bancorp (Company) 
 
 We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank). We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank. 
 
 Central Valley Community Bank (Bank) 
 
 The Bank commenced operations in January 1980 as a state-chartered bank. As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the California Department of Financial Protection and Innovation (DFPI). The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC. 
 The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor. For this insurance, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment. 
 The Bank operates 20 full-service branches which serve the communities of Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia, California. Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2020 FDIC data, the Bank’s branches in Fresno, Madera, San Joaquin, and Tulare Counties had a 3.40% combined deposit market share of all insured depositories. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus Counties), was less than 1.00% in 2020. 
 
 
 Dividend Declared 
 
 
 On October 28, 2020, the Board of Directors declared an $0.11 per share cash dividend payable on November 27, 2020 to shareholders of record as of November 13, 2020. 
 
 
 COVID-19 Pandemic 
 
 
 The COVID-19 pandemic has impacted the local economy in the San Joaquin Valley and greater Sacramento area. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020, causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates are increasing in our local market area as compared to the prior quarter end. 
 The Company is closely monitoring the effects of the pandemic on our loan and deposit customers. Our management team is focused on assessing the risks in our loan portfolio and working with our customers to minimize our losses. While some industry segments are being more impacted by the COVID-19 pandemic than others, we believe that our credit risk 
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 related to the loans outstanding to customers in the higher risk categories is well managed. This is primarily due to the existence of SBA and other loan guarantee programs, personal guarantees, and adequate collateralization. 
 Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). Pursuant to these new capabilities, we have implemented a loan program to allow customers who may be negatively impacted by the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days. 
 The CARES Act established a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors, and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. As a preferred SBA lender, we are participating in the PPP to help provide loans to our business customers to provide them with additional working capital. The Company has worked diligently with the SBA to qualify clients to receive PPP loans. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest. Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded. 
 The federal bank regulatory agencies, along with their state counterparts, have issued guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility. 
 We have also taken measures to protect the health and safety of our employees by implementing remote work arrangements to the full extent possible, and by adjusting banking center hours and operational measures to promote social distancing. Management is closely monitoring credit metrics. Additional resources have been shifted to credit administration to closely analyze higher risk segments within the loan portfolio, monitor and track loan payment deferrals and customer liquidity, and provide timely reporting to management and the board of directors. The management team continues to analyze economic conditions in our geographic markets and perform stress testing of our investment portfolio as well as our loan portfolio. Based on the Company’s capital levels, conservative underwriting policies, low loan-to-deposit ratio, loan concentration diversification, and suburban geographical marketplace, management expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain adequately capitalized. 
 
 
 Risks and Uncertainties 
 The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. 
 The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware. 
 
 
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 Financial position and results of operations 
 
 
 The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods. 
 
 
 Capital and liquidity 
 
 
 While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt. 
 The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. 
 
 
 Asset valuation 
 
 
 Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. 
 COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020. 
 
 Processes, controls and business continuity plan 
 
 
 The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans. 
 
 
 Lending operations and accommodations to borrowers 
 
 
 In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its borrowing clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to 90 days. As of September 30, 2020, based on the Bank’s discussion with these customers, loan customer requests to defer payments on loans totaling approximately $60.1 million were outstanding, of which, approximately $4.0 million or 7% expect to require up to an additional 90-day deferral, and $4.1 million or 6% expect they will require a loan modification. In accordance with interagency guidance issued in March 2020 and Section 4013 of the Cares Act, these short-term deferrals are not considered troubled debt restructurings. 
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 With the passage of the PPP administered by the SBA, the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. During the nine months ended September 30, 2020, the Company closed 1,077 PPP loans representing $211,575,000 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit losses charged to earnings. 
 
 
 Credit 
 
 
 The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by COVID-19, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses and record additional provisions for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. 
 
 
 Third Quarter of 2020 
 
 
 For the third quarter of 2020, our consolidated net income was $4,344,000 compared to $5,691,000 for the same period in 2019. Diluted EPS was $0.35 for the quarter ended September 30, 2020 compared to $0.42 for the same period in 2019. The decrease in net income during the third quarter of 2020 compared to the same period in 2019 is primarily due to a decrease in non-interest income of $1,651,000, an increase in provision for credit losses of $350,000, an increase in total non-interest expenses of $194,000, and a decrease in net interest income of $162,000, partially offset by a decrease in the provision for income taxes of $1,010,000. During the quarter ended September 30, 2020, the Company recorded a decrease of $1,628,000 in net realized gains on sales and calls of investment securities. During the quarter ended September 30, 2020, the Company recorded a $600,000 provision for credit losses, compared to a $250,000 provision during the quarter ended September 30, 2019. During the first quarter of 2020, we adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic. 
 Net interest margin (fully tax equivalent basis) decreased to 3.63% for the quarter ended September 30, 2020 compared to 4.50% for the same period in 2019. The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, the decrease in the yield on the loan portfolio, the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, and the decrease in the cost of total interest-bearing liabilities. The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, decreased to 2.07% for the three months ended September 30, 2020, compared to 3.07% for the three months ended September 30, 2019. The effective yield on average loans decreased to 4.68% for the three months ended September 30, 2020, compared to 5.55% for the three months ended September 30, 2019. The decrease in the loan yield was impacted by Company’s issuance of PPP loans. Total average PPP loans, which yield 1.00%, were $211,559,000 for the three months ended September 30, 2020. The cost of deposits (calculated by dividing annualized interest expense on interest bearing deposits by total deposits), decreased to 0.09% for the quarter ended September 30, 2020 compared to 0.17% for the same period in 2019. 
 Non-interest income decreased $1,651,000 or 44.36% to $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 for the same period in 2019, primarily driven by a decrease of $1,628,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $209,000, a decrease of $148,000 in other income, a decrease in interchange fees of $19,000, and a decrease in Federal Home Loan Bank (“FHLB”) dividends of $38,000, offset by an increase in loan placement fees of $397,000. Non-interest expense for the quarter ended September 30, 2020 increased $194,000 or 1.68% from the comparable period due to increases in professional services, regulatory assessment, data processing, loan related expenses, and alarm expenses, partially offset by decreases occupancy and equipment, information technology, directors’ expenses, tax provision, amortization of software, education and training, mileage and travel, armored courier fees, risk management expenses, stationery/supplies, telephone expenses, personnel, operating losses, advertising expenses, other expenses, and ATM/debit card expenses. 
 Annualized return on average equity for the third quarter of 2020 decreased to 7.50% compared to 9.77% for the same period in 2019. The decrease in return on average equity reflects a decrease in net income compared to the prior year. Annualized return on average assets was 0.90% and 1.43% for the quarter ended September 30, 2020 and 2019, respectively. Total average equity decreased to $231,656,000 for the third quarter of 2020 compared to $233,077,000 for the third quarter of 2019. The Company declared and paid $0.11 per share in cash dividends to holders of common stock during the third quarter of 2020, compared to $0.11 in dividends declared and paid during the third quarter of 2019. 
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 Our average total assets increased $340,227,000 or 21.42% to $1,928,594,000 during the third quarter of 2020 compared to the same period in 2019. Total average interest-earning assets increased $338,229,000 or 23.61% in the third quarter of 2020 compared to the same period of 2019. Average total loans, including nonaccrual loans, increased $174,643,000 or 18.41% in the third quarter of 2020 compared to the same period in 2019. Average total investments and interest-earning deposits in other banks increased $163,709,000 or 33.67% in the period ended September 30, 2020 compared to the same period in 2019. Average interest-bearing liabilities increased $97,855,000 or 12.84% in the period ended September 30, 2020 compared to the same period in 2019. Average non-interest bearing demand deposits increased 43.22% to $807,052,000 in 2020 compared to $563,498,000 in 2019. The ratio of average non-interest bearing demand deposits to average total deposits was 48.56% in the third quarter of 2020 compared to 43.24% in 2019. 
 
 
 First Nine Months of 2020 
 
 
 For the nine months ended September 30, 2020, our consolidated net income was $13,268,000 compared to $16,994,000 for the same period in 2019. Diluted EPS was $1.05 for the first nine months of 2020 compared to $1.25 for the first nine months of 2019. Net income for the nine-month period ended September 30, 2020 decreased 21.93%, compared to the nine-month period ended September 30, 2019, primarily driven by a decrease in net interest income, an increase in non-interest expense, and an increase in the provision for credit losses, partially offset by a decrease in net realized gains on sales and calls of investment securities, an increase in loan placement fees, and a decrease in provision for income taxes. Net interest income before the provision for credit losses decreased $339,000 or 0.71%. Net interest income during the first nine months of 2020 and 2019 benefited by approximately $505,000 and $593,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. Excluding these benefits, net interest income for the nine months ended September 30, 2020, decreased by $540,000 compared to the nine-month period ended September 30, 2019. Non-interest income decreased $637,000 or 5.64%, and non-interest expense increased $333,000 or 0.95% in the first nine months ended of 2020 compared to first nine months ended of 2019. During the nine months ended September 30, 2020, the Company recorded a provision for credit losses of $4,975,000 compared to $525,000 during same period in 2019. Net recoveries of previously charged-off loans totaling $552,000 and $134,000 during the nine months ended September 30, 2020 and 2019, respectively. 
 Annualized return on average equity for the nine months ended September 30, 2020 decreased to 7.78% compared to 9.96% for the same period in 2019. The decrease in return on average equity reflects the decrease in net income compared to the prior year. Annualized return on average assets was 0.99% and 1.44% for the nine months ended September 30, 2020 and 2019, respectively. Total average equity was $227,394,000 for the nine months ended September 30, 2020 compared to $227,551,000 for the same period in 2019. The change in shareholders’ equity was driven by the retention of earnings net of dividends paid, and an increase in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI). 
 Our average total assets increased $209,471,000 or 13.33% in the first nine months of 2020 compared to the same period in 2019. Total average interest-earning assets increased $205,691,000 or 14.47% comparing the first nine months of 2020 to the same period in 2019. Average total loans, including nonaccrual loans, increased $110,574,000 or 11.87% comparing the first nine months of 2020 to the same period in 2019. The effective yield on average loans decreased to 4.97% for the nine months September 30, 2020, compared to 5.58% for the nine months September 30, 2019. Total average PPP loans, which yield 1.00%, were $124,303,000 for the nine months ended September 30, 2020. Excluding PPP loans from total average loans, the effective yield on average loans for the nine months ended September 30, 2020 was 5.34%. Average total investments (securities and interest-earning deposits) increased $94,449,000, or 19.17% in the nine-month period ended September 30, 2020 compared to the same period in 2019, with average interest-bearing liabilities decreasing $38,803,000 or 5.06% on a period to period comparison. 
 Our net interest margin (fully tax equivalent basis) for the first nine months ended September 30, 2020 decreased to 3.93% compared to 4.54% for the same period in 2019. The decrease in net interest margin in the period-to-period comparison resulted primarily from a decrease in the effective yield on the Company’s average investment securities, the decrease in the yield on the loan portfolio, and the decrease in the effective yield on interest-earning deposits in other banks and Federal funds sold, partially offset by the decrease in the cost of total interest-bearing liabilities. The effective yield on interest-earning assets decreased 69 basis points to 4.04% for the nine-month period ended September 30, 2020 compared to 4.73% for the same period in 2019. For the nine-month period ended September 30, 2020, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, decreased 75 basis points, compared to the same period in the prior year, and the effective yield on loans decreased 61 basis points. The cost of total interest-bearing liabilities decreased 14 basis points to 0.21% compared to 0.35% for the same period in 2019. The cost of total deposits, including noninterest bearing accounts decreased to 0.10% compared to 0.15% for the nine months ended September 30, 2020 and 2019. 
 Net interest income before the provision for credit losses for the nine months ended September 30, 2020 was $47,646,000 compared to $47,985,000 for the same period in 2019, a decrease of $339,000 or 0.71%. Net interest income decreased as a result of yield changes, asset mix changes, and an increase in interest-bearing liabilities, offset by an increase in average earning assets. The Bank recovered $505,000 and $593,000, of foregone interest income and prepaid payment penalties in 2020 and 2019, respectively. The Bank had non-accrual loans totaling $3,458,000 at September 30, 2020, 
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 compared to $1,693,000 at December 31, 2019 and 2,157,000 at September 30, 2019. The Company had no other real estate owned or repossessed assets at September 30, 2020, December 31, 2019, or September 30, 2019. 
 At September 30, 2020, we had total net loans of $1,095,232,000, total assets of $1,950,560,000, total deposits of $1,681,214,000, and shareholders’ equity of $235,780,000. 
 
 
 Key Factors in Evaluating Financial Condition and Operating Performance 
 
 As a publicly traded community bank holding company, we focus on several key factors including: 
 
 · Return to our shareholders; 
 · Return on average assets; 
 · Development of revenue streams, including net interest income and non-interest income; 
 · Asset quality; 
 · Asset growth; 
 · Capital adequacy; 
 · Operating efficiency; and 
 · Liquidity 
 
 Return to Our Shareholders 
 
 Our return to shareholders is determined in a ratio that measures the return on average equity (ROE). ROE is a ratio that measures net income divided by average shareholders’ equity. Our annualized ROE was 7.78% for the nine months ended September 30, 2020 compared to 10.07% for the year ended December 31, 2019 and 9.96% for the nine months ended September 30, 2019. Our net income for the nine months ended September 30, 2020 decreased $3,726,000 or 21.93% to $13,268,000 compared to $16,994,000 for the nine months ended September 30, 2019, primarily driven by a decrease in net interest income, a decrease in net realized gains on sales and calls of investment securities, an increase in non-interest expenses, and an increase in the provision for credit losses, partially offset by an increase in loan placement fees, and a decrease in provision for income taxes. Net interest margin (NIM) decreased 61 basis points for the nine-month period ended September 30, 2020 compared to the nine months ended September 30, 2019. Diluted EPS was $1.05 for the nine months ended September 30, 2020 and $1.25 for the same period in 2019. 
 
 Return on Average Assets 
 
 Our return on average assets (ROA) is a ratio that we use to compare our performance with other banks and bank holding companies. Our annualized ROA for the nine months ended September 30, 2020 was 0.99% compared to 1.35% for the year ended December 31, 2019 and 1.44% for the nine months ended September 30, 2019. The decrease in ROA for the nine months ended September 30, 2020 compared to September 30, 2019 was due to the decrease in net income, notwithstanding an increase in in average assets. Average assets for the nine months ended September 30, 2020 was $1,780,716,000 compared to $1,574,089,000 for the year ended December 31, 2019. Median ROA for our peer group was 1.37% for the year ended December 31, 2019. Peer group data from S&P Global Market Intelligence includes bank holding companies in central California with assets from $600 million to $3.5 billion. 
 
 
 Development of Revenue Streams 
 
 Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin. The Company’s net interest margin (fully tax equivalent basis) decreased to 3.93% for the nine months ended September 30, 2020, compared to 4.54% for the same period in 2019. The decrease in net interest margin in the period-over-period comparison resulted primarily from the decrease in the effective yield on average investment securities (including interest-earning deposits in other banks and Federal funds sold), and a decrease in the yield on the Company’s loan portfolio. Interest-bearing liabilities continue to benefit from low interest rates. In comparing the two periods ending September 30, 2020 and 2019, the effective yield on total earning assets decreased 69 basis points, while the cost of total interest-bearing liabilities decreased 14 basis points and the cost of total deposits decreased to 0.10% compared to 0.15%. Net interest income before the provision for credit losses for the nine-month period ended September 30, 2020 was $47,646,000 compared to $47,985,000 for the same period in 2019. 
 Our non-interest income generally consists of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank-owned life insurance, net gains from sales of 
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 investment securities, FHLB dividends, and other income. Non-interest income for the nine months ended September 30, 2020 decreased $637,000 or 5.64%, to $10,659,000 compared to $11,296,000 for the nine months ended September 30, 2019. The decrease resulted primarily from decreases in net realized gains on sales and calls of investment securities, service charge income, interchange fees, and FHLB dividends; offset by increases in loan placement fees, and gain related to the collection of life insurance proceeds, compared to the comparable 2019 period. Further detail of non-interest income is provided below. 
 
 Asset Quality 
 
 For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of percentage of total loans and total assets and is a key element in estimating the future earnings of a company. Total nonperforming assets were $3,458,000 and $1,693,000 at September 30, 2020 and December 31, 2019, respectively. Nonperforming assets totaled 0.31% of gross loans as of September 30, 2020 and 0.18% of gross loans as of December 31, 2019. The ratio of nonperforming assets to total assets was 0.18% as of September 30, 2020 and 0.11% as of December 31, 2019. The nonperforming assets at September 30, 2020 and December 31, 2019 consisted of nonaccrual loans of $3,458,000 and $1,693,000, respectively. The Company had no other real estate owned (OREO) or repossessed assets at September 30, 2020 or December 31, 2019. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. 
 The allowance for credit losses as a percentage of outstanding loan balance was 1.32% as of September 30, 2020 and 0.97% as of December 31, 2019. The ratio of net charge-off (recovery) to average loans was (0.07)% as of September 30, 2020 and 0.11% as of December 31, 2019. 
 
 Asset Growth 
 
 As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased by $353,805,000 or 22.16% during the nine months ended September 30, 2020 to $1,950,560,000 compared to $1,596,755,000 as of December 31, 2019, primarily due to the Company’s participation in the PPP. Total gross loans increased by 17.65% or $166,509,000 to $1,109,889,000 as of September 30, 2020 compared to $943,380,000 as of December 31, 2019. Total deposits increased 26.10% to $1,681,214,000 as of September 30, 2020 compared to $1,333,285,000 as of December 31, 2019. The Company’s deposit balances for thenine months ended September 30, 2020 increased through organic growth and PPP loan proceeds retained in customer deposit 
 accounts. Our loan-to-deposit ratio at September 30, 2020 was 66.02% compared to 70.76% at December 31, 2019. The loan-to-deposit ratio of our peers was 82.00% at December 31, 2019. Further discussion of loans and deposits is below. 
 
 Capital Adequacy 
 
 Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities. 
 The Company and the Bank are each subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements may cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by bank regulatory agencies to ensure capital adequacy. As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of September 30, 2020, the Bank met or exceeded all regulatory capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2020. The Company’s regulatory capital ratios are presented in the table in the “Capital” section below. 
 
 
 Operating Efficiency 
 
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 Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue. When measuring operating efficiency, a lower ratio is more favorable. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was 64.52% for the nine months ended September 30, 2020 compared to 62.07% for the nine months ended September 30, 2019. The increase in the efficiency ratio was due to the growth in non-interest expense outpacing the growth in non-interest income. Further discussion of the change in net interest income and increase in operating expenses is below. 
 The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, increased 194.87% to $53,914,000 for the first nine months of 2020 compared to $18,284,000 for the same period in 2019, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, increased 206.49% to $34,784,000 from $11,349,000 for the same period in 2019. 
 
 Liquidity 
 
 Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (“FHLB”). We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $241,964,000 with the FHLB. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses. 
 We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling $726,519,000 or 37.25% of total assets at September 30, 2020 and $530,792,000 or 33.24% of total assets as of December 31, 2019. 
 
 
 
 RESULTS OF OPERATIONS 
 
 Net Income for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019 
 
 Net income decreased to $13,268,000 for the nine months ended September 30, 2020 compared to $16,994,000 for the nine months ended September 30, 2019. Basic and diluted earnings per share for September 30, 2020 were $1.06 and $1.05, respectively. Basic and diluted earnings per share for the same period in 2019 were $1.26 and $1.25, respectively. Annualized ROE was 7.78% for the nine months ended September 30, 2020 compared to 9.96% for the nine months ended September 30, 2019. Annualized ROA for the nine months ended September 30, 2020 and 2019 was 0.99% and 1.44%, respectively. 
 The decrease in net income for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily driven by a decrease in net interest income, an increase in non-interest expense, a decrease in net realized gains on sales and calls of investment securities, and an increase in the provision for credit losses, partially offset by an increase in loan placement fees, and a decrease in provision for income taxes. During the nine months ended September 30, 2020, the Company recorded a $4,975,000 provision for credit losses, compared to a $525,000 provision during the nine months ended September 30, 2019. The provision was recorded in anticipation of the potential effects of the COVID-19 pandemic on our loan portfolio. We adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic. 
 
 Interest Income and Expense 
 
 Net interest income is the most significant component of our income from operations. Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest-bearing liabilities. 
 The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are not included as interest earning assets for purposes of this table. 
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 CENTRAL VALLEY COMMUNITY BANCORP 
 SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES 
 
 
 For the Nine Months Ended 
September 30, 2020 For the Nine Months Ended 
September 30, 2019 
 (Dollars in thousands) Average
Balance Interest
Income/
Expense Average
Interest
Rate Average
Balance Interest
Income/
Expense Average
Interest
Rate 
 ASSETS 
 Interest-earning deposits in other banks $ 70,418 $ 222 0.42 % $ 16,633 $ 285 2.28 % 
 Securities: 
 Taxable securities 478,238 8,996 2.51 % 429,489 9,821 3.05 % 
 Non-taxable securities (1) 38,559 1,284 4.44 % 46,644 1,447 4.14 % 
 Total investment securities 516,797 10,280 2.65 % 476,133 11,268 3.16 % 
 
 Total securities and interest-earning deposits 
 587,215 10,502 2.38 % 492,766 11,553 3.13 % 
 Loans (2) (3) 1,040,116 38,688 4.97 % 928,874 38,747 5.58 % 
 Total interest-earning assets 1,627,331 $ 49,190 4.04 % 1,421,640 $ 50,300 4.73 % 
 Allowance for credit losses (11,439) (9,261) 
 Nonaccrual loans 1,894 2,562 
 
 Cash and due from banks 25,526 25,677 
 Bank premises and equipment 7,412 8,062 
 Other assets 129,992 122,565 
 Total average assets $ 1,780,716 $ 1,571,245 
 LIABILITIES AND SHAREHOLDERS’ EQUITY 
 
 Interest-bearing liabilities: 
 Savings and NOW accounts $ 417,075 $ 273 0.09 % $ 371,330 $ 429 0.15 % 
 Money market accounts 293,764 417 0.19 % 271,491 499 0.25 % 
 Time certificates of deposit 90,249 479 0.71 % 97,129 500 0.69 % 
 
 Total interest-bearing deposits 801,088 1,169 0.19 % 739,950 1,428 0.26 % 
 Other borrowed funds 5,155 106 2.74 % 27,490 582 2.82 % 
 Total interest-bearing liabilities 
 806,243 $ 1,275 0.21 % 767,440 $ 2,010 0.35 % 
 Non-interest bearing demand deposits 717,162 549,242 
 Other liabilities 29,917 27,012 
 Shareholders’ equity 227,394 227,551 
 Total average liabilities and shareholders’ equity $ 1,780,716 $ 1,571,245 
 Interest income and rate earned on average earning assets 
 $ 49,190 4.04 % $ 50,300 4.73 % 
 Interest expense and interest cost related to average interest-bearing liabilities 
 1,275 0.21 % 2,010 0.35 % 
 Net interest income and net interest margin (4) $ 47,915 3.93 % $ 48,290 4.54 % 

 
 
 (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $269 and $305 in 2020 and 2019, respectively. 
 (2) Loan interest income includes loan fees (costs) of $884 in 2020 and $56 in 2019. 
 (3) Average loans do not include nonaccrual loans but do include interest income recovered from previously charged off loans. 
 (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 
 
 
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 The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. 
 
 Changes in Volume/Rate For the Nine Months Ended September 30, 2020 and 2019 
 (In thousands) Volume Rate Net 
 Increase (decrease) due to changes in: 
 Interest income: 
 Interest-earning deposits in other banks $ 921 $ (984) $ (63) 
 Investment securities: 
 Taxable 1,114 (1,939) (825) 
 Non-taxable (1) (250) 87 (163) 
 Total investment securities 864 (1,852) (988) 
 Federal funds sold — — — 
 Loans 4,640 (4,699) (59) 
 
 Total earning assets (1) 6,425 (7,535) (1,110) 
 Interest expense: 
 Deposits: 
 Savings, NOW and MMA 92 (330) (238) 
 Time certificate of deposits (35) 14 (21) 
 
 Total interest-bearing deposits 57 (316) (259) 
 Other borrowed funds (473) (3) (476) 
 Total interest-bearing liabilities (416) (319) (735) 
 Net interest income (1) $ 6,841 $ (7,216) $ (375) 

 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. 
 
 
 Interest and fee income from loans decreased $59,000 or 0.15% for the nine months ended September 30, 2020 compared to the same period in 2019. Net interest income during the first nine months of 2020 was positively impacted by an increase in average total loans of $111,242,000 or 11.98% to $1,040,116,000 compared to $928,874,000 for the same period in 2019. The yield on average loans, excluding nonaccrual loans, was 4.97% for the nine months ended September 30, 2020 compared to 5.58% for the same period in 2019. Net interest income for the period ending September 30, 2020 was benefited by approximately $505,000 in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, compared to $593,000 recorded in the same period in 2019. The impact to interest income from the accretion of the loan marks on acquired loans was $1,039,000 and $750,000 for the nine months ended September 30, 2020 and 2019, respectively. The remaining balance of accretable loan marks on acquired loans as of September 30, 2020 was $2,877,000. 
 Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) decreased $1,015,000 in the first nine months of 2020 to $10,233,000 compared to $11,248,000 for the same period in 2019. The yield on average total investments (total securities and interest-earning deposits) decreased 75 basis points to 2.38% for the three month period ended September 30, 2020 compared to 3.13% for the same period in 2019. Average total securities and interest-earning deposits for the first nine months of 2020 increased $94,449,000 or 19.17% to $587,215,000 compared to $492,766,000 for the same period in 2019. Income from investments represents 21.48% of net interest income for the first nine months of 2020 compared to 23.44% for the same period in 2019. 
 In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in collateralized mortgage obligations (CMOs). At September 30, 2020, we held $272,504,000 or 43.13% of the total fair value of the investment portfolio in CMOs with an average yield of 2.30% as compared to $356,097,000 and $360,398,000 with average yields of 3.06% and 3.09% at December 31, 2019 and September 30, 2019, respectively. We invest in CMOs as part of our overall strategy to increase our net interest margin. CMOs by their nature react to changes in interest rates. In a normal declining rate environment, prepayments from CMOs would be expected to increase and the expected life of the investment would be expected to shorten. Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the CMOs would be expected to extend. However, in the current economic environment, prepayments may not behave according to historical norms. Premium amortization and discount accretion of these investments affects our net interest income. Management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, 
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 the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium amortization and discount accretion represents management’s reasonable estimate of principal pay downs inherent in the total investment portfolio. 
 The net-of-tax unrealized gain on the investment portfolio was $11,466,000 at September 30, 2020 and is reflected in the Company’s equity. At September 30, 2020, the average life of the investment portfolio was 5.07 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of $16,279,000. Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI). Refer to Note 3 of the Notes to Consolidated Financial Statements (unaudited) for more detail. For the nine months ended September 30, 2020 and 2019, no OTTI was recorded. Additional deterioration in the market values of our investment securities, if any, may require the Company to recognize OTTI losses in future periods. 
 A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. At September 30, 2020, we estimate an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $61,000,000 or 9.65%. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $73,000,000 or 11.55%. Our modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and risk tolerance policy limits established by the Board of Directors to measure the possible future risk in the investment portfolio. 
 Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, impairment, and prohibited practices. 
 Total interest income on a non-tax equivalent basis for the nine months ended September 30, 2020 decreased $1,074,000 or 2.15% to $48,921,000 compared to $49,995,000 for the nine months ended September 30, 2019. The yield on interest earning assets decreased 69 basis points to 4.04% on a fully tax equivalent basis for the nine months ended September 30, 2020 from 4.73% for the period ended September 30, 2019. The decrease was the result of yield changes, decrease in interest rates, and asset mix changes. Average interest earning assets increased to $1,627,331,000 for the nine months ended September 30, 2020 compared to $1,421,640,000 for the nine months ended September 30, 2019. The $205,691,000 increase in average earning assets was attributed to the $94,449,000 increase in average investments and a $111,242,000 or 11.98% increase in average loans. 
 Interest expense on deposits for the nine months ended September 30, 2020 and 2019 was $1,169,000 and $1,428,000, respectively. The average interest rate on interest bearing deposits increased to 0.19% for the nine months ended September 30, 2020 compared to 0.26% for the same period ended September 30, 2019. Average interest-bearing deposits increased 8.26% or $61,138,000 to $801,088,000 for the nine months ended September 30, 2020 compared to $739,950,000 for the same period ended September 30, 2019. 
 Average other borrowed funds decreased $22,335,000 or 81.25% to $5,155,000 with an effective rate of 2.74% for the nine months ended September 30, 2020 compared to $27,490,000 with an effective rate of 2.82% for the nine months ended September 30, 2019. Total interest expense on other borrowed funds was $106,000 for the nine months ended September 30, 2020 and $582,000 for the nine months ended September 30, 2019. Other borrowings include advances from the Federal Home Loan Bank (“FHLB”), advances on available unsecured lines of credit with correspondent banks, and junior subordinated deferrable interest debentures. The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rates were 1.88% and 3.90% at September 30, 2020 and 2019, respectively. See the section on “Financial Condition” for more detail. 
 The cost of interest-bearing liabilities decreased 14 basis points to 0.21% for the nine-month period ended September 30, 2020 compared to 0.35% for the same period in 2019. The cost of total deposits decreased to 0.10% compared to 0.15% for the three-month periods ended September 30, 2020 and 2019. Average non-interest bearing demand deposits increased 30.57% to $717,162,000 in 2020 compared to $549,242,000 for 2019. The ratio of average non-interest bearing demand deposits to average total deposits increased to 47.24% in the nine-month period ended September 30, 2020 compared to 42.60% for the same period in 2019. 
 
 Net Interest Income before Provision for Credit Losses 
 
 Net interest income before provision for credit losses for the nine months ended September 30, 2020 decreased by $339,000 or 0.71% to $47,646,000 compared to $47,985,000 for the same period in 2019. The decrease was a result of yield changes, asset mix changes, and an increase in average interest bearing liabilities, offset by an increase in average earning assets. The impact to interest income from the accretion of the loan marks on acquired loans was $1,039,000 and $750,000 for the nine months ended September 30, 2020 and 2019, respectively. In addition, net interest income before the provision for credit losses for the nine months ended September 30, 2020 was benefited by approximately $505,000 in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, as compared to $593,000 in nonrecurring income for the nine months ended September 30, 2019. Excluding these reversals and benefits, net interest income for the nine months ended 
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 September 30, 2020 decreased by $540,000 compared to the nine months ended September 30, 2019. Average interest earning assets were $1,627,331,000 for the nine months ended September 30, 2020 with a net interest margin (fully tax equivalent basis) of 3.93% compared to $1,421,640,000 with a net interest margin (fully tax equivalent basis) of 4.54% for the nine months ended September 30, 2019. The $205,691,000 increase in average earning assets was attributed to the $94,449,000 increase in average total investments and the $111,242,000 or 11.98% increase in average loans. For the nine months ended September 30, 2020, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 75 basis points. The effective yield on loans decreased 61 basis points. Average interest bearing liabilities increased 5.06% to $806,243,000 for the nine months ended September 30, 2020, compared to $767,440,000 for the same period in 2019. 
 
 Provision for Credit Losses 
 
 We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses, and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted. 
 The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools. The Board of Directors have established initial responsibility for the accuracy of credit risk grades with the individual lending officer. Then the Credit Review Officer (CRO) will review loans to ensure the accuracy of the risk grade and is empowered to change any risk grade, as appropriate. The CRO is not involved in loan originations. Quarterly, the lending officers must certify the current risk grade of the loans in their portfolio. The CRO reviews these certifications. At least quarterly the CRO reports his activities to the Board of Directors Audit Committee; and at least annually the loan portfolio is reviewed by a third party credit reviewer. The regulatory agencies will also review the loan portfolio on a periodic basis.. 
 Quarterly, the Chief Credit Officer (CCO) reviews the specific reserve calculations for all impaired credits. Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter. This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. 
 The allowance for credit losses is reviewed at least quarterly by the Board of Directors Audit Committee and by the Board of Directors. General reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance calculation and other portfolio trending analysis. 
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 The allocation of the allowance for credit losses is set forth below (in thousands): 
 
 Loan Type September 30, 2020 December 31, 2019 
 Commercial: 
 Commercial and industrial $ 1,863 $ 1,115 
 Agricultural production 297 313 
 Total commercial 2,160 1,428 
 Real estate: 
 Owner occupied 2,163 1,319 
 Real estate construction and other land loans 2,060 932 
 Commercial real estate 5,164 3,453 
 Agricultural real estate 932 925 
 Other real estate 337 140 
 Total real estate 10,656 6,769 
 Consumer: 
 Equity loans and lines of credit 619 425 
 Consumer and installment 738 472 
 Total consumer 1,357 897 
 Unallocated reserves 484 36 
 Total allowance for credit losses $ 14,657 $ 9,130 

 
 Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. 
 Managing high-risk credits includes developing a business strategy with the customer to mitigate our potential losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly. 
 During the nine months ended September 30, 2020, the Company recorded a $4,975,000 provision for credit losses, compared to a $525,000 provision during the nine months ended September 30, 2019. The provision to the allowance for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section. During the nine months ended September 30, 2020, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic. 
 The Company had net recoveries totaling $552,000 for the nine months ended September 30, 2020, and $134,000 for the same period in 2019. 
 Nonperforming loans, consisting entirely of nonaccrual loans, were $3,458,000 and $1,693,000 at September 30, 2020 and December 31, 2019, respectively, and $2,157,000 at September 30, 2019. Nonperforming loans as a percentage of total loans were 0.31% at September 30, 2020 compared to 0.18% at December 31, 2019 and 0.23% at September 30, 2019. The Company had no other real estate owned (OREO) at September 30, 2020 or December 31, 2019. The Company held no repossessed assets at September 30, 2020 or December 31, 2019. 
 The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.07)% for the nine months ended September 30, 2020, and 0.02% for the same period in 2019. 
 Economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result when negative economic conditions are anticipated, we may be required to make significant provisions to the allowance for credit losses. The Bank conducts banking operation principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our financial performance, results of operation and cash flows. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect on our business, results of operation and financial condition. The agricultural industry has been affected by declines in prices and yields for various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand 
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 for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure. 
 We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of September 30, 2020, there were $37.6 million in classified loans of which $6.9 million related to agricultural real estate, $10.7 million to commercial and industrial loans, $7.2 million to agricultural production, $5.7 million to real estate owner occupied, $2.0 million in commercial real estate, $4.2 million to real estate construction and other land loans, and $1.0 million to consumer equity loans and lines of credit. This compares to $33.8 million in classified loans of which $7.3 million related to agricultural real estate, $13.2 million to commercial and industrial loans, $4.3 million to agricultural production, $4.7 million to real estate owner occupied, $1.1 million to commercial real estate, $1.5 million to consumer equity and lines of credit, and $1.6 million to real estate construction and other land loans as of December 31, 2019. 
 As of September 30, 2020, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio. However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period. Refer to the “Allowance for Credit Losses” section for further information. 
 
 Net Interest Income after Provision for Credit Losses 
 
 Net interest income, after the provision for credit losses, was $42,671,000 for the nine months period ended September 30, 2020 and $47,460,000 for the same period in 2019. 
 
 Non-Interest Income 
 
 Non-interest income is comprised of customer service charges, loan placement fees, net gains on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, FHLB dividends, and other income. Non-interest income was $10,659,000 for the nine months ended September 30, 2020 compared to $11,296,000 for the same period in 2019. The $637,000 or 5.64% decrease in non-interest income during the nine months ended September 30, 2020 was primarily driven by a decrease of $999,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $519,000, a decrease of $106,000 in interchange fees, and a decrease in FHLB dividends of $95,000, offset by an increase in loan placement fees of $898,000 and an increase of $193,000 in other income. 
 During the nine months ended September 30, 2020, we realized a net gain on sales and calls of investment securities of $4,197,000 compared to $5,196,000 for the same period in 2019. The net gains realized on sales and calls of investment securities in 2020 and 2019 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. 
 Customer service charges decreased $519,000 or 25.01% to $1,556,000 for the first nine months of 2020 compared to $2,075,000 for the same period in 2019. Interchange fees decreased $106,000 to $995,000 the first nine months of 2020 compared to $1,101,000 for the same period in 2019. Loan placement fees increased $898,000 or 138.79% to $1,545,000 for the first nine months of 2020 compared to $647,000 for the same period in 2019. Other income increased $193,000 the first nine months of 2020 compared to the same period in 2019. The increase in other income resulted from a $463,000 gain related to the collection of life insurance proceeds. 
 The Bank holds stock from the Federal Home Loan Bank (“FHLB”) of San Francisco in conjunction with our borrowing capacity and generally earns quarterly dividends. We currently hold $5,595,000 in FHLB stock. We received dividends totaling $253,000 in the nine months ended September 30, 2020, compared to $348,000 for the same period in 2019. 
 
 
 
 
 Non-Interest Expenses 
 
 Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, Internet banking, and data processing are the major categories of non-interest expenses. Non-interest expenses increased $333,000 or 0.95% to $35,305,000 for the nine months ended September 30, 2020, compared to $34,972,000 for the nine months ended September 30, 2019. The net increase for the first nine months of 2020 was primarily the result of increases in salaries and employee benefits of $920,000, professional services of $684,000, data processing expenses of $298,000, and regulatory assessments of $123,000, partially offset by decreases in occupancy and equipment expenses of $769,000, information technology of $192,000, other non-interest expenses of $479,000, credit card expenses of $114,000, amortization of software of $155,000, advertising of $83,000, and directors’ expenses of $84,000. 
 The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO related gains and losses, and gains related to the collection of life insurance proceeds) was 64.52% for the nine months ended 
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 September 30, 2020 compared to 62.07% for the nine months ended September 30, 2019. The increase in the efficiency ratio was due to the growth in non-interest expense outpacing the growth in non-interest income. 
 Salaries and employee benefits increased $920,000 or 4.57% to $21,053,000 for the first nine months of 2020 compared to $20,133,000 for the nine months ended September 30, 2019. Full time equivalent employees were 271 for the nine months ended September 30, 2020, compared to 282 for the nine months ended September 30, 2019. The increase in salaries and employee benefits was the result of higher loan origination costs relating to the PPP loans processed during the second quarter of 2020 of approximately $913,000, offset by an increase of $1,379,000 in salaries and benefits (of which $525,000 related to the payment of a nonrecurring employee incentive), as well as an increase of $253,000 for directors’ and officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split dollar plans. 
 Occupancy and equipment expense decreased $769,000 or 18.10% to $3,479,000 for the nine months ended September 30, 2020 compared to $4,248,000 for the nine months ended September 30, 2019. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at September 30, 2020 and at September 30, 2019. The Company closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a newly opened banking office in Gold River during the second quarter of 2019. 
 Data processing expense increased to $1,484,000 for the nine months ended September 30, 2020 compared to $1,186,000 for the same period in 2019. Regulatory assessments increased to $340,000 for the nine months ended September 30, 2020 compared to $217,000 for the same period in 2019. The assessment base for calculating the amount owed is average assets minus average tangible equity. 
 Professional services increased by $684,000 in the first nine months of 2020 compared to the same period in 2019 due to higher legal expenses and consulting fees. The following table shows significant components of other non-interest expense as a percentage of average assets. 
 
 For the Nine Months 
Ended September 30, 
 2020 2019 
 (Dollars in thousands) Other Expense % Average
Assets Other Expense % Average
Assets 
 
 
 
 Stationery/supplies $ 185 0.01 % $ 176 0.01 % 
 
 Amortization of software 107 0.01 % 262 0.02 % 
 Postage 147 0.01 % 165 0.01 % 
 Risk management expense 126 0.01 % 164 0.01 % 
 
 Shareholder services 87 0.01 % 77 0.01 % 
 Personnel other 104 0.01 % 117 0.01 % 
 Armored courier fees 213 0.02 % 210 0.02 % 
 Credit card expense — — % 114 0.01 % 
 Telephone 147 0.01 % 287 0.02 % 
 Alarm 73 0.01 % 64 0.01 % 
 Donations 103 0.01 % 162 0.01 % 
 
 Education/training 115 0.01 % 107 0.01 % 
 Loan related expenses 50 — % 41 — % 
 General insurance 125 0.01 % 124 0.01 % 
 Travel and mileage expense 101 0.01 % 186 0.02 % 
 
 Operating losses 86 0.01 % 81 0.01 % 
 
 Other 1,015 0.08 % 926 0.08 % 
 Total other non-interest expense $ 2,784 0.21 % $ 3,263 0.28 % 

 
 Provision for Income Taxes 
 
 Our effective income tax rate was 26.39% for the nine months ended September 30, 2020 compared to 28.55% for the nine months ended September 30, 2019. The Company reported an income tax provision of $4,757,000 for the nine months ended September 30, 2020, compared to $6,790,000 for the nine months ended September 30, 2019. The effective tax rate was affected by the large provision for credit losses, which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds, offset by a decrease in tax exempt interest. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income. If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the 
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 amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria. As of September 30, 2020 and December 31, 2019, there was no reserve for uncertain tax positions. 
 
 
 
 Net Income for the Third Quarter of 2020 Compared to the Third Quarter of 2019 
 
 
 Net income decreased to $4,344,000 for the quarter ended September 30, 2020 compared to $5,691,000 for the quarter ended September 30, 2019. Basic earnings per share was $ 0.35 for the quarter ended September 30, 2020 compared to $ 0.43 for the same period in 2019. Diluted earnings per share was $ 0.35 for the quarter ended September 30, 2020 compared to $ 0.42 for the same period in 2019. Annualized ROE was 7.50% for the quarter ended September 30, 2020 compared to 9.77% for the quarter ended September 30, 2019. Annualized ROA for the three months ended September 30, 2020 was 0.90% compared to 1.43% for the quarter ended September 30, 2019. 
 
 The decrease in net income during the third quarter of 2020 compared to the same period in 2019 is primarily due to a a decrease in net interest income before the provision for credit losses of $162,000, a decrease in total non-interest income of $1,651,000, an increase in provision for credit losses of $350,000, and an increase in non-interest expenses of $194,000, partially offset by a decrease in the provision for income taxes of $1,010,000. During the quarter ended September 30, 2020, the Company recorded a $ 600,000 provision for credit losses, compared to a $ 250,000 provision during the quarter ended September 30, 2019. Non-interest income decreased $1,651,000 or 44.36% to $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 in the same period in 2019, primarily due to a decrease in net realized gains on sales and calls of investment securities of $1,628,000. In addition, during the third quarter 2020 there was a decrease of $209,000 in service charge income , a decrease in other income of $148,000, and a decrease of $19,000 in interchange fees, offset by an increase in loan placement fees of $397,000, compared to the same period in 2019. 
 
 
 Interest Income and Expense 
 
 The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table. 
 
 
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 CENTRAL VALLEY COMMUNITY BANCORP 
 SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES 
 
 For the Three Months Ended
September 30, 2020 For the Three Months Ended
September 30, 2019 
 (Dollars in thousands) Average
Balance Interest
Income/
Expense Average
Interest
Rate Average
Balance Interest
Income/
Expense Average
Interest
Rate 
 ASSETS 
 Interest-earning deposits in other banks $ 98,869 $ 26 0.11 % $ 14,025 $ 74 2.11 % 
 Securities 
 Taxable securities 501,462 2,771 2.21 % 457,582 3,462 3.03 % 
 Non-taxable securities (1) 49,630 561 4.52 % 14,645 194 5.30 % 
 Total investment securities 551,092 3,332 2.42 % 472,227 3,656 3.10 % 
 
 Total securities and interest-earning deposits 
 649,961 3,358 2.07 % 486,252 3,730 3.07 % 
 Loans (2) (3) 1,120,656 13,190 4.68 % 946,136 13,238 5.55 % 
 
 Total interest-earning assets 1,770,617 $ 16,548 3.72 % 1,432,388 $ 16,968 4.70 % 
 Allowance for credit losses (14,261) (9,423) 
 Non-accrual loans 2,660 2,537 
 
 Cash and due from banks 26,993 25,369 
 Bank premises and equipment 7,327 7,835 
 Other assets 135,258 129,661 
 Total average assets $ 1,928,594 $ 1,588,367 
 LIABILITIES AND SHAREHOLDERS’ EQUITY 
 
 Interest-bearing liabilities: 
 Savings and NOW accounts $ 457,848 $ 89 0.08 % $ 374,469 $ 175 0.19 % 
 Money market accounts 307,832 136 0.18 % 269,167 195 0.29 % 
 Time certificates of deposit 89,353 138 0.61 % 96,129 196 0.81 % 
 
 Total interest-bearing deposits 855,033 363 0.17 % 739,765 566 0.30 % 
 Other borrowed funds 5,155 25 1.94 % 22,568 156 2.76 % 
 Total interest-bearing liabilities 860,188 $ 388 0.18 % 762,333 $ 722 0.38 % 
 Non-interest bearing demand deposits 807,052 563,498 
 Other liabilities 29,698 29,459 
 Shareholders’ equity 231,656 233,077 
 Total average liabilities and shareholders’ equity $ 1,928,594 $ 1,588,367 
 Interest income and rate earned on average earning assets 
 $ 16,548 3.72 % $ 16,968 4.70 % 
 Interest expense and interest cost related to average interest-bearing liabilities 
 388 0.18 % 722 0.38 % 
 Net interest income and net interest margin (4) $ 16,160 3.63 % $ 16,246 4.50 % 

 (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $118 and $41 in 2020 and 2019, respectively. 
 (2) Loan interest income includes loan fees (costs) of $658 in 2020 and $72 in 2019. 
 (3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans. 
 (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets . 
 
 
 The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate. 
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 Changes in Volume/Rate For the Three Months Ended September 30, 2020 and 2019 
 (In thousands) Volume Rate Net 
 Increase (decrease) due to changes in: 
 Interest income: 
 Interest-earning deposits in other banks $ 447 $ (495) $ (48) 
 Investment securities: 
 Taxable 331 (1,022) (691) 
 Non-taxable (1) 463 (96) 367 
 Total investment securities 794 (1,118) (324) 
 Federal funds sold — — — 
 Loans 2,441 (2,489) (48) 
 
 Total earning assets (1) 3,682 (4,102) (420) 
 Interest expense: 
 Deposits: 
 Savings, NOW and MMA 66 (211) (145) 
 Time certificate of deposits (14) (44) (58) 
 Total interest-bearing deposits 52 (255) (203) 
 Other borrowed funds (121) (10) (131) 
 Total interest-bearing liabilities (69) (265) (334) 
 Net interest income (1) $ 3,751 $ (3,837) $ (86) 

 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. 
 
 
 Interest and fee income from loans decreased $48,000 or 0.36% to $ 13,190,000 for the third quarter of 2020 compared to $ 13,238,000 for the same period in 2019. Average total loans, including nonaccrual loans, for the third quarter of 2020 increased $174,643,000 or 18.41% to $1,123,316,000 compared to $948,673,000 for the same period in 2019. Yield on the loan portfolio, excluding nonaccrual loans, was 4.68% and 5.55% for the third quarters ending September 30, 2020 and 2019, respectively. Net interest income during the third quarters of 2020 and 2019 benefited by approximately $52,000 and $250,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. The accretion of the loan marks on acquired loans increased interest income by $172,000 and $299,000 during the quarters ended September 30, 2020 and 2019, respectively. 
 Income from investments represents 20.20% of net interest income for the third quarter of 2020 compared to 22.76% for the same quarter in 2019. Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) decreased $448,000 in the third quarter of 2020 to $3,241,000 compared to $3,689,000, for the same period in 2019. The yield on average total investments decreased 100 basis points to 2.07% on a fully tax equivalent basis for the third quarter of 2020 compared to 3.07% on a fully tax equivalent basis for the third quarter of 2019. Average total investments and interest bearing deposits in other banks for the third quarter of 2020 increased $163,709,000 or 33.67% to $649,961,000 compared to $486,252,000 for the third quarter of 2019. 
 Total interest income for the third quarter of 2020 decreased $496,000 or 2.93% to $16,431,000 compared to $16,927,000 for the third quarter ended September 30, 2019. The yield on interest earning assets decreased to 3.72% on a fully tax equivalent basis for the third quarter ended September 30, 2020 from 4.70% on a fully tax equivalent basis for the third quarter ended September 30, 2019. Average interest earning assets increased to $1,770,617,000 for the third quarter ended September 30, 2020 compared to $1,432,388,000 for the third quarter ended September 30, 2019. The $338,229,000 increase in average earning assets was attributed to the $174,520,000 increase in average loans, offset by the $163,709,000 increase in total investments. 
 Interest expense on deposits for the quarter ended September 30, 2020 decreased $203,000 or 35.87% to $ 363,000 compared to $ 566,000 for the quarter ended September 30, 2019. The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.09% and 0.17% for the quarters ended September 30, 2020 and 2019, respectively. Average interest bearing deposits increased 15.58% or $115,268,000 in the third quarter of 2020 compared to the same period in 2019. Average interest-bearing deposits were $855,033,000 for the quarter ended September 30, 2020, with an effective rate paid of 0.17%, compared to $739,765,000 for the same period in 2019, with an effective rate paid of 0.30%. 
 Average other borrowed funds totaled $5,155,000 for the quarter ended September 30, 2020, with an effective rate of 1.94% for the quarter ended September 30, 2020 compared to $22,568,000 and 2.76% for the quarter ended September 30, 
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 2019. As a result, interest expense on borrowed funds decreased $131,000 to $25,000 for the quarter ended September 30, 2020, from $156,000 for the quarter ended September 30, 2019. Other borrowings are comprised of advances from the Federal Home Loan Bank, junior subordinated deferrable interest debentures and advances on available unsecured lines of credit with correspondent banks. 
 The cost of our interest bearing liabilities was 0.18% and 0.38% for the quarters ended September 30, 2020 and 2019. The cost of total deposits was 0.09% and 0.17% for the quarters ended September 30, 2020 and 2019. Average non-interest bearing demand deposits increased 43.22% to $807,052,000 for the quarter ended September 30, 2020 compared to $563,498,000 for the quarter ended September 30, 2019. The ratio of average non-interest bearing demand deposits to average total deposits was 48.56% in the third quarter of 2020 compared to 43.24% for the same period in 2019. 
 
 
 Net Interest Income before Provision for Credit Losses 
 
 Net interest income before provision for credit losses for the quarter ended September 30, 2020, decreased $162,000 or 1.00% to $16,043,000 compared to $16,205,000 for the quarter ended September 30, 2019. The decrease was due to asset mix changes, and an increase in average interest-bearing liabilities, partially offset by the increase in average interest earning assets. Average interest earning assets were $1,770,617,000 for the quarter ended September 30, 2020, with a net interest margin (fully tax equivalent basis) of 3.63% compared to $1,432,388,000 with a net interest margin (fully tax equivalent basis) of 4.50% for the quarter ended September 30, 2019. The $338,229,000 increase in average earning assets can be attributed to the $174,643,000 increase in loans, and the $163,709,000 increase in total investments. Average interest bearing liabilities increased 12.84% to $860,188,000 for the quarter ended September 30, 2020 compared to $762,333,000 for the same period in 2019. 
 
 Provision for Credit Losses 
 
 
 During the quarter ended September 30, 2020, the Company recorded a $ 600,000 provision for credit losses, compared to $ 250,000 provision during the quarter ended September 30, 2019. The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.04)% for the quarter ended September 30, 2020 compared to 0.07% for the quarter ended September 30, 2019. During the quarter ended September 30, 2020, the Company had net recoveries totaling $120,000 compared to net charge-offs of $160,000 for the same period in 2019. Gross recoveries of previously charged off loan balances during the quarters ended September 30, 2020 and 2019 were $165,000 and $55,000, respectively. Gross charge-offs during the quarters ended September 30, 2020 and 2019 were $45,000 and $215,000, respectively. The majority of the loans charged off were previously classified and sufficient specific reserves related to these impaired credits were held in the allowance for credit losses in reporting periods prior to the date of charge-off. 
 
 Non-Interest Income 
 
 Non-interest income was $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 for the same period ended September 30, 2019. The $1,651,000 or 44.36% decrease in non-interest income for the quarter ended September 30, 2020 was primarily due to recording a $1,628,000 decrease in net realized gains on sales and calls of investment securities, a $209,000 decrease in service charge income, a $148,000 decrease in other income, a $38,000 decrease in Federal Home Loan Bank dividends, a $19,000 decrease in interchange fees, and a $6,000 decrease in appreciation in cash surrender value of bank-owned life insurance, partially offset by a $397,000 increase in loan placement fees. 
 Customer service charges decreased $209,000 or 31.10% to $ 463,000 for the third quarter of 2020 compared to $ 672,000 for the same period in 2019, due primarily to a decrease in overdraft and analysis fee income. Other income decreased $148,000 or 36.10% to $ 262,000 for the third quarter of 2020 compared to $ 410,000 for the same period in 2019. 
 
 Non-Interest Expenses 
 
 Salaries and employee benefits, occupancy and equipment, regulatory assessments, data processing, acquisition and integration expenses, Internet banking, license and maintenance contracts, and professional services are the major categories of non-interest expenses. Non-interest expenses increased $194,000 or 1.68% to $11,728,000 for the quarter ended September 30, 2020 compared to $11,534,000 for the same period in 2019. The net increase quarter over quarter was a result of increases in professional fees of $311,000, increases in data processing expenses of $204,000, and increases in regulatory assessments of $216,000. During the quarter ended September 30, 2020, nonrecurring expenses included $292,000 related to PPP loan forgiveness processing, and $46,000 related to additional accruals for salary continuation plans due to decreases in interest rates. The increases were partially offset by the decreases in occupancy and equipment of $121,000, decreases in salaries and employee benefits of $2,000, decreases in directors’ expenses of $44,000, decreases in mileage and travel of $51,000, decreases in advertising expenses of $23,000, decreases in Internet banking of $48,000, decreases in operating losses of $20,000, and decreases of $20,000 in information technology expenses. 
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 The Company’s efficiency ratio increased to 63.58% for the third quarter of 2020 compared to 62.07% for the third quarter of 2019. The increase in the efficiency ratio is due to the growth in non-interest expense outpacing the growth in operating revenue. 
 Salaries and employee benefits decreased $2,000 or 0.03% to $ 6,729,000 for the third quarter of 2020 compared to $ 6,731,000 for the third quarter of 2019. The number of full time equivalent (FTE) employees as of September 30, 2020, December 31, 2019 and September 30, 2019 was 269, 281, and 272, respectively. 
 Other non-interest expenses included decreases of $23,000 in risk management expense, $3,000 in armored courier expenses, $70,000 in amortization of software, $3,000 in education/training expenses, $2,000 in postage, $19,000 in donations, 127,000 in telephone expenses, $20,000 in operating losses, $3,000 in personnel expenses, and $6,000 in stationary and supplies, partially offset by an increase of $18,000 in loan related expenses and $1,000 in check printing expense, as compared to the same period in 2019. 
 
 
 Provision for Income Taxes 
 
 The effective income tax rate was 24.92% for the third quarter of 2020 compared to 30.11% for the same period in 2019. Provision for income taxes totaled $ 1,442,000 and $ 2,452,000 for the quarters ended September 30, 2020 and 2019, respectively. The effective tax rate was affected by the large provision for credit losses which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds. 
 
 
 
 FINANCIAL CONDITION 
 
 Summary of Changes in Consolidated Balance Sheets 
 
 September 30, 2020 compared to December 31, 2019 
 
 
 Total assets were $1,950,560,000 as of September 30, 2020, compared to $1,596,755,000 at December 31, 2019, an increase of 22.16% or $353,805,000. Total gross loans were $1,109,889,000 at September 30, 2020, compared to $943,380,000 at December 31, 2019, an increase of $166,509,000 or 17.65%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 36.81% or $186,475,000 to $693,072,000 at September 30, 2020 compared to $506,597,000 at December 31, 2019. Total deposits increased 26.10% or $347,929,000 to $1,681,214,000 at September 30, 2020, compared to $1,333,285,000 at December 31, 2019. Shareholders’ equity increased $7,652,000 or 3.35% to $235,780,000 at September 30, 2020, compared to $228,128,000 at December 31, 2019. The increase in shareholders’ equity was driven by retention of earnings, net of dividends paid, and an increase in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI), offset by the decrease in common stock as a result of the share repurchase program. Accrued interest payable and other liabilities was $28,411,000 at September 30, 2020, compared to $30,187,000 at December 31, 2019, a decrease of $1,776,000. 
 
 
 Fair Value 
 
 The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value. 
 
 Investments 
 
 Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity. As of September 30, 2020, investment securities with a fair value of $157,758,000, or 24.97% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment policies are established by the Board of Directors and implemented by management. Our policies are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and 
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 borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities. 
 The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at September 30, 2020 was 66.02% compared to 70.76% at December 31, 2019. The loan-to-deposit ratio of our peers was 82.00% at December 31, 2019. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 36.81% or $186,475,000 to $693,072,000 at September 30, 2020, from $506,597,000 at December 31, 2019. The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $16,279,000 at September 30, 2020, compared to a net unrealized gain of $3,999,000 at December 31, 2019. 
 The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. 
 The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. 
 Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2020 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. 
 For those securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those securities. For those securities that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the nine months ended September 30, 2020. There were no OTTI losses recorded during the nine months ended September 30, 2019. 
 At September 30, 2020, the Company held 11 U.S. Government agency securities of which five were in a loss position for less than 12 months and five had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. 
 At September 30, 2020, the Company held 87 obligations of states and political subdivision securities of which 10 were in a loss position for less than 12 months. At September 30, 2020, the Company held seven corporate debt securities of which two were in a loss position for less than twelve months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities and corporate debt securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. 
 At September 30, 2020, the Company held 118 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which twelve were in a loss position for less than 12 months and 17 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. 
 At September 30, 2020, the Company had a total of 24 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of $54,072,000 and a net unrealized gain of approximately $1,146,000. Four of the PLMABS securities were in a loss position for less than 12 months and none have been in loss for more than 12 months at September 30, 2020. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to 
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 be other-than-temporarily impaired at September 30, 2020. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary. 
 See Note 3 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio. 
 
 Loans 
 
 Total gross loans increased $166,509,000 or 17.65% to $1,109,889,000 as of September 30, 2020, compared to $943,380,000 as of December 31, 2019. 
 
 
 The following table sets forth information concerning the composition of our loan portfolio at the dates indicated: 
 
 Loan Type (dollars in thousands) September 30, 2020 % of Total
Loans December 31, 2019 % of Total
Loans 
 Commercial: 
 Commercial and industrial $ 296,338 26.7 % $ 102,541 10.9 % 
 Agricultural production 22,902 2.1 % 23,159 2.6 % 
 Total commercial 319,240 28.8 % 125,700 13.5 % 
 Real estate: 
 Owner occupied 195,189 17.6 % 197,946 21.0 % 
 Real estate construction and other land loans 72,612 6.5 % 73,718 7.8 % 
 Commercial real estate 318,766 28.7 % 329,333 34.9 % 
 Agricultural real estate 75,747 6.7 % 76,304 8.1 % 
 Other real estate 34,883 3.1 % 31,241 3.3 % 
 Total real estate 697,197 62.6 % 708,542 75.1 % 
 Consumer: 
 Equity loans and lines of credit 58,614 5.3 % 64,841 6.9 % 
 Consumer and installment 38,627 3.3 % 42,782 4.5 % 
 Total consumer 97,241 8.6 % 107,623 11.4 % 
 Net deferred origination costs (3,789) 1,515 
 Total gross loans 1,109,889 100.0 % 943,380 100.0 % 
 Allowance for credit losses (14,657) (9,130) 
 Total loans $ 1,095,232 $ 934,250 

 
 
 As of September 30, 2020, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.7% of total loans. This level of concentration of commercial loans and loans collateralized by real estate is consistent with 95.5% of total loans at December 31, 2019. Although management believes the loans within this concentration have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectibility, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows. The Company does not engage in any sub-prime mortgage lending activities. 
 At September 30, 2020, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $137,177,000, of which $2,646,000 were commercial loans, $118,843,000 were real estate loans, and $15,688,000 were consumer loans. At December 31, 2019, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $152,735,000, of which $4,009,000 were commercial loans, $130,656,000 were real estate loans, and $18,070,000 were consumer loans. 
 We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of September 30, 2020, gross loans included $210,057,000 in PPP loans which are fully guaranteed by the SBA. 
 The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly. 
 
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 Nonperforming Assets 
 
 Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when (i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest under the original contractual terms is not expected; or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. 
 At September 30, 2020, total nonperforming assets totaled $3,458,000, or 0.18% of total assets, compared to $1,693,000, or 0.11% of total assets at December 31, 2019. Total nonperforming assets at September 30, 2020, included nonaccrual loans totaling $3,458,000, no OREO, and no other repossessed assets. Nonperforming assets at December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO, and no other repossessed assets. At September 30, 2020, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans compared to one TDR totaling $322,000 at December 31, 2019. 
 A summary of nonperforming loans at September 30, 2020 and December 31, 2019 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at September 30, 2020 or at December 31, 2019. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future. 
 
 
 Composition of Nonperforming Loans 
 
 (In thousands) September 30, 2020 December 31, 2019 
 Nonaccrual loans: 
 Commercial and industrial $ 715 $ 187 
 Owner occupied real estate 380 416 
 
 
 Agricultural real estate — 321 
 Commercial real estate 507 381 
 Equity loans and lines of credit — 66 
 
 Troubled debt restructured loans (non-accruing): 
 
 
 
 
 
 Equity loans and lines of credit — 322 
 
 Total nonaccrual 3,458 1,693 
 Accruing loans past due 90 days or more — — 
 Total nonperforming loans $ 3,458 $ 1,693 
 Ratio of nonperforming loans to total loans 0.31 % 0.18 % 
 Ratio of allowance for credit losses to nonperforming loans 423.9 % 539.3 % 
 Loans considered to be impaired $ 12,686 $ 3,734 
 Related allowance for credit losses on impaired loans $ 739 $ 40 

 
 
 We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent. As of September 30, 2020 and December 31, 2019, we had impaired loans totaling $12,686,000 and $3,734,000, respectively. For collateral dependent loans secured by real estate, we obtain external valuations which are updated at least annually to determine the fair value of the collateral, and we record a charge-off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral, unless there is an extenuating circumstance that may positively affect the amount collected. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. 
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 The following table provides a reconciliation of the change in nonaccrual loans for the first nine months of 2020. 
 
 (In thousands) Balance, December 31, 2019 Additions
 to
Nonaccrual
Loans Net Pay
Downs Transfers
to
Foreclosed
Collateral and
 OREO Returns to
Accrual
Status Charge-
Offs Balance, September 30, 2020 
 Nonaccrual loans: 
 Commercial and industrial $ 187 $ 738 $ (46) $ — $ (164) $ — $ 715 
 Real estate 797 515 (425) — — — 887 
 Real estate construction and other land loans 
 — 1,769 (5) — — — 1,764 
 Agricultural real estate 321 — (321) — — — — 
 Equity loans and lines of credit 66 — (24) — (42) — — 
 Consumer — 95 (3) — — — 92 
 Restructured loans (non-accruing): 
 
 
 
 Equity loans and lines of credit 322 — (322) — — — — 
 
 Total nonaccrual $ 1,693 $ 3,117 $ (1,146) $ — $ (206) $ — $ 3,458 

 
 OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is initially recorded at fair value less costs to sell and thereafter carried at the lower of cost or fair value, less selling costs. We had no OREO properties at September 30, 2020 or December 31, 2019. The Company held no repossessed assets at September 30, 2020 or December 31, 2019. 
 
 
 Allowance for Credit Losses 
 
 We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. 
 For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 47 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 47 quarters was an appropriate look back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look back period. 
 In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received. 
 The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors. 
 The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (i) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (ii) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. 
 Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset 
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 monitoring process includes the use of asset classifications to segregate the assets, largely loans, into various risk categories. The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual. 
 The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated: 
 
 For the Nine Months 
Ended September 30, For the Year Ended 
December 31, For the Nine Months 
Ended September 30, 
 (Dollars in thousands) 2020 2019 2019 
 Balance, beginning of period $ 9,130 $ 9,104 $ 9,104 
 Provision for credit losses 4,975 1,025 525 
 Losses charged to allowance (169) (1,196) (280) 
 Recoveries 721 197 146 
 Balance, end of period $ 14,657 $ 9,130 $ 9,495 
 Allowance for credit losses to total loans at end of period 
 1.32 % 0.97 % 1.01 % 

 
 Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Risks and uncertainties exist in all lending transactions and our management and Board of Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period. 
 The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. We adjusted the economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure. 
 As of September 30, 2020, the balance in the allowance for credit losses (ALLL) was $14,657,000 compared to $9,130,000 as of December 31, 2019. The increase is attributed to the additional provision of $4,975,000 during the nine months ended September 30, 2020. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $317,461,000 as of September 30, 2020, compared to $291,182,000 as of December 31, 2019. At September 30, 2020 and December 31, 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. 
 As of September 30, 2020, the ALLL was 1.32% of total gross loans compared to 0.97% as of December 31, 2019. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $137,177,000 at September 30, 2020 and $152,735,000 at December 31, 2019. Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.51% and 1.15% at September 30, 2020 and December 31, 2019, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.84% and 1.16%, respectively. As of September 30, 2020, gross loans included $210,057,000 related to PPP loans which are fully guaranteed by the SBA. Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.92% and 1.15% as of September 30, 2020 and December 31, 2019, respectively. The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at September 30, 2020. The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL for those loans. 
 The Company’s loan portfolio balances for the nine months ended September 30, 2020 increased through organic growth and through participation in the PPP loan program. Management believes that the change in the allowance for credit losses to total loans ratio is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values. 
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 Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of September 30, 2020. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. 
 The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio. 
 
 September 30, 2020 December 31, 2019 September 30, 2019 
 (Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans 
 Impaired loans with specific reserves $ 4,450 0.40 % $ 1,504 0.16 % $ 1,342 0.14 % 
 Past due loans 256 0.02 % 784 0.08 % 925 0.10 % 
 Nonaccrual loans 3,458 0.31 % 1,693 0.18 % 2,157 0.23 % 

 
 
 Goodwill and Intangible Assets 
 
 Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at September 30, 2020, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. 
 During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. Goodwill is assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Based upon this assessment, it was determined that it was more likely than not that the fair value of the Company was more than its carrying value and therefore no quantitative impairment test was required. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results. 
 The intangible assets represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of Folsom Lake Bank of $1,879,000, the 2016 acquisition of Sierra Vista Bank of $508,000, and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method (which approximates the effective interest method) over estimated lives of five to 10 years from the date of acquisition. The carrying value of intangible assets at September 30, 2020 was $1,356,000, net of $2,396,000 in accumulated amortization expense. The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 accumulated amortization expense. We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required in the first nine months of 2020. Amortization expense recognized was $521,000 and $521,000 for the nine months ended September 30, 2020 and September 30, 2019, respectively. 
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 The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands): 
 
 Years Ended Estimated Core Deposit Intangible Amortization 
 2020 $ 174 
 2021 661 
 2022 455 
 2023 66 
 
 $ 1,356 

 Deposits and Borrowings 
 
 The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. 
 Total deposits increased $347,929,000 or 26.10% to $1,681,214,000 as of September 30, 2020, compared to $1,333,285,000 as of December 31, 2019, primarily due to recurring seasonal patterns. Interest-bearing deposits increased $137,663,000 or 18.64% to $876,321,000 as of September 30, 2020, compared to $738,658,000 as of December 31, 2019. Non-interest bearing deposits increased $210,266,000 or 35.36% to $804,893,000 as of September 30, 2020, compared to $594,627,000 as of December 31, 2019. Average non-interest bearing deposits to average total deposits was 47.24% for the nine months ended September 30, 2020 compared to 42.60% for the same period in 2019. The Company’s deposit balances for the nine months ended September 30, 2020 increased through organic growth, PPP loan proceeds retained in customer deposit accounts, and deferred tax payments. 
 The composition of the deposits and average interest rates paid at September 30, 2020 and December 31, 2019 is summarized in the table below. 
 
 (Dollars in thousands) September 30, 2020 % of
Total
Deposits Average Effective
Rate December 31, 2019 % of
Total
Deposits Average Effective
Rate 
 NOW accounts $ 318,061 18.9 % 0.12 % $ 266,048 20.0 % 0.21 % 
 MMA accounts 314,543 18.7 % 0.19 % 266,609 20.0 % 0.24 % 
 Time deposits 88,037 5.2 % 0.71 % 93,730 7.0 % 0.73 % 
 Savings deposits 155,680 9.3 % 0.02 % 112,271 8.4 % 0.02 % 
 Total interest-bearing 876,321 52.1 % 0.19 % 738,658 55.4 % 0.26 % 
 Non-interest bearing 804,893 47.9 % 594,627 44.6 % 
 Total deposits $ 1,681,214 100.0 % $ 1,333,285 100.0 % 

 Other Borrowings 
 
 As of September 30, 2020 and December 31, 2019, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to the Liquidity section below for further discussion of FHLB advances. 
 
 
 
 Capital 
 
 Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary source of capital for the Company has been through retained earnings. 
 The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. 
 Our shareholders’ equity was $235,780,000 at September 30, 2020, compared to $228,128,000 at December 31, 2019. The increase from December 31, 2019 in shareholders’ equity is the result of an increase in retained earnings from net income of $13,268,000, an increase in accumulated other comprehensive income (AOCI) of $8,649,000, the exercise of stock options of $277,000, stock issued under the employee stock purchase plan of $162,000, the effect of share based compensation expense 
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 of $362,000, and stock awarded to employees of $141,000, offset by common stock cash dividends of $4,155,000 and stock repurchases of $11,052,000. 
 On July 17, 2019, the Board of Directors of the Company approved the adoption of a program to effect repurchases of the Company’s common stock with the intent to purchase up to $10 million worth of the Company’s outstanding common stock, or approximately 479,616 shares. During the nine months ended September 30, 2020, the Company repurchased and retired 49,269 shares related to the July 17, 2019 stock repurchase plan at an approximate cost of $1,052,000, completing the plan. During the year ended December 31, 2019, the Company repurchased and retired a total of 431,444 shares at an approximate cost of $8,948,000. The stock repurchase program expired earlier than the set expiration date of July 17, 2020. 
 On January 15, 2020, the Board of Directors of the Company approved the adoption of a new program to effect repurchases of the Company’s common stock with the intent to purchase up to $10,000,000 of the Company’s outstanding common stock, or approximately 487,805 shares. During the nine months ended September 30, 2020, the Company repurchased and retired a total of 572,110 shares at an approximate cost of $17.45 per share, completing the stock repurchase plan. 
 During the first nine months of 2020, the Company declared and paid $4,155,000 in cash dividends ($0.33 per common share) to holders of common stock. The Company declared and paid a total of $5,805,000 in cash dividends ($0.43 per common share) to holders of common stock during the year ended December 31, 2019. 
 Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. 
 The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy 
 guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking 
 organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of 
 credit and recourse arrangements, which are reported as off-balance-sheet items. 
 The following table presents the Company’s regulatory capital ratios as of September 30, 2020 and December 31, 2019. 
 
 (Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) 
 September 30, 2020 Amount Ratio Amount Ratio 
 Tier 1 Leverage Ratio $ 172,417 9.26 % N/A N/A 
 Common Equity Tier 1 Ratio (CET 1) $ 167,417 14.23 % N/A N/A 
 Tier 1 Risk-Based Capital Ratio $ 172,417 14.65 % N/A N/A 
 Total Risk-Based Capital Ratio $ 187,131 15.90 % N/A N/A 
 
 December 31, 2019 
 Tier 1 Leverage Ratio $ 172,945 11.38 % N/A N/A 
 Common Equity Tier 1 Ratio (CET 1) $ 167,945 14.55 % N/A N/A 
 Tier 1 Risk-Based Capital Ratio $ 172,945 14.98 % N/A N/A 
 Total Risk-Based Capital Ratio $ 182,325 15.79 % N/A N/A 
 (1) Effective August 30, 2018, the minimum regulatory requirements were eliminated for bank holding companies with less than $3 billion of assets. 

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 The following table presents the Bank’s regulatory capital ratios as of September 30, 2020 and December 31, 2019. 
 
 (Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ” 
 Institution 
 
 September 30, 2020 Amount Ratio Amount Ratio Amount Ratio 
 Tier 1 Leverage Ratio $ 171,257 9.20 % $ 74,485 4.00 % $ 93,106 5.00 % 
 Common Equity Tier 1 Ratio (CET 1) $ 171,257 14.56 % $ 52,949 4.50 % $ 76,482 6.50 % 
 Tier 1 Risk-Based Capital Ratio $ 171,257 14.56 % $ 70,599 6.00 % $ 94,132 8.00 % 
 Total Risk-Based Capital Ratio $ 185,965 15.81 % $ 94,132 8.00 % $ 117,665 10.00 % 
 
 December 31, 2019 
 Tier 1 Leverage Ratio $ 171,332 11.27 % $ 60,810 4.00 % $ 76,012 5.00 % 
 Common Equity Tier 1 Ratio (CET 1) $ 171,332 14.85 % $ 51,930 7.00 % $ 75,010 6.50 % 
 Tier 1 Risk-Based Capital Ratio $ 171,332 14.85 % $ 69,240 8.50 % $ 92,320 8.00 % 
 Total Risk-Based Capital Ratio $ 180,712 15.66 % $ 92,320 10.50 % $ 115,400 10.00 % 
 (1) The 2019 minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. 
 

 The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At September 30, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. 
 The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes; (ii) in the event the Trust is deemed an investment company; or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. 
 The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of September 30, 2020, the rate was 1.88%. 
 
 
 Liquidity 
 
 Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Board of Director’s Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments. 
 Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of September 30, 2020, the Company had unpledged securities totaling $481,751,000 available as a secondary source of liquidity and total cash and cash equivalents of $87,010,000. Cash and cash equivalents at September 30, 2020 increased 65.50% compared to $52,574,000 at December 31, 2019. Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses. 
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 As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks. At September 30, 2020, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $241,964,000 in unused FHLB secured advances and a $14,196,000 secured credit line at the Federal Reserve Bank. We believe our liquidity sources to be stable and adequate. At September 30, 2020, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. 
 The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at September 30, 2020 and December 31, 2019: 
 
 Credit Lines (In thousands) September 30, 2020 December 31, 2019 
 Unsecured Credit Lines 
 (interest rate varies with market): 
 Credit limit $ 110,000 $ 70,000 
 Balance outstanding $ — $ — 
 Federal Home Loan Bank 
 (interest rate at prevailing interest rate): 
 Credit limit $ 241,964 $ 304,987 
 Balance outstanding $ — $ — 
 Collateral pledged $ 432,101 $ 446,742 
 Fair value of collateral $ 385,188 $ 410,788 
 Federal Reserve Bank 
 (interest rate at prevailing discount interest rate): 
 Credit limit $ 14,196 $ 4,931 
 Balance outstanding $ — $ — 
 Collateral pledged $ 14,402 $ 5,065 
 Fair value of collateral $ 14,593 $ 5,036 

 
 The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by California statutes and the regulations. 
 
 OFF-BALANCE SHEET ITEMS 
 
 In the ordinary course of business, the Company is a party to financial instruments with off-balance risk. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. For an expanded discussion of these financial instruments, refer to Note 7 of the Notes to Consolidated Financial Statements included herein and Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K. 
 In the ordinary course of business, the Company is party to various operating leases. For a fuller discussion of these financial instruments, refer to Note 10 of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Community West Bancshares 10-Q

Item 2. Management’s Discussion and Analysis
