What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 394 added, 453 removed, 640 unchanged (57% of the section changed)

25 unchanged sentences

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:

Internet address is:

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.

2 unchanged sentences

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 six months ended June 30, 2021.

There have been no material changes to the Company’s critical accounting policies during the nine months ended September 30, 2021.

Please refer to the Company’s 2020 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

15 unchanged sentences

Dividend Declared

On July 21, 2021, the Board of Directors declared a $0.12 per share cash dividend payable on August 20, 2021 to shareholders of record as of August 6, 2021.

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 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 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.

On January 13, 2021, the SBA reopened the PPP for second draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase.

At least $25 billion has been set aside for second draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods.

On October 20, 2021, the Board of Directors declared a $0.12 per share cash dividend payable on November 19, 2021 to shareholders of record as of November 5, 2021.

Impact and Response to COVID-19 Pandemic

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented volatility and disruption in financial markets and deterioration in economic activity and market conditions in the markets we serve.

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

In response to the effects of the pandemic on the U.S.

economy, the Board of Governors of the Federal Reserve System (“FRB”) has taken significant actions, including a reduction in the target range of the federal funds rate to 0.0% to 0.25% and an indeterminate amount of purchases of Treasury and mortgage-backed securities.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law.

It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

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

through 100% Small Business Administration (“SBA”) guaranteed loans distributed through banks.

These loans were intended to guarantee 24 weeks of payroll and other costs to help those businesses remain viable and keep their workers employed.

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

During 2020, we originated and funded approximately 1,089 loans, totaling $217.2 million.

In response to the COVID-19 pandemic and the CARES Act, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program’s qualifications.

On January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that received a loan through the initial PPP phase.

At least $25 billion has been set aside for Second Draw (“round two”) PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods.

Generally speaking, businesses with more than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans.

Further, maximum loan amounts have been increased for accommodation and food service businesses.

As of June 30, 2021 we have received approximately 512 applications totaling $78 million.

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.

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.

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, second and fourth 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.

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 June 30, 2021, based on the Bank’s discussion with these customers, loan customers with deferred payments of principal, interest, or both on loans totaling approximately $1.4 million were outstanding.

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.

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 year ended December 31, 2020 and the six months ended June 30, 2021, the Company closed 1,601 PPP loans representing $295,644,000 in funding.

It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S.

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.

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.

Second Quarter of 2021

For the second quarter of 2021, our consolidated net income was $7,563,000 compared to $2,301,000 for the same period in 2020.

Diluted EPS was $0.60 for the quarter ended June 30, 2021 compared to $0.18 for the same period in 2020.

The increase in net income during the second quarter of 2021 compared to the same period in 2020 is primarily driven by a decrease in provision for credit losses of $4,500,000, an increase in net interest income of $2,507,000, and an increase in non-interest income of $32,000, partially offset by an increase in total non-interest expenses of $132,000, and an increase in the provision for income taxes of $1,645,000.

During the quarter ended June 30, 2021, the Company recorded a $1,500,000 reversal of provision for credit losses, compared to a $3,000,000 provision during the quarter ended June 30, 2020.

Throughout 2020 and the first six months of of 2021, 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 3.60% for the quarter ended June 30, 2021 compared to 3.79% for the same period in 2020.

The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, offset by the increase in the yield on the loan portfolio, the increase 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 2.11% for the three months ended June 30, 2021, compared to 2.37% for the three months ended June 30, 2020.

The effective yield on average loans increased to 5.04% for the three months ended June 30, 2021, compared to 4.71% for the three months ended June 30, 2020.

As of September 30, 2021, we have originated approximately 512 round two loans totaling $78.5 million in outstanding borrowings.

The Paycheck Protection Program officially ended on May 31, 2021.

The first nine months of 2021 included $3.8 million in recapture of provision for credit losses, as a result of a modest improvement in our economic forecast.

In comparison, the first nine months of 2020 included a $5.0 million provision.

The Company’s allowance for credit losses at September 30, 2021 of $10.1 million, compares to the pre-pandemic allowance of $9.5 million at December 31, 2019.

We continue to monitor the impact of COVID-19 closely.

The extent to which the COVID-19 pandemic will impact our operations and financial results during 2021 is highly uncertain, but we may experience continued volatility in the provision for credit losses if this pandemic results in economic stress greater than forecasted on our borrowers and loan portfolios and lower interest income if the current low interest rate environment continues.

We only conduct business in the state of California.

California placed significant restrictions on businesses and individuals at the outset of the COVID-19 pandemic.

While many of these initial restrictions have been lifted, there is still the possibility that certain restrictions could be re-imposed or extended to contain further spread if the rate of infection were to surge again in any of these states, including as a result of the Delta variant that has recently caused an uptick in infections particularly among non-vaccinated individuals.

As a financial institution, we are considered an essential business and we have therefore continued to operate on a modified basis throughout the pandemic to comply with governmental restrictions and public health authority guidelines.

We remain focused on keeping our employees safe and our bank running effectively to serve our customers and continue to monitor the continued spread of COVID-19 and its Delta variant.

Our branches have been reopened across our footprint.

Furthermore, the onset and continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:

• Market interest rates have declined significantly and remain near historic lows, and these reductions, especially if prolonged, could adversely affect our net interest income, net interest margin, and earnings;

• We have experienced and continue to anticipate a slowdown in demand for our products and services, including the demand for traditional loans.

Although the decline has been offset, in part, due to PPP loans under the CARES Act and other governmental programs established in response to the pandemic, the PPP forgiveness process will continue to lessen the positive impact of these programs;

• Volatility in economic forecasts caused by the COVID-19 pandemic create wider uncertainty in the outlook for future net charge off activity resulting in the potential for changing levels of reserves in the allowance for credit losses;

• Declines in fair value of investment securities in our portfolio due to economic uncertainties could reduce the unrealized gains reported as part of our consolidated comprehensive income (loss).

Third Quarter of 2021

For the third quarter of 2021, our consolidated net income was $6,521,000 compared to $4,344,000 for the same period in 2020.

Diluted EPS was $0.54 for the quarter ended September 30, 2021 compared to $0.35 for the same period in 2020.

The increase in net income during the third quarter of 2021 compared to the same period in 2020 is primarily driven by a decrease in provision for credit losses of $1,100,000, an increase in net interest income of $2,167,000, and an increase in non-interest income of $77,000, partially offset by an increase in total non-interest expenses of $334,000, and an increase in the provision for income taxes of $833,000.

During the quarter ended September 30, 2021, the Company recorded a $500,000 reversal of provision for credit losses, compared to a $600,000 provision during the quarter ended September 30, 2020.

Throughout 2020 and the first nine months of of 2021, 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 3.47% for the quarter ended September 30, 2021 compared to 3.63% for the same period in 2020.

The net interest margin period-to-period comparisons were impacted by the increase in the yield on the average investment securities, including interest-earning deposits in other banks and Federal funds sold, offset by the increase in the yield on the loan portfolio 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, increased to 2.14% for the three months ended September 30, 2021, compared to 2.07% for the three months ended

September 30, 2020.

The effective yield on average loans increased to 4.91% for the three months ended September 30, 2021, compared to 4.68% for the three months ended September 30, 2020.

The increase in the loan yield was impacted by Company’s issuance of PPP loans.

Total average PPP loans, which have an annual interest rate of 1.00%, were $158,490,000 and $160,392,000 for the three months ended June 30, 2021 and 2020, respectively.

The cost of deposits (calculated by dividing annualized interest

expense on interest bearing deposits by total deposits), decreased to 0.05% for the quarter ended June 30, 2021 compared to 0.10% for the same period in 2020.

Non-interest income increased $32,000 or 1.56% to $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 for the same period in 2020, primarily driven by an increase in interchange fees of $164,000, an increase in service charge income of $20,000, and a increase in Federal Home Loan Bank (“FHLB”) dividends of $8,000, offset by a decrease of $88,000 in other income, a decrease in loan placement fees of $51,000, and a decrease of $21,000 in net realized gains on sales and calls of investment securities.

Non-interest expense for the quarter ended June 30, 2021 increased $132,000 or 1.15% from the comparable period due to increases in salaries and employee benefits, data processing, occupancy and equipment, personnel, regulatory assessments, appraisal fees, alarm monitoring, operating losses, information technology expenses, tax provision, postage, donations, education and training, armored courier fees, telephone expenses, loan related expenses, and ATM/debit card expenses, partially offset by decreases in professional services, internet banking expenses, risk management expenses, advertising, stationery and supplies, directors’ expenses, check printing, mileage and travel, and amortization of software.

Annualized return on average equity (ROE) for the second quarter of 2021 increased to 12.25% compared to 4.14% for the same period in 2020.

Total average PPP loans, which have an annual interest rate of 1.00%, were $84,292,000 and $211,559,000 for the three months ended September 30, 2021 and 2020, respectively.

The cost of deposits (calculated by dividing annualized interest expense on interest bearing deposits by total deposits), decreased to 0.05% for the quarter ended September 30, 2021 compared to 0.09% for the same period in 2020.

Non-interest income increased $77,000 or 3.72% to $2,148,000 for the quarter ended September 30, 2021 compared to $2,071,000 for the same period in 2020, primarily driven by an increase in interchange fees of $117,000, an increase of $60,000 in net realized gains on sales and calls of investment securities, an increase in service charge income of $24,000, an increase in Federal Home Loan Bank (“FHLB”) dividends of $13,000, and an increase of $12,000 in other income, offset by a decrease in loan placement fees of $218,000.

Non-interest expense for the quarter ended September 30, 2021 increased $334,000 or 2.85% from the comparable period due to increases in salaries and employee benefits, data processing, occupancy and equipment, personnel, regulatory assessments, appraisal fees, alarm monitoring, operating losses, information technology expenses, tax provision, postage, donations, education and training, directors’ expenses, telephone expenses, ATM/debit card expenses, mileage and travel, and amortization of software, partially offset by decreases in professional services, internet banking expenses, risk management expenses, advertising, armored courier fees, stationery and supplies, check printing, and loan related expenses.

Annualized return on average equity (ROE) for the third quarter of 2021 increased to 10.41% compared to 7.50% for the same period in 2020.

The increase in ROE reflects the increase in net income, as well as the increase in average shareholders’ equity compared to the prior year.

Annualized return on average assets (ROA) was 1.36% and 0.51% for the quarter ended June 30, 2021 and 2020, respectively.

Total average equity increased to $246,959,000 for the second quarter of 2021 compared to $222,479,000 for the second quarter of 2020.

The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the second quarter of 2021, compared to $0.11 in dividends declared and paid during the second quarter of 2020.

Our average total assets increased $413,767,000 or 22.81% to $2,227,632,000 during the second quarter of 2021 compared to the same period in 2020.

Total average interest-earning assets increased $393,188,000 or 23.62% in the second quarter of 2021 compared to the same period of 2020.

Total average loans, including nonaccrual loans, increased $3,217,000 or 0.30% in the second quarter of 2021 compared to the same period in 2020.

Average total investments and interest-earning deposits in other banks increased $391,002,000 or 66.35% in the period ended June 30, 2021 compared to the same period in 2020.

Average interest-bearing liabilities increased $251,149,000 or 31.06% in the period ended June 30, 2021 compared to the same period in 2020.

Average non-interest bearing demand deposits increased 18.61% to $893,441,000 in 2021 compared to $753,265,000 in 2020.

The ratio of average non-interest bearing demand deposits to average total deposits was 45.86% in the second quarter of 2021 compared to 48.39% in 2020.

First Six Months of 2021

For the six months ended June 30, 2021, our consolidated net income was $15,042,000 compared to $8,924,000 for the same period in 2020.

Diluted EPS was $1.20 for the first six months of 2021 compared to $0.71 for the first six months of 2020.

Net income for the six-month period ended June 30, 2021 increased 68.56%, compared to the six-month period ended June 30, 2020, primarily driven by an increase in net interest income, an increase in loan placement fees, a decrease in non-interest expense, and a decrease in the provision for credit losses, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in provision for income taxes.

Annualized return on average assets (ROA) was 1.13% and 0.90% for the quarters ended September 30, 2021 and 2020, respectively.

Total average equity increased to $250,520,000 for the third quarter of 2021 compared to $231,656,000 for the third quarter of 2020.

The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the third quarter of 2021, compared to $0.11 in dividends declared and paid during the third quarter of 2020.

Our average total assets increased $389,578,000 or 20.20% to $2,318,172,000 during the third quarter of 2021 compared to the same period in 2020.

Total average interest-earning assets increased $356,622,000 or 20.14% in the third quarter of 2021 compared to the same period of 2020.

Total average loans, including nonaccrual loans, decreased $53,361,000 or 4.75% in the third quarter of 2021 compared to the same period in 2020.

Average total investments and interest-earning deposits in other banks increased $409,167,000 or 62.95% in the quarter ended September 30, 2021 compared to the same period in 2020.

Average interest-bearing liabilities increased $250,724,000 or 29.15% in the quarter ended September 30, 2021 compared to the same period in 2020.

Average non-interest bearing demand deposits increased 13.47% to $915,742,000 in the third quarter of 2021 compared to $807,052,000 during the same period in 2020.

The ratio of average non-interest bearing demand deposits to average total deposits was 45.30% in the third quarter of 2021 compared to 48.56% in 2020.

First Nine Months of 2021

For the nine months ended September 30, 2021, our consolidated net income was $21,563,000 compared to $13,268,000 for the same period in 2020.

Diluted EPS was $1.74 for the first nine months of 2021 compared to $1.05 for the first nine months of 2020.

Net income for the nine-month period ended September 30, 2021 increased 62.52%, compared to the nine-month period ended September 30, 2020, primarily driven by an increase in net interest income, an increase in loan placement fees, a decrease in non-interest expense, and a decrease in the provision for credit losses, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in provision for income taxes.

Net interest income before the provision for credit losses increased $6,200,000 or 13.01%.

Net interest income during the first six months of 2021 and 2020 benefited by approximately $434,000 and $453,000, respectively, in nonrecurring income from prepayment penalties.

Excluding these benefits, net interest income for the six months ended June 30, 2021, decreased by $4,570,000 compared to the six-month period ended June 30, 2020.

Non-interest income decreased $4,512,000 or 52.54%, and non-interest expense decreased $559,000 or 2.37% in the first six months ended of 2021 compared to first six months ended of 2020.

During the six months ended June 30, 2021, the Company recorded a reversal of provision for credit losses of $3,300,000 compared to $4,375,000 provision during same period in 2020.

Net recoveries of previously charged-off loans totaling $824,000 and $432,000 during the six months ended June 30, 2021 and 2020, respectively.

Annualized return on average equity for the six months ended June 30, 2021 increased to 12.21% compared to 7.92% for the same period in 2020.

The impact to interest income from the accretion of the loan marks on acquired loans was $579,000 and $1,039,000 for the nine months ended September 30, 2021 and 2020, respectively.

Net interest income during the first nine months of 2021 and 2020 benefited by approximately $438,000 and $505,000, respectively, in nonrecurring income from loan prepayment penalties.

Excluding the loan mark accretion and prepayment penalties, net interest income for the nine months ended September 30, 2021, increased by $6,727,000 compared to the nine-month period ended September 30, 2020.

Non-interest income decreased $4,435,000 or 41.61%, and non-interest expense decreased $225,000 or 0.64% in the first nine months of 2021 compared to the first nine months of 2020.

During the nine months ended September 30, 2021, the Company recorded a reversal of provision for credit losses of $3,800,000 compared to $4,975,000 provision during same period in 2020.

Net recoveries of previously charged-off loans totaling $946,000 and $552,000 were recorded during the nine months ended September 30, 2021 and 2020, respectively.

Annualized return on average equity for the nine months ended September 30, 2021 increased to 11.60% compared to 7.78% for the same period in 2020.

The increase in ROE reflects the increase in net income, notwithstanding the increase in average shareholders’ equity compared to the prior year.

Annualized return on average assets was 1.39% and 1.05% for the six months ended June 30, 2021 and 2020, respectively.

Total average equity was $246,439,000 for the six months ended June 30, 2021 compared to $225,240,000 for the same period in 2020.

The change in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in net unrealized gains on available-for-sale (AFS) securities , and share repurchases.

Our average total assets increased $460,232,000 or 26.98% in the first six months of 2021 compared to the same period in 2020.

Total average interest-earning assets increased $441,383,000 or 28.39% comparing the first six months of 2021 to the same period in 2020.

Average total loans, including nonaccrual loans, increased $79,727,000 or 7.97% comparing the first six months of 2021 to the same period in 2020.

The effective yield on average loans decreased to 5.11% for the six months June 30, 2021, compared to 5.13% for the six months June 30, 2020.

Total average PPP loans, which yield 1.00%,

were $169,553,000 and $80,196,000 for the six months ended June 30, 2021 and 2020 , respectively.

Excluding PPP loans from total average loans, the effective yield on average loans for the six months ended June 30, 2021 and 2020 was 4.99% and 5.42%, respectively.

Average total investments (securities and interest-earning deposits) increased $363,326,000, or 65.41% in the six-month period ended June 30, 2021 compared to the same period in 2020, with average interest-bearing liabilities decreasing $242,059,000 or 31.07% on a period to period comparison.

Our net interest margin (fully tax equivalent basis) for the first six months ended June 30, 2021 decreased to 3.67% compared to 4.11% for the same period in 2020.

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 49 basis points to 3.73% for the six-month period ended June 30, 2021 compared to 4.22% for the same period in 2020.

For the six-month period ended June 30, 2021, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, decreased 48 basis points, compared to the same period in the prior year, and the effective yield on loans decreased 2 basis points.

Annualized return on average assets was 1.30% and 0.99% for the nine months ended September 30, 2021 and 2020, respectively.

Total average equity was $247,814,000 for the nine months ended September 30, 2021 compared to $227,394,000 for the same period in 2020.

The change in shareholders’ equity was

driven by the retention of earnings, net of dividends paid, the decrease in net unrealized gains on available-for-sale (AFS) securities , and share repurchases.

Our average total assets increased $436,695,000 or 24.52% in the first nine months of 2021 compared to the same period in 2020.

Total average interest-earning assets increased $413,076,000 or 25.38% comparing the first nine months of 2021 to the same period in 2020.

Average total loans, including nonaccrual loans, increased $35,028,000 or 3.36% comparing the first nine months of 2021 to the same period in 2020.

The effective yield on average loans increased to 5.04% for the nine months September 30, 2021, compared to 4.97% for the nine months September 30, 2020.

Total average PPP loans were $140,883,000 and $124,303,000 for the nine months ended September 30, 2021 and 2020 , respectively.

Excluding PPP loans from total average loans, the effective yield on average loans for the nine months ended September 30, 2021 and 2020 was 4.90% and 5.34%, respectively.

Average total investments (securities and interest-earning deposits) increased $378,890,000, or 64.52% in the nine-month period ended September 30, 2021 compared to the same period in 2020.

Average interest-bearing liabilities increased $245,080,000 or 30.40% on a period-to-period comparison.

Our net interest margin (fully tax equivalent basis) for the first nine months ended September 30, 2021 decreased to 3.60% compared to 3.93% for the same period in 2020.

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 increase 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 38 basis points to 3.66% for the nine-month period ended September 30, 2021 compared to 4.04% for the same period in 2020.

For the nine-month period ended September 30, 2021, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, decreased 27 basis points, compared to the same period in the prior year, and the effective yield on loans increased seven basis points.

The cost of total interest-bearing liabilities decreased 10 basis points to 0.11% compared to 0.21% for the same period in 2020.

The cost of total deposits, including noninterest bearing accounts decreased to 0.06% compared to 0.11% for the six months ended June 30, 2021 and 2020.

Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2021 was $35,636,000 compared to $31,603,000 for the same period in 2020, an increase of $4,033,000 or 12.76%.

Net interest income increased 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 cost of total deposits, including noninterest bearing accounts decreased to 0.05% compared to 0.10% for the nine months ended September 30, 2021 and 2020, respectively.

Net interest income before the reversal of provision for credit losses for the nine months ended September 30, 2021 was $53,846,000 compared to $47,646,000 for the same period in 2020, an increase of $6,200,000 or 13.01%.

Net interest income increased as a result of yield changes, and asset mix changes, offset by an increase in average earning assets and an increase in interest-bearing liabilities.

The Bank recovered $438,000 and $505,000, of foregone interest income and prepaid payment penalties in 2021 and 2020, respectively.

The Bank had non-accrual loans totaling $2,035,000 at June 30, 2021, compared to $3,278,000 at December 31, 2020 and $2,406,000 at June 30, 2020.

The Company had no other real estate owned or repossessed assets at June 30, 2021, December 31, 2020, or June 30, 2020.

At June 30, 2021, we had total net loans of $1,059,506,000, total assets of $2,280,550,000, total deposits of $1,979,094,000, and shareholders’ equity of $251,049,000.

The impact to interest income from the accretion of the loan marks on acquired loans was $579,000 and $1,039,000 for the nine months ended September 30, 2021 and 2020, respectively.

The Bank had non-accrual loans totaling $1,597,000 at September 30, 2021, compared to $3,278,000 at December 31, 2020 and $3,458,000 at September 30, 2020.

The Company had no other real estate owned or repossessed assets at September 30, 2021, December 31, 2020, or September 30, 2020.

At September 30, 2021, we had total net loans of $1,073,436,000, total assets of $2,348,377,000, total deposits of $2,058,092,000, and shareholders’ equity of $246,548,000.

Key Factors in Evaluating Financial Condition and Operating Performance

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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 12.21% for the six months ended June 30, 2021 compared to 8.85% for the year ended December 31, 2020 and 7.92% for the six months ended June 30, 2020.

Our net income for the six months ended June 30, 2021 increased $6,118,000 or 68.56% to $15,042,000 compared to $8,924,000 for the six months ended June 30, 2020, primarily driven by an increase in net interest income, a decrease in non-interest expenses, a reversal of the provision for credit losses, and an increase in loan placement fees, offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income.

Net interest margin (NIM) decreased 44 basis points for the six-month period ended June 30, 2021 compared to the six months ended June 30, 2020.

Diluted EPS was $1.20 for the six months ended June 30, 2021 and $0.71 for the same period in 2020.

Our return to shareholders is determined in a ratio that measures the return on average equity (ROE), which is net income divided by average shareholders’ equity.

Our annualized ROE was 11.60% for the nine months ended September 30, 2021 compared to 8.85% for the year ended December 31, 2020 and 7.78% for the nine months ended September 30, 2020.

Our net income for the nine months ended September 30, 2021 increased $8,295,000 or 62.52% to $21,563,000 compared to $13,268,000 for the nine months ended September 30, 2020, primarily driven by an increase in net interest income, a decrease in non-interest expenses, a reversal of the provision for credit losses, and an increase in loan placement fees, offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income.

Net interest margin (NIM) decreased 33 basis points for the nine-month period ended

September 30, 2021 compared to the nine months ended September 30, 2020.

Diluted EPS was $1.74 for the nine months ended September 30, 2021 and $1.05 for the same period in 2020.

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 six months ended June 30, 2021 was 1.39% compared to 1.11% for the year ended December 31, 2020 and 1.05% for the six months ended June 30, 2020.

The increase in ROA for the six months ended June 30, 2021 compared to June 30, 2020 was due to the increase in net income, notwithstanding the increase in average assets.

Average assets for the six months ended June 30, 2021 was $2,166,196,000 compared to $1,832,987,000 for the year ended December 31, 2020.

Our annualized ROA for the nine months ended September 30, 2021 was 1.30% compared to 1.11% for the year ended December 31, 2020 and 0.99% for the nine months ended September 30, 2020.

The increase in ROA for the nine months ended September 30, 2021 compared to September 30, 2020 was due to the increase in net income, notwithstanding the increase in average assets.

Average assets for the nine months ended September 30, 2021 was $2,217,411,000 compared to $1,832,987,000 for the year ended December 31, 2020.

Median ROA for our peer group was 1.06% for the year ended December 31, 2020.

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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 3.67% for the six months ended June 30, 2021, compared to 4.11% for the same period in 2020.

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.

The Company’s net interest margin (fully tax equivalent basis) decreased to 3.60% for the nine months ended September 30, 2021, compared to 3.93% for the same period in 2020.

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), offset by an increase 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 June 30, 2021 and 2020, the effective yield on total earning assets decreased 49 basis points, while the cost of total interest-bearing liabilities decreased 12 basis points and the cost of total deposits decreased to 0.06% compared to 0.11%.

Net interest income before the reversal of provision for credit losses for the six-month period ended June 30, 2021 was $35,636,000 compared to $31,603,000 for the same period in 2020.

In comparing the two periods ending September 30, 2021 and 2020, the effective yield on total earning assets decreased 38 basis points, while the cost of total interest-bearing liabilities decreased 10 basis points and the cost of total deposits decreased to 0.05% compared to 0.10%.

Net interest income before the reversal of provision for credit losses for the nine-month period ended September 30, 2021 was $53,846,000 compared to $47,646,000 for the same period in 2020.

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 investment securities, FHLB dividends, and other income.

Non-interest income for the six months ended June 30, 2021 decreased $4,512,000 or 52.54%, to $4,076,000 compared to $8,588,000 for the six months ended June 30, 2020.

Non-interest income for the nine months ended September 30, 2021 decreased $4,435,000 or 41.61%, to $6,224,000 compared to $10,659,000 for the nine months ended September 30, 2020.

The decrease resulted primarily from decreases in net realized gains on sales and calls of investment securities, service charge income, gain related to the collection of life insurance proceeds, and FHLB dividends;

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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 $2,035,000 and $3,278,000 at June 30, 2021 and December 31, 2020, respectively.

Nonperforming assets totaled 0.19% of gross loans as of June 30, 2021 and 0.30% of gross loans as of December 31, 2020.

The ratio of nonperforming assets to total assets was 0.09% as of June 30, 2021 and 0.16% as of December 31, 2020.

The nonperforming assets at June 30, 2021 and December 31, 2020 consisted of nonaccrual loans of $2,035,000 and $3,278,000, respectively.

The Company had no other real estate owned (OREO) or repossessed assets at June 30, 2021 or December 31, 2020.

Total nonperforming assets were $1,597,000 and $3,278,000 at September 30, 2021 and December 31, 2020, respectively.

Nonperforming assets totaled 0.15% of gross loans as of September 30, 2021 and 0.30% of gross loans as of December 31, 2020.

The ratio of nonperforming assets to total assets was 0.07% as of September 30, 2021 and 0.16% as of December 31, 2020.

The nonperforming assets at September 30, 2021 and December 31, 2020 consisted of nonaccrual loans of $1,597,000 and $3,278,000, respectively.

The Company had no other real estate owned (OREO) or repossessed assets at September 30, 2021 or December 31, 2020.

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 0.98% as of June 30, 2021 and 1.17% as of December 31, 2020.

The ratio of net charge-off (recovery) to average loans was (0.15)% as of June 30, 2021 and (0.05)% as of December 31, 2020.

The allowance for credit losses as a percentage of the outstanding loan balance was 0.93% as of September 30, 2021 and 1.17% as of December 31, 2020.

The ratio of net charge-off (recovery) to average loans was (0.12)% for the nine months ended September 30, 2021 and (0.05)% as of December 31, 2020.

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 $276,454,000 or 13.79% during the six months ended June 30, 2021 to $2,280,550,000 compared to $2,004,096,000 as of December 31, 2020, primarily due to the Company’s participation in the PPP.

Total gross loans decreased by 2.94% or $32,402,000 to $1,069,945,000 as of June 30, 2021 compared to $1,102,347,000 as of December 31, 2020.

The gross loan decrease consisted of a decrease of $83,414,000 in the PPP loans, offset by an increase of $51,012,000 in non-PPP loan growth.Total deposits increased 14.88% to $1,979,094,000 as

of June 30, 2021 compared to $1,722,710,000 as of December 31, 2020.

The Company’s deposit balances for the six months ended June 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

Our loan-to-deposit ratio at June 30, 2021 was 54.06% compared to 63.99% at December 31, 2020.

Total assets increased by $344,281,000 or 17.18% during the nine months

ended September 30, 2021 to $2,348,377,000 compared to $2,004,096,000 as of December 31, 2020, primarily due to the increase in deposit balances.

Total gross loans decreased by 1.71% or $18,850,000 to $1,083,497,000 as of September 30, 2021 compared to $1,102,347,000 as of December 31, 2020.

The gross loan decrease consisted of a decrease of $128,656,000 in the PPP loans, offset by an increase of $109,806,000 in non-PPP loan growth.

Total deposits increased 19.47% to $2,058,092,000 as of September 30, 2021 compared to $1,722,710,000 as of December 31, 2020.

The Company’s deposit balances for the nine months ended September 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

Our loan-to-deposit ratio at September 30, 2021 was 52.65% compared to 63.99% at December 31, 2020.

The loan-to-deposit ratio of our peers was 80.00% at December 31, 2020.

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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 June 30, 2021, 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 June 30, 2021.

As of September 30, 2021, 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, 2021.

The Company’s regulatory capital ratios are presented in the table in the “Capital” section below.

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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 55.96% for the six months ended June 30, 2021 compared to 65.00% for the six months ended June 30, 2020.

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 56.46% for the nine months ended September 30, 2021 compared to 64.52% for the nine months ended September 30, 2020.

The improvement in the efficiency ratio was due to the growth in non-interest income along with the decrease in non-interest expense.

Further discussion of the change in net interest income and decrease 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 13.36% to $40,516,000 for the first six months of 2021 compared to $35,740,000 for the same period in 2020, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, decreased 2.41% to $22,671,000 from $23,230,000 for the same period in 2020.

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 13.53% to $61,209,000 for the first nine months of 2021 compared to $53,914,000 for the same period in 2020, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, decreased 0.65% to $34,559,000 from $34,784,000 for the same period in 2020.

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.

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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 $1,080,604,000 or 47.38% of total assets at June 30, 2021 and $788,004,000 or 39.32% of total assets as of December 31, 2020.

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 $1,135,541,000 or 48.35% of total assets at September 30, 2021 and $788,004,000 or 39.32% of total assets as of December 31, 2020.

RESULTS OF OPERATIONS

Net Income for the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

Net income increased to $15,042,000 for the six months ended June 30, 2021 compared to $8,924,000 for the six months ended June 30, 2020.

Basic and diluted earnings per share for June 30, 2021 were $1.20 and $1.20, respectively.

Net Income for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

Net income increased to $21,563,000 for the nine months ended September 30, 2021 compared to $13,268,000 for the nine months ended September 30, 2020.

Basic and diluted earnings per share for September 30, 2021 were $1.75 and $1.74, respectively.

Basic and diluted earnings per share for the same period in 2020 were $1.06 and $1.05, respectively.

Annualized ROE was 12.21% for the six months ended June 30, 2021 compared to 7.92% for the six months ended June 30, 2020.

Annualized ROA for the six months ended June 30, 2021 and 2020 was 1.39% and 1.05%, respectively.

The increase in net income for the six months ended June 30, 2021 compared to the same period in 2020 was primarily driven by an increase in net interest income, a decrease in non-interest expense, a reversal of provision for credit losses, and an increase in loan placement fees, partially offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income.

During the six months ended June 30, 2021, the Company recorded a $3,300,000 reversal of provision for credit losses, compared to a $4,375,000 provision during the six months ended June 30, 2020.

The reversal of 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 six months ended June 30, 2021, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.

Annualized ROE was 11.60% for the nine months ended September 30, 2021 compared to 7.78% for the nine months ended September 30, 2020.

Annualized ROA for the nine months ended September 30, 2021 and 2020 was 1.30% and 0.99%, respectively.

The increase in net income for the nine months ended September 30, 2021 compared to the same period in 2020 was primarily driven by an increase in net interest income, a decrease in non-interest expense, a reversal of provision for credit losses, and an increase in loan placement fees, partially offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income.

During the nine months ended September 30, 2021, the Company recorded a $3,800,000 reversal of provision for credit losses, compared to a $4,975,000 provision during the nine months ended September 30, 2020.

The reversal of provision 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, 2021, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.

Interest Income and Expense

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SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

For the Six Months Ended

June 30, 2021 For the Six Months Ended

June 30, 2020

For the Nine Months Ended

September 30, 2021 For the Nine Months Ended

September 30, 2020

(Dollars in thousands) Average

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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 Six Months Ended June 30, 2021 and 2020

Changes in Volume/Rate For the Nine Months Ended September 30, 2021 and 2020

(In thousands) Volume Rate Net

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(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $1,823,000 or 7.15% for the six months ended June 30, 2021 compared to the same period in 2020.

Net interest income during the first six months of 2021 was positively impacted by an increase in average total loans of $78,057,000 or 7.81% to $1,077,455,000 compared to $999,398,000 for the same period in 2020.

The yield on average loans, excluding nonaccrual loans, was 5.11% for the six months ended June 30, 2021 compared to 5.13% for the same period in 2020.

Net interest income for the period ending June 30, 2021 was benefited by approximately $434,000 in nonrecurring income from prepayment penalties, compared to $453,000 recorded in the same period in 2020.

The impact to interest income from the accretion of the loan marks on acquired loans was $349,000 and $867,000 for the six months ended June 30, 2021 and 2020, respectively.

The remaining balance of accretable loan marks on acquired loans as of June 30, 2021 was $2,247,000.

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) increased $1,889,000 in the first six months of 2021 to $8,881,000 compared to $6,992,000 for the same period in 2020.

The yield on average total investments (total securities and interest-earning deposits) decreased 48 basis points to 2.09% for the six month period ended June 30, 2021 compared to 2.57% for the same period in 2020.

Average total securities and interest-earning deposits for the first six months of 2021 increased $363,326,000 or 65.41% to $918,823,000 compared to $555,497,000 for the same period in 2020.

Income from investments represents 24.92% of net interest income for the first six months of 2021 compared to 22.12% for the same period in 2020.

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).

At June 30, 2021, we held $407,823,000 or 42.82% of the total fair value of the investment portfolio in CMOs with an average yield of 1.57% as compared to $299,806,000 and $254,338,000 with average yields of 2.15% and 2.57% at December 31, 2020 and June 30, 2020, respectively.

Interest and fee income from loans increased $1,841,000 or 4.76% for the nine months ended September 30, 2021 compared to the same period in 2020.

Net interest income during the first nine months of 2021 was positively impacted by an increase in average total loans of $34,186,000 or 3.29% to $1,074,302,000 compared to $1,040,116,000 for the same period in 2020.

The yield on average loans, excluding nonaccrual loans, was 5.04% for the nine months ended September 30, 2021 compared to 4.97% for the same period in 2020.

Net interest income for the period ending September 30, 2021 was benefited by approximately $438,000 in nonrecurring income from prepayment penalties, compared to $505,000 recorded in the same period in 2020.

The impact to interest income from the accretion of the loan marks on acquired loans was $579,000 and $1,039,000 for the nine months ended September 30, 2021 and 2020, respectively.

The remaining balance of accretable loan marks on acquired loans as of September 30, 2021 was $2,016,000.

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) increased $3,937,000 in the first nine months of 2021 to $14,170,000 compared to $10,233,000 for the same period in 2020.

The yield on average total investments (total securities and interest-earning deposits) decreased 27 basis points to 2.11% for the nine month period ended September 30, 2021 compared to 2.38% for the same period in 2020.

Average total securities and interest-earning deposits for the first nine months of 2021 increased $378,890,000 or 64.52% to $966,105,000 compared to $587,215,000 for the same period in 2020.

Income from investments represents 26.32% of net interest income for the first nine months of 2021 compared to 21.48% for the same period in 2020.

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment portfolio is in mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).

At September 30, 2021, we held $481,801,000 or 45.44% of the total fair value of the investment portfolio in CMOs with an average yield of 1.56% as compared to $299,806,000 and $272,504,000 with average yields of 2.15% and 2.30% at December 31, 2020 and September 30, 2020, respectively.

We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin.

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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, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.

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, 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 $12,874,000 at June 30, 2021 and is reflected in the Company’s equity.

At June 30, 2021, the average life of the investment portfolio was 5.22 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of $18,278,000.

The net-of-tax unrealized gain on the investment portfolio was $10,290,000 at September 30, 2021 and is reflected in the Company’s equity.

At September 30, 2021, the average life of the investment portfolio was 5.43 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of $14,609,000.

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 six months ended June 30, 2021 and 2020, no OTTI was recorded.

For the nine months ended September 30, 2021 and 2020, 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 June 30, 2021, 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 $106,000,000 or 10.25%.

At September 30, 2021, 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 $118,000,000 or 10.77%.

Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $120,000,000 or 10.95%.

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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 six months ended June 30, 2021 increased $3,712,000 or 11.43% to $36,202,000 compared to $32,490,000 for the six months ended June 30, 2020.

The yield on interest earning assets decreased 49 basis points to 3.73% on a fully tax equivalent basis for the six months ended June 30, 2021 from 4.22% for the period ended June 30, 2020.

Total interest income on a non-tax equivalent basis for the nine months ended September 30, 2021 increased $5,778,000 or 11.81% to $54,699,000 compared to $48,921,000 for the nine months ended September 30, 2020.

The yield on interest earning assets decreased 38 basis points to 3.66% on a fully tax equivalent basis for the nine months ended September 30, 2021 from 4.04% for the period ended September 30, 2020.

The decrease was the result of yield changes, decrease in interest rates, and asset mix changes.

Average interest earning assets increased to $1,996,278,000 for the six months ended June 30, 2021 compared to $1,554,895,000 for the six months ended June 30, 2020.

Average interest earning assets increased to $2,040,407,000 for the nine months ended September 30, 2021 compared to $1,627,331,000 for the nine months ended September 30, 2020.

The $413,076,000 increase in average earning assets was attributed to the $378,890,000 increase in average investments and a $34,186,000 or 3.29% increase in average loans.

Interest expense on deposits for the six months ended June 30, 2021 and 2020 was $520,000 and $806,000, respectively.

The average interest rate on interest bearing deposits decreased to 0.10% for the six months ended June 30, 2021 compared to 0.21% for the same period ended June 30, 2020.

Average interest-bearing deposits increased 31.28% or $242,059,000 to $1,015,879,000 for the six months ended June 30, 2021 compared to $773,820,000 for the same period ended June 30, 2020.

Average other borrowed funds were $5,155,000 with an effective rate of 1.78% for the six months ended June 30, 2021 compared to $5,155,000 with an effective rate of 3.14% for the six months ended June 30, 2020.

Total interest expense on other borrowed funds was $46,000 for the six months ended June 30, 2021 and $81,000 for the six months ended June 30, 2020.

Interest expense on deposits for the nine months ended September 30, 2021 and 2020 was $783,000 and $1,169,000, respectively.

The average interest rate on interest bearing deposits decreased to 0.10% for the nine months ended September 30, 2021 compared to 0.19% for the same period ended September 30, 2020.

Average interest-bearing deposits increased 30.59% or $245,080,000 to $1,046,168,000 for the nine months ended September 30, 2021 compared to $801,088,000 for the same period ended September 30, 2020.

Average other borrowed funds were $5,155,000 with an effective rate of 1.81% for the nine months ended September 30, 2021 compared to $5,155,000 with an effective rate of 2.74% for the nine months ended September 30, 2020.

Total interest expense on other borrowed funds was $70,000 for the nine months ended September 30, 2021 and $106,000 for the nine months ended September 30, 2020.

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 1.78% and 3.90% at June 30, 2021 and 2020, respectively.

The rates were 1.73% and 3.90% at September 30, 2021 and 2020, respectively.

See the section on “Financial Condition” for more detail.

The cost of interest-bearing liabilities decreased 12 basis points to 0.11% for the six-month period ended June 30, 2021 compared to 0.23% for the same period in 2020.

The cost of total deposits decreased to 0.06% compared to 0.11% for the six-month periods ended June 30, 2021 and 2020.

The cost of interest-bearing liabilities decreased 10 basis points to 0.11% for the nine-month period ended September 30, 2021 compared to 0.21% for the same period in 2020.

The cost of total deposits decreased to 0.05% compared to 0.10% for the nine-month periods ended September 30, 2021 and 2020, respectively.

Average non-interest bearing demand deposits increased 23.40% to $885,008,000 in 2021 compared to $717,162,000 for 2020.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 46.11% in the six-month period ended June 30, 2021 compared to 46.47% for the same period in 2020.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 45.83% in the nine-month period ended September 30, 2021 compared to 47.24% for the same period in 2020.

Net Interest Income before Provision for Credit Losses

Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2021 increased by $4,033,000 or 12.76% to $35,636,000 compared to $31,603,000 for the same period in 2020.

The increase was a result of yield changes, asset mix changes, an increase in average earning assets, offset by an increase in average interest bearing liabilities.

The impact to interest income from the accretion of the loan marks on acquired loans was $349,000 and $867,000 for the six months ended June 30, 2021 and 2020, respectively.

In addition, net interest income before the provision for credit losses for the six months ended June 30, 2021 was benefited by approximately $434,000 in nonrecurring income from prepayment penalties, as compared to $453,000 in nonrecurring income for the six months ended June 30, 2020.

Excluding these reversals and benefits, net interest income for the six months ended June 30, 2021 increased by $4,570,000 compared to the six months ended June 30, 2020.

Average interest earning assets were $1,996,278,000 for the six months ended June 30, 2021 with a net

interest margin (fully tax equivalent basis) of 3.67% compared to $1,554,895,000 with a net interest margin (fully tax equivalent basis) of 4.11% for the six months ended June 30, 2020.

Net interest income before the reversal of provision for credit losses for the nine months ended September 30, 2021 increased by $6,200,000 or 13.01% to $53,846,000 compared to $47,646,000 for the same period in 2020.

The increase was a result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in average interest bearing liabilities.

The impact to interest income from the accretion of the loan marks on acquired loans was $579,000 and $1,039,000 for the nine months ended September 30, 2021 and 2020, respectively.

In addition, net interest income before the provision for credit losses for the nine months ended September 30, 2021 was benefited by approximately $438,000 in nonrecurring income from prepayment penalties, as compared to $505,000 in nonrecurring income for the nine months ended

September 30, 2020.

Excluding these reversals and benefits, net interest income for the nine months ended September 30, 2021 increased by $6,727,000 compared to the nine months ended September 30, 2020.

Average interest earning assets were $2,040,407,000 for the nine months ended September 30, 2021 with a net interest margin (fully tax equivalent basis) of 3.60% compared to $1,627,331,000 with a net interest margin (fully tax equivalent basis) of 3.93% for the nine months ended September 30, 2020.

The $413,076,000 increase in average earning assets was attributed to the $378,890,000 increase in average total investments and the $34,186,000 or 3.29% increase in average loans.

For the six months ended June 30, 2021, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 48 basis points.

The effective yield on loans decreased 2 basis points.

Average interest bearing liabilities increased 31.07% to $1,021,034,000 for the six months ended June 30, 2021, compared to $778,975,000 for the same period in 2020.

For the nine months ended September 30, 2021, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 27 basis points.

The effective yield on loans increased seven basis points.

Average interest bearing liabilities increased 30.40% to $1,051,323,000 for the nine months ended September 30, 2021, compared to $806,243,000 for the same period in 2020.

Provision for Credit Losses

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The allocation of the allowance for credit losses is set forth below (in thousands):

Loan Type June 30, 2021 December 31, 2020

Loan Type September 30, 2021 December 31, 2020

Commercial and industrial $ 2,028 $ 1,764

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Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly.

During the six months ended June 30, 2021, the Company recorded a $3,300,000 reversal of provision for credit losses, compared to a $4,375,000 provision during the six months ended June 30, 2020.

During the six months ended June 30, 2021, 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 $824,000 for the six months ended June 30, 2021, and $432,000 for the same period in 2020.

Nonperforming loans, consisting entirely of nonaccrual loans, were $2,035,000 and $3,278,000 at June 30, 2021 and December 31, 2020, respectively, and $2,406,000 at June 30, 2020.

Nonperforming loans as a percentage of total loans were 0.19% at June 30, 2021 compared to 0.30% at December 31, 2020 and 0.21% at June 30, 2020.

The Company had no other real estate owned (OREO) at June 30, 2021 or December 31, 2020.

The Company held no repossessed assets at June 30, 2021 or December 31, 2020.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.15)% for the six months ended June 30, 2021, and (0.09)% for the same period in 2020.

During the nine months ended September 30, 2021, 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 $946,000 for the nine months ended September 30, 2021, and $552,000 for the same period in 2020.

Nonperforming loans, consisting entirely of nonaccrual loans, were $1,597,000 and $3,278,000 at September 30, 2021 and December 31, 2020, respectively, and $3,458,000 at September 30, 2020.

Nonperforming loans as a percentage of total loans were 0.15% at September 30, 2021 compared to 0.30% at December 31, 2020 and 0.31% at September 30, 2020.

The Company had no other real estate owned (OREO) at September 30, 2021 or December 31, 2020.

The Company held no repossessed assets at September 30, 2021 or December 31, 2020.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.12)% for the nine months ended September 30, 2021, and (0.07)% for the same period in 2020.

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.

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The agricultural industry has been affected by declines in prices and the changes in yields on 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

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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 June 30, 2021, there were $32.9 million in classified loans of which $1.2 million related to agricultural real estate, $12.1 million to commercial and industrial loans, $3.0 million to agricultural production, $7.0 million to real estate owner occupied, $9.6 million in commercial real estate.

This compares to $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $3.3 million to agricultural production, $7.3 million to real estate owner occupied, $9.6 million to commercial real estate, $1.0 million to consumer equity and lines of credit, and $3.2 million to real estate construction and other land loans as of December 31, 2020.

As of June 30, 2021, 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.

As of September 30, 2021, there were $23.1 million in classified loans of which $1.1 million related to agricultural real estate, $11.1 million to commercial and industrial loans, $3.3 million to agricultural production, $5.5 million to owner occupied real estate, and $1.9 million in commercial real estate.

This compares to $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $3.3 million to agricultural production, $7.3 million to owner occupied real estate, $9.6 million to commercial real estate, $1.0 million to consumer equity and lines of credit, and $3.2 million to real estate construction and other land loans as of December 31, 2020.

As of September 30, 2021, 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.

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Net Interest Income after Provision for Credit Losses

Net interest income, after the provision for credit losses, was $38,936,000 for the six months period ended June 30, 2021 and $27,228,000 for the same period in 2020.

Net interest income, after the provision for credit losses, was $57,646,000 for the nine months period ended September 30, 2021 and $42,671,000 for the same period in 2020.

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 $4,076,000 for the six months ended June 30, 2021 compared to $8,588,000 for the same period in 2020.

The $4,512,000 or 52.54% decrease in non-interest income during the six months ended June 30, 2021 was primarily driven by a decrease of $4,219,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $194,000, a decrease of $569,000 in other income, and a decrease in FHLB dividends of $29,000, offset by an increase in loan placement fees of $307,000 and an increase of $201,000 in interchange fees.

During the six months ended June 30, 2021, we realized a net loss on calls of investment securities of $79,000 compared to a $4,140,000 net gain for the same period in 2020.

The net gains realized on sales and calls of investment securities in 2020 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.

Customer service charges decreased $194,000 or 17.75% to $899,000 for the first six months of 2021 compared to $1,093,000 for the same period in 2020.

Interchange fees increased $201,000 to $841,000 the first six months of 2021 compared to $640,000 for the same period in 2020.

Loan placement fees increased $307,000 or 35.70% to $1,167,000 for the first six months of 2021 compared to $860,000 for the same period in 2020.

Other income decreased $569,000 the first six months of 2021 compared to the same period in 2020.

The decrease in other income resulted from a $463,000 gain recorded the first six months of 2020 related to the collection of life insurance proceeds.

Non-interest income was $6,224,000 for the nine months ended September 30, 2021 compared to $10,659,000 for the same period in 2020.

The $4,435,000 or 41.61% decrease in non-interest income during the nine months ended September 30, 2021 was primarily driven by a decrease of $4,159,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $170,000, a decrease of $557,000 in other income, and a decrease in FHLB dividends of $16,000, offset by an increase in loan placement fees of $89,000 and an increase of $318,000 in interchange fees.

During the nine months ended September 30, 2021, we realized a net gain on sales and calls of investment securities of $38,000 compared to a $4,197,000 net gain for the same period in 2020.

The net gains realized on sales and calls of investment securities in 2021 and 2020 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.

Customer service charges decreased $170,000 or 10.93% to $1,386,000 for the first nine months of 2021 compared to $1,556,000 for the same period in 2020.

Interchange fees increased $318,000 to $1,313,000 the first nine months of 2021 compared to $995,000 for the same period in 2020.

Loan placement fees increased $89,000 or 5.76% to $1,634,000 for the first nine months of 2021 compared to $1,545,000 for the same period in 2020.

Other income decreased $557,000 the first nine months of 2021 compared to the same period in 2020.

The decrease in other income resulted from a $463,000 gain recorded the first nine months of 2020 related to the collection of tax-exempt 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 $153,000 in the six months ended June 30, 2021, compared to $182,000 for the same period in 2020.

We received dividends totaling $237,000 in the nine months ended September 30, 2021, compared to $253,000 for the same period in 2020.

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 decreased $559,000 or 2.37% to $23,018,000 for the six months ended June 30, 2021, compared to $23,577,000 for the six months ended June 30, 2020.

The net decrease for the first six months of 2021 was primarily the result of decreases in salaries and employee benefits of $407,000, directors’ expenses of $174,000, internet banking of $170,000, professional services of $149,000, advertising of $83,000, ATM/Debit card expenses of $65,000, information technology of $40,000, amortization of software of $47,000, stationary and supplies of $44,000, and operating losses of $19,000, partially offset by increases in data processing expenses of $352,000, regulatory assessments of $140,000, personnel of $131,000, occupancy and equipment expenses of $31,000, and donations of $26,000.

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 55.96% for the six months ended June 30, 2021 compared to 65.00% for the six months ended June 30, 2020.

The decrease in the efficiency ratio was due to the decrease in non-interest expense as well as the growth in non-interest income.

Salaries and employee benefits decreased $407,000 or 2.84% to $13,917,000 for the first six months of 2021 compared to $14,324,000 for the six months ended June 30, 2020.

Full time equivalent employees were 261 for the six months ended June 30, 2021, compared to 270 for the six months ended June 30, 2020.

Non-interest expenses decreased $225,000 or 0.64% to $35,080,000 for the nine months ended September 30, 2021, compared to $35,305,000 for the nine months ended September 30, 2020.

The net decrease for the first nine months of 2021 was primarily the result of decreases in salaries and employee benefits of $45,000, directors’ expenses of $162,000, internet banking of $283,000, professional services of $357,000, advertising of $121,000, ATM/Debit card expenses of $10,000, amortization of software of $43,000, stationary and supplies of $62,000, armored courier of $14,000, and operating losses of $9,000, partially offset by increases in data processing expenses of $357,000, information technology of $257,000, regulatory assessments of $212,000, personnel of $132,000, occupancy and equipment expenses of $59,000, donations of $39,000, general insurance of $20,000, telephone of $14,000, and postage of $9,000.

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 56.46% for the nine months ended September 30, 2021 compared to 64.52% for the nine months ended September 30, 2020.

The improvement in the efficiency ratio was due to the decrease in non-interest expense as well as the growth in non-interest income.

Salaries and employee benefits decreased $45,000 or 0.21% to $21,008,000 for the first nine months of 2021 compared to $21,053,000 for the nine months ended September 30, 2020.

Full time equivalent employees were 258 for the nine months ended September 30, 2021, compared to 271 for the nine months ended September 30, 2020.

The decrease in total salaries and employee benefits was the result of a decrease of $1,186,000 in officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split dollar plans;

offset by an increase of approximately $429,000 in salaries and benefits and a decrease in loan issuance costs of $731,000.

A portion of the salaries and benefits increase was related to $172,000 paid and/or accrued for severance pay.

Occupancy and equipment expense increased $31,000 or 1.36% to $2,314,000 for the six months ended June 30, 2021 compared to $2,283,000 for the six months ended June 30, 2020.

Occupancy and equipment expense increased $59,000 or 1.70% to $3,538,000 for the nine months ended September 30, 2021 compared to $3,479,000 for the nine months ended September 30, 2020.

The Company made no changes in its depreciation expense methodology.

The Company operated 20 full-service offices at June 30, 2021 and at June 30, 2020.

Data processing expense increased to $1,242,000 for the six months ended June 30, 2021 compared to $890,000 for the same period in 2020.

Regulatory assessments increased to $333,000 for the six months ended June 30, 2021 compared to $193,000 for the same period in 2020.

The assessment base for calculating the amount owed is average assets minus average tangible equity.

Professional services decreased by $149,000 in the first six months of 2021 compared to the same period in 2020.

Personnel expense included an accrual of $136,000 for an executive search firm to find a replacement for our retiring chief executive officer.

The Company operated 20 full-service offices at September 30, 2021 and at September 30, 2020.

Data processing expense increased to $1,841,000 for the nine months ended September 30, 2021 compared to $1,484,000 for the same period in 2020.

Regulatory assessments increased to $552,000 for the nine months ended September 30, 2021 compared to $340,000 for the same period in 2020.

The assessment base for calculating regulatory assessments is average assets less average tangible equity.

Professional services decreased by $357,000 in the first nine months of 2021 compared to the same period in 2020.

Personnel expense included $151,000 for an executive search firm to find a replacement for our retiring President & CEO.

The following table shows significant components of other non-interest expense as a percentage of average assets.

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

(Dollars in thousands) Other Expense % Average

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Provision for Income Taxes

Our effective income tax rate was 24.77% for the six months ended June 30, 2021 compared to 27.09% for the six months ended June 30, 2020.

The Company reported an income tax provision of $4,952,000 for the six months ended June 30, 2021, compared to $3,315,000 for the six months ended June 30, 2020.

Our effective income tax rate was 25.10% for the nine months ended September 30, 2021 compared to 26.39% for the nine months ended September 30, 2020.

The Company reported an income tax provision of $7,227,000 for the nine months ended September 30, 2021, compared to $4,757,000 for the nine months ended September 30, 2020.

The effective tax rate was affected by the increase 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 amount of the position that would be ultimately sustained upon

examination do not meet a more-likely-than-not criteria.

As of June 30, 2021 and December 31, 2020, there was no reserve for uncertain tax positions.

Net Income for the Second Quarter of 2021 Compared to the Second Quarter of 2020

Net income increased to $7,563,000 for the quarter ended June 30, 2021 compared to $2,301,000 for the quarter ended June 30, 2020.

Basic earnings per share was $ 0.61 for the quarter ended June 30, 2021 compared to $ 0.18 for the same period in 2020.

Diluted earnings per share was $ 0.60 for the quarter ended June 30, 2021 compared to $ 0.18 for the same period in 2020.

Annualized ROE was 12.25% for the quarter ended June 30, 2021 compared to 4.14% for the quarter ended June 30, 2020.

Annualized ROA for the three months ended June 30, 2021 was 1.36% compared to 0.51% for the quarter ended June 30, 2020.

The increase in net income during the second quarter of 2021 compared to the same period in 2020 is primarily due to a decrease in provision for credit losses of $4,500,000, an increase in net interest income before the provision for credit losses of $2,507,000, and an increase in total non-interest income of $32,000, partially offset by an increase in the provision for income taxes of $1,645,000 and an increase in non-interest expenses of $132,000.

During the quarter ended June 30, 2021, the Company recorded a $ 1,500,000 reversal of provision for credit losses, compared to a $ 3,000,000 provision during the quarter ended June 30, 2020.

Non-interest income increased $32,000 or 1.56% to $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 in the same period in 2020.

During the second quarter of 2021 interchange fees increased $164,000, service charge income increased $20,000 and Federal Home Loan Bank dividends increased $8,000, offset by a decrease in placement fees of $51,000, a decrease in other income of $88,000, and a decrease in net realized gains on sales and calls of investment securities of $21,000, compared to the same period in 2020.

For the quarter ended June 30, 2020, non-interest income included a $166,000 gain related to the collection of tax-exempt life insurance proceeds.

If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would

be ultimately sustained upon examination do not meet a more-likely-than-not criteria.

As of September 30, 2021 and December 31, 2020, there was no reserve for uncertain tax positions.

Net Income for the Third Quarter of 2021 Compared to the Third Quarter of 2020

Net income increased to $6,521,000 for the quarter ended September 30, 2021 compared to $4,344,000 for the quarter ended September 30, 2020.

Basic earnings per share was $ 0.54 for the quarter ended September 30, 2021 compared to $ 0.35 for the same period in 2020.

Diluted earnings per share was $ 0.54 for the quarter ended September 30, 2021 compared to $ 0.35 for the same period in 2020.

Annualized ROE was 10.41% for the quarter ended September 30, 2021 compared to 7.50% for the quarter ended September 30, 2020.

Annualized ROA for the three months ended September 30, 2021 was 1.13% compared to 0.90% for the quarter ended September 30, 2020.

The increase in net income during the third quarter of 2021 compared to the same period in 2020 is primarily due to a decrease in provision for credit losses of $1,100,000, an increase in net interest income before the provision for credit losses of $2,167,000, and an increase in total non-interest income of $77,000, partially offset by an increase in the provision for income taxes of $833,000 and an increase in non-interest expenses of $334,000.

During the quarter ended September 30, 2021, the Company recorded a $ 500,000 reversal of provision for credit losses, compared to a $ 600,000 provision during the quarter ended September 30, 2020.

Non-interest income increased $77,000 or 3.72% to $2,148,000 for the quarter ended September 30, 2021 compared to $2,071,000 in the same period in 2020.

During the third quarter of 2021 interchange fees increased $117,000, net realized gains on sales and calls of investment securities increased $60,000, service charge income increased $24,000, Federal Home Loan Bank dividends increased $13,000, and other income increased $12,000, offset by a decrease in loan placement fees of $218,000, compared to the same period in 2020.

Interest Income and Expense

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For the Three Months Ended

June 30, 2021 For the Three Months Ended

June 30, 2020

September 30, 2021 For the Three Months Ended

September 30, 2020

(Dollars in thousands) Average

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The change in interest due to both rate and volume has been allocated to the change in rate.

Changes in Volume/Rate For the Three Months Ended June 30, 2021 and 2020

Changes in Volume/Rate For the Three Months Ended September 30, 2021 and 2020

(In thousands) Volume Rate Net

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(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $956,000 or 7.59% to $ 13,556,000 for the second quarter of 2021 compared to $ 12,600,000 for the same period in 2020.

Total average loans, including nonaccrual loans, for the second quarter of 2021 increased $3,217,000 or 0.30% to $1,080,425,000 compared to $1,077,208,000 for the same period in 2020.

Yield on the loan portfolio, excluding nonaccrual loans, was 5.04% and 4.71% for the second quarters ending June 30, 2021 and 2020, respectively.

Net interest income during the second quarters of 2021 and 2020 benefited by approximately $4,000 and $288,000, 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 $176,000 and $174,000 during the quarters ended June 30, 2021 and 2020, respectively.

Income from investments represents 26.54% of net interest income for the second quarter of 2021 compared to 21.73% for the same quarter in 2020.

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) increased $1,415,000 in the second quarter of 2021 to $4,799,000 compared to $3,384,000, for the same period in 2020.

The yield on average total investments decreased 26 basis points to 2.11% on a fully tax equivalent basis for the second quarter of 2021 compared to 2.37% on a fully tax equivalent basis for the second quarter of 2020.

Average total investments and interest bearing deposits in other banks for the second quarter of 2021 increased $391,002,000 or 66.35% to $980,329,000 compared to $589,327,000 for the second quarter of 2020.

Total interest income for the second quarter of 2021 increased $2,371,000 or 14.83% to $18,355,000 compared to $15,984,000 for the second quarter ended June 30, 2020.

The yield on interest earning assets decreased to 3.65% on a fully tax equivalent basis for the second quarter ended June 30, 2021 from 3.89% on a fully tax equivalent basis for the second quarter ended June 30, 2020.

Average interest earning assets increased to $2,058,103,000 for the second quarter ended June 30, 2021 compared to $1,664,915,000 for the second quarter ended June 30, 2020.

The $393,188,000 increase in average earning assets was attributed to the $2,186,000 increase in average loans and the $391,002,000 increase in total investments.

Interest expense on deposits for the quarter ended June 30, 2021 decreased $122,000 or 32.62% to $ 252,000 compared to $ 374,000 for the quarter ended June 30, 2020.

The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.05% and 0.10% for the quarters ended June 30, 2021 and 2020, respectively.

Average interest bearing deposits increased 31.26% or $251,149,000 in the second quarter of 2021 compared to the same period in 2020.

Average interest-bearing deposits were $1,054,567,000 for the quarter ended June 30, 2021, with an effective rate paid of 0.10%, compared to $803,418,000 for the same period in 2020, with an effective rate paid of 0.19%.

Average other borrowed funds totaled $5,155,000 for the quarter ended June 30, 2021, with an effective rate of 1.71% for the quarter ended June 30, 2021 compared to $5,155,000 and 2.79% for the quarter ended June 30, 2020.

As a result, interest expense on borrowed funds decreased $14,000 to $22,000 for the quarter ended June 30, 2021, from $36,000 for the

quarter ended June 30, 2020.

Interest and fee income from loans increased $18,000 or 0.14% to $ 13,208,000 for the third quarter of 2021 compared to $ 13,190,000 for the same period in 2020.

Total average loans, including nonaccrual loans, for the third quarter of 2021 decreased $53,361,000 or 4.75% to $1,069,955,000 compared to $1,123,316,000 for the same period in 2020, due to a decrease of $127,267,000 in PPP loans, offset by an increase of $73,906 in non-PPP loans.

Yield on the loan portfolio, excluding nonaccrual loans, was 4.91% and 4.68% for the third quarters ending September 30, 2021 and 2020, respectively.

Net interest income during the third quarters of 2021 and 2020 benefited by approximately $4,000 and $52,000, 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 $231,000 and $172,000 during the quarters ended September 30, 2021 and 2020, respectively.

Income from investments represents 29.04% of net interest income for the third quarter of 2021 compared to 20.20% for the same quarter in 2020.

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) increased $2,048,000 in the third quarter of 2021 to $5,289,000 compared to $3,241,000, for the same period in 2020.

The yield on average total investments increased seven basis points to 2.14% on a fully tax equivalent basis for the third quarter of 2021 compared to 2.07% on a fully tax equivalent basis for the third quarter of 2020.

Average total investments and interest bearing deposits in other banks for the third quarter of 2021 increased $409,167,000 or 62.95% to $1,059,128,000 compared to $649,961,000 for the third quarter of 2020.

Total interest income for the third quarter of 2021 increased $2,066,000 or 12.57% to $18,497,000 compared to $16,431,000 for the third quarter ended September 30, 2020.

The yield on interest earning assets decreased to 3.52% on a fully tax equivalent basis for the third quarter ended September 30, 2021 from 3.72% on a fully tax equivalent basis for the third quarter ended September 30, 2020.

Average interest earning assets increased to $2,127,239,000 for the third quarter ended September 30, 2021 compared to $1,770,617,000 for the third quarter ended September 30, 2020.

The $356,622,000 increase in average earning assets was attributed to the the $409,167,000 increase in total investments, offset by $52,545,000 decrease in average loans.

Interest expense on deposits for the quarter ended September 30, 2021 decreased $100,000 or 27.55% to $ 263,000 compared to $ 363,000 for the quarter ended September 30, 2020.

The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.05% and 0.09% for the quarters ended September 30, 2021 and 2020, respectively.

Average interest bearing deposits increased 29.32% or $250,724,000 in the third quarter of 2021 compared to the same period in 2020.

Average interest-bearing deposits were $1,105,757,000 for the quarter ended September 30, 2021, with an effective rate paid of 0.09%, compared to $855,033,000 for the same period in 2020, with an effective rate paid of 0.17%.

Average other borrowed funds totaled $5,155,000 for the quarter ended September 30, 2021, with an effective rate of 1.71% for the quarter ended September 30, 2021 compared to $5,155,000 and 1.94% for the quarter ended September 30, 2020.

As a result, interest expense on borrowed funds decreased $3,000 to $22,000 for the quarter ended September 30, 2021, from $25,000 for the quarter ended September 30, 2020.

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 0.10% and 0.20% for the quarters ended June 30, 2021 and 2020.

The cost of total deposits was 0.05% and 0.10% for the quarters ended June 30, 2021 and 2020.

Average non-interest bearing demand deposits increased 18.61% to $893,441,000 for the quarter ended June 30, 2021 compared to $753,265,000 for the quarter ended June 30, 2020.

The ratio of average non-interest bearing demand deposits to average total deposits was 45.86% in the second quarter of 2021 compared to 48.39% for the same period in 2020.

The cost of our interest bearing liabilities was 0.10% and 0.18% for the quarters ended September 30, 2021 and 2020.

The cost of total deposits was 0.05% and 0.09% for the quarters ended September 30, 2021 and 2020.

Average non-interest bearing demand deposits increased 13.47% to $915,742,000 for the quarter ended September 30, 2021 compared to $807,052,000 for the quarter ended September 30, 2020.

The ratio of average non-interest bearing demand deposits to average total deposits was 45.30% in the third quarter of 2021 compared to 48.56% for the same period in 2020.

Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for the quarter ended June 30, 2021, increased $2,507,000 or 16.10% to $18,081,000 compared to $15,574,000 for the quarter ended June 30, 2020.

Net interest income before provision for credit losses for the quarter ended September 30, 2021, increased $2,167,000 or 13.51% to $18,210,000 compared to $16,043,000 for the quarter ended September 30, 2020.

The increase was due to asset mix changes, and the increase in average interest earning assets, partially offset by an increase in average interest-bearing liabilities.

Average interest earning assets were $2,058,103,000 for the quarter ended June 30, 2021, with a net interest margin (fully tax equivalent basis) of 3.60% compared to $1,664,915,000 with a net interest margin (fully tax equivalent basis) of 3.79% for the quarter ended June 30, 2020.

The $393,188,000 increase in average earning assets can be attributed to the $3,217,000 increase in loans, and the $391,002,000 increase in total investments.

Average interest bearing liabilities increased 31.06% to $1,059,722,000 for the quarter ended June 30, 2021 compared to $808,573,000 for the same period in 2020.

Average interest earning assets were $2,127,239,000 for the quarter ended September 30, 2021, with a net interest margin (fully tax equivalent basis) of 3.47% compared to $1,770,617,000 with a net interest margin (fully tax equivalent basis) of 3.63% for the quarter ended September 30, 2020.

The $356,622,000 increase in average earning assets can be attributed to the $409,167,000 increase in total investments, offset by the $53,361,000 decrease in loans.

Average interest bearing liabilities increased 29.15% to $1,110,912,000 for the quarter ended September 30, 2021 compared to $860,188,000 for the same period in 2020.

Provision for Credit Losses

During the quarter ended June 30, 2021, the Company recorded a $ 1,500,000 reversal of provision for credit losses, compared to $ 3,000,000 provision during the quarter ended June 30, 2020.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was 0.04% for the quarter ended June 30, 2021 compared to (0.15)% for the quarter ended June 30, 2020.

During the quarter ended June 30, 2021, the Company had net charge-offs totaling $117,000 compared to net recoveries of $391,000 for the same period in 2020.

Gross recoveries of previously charged off loan balances during the quarters ended June 30, 2021 and 2020 were $54,000 and $471,000, respectively.

Gross charge-offs during the quarters ended June 30, 2021 and 2020 were $171,000 and $80,000, respectively.

During the quarter ended September 30, 2021, the Company recorded a $ 500,000 reversal of provision for credit losses, compared to $ 600,000 provision during the quarter ended September 30, 2020.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.05)% for the quarter ended September 30, 2021 compared to (0.04)% for the quarter ended September 30, 2020.

During the quarter ended September 30, 2021, the Company had net recoveries totaling $122,000 compared to net recoveries of $120,000 for the same period in 2020.

Gross recoveries of previously charged off loan balances during the quarters ended September 30, 2021 and 2020 were $156,000 and $165,000, respectively.

Gross charge-offs during the quarters ended September 30, 2021 and 2020 were $34,000 and $45,000, 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 $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 for the same period ended June 30, 2020.

The $32,000 or 1.56% increase in non-interest income for the quarter ended June 30, 2021 was primarily due to recording a $164,000 increase in interchange fees, a $20,000 increase in service charge income, and a $8,000 increase in Federal Home Loan Bank dividends, partially offset by a $88,000 decrease in other income, a $51,000 decrease in loan placement fees, and a $21,000 decrease in net realized gains on sales and calls of investment securities,

Customer service charges increased $20,000 or 4.47% to $ 467,000 for the second quarter of 2021 compared to $ 447,000 for the same period in 2020, due primarily to an increase in overdraft fee income.

Other income decreased $88,000 or 16.39% to $ 449,000 for the second quarter of 2021 compared to $ 537,000 for the same period in 2020.

For the quarter ended June 30, 2020, other income included a $166,000 gain related to the collection of tax-exempt life insurance proceeds.

Non-interest income was $2,148,000 for the quarter ended September 30, 2021 compared to $2,071,000 for the same period ended September 30, 2020.

The $77,000 or 3.72% increase in non-interest income for the quarter ended September 30, 2021 was primarily due to recording a $117,000 increase in interchange fees, a $60,000 increase in net realized gains on sales and calls of investment securities, a $24,000 increase in service charge income, a $13,000 increase in Federal Home Loan Bank dividends, and a $12,000 increase in other income, partially offset by a $218,000 decrease in loan placement fees.

Customer service charges increased $24,000 or 5.18% to $ 487,000 for the third quarter of 2021 compared to $ 463,000 for the same period in 2020, due primarily to an increase in overdraft fee income.

Other income increased $12,000 or 4.58% to $ 274,000 for the third quarter of 2021 compared to $ 262,000 for the same period in 2020.

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 $132,000 or 1.15% to $11,630,000 for the quarter ended June 30, 2021 compared to $11,498,000 for the same period in 2020.

The net increase quarter over quarter was a result of a increases in salaries and employee benefits of $167,000, increases in data processing expense of $71,000, increases in occupancy and equipment expenses of $62,000, increases in regulatory assessments of $26,000, increases in appraisal fees of $25,000, increases in alarm monitoring expenses of 15,000, increases in operating losses of $10,000, and increases in Information technology expenses of $9,000.

The increases were partially offset by the decreases in Internet banking expenses of $98,000, the decreases in professional services of $47,000, the decreases in advertising expenses of $39,000, the decreases in stationery and supplies of $29,000, the decreases in directors’ expenses of $23,000, and the decreases in amortization of software of $14,000 .

During the quarter ended June 30, 2021, nonrecurring expenses included $106,000 related to PPP loan forgiveness processing.

The Company’s efficiency ratio decreased to 55.58% for the second quarter of 2021 compared to 64.27% for the second quarter of 2020.

Non-interest expenses increased $334,000 or 2.85% to $12,062,000 for the quarter ended September 30, 2021 compared to $11,728,000 for the same period in 2020.

The net increase quarter over quarter was a result of increases in salaries and employee benefits of $362,000, increases in information technology expenses of $297,000, increases in occupancy and equipment expenses of $28,000, increases in regulatory assessments of $72,000, increases in appraisal fees of $67,000, increases in ATM/Debit card expenses of $55,000, increases in education and training of $20,000, increases in mileage and travel of $20,000, increases in telephone expenses of $13,000, increases in directors’ expenses of $12,000, increases in operating losses of $10,000, increases in data processing expense of $5,000, and increases in amortization of software of $2,000.

The increases were partially offset by a decrease in Internet banking expenses of $113,000, a decrease in professional services of $208,000, a decrease in advertising expenses of $38,000, a decrease in stationery and supplies of $18,000, a decrease of $15,000 in armored courier fees, and a decrease in alarm monitoring expenses of $2,000.

During the quarter ended September 30, 2021, nonrecurring expenses included $98,000 related to PPP loan forgiveness processing.

The Company’s efficiency ratio decreased to 57.66% for the third quarter of 2021 compared to 63.58% for the third quarter of 2020.

The improvement in the efficiency ratio is due to the growth in operating revenue outpacing the increase in non-interest expense.

Salaries and employee benefits increased $167,000 or 2.45% to $ 6,979,000 for the second quarter of 2021 compared to $ 6,812,000 for the second quarter of 2020.

The number of full time equivalent (FTE) employees as of June 30, 2021, December 31, 2020 and June 30, 2020 was 247, 273, and 265, respectively.

Other non-interest expenses included increases of $20,000 in donations, $18,000 in personnel expenses, $8,000 in education/training expenses, $4,000 in telephone expenses, and $3,000 in armored courier expenses, partially offset by decreases of $29,000 in stationary and supplies, $14,000 in amortization of software, $13,000 in risk management expense, and $13,000 in check printing expense, as compared to the same period in 2020.

Salaries and employee benefits increased $362,000 or 5.38% to $ 7,091,000 for the third quarter of 2021 compared to $ 6,729,000 for the third quarter of 2020.

The increase in total salaries and employee benefits was the result of an increase of approximately $319,000 in salaries and benefits, and an increase of $100,000 in officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split dollar plans;

offset by a decrease in loan origination costs of $57,000.

The number of full time equivalent (FTE) employees as of September 30, 2021, December 31, 2020 and September 30, 2020 was 246, 273, and 269, respectively.

Provision for Income Taxes

The effective income tax rate was 24.58% for the second quarter of 2021 compared to 26.27% for the same period in 2020.

Provision for income taxes totaled $ 2,465,000 and $ 820,000 for the quarters ended June 30, 2021 and 2020, respectively.

The effective income tax rate was 25.86% for the third quarter of 2021 compared to 24.92% for the same period in 2020.

Provision for income taxes totaled $ 2,275,000 and $ 1,442,000 for the quarters ended September 30, 2021 and 2020, respectively.

The 2021 effective tax rate was affected by the increase in tax-exempt interest, as well as the reversal of provision for credit losses.

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Summary of Changes in Consolidated Balance Sheets

June 30, 2021 compared to December 31, 2020

Total assets were $2,280,550,000 as of June 30, 2021, compared to $2,004,096,000 at December 31, 2020, an increase of 13.79% or $276,454,000.

Total gross loans were $1,069,945,000 at June 30, 2021, compared to $1,102,347,000 at December 31, 2020, a decrease of $32,402,000 or 2.94%.

The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 38.13% or $287,429,000 to $1,041,258,000 at June 30, 2021 compared to $753,829,000 at December 31, 2020.

Total deposits increased 14.88% or $256,384,000 to $1,979,094,000 at June 30, 2021, compared to $1,722,710,000 at December 31, 2020.

Shareholders’ equity increased $6,028,000 or 2.46% to $251,049,000 at June 30, 2021, compared to $245,021,000 at December 31, 2020.

September 30, 2021 compared to December 31, 2020

Total assets were $2,348,377,000 as of September 30, 2021, compared to $2,004,096,000 at December 31, 2020, an increase of 17.18% or $344,281,000.

Total gross loans were $1,083,497,000 at September 30, 2021, compared to $1,102,347,000 at December 31, 2020, a decrease of $18,850,000 or 1.71%.

The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 46.31% or $349,078,000 to $1,102,907,000 at September 30, 2021 compared to $753,829,000 at December 31, 2020.

Total deposits increased 19.47% or $335,382,000 to $2,058,092,000 at September 30, 2021, compared to $1,722,710,000 at December 31, 2020.

Shareholders’ equity increased $1,527,000 or 0.62% to $246,548,000 at September 30, 2021, compared to $245,021,000 at December 31, 2020.

The increase in shareholders’ equity was driven by the retention of e arnings, net of dividends paid , the decrease in unrealized gains on available-for-sale (AFS) securities, and share repurchases.

Accrued interest payable and other liabilities was $45,252,000 at June 30, 2021, compared to $31,210,000 at December 31, 2020, a increase of $14,042,000.

Accrued interest payable and other liabilities was $38,582,000 at September 30, 2021, compared to $31,210,000 at December 31, 2020, an increase of $7,372,000.

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.

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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 June 30, 2021, investment securities with a fair value of $191,882,000, or 20.15% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.

As of September 30, 2021, investment securities with a fair value of $262,024,000, or 24.71% 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.

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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 June 30, 2021 was 54.06%

compared to 63.99% at December 31, 2020.

Our loan-to-deposit ratio at September 30, 2021 was 52.65% compared to 63.99% at December 31, 2020.

The loan-to-deposit ratio of our peers was 80.00% at December 31, 2020.

The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 38.13% or $287,429,000 to $1,041,258,000 at June 30, 2021, from $753,829,000 at December 31, 2020.

The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $18,278,000 at June 30, 2021, compared to a net unrealized gain of $21,091,000 at December 31, 2020.

The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 46.31% or $349,078,000 to $1,102,907,000 at September 30, 2021, from $753,829,000 at December 31, 2020.

The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $14,609,000 at September 30, 2021, compared to a net unrealized gain of $21,091,000 at December 31, 2020.

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.

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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 June 30, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at June 30, 2021 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.

Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2021 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.

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.

There were no OTTI losses recorded during the six months ended June 30, 2020.

At June 30, 2021, the Company held two U.S.

Treasury securities of which one security was in a loss position for less than 12 months.

The unrealized loss on the Company’s investment in direct obligations of U.S.

Treasury securities is associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuer.

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 June 30, 2021.

At June 30, 2021, the Company held one U.S.

There were no OTTI losses recorded during the nine months ended September 30, 2020.

At September 30, 2021, the Company held one U.S.

Treasury securities which was in a gain position.

At September 30, 2021, the Company held one U.S.

Government agency security which was in a gain position.

At June 30, 2021, the Company held 122 obligations of states and political subdivision securities of which 16 were in a loss position for less than 12 months.

At September 30, 2021, the Company held 129 obligations of states and political subdivision securities of which 25 were in a loss position for less than 12 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 June 30, 2021.

At June 30, 2021, the Company held 115 U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations of which eight were in a loss position for less than 12 months and 11 have been in a loss position for more than 12 months.

At September 30, 2021, the Company held 119 U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 14 were in a loss position for less than 12 months and nine 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.

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.

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 June 30, 2021.

At June 30, 2021, the Company had a total of 49 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of $180,844,000 and a net unrealized loss of approximately $63,000.

18 of the PLMABS securities were in a loss position for less than 12 months and two has been in loss for more than 12 months at June 30, 2021.

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 June 30, 2021.

At September 30, 2021, the Company had a total of 63 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of $255,324,000 and a net unrealized loss of approximately $1,568,000.

31 of the PLMABS securities were in a loss position for less than 12 months and four has been in loss for more than 12 months at September 30, 2021.

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, 2021.

The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

At June 30, 2021, the Company held 14 corporate debt securities of which five were in a loss position for less than 12 months.

At September 30, 2021, the Company held 15 corporate debt securities of which eight were in a loss position for less than 12 months.

The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes.

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.

Total gross loans decreased $32,402,000 or 2.94% to $1,069,945,000 as of June 30, 2021, compared to $1,102,347,000 as of December 31, 2020.

Total gross loans decreased $18,850,000 or 1.71% to $1,083,497,000 as of September 30, 2021, compared to $1,102,347,000 as of December 31, 2020.

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:

Loan Type (Dollars in thousands) June 30, 2021 % of Total

Loan Type (Dollars in thousands) September 30, 2021 % of Total

Loans December 31, 2020 % of Total

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Total consumer 93,083 8.6 % 92,870 8.3 %

Net deferred origination costs (1,390) (2,612)

Net deferred origination fees (409) (2,612)

Total gross loans 1,083,497 100.0 % 1,102,347 100.0 %

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Total loans $ 1,073,436 $ 1,089,432

As of June 30, 2021, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.5% of total loans.

This level of concentration of commercial loans and loans collateralized by real estate is consistent with 96.7% of total loans at December 31, 2020.

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.

As of September 30, 2021, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.5% of total loans.

This level of concentration of commercial loans

and loans collateralized by real estate is consistent with 96.7% of total loans at December 31, 2020.

Although management believes the loans within this concentration have no more than the normal risk of collectability, 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 collectability, 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 June 30, 2021, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $109,932,000, of which $2,374,000 were commercial loans, $98,912,000 were real estate loans, and $8,646,000 were consumer loans.

At September 30, 2021, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $99,020,000, of which $2,305,000 were commercial loans, $88,552,000 were real estate loans, and $8,163,000 were consumer loans.

At December 31, 2020, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $127,186,000, of which $2,529,000 were commercial loans, $110,616,000 were real estate loans, and $14,041,000 were consumer loans.

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Contributing to the commercial and industrial loan growth was the issuance of PPP loans.

As of June 30, 2021, gross loans included $109,502,000 in PPP loans which are fully guaranteed by the SBA.

As of September 30, 2021, gross loans included $64,260,000 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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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 June 30, 2021, total nonperforming assets totaled $2,035,000, or 0.09% of total assets, compared to $3,278,000, or 0.16% of total assets at December 31, 2020.

Total nonperforming assets at June 30, 2021, included nonaccrual loans totaling $2,035,000, no OREO, and no other repossessed assets.

At September 30, 2021, total nonperforming assets totaled $1,597,000, or 0.07% of total assets, compared to $3,278,000, or 0.16% of total assets at December 31, 2020.

Total nonperforming assets at September 30, 2021, included nonaccrual loans totaling $1,597,000, no OREO, and no other repossessed assets.

Nonperforming assets at December 31, 2020 consisted of $3,278,000 in nonaccrual loans, no OREO, and no other repossessed assets.

At June 30, 2021 and December 31, 2020, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans.

A summary of nonperforming loans at June 30, 2021 and December 31, 2020 is set forth below.

The Company had no loans past due more than 90 days and still accruing interest at June 30, 2021 or at December 31, 2020.

At September 30, 2021 and December 31, 2020, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans.

A summary of nonperforming loans at September 30, 2021 and December 31, 2020 is set forth below.

The Company had no loans past due more than 90 days and still accruing interest at September 30, 2021 or at December 31, 2020.

Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

Composition of Nonperforming Loans

(In thousands) June 30, 2021 December 31, 2020

(In thousands) September 30, 2021 December 31, 2020

Nonaccrual loans:

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Real estate construction and other land loans — 1,556

Agricultural real estate 1,204 —

Agricultural production 779 —

Commercial real estate 485 512

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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 June 30, 2021 and December 31, 2020, we had impaired loans totaling $8,539,000 and $11,186,000, respectively.

As of September 30, 2021 and December 31, 2020, we had impaired loans totaling $10,060,000 and $11,186,000, 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.

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The following table provides a reconciliation of the change in nonaccrual loans for the first six months of 2021.

The following table provides a reconciliation of the change in nonaccrual loans for the first nine months of 2021.

(In thousands) Balance, December 31, 2020 Additions

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Status Charge-

Offs Balance, June 30, 2021

Offs Balance, September 30, 2021

Nonaccrual loans:

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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 June 30, 2021 or December 31, 2020.

The Company held no repossessed assets at June 30, 2021 or December 31, 2020.

We had no OREO properties at September 30, 2021 or December 31, 2020.

The Company held no repossessed assets at September 30, 2021 or December 31, 2020.

Allowance for Credit Losses

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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.

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.

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The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:

For the Six Months

Ended June 30, For the Year Ended

December 31, For the Six Months

Ended June 30,

For the Nine Months

Ended September 30, For the Year Ended

December 31, For the Nine Months

Ended September 30,

(Dollars in thousands) 2021 2020 2020

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At the onset of COVID we established a dedicated qualitative factor to address the lagging effect on our quantitative data.

We have begun reducing that factor’s impact on the ALLL given the passage of time.

We adjusted the economic risk factor methodology to incorporate the improving economic conditions and decreasing unemployment rate.

We have materially reduced that factor’s impact on the ALLL given the passage of time and improving economic conditions from mid-2020.

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.

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Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.

As of June 30, 2021, the balance in the allowance for credit losses (ALLL) was $10,439,000 compared to $12,915,000 as of December 31, 2020.

The decrease is attributed to the reversal of provision of $3,300,000 during the six months ended June 30, 2021.

The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $316,702,000 as of June 30, 2021, compared to $326,179,000 as of December 31, 2020.

At June 30, 2021 and December 31, 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000.

As of September 30, 2021, the balance in the allowance for credit losses (ALLL) was $10,061,000 compared to $12,915,000 as of December 31, 2020.

The decrease is attributed to the reversal of provision for credit losses of $3,800,000 during the nine months ended September 30, 2021.

The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $332,875,000 as of September 30, 2021, compared to $326,179,000 as of December 31, 2020.

At September 30, 2021 and December 31, 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $150,000 and $250,000, respectively.

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 June 30, 2021, the ALLL was 0.98% of total gross loans compared to 1.17% as of December 31, 2020.

Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $109,932,000 at June 30, 2021 and $127,186,000 at December 31, 2020.

Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.09% and 1.32% at June 30, 2021 and December 31, 2020, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.13% and 1.41%, respectively.

As of June 30, 2021, gross loans included $109,502,000 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 1.23% and 1.65% as of June 30, 2021 and December 31, 2020, respectively.

The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at June 30, 2021.

The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL.

As of September 30, 2021, the ALLL was 0.93% of total gross loans compared to 1.17% as of December 31, 2020.

Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $99,020,000 at September 30, 2021 and $127,186,000 at December 31, 2020.

Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.02% and 1.32% at September 30, 2021 and December 31, 2020, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.00% and 1.41%, respectively.

As of September 30, 2021, gross loans included $64,260,000 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 1.09% and 1.65% as of September 30, 2021 and December 31, 2020, 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, 2021.

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.

The Company’s loan portfolio balances for the six months ended June 30, 2021 increased through organic growth.

The Company’s loan portfolio balances for the nine months ended September 30, 2021 increased through organic growth.

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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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 June 30, 2021.

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, 2021.

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.

June 30, 2021 December 31, 2020 June 30, 2020

September 30, 2021 December 31, 2020 September 30, 2020

(Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans

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Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.

Total goodwill at June 30, 2021, 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.

Total goodwill at September 30, 2021, 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.

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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.

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, second and fourth 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.

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.

The Company’s annual goodwill test is completed as of September 30 each year.

Management performed an annual impairment test in the third quarter of 2021 utilizing various qualitative factors.

Management believes these factors are sufficient and comprehensive and as such, no further factors need to be assessed at this time.

Based on management’s analysis performed, no impairment was required.

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.

No such events or circumstances arose during the first six months of 2021.

No such events or circumstances arose during the first nine months of 2021.

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.

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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 June 30, 2021 was $835,000, net of $2,744,000 in accumulated amortization expense.

The carrying value of intangible assets at September 30, 2021 was $662,000, net of $3,090,000 in accumulated amortization expense.

The carrying value at December 31, 2020 was $1,183,000, net of $2,569,000 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 six months of 2021.

Amortization expense recognized was $347,000 and $347,000 for the six months ended June 30, 2021 and June 30, 2020, respectively.

Based on the evaluation, no changes to the remaining useful lives was required in the first nine months of 2021.

Amortization expense recognized was $521,000 and $521,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively.

The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands):

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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 $256,384,000 or 14.88% to $1,979,094,000 as of June 30, 2021, compared to $1,722,710,000 as of December 31, 2020.

Interest-bearing deposits increased $181,867,000 or 20.26% to $1,079,688,000 as of June 30, 2021, compared to $897,821,000 as of December 31, 2020.

Non-interest bearing deposits increased $74,517,000 or 9.03% to $899,406,000 as of June 30, 2021, compared to $824,889,000 as of December 31, 2020.

Average non-interest bearing deposits to average total deposits was 46.11% for the six months ended June 30, 2021 compared to 46.47% for the same period in 2020.

The Company’s deposit balances for the six months ended June 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

The composition of the deposits and average interest rates paid at June 30, 2021 and December 31, 2020 is summarized in the table below.

(Dollars in thousands) June 30, 2021 % of

Total deposits increased $335,382,000 or 19.47% to $2,058,092,000 as of September 30, 2021, compared to $1,722,710,000 as of December 31, 2020.

Interest-bearing deposits increased $226,022,000 or 25.17% to $1,123,843,000 as of September 30, 2021, compared to $897,821,000 as of December 31, 2020.

Non-interest bearing deposits increased $109,360,000 or 13.26% to $934,249,000 as of September 30, 2021, compared to $824,889,000 as of December 31, 2020.

Average non-interest bearing deposits to average total deposits was 45.83% for the nine months ended September 30, 2021 compared to 47.24% for the same period in 2020.

The Company’s deposit balances for the nine months ended September 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

The composition of the deposits and average interest rates paid at September 30, 2021 and December 31, 2020 is summarized in the table below.

(Dollars in thousands) September 30, 2021 % of

Deposits Average Effective

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Other Borrowings

As of June 30, 2021 and December 31, 2020, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances.

As of September 30, 2021 and December 31, 2020, 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.

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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 $251,049,000 at June 30, 2021, compared to $245,021,000 at December 31, 2020.

The increase from December 31, 2020 in shareholders’ equity is the result of a an increase in retained earnings from net income of $15,042,000, the exercise of stock options of $213,000, stock issued under the employee stock purchase plan of $110,000, the effect of share based compensation expense of $210,000, and stock awarded to employees of $158,000, offset by a decrease in accumulated other comprehensive income (AOCI) of $1,982,000, common stock cash dividends of $2,881,000, and stock repurchases of $4,842,000.

Our shareholders’ equity was $246,548,000 at September 30, 2021, compared to $245,021,000 at December 31, 2020.

The increase from December 31, 2020 in shareholders’ equity is the result of an increase in retained earnings from net income of $21,563,000, the exercise of stock options of $222,000, stock issued under the employee stock purchase plan of $159,000, the effect of share-based compensation expense of $310,000, and stock awarded to employees of $158,000, offset by a decrease in accumulated other comprehensive income (AOCI) of $4,566,000, common stock cash dividends of $4,319,000, and stock repurchases of $12,000,000.

On March 17, 2021, 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 $12 million worth of the Company’s outstanding common stock.

During the six months ended June 30, 2021, the Company repurchased and retired 239,679 shares at an approximate cost of $4,842,000.

The share repurchase plan began on March 18, 2021 and will end on March 17, 2022.

During the first six months of 2021, the Company declared and paid $2,881,000 in cash dividends ($0.23 per common share) to holders of common stock.

During the nine months ended September 30, 2021, the Company repurchased and retired 584,619 shares at a cost of $12,000,000, completing the stock repurchase program.

During the first nine months of 2021, the Company declared and paid $4,319,000 in cash dividends ($0.35 per common share) to holders of common stock.

The Company declared and paid a total of $5,530,000 in cash dividends ($0.44 per common share) to holders of common stock during the year ended December 31, 2020.

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credit and recourse arrangements, which are reported as off-balance-sheet items.

The following table presents the Company’s regulatory capital ratios as of June 30, 2021 and December 31, 2020.

The following table presents the Company’s regulatory capital ratios as of September 30, 2021 and December 31, 2020.

(Dollars in thousands)

June 30, 2021 Amount Ratio

September 30, 2021 Amount Ratio

Tier 1 Leverage Ratio $ 184,942 8.24 %

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Total Risk-Based Capital Ratio $ 191,572 15.58 %

The following table presents the Bank’s regulatory capital ratios as of June 30, 2021 and December 31, 2020.

The following table presents the Bank’s regulatory capital ratios as of September 30, 2021 and December 31, 2020.

(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ”

June 30, 2021 Amount Ratio Amount Ratio Amount Ratio

September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

Tier 1 Leverage Ratio $ 183,529 8.18 % $ 89,783 4.00 % $ 112,229 5.00 %

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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 June 30, 2021, 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%.

At September 30, 2021, 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).

8 unchanged sentences

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 June 30, 2021, the rate was 1.78%.

As of September 30, 2021, the rate was 1.73%.

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.

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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 June 30, 2021, the Company had unpledged securities totaling $768,056,000 available as a secondary source of liquidity and total cash and cash equivalents of $120,666,000.

Cash and cash equivalents at June 30, 2021 increased 71.70% compared to $70,278,000 at December 31, 2020.

As of September 30, 2021, the Company had unpledged securities totaling $805,824,000 available as a secondary source of liquidity and total cash and cash equivalents of $67,693,000.

Cash and cash equivalents at September 30, 2021 decreased 3.68% compared to $70,278,000 at December 31, 2020.

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.

As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks.

At June 30, 2021, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $245,311,000 in unused FHLB secured advances and a $11,480,000 secured credit line at the Federal Reserve Bank.

At September 30, 2021, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $262,091,000 in unused FHLB secured advances and a $10,691,000 secured credit line at the Federal Reserve Bank.

We believe our liquidity sources to be stable and adequate.

At June 30, 2021, 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 June 30, 2021 and December 31, 2020:

Credit Lines (In thousands) June 30, 2021 December 31, 2020

At September 30, 2021, 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, 2021 and December 31, 2020:

Credit Lines (In thousands) September 30, 2021 December 31, 2020

Unsecured Credit Lines

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis