Community West Bancshares 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; (14) the uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company. When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 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 31 Internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments. There have been no material changes to the Company’s critical accounting policies during the nine months ended September 30, 2021. Please refer to the Company’s 2020 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report. OVERVIEW Central Valley Community Bancorp (Company) We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank). We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank. Central Valley Community Bank (Bank) The Bank commenced operations in January 1980 as a state-chartered bank. As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the California Department of Financial Protection and Innovation (DFPI). The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC. The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor. For this insurance, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment. The Bank operates 20 full-service branches which serve the communities of Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia, California. Additionally, the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2021 FDIC data, the Bank’s branches in Fresno, Madera, San Joaquin, and Tulare Counties had a 3.83% combined deposit market share of all insured depositories. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus Counties), was less than 1.00% in 2021. Dividend Declared 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 32 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 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; and • 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 33 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 $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 1.13% 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%. 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 1.30% 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 34 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 0.05% 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 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 As a publicly traded community bank holding company, we focus on several key factors including: · Return to our shareholders; · Return on average assets; · Development of revenue streams, including net interest income and non-interest income; · Asset quality; · Asset growth; · Capital adequacy; · Operating efficiency; and · Liquidity Return to Our Shareholders Our return to shareholders is determined in a ratio that measures the return on average equity (ROE), 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 35 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 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. Peer group data from S&P Global Market Intelligence includes bank holding companies in central California with assets from $1 billion to $3.5 billion. Development of Revenue Streams Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin. The Company’s net interest margin (fully tax equivalent basis) decreased to 3.60% 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 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 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; offset by increases in loan placement fees, and interchange fees, compared to the comparable 2020 period. Further detail of non-interest income is provided below. Asset Quality For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of percentage of total loans and total assets and is a key element in estimating the future earnings of a company. Total nonperforming assets were $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 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. Asset Growth As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased by $344,281,000 or 17.18% during the nine months 36 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. Further discussion of loans and deposits is below. Capital Adequacy Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities. The Company and the Bank are each subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements may cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by bank regulatory agencies to ensure capital adequacy. As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of September 30, 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. Operating Efficiency Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue. When measuring operating efficiency, a lower ratio is more favorable. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was 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 13.53% 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 Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (“FHLB”). We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $262,091,000 with the FHLB. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses. 37 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 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 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 Net interest income is the most significant component of our income from operations. Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities. The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are not included as interest earning assets for purposes of this table. 38 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Nine Months Ended September 30, 2021 For the Nine Months Ended September 30, 2020 (Dollars in thousands) Average Balance Interest Income/ Expense Average Interest Rate Average Balance Interest Income/ Expense Average Interest Rate ASSETS Interest-earning deposits in other banks $ 104,705 $ 89 0.11 % $ 70,418 $ 222 0.42 % Securities: Taxable securities 629,710 9,937 2.10 % 478,238 8,996 2.51 % Non-taxable securities (1) 231,690 5,244 3.02 % 38,559 1,284 4.44 % Total investment securities 861,400 15,181 2.35 % 516,797 10,280 2.65 % Total securities and interest-earning deposits 966,105 15,270 2.11 % 587,215 10,502 2.38 % Loans (2) (3) 1,074,302 40,529 5.04 % 1,040,116 38,688 4.97 % Total interest-earning assets 2,040,407 $ 55,799 3.66 % 1,627,331 $ 49,190 4.04 % Allowance for credit losses (11,969) (11,439) Nonaccrual loans 2,736 1,894 Cash and due from banks 36,776 25,526 Bank premises and equipment 8,421 7,412 Other assets 141,040 129,992 Total average assets $ 2,217,411 $ 1,780,716 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 522,122 $ 143 0.04 % $ 417,075 $ 273 0.09 % Money market accounts 434,204 486 0.15 % 293,764 417 0.19 % Time certificates of deposit 89,842 154 0.23 % 90,249 479 0.71 % Total interest-bearing deposits 1,046,168 783 0.10 % 801,088 1,169 0.19 % Other borrowed funds 5,155 70 1.81 % 5,155 106 2.74 % Total interest-bearing liabilities 1,051,323 $ 853 0.11 % 806,243 $ 1,275 0.21 % Non-interest bearing demand deposits 885,008 717,162 Other liabilities 33,266 29,917 Shareholders’ equity 247,814 227,394 Total average liabilities and shareholders’ equity $ 2,217,411 $ 1,780,716 Interest income and rate earned on average earning assets $ 55,799 3.66 % $ 49,190 4.04 % Interest expense and interest cost related to average interest-bearing liabilities 853 0.11 % 1,275 0.21 % Net interest income and net interest margin (4) $ 54,946 3.60 % $ 47,915 3.93 % (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,101 and $269 in 2021 and 2020, respectively. (2) Loan interest income includes loan fees of $4,966 in 2021 and $884 in 2020. (3) Average loans do not include nonaccrual loans but do include interest income recovered from previously charged off loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 39 The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes in Volume/Rate For the Nine Months Ended September 30, 2021 and 2020 (In thousands) Volume Rate Net Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks $ 108 $ (241) $ (133) Investment securities: Taxable 2,849 (1,908) 941 Non-taxable (1) 6,431 (2,471) 3,960 Total investment securities 9,280 (4,379) 4,901 Federal funds sold — — — Loans 1,271 570 1,841 Total earning assets (1) 10,659 (4,050) 6,609 Interest expense: Deposits: Savings, NOW and MMA 267 (328) (61) Time certificate of deposits (2) (323) (325) Total interest-bearing deposits 265 (651) (386) Other borrowed funds (1) (35) (36) Total interest-bearing liabilities 264 (686) (422) Net interest income (1) $ 10,395 $ (3,364) $ 7,031 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. 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. CMOs and MBS by their nature react to changes in interest rates. In a normal declining rate environment, prepayments from CMOs and MBS would be expected to increase and the expected life of the investment would be expected to shorten. Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the CMOs and MBS would be expected to extend. However, in the current economic environment, prepayments may not behave according to historical norms. Premium amortization and discount accretion of these investments affects our net interest income. Management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest 40 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 $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 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 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%. Our modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and risk tolerance policy limits established by the Board of Directors to measure the possible future risk in the investment portfolio. Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, impairment, and prohibited practices. Total interest income on a non-tax equivalent basis for the nine months ended September 30, 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 $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 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 1.73% 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 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 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 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 41 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 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 We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses, and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted. The establishment of an adequate credit allowance is based on an allowance model that utilizes qualitative and quantitative factors, historical losses, loan level risk ratings and portfolio management tools. The Board of Directors has established initial responsibility for the accuracy of credit risk ratings with the individual credit officer and oversight from Credit Administration who ensures the accuracy of the risk ratings. Quarterly, the credit officers must certify the current risk ratings of the loans in their portfolio. Credit Administration reviews the certifications and reports to the Board of Directors Audit Committee. At least annually, the loan portfolio, including risk ratings, is reviewed by a third party credit reviewer. Regulatory agencies also review the loan portfolio on a periodic basis. See “Allowance for Credit Losses” for more information on the Company’s Allowance for Loan Loss. Quarterly, the Chief Credit Officer (CCO) reviews the specific reserve calculations for all impaired credits. Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter. This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. The allowance for credit losses is reviewed at least quarterly by the Board of Directors’ Audit Committee and by the Board of Directors. General reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance calculation and other portfolio trending analysis. 42 The allocation of the allowance for credit losses is set forth below (in thousands): Loan Type September 30, 2021 December 31, 2020 Commercial: Commercial and industrial $ 2,028 $ 1,764 Agricultural production 306 255 Total commercial 2,334 2,019 Real estate: Owner occupied 1,358 2,128 Real estate construction and other land loans 992 1,204 Commercial real estate 3,477 4,781 Agricultural real estate 643 838 Other real estate 146 223 Total real estate 6,616 9,174 Consumer: Equity loans and lines of credit 294 457 Consumer and installment 420 634 Total consumer 714 1,091 Unallocated reserves 397 631 Total allowance for credit losses $ 10,061 $ 12,915 Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. Managing high-risk credits includes developing a business strategy with the customer to mitigate our potential losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly. During the nine months ended September 30, 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. 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. The Bank conducts banking operations principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our business, financial performance and results of operations. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operations and financial condition. 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 for our loans. Further declines in commodity prices or collateral values may increase the 43 incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure. We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of September 30, 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. Refer to the “Allowance for Credit Losses” section for further information. Net Interest Income after Provision for Credit Losses Net interest income, after the provision for credit losses, was $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 $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 $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 $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. 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 44 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. 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 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 Nine Months Ended September 30, 2021 2020 (Dollars in thousands) Other Expense % Average Assets Other Expense % Average Assets Stationery/supplies $ 123 0.01 % $ 185 0.01 % Amortization of software 64 — % 107 0.01 % Postage 156 0.01 % 147 0.01 % Risk management expense 78 — % 126 0.01 % Shareholder services 84 0.01 % 87 0.01 % Personnel other 236 0.01 % 104 0.01 % Armored courier fees 199 0.01 % 213 0.02 % Telephone 161 0.01 % 147 0.01 % Alarm 100 0.01 % 73 0.01 % Donations 142 0.01 % 103 0.01 % Education/training 123 0.01 % 115 0.01 % Loan related expenses 46 — % 50 — % General insurance 145 0.01 % 125 0.01 % Travel and mileage expense 59 — % 101 0.01 % Operating losses 77 — % 86 0.01 % Other 859 0.05 % 1,015 0.08 % Total other non-interest expense $ 2,652 0.16 % $ 2,784 0.22 % Provision for Income Taxes 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 45 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 The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table. 46 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Three Months Ended September 30, 2021 For the Three Months Ended September 30, 2020 (Dollars in thousands) Average Balance Interest Income/ Expense Average Interest Rate Average Balance Interest Income/ Expense Average Interest Rate ASSETS Interest-earning deposits in other banks $ 70,980 $ 29 0.16 % $ 98,869 $ 26 0.11 % Securities Taxable securities 746,923 3,842 2.06 % 501,462 2,771 2.21 % Non-taxable securities (1) 241,225 1,794 2.97 % 49,630 561 4.52 % Total investment securities 988,148 5,636 2.28 % 551,092 3,332 2.42 % Total securities and interest-earning deposits 1,059,128 5,665 2.14 % 649,961 3,358 2.07 % Loans (2) (3) 1,068,111 13,208 4.91 % 1,120,656 13,190 4.68 % Total interest-earning assets 2,127,239 $ 18,873 3.52 % 1,770,617 $ 16,548 3.72 % Allowance for credit losses (10,558) (14,261) Non-accrual loans 1,844 2,660 Cash and due from banks 39,566 26,993 Bank premises and equipment 8,562 7,327 Other assets 151,519 135,258 Total average assets $ 2,318,172 $ 1,928,594 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 551,590 $ 50 0.04 % $ 457,848 $ 89 0.08 % Money market accounts 464,546 166 0.14 % 307,832 136 0.18 % Time certificates of deposit 89,621 47 0.21 % 89,353 138 0.61 % Total interest-bearing deposits 1,105,757 263 0.09 % 855,033 363 0.17 % Other borrowed funds 5,155 22 1.71 % 5,155 25 1.94 % Total interest-bearing liabilities 1,110,912 $ 285 0.10 % 860,188 $ 388 0.18 % Non-interest bearing demand deposits 915,742 807,052 Other liabilities 40,998 29,698 Shareholders’ equity 250,520 231,656 Total average liabilities and shareholders’ equity $ 2,318,172 $ 1,928,594 Interest income and rate earned on average earning assets $ 18,873 3.52 % $ 16,548 3.72 % Interest expense and interest cost related to average interest-bearing liabilities 285 0.10 % 388 0.18 % Net interest income and net interest margin (4) $ 18,588 3.47 % $ 16,160 3.63 % (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $377 and $118 in 2021 and 2020, respectively. (2) Loan interest income includes loan fees of $1,076 in 2021 and $658 in 2020. (3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets . The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. 47 Changes in Volume/Rate For the Three Months Ended September 30, 2021 and 2020 (In thousands) Volume Rate Net Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks $ (7) $ 10 $ 3 Investment securities: Taxable 1,356 (285) 1,071 Non-taxable (1) 2,165 (932) 1,233 Total investment securities 3,521 (1,217) 2,304 Federal funds sold — — — Loans (618) 636 18 Total earning assets (1) 2,896 (571) 2,325 Interest expense: Deposits: Savings, NOW and MMA 87 (96) (9) Time certificate of deposits — (91) (91) Total interest-bearing deposits 87 (187) (100) Other borrowed funds — (3) (3) Total interest-bearing liabilities 87 (190) (103) Net interest income (1) $ 2,809 $ (381) $ 2,428 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. 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%. 48 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 0.18% 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 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 $2,127,239,000 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 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 $2,148,000 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. 49 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 $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 $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 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. The 2020 effective tax rate was affected by the large provision for credit losses which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds. FINANCIAL CONDITION Summary of Changes in Consolidated Balance Sheets September 30, 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 $38,582,000 at September 30, 2021, compared to $31,210,000 at December 31, 2020, an increase of $7,372,000. 50 Fair Value The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value. Investments Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity. As of September 30, 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. Our policies are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities. The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at September 30, 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 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. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 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 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 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 September 30, 2021. 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 51 and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 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 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. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021. See Note 3 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio. Loans Total gross loans 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) September 30, 2021 % of Total Loans December 31, 2020 % of Total Loans Commercial: Commercial and industrial $ 184,830 17.0 % $ 273,994 24.9 % Agricultural production 32,178 3.0 % 21,971 2.0 % Total commercial 217,008 20.0 % 295,965 26.9 % Real estate: Owner occupied 210,577 19.4 % 208,843 18.9 % Real estate construction and other land loans 65,912 6.1 % 55,419 5.0 % Commercial real estate 365,564 33.7 % 338,886 30.7 % Agricultural real estate 98,150 9.1 % 84,258 7.6 % Other real estate 33,612 3.1 % 28,718 2.6 % Total real estate 773,815 71.4 % 716,124 64.8 % Consumer: Equity loans and lines of credit 54,833 5.1 % 55,634 5.0 % Consumer and installment 38,250 3.5 % 37,236 3.3 % Total consumer 93,083 8.6 % 92,870 8.3 % Net deferred origination fees (409) (2,612) Total gross loans 1,083,497 100.0 % 1,102,347 100.0 % Allowance for credit losses (10,061) (12,915) Total loans $ 1,073,436 $ 1,089,432 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 52 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 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. We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of September 30, 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. Nonperforming Assets Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when (i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest under the original contractual terms is not expected; or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. At September 30, 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 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) September 30, 2021 December 31, 2020 Nonaccrual loans: Commercial and industrial $ 333 $ 752 Owner occupied real estate — 370 Real estate construction and other land loans — 1,556 Agricultural production 779 — Commercial real estate 485 512 Consumer and installment — 88 Total nonaccrual 1,597 3,278 Accruing loans past due 90 days or more — — Total nonperforming loans $ 1,597 $ 3,278 Ratio of nonperforming loans to total loans 0.15 % 0.30 % Ratio of allowance for credit losses to nonperforming loans 630.0 % 394.0 % Loans considered to be impaired $ 10,060 $ 11,186 Related allowance for credit losses on impaired loans $ 931 $ 631 — 53 We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent. As of September 30, 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. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. 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 to Nonaccrual Loans Net Pay Downs Transfers to Foreclosed Collateral and OREO Returns to Accrual Status Charge- Offs Balance, September 30, 2021 Nonaccrual loans: Commercial and industrial $ 752 $ — $ (364) $ — $ (55) $ — $ 333 Agricultural land and industrial — 2,141 (1,362) — — — 779 Real estate 882 17 (240) — (174) — 485 Real estate construction and other land loans 1,556 — (1,531) — (25) — — Consumer 88 — (2) — (86) — — Total nonaccrual $ 3,278 $ 2,158 $ (3,499) $ — $ (340) $ — $ 1,597 OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is initially recorded at fair value less costs to sell and thereafter carried at the lower of cost or fair value, less selling costs. We had no OREO properties at September 30, 2021 or December 31, 2020. The Company held no repossessed assets at September 30, 2021 or December 31, 2020. Allowance for Credit Losses We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 51 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 51 quarters was an appropriate look back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look back period. In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received. The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of 54 asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors. The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (i) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (ii) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans, into various risk categories. The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual. The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated: For the Nine Months Ended September 30, For the Year Ended December 31, For the Nine Months Ended September 30, (Dollars in thousands) 2021 2020 2020 Balance, beginning of period $ 12,915 $ 9,130 $ 9,130 (Reversal of) provision for credit losses (3,800) 3,275 4,975 Losses charged to allowance (261) (229) (169) Recoveries 1,207 739 721 Balance, end of period $ 10,061 $ 12,915 $ 14,657 Allowance for credit losses to total loans at end of period 0.93 % 1.17 % 1.32 % Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Risks and uncertainties exist in all lending transactions and our management and Board of Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period. The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. At the onset of COVID we established a dedicated qualitative factor to address the lagging effect on our quantitative data. 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. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure. As of September 30, 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 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. The 55 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 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. Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of September 30, 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. September 30, 2021 December 31, 2020 September 30, 2020 (Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans Impaired loans with specific reserves $ 9,436 0.87 % $ 10,072 0.91 % $ 4,450 0.40 % Past due loans 313 0.03 % 89 0.01 % 256 0.02 % Nonaccrual loans 1,597 0.15 % 3,278 0.30 % 3,458 0.31 % Goodwill and Intangible Assets Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at September 30, 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. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. 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 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. The intangible assets represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of Folsom Lake Bank of $1,879,000, the 2016 acquisition of Sierra Vista Bank of $508,000, and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method (which approximates the effective interest method) over estimated lives of five to 10 years from the date of acquisition. The carrying value of intangible assets at September 30, 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 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. 56 The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands): Years Ended Estimated Core Deposit Intangible Amortization 2021 $ 141 2022 455 2023 66 $ 662 Deposits and Borrowings The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. Total deposits increased $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 Total Deposits Average Effective Rate December 31, 2020 % of Total Deposits Average Effective Rate NOW accounts $ 357,602 17.4 % 0.05 % $ 310,697 18.0 % 0.11 % MMA accounts 482,251 23.4 % 0.15 % 341,088 19.8 % 0.18 % Time deposits 89,858 4.4 % 0.23 % 89,846 5.2 % 0.65 % Savings deposits 194,132 9.4 % 0.01 % 156,190 9.1 % 0.02 % Total interest-bearing 1,123,843 54.6 % 0.10 % 897,821 52.1 % 0.18 % Non-interest bearing 934,249 45.4 % 824,889 47.9 % Total deposits $ 2,058,092 100.0 % $ 1,722,710 100.0 % Other Borrowings 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. Refer to the Liquidity section below for further discussion of FHLB advances. Capital Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary source of capital for the Company has been through retained earnings. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. Our shareholders’ equity was $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. 57 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 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. Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. The following table presents the Company’s regulatory capital ratios as of September 30, 2021 and December 31, 2020. (Dollars in thousands) September 30, 2021 Amount Ratio Tier 1 Leverage Ratio $ 184,942 8.24 % Common Equity Tier 1 Ratio (CET 1) $ 179,942 12.34 % Tier 1 Risk-Based Capital Ratio $ 184,942 12.68 % Total Risk-Based Capital Ratio $ 195,153 13.39 % December 31, 2020 Tier 1 Leverage Ratio $ 178,407 9.28 % Common Equity Tier 1 Ratio (CET 1) $ 173,407 14.10 % Tier 1 Risk-Based Capital Ratio $ 178,407 14.50 % Total Risk-Based Capital Ratio $ 191,572 15.58 % 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 ” Institution 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 % Common Equity Tier 1 Ratio (CET 1) $ 183,529 12.59 % $ 65,589 4.50 % $ 94,740 6.50 % Tier 1 Risk-Based Capital Ratio $ 183,529 12.59 % $ 87,453 6.00 % $ 116,604 8.00 % Total Risk-Based Capital Ratio $ 193,740 13.29 % $ 116,604 8.00 % $ 145,754 10.00 % December 31, 2020 Tier 1 Leverage Ratio $ 177,269 9.23 % $ 76,852 4.00 % $ 96,065 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 177,269 14.41 % $ 55,346 7.00 % $ 79,945 6.50 % Tier 1 Risk-Based Capital Ratio $ 177,269 14.41 % $ 73,795 8.50 % $ 98,394 8.00 % Total Risk-Based Capital Ratio $ 190,434 15.48 % $ 98,394 10.50 % $ 122,992 10.00 % (1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At September 30, 2021, all of the trust preferred securities that have been issued qualify as 58 Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes; (ii) in the event the Trust is deemed an investment company; or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of September 30, 2021, the rate was 1.73%. Liquidity Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Board of Director’s Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of September 30, 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 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 September 30, 2021, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. 59 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 (interest rate varies with market): Credit limit $ 110,000 $ 110,000 Balance outstanding $ — $ — Federal Home Loan Bank (interest rate at prevailing interest rate): Credit limit $ 262,091 $ 235,371 Balance outstanding $ — $ — Collateral pledged $ 462,612 $ 435,152 Fair value of collateral $ 417,729 $ 379,831 Federal Reserve Bank (interest rate at prevailing discount interest rate): Credit limit $ 10,691 $ 13,323 Balance outstanding $ — $ — Collateral pledged $ 11,045 $ 13,538 Fair value of collateral $ 10,988 $ 13,703 The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by California statutes and the regulations. OFF-BALANCE SHEET ITEMS In the ordinary course of business, the Company is a party to financial instruments with off-balance risk. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. For an expanded discussion of these financial instruments, refer to Note 7 of the Notes to Consolidated Financial Statements included herein and Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K. In the ordinary course of business, the Company is party to various operating leases. For a fuller discussion of these financial instruments, refer to Note 10 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.