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. 29 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 July 19, 2023, the Board of Directors declared a $0.12 per share cash dividend payable on August 18, 2023 to shareholders of record as of August 4, 2023. 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. 30 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 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 period ended June 30, 2023 included the following: • Net income for the second quarter of 2023 decreased to $6,282,000 or $0.54 per diluted common share, compared to $6,970,000 and $0.59, respectively, in the first quarter of 2023. • Net loans decreased $5.3 million or 0.42%, and total assets increased $67.3 million or 2.78% at June 30, 2023 compared to December 31, 2022. • Total deposits increased 4.79% to $2.20 billion at June 30, 2023 compared to December 31, 2022. • Total cost of deposits increased to 0.88% for the quarter ended June 30, 2023 compared to 0.20% for the quarter ended March 31, 2023. • Average non-interest bearing demand deposit accounts as a percentage of total average deposits was 43.53% and 43.92% for the quarters ended June 30, 2023 and 2022, respectively. • Net interest margin decreased to 3.46% for the quarter ended June 30, 2023, from 3.81% for the quarter ended March 31, 2023. • There were no non-performing assets for the quarter ended June 30, 2023. Additionally, net loan recoveries were $22,000 and loans delinquent more than 30 days were $252,000. • Capital positions remain strong at June 30, 2023 with a 8.51% Tier 1 Leverage Ratio; a 12.41% Common Equity Tier 1 Ratio; a 12.71% Tier 1 Risk-Based Capital Ratio; and a 15.76% Total Risk-Based Capital Ratio. • The Company declared a $0.12 per common share cash dividend, payable on August 18, 2023 to shareholders of record as of August 4, 2023. 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. 31 RESULTS OF OPERATIONS For the Three Months Ended For the Six Months Ended June 30, March 31, June 30, June 30, June 30, (In thousands, except share and per-share amounts) 2023 2023 2022 2023 2022 Net interest income before (credit) provision for credit losses $ 20,205 $ 21,581 $ 19,810 $ 41,786 $ 37,407 (Credit) provision for credit losses (343) 518 — 290 — Net interest income after (credit) provision for credit losses 20,548 20,948 19,810 41,496 37,407 Total non-interest income 1,594 1,575 770 3,169 2,604 Total non-interest expenses 13,805 13,205 12,083 27,010 23,528 Income before provision for income taxes 8,337 9,318 8,497 17,655 16,483 Provision for income taxes 2,055 2,348 1,955 4,403 3,855 Net income $ 6,282 $ 6,970 $ 6,542 $ 13,252 $ 12,628 Net income decreased to $6,282,000 for the three months ended June 30, 2023 compared to $6,542,000 for the three months ended June 30, 2022. Basic and diluted earnings per share for the quarter ended June 30, 2023 were $0.54. Basic and diluted earnings per share for the same period in 2022 were $0.56. Net income for the period was impacted by an increase in total non-interest expenses of $1,722,000, primarily driven by the increase in costs for salaries and employee benefits and non-recurring one-time expenses in professional services, and an increase in the provision for income taxes of $100,000, partially offset by an increase in net interest income before provision for credit losses of $395,000 and an increase in non-interest income of $824,000. During the quarter ended June 30, 2023, the Company recorded a $343,000 credit for credit losses, compared to no provision during the quarter ended June 30, 2022. Net income increased to $13,252,000 for the six months ended June 30, 2023 compared to $12,628,000 for the six months ended June 30, 2022. Basic and diluted earnings per share for the six months ended June 30, 2023 were $1.13. Basic and diluted earnings per share for the same period in 2022 were $1.08 and $1.07, respectively. Annualized return on average equity (“ROAE”) was 14.44% for the six months ended June 30, 2023 compared to 12.35% for the six months ended June 30, 2022. Annualized return on average assets (“ROAA”) for the six months ended June 30, 2023 and 2022 was 1.08% and 1.03%, respectively. The increase in net income for the six months ended June 30, 2023 compared to the same period in 2022 was primarily driven by an increase of $11,483,000 in total interest income, offset by an increase in total interest expense of $7,104,000. Additionally, the six month period saw an increase in non-interest income of $565,000 and an increase in non-interest expense of $3,482,000. During the six months ended June 30, 2023, the Company recorded a $290,000 provision for credit losses, compared to no provision during the six months ended June 30, 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. 32 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Three Months Ended June 30, 2023 For the Three Months Ended June 30, 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 $ 107,134 $ 1,374 5.13 % $ 33,067 $ 53 0.64 % Securities Taxable securities 765,304 5,826 3.05 % 945,210 5,651 2.39 % Non-taxable securities (1) 256,624 1,779 2.77 % 274,217 2,378 3.47 % Total investment securities 1,021,928 7,605 2.98 % 1,219,427 8,029 2.63 % Total securities and interest-earning deposits 1,129,062 8,979 3.18 % 1,252,494 8,082 2.58 % Loans (2) (3) 1,257,984 17,382 5.54 % 1,085,887 12,883 4.76 % Total interest-earning assets 2,387,046 $ 26,361 4.43 % 2,338,381 $ 20,965 3.60 % Allowance for credit losses (15,317) (9,870) Non-accrual loans — 280 Cash and due from banks 26,467 33,050 Bank premises and equipment 9,392 8,132 Other assets 93,936 71,989 Total average assets $ 2,501,524 $ 2,441,962 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 476,398 $ 158 0.13 % $ 600,685 $ 34 0.02 % Money market accounts 547,452 2,423 1.78 % 520,224 164 0.13 % Time certificates of deposit 225,638 2,290 4.07 % 89,107 33 0.15 % Total interest-bearing deposits 1,249,488 4,871 1.56 % 1,210,016 231 0.08 % Other borrowed funds 69,653 911 5.23 % 78,435 424 2.16 % Total interest-bearing liabilities 1,319,141 $ 5,782 1.76 % 1,288,451 $ 655 0.20 % Non-interest bearing demand deposits 963,104 947,724 Other liabilities 34,492 28,091 Shareholders’ equity 184,787 177,696 Total average liabilities and shareholders’ equity $ 2,501,524 $ 2,441,962 Interest income and rate earned on average earning assets $ 26,361 4.43 % $ 20,965 3.60 % Interest expense and interest cost related to average interest-bearing liabilities 5,782 1.76 % 655 0.20 % Net interest income and net interest margin (4) $ 20,579 3.46 % $ 20,310 3.48 % (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $374 and $499 at June 30, 2023 and June 30, 2022, respectively. (2) Loan interest income includes loan fees of $26 and $226 at June 30, 2023 and June 30, 2022, respectively. (3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 33 CENTRAL VALLEY COMMUNITY BANCORP SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES For the Six Months Ended June 30, 2023 For the Six Months Ended June 30, 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 $ 57,285 $ 1,449 5.06 % $ 81,204 $ 109 0.27 % Securities: Taxable securities 774,569 11,712 3.02 % 913,481 10,176 2.23 % Non-taxable securities (1) 257,036 3,557 2.77 % 265,459 4,201 3.17 % Total investment securities 1,031,605 15,269 2.96 % 1,178,940 14,377 2.44 % Total securities and interest-earning deposits 1,088,890 16,718 3.07 % 1,260,144 14,486 2.30 % Loans (2) (3) 1,259,075 34,159 5.47 % 1,051,772 25,044 4.80 % Total interest-earning assets 2,347,965 $ 50,877 4.37 % 2,311,916 $ 39,530 3.45 % Allowance for credit losses (13,117) (9,851) Nonaccrual loans — 345 Cash and due from banks 27,017 42,713 Bank premises and equipment 8,735 8,218 Other assets 90,142 97,603 Total average assets $ 2,460,742 $ 2,450,944 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts $ 501,177 $ 252 0.10 % $ 589,785 $ 68 0.02 % Money market accounts 508,028 3,259 1.29 % 531,383 347 0.13 % Time certificates of deposit 147,577 2,365 3.23 % 88,262 68 0.16 % Total interest-bearing deposits 1,156,782 5,876 1.02 % 1,209,430 483 0.08 % Other borrowed funds 96,915 2,468 5.09 % 59,062 757 2.56 % Total interest-bearing liabilities 1,253,697 $ 8,344 1.34 % 1,268,492 $ 1,240 0.20 % Non-interest bearing demand deposits 990,505 944,362 Other liabilities 33,050 33,538 Shareholders’ equity 183,490 204,552 Total average liabilities and shareholders’ equity $ 2,460,742 $ 2,450,944 Interest income and rate earned on average earning assets $ 50,877 4.37 % $ 39,530 3.45 % Interest expense and interest cost related to average interest-bearing liabilities 8,344 1.34 % 1,240 0.20 % Net interest income and net interest margin (4) $ 42,533 3.65 % $ 38,290 3.34 % (1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $747 and $882 at June 30, 2023 and June 30, 2022, respectively. (2) Loan interest income includes loan fees of $36 and $490 at June 30, 2023 and June 30, 2022, respectively. (3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 34 The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-bearing 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 June 30, 2023 and 2022 For the Six Months Ended June 30, 2023 and 2022 (In thousands) Volume Rate Net Volume Rate Net Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks $ 118 $ 1,203 $ 1,321 $ (32) $ 1,372 $ 1,340 Investment securities: Taxable (1,075) 1,250 175 (1,547) 3,082 1,535 Non-taxable (1) (152) (447) (599) (133) (511) (644) Total investment securities (1,227) 803 (424) (1,680) 2,571 891 Loans 2,042 2,457 4,499 4,936 4,179 9,115 Total earning assets (1) 933 4,463 5,396 3,224 8,122 11,346 Interest expense: Deposits: Savings, NOW and MMA 1 2,382 2,383 (25) 3,120 3,095 Time certificate of deposits 49 2,208 2,257 46 2,251 2,297 Total interest-bearing deposits 50 4,590 4,640 21 5,371 5,392 Other borrowed funds (47) 534 487 481 1,230 1,711 Total interest-bearing liabilities 3 5,124 5,127 502 6,601 7,103 Net interest income (1) $ 930 $ (661) $ 269 $ 2,722 $ 1,521 $ 4,243 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. Comparison of the quarter ended June 30, 2023 and June 30, 2022 The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, decreased 2 basis points to 3.46% for the second quarter of 2023, from 3.48% for the second quarter of 2022. Average interest earning assets were $2,387,046,000 for the three months ended June 30, 2023 compared to $2,338,381,000 for the three months ended June 30, 2022. The $48,665,000 increase in average earning assets was attributed to the $172,097,000 or 15.85% increase in average loans, partially offset by the $123,432,000 decrease in average total securities and interest-earning deposits. For the three months ended June 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 60 basis points. The effective yield on loans increased 78 basis points. Average interest bearing liabilities increased 2.38% to $1,319,141,000 for the three months ended June 30, 2023, compared to $1,288,451,000 for the same period in 2022. Interest and fee income from loans increased $4,499,000 or 34.92% for the three months ended June 30, 2023 compared to the same period in 2022. Net interest income during the three months ended June 30, 2023 was impacted by an increase in average total loans of $172,097,000 or 15.85% to $1,257,984,000 compared to $1,085,887,000 for the same period in 2022. The yield on average loans, excluding nonaccrual loans, was 5.54% for the three months ended June 30, 2023 compared to 4.76% for the same period in 2022. Net interest income for the period ending June 30, 2023 was benefited by approximately $40,000 in nonrecurring income from prepayment penalties, compared to $184,000 recorded in the same period in 2022. The impact to interest income from the accretion of the loan marks on acquired loans was $72,000 and $102,000 for the three months ended June 30, 2023 and 2022, respectively. 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 $1,023,000 in the three months ended June 30, 2023 to $8,605,000 compared to $7,582,000 for the same period in 2022. The yield on average total investments (total securities and interest-earning deposits) increased 60 basis points to 3.18% for the three month period ended June 30, 2023 35 compared to 2.58% for the same period in 2022. Average total securities and interest-earning deposits for the three month period ended June 30, 2023 decreased $123,432,000 or 9.85% to $1,129,062,000 compared to $1,252,494,000 for the same period in 2022. Total interest income on a non-tax equivalent basis for the three months ended June 30, 2023 increased $5,522,000 or 26.98% to $25,987,000 compared to $20,465,000 for the three months ended June 30, 2022. The yield on interest earning assets increased 83 basis points to 4.43% on a fully tax equivalent basis for the three months ended June 30, 2023 from 3.60% for the period ended June 30, 2022. The increase was the result of yield changes, increase in interest rates, and asset mix changes. Average interest earning assets increased to $2,387,046,000 for the three months ended June 30, 2023 compared to $2,338,381,000 for the three months ended June 30, 2022. Interest expense on deposits for the three months ended June 30, 2023 and 2022 was $4,871,000 and $231,000, respectively. The average interest rate on interest bearing deposits increased to 1.56% for the three months ended June 30, 2023 compared to 0.08% for the same period ended June 30, 2022. Average interest-bearing deposits increased 3.26% or $39,472,000 to $1,249,488,000 for the three months ended June 30, 2023 compared to $1,210,016,000 for the same period ended June 30, 2022. Average other borrowed funds were $69,653,000 with an effective rate of 5.23% for the three months ended June 30, 2023 compared to $78,435,000 with an effective rate of 2.16% for the three months ended June 30, 2022. Total interest expense on other borrowed funds was $911,000 for the three months ended June 30, 2023 and $424,000 for the three months ended June 30, 2022. The cost of interest-bearing liabilities increased 156 basis points to 1.76% for the three month period ended June 30, 2023 compared to 0.20% for the same period in 2022. The cost of total deposits increased to 0.88% compared to 0.04% for the three month periods ended June 30, 2023 and 2022, respectively. Average non-interest bearing demand deposits increased 1.62% to $963,104,000 for the three month period ended June 30, 2023 compared to $947,724,000 for the same period in 2022. The ratio of average non-interest bearing demand deposits to average total deposits decreased to 43.53% in the three month period ended June 30, 2023 compared to 43.92% for the same period in 2022. Net interest income before the provision for credit losses for the three months ended June 30, 2023 increased by $395,000 or 1.99% to $20,205,000 compared to $19,810,000 for the same period in 2022. The increase was a result of yield changes, asset mix changes, a credit to the provision for credit losses, and an increase in average earning assets, offset by an increase in interest expense on average interest bearing liabilities. Comparison of the six months ended June 30, 2023 and June 30, 2022 The Company’s net interest margin (fully tax equivalent basis), expressed as a percentage of average earning assets, increased 31 basis points to 3.65% for the six months ended June 30, 2023, from 3.34% for the same period of 2022. Average interest earning assets were $2,347,965,000 for the six months ended June 30, 2023 compared to $2,311,916,000 for the six months ended June 30, 2022. The $36,049,000 increase in average earning assets was attributed to the $207,303,000 or 19.71% increase in average loans, partially offset by the $171,254,000 decrease in average total securities and interest-earning deposits. For the six months ended June 30, 2023, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 77 basis points. The effective yield on loans increased 67 basis points. Average interest bearing liabilities decreased 1.17% to $1,253,697,000 for the six months ended June 30, 2023, compared to $1,268,492,000 for the same period in 2022. Interest and fee income from loans increased $9,115,000 or 36.40% for the six months ended June 30, 2023 compared to the same period in 2022. Net interest income during the first six months of 2023 was impacted by an increase in average total loans of $207,303,000 or 19.71% to $1,259,075,000 compared to $1,051,772,000 for the same period in 2022. The yield on average loans, excluding nonaccrual loans, was 5.47% for the six months ended June 30, 2023 compared to 4.80% for the same period in 2022. Net interest income for the six months ending June 30, 2023 was benefited by approximately $42,000 in nonrecurring income from prepayment penalties, compared to $470,000 recorded in the same period in 2022. The impact to interest income from the accretion of the loan marks on acquired loans was $139,000 and $342,000 for the six months ended June 30, 2023 and 2022, respectively. The remaining balance of accretable loan marks on acquired loans as of June 30, 2023 was $1,133,000. 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 $2,368,000 in the first six months of 2023 to $15,971,000 compared to $13,603,000 for the same period in 2022. The yield on average total investments (total securities and 36 interest-earning deposits) increased 77 basis points to 3.07% for the six months period ended June 30, 2023 compared to 2.30% for the same period in 2022. Average total securities and interest-earning deposits for the first six months of 2023 decreased $171,254,000 or 13.59% to $1,088,890,000 compared to $1,260,144,000 for the same period in 2022. Income from these investments represents 38.22% of net interest income for the first six months of 2023 compared to 36.36% for the same period in 2022. Total interest income on a non-tax equivalent basis for the six months ended June 30, 2023 increased $11,483,000 or 29.71% to $50,130,000 compared to $38,647,000 for the six months ended June 30, 2022. The yield on interest earning assets increased 92 basis points to 4.37% on a fully tax equivalent basis for the six months ended June 30, 2023 from 3.45% for the six months ended June 30, 2022. The increase was the result of yield changes, increase in interest rates, and asset mix changes. Average interest earning assets increased to $2,347,965,000 for the six months ended June 30, 2023 compared to $2,311,916,000 for the six months ended June 30, 2022. The $36,049,000 increase in average earning assets was attributed to the $207,303,000 or 19.71% increase in average loans, partially offset by the $171,254,000 decrease in average total securities and interest-bearing deposits. Interest expense on deposits for the six months ended June 30, 2023 and 2022 was $5,876,000 and $483,000, respectively. The average interest rate on interest bearing deposits increased to 1.02% for the six months ended June 30, 2023 compared to 0.08% for the same period ended June 30, 2022. Average interest-bearing deposits decreased 4.35% or $52,648,000 to $1,156,782,000 for the six months ended June 30, 2023 compared to $1,209,430,000 for the same period ended June 30, 2022. Average other borrowed funds were $96,915,000 with an effective rate of 5.09% for the six months ended June 30, 2023 compared to $59,062,000 with an effective rate of 2.56% for the six months ended June 30, 2022. Total interest expense on other borrowed funds was $2,468,000 for the six months ended June 30, 2023 and $757,000 for the six months ended June 30, 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 114 basis points to 1.34% for the six months ended June 30, 2023 compared to 0.20% for the same period in 2022. The cost of total deposits increased to 0.55% compared to 0.05% for the six months ended June 30, 2023 and 2022, respectively. Average non-interest bearing demand deposits increased 4.89% to $990,505,000 for the six months ended June 30, 2023 compared to $944,362,000 for the same period in 2022. The ratio of average non-interest bearing demand deposits to average total deposits increased to 46.13% in the six months ended June 30, 2023 compared to 43.85% for the same period in 2022. Net interest income before the provision for credit losses for the six months ended June 30, 2023 increased by $4,379,000 or 11.71% to $41,786,000 compared to $37,407,000 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. 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 June 30, For the Six Months Ended June 30, (Dollars in thousands) 2023 2022 2023 2022 Balance, beginning of period $ 15,257 $ 9,864 $ 10,848 $ 9,600 Impact of ASU 2016-13 adoption — — 3,910 — Provision for credit losses 184 — 702 — Losses charged to allowance (3) (16) (357) (117) Recoveries 25 25 360 390 Balance, end of period $ 15,463 $ 9,873 $ 15,463 $ 9,873 Allowance for credit losses to total loans at end of period 1.23 % 0.87 % 1.23 % 0.87 % 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, 37 additional provisions may be necessary. Management believes that the level of allowance for credit losses has been adjusted accordingly. During the three and six month periods ended June 30, 2023, the Company recorded a $184,000 and $702,000 provision for credit losses on loans, respectively, compared to no provisi on durin g the three and six month periods ended June 30, 2022. The Company had net recoveries totaling $22,000 and $9,000 for the three months ended June 30, 2023 and 2022, respectively, and net recoveries totaling $3,000 and $273,000 for the six months ended June 30, 2023 and 2022, respectively. The Company has been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of June 30, 2023, there were $25,435,000 in classified loans of which $1,339,000 related to commercial and industrial loans, $1,160,000 to agricultural production, $2,142,000 to owner occupied real estate, $16,603,000 to real estate construction and other land loans, $2,378,000 to non-owner occupied real estate, $1,766,000 to farmland, and $47,000 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 $1,594,000 for the three months ended June 30, 2023 compared to $770,000 for the same period in 2022. The $824,000 or 107.01% increase in non-interest income during the three months ended June 30, 2023 was primarily driven by a positive change of $930,000 in net realized loss on sales and calls of investment securities from $969,000 at June 30, 2022 to $39,000 at June 30, 2023 and an increase of $154,000 in other income. These increases were partially offset by decreases in loan placement fees of $96,000 and a decrease in service charge income of $177,000. Non-interest income was $3,169,000 for the six months ended June 30, 2023 compared to $2,604,000 for the same period in 2022. The $565,000 or 21.70% increase in non-interest income during the six months ended June 30, 2023 was primarily driven by a positive change of $506,000 in net realized loss on sales and calls of investment securities from $763,000 at June 30, 2022 to $257,000 at June 30, 2023 and an increase of $611,000 in other income. These increases were partially offset by decreases in loan placement fees of $271,000 and a decrease in service charge income of $328,000. 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 $7,136,000 in FHLB stock. We received dividends totaling $106,000 and $215,000 in the three and six months ended June 30, 2023, respectively, compared to $82,000 and $167,000 for the three and six months ended June 30, 2022, respectively. The following table shows significant components of other non-interest income for the periods indicated: For the Three Months Ended June 30, For the Six Months Ended June 30, (Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change Appreciation in cash surrender value of bank owned life insurance $ 254 $ 245 $ 9 3.7 % $ 503 $ 487 $ 16 3.3 % Loan placement fees 172 268 (96) (35.8) % 296 567 (271) (47.8) % Interchange fees 458 478 (20) (4.2) % 903 920 (17) (1.8) % Federal Home Loan Bank dividends 106 82 24 29.3 % 215 167 48 28.7 % Other 276 122 154 126.2 % 754 143 611 427.3 % Total other non-interest income $ 1,266 $ 1,195 $ 71 5.9 % $ 2,671 $ 2,284 $ 387 16.9 % 38 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 $1,722,000 or 14.25% to $13,805,000 for the three months ended June 30, 2023, compared to $12,083,000 for the three months ended June 30, 2022. The net increase for the three months ended June 30, 2023 was primarily the result of increases in salaries and employee benefits of $919,000, professional services of $419,000, regulatory assessments of $162,000, information technology of $107,000, and directors’ expenses of $103,000, partially offset by a decrease of the amortization of core deposit intangibles of $106,000 and occupancy and equipment expense of $80,000. Non-interest expenses increased $3,482,000 or 14.80% to $27,010,000 for the six months ended June 30, 2023, compared to $23,528,000 for the six months ended June 30, 2022. The net increase for the six month period was primarily the result of increases in salaries and employee benefits of $2,009,000, professional services of $397,000, directors’ expenses of $221,000, and information technology of $196,000, partially offset by a decrease of the amortization of core deposit intangible of $212,000. Salaries and employee benefits increased $2,009,000 or 14.35% to $16,010,000 for the first six months of 2023 compared to $14,001,000 for the six months ended June 30, 2022. The increase in salaries and benefits and director expenses was primarily due to credits in post-retirement costs recorded in the prior year, a result of changes in the discount rate compared to expense in the current period. Additionally, increases in salaries and benefits were a reflection of salary adjustments due to market conditions. Full time equivalent employees were 246 for the six months ended June 30, 2023, compared to 244 for the six months ended June 30, 2022. The following table shows significant components of other non-interest expense for the periods indicated: For the Three Months Ended June 30, For the Six Months Ended June 30, (Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change Regulatory assessments $ 356 $ 194 $ 162 83.5 % $ 566 $ 416 $ 150 36.1 % Data processing expense 618 548 70 12.8 % 1,269 1,089 180 16.5 % ATM/Debit card expenses 193 217 (24) (11.1) % 377 412 (35) (8.5) % Internet banking 47 48 (1) (2.1) % 82 69 13 18.8 % Advertising 124 138 (14) (10.1) % 249 278 (29) (10.4) % Professional Services 883 464 419 90.3 % 1,235 838 397 47.4 % Information technology 935 828 107 12.9 % 1,782 1,586 196 12.4 % Directors’ expenses 151 48 103 214.6 % 314 93 221 237.6 % Loan related expenses 51 68 (17) (25.0) % 198 139 59 42.4 % Personnel other 63 59 4 6.8 % 323 162 161 99.4 % Amortization of core deposit intangibles 34 140 (106) (75.7) % 68 280 (212) (75.7) % Other 1,110 930 180 19.4 % 2,016 1,659 357 21.5 % Total other non-interest expense $ 4,565 $ 3,682 $ 883 24.0 % $ 8,479 $ 7,021 $ 1,458 20.8 % Provision for Income Taxes Our effective income tax rate was 24.65% and 24.94% and for the three and six month periods ended June 30, 2023, respectively, compared to 23.01% and 23.39% for the three and six month periods ended June 30, 2022, respectively. The Company reported an income tax provision of $2,055,000 and $4,403,000 for the three and six month periods ended June 30, 2023, respectively, compared to $1,955,000 and $3,855,000 for the three and six month periods ended June 30, 2022, respectively. 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 39 amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria. As of June 30, 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 $2,489,807,000 as of June 30, 2023, compared to $2,422,519,000 at December 31, 2022, an increase of 2.78% or $67,288,000. Total gross loans were $1,255,658,000 at June 30, 2023, compared to $1,256,304,000 at December 31, 2022, an decrease of $646,000 or 0.05%. Total cash and cash equivalents increased 312.76% or $97,488,000 to $128,658,000 at June 30, 2023 compared to $31,170,000 at December 31, 2022. The investment portfolio decreased 1.75% or $30,297,000 to $930,193,000 at June 30, 2023 compared to $960,490,000 at December 31, 2022. Total deposits increased 4.79% or $100,645,000 to $2,200,294,000 at June 30, 2023, compared to $2,099,649,000 at December 31, 2022. Shareholders’ equity increased $12,700,000 or 7.27% to $187,360,000 at June 30, 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 the retention of e arnings, partially offset by dividends paid. Accrued interest payable and other liabilities was $32,482,000 at June 30, 2023, compared to $32,611,000 at December 31, 2022, an decrease of $129,000. 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 June 30, 2023, investment securities with a fair value of $340,310,000, or 36.84% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at June 30, 2023 was 57.07% compared to 59.83% at December 31, 2022 and 53.94% at June 30, 2022. The total investment portfolio decreased 1.75% or $30,297,000 to $930,193,000 at June 30, 2023 compared to $960,490,000 at December 31, 2022. The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $85,234,000 at June 30, 2023, compared to net unrealized losses of $91,643,000 at December 31, 2022 and $80,011,000 at June 30, 2022. See Note 2 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 $646,000 or 0.05% to $1,255,658,000 as of June 30, 2023, compared to $1,256,304,000 as of December 31, 2022. 40 The following table sets forth information concerning the composition of our loan portfolio at the dates indicated: Loan Type (Dollars in thousands) June 30, 2023 % of Total Loans December 31, 2022 % of Total Loans Commercial: Commercial and industrial $ 103,490 8.2 % $ 141,197 11.2 % Agricultural production 36,283 2.9 % 37,007 2.9 % Total commercial 139,773 11.1 % 178,204 14.1 % Real estate: Construction & other land loans 77,865 6.2 % 109,175 8.7 % Commercial real estate - owner occupied 195,348 15.6 % 194,663 15.5 % Commercial real estate - non-owner occupied 502,814 40.1 % 464,809 37.2 % Farmland 118,616 9.4 % 119,648 9.5 % Multi-family residential 53,432 4.3 % 24,586 2.0 % 1-4 family - close-ended 90,064 7.2 % 93,510 7.4 % 1-4 family - revolving 28,625 2.3 % 30,071 2.4 % Total real estate 1,066,764 85.1 % 1,036,462 82.7 % Consumer: 47,597 3.8 % 40,252 3.2 % Total gross loans 1,254,134 100.0 % 1,254,918 100.0 % Net deferred origination fees 1,524 1,386 Loan, net of deferred origination fees 1,255,658 1,256,304 Allowance for credit losses (15,463) (10,848) Total loans $ 1,240,195 $ 1,245,456 As of June 30, 2023, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.1% 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. At June 30, 2023, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $67,523,000, of which $1,788,000 were commercial loans, $61,225,000 were real estate loans, and $4,510,000 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 June 30, 2023 and December 31, 2022 there were no nonperforming assets. 41 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 $15,463,000 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 June 30, 2023 December 31, 2022 Commercial: Commercial and industrial $ 876 $ 1,583 Agricultural production 601 229 Total commercial 1,477 1,812 Real estate: Construction & other land loans 2,617 1,678 Commercial real estate - owner occupied 1,798 814 Commercial real estate - non-owner occupied 5,241 4,388 Farmland 1,253 863 Multi-family residential 386 60 1-4 family - revolving 1,335 465 1-4 family - revolving 543 142 Total real estate 13,173 8,410 Consumer: 813 286 Total consumer 813 286 Unallocated reserves — 340 Total allowance for credit losses $ 15,463 $ 10,848 As of June 30, 2023, the balance in the allowance for credit losses (ACL) on loans was $15,463,000, or 1.23% 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 balance of the Company’s loan portfolio. The balance of unfunded commitments to extend credit on construction and other loans and letters of credit was $266,410,000 as of June 30, 2023, compared to $288,141,000 as of December 31, 2022. At June 30, 2023 and December 31, 2022, the balance of the reserve for unfunded commitments was $629,000 and $110,000, respectively. The reserve for unfunded commitments is calculated by 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. June 30, 2023 December 31, 2022 June 30, 2022 (Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans Past due loans 254 0.02 % 5,895 0.47 % 207 0.02 % Nonaccrual loans — — % — — % 271 0.02 % 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 $100,645,000 or 4.79% to $2,200,294,000 as of June 30, 2023, compared to $2,099,649,000 as of December 31, 2022. Interest-bearing deposits increased $200,124,000 or 19.19% to $1,243,206,000 as of June 30, 2023, compared to $1,043,082,000 as of December 31, 2022. Non-interest bearing deposits decreased $99,479,000 or 9.42% to $957,088,000 as of June 30, 2023, compared to $1,056,567,000 as of December 31, 2022. Average non-interest bearing 42 deposits to average total deposits was 46.13% for the six months ended June 30, 2023 compared to 43.85% for the same period in 2022. The composition of the deposits and year-to-date average effective rates at June 30, 2023 and December 31, 2022 is summarized in the table below. (Dollars in thousands) June 30, 2023 % of Total Deposits Average Effective Rate December 31, 2022 % of Total Deposits Average Effective Rate NOW accounts $ 272,419 12.4 % 0.12 % $ 324,089 15.4 % 0.06 % MMA accounts 569,807 25.9 % 1.29 % 435,783 20.8 % 0.17 % Time deposits 208,864 9.5 % 3.23 % 67,923 3.2 % 0.14 % Savings deposits 192,116 8.7 % 0.08 % 215,287 10.3 % 0.01 % Total interest-bearing 1,243,206 56.5 % 1.02 % 1,043,082 49.7 % 0.10 % Non-interest bearing 957,088 43.5 % 1,056,567 50.3 % Total deposits $ 2,200,294 100.0 % $ 2,099,649 100.0 % As of June 30, 2023 there was $776,137,000 in uninsured deposits or 35.27% of total deposits, compared to $900,123,000 and 42.87% as of December 31, 2022. Other Borrowings As of June 30, 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 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 $187,360,000 at June 30, 2023, compared to $174,660,000 at December 31, 2022. The increase from December 31, 2022 in shareholders’ equity is the result of a decrease in accumulated other comprehensive loss of $5,359,000, an increase in retained earnings from net income of $13,252,000, stock issued under the employee stock purchase plan of $123,000, the effect of share-based compensation expense of $298,000, and stock awarded to employees of $221,000, offset by common stock cash dividends of $2,821,000 and the adoption of ASU 2016-13 of $3,731,000. During the first six months of 2023, the Company declared and paid $2,821,000 in cash dividends ($0.24 per common share) to holders of common stock. The Company declared and paid $2,824,000 in cash dividends ($0.24 per common share) to holders of common stock during the six months ended June 30, 2022 . 43 The following table presents the Company’s regulatory capital r atios as of June 30, 2023 and December 31, 2022. (Dollars in thousands) June 30, 2023 Amount Ratio Tier 1 Leverage Ratio $ 212,614 8.51 % Common Equity Tier 1 Ratio (CET 1) $ 207,614 12.41 % Tier 1 Risk-Based Capital Ratio $ 212,614 12.71 % Total Risk-Based Capital Ratio $ 263,679 15.76 % 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 June 30, 2023 and December 31, 2022. (Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ” Institution June 30, 2023 Amount Ratio Amount Ratio Amount Ratio Tier 1 Leverage Ratio $ 275,830 11.04 % $ 99,397 4.00 % $ 124,921 5.00 % Common Equity Tier 1 Ratio (CET 1) $ 275,830 16.49 % $ 75,264 7.00 % $ 108,715 6.50 % Tier 1 Risk-Based Capital Ratio $ 275,830 16.49 % $ 100,352 8.50 % $ 133,803 8.00 % Total Risk-Based Capital Ratio $ 292,378 17.48 % $ 133,803 10.50 % $ 167,253 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%. 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 June 30, 2023, the Company had unpledged securities totaling $589,883,000 available as a secondary source of liquidity and total cash and cash equivalents of $128,658,000. Cash and cash equivalents at June 30, 2023 increased 312.76% 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 June 30, 2023, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent 44 banks, $347,510,000 in unused FHLB secured advances, a $4,583,000 secured credit line at the Federal Reserve Bank, and $37,968,000 available under the Federal Reserve’s Bank Term Loan Funding Program. We believe our liquidity sources to be stable and adequate. At June 30, 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 June 30, 2023 and December 31, 2022: Credit Lines (In thousands) June 30, 2023 December 31, 2022 Unsecured Credit Lines Credit limit $ 110,000 $ 110,000 Balance outstanding $ — $ — Federal Home Loan Bank Credit limit $ 347,510 $ 319,309 Balance outstanding $ — $ 46,000 Collateral pledged $ 629,485 $ 687,357 Fair value of collateral $ 498,157 $ 565,869 Federal Reserve Bank Term Loan Funding Program Credit limit $ 37,968 $ — Balance outstanding $ — $ — Collateral pledged $ 55,272 $ — Fair value of collateral $ 48,584 $ — Federal Reserve Bank Credit limit $ 4,583 $ 4,702 Balance outstanding $ — $ — Collateral pledged $ 5,188 $ 5,508 Fair value of collateral $ 4,614 $ 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis.