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) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make, whether held in the portfolio or in the secondary market; (4) our ability to mitigate and manage deposit liabilities in a manner that balances the need to meet current and expected withdrawals while investing a sufficient portion of our assets to promote strong earning capacity; (5) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (6) a decline in economic conditions in the Central Valley and the Greater Sacramento Region, including the impact of inflation; (7) the Company’s ability to continue its internal growth at historical rates; (8) the Company’s ability to maintain its net interest margin; (9) the decline in quality of the Company’s earning assets; (10) a decline in credit quality; (11) changes in the regulatory environment; (12) fluctuations in the real estate market; (13) changes in business conditions and inflation; (14) changes in securities markets; (15) regulatory limits on Central Valley Community Bank’s ability to pay dividends to the Company; (16) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (17) 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; (18) the other risks set forth in the Company’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2022. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company. When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The 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. General 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. Dividend Declared On April 19, 2023, the Board of Directors declared a $0.12 per share cash dividend payable on May 19, 2023 to shareholders of record as of May 5, 2023. 27 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. Allowance for Credit Losses As a result of our January 1, 2023, adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2022. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”). The CECL approach requires an estimate of the credit losses expected over the life of a financial asset carried at amortized cost. It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. Management’s evaluation of the appropriateness of the allowance for credit losses is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the allowance for credit losses is a critical accounting estimate as it requires significant reliance on the use of estimates and significant judgment as to the amount and timing of expected future cash flows on criticized loans, significant reliance on historical loss rates, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The allowance for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 to the Consolidated Financial Statements and the “ Allowance for Credit Losses on Loans ” section below. Please refer to the Company’s 2022 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies. Financial Highlights The significant highlights for the Company as of or for the three months ended March 31, 2023 included the following: • Net income for the first quarter of 2023 decreased to $6,970,000 or $0.59 per diluted common share, compared to $7,633,000 and $0.65, respectively, in the fourth quarter of 2022. The Company recorded a $633,000 provision for credit losses during the first quarter of 2023. • Net loans increased $24.8 million or 1.99%, and total assets increased $41.4 million or 1.71% at March 31, 2023 compared to December 31, 2022. • Total deposits increased 3.62% to $2.18 billion at March 31, 2023 compared to December 31, 2022. • Total cost of deposits increased to 0.20% for the quarter ended March 31, 2023 compared to 0.09% for the quarter ended December 31, 2022. • Average non-interest bearing demand deposit accounts as a percentage of total average deposits was 48.92% and 43.77% for the quarters ended March 31, 2023 and 2022, respectively. 28 • There were no non-performing assets for the quarter ended March 31, 2023. Additionally, net loan charge-offs were $19,000 and loans delinquent more than 30 days were $22,000. • The Company adopted and implemented Accounting Standard Update (ASU) 2016-13, more commonly referred to as the Current Expected Credit Loss (CECL) method on January 1, 2023, which resulted in an increase to the allowance for credit losses for loans of $3,910,000, a reserve for held-to-maturity securities of $776,000, an increase to the reserve for unfunded commitments of $612,000, and a decrease, net of taxes, to retained earnings of $3,731,000. • Net interest margin increased to 3.81% at March 31, 2023, from 3.80% at December 31, 2022. • Capital positions remain strong at March 31, 2023 with a 8.58% Tier 1 Leverage Ratio; a 11.80% Common Equity Tier 1 Ratio; a 12.09% Tier 1 Risk-Based Capital Ratio; and a 15.08% Total Risk-Based Capital Ratio. Overview The following is management’s discussion and analysis of the Company’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report. RESULTS OF OPERATIONS March 31, December 31, March 31, (In thousands, except share and per-share amounts) 2023 2022 2022 Net interest income before provision for credit losses 21,581 21,993 17,597 Provision for credit losses 633 500 — Net interest income after provision for credit losses 20,948 21,493 17,597 Total non-interest income 1,575 970 1,834 Total non-interest expenses 13,205 12,152 11,445 Income before provision for income taxes 9,318 10,311 7,986 Provision for income taxes 2,348 2,678 1,900 Net income $ 6,970 $ 7,633 $ 6,086 Net income increased to $6,970,000 for the three months ended March 31, 2023 compared to $6,086,000 for the three months ended March 31, 2022. Basic and diluted earnings per share for March 31, 2023 were $0.60 and $0.59, respectively. Basic and diluted earnings per share for the same period in 2022 were $0.51 and $0.51, respectively. Annualized return on equity (“ROE”) was 15.64% for the three months ended March 31, 2023 compared to 10.51% for the three months ended March 31, 2022. Annualized return on assets (“ROA”) for the three months ended March 31, 2023 and 2022 was 1.15% and 0.99%, respectively. The increase in net income for the three months ended March 31, 2023 compared to the same period in 2022 was primarily driven by an increase of $5,961,000 in total interest income, offset by an increase in total interest expense of $1,977,000. Additionally, the three-month period saw a decrease in non-interest income of $259,000 and an increase in non-interest expense of $1,760,000. During the quarter ended March 31, 2023, the Company recorded a $633,000 provision for credit losses, compared to no provision during the quarter ended March 31, 2022. The provision for credit loses resulted from our assessment of the overall adequacy of the allowance for credit losses on HTM debt securities and loans, including unfunded commitments. Net Interest Income and Net Interest Margin The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of interest‑bearing liabilities, the relative volumes of earning assets and interest‑bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest‑bearing liabilities. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid. The following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company’s balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages. 29 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Three Months Ended March 31, 2023 For the Three Months Ended March 31, 2022 (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 $ 6,882 $ 75 4.36 % $ 129,877 $ 57 0.18 % Securities: Taxable securities 783,938 5,886 3.00 % 881,399 4,524 2.05 % Non-taxable securities (1) 257,452 1,777 2.76 % 256,604 1,823 2.84 % Total investment securities 1,041,390 7,663 2.94 % 1,138,003 6,347 2.23 % Total securities and interest-earning deposits 1,048,272 7,738 2.95 % 1,267,880 6,404 2.02 % Loans (2) (3) 1,260,178 16,508 5.31 % 1,017,280 12,161 4.85 % Total interest-earning assets 2,308,450 $ 24,246 4.26 % 2,285,160 $ 18,565 3.29 % Allowance for credit losses (14,759) (9,832) Nonaccrual loans — 409 Cash and due from banks 27,574 52,482 Bank premises and equipment 8,072 8,306 Other assets 86,303 123,500 Total average assets $ 2,415,640 $ 2,460,025 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 526,232 $ 92 0.07 % $ 578,763 $ 35 0.02 % Money market accounts 468,166 837 0.73 % 542,666 182 0.14 % Time certificates of deposit 68,650 75 0.44 % 87,409 35 0.16 % Total interest-bearing deposits 1,063,048 1,004 0.38 % 1,208,838 252 0.08 % Other borrowed funds 124,480 1,558 5.01 % 39,474 333 3.37 % Total interest-bearing liabilities 1,187,528 $ 2,562 0.87 % 1,248,312 $ 585 0.19 % Non-interest bearing demand deposits 1,018,210 940,963 Other liabilities 31,591 39,044 Shareholders’ equity 178,311 231,706 Total average liabilities and shareholders’ equity $ 2,415,640 $ 2,460,025 Interest income and rate earned on average earning assets $ 24,246 4.26 % $ 18,565 3.29 % Interest expense and interest cost related to average interest-bearing liabilities 2,562 0.87 % 585 0.19 % Net interest income and net interest margin (4) $ 21,684 3.81 % $ 17,980 3.19 % (1) C alculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $373 and $383 in 2023 and 2022, respectively. (2) Loan interest income includes loan costs of $260 in 2023 and loan fees of $264 in 2022. (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. 30 The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest‑earning assets and interest‑bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column. Changes in Volume/Rate For the Three Months Ended March 31, 2023 and 2022 (In thousands) Volume Rate Net Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks $ (53) $ 71 $ 18 Investment securities: Taxable (500) 1,860 1,360 Non-taxable (1) 6 (51) (45) Total investment securities (494) 1,809 1,315 Loans 2,903 1,444 4,347 Total earning assets (1) 2,356 3,324 5,680 Interest expense: Deposits: Savings, NOW and MMA (27) 740 713 Time certificate of deposits (7) 47 40 Total interest-bearing deposits (34) 787 753 Other borrowed funds 707 518 1,225 Total interest-bearing liabilities 673 1,305 1,978 Net interest income (1) $ 1,683 $ 2,019 $ 3,702 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, increased 62 basis points to 3.81% for the first quarter of 2023, from 3.19% for the first quarter of 2022. Average interest earning assets were $2,308,450,000 for the three months ended March 31, 2023 compared to $2,285,160,000 for the three months ended March 31, 2022. The $23,290,000 increase in average earning assets was attributed to the $219,608,000 decrease in average total investments, offset by the $242,898,000 or 23.88% increase in average loans. For the three months ended March 31, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 93 basis points. The effective yield on loans increased 46 basis points. Average interest bearing liabilities decreased 4.87% to $1,187,528,000 for the three months ended March 31, 2023, compared to $1,248,312,000 for the same period in 2022. Interest and fee income from loans increased $4,347,000 or 35.75% for the three months ended March 31, 2023 compared to the same period in 2022. Net interest income during the first three months of 2023 was impacted by an increase in average total loans of $242,898,000 or 23.88% to $1,260,178,000 compared to $1,017,280,000 for the same period in 2022. The yield on average loans, excluding nonaccrual loans, was 5.31% for the three months ended March 31, 2023 compared to 4.85% for the same period in 2022. Net interest income for the period ending March 31, 2023 was benefited by approximately $649,000 in nonrecurring income from prepayment penalties, compared to $676,000 recorded in the same period in 2022. The impact to interest income from the accretion of the loan marks on acquired loans was $67,000 and $222,000 for the three months ended March 31, 2023 and 2022, respectively. The remaining balance of accretable loan marks on acquired loans as of March 31, 2023 was $1,205,000. 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 $1,345,000 in the first three months of 2023 to $7,366,000 compared to $6,021,000 for the same period in 2022. The yield on average total investments (total securities and interest-earning deposits) increased 93 basis points to 2.95% for the three month period ended March 31, 2023 compared to 2.02% for the same period in 2022. Average total securities and interest-earning deposits for the first three months of 2023 decreased $219,608,000 or 17.32% to $1,048,272,000 compared to $1,267,880,000 for the same period in 2022. Income from investments represents 34.13% of net interest income for the first three months of 2023 compared to 34.22% for the same period in 2022. 31 Total interest income on a non-tax equivalent basis for the three months ended March 31, 2023 increased $5,961,000 or 32.79% to $24,143,000 compared to $18,182,000 for the three months ended March 31, 2022. The yield on interest earning assets increased 97 basis points to 4.26% on a fully tax equivalent basis for the three months ended March 31, 2023 from 3.29% for the period ended March 31, 2022. The decrease was the result of yield changes, decrease in interest rates, and asset mix changes. Average interest earning assets increased to $2,308,450,000 for the three months ended March 31, 2023 compared to $2,285,160,000 for the three months ended March 31, 2022. The $23,290,000 increase in average earning assets was attributed to the $219,608,000 decrease in average investments, offset by a $242,898,000 or 23.88% increase in average loans. Interest expense on deposits for the three months ended March 31, 2023 and 2022 was $1,004,000 and $252,000, respectively. The average interest rate on interest bearing deposits increased to 0.38% for the three months ended March 31, 2023 compared to 0.08% for the same period ended March 31, 2022. Average interest-bearing deposits decreased 12.06% or $145,790,000 to $1,063,048,000 for the three months ended March 31, 2023 compared to $1,208,838,000 for the same period ended March 31, 2022. Average other borrowed funds were $124,480,000 with an effective rate of 5.01% for the three months ended March 31, 2023 compared to $39,474,000 with an effective rate of 3.37% for the three months ended March 31, 2022. Total interest expense on other borrowed funds was $1,558,000 for the three months ended March 31, 2023 and $333,000 for the three months ended March 31, 2022. Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1 st , subordinated debt, senior debt, advances on lines of credit, advances from the Federal Home Loan Bank (“FHLB”) , and overnight borrowings. The cost of interest-bearing liabilities increased 68 basis points to 0.87% for the three-month period ended March 31, 2023 compared to 0.19% for the same period in 2022. The cost of total deposits increased to 0.20% compared to 0.05% for the three-month periods ended March 31, 2023 and 2022, respectively. Average non-interest bearing demand deposits increased 8.21% to $1,018,210,000 for the three month period ended March 31, 2023 compared to $940,963,000 for the same period in 2022. The ratio of average non-interest bearing demand deposits to average total deposits increased to 48.92% in the three-month period ended March 31, 2023 compared to 43.77% for the same period in 2022. Net interest income before the provision for credit losses for the three months ended March 31, 2023 increased by $3,984,000 or 22.64% to $21,581,000 compared to $17,597,000 for the same period in 2022. The increase was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in interest expense on average interest bearing liabilities. The impact to interest income from the accretion of the loan marks on acquired loans was $67,000 and $222,000 for the three months ended March 31, 2023 and 2022, respectively. In addition, net interest income before the provision for credit losses for the three months ended March 31, 2023 was benefited by approximately $649,000 in nonrecurring income from prepayment penalties, as compared to $676,000 in nonrecurring income for the three months ended March 31, 2022. Excluding these reversals and benefits, net interest income for the three months ended March 31, 2023 increased by $4,292,000 compared to the three months ended March 31, 2022. Provision for Credit Losses on Loans The following table sets forth information regarding our provisions for credit losses on loans, charge-offs and recoveries and ending allowance for credit losses for loans 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) 2023 2022 2022 Balance, beginning of period $ 10,848 $ 9,600 $ 9,600 Impact of ASU 2016-13 adoption 3,910 — — Provision (reversal of) for credit losses 518 1,000 — Losses charged to allowance (354) (178) (101) Recoveries 335 426 365 Balance, end of period $ 15,257 $ 10,848 $ 9,864 Allowance for credit losses to total loans at end of period 1.19 % 0.86 % 0.97 % 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, 32 additional provisions may be necessary. Management believes that the level of allowance for credit losses has been adjusted accordingly. During the three months ended March 31, 2023, the Company recorded a $518,000 provision for credit losses on loans, compared to no provisi on durin g the three months ended March 31, 2022. The Company had net charge-offs totaling $19,000 for the three months ended March 31, 2023, and net recoveries of $264,000 for the same period in 2022. The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.01)% for the three months ended March 31, 2023, and (0.10)% for the same period in 2022. 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, 2023, there were $30,843,000 in classified loans of which $1,950,000 related to commercial and industrial loans, $5,183,000 to agricultural production, $2,159,000 to owner occupied real estate, $15,821,000 to real estate construction and other land loans, $2,395,000 to non-owner occupied real estate, $3,022,000 to farmland, $— to 1-4 family revolving, and $50,000 to consumer. This compares to $27,783,000 in classified loans of which $1,655,000 related to commercial and industrial loans, $5,399,000 to agricultural production, $2,169,000 to owner occupied real estate, $15,024,000 to real estate construction and other land loans, $2,412,000 to non-owner occupied real estate, $824,000 to farmland, $266,000 to 1-4 family revolving, and $34,000 to consumer as of December 31, 2022. Non-Interest Income Non-interest income is comprised of customer service charges, loan placement fees, net gains/losses 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 $1,575,000 for the three months ended March 31, 2023 compared to $1,834,000 for the same period in 2022. The $259,000 or 14.12% decrease in non-interest income during the three months ended March 31, 2023 was primarily driven by a decrease in loan placement fees of $175,000, a decrease in service charge income of $152,000, and a change of $425,000 in net realized sales and calls of investment securities from a $206,000 gain at March 31, 2022 to a $219,000 loss at March 31, 2023. These decreases were offset by an increase of $458,000 in other income. 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 $6,169,000 in FHLB stock. We received dividends totaling $109,000 in the three months ended March 31, 2023, compared to $85,000 for the same period in 2022. 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 $1,760,000 or 15.38% to $13,205,000 for the three months ended March 31, 2023, compared to $11,445,000 for the three months ended March 31, 2022. The net increase for the first three months of 2023 was primarily the result of increases in salaries and employee benefits of $1,090,000, information technology of $89,000, occupancy and equipment expenses of $96,000, director’s expenses of $118,000, provision for unfunded commitments of $0, and personnel other of $156,000, partially offset by a decrease by the amortization of core deposit intangibles of $106,000. Salaries and employee benefits increased $1,090,000 or 15.70% to $8,034,000 for the first three months of 2023 compared to $6,944,000 for the three months ended March 31, 2022. The increase in salaries and employee benefits was primarily attributed to non-recurring expenditures relating to fees from the transition of our Chief Financial Officer, and cost of living adjustments. Full time equivalent employees were 257 for the three months ended March 31, 2023, compared to 253 for the three months ended March 31, 2022. Occupancy and equipment expense increased $96,000 or 8.26% to $1,258,000 for the three months ended March 31, 2023 compared to $1,162,000 for the three months ended March 31, 2022. The Company made no changes in its depreciation expense methodology. The Company operated 19 full-service offices at March 31, 2023 compared to 20 at March 31, 2022. Data processing expense increased to $650,000 for the three months ended March 31, 2023 compared to $541,000 for the same period in 2022. Regulatory assessments decreased to $210,000 for the three months ended March 31, 2023 compared to $222,000 for the same period in 2022. The assessment base for calculating regulatory assessments is average assets less average tangible equity. 33 Professional services decreased by $21,000 in the first three months of 2023 compared to the same period in 2022. The following table shows significant components of other non-interest expense as a percentage of average assets. For the Three Months Ended March 31, 2023 2022 (Dollars in thousands) Other Expense Other Expense $ Change % Change Stationery/supplies $ 34 $ 34 $ — — % Amortization of software 17 19 (2) (10.5) % Postage 6 50 (44) (88.0) % Risk management expense 20 30 (10) (33.3) % Shareholder services 23 22 1 4.5 % Armored courier fees 61 56 5 8.9 % Telephone 119 71 48 67.6 % Alarm 39 42 (3) (7.1) % Donations 80 64 16 25.0 % Education/training 46 64 (18) (28.1) % General insurance 66 49 17 34.7 % Travel and mileage expense 37 24 13 54.2 % Other 393 225 168 74.7 % Total other non-interest expense $ 941 $ 750 $ 191 25.5 % Provision for Income Taxes Our effective income tax rate was 25.20% for the three months ended March 31, 2023 compared to 23.79% for the three months ended March 31, 2022. The Company reported an income tax provision of $2,348,000 for the three months ended March 31, 2023, compared to $1,900,000 for the three months ended March 31, 2022. The effective tax rate was affected by the change 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, 2023 and December 31, 2022, there was no reserve for uncertain tax positions. FINANCIAL CONDITION Summary of Changes in Consolidated Balance Sheets Total assets were $2,463,893,000 as of March 31, 2023, compared to $2,422,519,000 at December 31, 2022, an increase of 1.71% or $41,374,000. Total gross loans were $1,285,554,000 at March 31, 2023, compared to $1,256,304,000 at December 31, 2022, an increase of $29,250,000 or 2.33%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 1.52% or $14,654,000 to $980,829,000 at March 31, 2023 compared to $966,175,000 at December 31, 2022. Total deposits increased 3.62% or $76,098,000 to $2,175,747,000 at March 31, 2023, compared to $2,099,649,000 at December 31, 2022. Shareholders’ equity increased $7,392,000 or 4.23% to $182,052,000 at March 31, 2023, compared to $174,660,000 at December 31, 2022. The increase in shareholders’ equity was driven by the change in the unrealized losses on investment securities, and dividends paid , offset by the retention of e arnings. Accrued interest payable and other liabilities was $36,459,000 at March 31, 2023, compared to $32,611,000 at December 31, 2022, an increase of $3,848,000. 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, 2023, investment securities with a fair value of $247,692,000, or 26.48% of our investment 34 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, 2023 was 59.09% compared to 59.83% at December 31, 2022. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 1.52% or $14,654,000 to $980,829,000 at March 31, 2023, from $966,175,000 at December 31, 2022. The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $84,991,000 at March 31, 2023, compared to a net unrealized loss of $91,643,000 at December 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 increased $29,250,000 or 2.33% to $1,285,554,000 as of March 31, 2023, compared to $1,256,304,000 as of December 31, 2022. The following table sets forth information concerning the composition of our loan portfolio at the dates indicated: Loan Type (Dollars in thousands) March 31, 2023 % of Total Loans December 31, 2022 % of Total Loans Commercial: Commercial and industrial $ 149,689 11.7 % $ 141,197 11.2 % Agricultural production 22,104 1.7 % 37,007 2.9 % Total commercial 171,793 13.4 % 178,204 14.1 % Real estate: Construction & other land loans 112,989 8.8 % 109,175 8.7 % Commercial real estate - owner occupied 196,117 15.3 % 194,663 15.5 % Commercial real estate - non-owner occupied 500,420 39.0 % 464,809 37.2 % Farmland 116,723 9.1 % 119,648 9.5 % Multi-family residential 23,694 1.8 % 24,586 2.0 % 1-4 family - close-ended 91,696 7.1 % 93,510 7.4 % 1-4 family - revolving 27,260 2.1 % 30,071 2.4 % Total real estate 1,068,899 83.2 % 1,036,462 82.7 % Consumer: 43,431 3.4 % 40,252 3.2 % Total gross loans 1,284,123 100.0 % 1,254,918 100.0 % Net deferred origination fees 1,431 1,386 Loan, net of deferred origination fees 1,285,554 1,256,304 Allowance for credit losses (15,257) (10,848) Total loans $ 1,270,297 $ 1,245,456 As of March 31, 2023, 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 96.8% of total loans at December 31, 2022. 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. 35 At March 31, 2023, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $69,012,000, of which $1,843,000 were commercial loans, $62,593,000 were real estate loans, and $4,576,000 were consumer loans. At December 31, 2022, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $73,456,000, of which $2,049,000 were commercial loans, $66,583,000 were real estate loans, and $4,824,000 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. Nonperforming Assets Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when (i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest under the original contractual terms is not expected; or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. At March 31, 2023 and December 31, 2022 there were no nonperforming assets. Allowance for Credit Losses on Loans For additional information regarding provisions to credit losses on loans, see “Provision for credit losses on loans” above. Based on the current conditions of the loan portfolio, management believes that the $15,257,000 is adequate to absorb current expected credit losses in the Company’s loan portfolio. The following table summarizes the allocation for the allowance for credit losses by loan type as of the dates indicated (in thousands): Loan Type March 31, 2023 December 31, 2022 Commercial: Commercial and industrial $ 1,164 $ 1,583 Agricultural production 864 229 Total commercial 2,028 1,812 Real estate: Construction & other land loans 2,802 1,678 Commercial real estate - owner occupied 1,606 814 Commercial real estate - non-owner occupied 4,935 4,388 Farmland 1,142 863 Multi-family residential 173 60 1-4 family - revolving 1,148 465 1-4 family - revolving 544 142 Total real estate 12,350 8,410 Consumer: 879 286 Total consumer 879 286 Unallocated reserves — 340 Total allowance for credit losses $ 15,257 $ 10,848 As of March 31, 2023, the balance in the allowance for credit losses (ACL) on loans was $15,257,000, or 1.19% of total gross loans, compared to $10,848,000, or 0.86% of total gross loans, as of December 31, 2022. The increase is attributed to the impact of the adoption of ASU 2016-13 and increases in the Company’s loan portfolio balances. The balance of unfunded commitments to extend credit on construction and other loans and letters of credit was $318,046,000 as of March 31, 2023, compared to $288,141,000 as of December 31, 2022. At March 31, 2023 and December 31, 2022, the balance of the reserve for unfunded commitments was $928,000 and $110,000, respectively. The reserve for unfunded commitments is calculated by 36 management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of the ACL and is considered separately as a liability for accounting and regulatory reporting purposes. The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio. March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans Past due loans 25 — % 5,895 0.47 % 17 — % Nonaccrual loans — — % — — % 292 0.03 % Deposits 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 $76,098,000 or 3.62% to $2,175,747,000 as of March 31, 2023, compared to $2,099,649,000 as of December 31, 2022. Interest-bearing deposits increased $157,241,000 or 15.07% to $1,200,323,000 as of March 31, 2023, compared to $1,043,082,000 as of December 31, 2022. Non-interest bearing deposits decreased $81,143,000 or 7.68% to $975,424,000 as of March 31, 2023, compared to $1,056,567,000 as of December 31, 2022. Average non-interest bearing deposits to average total deposits was 48.92% for the three months ended March 31, 2023 compared to 43.77% for the same period in 2022. The composition of the deposits and average interest rates paid at March 31, 2023 and December 31, 2022 is summarized in the table below. (Dollars in thousands) March 31, 2023 % of Total Deposits Average Effective Rate December 31, 2022 % of Total Deposits Average Effective Rate NOW accounts $ 294,109 13.5 % 0.24 % $ 324,089 15.4 % 0.06 % MMA accounts 488,344 22.4 % 0.73 % 435,783 20.8 % 0.17 % Time deposits 213,032 9.8 % 0.60 % 67,923 3.2 % 0.14 % Savings deposits 204,838 9.4 % 0.05 % 215,287 10.3 % 0.01 % Total interest-bearing 1,200,323 55.1 % 0.44 % 1,043,082 49.7 % 0.10 % Non-interest bearing 975,424 44.9 % 1,056,567 50.3 % Total deposits $ 2,175,747 100.0 % $ 2,099,649 100.0 % As of March 31, 2023 there was $794,872,000 in uninsured deposits or 36.53% of total deposits, compared to $900,123,000 and 42.87% as of December 31, 2022. Other Borrowings As of March 31, 2023 the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. At December 31, 2022 the Company had $46,000,000 in FHLB advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to the Liquidity section below for further discussion of FHLB advances. Capital Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary source of capital for the Company has been through retained earnings. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital 37 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 $182,052,000 at March 31, 2023, compared to $174,660,000 at December 31, 2022. The increase from December 31, 2022 in shareholders’ equity is the result of an increase in accumulated other comprehensive income (AOCI) of $5,126,000, an increase in retained earnings from net income of $6,970,000, stock issued under the employee stock purchase plan of $76,000, the effect of share-based compensation expense of $140,000, and stock awarded to employees of $221,000, offset by common stock cash dividends of $1,410,000 and the adoption of ASU 2016-13 of $3,731,000. During the first three months of 2023, the Company declared and paid $1,410,000 in cash dividends ($0.12 per common share) to holders of common stock. The Company declared and paid $1,408,000 in cash dividends ($0.12 per common share) to holders of common stock during the quarter ended December 31, 2022 . The Company declared and paid a total of $5,638,000 in cash dividends ($0.48 per common share) to holders of common stock during the year ended December 31, 2022 . The following table presents the Company’s regulatory capital r atios as of March 31, 2023 and December 31, 2022. (Dollars in thousands) March 31, 2023 Amount Ratio Tier 1 Leverage Ratio $ 207,480 8.58 % Common Equity Tier 1 Ratio (CET 1) $ 202,480 11.80 % Tier 1 Risk-Based Capital Ratio $ 207,480 12.09 % Total Risk-Based Capital Ratio $ 258,145 15.08 % December 31, 2022 Tier 1 Leverage Ratio $ 205,154 8.37 % Common Equity Tier 1 Ratio (CET 1) $ 200,154 11.92 % Tier 1 Risk-Based Capital Ratio $ 205,154 12.22 % Total Risk-Based Capital Ratio $ 250,556 14.92 % The following table presents the Bank’s regulatory capital ratios as of March 31, 2023 and December 31, 2022. (Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ” Institution March 31, 2023 Amount Ratio Amount Ratio Amount Ratio Tier 1 Leverage Ratio $ 270,488 11.19 % $ 96,664 4.00 % $ 120,829 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 270,488 15.77 % $ 77,259 7.00 % $ 111,596 6.50 % Tier 1 Risk-Based Capital Ratio $ 270,488 15.77 % $ 103,012 8.50 % $ 137,349 8.00 % Total Risk-Based Capital Ratio $ 286,673 16.75 % $ 137,349 10.50 % $ 171,687 10.00 % December 31, 2022 Tier 1 Leverage Ratio $ 266,373 10.86 % $ 98,075 4.00 % $ 122,594 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 266,373 15.87 % $ 75,516 7.00 % $ 109,079 6.50 % Tier 1 Risk-Based Capital Ratio $ 266,373 15.87 % $ 100,688 8.50 % $ 134,251 8.00 % Total Risk-Based Capital Ratio $ 277,331 16.53 % $ 134,251 10.50 % $ 167,814 10.00 % (1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. 38 Liquidity Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Board of Director’s Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of March 31, 2023, the Company had unpledged securities totaling $694,339,000 available as a secondary source of liquidity and total cash and cash equivalents of $64,262,000. Cash and cash equivalents at March 31, 2023 increased 106.17% compared to $31,170,000 at December 31, 2022. 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, 2023, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $318,365,000 in unused FHLB secured advances, a $4,792,000 secured credit line at the Federal Reserve Bank, and $38,209,000 available under the Federal Reserve’s Bank Term Loan Funding Program. We believe our liquidity sources to be stable and adequate. At March 31, 2023, 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, 2023 and December 31, 2022: Credit Lines (In thousands) March 31, 2023 December 31, 2022 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 $ 318,365 $ 319,309 Balance outstanding $ — $ 46,000 Collateral pledged $ 599,332 $ 687,357 Fair value of collateral $ 498,312 $ 565,869 Federal Reserve Bank Term Loan Funding Program (interest rate at prevailing interest rate): Credit limit $ 38,209 $ — Balance outstanding $ — $ — Collateral pledged $ 56,429 $ — Fair value of collateral $ 50,214 $ — Federal Reserve Bank (interest rate at prevailing discount interest rate): Credit limit $ 4,792 $ 4,702 Balance outstanding $ — $ — Collateral pledged $ 5,335 $ 5,508 Fair value of collateral $ 4,782 $ 4,893 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. 39