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 27 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 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 three months ended March 31, 2022. Please refer to the Company’s 2021 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 April 20, 2022, the Board of Directors declared a $0.12 per share cash dividend payable on May 20, 2022 to shareholders of record as of May 6, 2022. 28 Economic Conditions The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies. It has caused significant economic and financial disruption that have adversely affected or otherwise impacted our businesses. The COVID-19 has not yet been globally contained and the number of cases continues to increase in many locations, including in the United States in which we operate. During the course of the continuing pandemic, there have been varying governmental and other responses to slow or control the spread of the COVID-19 and to mitigate the adverse impact of the COVID-19, such as stay at home orders, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful in a sustained manner. We cannot predict at this time the scope and duration of the pandemic. Despite the continuing challenges in recent months, there has been some improvement in the economic environment and resilience in the markets in which we operate. With the seemingly wider availability and distribution of vaccinations and the easing of some restrictions in the United States, we have seen steps towards broader containment. However, there still remains much uncertainty around containment of the pandemic, which will depend on various factors, including but not limited to, the extent and spread of variants of the virus; efficacy of vaccines; and government and other actions to mitigate the spread of COVID-19. Through the COVID-19 pandemic, the Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan. The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations. The Company has been assisting customers with loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas. Agriculture and agricultural-related businesses remain a critical part of the Central Valley’s economy. The Valley’s agricultural production is widely diversified, producing nuts, vegetables, frui t, cattle, dairy products, and cotton. The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. From time to time, California experiences severe droughts or adverse weather issues, which could significantly harm the business of our customers and the credit quality of the loans to those customers. Currently, California is experiencing multi-year drought conditions which impacts surface water deliveries to customers. In reaction to these conditions, we closely monitor the surface water availability with customer specific budgeting and third party information and surveys. There are also certain regulatory impacts that limit the water than can be pumped from underground sources. Both sources are closely considered and monitored in the granting and monitoring of our loan exposures, along with related issues affecting our customers. We closely monitor the water resources and the related issues affecting our customers, and we will remain vigilant for identifying signs of deterioration within the loan portfolio in an effort to manage cred it quality and work with borrowers where possible to mitigate any losses. First Quarter of 2022 For the first quarter of 2022, our consolidated net income was $6,086,000 compared to $7,479,000 for the same period in 2021. Diluted EPS was $0.51 for the quarter ended March 31, 2022 compared to $0.60 for the same period in 2021. The decrease in net income during the first quarter of 2022 compared to the same period in 2021 is primarily driven by no reversal of provision for credit losses, a decrease in loan placement fees of $358,000, a decrease in non-interest income of $165,000, and an increase in total non-interest expenses of $57,000, partially offset by a decrease in the provision for income taxes of $587,000, an increase in interchange fees of $72,000, an increase in net realized gains on sales and calls of investment securities of $206,000, an increase in service charge income of $107,000, and an increase in net interest income of $42,000. During the quarter ended March 31, 2022, the Company recorded no provision for credit losses, compared to a $1,800,000 reversal of provision during the quarter ended March 31, 2021. Throughout 2020, 2021 and the first three months of 2022, 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 3.19% for the quarter ended March 31, 2022 compared to 3.76% for the same period in 2021. The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, including interest-earning deposits in other banks and Federal funds sold, by the decrease in the yield on the loan portfolio and the increase in the cost of total interest-bearing liabilities. The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, decreased to 2.02% for the three months ended March 31, 2022, compared to 2.07% for the three months ended March 31, 2021. The effective yield on average loans decreased to 4.85% for the three months ended March 31, 2022, compared to 5.18% for the three months ended March 31, 2021. Total average PPP loans, which have an annual interest rate of 1.00%, were $11,329,000 and $178,956,000 for the three months ended March 31, 2022 and 2021, respectively. Excluding PPP loans from total average loans, the effective yield on average loans for the three months ended March 31, 2022 and 2021 was 4.87% and 5.11%, 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 March 31, 2022 compared to 0.06% for the same period in 2021. 29 Non-interest income decreased $165,000 or 8.25% to $1,834,000 for the quarter ended March 31, 2022 compared to $1,999,000 for the same period in 2021, primarily driven by a decrease in loan placement fees of $358,000, and a decrease of $276,000 in other income, offset by an increase of $206,000 in net realized gains on sales and calls of investment securities, an increase in service charge income of $107,000, an increase in interchange fees of $72,000, an increase in appreciation in cash surrender value of bank owned life insurance of $69,000, and an increase in Federal Home Loan Bank (“FHLB”) dividends of $15,000. Non-interest expense for the quarter ended March 31, 2022 increased $57,000 or 0.50% from the comparable period due to increases in salaries and employee benefits, occupancy and equipment, professional services, regulatory assessments, appraisal fees, alarm monitoring, information technology expenses, risk management expenses, donations, education and training, directors’ expenses, telephone expenses, mileage and travel, loan related expenses, advertising, and amortization of software, partially offset by decreases in data processing, tax provision, personnel, internet banking expenses, amortization of core deposit intangibles, ATM/debit card expenses, postage, armored courier fees, stationery and supplies, check printing, and operating losses. Annualized return on average equity (ROE) for the first quarter of 2022 decreased to 10.51% compared to 12.17% for the same period in 2021. The decrease in ROE reflects the decrease in net income, notwithstanding the decrease in average shareholders’ equity compared to the prior year. Annualized return on average assets (ROA) was 0.99% and 1.42% for the quarters ended March 31, 2022 and 2021, respectively. Total average equity decreased to $231,706,000 for the first quarter of 2022 compared to $245,913,000 for the first quarter of 2021. The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the first quarter of 2022, compared to $0.11 in dividends declared and paid during the first quarter of 2021. Our average total assets increased $355,948,000 or 16.92% to $2,460,025,000 during the first quarter of 2022 compared to the same period in 2021. Total average interest-earning assets increased $351,388,000 or 18.17% in the first quarter of 2022 compared to the same period of 2021. Total average loans, including nonaccrual loans, decreased $63,163,000 or 5.84% in the first quarter of 2022 compared to the same period in 2021. Average total investments and interest-earning deposits in other banks increased $411,248,000 or 48.01% in the quarter ended March 31, 2022 compared to the same period in 2021. Average interest-bearing liabilities increased $266,395,000 or 27.13% in the quarter ended March 31, 2022 compared to the same period in 2021. Average non-interest bearing demand deposits increased 11.35% to $940,963,000 in the first quarter of 2022 compared to $845,065,000 during the same period in 2021. The ratio of average non-interest bearing demand deposits to average total deposits was 43.77% in the first quarter of 2022 compared to 46.39% in 2021. 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 10.51% for the three months ended March 31, 2022 compared to 11.50% for the year ended December 31, 2021 and 12.17% for the three months ended March 31, 2021. Our net income for the three months ended March 31, 2022 decreased $1,393,000 or 18.63% to $6,086,000 compared to $7,479,000 for the three months ended March 31, 2021, primarily driven by no reversal of provision for credit losses,a decrease in loan placement fees, a decrease in non-interest income, and an increase in total non-interest expenses, partially offset by a decrease in the provision for income taxes, an increase in interchange fees, an increase in net realized gains on sales and calls of investment securities, an increase in service charge income, and an increase in net interest income. Net interest margin (NIM) decreased 57 basis points for the three-month period ended March 31, 2022 compared to the three months ended March 31, 2021. Diluted EPS was $0.51 for the three months ended March 31, 2022 and $0.60 for the same period in 2021. 30 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 three months ended March 31, 2022 was 0.99% compared to 1.25% for the year ended December 31, 2021 and 1.42% for the three months ended March 31, 2021. The decrease in ROA for the three months ended March 31, 2022 compared to March 31, 2021 was due to the decrease in net income. Average assets for the three months ended March 31, 2022 was $2,460,025,000 compared to $2,267,615,000 for the year ended December 31, 2021. Median ROA for our peer group was 0.93% for the year ended December 31, 2021. 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 3.19% for the three months ended March 31, 2022, compared to 3.76% for the same period in 2021. 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), the decrease in the yield on the Company’s loan portfolio, and the increase on the cost of interest bearing liabilities. Interest-bearing liabilities continue to benefit from low interest rates. In comparing the two periods ending March 31, 2022 and 2021, the effective yield on total earning assets decreased 53 basis points, while the cost of total interest-bearing liabilities increased 7 basis points and the cost of total deposits decreased to 0.05% compared to 0.06%. Net interest income before the reversal of provision for credit losses for the three-month period ended March 31, 2022 was $17,597,000 compared to $17,555,000 for the same period in 2021. 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 three months ended March 31, 2022 decreased $165,000 or 8.25%, to $1,834,000 compared to $1,999,000 for the three months ended March 31, 2021. The decrease resulted primarily from decreases in loan placement fees and other income, offset by increases in net realized gains on sales and calls of investment securities, service charge income, FHLB dividends; and interchange fees, compared to the comparable 2021 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 $292,000 and $946,000 at March 31, 2022 and December 31, 2021, respectively. Nonperforming assets totaled 0.03% of gross loans as of March 31, 2022 and 0.09% of gross loans as of December 31, 2021. The ratio of nonperforming assets to total assets was 0.01% as of March 31, 2022 and 0.04% as of December 31, 2021. The nonperforming assets at March 31, 2022 and December 31, 2021 consisted of nonaccrual loans of $292,000 and $3,278,000, respectively. The Company had no other real estate owned (OREO) or repossessed assets at March 31, 2022 or December 31, 2021. 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 0.97% as of March 31, 2022 and 0.92% as of December 31, 2021. The ratio of net charge-off (recovery) to average loans was (0.10)% for the three months ended March 31, 2022 and (0.09)% as of December 31, 2021. 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 decreased by $27,109,000 or 1.11% during the three months ended March 31, 2022 to $2,423,030,000 compared to $2,450,139,000 as of December 31, 2021. Total gross loans decreased by 2.61% or $27,069,000 to $1,012,042,000 as of March 31, 2022 compared to $1,039,111,000 as of December 31, 2021. The gross loan decrease consisted of a decrease of $14,999,000 in the PPP loans, as well as a decrease of $12,070,000 in non-PPP loan growth. Total deposits increased 1.86% to $2,162,360,000 as of March 31, 2022 compared to $2,122,797,000 as of 31 December 31, 2021. The Company’s deposit balances for the three months ended March 31, 2022 increased through organic growth. Our loan-to-deposit ratio at March 31, 2022 was 46.80% compared to 48.95% at December 31, 2021. The loan-to-deposit ratio of our peers was 71.00% at December 31, 2021. 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 March 31, 2022, 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 March 31, 2022. 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 57.66% for the three months ended March 31, 2022 compared to 56.34% for the three months ended March 31, 2021. The deterioration in the efficiency ratio was due to the decrease in non-interest income outpacing the increase in non-interest expense. Further discussion of the change in net interest income and increase in operating expenses is below. The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, decreased 1.49% to $19,608,000 for the first three months of 2022 compared to $19,904,000 for the same period in 2021, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, increased 0.81% to $11,305,000 from $11,214,000 for the same period in 2021. 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 $284,114,000 with the FHLB. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses. We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling $1,257,664,000 or 51.90% of total assets at March 31, 2022 and $1,280,091,000 or 52.25% of total assets as of December 31, 2021. 32 RESULTS OF OPERATIONS Net Income for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021 Net income decreased to $6,086,000 for the three months ended March 31, 2022 compared to $7,479,000 for the three months ended March 31, 2021. Basic and diluted earnings per share for March 31, 2022 were $0.51 and $0.51, respectively. Basic and diluted earnings per share for the same period in 2021 were $0.60 and $0.60, respectively. Annualized ROE was 10.51% for the three months ended March 31, 2022 compared to 12.17% for the three months ended March 31, 2021. Annualized ROA for the three months ended March 31, 2022 and 2021 was 0.99% and 1.42%, respectively. The decrease in net income for the three months ended March 31, 2022 compared to the same period in 2021 was primarily driven by an increase in non-interest expense, no reversal of provision for credit losses, and a decrease in loan placement fees, partially offset by an increase in net interest income, an increase in net realized gains on sales and calls of investment securities, a decrease in provision for income taxes, and an increase in service charge income. During the three months ended March 31, 2022, the Company recorded no reversal of provision for credit losses, compared to a $1,800,000 reversal of provision during the three months ended March 31, 2021. 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 three months ended March 31, 2022, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic as well as the continuing labor shortage and ongoing supply chain disruptions. 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. 33 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Three Months Ended March 31, 2022 For the Three Months Ended March 31, 2021 (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 $ 129,877 $ 57 0.18 % $ 129,185 $ 32 0.10 % Securities: Taxable securities 881,399 4,524 2.05 % 510,322 2,733 2.14 % Non-taxable securities (1) 256,604 1,823 2.84 % 217,125 1,667 3.07 % Total investment securities 1,138,003 6,347 2.23 % 727,447 4,400 2.42 % Total securities and interest-earning deposits 1,267,880 6,404 2.02 % 856,632 4,432 2.07 % Loans (2) (3) 1,017,280 12,161 4.85 % 1,077,140 13,765 5.18 % Total interest-earning assets 2,285,160 $ 18,565 3.29 % 1,933,772 $ 18,197 3.82 % Allowance for credit losses (9,832) (13,453) Nonaccrual loans 409 3,712 Cash and due from banks 52,482 34,710 Bank premises and equipment 8,306 8,282 Other assets 123,500 137,054 Total average assets $ 2,460,025 $ 2,104,077 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 578,763 $ 35 0.02 % $ 491,910 $ 48 0.04 % Money market accounts 542,666 182 0.14 % 395,686 160 0.16 % Time certificates of deposit 87,409 35 0.16 % 89,166 60 0.27 % Total interest-bearing deposits 1,208,838 252 0.08 % 976,762 268 0.11 % Other borrowed funds 39,474 333 3.37 % 5,155 24 1.86 % Total interest-bearing liabilities 1,248,312 $ 585 0.19 % 981,917 $ 292 0.12 % Non-interest bearing demand deposits 940,963 845,065 Other liabilities 39,044 31,182 Shareholders’ equity 231,706 245,913 Total average liabilities and shareholders’ equity $ 2,460,025 $ 2,104,077 Interest income and rate earned on average earning assets $ 18,565 3.29 % $ 18,197 3.82 % Interest expense and interest cost related to average interest-bearing liabilities 585 0.19 % 292 0.12 % Net interest income and net interest margin (4) $ 17,980 3.19 % $ 17,905 3.76 % (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $383 and $350 in 2022 and 2021, respectively. (2) Loan interest income includes loan fees of $264 in 2022 and $2,068 in 2021. (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. 34 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 Three Months Ended March 31, 2022 and 2021 (In thousands) Volume Rate Net Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks $ — $ 25 $ 25 Investment securities: Taxable 1,987 (196) 1,791 Non-taxable (1) 303 (147) 156 Total investment securities 2,290 (343) 1,947 Loans (765) (839) (1,604) Total earning assets (1) 1,525 (1,157) 368 Interest expense: Deposits: Savings, NOW and MMA 67 (58) 9 Time certificate of deposits (1) (24) (25) Total interest-bearing deposits 66 (82) (16) Other borrowed funds 157 152 309 Total interest-bearing liabilities 223 70 293 Net interest income (1) $ 1,302 $ (1,227) $ 75 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. Interest and fee income from loans decreased $1,604,000 or 11.65% for the three months ended March 31, 2022 compared to the same period in 2021. Net interest income during the first three months of 2022 was negatively impacted by a decrease in average total loans of $59,860,000 or (5.56)% to $1,017,280,000 compared to $1,077,140,000 for the same period in 2021. The yield on average loans, excluding nonaccrual loans, was 4.85% for the three months ended March 31, 2022 compared to 5.18% for the same period in 2021. Net interest income for the period ending March 31, 2022 was benefited by approximately $286,000 in nonrecurring income from prepayment penalties, compared to $430,000 recorded in the same period in 2021. The impact to interest income from the accretion of the loan marks on acquired loans was $222,000 and $173,000 for the three months ended March 31, 2022 and 2021, respectively. The remaining balance of accretable loan marks on acquired loans as of March 31, 2022 was $1,572,000. Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $1,939,000 in the first three months of 2022 to $6,021,000 compared to $4,082,000 for the same period in 2021. The yield on average total investments (total securities and interest-earning deposits) decreased 5 basis points to 2.02% for the three month period ended March 31, 2022 compared to 2.07% for the same period in 2021. Average total securities and interest-earning deposits for the first three months of 2022 increased $411,248,000 or 48.01% to $1,267,880,000 compared to $856,632,000 for the same period in 2021. Income from investments represents 34.22% of net interest income for the first three months of 2022 compared to 23.25% for the same period in 2021. 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 March 31, 2022, we held $697,117,000 or 60.01% of the total fair value of the investment portfolio in CMOs with an average yield of 1.82% as compared to $527,659,000 and $322,306,000 with average yields of 2.08% and 1.52% at December 31, 2021 and March 31, 2021, 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 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 35 discount accretion represents management’s reasonable estimate of principal pay downs inherent in the total investment portfolio. The net-of-tax unrealized loss on the investment portfolio was $49,287,000 at March 31, 2022 and is reflected in the Company’s equity. At March 31, 2022, the average life of the investment portfolio was 4.93 years and the fair value of the portfolio reflected a net pre-tax unrealized loss of $69,974,000. 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 three months ended March 31, 2022 and 2021, 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 March 31, 2022, 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 $119,000 or 9.77%. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $(123,000) or (10.10)%. 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 three months ended March 31, 2022 increased $335,000 or 1.88% to $18,182,000 compared to $17,847,000 for the three months ended March 31, 2021. The yield on interest earning assets decreased 53 basis points to 3.29% on a fully tax equivalent basis for the three months ended March 31, 2022 from 3.82% for the period ended March 31, 2021. The decrease was the result of yield changes, decrease in interest rates, and asset mix changes. Average interest earning assets increased to $2,285,160,000 for the three months ended March 31, 2022 compared to $1,933,772,000 for the three months ended March 31, 2021. The $351,388,000 increase in average earning assets was attributed to the $411,248,000 increase in average investments, offset by a $59,860,000 or (5.56)% decrease in average loans. Interest expense on deposits for the three months ended March 31, 2022 and 2021 was $252,000 and $268,000, respectively. The average interest rate on interest bearing deposits decreased to 0.08% for the three months ended March 31, 2022 compared to 0.11% for the same period ended March 31, 2021. Average interest-bearing deposits increased 23.76% or $232,076,000 to $1,208,838,000 for the three months ended March 31, 2022 compared to $976,762,000 for the same period ended March 31, 2021. Average other borrowed funds were $39,474,000 with an effective rate of 3.37% for the three months ended March 31, 2022 compared to $5,155,000 with an effective rate of 1.86% for the three months ended March 31, 2021. Total interest expense on other borrowed funds was $333,000 for the three months ended March 31, 2022 and $24,000 for the three months ended March 31, 2021. Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1 st , subordinated debt, advances on lines of credit, advances from the Federal Home Loan Bank (“FHLB”) , and overnight borrowings. The junior subordinated debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rates were 1.84% and 1.73% at March 31, 2022 and 2021, respectively . The subordinated debt, issued in 2021, initially bears a fixed interest rate of 3.125% per year until December 1, 2026 when the interest rate will reset to a floating rate. See the section on “Financial Condition” for more detail. The cost of interest-bearing liabilities increased 7 basis points to 0.19% for the three-month period ended March 31, 2022 compared to 0.12% for the same period in 2021. The cost of total deposits decreased to 0.05% compared to 0.06% for the three-month periods ended March 31, 2022 and 2021, respectively. Average non-interest bearing demand deposits increased 11.35% to $940,963,000 in 2022 compared to $845,065,000 for 2021. The ratio of average non-interest bearing demand deposits to average total deposits decreased to 43.77% in the three-month period ended March 31, 2022 compared to 46.39% for the same period in 2021. Net Interest Income before Provision for Credit Losses Net interest income before the reversal of provision for credit losses for the three months ended March 31, 2022 increased by $42,000 or 0.24% to $17,597,000 compared to $17,555,000 for the same period in 2021. 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 $222,000 and $173,000 for the three months ended March 31, 2022 and 2021, respectively. In addition, net interest income before the provision for credit losses for the three months ended March 31, 2022 was benefited by approximately $286,000 in nonrecurring income from prepayment penalties, as compared to $430,000 in nonrecurring income for the three months ended March 31, 2021. Excluding these reversals and benefits, net interest income for the three months ended March 31, 2022 increased by $137,000 36 compared to the three months ended March 31, 2021. Average interest earning assets were $2,285,160,000 for the three months ended March 31, 2022 with a net interest margin (fully tax equivalent basis) of 3.19% compared to $1,933,772,000 with a net interest margin (fully tax equivalent basis) of 3.76% for the three months ended March 31, 2021. The $351,388,000 increase in average earning assets was attributed to the $411,248,000 increase in average total investments, offset by the $59,860,000 or (5.56)% decrease in average loans. For the three months ended March 31, 2022, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 5 basis points. The effective yield on loans decreased 33 basis points. Average interest bearing liabilities increased 27.13% to $1,248,312,000 for the three months ended March 31, 2022, compared to $981,917,000 for the same period in 2021. 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/Compliance 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/Compliance 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. 37 The allocation of the allowance for credit losses is set forth below (in thousands): Loan Type March 31, 2022 December 31, 2021 Commercial: Commercial and industrial $ 1,797 $ 1,691 Agricultural production 196 320 Total commercial 1,993 2,011 Real estate: Owner occupied 1,303 1,355 Real estate construction and other land loans 1,081 812 Commercial real estate 3,893 3,805 Agricultural real estate 693 697 Other real estate 78 72 Total real estate 7,048 6,741 Consumer: Equity loans and lines of credit 228 256 Consumer and installment 297 312 Total consumer 525 568 Unallocated reserves 298 280 Total allowance for credit losses $ 9,864 $ 9,600 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 three months ended March 31, 2022, the Company recorded no reversal of provision for credit losses, compared to a $1,800,000 reversal of provisi on durin g the three months ended March 31, 2021. 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 three months ended March 31, 2022, the Company adjusted the economic risk and interest rate factors to incorporate the potential and realized implications from rising interest rates, input price increases and supply chain backlogs. The Company had net recoveries totaling $264,000 for the three months ended March 31, 2022, and $941,000 for the same period in 2021. Nonperforming loans, consisting entirely of nonaccrual loans, were $292,000 and $946,000 at March 31, 2022 and December 31, 2021, respectively, and $3,783,000 at March 31, 2021. Nonperforming loans as a percentage of total loans were 0.03% at March 31, 2022 compared to 0.09% at December 31, 2021 and 0.35% at March 31, 2021. The Company had no other real estate owned (OREO) at March 31, 2022 or December 31, 2021. The Company held no repossessed assets at March 31, 2022 or December 31, 2021. The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.10)% for the three months ended March 31, 2022, and (0.35)% for the same period in 2021. 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 38 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 March 31, 2022, there were $10.7 million in classified loans of which $2.5 million related to commercial and industrial loans, $2.1 million to agricultural production, $3.6 million to owner occupied real estate, and $2.5 million in commercial real estate. This compares to $8.5 in classified loans of which $2.6 million related to commercial and industrial loans, $2.4 million to agricultural production, $3.6 million to owner occupied real estate as of December 31, 2021. As of March 31, 2022, 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 $17,597,000 for the three months period ended March 31, 2022 and $19,355,000 for the same period in 2021. 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 $1,834,000 for the three months ended March 31, 2022 compared to $1,999,000 for the same period in 2021. The $165,000 or 8.25% decrease in non-interest income during the three months ended March 31, 2022 was primarily driven by a a decrease in loan placement fees of $358,000 and a decrease of $276,000 in other income, offset by an increase of $206,000 in net realized gains on sales and calls of investment securities, an increase in service charge income of $107,000, an increase of $72,000 in interchange fees, an increase of $69,000 in appreciation in cash surrender value of bank-owned life insurance, and an increase in FHLB dividends of $15,000. During the three months ended March 31, 2022, we realized a net gain on sales and calls of investment securities of $206,000 compared to a no net gains for the same period in 2021. The net gains realized on sales and calls of investment securities in 2022 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. Customer service charges increased $107,000 or 24.77% to $539,000 for the first three months of 2022 compared to $432,000 for the same period in 2021. Interchange fees increased $72,000 to $442,000 the first three months of 2022 compared to $370,000 for the same period in 2021. Loan placement fees decreased $358,000 or 54.49% to $299,000 for the first three months of 2022 compared to $657,000 for the same period in 2021. Other income decreased $276,000 the first three months of 2022 compared to the same period in 2021. 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 $85,000 in the three months ended March 31, 2022, compared to $70,000 for the same period in 2021. Non-Interest Expenses Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, Internet banking, and data processing are the major categories of non-interest expenses. Non-interest expenses increased $57,000 or 0.50% to $11,445,000 for the three months ended March 31, 2022, compared to $11,388,000 for the three months ended March 31, 2021. The net increase for the first three months of 2022 was primarily the result of increases in information technology of $199,000, regulatory assessments of $61,000, occupancy and equipment expenses of $49,000, professional services of $18,000, advertising of $11,000, donations of $6,000, general insurance of $3,000, salaries and employee benefits of $6,000, directors’ expenses of $4,000, amortization of software of $3,000, partially offset by decreases in internet banking of $103,000, data processing expenses of $76,000, personnel of $70,000, ATM/Debit card expenses of $30,000, operating losses of $17,000, stationary and supplies of $16,000, armored courier of $13,000, and postage of $5,000. The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO related gains and losses, and gains related to the collection of life insurance proceeds) was 57.66% for the three months ended 39 March 31, 2022 compared to 56.34% for the three months ended March 31, 2021. The modest deterioration in the efficiency ratio was due to the decrease in non-interest income outpacing the increase in non-interest expense. Salaries and employee benefits increased $6,000 or 0.09% to $6,944,000 for the first three months of 2022 compared to $6,938,000 for the three months ended March 31, 2021. Full time equivalent employees were 244 for the three months ended March 31, 2022, compared to 269 for the three months ended March 31, 2021. Occupancy and equipment expense increased $49,000 or 4.40% to $1,162,000 for the three months ended March 31, 2022 compared to $1,113,000 for the three months ended March 31, 2021. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at March 31, 2022 and at March 31, 2021. Data processing expense decreased to $541,000 for the three months ended March 31, 2022 compared to $617,000 for the same period in 2021. Regulatory assessments increased to $222,000 for the three months ended March 31, 2022 compared to $161,000 for the same period in 2021. The assessment base for calculating regulatory assessments is average assets less average tangible equity. Professional services increased by $18,000 in the first three months of 2022 compared to the same period in 2021. The following table shows significant components of other non-interest expense as a percentage of average assets. For the Three Months Ended March 31, 2022 2021 (Dollars in thousands) Other Expense % Average Assets Other Expense % Average Assets Stationery/supplies $ 34 0.01 % $ 50 0.01 % Amortization of software 19 — % 16 — % Postage 50 0.01 % 55 0.01 % Risk management expense 30 — % 27 0.01 % Shareholder services 22 — % 22 — % Personnel other 103 0.02 % 173 0.03 % Armored courier fees 56 0.01 % 69 0.01 % Telephone 71 0.01 % 50 0.01 % Alarm 42 0.01 % 32 0.01 % Donations 64 0.01 % 58 0.01 % Education/training 64 0.01 % 31 0.01 % Loan related expenses 71 0.01 % 65 0.01 % General insurance 49 0.01 % 46 0.01 % Travel and mileage expense 24 — % 7 — % Operating losses (5) — % 12 — % Other 209 0.03 % 238 0.05 % Total other non-interest expense $ 903 0.15 % $ 951 0.18 % Provision for Income Taxes Our effective income tax rate was 23.79% for the three months ended March 31, 2022 compared to 24.95% for the three months ended March 31, 2021. The Company reported an income tax provision of $1,900,000 for the three months ended March 31, 2022, compared to $2,487,000 for the three months ended March 31, 2021. The effective tax rate was affected by the increase in tax-exempt interest. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income. If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria. As of March 31, 2022 and December 31, 2021, there was no reserve for uncertain tax positions. 40 FINANCIAL CONDITION Summary of Changes in Consolidated Balance Sheets March 31, 2022 compared to December 31, 2021 Total assets were $2,423,030,000 as of March 31, 2022, compared to $2,450,139,000 at December 31, 2021, a decrease of 1.11% or $27,109,000. Total gross loans were $1,012,042,000 at March 31, 2022, compared to $1,039,111,000 at December 31, 2021, a decrease of $27,069,000 or 2.61%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) decreased 2.02% or $25,278,000 to $1,225,401,000 at March 31, 2022 compared to $1,250,679,000 at December 31, 2021. Total deposits increased 1.86% or $39,563,000 to $2,162,360,000 at March 31, 2022, compared to $2,122,797,000 at December 31, 2021. Shareholders’ equity decreased $56,185,000 or 22.67% to $191,660,000 at March 31, 2022, compared to $247,845,000 at December 31, 2021. The decrease in shareholders’ equity was driven by the decrease in unrealized gains on available-for-sale (AFS) securities, and share repurchases, offset by the retention of e arnings, net of dividends paid . Accrued interest payable and other liabilities was $29,520,000 at March 31, 2022, compared to $40,043,000 at December 31, 2021, a decrease of $10,523,000. Fair Value The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value. Investments Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity. As of March 31, 2022, investment securities with a fair value of $223,954,000, or 19.28% 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 March 31, 2022 was 46.80% compared to 48.95% at December 31, 2021. The loan-to-deposit ratio of our peers was 71.00% at December 31, 2021. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, decreased 2.02% or $25,278,000 to $1,225,401,000 at March 31, 2022, from $1,250,679,000 at December 31, 2021. The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $69,974,000 at March 31, 2022, compared to a net unrealized gain of $10,835,000 at December 31, 2021. 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 March 31, 2022 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at 41 March 31, 2022 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 three months ended March 31, 2021. At March 31, 2022, the Company held one U.S. Treasury securities which was in a loss position for less than 12 months. At March 31, 2022, the Company held one U.S. Government agency security which was in a loss position for less than 12 months. At March 31, 2022, the Company held 114 obligations of states and political subdivision securities of which 83 were in a loss position for less than 12 months and four have been in a loss position for more 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 March 31, 2022. At March 31, 2022, the Company held 108 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 33 were in a loss position for less than 12 months and ten have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022. At March 31, 2022, the Company had a total of 100 Private Label Mortgage and Asset Backed Securities (PLMABS). 73 of the PLMABS securities were in a loss position for less than 12 months and 13 have been in loss for more than 12 months at March 31, 2022. 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 March 31, 2022. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary. At March 31, 2022, the Company held 13 corporate debt securities of which 11 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 March 31, 2022. 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 $27,069,000 or 2.61% to $1,012,042,000 as of March 31, 2022, compared to $1,039,111,000 as of December 31, 2021. 42 The following table sets forth information concerning the composition of our loan portfolio at the dates indicated: Loan Type (Dollars in thousands) March 31, 2022 % of Total Loans December 31, 2021 % of Total Loans Commercial: Commercial and industrial $ 116,927 11.6 % $ 136,847 13.2 % Agricultural production 32,045 3.2 % 40,860 3.9 % Total commercial 148,972 14.8 % 177,707 17.1 % Real estate: Owner occupied 204,272 20.2 % 212,234 20.4 % Real estate construction and other land loans 73,358 7.2 % 61,586 5.9 % Commercial real estate 375,017 37.2 % 369,529 35.6 % Agricultural real estate 94,462 9.3 % 98,481 9.5 % Other real estate 25,351 2.5 % 26,084 2.5 % Total real estate 772,460 76.4 % 767,914 73.9 % Consumer: Equity loans and lines of credit 54,706 5.4 % 55,620 5.4 % Consumer and installment 34,825 3.4 % 36,999 3.6 % Total consumer 89,531 8.8 % 92,619 9.0 % Net deferred origination fees 1,079 871 Total gross loans 1,012,042 100.0 % 1,039,111 100.0 % Allowance for credit losses (9,864) (9,600) Total loans $ 1,002,178 $ 1,029,511 As of March 31, 2022, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.6% of total loans. This level of concentration of commercial loans and loans collateralized by real estate is consistent with 96.4% of total loans at December 31, 2021. 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 March 31, 2022, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $85,346,000, of which $2,006,000 were commercial loans, $77,280,000 were real estate loans, and $6,060,000 were consumer loans. At December 31, 2021, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $93,201,000, of which $2,111,000 were commercial loans, $83,128,000 were real estate loans, and $7,962,000 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 decrease was the forgiveness of PPP loans. As of March 31, 2022, gross loans included $3,554,000 in PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021 . 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. 43 At March 31, 2022, total nonperforming assets totaled $292,000, or 0.01% of total assets, compared to $946,000, or 0.04% of total assets at December 31, 2021. Total nonperforming assets at March 31, 2022, included nonaccrual loans totaling $292,000, no OREO, and no other repossessed assets. Nonperforming assets at December 31, 2021 consisted of $946,000 in nonaccrual loans, no OREO, and no other repossessed assets. At March 31, 2022 and December 31, 2021, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans. A summary of nonperforming loans at March 31, 2022 and December 31, 2021 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at March 31, 2022 or at December 31, 2021. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future. Composition of Nonperforming Loans (In thousands) March 31, 2022 December 31, 2021 Nonaccrual loans: Commercial and industrial $ 292 $ 312 Agricultural production — 634 Total nonaccrual 292 946 Accruing loans past due 90 days or more — — Total nonperforming loans $ 292 $ 946 Ratio of nonperforming loans to total loans 0.03 % 0.09 % Ratio of allowance for credit losses to nonperforming loans 3,378.1 % 1,014.8 % Loans considered to be impaired $ 3,759 $ 8,586 Related allowance for credit losses on impaired loans $ 583 $ 649 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 March 31, 2022 and December 31, 2021, we had impaired loans totaling $3,759,000 and $8,586,000, 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 three months of 2022. (In thousands) Balance, December 31, 2021 Additions to Nonaccrual Loans Net Pay Downs Transfers to Foreclosed Collateral and OREO Returns to Accrual Status Charge- Offs Balance, March 31, 2022 Nonaccrual loans: Commercial and industrial $ 312 $ — $ (20) $ — $ — $ — $ 292 Agricultural land and industrial 634 — (303) — (331) — — Total nonaccrual $ 946 $ — $ (323) $ — $ (331) $ — $ 292 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 March 31, 2022 or December 31, 2021. The Company held no repossessed assets at March 31, 2022 or December 31, 2021. 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 44 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 53 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 53 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/Compliance Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors. The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (i) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (ii) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset 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 Three Months Ended March 31, For the Year Ended December 31, For the Three Months Ended March 31, (Dollars in thousands) 2022 2021 2021 Balance, beginning of period $ 9,600 $ 12,915 $ 12,915 (Reversal of) provision for credit losses — (4,300) (1,800) Losses charged to allowance (101) (267) (57) Recoveries 365 1,252 998 Balance, end of period $ 9,864 $ 9,600 $ 12,056 Allowance for credit losses to total loans at end of period 0.97 % 0.92 % 1.11 % 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/Compliance 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 45 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 March 31, 2022, the balance in the allowance for credit losses (ALLL) was $9,864,000 compared to $9,600,000 as of December 31, 2021. The increase is attributed to the net recoveries durin g the three months ended March 31, 2022. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $346,752,000 as of March 31, 2022, compared to $326,108,000 as of December 31, 2021. At March 31, 2022 and December 31, 2021, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $115,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. As of March 31, 2022, the ALLL was 0.97% of total gross loans compared to 0.92% as of December 31, 2021. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $85,346,000 at March 31, 2022 and $93,201,000 at December 31, 2021. Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.06% and 1.01% at March 31, 2022 and December 31, 2021, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.01% and 0.98%, respectively. As of March 31, 2022, gross loans included $3,554,000 related to PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021. Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.07% and 1.04% as of March 31, 2022 and December 31, 2021, respectively. The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at March 31, 2022. The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans. The Company’s loan portfolio balances for the three months ended March 31, 2022 decreased. 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 March 31, 2022. 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. March 31, 2022 December 31, 2021 March 31, 2021 (Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans Impaired loans with specific reserves $ 3,624 0.36 % $ 8,450 0.81 % $ 10,015 0.92 % Past due loans 17 — % 80 0.01 % — — % Nonaccrual loans 292 0.03 % 946 0.09 % 3,783 0.35 % 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 March 31, 2022, 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. 46 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 three months of 2022. 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 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 March 31, 2022 was $382,000, net of $2,862,000 in accumulated amortization expense. The carrying value at December 31, 2021 was $522,000, net of $3,230,000 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 three months of 2022. Amortization expense recognized was $140,000 and $174,000 for the three months ended March 31, 2022 and March 31, 2021, respectively. The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next two years (in thousands): Years Ended Estimated Core Deposit Intangible Amortization 2022 $ 314 2023 68 $ 382 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 $39,563,000 or 1.86% to $2,162,360,000 as of March 31, 2022, compared to $2,122,797,000 as of December 31, 2021. Interest-bearing deposits increased $77,080,000 or 6.65% to $1,236,293,000 as of March 31, 2022, compared to $1,159,213,000 as of December 31, 2021. Non-interest bearing deposits decreased $37,517,000 or 3.89% to $926,067,000 as of March 31, 2022, compared to $963,584,000 as of December 31, 2021. Average non-interest bearing deposits to average total deposits was 43.77% for the three months ended March 31, 2022 compared to 46.39% for the same period in 2021. The Company’s deposit balances for the three months ended March 31, 2022 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. The composition of the deposits and average interest rates paid at March 31, 2022 and December 31, 2021 is summarized in the table below. (Dollars in thousands) March 31, 2022 % of Total Deposits Average Effective Rate December 31, 2021 % of Total Deposits Average Effective Rate NOW accounts $ 382,907 17.7 % 0.03 % $ 360,462 17.0 % 0.05 % MMA accounts 558,308 25.8 % 0.14 % 511,448 24.1 % 0.15 % Time deposits 84,702 3.9 % 0.16 % 90,030 4.2 % 0.21 % Savings deposits 210,376 9.8 % 0.01 % 197,273 9.3 % 0.01 % Total interest-bearing 1,236,293 57.2 % 0.08 % 1,159,213 54.6 % 0.10 % Non-interest bearing 926,067 42.8 % 963,584 45.4 % Total deposits $ 2,162,360 100.0 % $ 2,122,797 100.0 % Other Borrowings As of March 31, 2022 and December 31, 2021, 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. 47 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 $191,660,000 at March 31, 2022, compared to $247,845,000 at December 31, 2021. The decrease from December 31, 2021 in shareholders’ equity is the result of an increase in retained earnings from net income of $6,086,000, the exercise of stock options of $132,000, stock issued under the employee stock purchase plan of $57,000, the effect of share-based compensation expense of $97,000, and stock awarded to employees of $273,000, offset by a decrease in accumulated other comprehensive income (AOCI) of $56,919,000, common stock cash dividends of $1,425,000, and stock repurchases of $4,486,000. On November 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 $15 million worth of the Company’s outstanding common stock, or approximately 702,576 shares. During the year ended December 31, 2021, the Company repurchased and retired 76,613 shares at an approximate average cost of $21.10 per share. During the three months ended March 31, 2022, the Company repurchased and retired 195,873 shares at an average cost of $22.87 or $4,486,000. During the first three months of 2022, the Company declared and paid $1,425,000 in cash dividends ($0.12 per common share) to holders of common stock. The Company declared and paid a total of $5,757,000 in cash dividends ($0.47 per common share) to holders of common stock during the year ended December 31, 2021. 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 r atios as of March 31, 2022 and December 31, 2021. (Dollars in thousands) March 31, 2022 Amount Ratio Tier 1 Leverage Ratio $ 189,878 7.87 % Common Equity Tier 1 Ratio (CET 1) $ 184,878 12.06 % Tier 1 Risk-Based Capital Ratio $ 189,878 12.38 % Total Risk-Based Capital Ratio $ 234,192 15.27 % December 31, 2021 Tier 1 Leverage Ratio $ 189,020 8.03 % Common Equity Tier 1 Ratio (CET 1) $ 184,020 12.48 % Tier 1 Risk-Based Capital Ratio $ 189,020 12.82 % Total Risk-Based Capital Ratio $ 233,034 15.80 % 48 The following table presents the Bank’s regulatory capital ratios as of March 31, 2022 and December 31, 2021. (Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ” Institution March 31, 2022 Amount Ratio Amount Ratio Amount Ratio Tier 1 Leverage Ratio $ 205,924 8.54 % $ 96,504 4.00 % $ 120,630 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 205,924 13.43 % $ 68,989 7.00 % $ 99,651 6.50 % Tier 1 Risk-Based Capital Ratio $ 205,924 13.43 % $ 91,985 8.50 % $ 122,647 8.00 % Total Risk-Based Capital Ratio $ 215,903 14.08 % $ 122,647 10.50 % $ 153,309 10.00 % December 31, 2021 Tier 1 Leverage Ratio $ 199,329 8.47 % $ 94,156 4.00 % $ 117,695 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 199,329 13.52 % $ 66,355 7.00 % $ 95,846 6.50 % Tier 1 Risk-Based Capital Ratio $ 199,329 13.52 % $ 88,473 8.50 % $ 117,964 8.00 % Total Risk-Based Capital Ratio $ 209,044 14.18 % $ 117,964 10.50 % $ 147,455 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 March 31, 2022, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes; (ii) in the event the Trust is deemed an investment company; or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of March 31, 2022, the rate was 1.84%. On November 12, 2021, the Company completed a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt initially bears a fixed interest rate of 3.125% per year. Commencing on December 1, 2026, the interest rate on the Subordinated Debt will reset each quarter at a floating interest rate equal to the then-current three month term SOFR plus 210 basis points. The Company may at its option redeem in whole or in part the Subordinated Debt on or after November 12, 2026 without a premium. The Subordinated Debt is treated as Tier 2 Capital for regulatory purposes. 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 49 investment securities. As of March 31, 2022, the Company had unpledged securities totaling $944,873,000 available as a secondary source of liquidity and total cash and cash equivalents of $88,837,000. Cash and cash equivalents at March 31, 2022 decreased 45.65% compared to $163,467,000 at December 31, 2021. 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 March 31, 2022, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $284,114,000 in unused FHLB secured advances and a $8,845,000 secured credit line at the Federal Reserve Bank. We believe our liquidity sources to be stable and adequate. At March 31, 2022, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at March 31, 2022 and December 31, 2021: Credit Lines (In thousands) March 31, 2022 December 31, 2021 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 $ 284,114 $ 277,130 Balance outstanding $ — $ — Collateral pledged $ 493,606 $ 481,437 Fair value of collateral $ 446,941 $ 435,089 Federal Reserve Bank (interest rate at prevailing discount interest rate): Credit limit $ 8,845 $ 9,961 Balance outstanding $ — $ — Collateral pledged $ 9,464 $ 10,361 Fair value of collateral $ 9,073 $ 10,241 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.