Central Valley Community Bancorp
Annual Report 2020

Plain-text annual report

2020 2020 To Our Shareholders Last year I closed this annual shareholder letter by observing that uncertainty was impacting the financial services industry. Little did I know what an understatement that would turn out to be! As 2020 found us dealing with the financial impact of a worldwide pandemic and the Federal response of lowering rates, we could not know how much this would affect the economic wellbeing of our clients or communities. As such, we had to learn quickly, practice perseverance and embrace flexibility. While 2020 proved to be a difficult year, in many respects it brought out the best in our Company. We rallied in our essential role of providing banking access in the safest way possible for our team, our clients and our communities – helping fuel the economy throughout the quarantines and shutdowns. We all learned the meaning of shelter-at-home orders, social distancing and color-coded regional economic impacts, both personally and professionally. And we supported our territory in tangible ways, especially for those on the front lines, like healthcare workers and first responders who selflessly managed unprecedented volume during the pandemic and California’s wildfires. We made physical access to banking available wherever possible and ramped up digital education and access. Significant team resources were invested into processing Paycheck Protection Program (PPP) loan applications, with our team processing a total of 1,077 PPP loans totaling $211,575,000 in 2020. Choosing to extend our PPP participation in 2021, as of this writing we have processed an additional 405 PPP loans totaling $65,000,000. We look forward to the continued benefits for our business clients along with improved economic conditions throughout our territory. Even during the toughest of economic times, our leadership team remained true to the Mission Statement of our now 41-year-old community bank. Our community support focused on food insecurity, housing and social justice, and we launched a campaign to support the Central Sierra Resiliency Fund to help the people and communities affected by the devastating Creek Fire, the largest single fire incident recorded in California history. Financial Overview While 2020 will likely be remembered for many negative reasons, we choose to reflect on the tremendous support and compassion demonstrated by our team for the clients and communities we serve. Likewise, we are grateful for the confidence and support you have shown us during this time. Throughout 2020 we remained focused on credit quality in our loan portfolio and made appropriate allocations to the Allowance For Loan and Lease Losses. Our team worked closely with borrowers to understand their unique circumstances, and assisted nearly 300 clients with a loan deferral program. This work, along with strong capital levels, will help ensure safety and soundness for our shareholders as we emerge from the pandemic. In 2020, we reached the milestone of exceeding $2 billion in assets as of December 31, 2020. The Company reported net income for the year ended December 31, 2020, of $20,347,000 and enjoyed strong loan and deposit growth with loans reaching $1,102,347,000 and total deposits reaching $1,722,710,000. In 2020 the Board of Directors declared dividends of $0.44 per share totaling $5,530,000. And to underscore the year’s accomplishments, the Company’s tangible book value improved by nearly 15 percent. Farewell, Pat… and Welcome, Pat! Pat Carman, Executive Vice President, Chief Credit Officer, retired in November 2020 with over 48 years of industry expertise, the last 12 with Central Valley Community Bank. Pat Carman was succeeded by Pat Luis as the new Executive Vice President, Chief Credit Officer. Luis joined CVCB with over 35 years of bank credit management expertise. He oversees the Credit Administration Division and credit quality for the Bank, and serves as a member of the Managing Committee. Known for his extensive credit risk knowledge, agribusiness understanding, team development acumen and business intelligence, Luis has worked in large national banks and the farm credit association – mostly in California and the Western US – throughout his career. Board Member Addition Andriana Majarian was added to the Board of Directors in December 2020. She is the Chief Operating Officer of Agrian, based in Clovis, California, one of the world’s largest and most-profitable ag technology companies, acquired by TELUS Agriculture in August 2020. Andriana serves on Agrian’s executive leadership team and oversees all aspects of the company’s global operations in 58 countries. Her experience and leadership are focused on developing and delivering technology-driven business services and solutions, providing outstanding client service and expanding Agrian’s revenue growth. 1 Upgrades for Improved Client Service… Both Online and In Person The Bank continued to upgrade and refine our cybersecurity and innovation initiatives in 2020, in addition to digital processes that enabled our clients to experience improved service. This is all part of our ongoing commitment to investing in advanced technologies to ensure that our Company and clients are prepared for the future, no matter what it may hold. • • In the summer of 2020, Personal and Business Online Banking systems were upgraded to an improved, intuitive system design with added services for over 12,000 of our valued Personal and Business clients. This was further enhanced by the launch of Digital Wallet, which enables clients to make purchases easily and securely – with contactless safety – using their smartphones. Meanwhile, in the brick-and-mortar world, our Prather Banking Center set in the Central Sierra, relocated to a temporary facility in its existing shopping center while a new, permanent office is being constructed in its original location. The new Banking Center is expected to be completed in the spring of 2021. Awards & Achievements During 2020, the Company earned recognition in a wide range of categories, from our robust financial performance to our talented team. Among the highlights: • • Continuing our growing impact with SCORE, a nonprofit organization dedicated to small business advocacy. Our team provides mentoring for new and existing businesses throughout our territory. Achieving a Super Premier performance rating from The Findley Reports – the highest of the three performance tiers recognized by the firm, based upon the Bank’s 2019 operating results. Earning a 5-Star Superior rating from Bauer Financial for all four quarters of 2020, a rating reserved for financial institutions that are among the nation’s strongest and safest, operating above regulatory capital requirements. Being honored by The Business Journal as “Best Business Bank” for the seventh consecutive year in its 2020 Best of Central Valley Business Awards. Stronger. Sharper. More Committed than Ever. There’s no question that 2020 will be remembered as a year of extraordinary change, challenge and heroism, as well as a reminder of humanity’s unquenchable ability to adapt and endure. The year 2020 did not define us – it sharpened us. We emerged from 2020 stronger so that, no matter the situation, our team is ready, willing and able to serve our clients with the excellence we have long been known for. As we entered 2021, we were mindful of the political changes brought about by the 2020 elections, the start of the COVID-19 vaccine rollout and the hopeful improvement of economic conditions. No matter what 2021 may bring, we remain optimistic that our brand of relationship banking will continue to serve our team, clients and shareholders very well. Thank you for your loyalty and commitment to our Company during this unpreceded time. Our experienced leadership, dedicated local banking professionals and committed Board of Directors will continue to earn your trust daily as we continue to successfully serve our communities, guided by the core values that have been at our forefront for over 40 years. Sincerely, Daniel J. Doyle Chairman of the Board, Central Valley Community Bancorp Central Valley Community Bank James M. Ford President & CEO, Central Valley Community Bancorp Central Valley Community Bank 2 Board of Directors Investing In Relationships Daniel J. Doyle Chairman of the Board, Central Valley Community Bancorp Central Valley Community Bank James M. Ford President and CEO, Central Valley Community Bancorp Central Valley Community Bank Daniel N. Cunningham Vice Chairman, Central Valley Community Bancorp Central Valley Community Bank Director, Quinn Group Inc. Steven D. McDonald Secretary of the Board, Central Valley Community Bancorp Central Valley Community Bank President, McDonald Properties, Inc. F.T. “Tommy” Elliott, IV Owner, Wileman Bros. & Elliott, Inc. Kaweah Container, Inc. Robert J. Flautt Retired Bank Executive Gary D. Gall Retired Bank Executive Andriana D. Majarian Chief Operating Officer, Agrian Louis C. McMurray President, Charles McMurray Co. Karen A. Musson Marketing and Media, Gar Tootelian, Inc. Dorothea D. Silva Principal, Avaunt Ltd. CPAs and Consultants William S. Smittcamp President and CEO, Wawona Frozen Foods 3 Making History Together Our history is written by many hands, but with one vision: to help our clients and communities succeed. We are proud of our legacy of success, and just as proud that our story is still being written today. A History of Strength - A Heart of Service Central Valley Community Bank (Bank), founded in 1979, is a California State chartered bank with deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC). The Bank commenced operations on January 10, 1980, in Clovis, California, with 12 professional bankers and beginning assets of $2,000,000.  Central Valley Community Bancorp (Company), was established on November 15, 2000, as the holding company for Central Valley Community Bank and is registered as a bank holding company with the Board of Governors of the Federal Reserve System. The common stock of the Company trades on the NASDAQ stock exchange under the symbol “CVCY.” The Company is regulated by the Federal Deposit Insurance Corporation, Federal Reserve Board, Securities and Exchange Commission, and the California Department of Business Oversight. The Bank operates full-service offices in 16 communities within the San Joaquin Valley and Greater Sacramento Region. Banking Centers are located in Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Stockton and Visalia. Additionally, the Bank operates Commercial, Real Estate, SBA and Agribusiness Lending Departments. With assets exceeding $2 billion as of December 31, 2020, Central Valley Community Bank has grown into a well-capitalized institution, with a proven track record of financial strength, security and stability. The Company’s financial performance continues to receive industry acclaim and national recognition. Despite the Bank’s growth, it has remained true to its original roots and committed to its core values of teamwork, respect, accountability, integrity and leadership. Central Valley Community Bank distinguishes itself from other financial institutions through its strength, client advocacy, exemplary service to clients and communities, and the values that have guided the Bank since its opening. The Bank’s unique brand of personalized service is demonstrated daily by professional bankers who live its mission of providing personalized financial solutions that guide businesses and communities to succeed and thrive. Guided by an engaged Board of Directors and a seasoned Executive Management Team, the Bank continues to focus on personalized service, client referrals and team member satisfaction. Central Valley Community Bank’s strong foundation, concern for its team and training opportunities at all levels has afforded the ongoing addition and retention of high-quality employees. Supporting Our Communities In So Many Ways Focused on investing in the communities it serves, the Bank annually supports a wide variety of organizations with financial donations and the talents and energy of its people. Additionally, Bank management serves in leadership positions for civic and philanthropic organizations, as well as industry groups at the state and national levels. Providing leadership-by- example sets the pace for the entire team, all committed to improving and strengthening the quality of life in the communities where they live, work and raise their families. This is evidenced by The Business Journal’s “Best of Central Valley Business Awards” where the Bank was honored for the seventh consecutive year as “Best Business Bank” in 2020. Always On The Leading Edge Of Security & Convenience Central Valley Community Bank maintains state-of-the-art data processing and information systems, and offers a complete line of innovative and competitive business and personal deposit and loan products. Through FDIC insurance, client deposits for all insurable accounts are protected up to $250,000. For maximum convenience, personal and business services are available through Online Banking with Bill Pay, Mobile Banking, Mobile Deposit, CVCB CardControl, eStatements and Financial tools. The Private Business Banking Department ensures that businesses of all sizes benefit from custom-tailored Cash Management services through Business Online Banking, Remote Deposit and Merchant Card Services. In addition, ATMs are located throughout the Bank’s territory, and clients are able to access ATMs nationwide for free through the MoneyPass® network. BankLine provides 24-hour telephone banking and convenient banking hours are offered at the Bank’s offices. A Proud Reputation Built On Personal Relationships Central Valley Community Bank has built a reputation for superior banking service by offering personalized “relationship banking” for businesses, professionals and individuals. Serving the business community has always been a primary focus for the Bank, which continues to expand its commercial banking team to serve even more satisfied clients. Central Valley Community Bank’s experienced banking professionals live and work in the local community, and have a deep understanding of the marketplace. As a result, the Bank has remained an active business lender and is proud to be a Preferred SBA Lender. Central Valley Community Bank has consistently been ranked upon the top SBA 504 lenders in the Central Valley from CenCal Business Group’s Lender of the Year award in recent years. At Central Valley Community Bank, you will find the secure lending power of a big bank plus the stable values and relationships of a community bank. From small manufacturing to large agribusiness organizations, healthcare companies to service industries, and everything in between, Central Valley Community Bank is always ready to leverage its strength, experience and commitment to help businesses thrive – even in the toughest economic times – by offering tailored lending products. Central Valley Community Bank is dedicated to providing outstanding value to its clients by increasing and enhancing its products and services, while emphasizing needs-based consulting within Banking Centers and Customer Service environments. Serving both new and long-time customers continues to be an important factor in the Bank’s growth, as demonstrated in ongoing client referrals. Dependable values and security are important to banking clients, and the Bank is well-positioned to provide them with an ongoing emphasis on privacy, safety and convenience. A Firm Foundation For Building A Strong Future Thanks to the vision of the Company’s leadership and Board of Directors, the Bank has grown steadily and sensibly for over four decades, keeping pace with the needs of its clients and the communities it serves, all while retaining the local values that formed the Bank’s firm foundation. 4 Trusted Leadership Holding Company & Bank Officers Patrick A. Luis James M. Ford Executive Vice President, President and CEO Chief Credit Officer Bank Executive Management James J. Kim Executive Vice President, Chief Operating Officer Teresa Gilio Executive Vice President, Chief Administrative Officer A. Ken Ramos Executive Vice President, Market Executive, Southern Region Dawn M. Cagle Senior Vice President, Human Resources David A. Kinross Executive Vice President, Chief Financial Officer Blaine C. Lauhon Executive Vice President, Market Executive, Northern Region Independent Auditors Crowe LLP, Sacramento, CA Counsel Buchalter, A Professional Corporation, Sacramento, CA Central Valley Community Bank Executive Management From Left to Right: David A. Kinross, Patrick A. Luis, Dawn M. Cagle, James M. Ford, James J. Kim, A. Ken Ramos, Teresa Gilio and Blaine C. Lauhon 5 Corporate Responsibility Mission Statement We provide personalized financial solutions that guide businesses and communities to succeed and thrive. Core Values Teamwork, Respect, Accountability, Integrity and Leadership Environmental, Social and Governance (ESG) At Central Valley Community Bank, we believe that accountable corporate behavior is essential for a community bank, and work diligently to ensure a more equitable, resilient future for our clients, team members, shareholders and the communities where we live and operate. For that reason, our executive management team annually reviews and prioritizes the Company’s areas of focus, which include: community and charitable giving, responsible lending practices, economic growth, sustainable practices, vendor management and employment practices, among others. Since 1980, we have supported our clients with a full range of banking and financial services, while championing initiatives that strengthen our communities, protect our environment and promote transparency, accountability and diversity. In 2020, with the immense hardships brought on by the COVID-19 pandemic and California wildfires, we elevated our community support in the areas of food insecurity, housing and social justice to be able to help more people and communities rebuild their lives and achieve financial balance. Our governance structure enables us to manage all major aspects of our business through an integrated process of financial, strategic, risk and leadership planning. This structure and process also ensure our compliance with laws and regulations while providing clear lines of authority for decision-making and accountability. Guided by our core values and high ethical standards, we strive to operate with integrity that inspires our clients and community to confidently place their trust in our Company. Diversity, Equity and Inclusion (DEI) Our Bank policy reflects our commitment to maintaining a diverse and inclusive workplace in which all team members are supported, valued for their unique perspectives, skills and experiences, and have the opportunity to contribute to the Company’s success. This commitment is evident throughout our workplace and our impact on the communities we serve. For more information on Corporate Responsibility, please visit the About Us section of our website at www.cvcb.com. 6 Trend Analysis Central Valley Community Bancorp 9 8 2 , 1 2 $ 3 4 4 , 1 2 $ 7 4 3 , 0 2 $ 2 8 1 , 5 1 $ 6 2 0 , 4 1 $ 2 1 7 , 5 5 0 , 1 $ 8 2 1 , 2 1 9 $ 3 8 8 , 0 3 9 $ 9 5 . 1 $ 2 6 . 1 $ 4 5 . 1 $ 3 3 . 1 $ 0 1 1 $ . 3 4 3 , 3 9 7 $ , 3 7 5 6 4 6 $ 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Net Income (In Thousands) Diluted Earnings Per Share Average Total Loans (In Thousands) , 4 9 1 8 6 5 1 $ , , 4 5 7 3 3 3 1 $ , , 5 0 3 4 8 2 , 1 $ 1 3 2 , 4 4 1 , 1 $ , 0 8 7 5 9 2 , 1 $ , 0 1 4 7 5 5 , 1 $ , 6 9 6 1 9 4 , 1 $ 7 0 0 , 1 2 3 , 1 $ % 4 8 . 9 % 9 6 . 7 % 7 0 . 0 1 % 9 3 . 9 % 5 8 . 8 , 9 8 0 4 7 5 1 $ , , 7 8 9 2 3 8 1 $ , 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Average Total Deposits (In Thousands) Return on Shareholders’ Equity Average Total Assets (In Thousands) 7 Comparative Stock Price Performance Central Valley Community Bancorp Total Return Performance Index Value 169.03 138.65 121.31 172.83 145.97 139.08 192.45 186.36 Russell 2000 164.08 123.76 123.04 155.35 154.47 136.19 Central Valley Community Bancorp 132.56 SNL Bank NASDAQ Index 100.00 100.00 100.00 2015 2016 2017 2018 2019 2020 Note: The graph above shows the cumulative total shareholder return on Central Valley Community Bancorp common stock compared to the cumulative total returns for the Russell 2000 Index and the SNL Bank NASDAQ Index, measured as of the last trading day of each year shown. The graph assumes an investment of $100 on December 31, 2015 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future stock performance. Source: S&P Global Market Intelligence © 2021 8 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Balance Sheets December 31, 2020 and 2019 (In thousands, except share amounts) ASSETS Cash and due from banks Interest-earning deposits in other banks Total cash and cash equivalents Available-for-sale debt securities Equity securities 2020 2019 $ $ 34,175 36,103 70,278 710,092 7,634 Loans, less allowance for credit losses of $12,915 at December 31, 2020 and $9,130 at December 31, 2019 1,089,432 Bank premises and equipment, net Bank owned life insurance Federal Home Loan Bank stock Goodwill Core deposit intangibles Accrued interest receivable and other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Junior subordinated deferrable interest debentures Accrued interest payable and other liabilities Total liabilities Commitments and contingencies (Note 12) Shareholders’ equity: Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 12,509,848 at December 31, 2020 and 13,052,407 at December 31, 2019 Retained earnings Accumulated other comprehensive income, net of tax Total shareholders’ equity 24,195 28,379 52,574 470,746 7,472 934,250 7,618 30,230 6,062 53,777 1,878 32,148 8,228 28,713 5,595 53,777 1,183 29,164 $ $ 2,004,096 $ 1,596,755 $ 824,889 897,821 1,722,710 5,155 31,210 1,759,075 — 79,416 150,749 14,856 245,021 594,627 738,658 1,333,285 5,155 30,187 1,368,627 — 89,379 135,932 2,817 228,128 Total liabilities and shareholders’ equity $ 2,004,096 $ 1,596,755 The accompanying notes are an integral part of these consolidated financial statements. 9 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Income For the Years Ended December 31, 2020, 2019, and 2018 (In thousands, except per share amounts) 2020 2019 2018 Interest income: Interest and fees on loans Interest on deposits in other banks Interest and dividends on investment securities: Taxable Exempt from Federal income taxes Total interest income Interest expense: Interest on deposits Interest on junior subordinated deferrable interest debentures Other Total interest expense Net interest income before provision for credit losses Provision for credit losses Net interest income after provision for credit losses Non-interest income: Service charges Appreciation in cash surrender value of bank owned life insurance Interchange fees Loan placement fees Net realized gain on sale of credit card portfolio Net realized gains on sales and calls of investment securities Federal Home Loan Bank dividends Other income Total non-interest income Non-interest expenses: Salaries and employee benefits Occupancy and equipment Regulatory assessments Data processing expense Professional services ATM/Debit card expenses Information technology Directors’ expenses Advertising Internet banking expenses Acquisition and integration expenses Amortization of core deposit intangibles Other expense Total non-interest expenses Income before provision for income taxes Provision for income taxes Net income Basic earnings per common share Diluted earnings per common share Cash dividends per common share $ $ $ $ $ 52,066 246 11,740 1,966 66,018 1,465 130 — 1,595 64,423 3,275 61,148 2,071 711 1,347 2,291 — 4,252 323 2,802 13,797 28,603 4,626 490 2,046 2,398 819 2,391 615 663 650 — 695 3,688 47,684 27,261 6,914 20,347 1.62 1.62 0.44 $ $ $ $ $ 51,464 375 13,197 1,295 66,331 1,928 210 421 2,559 63,772 1,025 62,747 2,756 728 1,446 978 — 5,199 455 1,743 13,305 26,654 5,439 251 1,557 1,305 920 2,611 710 756 816 — 695 4,386 46,100 29,952 8,509 21,443 1.60 1.59 0.43 $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 49,936 459 10,254 3,538 64,187 1,153 199 132 1,484 62,703 50 62,653 2,986 695 1,462 708 462 1,314 590 2,107 10,324 26,221 5,972 619 1,666 1,475 739 1,113 465 758 732 217 455 4,636 45,068 27,909 6,620 21,289 1.55 1.54 0.31 10 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2020, 2019, and 2018 (In thousands) NET INCOME Other Comprehensive Income (Loss): Unrealized gains (losses) on securities: Unrealized holdings gains (losses) arising during the period Less: reclassification for net (gains) losses included in net income Other comprehensive income (loss), before tax Tax (expense) benefit related to items of other comprehensive income Total other comprehensive income (loss) Comprehensive income 2020 2019 2018 20,347 $ 21,443 $ 21,289 21,344 (4,252) 17,092 (5,053) 12,039 15,455 (5,199) 10,256 (3,032) 7,224 32,386 $ 28,667 $ (9,159) (1,314) (10,473) 3,096 (7,377) 13,912 $ $ The accompanying notes are an integral part of these consolidated financial statements. 11 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2020, 2019, and 2018 (In thousands, except share amounts) Balance, January 1, 2018 Net income Other comprehensive loss Restricted stock granted net of forfeitures Cash dividend ($0.31 per common share) Stock issued under employee stock purchase plan Stock-based compensation expense Repurchase and retirement of common stock Stock options exercised Balance, December 31, 2018 Net income Other comprehensive income Stock issued under employee stock purchase plan Restricted stock granted net of forfeitures Stock awarded to employees Stock-based compensation expense Cash dividend ($0.43 per common share) Repurchase and retirement of common stock Stock options exercised Balance, December 31, 2019 Net income Other comprehensive income Restricted stock granted, net of forfeitures Stock issued under employee stock purchase plan Stock awarded to employees Stock-based compensation expense Cash dividend ($0.44 per common share) Stock options exercised Repurchase and retirement of common stock Balance, December 31, 2020 Common Stock Shares Amount 13,696,722 - - 20,494 - 11,581 - (47,862) 74,030 13,754,965 - - 12,286 16,495 5,295 - - (768,754) 32,120 13,052,407 - - 13,008 15,764 6,548 - - 43,500 (621,379) $ 103,314 - - - - 211 482 (894) 738 103,851 - - 216 - 100 555 - (15,619) 276 89,379 - - - 199 141 470 - 279 (11,052) Retained Earnings $ 103,275 21,289 - - (4,270) - - - - 120,294 21,443 - - - - - (5,805) - - 135,932 20,347 - - - - - (5,530) - - Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity $ $ 2,970 - (7,377) - - - - - - (4,407) - 7,224 - - - - - - - 2,817 - 12,039 - - - - - - (11,052) 209,559 21,289 (7,377) - (4,270) 211 482 (894) 738 219,738 21,443 7,224 216 - 100 555 (5,805) (15,619) 276 228,128 20,347 12,039 - 199 141 470 (5,530) 279 12,509,848 $ 79,416 $ 150,749 $ 14,856 $ 245,021 The accompanying notes are an integral part of these consolidated financial statements. 12 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Cash Flows For the Years Ended December 31, 2020, 2019, and 2018 (In thousands) 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Net (increase) decrease in deferred loan costs Depreciation Accretion Amortization Stock-based compensation Provision for credit losses Net realized gains on sales and calls of available-for-sale investment securities Net (gain) loss on sale and disposal of equipment Net change in equity investments Increase in bank owned life insurance, net of expenses Net gain on sale of credit card portfolio Net gain on bank owned life insurance Net (increase) decrease in accrued interest receivable and other assets Net increase (decrease) in accrued interest payable and other liabilities (Provision) benefit for deferred income taxes Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale investment securities Proceeds from sales or calls of available-for-sale investment securities Proceeds from maturity and principal repayment of available-for-sale investment securities Proceeds from sale of credit card portfolio Net increase in loans Purchases of premises and equipment Purchases of bank owned life insurance FHLB stock redeemed Proceeds from bank owned life insurance Proceeds from sale of premises and equipment Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand, interest-bearing and savings deposits Net decrease in time deposits Proceeds from short-term borrowings from Federal Home Loan Bank Repayments of short-term borrowings to Federal Home Loan Bank Proceeds of borrowings from other financial institutions Repayments of borrowings from other financial institutions Purchase and retirement of common stock Proceeds from stock issued under employee stock purchase plan Proceeds from exercise of stock options Cash dividend payments on common stock Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest Income taxes Operating cash flows from operating leases Non-cash investing and financing activities: Initial recognition of operating lease right-of-use assets $ 20,347 $ 21,443 $ (4,127) 881 (1,326) 4,622 470 3,275 (4,252) (6) (162) (551) — (1,167) (1,128) 1,165 (1,051) 16,990 (540,362) 283,956 35,914 — (154,331) (1,492) (250) 467 3,485 6 (372,607) 393,308 (3,883) — — — — (11,052) 199 279 (5,530) 373,321 17,704 52,574 (77) 1,742 (917) 4,564 555 1,025 (5,199) — (218) (728) — — (9,521) 9,641 (589) 21,721 (301,254) 281,906 25,120 — (25,606) (876) (1,000) 781 — — (20,929) 54,074 (3,087) 725,500 (735,500) 2,870 (2,870) (15,619) 216 276 (5,805) 20,055 20,847 31,727 $ $ $ $ $ 70,278 $ 52,574 $ 1,706 5,120 2,240 $ $ $ — $ 2,517 9,140 1,643 10,129 $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 21,289 233 1,703 (898) 6,457 482 50 (1,314) 2 42 (695) (462) — 3,218 (599) 403 29,911 (225,970) 246,824 36,495 2,954 (20,477) (791) — — — — 39,035 (112,134) (31,253) 568,500 (558,500) 19,705 (19,705) (894) 211 738 (4,270) (137,602) (68,656) 100,383 31,727 1,460 2,700 — — 13 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General - Central Valley Community Bancorp (the ‘‘Company’’) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the ‘‘Bank’’). The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities. The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st. The Trust is a wholly-owned subsidiary of the Company. The Bank operates 20 full service offices throughout California’s San Joaquin Valley and Greater Sacramento Region. The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. The accounting and reporting policies of the Company and the Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. Intercompany transactions and balances are eliminated in consolidation. For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability on the Company’s consolidated financial statements. The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet. Risks and Uncertainties - In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. COVID-19 continues to aggressively spread globally, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate, could adversely affect our operations. While the spread of COVID-19 has minimally affected our operations as of December 31, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued ‘‘shelter at home’’ orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely affect several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, or deferred tax assets. Use of Estimates - The preparation of these financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions. Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased. Investment Securities - Investments are classified into the following categories: • Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity. • Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value in the period which the transfer occurs. During the year ended December 31, 2020, there were no transfers between categories. Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term ‘‘other than temporary’’ is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. Loans - All loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses. Interest is accrued daily based upon outstanding loan principal balances. However, when a loan becomes impaired and the future collectability of interest and principal is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest income is suspended. Any loan delinquent 90 days or more is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest. 14 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred. Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. Acquired loans and Leases - Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Should the Company’s allowance for credit losses methodology indicate that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company will establish an allowance for those loans through a charge to provision for credit losses. At the time of an acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which collection of all contractual payments was not considered probable at the date of acquisition. This determination is made by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate the timing and amount of future cash flows, or if the loan is acquired primarily for the rewards of ownership of the underlying collateral, the loan is classified as non-accrual. An acquired loan previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status. All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan. Allowance for Credit Losses - The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are made to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to come solely from the sale or operation of underlying collateral. A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. When determining the allowance for loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the allowance on acquired loans, the Company estimates probable incurred credit losses as compared to the Company’s recorded investment, with the recorded investment being net of any unaccreted discounts from the acquisition. The determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of a simple average of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. The Company segregates the allowance by portfolio segment. These portfolio segments include commercial, real estate, and consumer loans. The relative significance of risk considerations vary by portfolio segment. For commercial and real estate loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for real estate loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet. Commercial: Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses. Additionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Past due payments may indicate the borrower’s capacity to repay their obligations may be deteriorating. Agricultural production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions. Real Estate: Owner-occupied commercial real estate - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows. To meet this classification, the owner’s operation must occupy no less than 50% of the real estate held. Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential. Real estate construction and other land loans - Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs and time lines. Trends in the construction industry significantly 15 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Agricultural real estate - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S. dollar affecting the export of commodities. Investor commercial real estate - Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flows to service debt obligations. Other real estate - Primarily loans secured by agricultural real estate for development and production of permanent plantings that have not reached maximum yields. Also real estate loans where agricultural vertical integration exists in packing and shipping of commodities. Risk is primarily based on the liquidity of the borrower to sustain payment during the development period. Consumer: Equity loans and lines of credit - The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating. Installment and other consumer loans - An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases. Other consumer loans include other open ended unsecured consumer loans. Open ended unsecured loans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends. Open ended unsecured loans in homogeneous loan portfolio segments are not evaluated for specific impairment. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FDIC and California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. Risk Rating - The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2020. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows: Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification is considered temporary and short term. Loss - Loans classified as loss are considered uncollectible and charged off immediately. The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans. Bank Premises and Equipment - Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of Bank premises are estimated to be between 20 and 40 years. The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Investments in Low Income Housing Tax Credit Funds - The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our 16 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), we elected to account for the investments in qualified affordable housing tax credit funds using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized as part of income tax expense (benefit). Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. The Company’s investment in Low Income Housing Tax Credit Funds is reported in other assets on the consolidated balance sheet. Other Real Estate Owned - Other real estate owned (OREO) is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. OREO, when acquired, is initially recorded at fair value less estimated disposition costs, establishing a new cost basis. Fair value of OREO is generally based on an independent appraisal of the property. Subsequent to initial measurement, OREO is carried at the lower of the recorded investment or fair value less disposition costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Revenues and expenses associated with OREO are reported as a component of noninterest expense when incurred. Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in noninterest expense. The carrying value of foreclosed assets was $0 at December 31, 2020 and at December 31, 2019. Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Business Combinations - The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques included discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Goodwill - Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Goodwill represents the excess of the purchase price of acquired businesses over the net fair value of assets, including identified intangible assets, acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting. The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company has selected September 30 as the date to perform the annual impairment test. Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. During the fourth quarter, management performed a qualitative assessment including an evaluation of performance trends, market information and economic data and determined it was more likely than not that the fair value of the reporting unit exceeded the carrying value. As such, no quantitative goodwill impairment test was required as of December 31, 2020. Goodwill is the only intangible asset with an indefinite life on the balance sheet. Intangible Assets - The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in business combinations. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2019 and determined no impairment was necessary. Core deposit intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. No such events or circumstances arose during the fourth quarter of 2020, so core deposit intangibles were not required to be retested. Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Income Taxes - The Company files its income taxes on a consolidated basis with the Bank. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense represents the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is ‘‘more likely than not’’ that all or a portion of the deferred tax assets will not be realized. ‘‘More likely than not’’ is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. Retirement Plans - Employee 401(k) plan expense is the amount of employer matching contributions. Profit sharing plan expense is the amount of employer contributions. Contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Deferred compensation and supplemental retirement plan expense is allocated over years of service. Earnings Per Common Share - Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders (net income after deducting dividends, if any, on preferred stock and accretion of discount) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, result in the issuance of common stock which shares in the earnings of the Company. All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and splits and the treasury 17 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) stock method is applied to determine the dilutive effect of stock options in computing diluted EPS. Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements. Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. Share-Based Compensation - Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Additionally, the compensation expense for the Company’s employee stock ownership plan is based on the market price of the shares as they are committed to be released to participant accounts. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Dividend Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders. Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 2. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Recently Issued Accounting Standards: FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments—Credit Losses, commonly referred to as ‘‘CECL,’’ was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt securities. Under the provisions of the update, credit losses recognized on available for sale (‘‘AFS’’) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL, reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. On August 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), ‘‘Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,’’ that would provide private entities and certain small public companies additional time to implement the standards of CECL, leases, and hedging. The final ASU extends the effective date for SEC filers, such as the Company, that are classified as smaller reporting companies to January 1, 2023. The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2021 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans as well as the economic conditions as of the date of adoption. The Company also anticipates changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements. FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this ASU effective January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements and disclosures. FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company believes the adoption of this guidance on activities subsequent to December 31,2020 through December 31, 2022 will not have a material impact on the consolidated financial statements. In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (‘‘the agencies’’) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (‘‘CARES’’) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (‘‘TDRs’’). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. 18 Notes to Consolidated Financial Statements 2. FAIR VALUE MEASUREMENTS Fair Value Hierarchy Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level - 1 Quoted market prices (unadjusted) for identical instruments traded in active markets that the entity has the ability to access as of the measurement date. Level - 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level - 3 Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands): December 31, 2020 Fair Value Level 1 Level 2 Level 3 Total Carrying Amount Financial assets: Cash and due from banks $ 34,175 $ 34,175 $ 36,103 36,103 - $ - - $ 34,175 - 36,103 Interest-earning deposits in other banks Available-for-sale investment securities Equity securities Loans, net Federal Home Loan Bank stock Accrued interest receivable Financial liabilities: Deposits Junior subordinated deferrable interest debentures Accrued interest payable December 31, 2019 Fair Value Level 1 Level 2 Level 3 Total Carrying Amount Financial assets: Cash and due from banks $ 24,195 $ 24,195 $ Interest-earning deposits in other banks Available-for-sale investment securities Equity securities Loans, net Federal Home Loan Bank stock Accrued interest receivable Financial liabilities: Deposits Short-term borrowings Junior subordinated deferrable interest debentures Accrued interest payable 28,379 28,379 - $ - - $ 24,195 - 28,379 470,746 7,472 934,250 6,062 5,591 - 7,472 - 470,746 - - - - 928,807 470,746 7,472 928,807 N/A N/A N/A N/A 33 1,798 3,760 5,591 1,333,285 - 1,160,224 - 93,395 - - - 1,253,619 - 5,155 176 - - - 129 3,976 47 3,976 176 These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The methods and assumptions used to estimate fair values are described as follows: 710,092 7,634 1,089,432 - 7,634 - 710,092 - - - - 1,087,124 710,092 7,634 1,087,124 (a) Cash and Cash Equivalents - The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1. 5,595 8,834 N/A N/A N/A N/A 9 3,617 5,208 8,834 1,722,710 1,691,647 90,008 - 1,781,655 5,155 65 - - - 41 3,693 24 3,693 65 (b) Investment Securities - Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. (c) Loans - Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s 19 Notes to Consolidated Financial Statements 2. FAIR VALUE MEASUREMENTS (Continued) historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above a follow the guidance in ASU 2016-01 which prescribes an ‘‘exit price’’ approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. (d) FHLB Stock - It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. (e) Deposits - Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification. (f) Short-Term Borrowings - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. (g) Accrued Interest Receivable/Payable - The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability. (h) Off-Balance Sheet Instruments - Fair values for off-balance sheet, credit- related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material. Assets Recorded at Fair Value The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2020: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands): Fair Value Level 1 Level 2 Level 3 Available-for-sale investment securities Debt Securities: U.S. Government agencies Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label mortgage and asset backed securities Corporate debt securities Equity Securities $ 680 $ - $ 680 $ 379,565 216,298 83,508 30,041 7,634 - - - - 7,634 379,565 216,298 83,508 30,041 - Total assets measured at fair value on a recurring basis $ 717,726 $ 7,634 $ 710,092 $ - - - - - - - Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2020, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2020. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2020. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2020 (in thousands): Fair Value Level 1 Level 2 Level 3 Impaired loans: Real estate: Real estate-construction and other land loans Total assets measured at fair value on a non-recurring basis $ $ 1,260 $ - $ - $ 1,260 1,260 $ - $ - $ 1,260 At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2020. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $1,528,000 with a valuation allowance of $268,000 at December 31, 2020, and a resulting fair value of $1,260,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans. During the year ended December 31, 2020 specific allocation for the allowance for credit losses related to loans carried at fair value was $268,000, 20 Notes to Consolidated Financial Statements 2. FAIR VALUE MEASUREMENTS (Continued) compared to $0 during the year ended December 31, 2019. There were no net charge-offs related to loans carried at fair value at December 31, 2020 and 2019. The following two tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2019: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands): Fair Value Level 1 Level 2 Level 3 Available-for-sale securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage and asset backed securities Corporate debt securities Equity Securities Total assets measured at fair value on a recurring basis 14,494 $ - $ 14,494 $ 91,111 196,719 159,378 9,044 7,472 - - 91,111 196,719 - - 7,472 159,378 9,044 - $ 478,218 $ 7,472 $ 470,746 $ - - - - - - - Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2019, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2019. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2019. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. As of December 31, 2019 there were no impaired loans or assets that were measured at the lower of cost or fair value. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2019. 3. INVESTMENT SECURITIES The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $21,091,000 at December 31, 2020 compared to an unrealized gain of $3,999,000 at December 31, 2019. The unrealized gain recorded is net of $6,235,000 and $1,182,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 2020 and 2019, respectively. The following tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): December 31, 2020 Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Estimated Fair Value Available-for-Sale Securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government 651 $ 29 $ - $ 680 361,734 18,170 (339) 379,565 sponsored entities and agencies collateralized by residential mortgage obligations Private label mortgage and asset backed securities Corporate debt securities 214,203 3,575 (1,480) 216,298 82,413 30,000 1,337 260 (242) (219) 83,508 30,041 $ 689,001 $ 23,371 $ (2,280) $ 710,092 December 31, 2019 Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Estimated Fair Value Available-for-Sale Securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government 14,740 $ 12 $ (258) $ 14,494 89,574 2,965 (1,428) 91,111 sponsored entities and agencies collateralized by residential mortgage obligations Private label mortgage and asset backed securities Corporate debt securities 198,125 1,409 (2,815) 196,719 155,308 9,000 4,223 79 (153) (35) 159,378 9,044 $ 466,747 $ 8,688 $ (4,689) $ 470,746 Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2020, 2019, and 2018 are shown below (in thousands): Years Ended December 31, 2020 2019 2018 Available-for-Sale Securities Proceeds from sales or calls Gross realized gains from sales or calls Gross realized losses from sales or calls $ 246,824 $ 281,906 $ 283,956 1,976 $ 5,319 $ 7,123 $ (662) (120) $ (2,871) $ $ Losses recognized in 2020, 2019, and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fit with the Company’s current risk profile. The provision for income taxes includes $1,257,000, $1,537,000, and $388,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2020, 2019, and 2018, respectively. 21 Notes to Consolidated Financial Statements 3. INVESTMENT SECURITIES (Continued) Investment securities with unrealized losses at December 31, 2020 and 2019 are summarized and classified according to the duration of the loss period as follows (in thousands): December 31, 2020 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities Debt Securities: Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage and asset backed securities Corporate debt securities Available-for-Sale Securities Debt Securities: U.S. Government agencies Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Corporate debt securities $ 36,209 $ (339) $ - $ - $ 36,209 $ (339) 30,755 (385) 77,337 (1,095) 108,092 (1,480) 25,407 12,881 (242) (119) - 3,900 - (100) 25,407 16,781 (242) (219) $ 105,252 $ (1,085) $ 81,237 $ (1,195) $ 186,489 $ (2,280) December 31, 2019 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ - $ - $ 13,713 $ (258) $ 13,713 $ (258) 65,606 (1,428) - - 65,606 (1,428) 71,650 (932) 69,518 (1,883) 141,168 (2,815) 17,811 3,965 (81) (35) 5,624 - (72) - 23,435 3,965 (153) (35) $ 159,032 $ (2,476) $ 88,855 $ (2,213) $ 247,887 $ (4,689) We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of December 31, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2020, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. There were no OTTI losses recorded during the twelve months ended December 31, 2020, 2019, or 2018. U.S. Government Agencies - At December 31, 2020, the Company held one U.S. Government agency securities of which was in a gain position. Obligations of States and Political Subdivisions - At December 31, 2020, the Company held 106 obligations of states and political subdivision securities of which six were in a loss position for less than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020. U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2020, the Company held 113 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which nine were in a loss position for less than 12 months and 16 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020. Private Label Mortgage and Asset Backed Securities - At December 31, 2020, the Company had a total of 31 Private Label Mortgage and Asset Backed Securities (PLMBS) with a remaining principal balance of $82,413,000 and a net unrealized gain of approximately $1,095,000. Six of these securities were in a loss position for less than 12 months and none have been in a loss position for more than 12 months at December 31, 2020. Seven of these PLMBS with a remaining principal balance of $812,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020. Corporate Debt Securities - At December 31, 2020, the Company held nine corporate debt securities of which three were in a loss position for less than 12 months and one has been in a loss position for more than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020. The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2020 and 2019 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2020 December 31, 2019 Amortized Estimated Amortized Estimated Fair Value Fair Value Cost Cost Within one year After one year through five years After five years through ten years After ten years Investment securities not due at a single maturity date: U.S. Government agencies U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label mortgage and asset backed securities Corporate debt securities $ 298 $ 305 $ - $ 3,254 18,330 339,852 3,631 20,644 354,985 361,734 379,565 1,561 20,280 67,733 89,574 - 1,697 21,088 68,326 91,111 651 680 14,740 14,494 214,203 216,298 198,125 196,719 82,413 30,000 83,508 30,041 155,308 9,000 159,378 9,044 $ 689,001 $ 710,092 $ 466,747 $ 470,746 Investment securities with amortized costs totaling $178,561,000 and $89,158,000 and fair values totaling $185,053,000 and $91,677,000 were 22 Notes to Consolidated Financial Statements 3. INVESTMENT SECURITIES (Continued) pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2020 and 2019, respectively. 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES capacity of $235,371,000 as of December 31, 2020. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. Salaries and employee benefits totaling $2,782,000, $2,116,000, and $2,453,000 have been deferred as loan origination costs for the years ended December 31, 2020, 2019, and 2018, respectively. Outstanding loans are summarized as follows (in thousands): Allowance for Credit Losses Loan Type Commercial: Commercial and industrial Agricultural production Total commercial Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Net deferred origination costs Total gross loans Allowance for credit losses December 31, 2020 % of Total loans December 31, 2019 % of Total loans $ 273,994 21,971 295,965 24.9% $ 2.0% 26.9% 102,541 23,159 125,700 10.9% 2.6% 13.5% 208,843 18.9% 197,946 21.0% 55,419 338,886 84,258 28,718 716,124 55,634 37,236 92,870 (2,612) 5.0% 30.7% 7.6% 2.6% 64.8% 5.0% 3.3% 8.3% 1,102,347 (12,915) 100.0% 73,718 329,333 76,304 31,241 708,542 64,841 42,782 107,623 1,515 943,380 (9,130) 7.8% 34.9% 8.1% 3.3% 75.1% 6.9% 4.5% 11.4% 100.0% Total loans $ 1,089,432 $ 934,250 At December 31, 2020 and 2019, loans originated under Small Business Administration (SBA) programs totaling $24,220,000 and $21,910,000, respectively, were included in the real estate and commercial categories. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At December 31, 2020, PPP loans totaling $192,916,000 were outstanding and included in the commercial and industrial category above. Approximately $434,983,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Changes in the allowance for credit losses were as follows (in thousands): Years Ended December 31, 2020 2019 2018 Balance, beginning of year $ Provision charged to operations Losses charged to allowance Recoveries $ $ 9,130 3,275 (229) 739 9,104 1,025 (1,196) 197 8,778 50 (210) 486 Balance, end of year $ 12,915 $ 9,130 $ 9,104 23 Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2020, 2019, and 2018 by portfolio segment (in thousands): Allowance for credit losses: Beginning balance, January 1, 2020 Provision charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2020 Allowance for credit losses: Beginning balance, January 1, 2019 Provision (reversal) charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2019 Allowance for credit losses: Beginning balance, January 1, 2018 Provision (reversal) charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2018 Commercial Real Estate Consumer Unallocated Total $ $ $ $ $ $ $ $ $ $ $ 1,428 100 (121) 612 2,019 1,671 655 (1,032) 134 1,428 2,071 (513) (94) 207 $ $ $ $ $ 6,769 2,405 - - 9,174 6,539 230 - - 6,769 5,795 642 - 102 $ $ $ $ $ 897 175 (108) 127 1,091 826 172 (164) 63 897 825 (60) (116) 177 $ $ $ $ $ 36 595 - - 631 68 (32) - - 36 87 (19) - - 9,130 3,275 (229) 739 12,915 9,104 1,025 (1,196) 197 9,130 8,778 50 (210) 486 1,671 $ 6,539 $ 826 $ 68 $ 9,104 The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2020 and December 31, 2019 (in thousands): Allowance for credit losses: Ending balance, December 31, 2020 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Ending balance, December 31, 2019 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Commercial Real Estate Consumer Unallocated Total $ $ $ $ $ $ 2,019 339 1,680 1,428 2 1,426 $ $ $ $ $ $ 9,174 271 8,903 6,769 3 6,766 $ $ $ $ $ $ 1,091 21 1,070 897 35 862 $ $ $ $ $ $ 631 - 631 36 - 36 $ $ $ $ $ $ 12,915 631 12,284 9,130 40 9,090 The following table shows the ending balances of loans as of December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands): Loans: Ending balance, December 31, 2020 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Loans: Ending balance, December 31, 2019 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Commercial Real Estate Consumer Total $ $ $ $ $ $ 295,965 7,402 288,563 125,700 187 125,513 $ $ $ $ $ $ 716,124 2,616 713,508 708,542 2,036 706,506 $ $ $ $ $ $ 92,870 $ 1,104,959 1,168 $ 11,186 91,702 $ 1,093,773 107,623 1,511 106,112 $ $ $ 941,865 3,734 938,131 24 Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2020 (in thousands): Pass Special Mention Substandard Doubtful Total Commercial: Commercial and industrial Agricultural production Real Estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment $ 258,587 18,289 $ 5,004 377 $ 10,403 3,305 $ 197,721 50,560 314,710 72,875 28,557 54,034 37,084 3,870 1,622 14,537 10,195 161 640 - 7,252 3,237 9,639 1,188 - 960 152 Total $ 1,032,417 $ 36,406 $ 36,136 $ - - - - - - - - - - $ 273,994 21,971 208,843 55,419 338,886 84,258 28,718 55,634 37,236 $ 1,104,959 The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2019 (in thousands): Pass Special Mention Substandard Doubtful Total Commercial: Commercial and industrial Agricultural production Real Estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Total $ 86,705 18,814 $ 2,635 - $ 13,201 4,345 $ 186,370 72,142 310,982 68,032 31,241 62,776 42,782 6,881 - 17,202 946 - 519 - 4,695 1,576 1,149 7,326 - 1,546 - $ 879,844 $ 28,183 $ 33,838 $ The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2020 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Commercial: Commercial and industrial Agricultural production Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Total $ $ - - - - - - - - 5 5 $ $ - - - - - - - 24 - 24 $ $ 60 - $ 60 - 273,934 21,971 $ 273,994 21,971 $ - - - - - - - $ 60 $ - - - - - 24 5 89 208,843 208,843 55,419 338,886 84,258 28,718 55,610 37,231 55,419 338,886 84,258 28,718 55,634 37,236 $ 1,104,870 $ 1,104,959 $ - - - - - - - - - - - - - - - - - - - - $ 102,541 23,159 197,946 73,718 329,333 76,304 31,241 64,841 42,782 $ 941,865 $ Non- accrual 752 - 370 1,556 512 - - - 88 $ 3,278 25 Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2019 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non- accrual Commercial: Commercial and industrial Agricultural production $ $ 17 - $ - - Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment - - - - - - 168 218 - 381 - - - - Total $ 185 $ 599 $ - - - - - - - - - - $ 17 - 218 - 381 - - - 168 $ 102,524 23,159 $ 102,541 23,159 $ 197,728 197,946 73,718 328,952 76,304 31,241 64,841 42,614 73,718 329,333 76,304 31,241 64,841 42,782 $ 784 $ 941,081 $ 941,865 $ - - - - - - - - - - $ 187 - 416 - 381 321 - 388 - $ 1,693 The following table shows information related to impaired loans by class at The following table shows information related to impaired loans by class at December 31, 2020 (in thousands): December 31, 2019 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial: Commercial and industrial $ 60 $ 61 $ Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Total real estate Consumer: Equity loans and lines of credit Total with no related allowance recorded With an allowance recorded: Commercial: Commercial and industrial Real estate: Real estate construction and other land loans Commercial real estate Agricultural real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with an allowance recorded 370 28 512 910 144 409 28 561 998 180 1,114 1,239 7,342 7,373 1,528 148 30 1,706 936 88 1,024 10,072 1,552 149 29 1,730 936 93 1,029 10,132 Total $ 11,186 $ 11,371 $ - - - - - - - 339 268 3 - 271 9 12 21 631 631 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. With no related allowance recorded: Commercial: Commercial and industrial $ 163 $ 432 $ Real estate: Owner occupied Commercial real estate Agricultural real estate Total real estate Consumer: Equity loans and lines of credit Total with no related allowance recorded With an allowance recorded: Commercial: Commercial and industrial Real estate: Commercial real estate Agricultural real estate Total real estate Consumer: Equity loans and lines of credit Total with an allowance recorded 416 1,110 321 1,847 220 426 1,361 321 2,108 256 2,230 2,796 24 152 37 189 1,291 1,504 27 153 37 190 1,292 1,509 Total $ 3,734 $ 4,305 $ - - - - - - - 2 3 - 3 35 40 40 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 26 Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2020, 2019, and 2018 (in thousands): With no related allowance recorded: Commercial: Commercial and industrial Agricultural production Total commercial Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Consumer: Equity loans and lines of credit Total with no related allowance recorded With an allowance recorded: Commercial: Commercial and industrial Agricultural production Total commercial Real estate: Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with an allowance recorded Total Year Ended December 31, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized $ $ 1,322 104 1,426 394 8 779 146 - 1,327 216 2,969 6,139 430 6,569 586 206 27 - 819 1,001 64 1,065 8,453 $ 11,422 $ $ - - - - - - - - - 12 12 582 - 582 - 11 2 - 13 55 - 55 650 662 $ 214 - 214 223 1,174 1,306 25 - 2,728 593 3,535 57 - 57 - 325 42 - 367 1,139 20 1,159 1,583 5,118 $ $ - - - - 45 50 - - 95 13 108 1 - 1 - 12 2 - 14 56 - 56 71 $ 179 $ 311 - 311 17 2,857 1,542 1,173 702 6,291 217 6,819 55 - 55 - 200 49 86 335 1,054 3 1,057 1,447 8,266 $ - - - - 85 51 159 - 295 - 295 4 - 4 - 12 3 - 15 57 - 57 76 $ 371 Foregone interest on nonaccrual loans totaled $177,000, $85,000, and $267,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes. Troubled Debt Restructurings: As of December 31, 2020 and 2019, the Company has a recorded investment in troubled debt restructurings of $7,908,000 and, $2,362,000, respectively. The Company has allocated $20,000 and $38,000 of specific reserves for those loans at December 31, 2020 and 2019, respectively. The Company has committed to lend no additional amounts as of December 31, 2020 to customers with outstanding loans that are classified as troubled debt restructurings. For the years ended December 31, 2020, 2019, and 2018 the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven. As discussed in Note 1 to these financial statements, Section 4013 of the CARES Act and the ‘‘Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)’’ provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. The remaining TDRs disclosed below were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $25 million resulting from the COVID-19 pandemic that were not classified as a TDRs at December 31, 2020. 27 Notes to Consolidated Financial Statements 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2020 (dollars in thousands): Troubled Debt Restructurings: Commercial: Commercial and industrial Pre- Modification Outstanding Recorded Investment (1) Number of Loans Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment 1 $ 12,925 $ - $ 12,925 $ 6,650 (1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any. (2) Balance outstanding after principal modification, if any borrower reduction to recorded investment. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2019 (dollars in thousands): Troubled Debt Restructurings: Consumer Equity loans and line of credit Pre- Modification Outstanding Recorded Investment (1) Number of Loans Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment 3 $ 532 $ - $ 532 $ 446 (1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any. (2) Balance outstanding after principal modification, if any borrower reduction to recorded investment. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2018 (dollars in thousands): Troubled Debt Restructurings: Commercial: Commercial and Industrial Real Estate: Commercial real estate Total Pre- Modification Outstanding Recorded Investment (1) Number of Loans Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment 1 1 2 $ $ 38 $ 166 204 $ - - - $ $ 38 $ 166 204 $ 30 161 191 (1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any. (2) Balance outstanding after principal modification, if any borrower reduction to recorded investment. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 2020, 2019, and 2018. 28 Notes to Consolidated Financial Statements 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment consisted of the following (in thousands): Land Buildings and improvements Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization December 31, 2020 2019 $ $ 1,131 6,948 12,473 4,248 24,800 1,131 6,948 11,045 4,198 23,322 (16,572) (15,704) $ 8,228 $ 7,618 Depreciation and amortization included in occupancy and equipment expense totaled $881,000, $1,742,000 and $1,703,000 for the years ended December 31, 2020, 2019, and 2018, respectively. events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2020 and determined no impairment was necessary. Amortization expense recognized was $695,000 for 2020, $695,000 for 2019, and $455,000 for 2018. The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands): Years Ending December 31, 2021 2022 2023 Thereafter Total Estimated Core Deposit Intangible Amortization $ $ 662 455 66 - 1,183 6. GOODWILL AND INTANGIBLE ASSETS 7. DEPOSITS Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2020 and 2019 was $53,777,000. Total goodwill at December 31, 2020 consisted of $13,466,000, $10,394,000, $6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company has selected September 30 as the date to perform the annual impairment test. Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the nine months ended September 30, 2020. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. With the economic risks and uncertainties associated with the COVID-19 pandemic continuing during the fourth quarter of 2020, management performed a qualitative assessment including performance trends, market information and economic data and determined it was more likely than not that the fair value of the reporting unit exceeded the carrying value. As such no quantitative goodwill impairment test was required as of December 31, 2020. The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Folsom Lake Bank in 2017 of $1,879,000, Sierra Vista Bank in 2016 of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. At December 31, 2020, the weighted average remaining amortization period is two years. The carrying value of intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense. The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether Interest-bearing deposits consisted of the following (in thousands): Savings Money market NOW accounts Time, $250,000 or more Time, under $250,000 December 31, 2020 2019 $ 156,190 341,088 310,697 19,790 70,056 $ 112,271 266,609 266,048 22,729 71,001 $ 897,821 $ 738,658 Aggregate annual maturities of time deposits are as follows (in thousands): Years Ending December 31, 2021 2022 2023 2024 2025 Thereafter $ 76,436 8,372 2,699 760 693 886 $ 89,846 Interest expense recognized on interest-bearing deposits consisted of the following (in thousands): Savings Money market NOW accounts Time certificates of deposit Years Ended December 31, 2020 2019 2018 $ $ $ 25 542 316 582 $ 28 656 538 706 37 419 414 283 1,465 $ 1,928 $ 1,153 29 Notes to Consolidated Financial Statements 8. BORROWING ARRANGEMENTS The table below summarizes the total lease cost for the period ending: Federal Home Loan Bank Advances - As of December 31, 2020 and December 31, 2019 , the Company had no Federal Home Loan Bank (FHLB) of San Francisco advances. Approximately $434,983,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $235,371,000 as of December 31, 2020. FHLB advances are also secured by investment securities with amortized costs totaling $169,000 and $248,000 and market values totaling $178,000 and $256,000 at December 31, 2020 and 2019, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. Lines of Credit - The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 and $70,000,000 at December 31, 2020 and 2019, respectively, at interest rates which vary with market conditions. As of December 31, 2020 and 2019, the Company had no Federal funds purchased. Federal Reserve Line of Credit - The Bank has a line of credit in the amount of $13,323,000 and $4,931,000 with the Federal Reserve Bank of San Francisco (FRB) at December 31, 2020 and 2019, respectively, which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $13,538,000 and $5,065,000 and market values totaling $13,703,000 and $5,036,000, respectively. At December 31, 2020 and 2019, the Bank had no outstanding borrowings with the FRB. 9. LEASES Leases - The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases with terms extending through 2028. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease cost is comprised of lease expense recognized on a straight-line basis, the amortization of the right-of-use asset and the implicit interest accreted on the operating lease liability. Operating lease cost is included in occupancy and equipment expense on our consolidated statements of income. We evaluate the lease term by assuming the exercise of options to extend that are reasonably assured and those option periods covered by an option to terminate the lease, if deemed not reasonably certain to be exercised. The lease term is used to determine the straight-line expense and limits the depreciable life of any related leasehold improvements. Certain leases require us to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are classified in occupancy and equipment expense on our consolidated statements of income, consistent with similar costs for owned locations, but is not included in operating lease cost below. We calculate the lease liability using a discount rate that represents our incremental borrowing rate at the lease commencement date. Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2020 are as follows (in thousands): Years Ending December 31, 2021 2022 2023 2024 2025 Thereafter $ Total lease payments Less: imputed interest Present value of operating lease liabilities $ 1,753 1,843 1,721 1,383 1,023 1,944 9,667 (786) 8,881 (Dollars in thousands) Operating lease cost Short-term lease cost Variable lease cost Total lease cost December 31, 2020 December 31, 2019 $ $ $ 2,243 13 288 2,544 $ 2,226 68 375 2,669 The table below summarizes other information related to our operating leases: December 31, 2020 December 31, 2019 Weighted average remaining lease term, in years Weighted average discount rate 6 2.77% 7 2.93% The table below shows operating lease right of use assets and operating lease liabilities as of : (Dollars in thousands) December 31, 2020 December 31, 2019 Operating lease right-of-use assets Operating lease liabilities $ $ 8,195 8,881 $ $ 9,735 10,418 The right-of-use-assets and lease liabilities are included with other assets and other liabilities on the balance sheet, respectively. 10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES Service 1st Capital Trust I is a Delaware business trust formed by Service 1st. The Company succeeded to all of the rights and obligations of Service 1st in connection with the merger with Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2020, the rate was 1.84%. Interest expense recognized by the Company for the years ended 30 Notes to Consolidated Financial Statements JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES 10. (Continued) December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000, respectively. 11. INCOME TAXES The provision for income taxes for the years ended December 31, 2020, 2019, and 2018 consisted of the following (in thousands): than not that all or a portion of the deferred tax asset will not be realized. More likely than not is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of the evidence, a valuation allowance is needed. Thus, management concludes no valuation allowance is necessary against deferred tax assets as of December 31, 2020 and 2019. The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes. The significant items comprising these differences for the years ended December 31, 2020, 2019, and 2018 consisted of the following: 2020 Current Deferred Provision for income taxes 2019 Current Deferred Provision for income taxes 2018 Current Deferred Provision for income taxes Federal State Total $ $ $ $ $ $ 4,915 (656) 4,259 5,747 (387) 5,360 3,995 (140) 3,855 $ $ $ $ $ $ 3,050 (395) 2,655 3,351 (202) 3,149 2,689 76 2,765 $ $ $ $ $ $ 7,965 (1,051) 6,914 9,098 (589) 8,509 6,684 (64) 6,620 Deferred tax assets (liabilities) consisted of the following (in thousands): Deferred tax assets: Allowance for credit losses Deferred compensation Net operating loss carryovers Mark-to-market adjustment Other deferred tax assets Other-than-temporary impairment Loan and investment impairment Operating lease liabilities Partnership income State taxes December 31, 2020 2019 $ $ 3,818 4,729 2,148 21 303 192 851 2,625 105 674 2,638 4,490 2,266 58 374 192 1,158 3,080 200 692 Total deferred tax assets 15,466 15,148 Deferred tax liabilities: Operating lease right-of-use assets Finance leases Unrealized gain on available-for-sale investment securities Core deposit intangible FHLB stock Loan origination costs Bank premises and equipment Total deferred tax liabilities (2,423) (275) (6,235) (350) (191) (849) (405) (10,728) (2,878) (175) (1,182) (555) (234) (925) (459) (6,408) Net deferred tax assets $ 4,738 $ 8,740 The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is more likely Federal income tax, at statutory rate State taxes, net of Federal tax benefit Tax exempt investment security income, net Bank owned life insurance, net Compensation—Stock Compensation Change in uncertain tax positions Other Effective tax rate 2020 2019 2018 21.0 % 21.0 % 21.0 % 7.7 % 8.3 % 7.8 % (1.5)% (1.2)% (0.2)% - % (0.4)% 25.4 % (0.9)% (0.4)% (0.2)% - % 0.6 % 28.4 % (2.7)% (0.6)% (0.6)% (0.3)% (0.9)% 23.7 % As of December 31, 2020, the Company had Federal and California net operating loss (‘‘NOL’’) carry-forwards of $7,093,000 and $7,692,000, respectively. These NOLs were acquired through business combinations and are subject to IRC 382 will begin expiring at various dates between 2029 and 2035, for federal purposes and various dates between 2029 and 2036 for California purposes. While they are subject to IRC Section 382, management has determined that all of the NOLs are more than likely than not to be utilized before they expire. The Company and its subsidiary file income tax returns in the U.S. federal, California, and Georgia jurisdictions. The Company conducts all of its business activities in the State of California. There are no pending U.S. federal or state income tax examinations by those taxing authorities. The Company is no longer subject to the examination by U.S. federal taxing authorities for the years ended before December 31, 2017 and by the state taxing authorities for the years ended before December 31, 2016. As of December 31, 2020, the Company has no unrecognized tax benefits and does not expect any material changes in the next 12 months. During the years ended December 31, 2020 and 2019, the Company recorded no interest or penalties related to uncertain tax positions. 12. COMMITMENTS AND CONTINGENCIES Federal Reserve Requirements - Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits. The amount of such reserve balances required at December 31, 2020 was zero. Correspondent Banking Agreements - The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $9,628,000 at December 31, 2020. Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the balance sheet. 31 Notes to Consolidated Financial Statements 12. COMMITMENTS AND CONTINGENCIES (Continued) 13. SHAREHOLDERS’ EQUITY The following financial instruments represent off-balance-sheet credit risk (in thousands): Commitments to extend credit Standby letters of credit December 31, 2020 2019 $ $ 314,774 11,405 $ $ 289,465 1,717 Commitments to extend credit consist primarily of unfunded commercial loan commitments and revolving lines of credit, single-family residential equity lines of credit and commercial and residential real estate construction loans. Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction. Commercial revolving lines of credit have a high degree of industry diversification. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are generally secured and are issued by the Bank to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2020 and 2019. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used. At December 31, 2020, commercial loan commitments represent 48% of total commitments and are generally secured by collateral other than real estate or unsecured. Real estate loan commitments represent 42% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. Consumer loan commitments represent the remaining 10% of total commitments and are generally unsecured. In addition, the majority of the Bank’s loan commitments have variable interest rates. At December 31, 2020 and 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process. While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Changes in this contingent allocation are recorded in other non-interest expense. Concentrations of Credit Risk - At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate- related loans, representing approximately 96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related. At December 31, 2019, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 95.5% of total loans of which 13.5% were commercial and 82% were real-estate-related. Management believes the loans within these concentrations have no more than the typical risks of collectability. However, in light of the current economic environment, additional declines in the performance of the economy in general, or a continued decline in real estate values or drought-related decline in agricultural business in the Company’s primary market area could have an adverse impact on collectability, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition, results of operations and cash flows of the Company. Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company. Regulatory Capital - The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements could result in mandatory or, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Company and the Bank each meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities and certain off-balance- sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. The most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines. Management knows of no conditions or events since that notification that would change the Bank’s category. Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of well capitalized under the regulatory framework for prompt correct action and the Company’s ratios exceed the required minimum ratios for capital adequacy purposes. Effective August 30, 2018, bank holding companies with consolidated assets of $3 billion or more and banks like Central Valley Community Bank must comply with minimum capital ratio requirements which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (‘‘leverage’’) ratio of 4%. In addition, a ‘‘capital conversation buffer’’ is established which requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases. Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2020 and 2019. There are no conditions or events since those notifications that management believes have changed those categories. The capital ratios for the Company and the Bank are presented in the table below (exclusive of the capital conservation buffer). The following table presents the Company’s and the Bank’s actual capital ratios as of December 31, 2020 and December 31, 2019, as well as the minimum capital ratios for capital adequacy for the Bank. (Dollars in thousands) December 31, 2020 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio December 31, 2019 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Actual Ratio Amount Ratio $ 178,407 $ 173,407 $ 178,407 $ 191,572 9.28% 14.10% 14.50% 15.58% $ 172,945 $ 167,945 $ 172,945 $ 182,325 11.38% 14.55% 14.98% 15.79% 32 Notes to Consolidated Financial Statements 13. SHAREHOLDERS’ EQUITY (Continued) The following table presents the Bank’s regulatory capital ratios as of December 31, 2020 and December 31, 2019. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations is as follows (in thousands, except share and per-share amounts): (Dollars in thousands) December 31, 2020 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio December 31, 2019 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Actual Ratio Minimum regulatory requirement (1) Amount Ratio Amount Ratio $ 177,269 9.23% $ 76,852 4.00% $ 177,269 $ 177,269 $ 190,434 14.41% $ 55,346 14.41% $ 73,795 15.48% $ 98,394 7.00% 8.50% 10.50% $ 171,332 11.27% $ 60,810 4.00% $ 171,332 $ 171,332 $ 180,712 14.85% $ 51,930 14.85% $ 69,240 15.66% $ 92,320 7.00% 8.50% 10.50% (1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. Dividends - During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000. During 2019, the Bank declared and paid cash dividends to the Company in the amount of $20,100,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,805,000 or $0.43 per common share cash dividend to shareholders of record during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repurchased and retired common stock in the amount of $15,619,000. During 2018, the Bank declared and paid cash dividends to the Company in the amount of $2,850,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $4,270,000 or $0.31 per common share cash dividend to shareholders of record during the year ended December 31, 2018. During the year ended December 31, 2018, the Company repurchased and retired common stock in the amount of $894,000. The Company’s primary source of income with which to pay cash dividends is dividends from the Bank. The California Financial Code restricts the total amount of dividends payable by a bank at any time without obtaining the prior approval of the California Department of Business Oversight to the lesser of (1) the Bank’s retained earnings or (2) the Bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2020, $26,191,000 of the Bank’s retained earnings were free of these restrictions. For the Years Ended December 31, 2020 2019 2018 Basic Earnings Per Common Share: Net income Weighted average shares outstanding $ 20,347 $ 21,443 $ 21,289 12,534,078 13,415,118 13,699,823 Net income per common share $ 1.62 $ 1.60 $ 1.55 Diluted Earnings Per Common Share: Net income Weighted average shares outstanding Effect of dilutive stock options and warrants Weighted average shares of common stock and common stock equivalents Net income per diluted common share $ 20,347 $ 21,443 $ 21,289 12,534,078 13,415,118 13,699,823 42,241 98,489 125,185 12,576,319 13,513,607 13,825,008 $ 1.62 $ 1.59 $ 1.54 No outstanding options and restricted stock awards were anti-dilutive at December 31, 2020, 2019, and 2018. 14. EQUITY-BASED COMPENSATION On December 31, 2020, the Company had four equity-based compensation plans, which are described below. The Plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise or restricted share grants. The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company’s common stock, including restricted stock. The 2015 plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is over one to five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, 768,560 shares remain reserved for future grants as of December 31, 2020. 33 Notes to Consolidated Financial Statements 14. EQUITY-BASED COMPENSATION (Continued) Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan whereby our employees may purchase Company common shares through payroll deductions of between one percent and 15 percent percent of pay in each pay period. Shares are purchased at the end of an offering period at a discount of ten percent from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The plan calls for 500,000 common shares to be set aside for employee purchases, and there were 457,928 shares available for future purchase under the plan as of December 31, 2020. In October 2017, the Company adopted the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. The maximum number of shares that can be issued with respect to all awards under the plan is 38,400. For the years ended December 31, 2020, 2019, and 2018, the compensation cost recognized for share-based compensation was $470,000, $555,000, and $482,000, respectively. The recognized tax benefit for share-based compensation expense was $76,000, $46,000, and $142,000 for 2020, 2019, and 2018 respectively. Stock Options - The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield. The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience. Stock volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant. The compensation cost for options granted is based on the weighted average grant date fair value per share. No options to purchase shares of the Company’s common stock were granted during the years ending December 31, 2020, 2019 and 2018 from any of the Company’s stock based compensation plans. A summary of the combined activity of the Plans during the years then ended is presented below (dollars in thousands, except per-share amounts): Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Shares Aggregate Intrinsic Value Options outstanding at January 1, 2018 Options exercised Options forfeited Options outstanding at December 31, 2018 Options exercised Options forfeited Options outstanding at December 31, 2019 Options exercised Options forfeited Options outstanding at December 31, 2020 Options vested or expected to vest at December 31, 2020 Options exercisable at December 31, 2020 232,870 $ (74,030) $ (4,400) $ 9.13 9.97 10.85 154,440 $ (32,120) $ (1,200) $ 121,120 $ (43,500) $ (550) $ 8.68 8.59 5.55 8.73 6.39 7.40 2.81 $ 1,554 2.06 $ 1,567 77,070 $ 10.06 1.51 $ 382,291 77,070 $ 10.06 1.51 $ 382,291 77,070 $ 10.06 1.51 $ 382,291 Information related to the stock option plan during each year follows (in thousands): 2020 2019 2018 Intrinsic value of options exercised Cash received from options exercised Excess tax benefit realized for option exercises $ $ $ 433 279 76 $ $ $ 366 276 46 $ $ $ 767 738 142 As of December 31, 2020, there is no unrecognized compensation cost related to stock options granted under all Plans. All options are fully vested. Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for the issuance of shares to directors and officers. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant. 34 Notes to Consolidated Financial Statements 14. EQUITY-BASED COMPENSATION (Continued) The following table presents the restricted common stock activity during the years presented: Nonvested outstanding shares at January 1, 2018 Vested Forfeited Nonvested outstanding shares at December 31, 2018 Granted Vested Forfeited Nonvested outstanding shares at December 31, 2019 Granted Vested Forfeited Nonvested outstanding shares at December 31, 2020 Weighted Average Grant Date Fair Value $ $ $ $ $ $ $ $ $ $ $ $ 13.33 13.09 14.37 15.98 19.77 16.61 18.06 17.38 16.42 18.23 19.16 15.60 Shares 63,768 (20,733) (1,710) 63,529 25,420 (40,159) (3,630) 45,160 21,397 (34,703) (1,841) 30,013 The shares awarded to employees and directors under the restricted stock agreements vest on applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated. As of December 31, 2020, there were 30,013 shares of restricted stock that are nonvested and expected to vest. Share-based compensation cost charged against income for restricted stock awards was $449,000, $533,000, and $459,000 for the year ended December 31, 2020, 2019, and 2018 respectively. As of December 31, 2020, there was $225,000 of total unrecognized compensation cost related to nonvested restricted common stock. Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 0.85 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $2,507,000 at December 31, 2020. 15. EMPLOYEE BENEFITS 401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit sharing plan. The 401(k) plan covers substantially all employees who have completed a one-month employment period. Participants in the profit sharing plan are eligible to receive employer contributions after completion of 2 years of service. Bank contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Participants are automatically vested 100% in all employer contributions. The Bank contributed $370,000, $750,000, and $900,000 to the profit sharing plan in 2020, 2019, and 2018, respectively. Additionally, the Bank may elect to make a matching contribution to the participants’ 401(k) plan accounts. The amount to be contributed is announced by the Bank at the beginning of the plan year. For the years ended December 31, 2020 and 2019, the Bank made a 100% matching contribution on all deferred amounts up to 5% of eligible compensation. For the year ended December 31, 2018, the Bank made a 100% matching contribution on all deferred amounts up to 3% of eligible compensation and a 50% matching contribution on all deferred amounts above 3% to a maximum of 5%. For the years ended December 31, 2020, 2019, and 2018, the Bank made matching contributions totaling $1,008,000, $959,000, and $748,000, respectively. Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation Plan which provides directors with an unfunded, deferred compensation program. Under the plan, eligible participants may elect to defer some or all of their current compensation or director fees. Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.49% at December 31, 2020). At December 31, 2020 and 2019, the total net deferrals included in accrued interest payable and other liabilities were $4,292,000 and $4,177,000, respectively. In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is the beneficiary and owner of the policies. The cash surrender value of the policies totaled $9,464,000 and $9,686,000 and at December 31, 2020 and 2019, respectively. Income recognized on these policies, net of related expenses, for the years ended December 31, 2020, 2019, and 2018, was $245,000, $250,000, and $249,000, respectively. In October 2015, the Board of Directors of the Company and the Bank adopted a board resolution to create the Central Valley Community Bank Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all eligible executives of the Bank may elect to defer up to 50 percent of their compensation for each deferral year. Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.49% at December 31, 2020). At December 31, 2020 and 2019, the total net deferrals included in accrued interest payable and other liabilities were $209,000 and $145,000, respectively. Salary Continuation Plans - The Board of Directors has approved salary continuation plans for certain key executives. Under these plans, the Bank is obligated to provide the executives with annual benefits for 10-15 years after retirement. In connection with the acquisitions of Folsom Lake Bank (FLB), Service 1st Bank, and Visalia Community Bank (VCB), the Bank assumed a liability for the estimated present value of future benefits payable to former key executives of FLB, Service 1st, and VCB. The liability relates to change in control benefits associated with their salary continuation plans. The benefits are payable to the individuals when they reach retirement age. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives. The expense recognized under these plans for the years ended December 31, 2020, 2019, and 2018, totaled $1,624,000, $1,465,000, and $15,000, respectively. Accrued compensation payable under the salary continuation plans totaled $11,389,000 and $10,716,000 at December 31, 2020 and 2019, respectively. These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired. In connection with these plans, the Bank purchased single-premium life insurance policies with cash surrender values totaling $19,249,000 and $20,544,000 at December 31, 2020 and 2019, respectively. Income recognized on these policies, net of related expense, for the years ended December 31, 2020, 2019, and 2018 totaled $466,000, $478,000, and $446,000, respectively. Employee Stock Purchase Plan - During 2017, the Company adopted an Employee Stock Purchase Plan which allows employees to purchase the Company’s stock at a discount to fair market value as of the date of purchase. The Company bears all costs of administering the plan, including broker’s fees, commissions, postage and other costs actually incurred. 16. LOANS TO RELATED PARTIES During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors. The following is a summary of the aggregate activity involving related-party borrowers (in thousands): Balance, January 1, 2020 Disbursements Effects of changes in composition of related parties Amounts repaid Balance, December 31, 2020 Undisbursed commitments to related parties, December 31, 2020 $ $ $ 11,111 240 (1) (855) 10,495 269 35 Notes to Consolidated Financial Statements 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2020 and 2019 (In thousands) ASSETS Cash and cash equivalents Investment in Bank subsidiary Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Junior subordinated debentures due to subsidiary grantor trust Other liabilities Total liabilities Shareholders’ equity: Common stock Retained earnings Accumulated other comprehensive income, net of tax Total shareholders’ equity Total liabilities and shareholders’ equity 2020 2019 $ 896 249,037 354 $ 1,675 231,671 220 $ 250,287 $ 233,566 $ $ 5,155 111 5,266 5,155 283 5,438 79,416 150,749 14,856 245,021 89,379 135,932 2,817 228,128 $ 250,287 $ 233,566 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2020, 2019, and 2018 (In thousands) 2020 2019 2018 Income: Dividends declared by Subsidiary—eliminated in consolidation Other income Total income Expenses: Interest on junior subordinated deferrable interest debentures Professional fees Other expenses Total expenses Income before equity in undistributed net income of Subsidiary Equity in undistributed net income of Subsidiary, net of distributions Income before income tax benefit Benefit from income taxes Net income Comprehensive income $ 15,622 4 15,626 $ 20,100 6 20,106 130 283 555 968 14,658 5,328 19,986 361 20,347 32,386 $ $ 210 209 437 856 19,250 1,932 21,182 261 21,443 28,667 $ $ $ $ $ 2,850 6 2,856 199 217 548 964 1,892 19,075 20,967 322 21,289 13,912 36 Notes to Consolidated Financial Statements 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020, 2019, and 2018 (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary, net of distributions Equity-based compensation Net (increase) decrease in other assets Net (decrease) increase in other liabilities Benefit for deferred income taxes Net cash provided by operating activities Cash flows used in investing activities: Investment in subsidiary Cash flows from financing activities: Cash dividend payments on common stock Purchase and retirement of common stock Proceeds from exercise of stock options Proceeds from stock issued under employee stock purchase plan Net cash used in financing activities Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest 2020 2019 2018 $ 20,347 $ 21,443 $ 21,289 (5,328) 470 (208) (31) 75 15,325 (1,932) 555 136 69 10 20,281 - - (5,530) (11,052) 279 199 (16,104) (779) 1,675 896 153 $ $ (5,805) (15,619) 276 216 (20,932) (651) 2,326 1,675 215 $ $ $ $ (19,075) 482 372 166 11 3,245 - (4,270) (894) 738 211 (4,215) (970) 3,296 2,326 185 37 Supplementary Financial Information The following supplementary financial information is not a part of the Company’s financial statements. Net interest income Provision for (Reversal of ) credit losses Net interest income after provision for credit losses Other non-interest income Net realized gains on investment securities Total non-interest expense Provision for income taxes Net income Basic earnings per share Diluted earnings per share Unaudited Quarterly Statement of Operations Data (In thousands, except per share amounts) Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019 Q1 2019 $ $ $ $ 16,777 $ (1,700) 16,043 $ 600 15,574 $ 3,000 16,029 $ 1,375 15,786 $ 500 16,205 $ 250 15,946 $ 300 15,835 (25) 18,477 3,083 55 12,379 2,157 15,443 2,014 57 11,728 1,442 12,574 2,105 (58) 11,499 821 14,654 2,343 4,198 12,078 2,494 15,286 2,006 3 11,127 1,719 15,955 2,037 1,685 11,534 2,452 15,646 2,139 2,459 11,772 2,385 15,860 1,924 1,052 11,667 1,953 7,079 $ 4,344 $ 2,301 $ 6,623 $ 4,449 $ 5,691 $ 6,087 $ 5,216 0.57 $ 0.35 $ 0.18 $ 0.52 $ 0.34 $ 0.43 $ 0.45 $ 0.57 $ 0.35 $ 0.18 $ 0.52 $ 0.34 $ 0.42 $ 0.45 $ 0.38 0.38 38 Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Central Valley Community Bancorp and Subsidiary Fresno, California Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and Subsidiary (the ‘‘Company’’) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the ‘‘financial statements’’). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinions These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (‘‘PCAOB’’) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses—Qualitative Factors and General Reserve Allocation As described in Notes 1—Summary of Significant Accounting Policies and 4—Loans and Allowance for Credit Losses to the consolidated financial statements, the allowance for credit losses is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. At December 31, 2020, the allowance for credit losses was $12.9 million, which consists of two primary components, $0.6 million of specific reserves related to impaired loans and $12.3 million of general reserves for probable incurred losses related to loans that are not impaired. The determination of the allowance for credit losses involves significant assumptions which require a high degree of judgment relating to the Company’s loan portfolio and the evaluation of the general economic conditions and other qualitative factors, and how those assumptions impact the probable incurred losses within the loan portfolio. 39 Changes in these assumptions could have a material effect on the Company’s financial results. The qualitative factors for the general reserve allocation include consideration of economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Auditing management’s determination of the qualitative factor component within the general reserve allocation was identified as a critical audit matter because of the significant auditor judgments needed to evaluate the significant subjective and complex judgments made by management. The primary procedures we performed to address this critical audit matter included: • Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors. • Evaluation of the reasonableness of management’s judgments related to the data and assumptions used in the determination of qualitative factors. • Analytically evaluating the qualitative factors year over year for directional consistency and testing for reasonableness. • Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. • Analytical evaluation of the overall adequacy of the allowance for credit losses, including the qualitative factors. Goodwill Impairment Evaluation As described in Note 1—Summary of Significant Accounting Policies and Note 6—Goodwill and Intangible Assets to the consolidated financial statements, the Company’s goodwill balance was $53.8 million at December 31, 2020, which is allocated to the Company’s single reporting unit. Goodwill is assessed for impairment in the third quarter of each year, or on an interim basis if there are conditions that could more likely than not reduce the fair value of the Company below its carrying value. The Company engaged a third party valuation specialist to assist in performing a quantitative goodwill impairment test. The estimated fair value of the reporting unit was calculated by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in the Company’s industry. The calculation to test for goodwill impairment involves significant estimates and subjective assumptions, which require a high degree of management judgment. Auditing the quantitative goodwill impairment test was identified as a critical audit matter as the audit procedures used to evaluate the methodologies and assumptions used involved a high degree of auditor judgment and the level of complexity required the use of more experienced audit personnel and valuation specialists. The primary procedures we performed to address this critical audit matter included: • Testing the completeness and accuracy of data inputs used in, and the mathematical accuracy of, the valuation analysis. • Utilization of Crowe LLP employed valuation specialists to assist in the evaluation of the appropriateness of the methodologies and assumptions utilized in management’s valuation, including the reasonableness of significant assumptions, weighting allocation and the reasonableness of the overall fair value. • Evaluating the sensitivity of the fair value based on various forecasted scenarios. • Evaluating the knowledge, skill and ability of the Company’s specialist related to the analysis performed. We have served as the Company’s auditor since 2011. Sacramento, California March 10, 2021 40 Selected Consolidated Financial Data Statements of Income Total interest income Total interest expense Net interest income before provision for credit losses Provision for (reversal of ) credit losses Net interest income after provision for credit losses Non-interest income Non-interest expenses Income before provision for income taxes Provision for income taxes Net income Basic earnings per share Diluted earnings per share Cash dividends declared per common share Years Ended December 31, (In thousands, except per-share amounts) 2020 2019 2018 2017 2016 $ 66,018 $ 1,595 66,331 $ 2,559 64,187 $ 1,484 57,376 $ 1,137 64,423 3,275 61,148 13,797 47,684 27,261 6,914 63,772 1,025 62,747 13,305 46,100 29,952 8,509 62,703 50 62,653 10,324 45,068 27,909 6,620 56,239 (1,150) 57,389 10,836 44,406 23,819 9,793 46,676 1,096 45,580 (5,850) 51,430 9,591 38,922 22,099 6,917 $ $ $ $ 20,347 $ 21,443 $ 21,289 $ 14,026 $ 15,182 1.62 $ 1.60 $ 1.55 $ 1.12 $ 1.62 $ 1.59 $ 1.54 $ 1.10 $ 0.44 $ 0.43 $ 0.31 $ 0.24 $ 1.34 1.33 0.24 December 31, (In thousands) Balances at end of year: 2020 2019 2018 2017 2016 Investment securities, Federal funds sold and deposits in other banks Net loans Total deposits Total assets Shareholders’ equity Earning assets $ 753,829 $ 1,089,432 1,722,710 2,004,096 245,021 1,837,402 506,597 $ 934,250 1,333,285 1,596,755 228,128 1,450,347 477,932 $ 909,591 1,282,298 1,537,836 219,738 1,406,987 604,801 $ 891,901 1,425,687 1,661,655 209,559 1,505,436 558,132 747,302 1,255,979 1,443,323 164,033 1,319,065 Average balances: Investment securities, Federal funds sold and deposits in other banks Net loans Total deposits Total assets Shareholders’ equity Earning assets $ 623,117 $ 1,043,470 1,568,194 1,832,987 229,807 1,676,567 494,455 $ 921,546 1,295,780 1,574,089 228,352 1,423,015 526,606 $ 903,204 1,333,754 1,577,410 211,324 1,435,025 568,426 $ 784,085 1,284,305 1,491,696 182,507 1,358,930 560,860 636,475 1,144,231 1,321,007 154,325 1,205,142 Data from 2017 reflects the partial year impact of the acquisition of Folsom Lake Bank on October 1, 2017. Data from 2016 reflects the partial year impact of the acquisition of Sierra Vista Bank on October 1, 2016. 41 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report. Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; (14) the uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company. When the Company uses in this Annual Report 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 Annual Report. 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. See also the discussion of risk factors in Item 1A, ‘‘Risk Factors.’’ We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise. INTRODUCTION Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was incorporated on February 7, 2000. The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves. The Company currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Company’s market area includes the central valley area from Sacramento, California to Bakersfield, California. During 2020, we focused on managing the COVID-19 affects on businesses, customers and employees. We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry. As of December 31, 2020, the Bank operated 20 full-service offices. Additionally, the Bank maintains a Commercial Real Estate Division, an Agribusiness Center and a SBA Lending Division. The Real Estate Division processes or assists in processing the majority of the Bank’s real estate related transactions, including interim construction loans for single family residences and commercial buildings. We offer permanent single family residential loans through our mortgage broker services. ECONOMIC CONDITIONS For the years leading up to 2020, the economy, as evidenced by the California, Central Valley, and Greater Sacrament Region unemployment rates, and housing prices, were showing moderate and steady improvement. During 2020, the outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in California, including our primary market area. As a result, the demand for our products and services has been and may continue to be significantly impacted. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience an adverse effect on its business, financial condition and results of operations. Agriculture and agricultural-related businesses remain a critical part of the Central Valley’s economy. The Valley’s agricultural production is widely diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton. The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. From time to time, California experiences severe droughts or adverse weather issues, which could significantly harm the business of our customers and the credit quality of the loans to those customers. We closely monitor the water resources and the related issues affecting our customers, and will remain vigilant for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any losses. OVERVIEW Diluted earnings per share (EPS) for the year ended December 31, 2020 was $1.62 compared to $1.59 and $1.54 for the years ended December 31, 2019 and 2018, respectively. Net income for 2020 was $20,347,000 compared to $21,443,000 and $21,289,000 for the years ended December 31, 2019 and 2018, respectively. The decrease in net income for 2020 compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. Total assets at December 31, 2020 were $2,004,096,000 compared to $1,596,755,000 at December 31, 2019. Return on average equity (‘‘ROE’’) for 2020 was 8.85% compared to 9.39% and 10.07% for 2019 and 2018, respectively. Return on average assets (‘‘ROA’’) for 2020 was 1.11% compared to 1.36% and 1.35% for 2019 and 2018, respectively. Total equity was $245,021,000 at December 31, 2020 compared to $228,128,000 at December 31, 2019. The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, 42 Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW (Continued) the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000. Average total loans increased $124,829,000 or 13.41% to $1,055,712,000 in 2020 compared to $930,883,000 in 2019. In 2020, we recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 in 2019 and a provision of $50,000 in 2018. The Company had nonperforming assets consisting of $3,278,000 in nonaccrual loans at December 31, 2020. At December 31, 2019, nonperforming assets totaled $1,693,000. Net loan loss recoveries for 2020 were $510,000 compared to net loan loss charge-offs in the amount of $999,000 for 2019 and net loan loss recoveries of $276,000 for 2018. Refer to ‘‘Asset Quality’’ below for further information. Dividend Declared The Company declared a $0.11 per common share cash dividend, payable on February 26, 2021 to shareholders of record on February 12, 2021. Key Factors in Evaluating Financial Condition and Operating Performance In evaluating our financial condition and operating performance, we focus on several key factors including: accretion of the loan marks on acquired loans in the amount of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. In addition, net interest income before the provision for credit losses for the year ended December 31, 2020 benefited by approximately $805,000 in nonrecurring income from prepayment penalties and payoff of loans, as compared to $619,000 in nonrecurring income for the year ended December 31, 2019. Excluding these reversals and benefits, net interest income for the year ended December 31, 2020 decreased by $133,000 compared to the year ended December 31, 2019. Non-interest income increased 3.70% in 2020 compared to 2019 primarily due to an increase in loan placement fees of $1,313,000, an increase of $1,059,000 in other income, partially offset by a $947,000 decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income of $685,000, and a $132,000 decrease in Federal Home Loan Bank dividends. The increase in other income resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds. Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019. The net increase year over year resulted from increases in salaries and employee benefits of $1,949,000, professional services of $1,093,000, data processing of $489,000, regulatory assessments of $239,000, and operating losses of $40,000, offset by decreases in occupancy and equipment expenses of $813,000, information technology of $220,000, amortization of software of $227,000, internet banking of $166,000, credit card expenses of $114,000, and directors’ expenses of $95,000, in 2020 compared to 2019. The Company recorded an income tax provision of $6,914,000 for the year ended December 31, 2020, compared to $8,509,000 for the year ended December 31, 2019, and $6,620,000 for the year ended December 31, 2018. Basic EPS was $1.62 for 2020 compared to $1.60 and $1.55 for 2019 and 2018, respectively. Diluted EPS was $1.62 for 2020 compared to $1.59 and $1.54 for 2019 and 2018, respectively. • Return to our shareholders; • Return on average assets; • Development of revenue streams, including net interest income and Return on Average Assets non-interest income; • Asset quality; • Asset growth; • Capital adequacy; • Operating efficiency; and • Liquidity. Return to Our Shareholders One measure of our return to our shareholders is the return on average equity (ROE), which is a ratio that measures net income divided by average shareholders’ equity. Our ROE was 8.85% for the year ended 2020 compared to 9.39% and 10.07% for the years ended 2019 and 2018, respectively. Our net income for the year ended December 31, 2020 decreased $1,096,000 compared to 2019 and increased $154,000 in 2019 compared to 2018. Contributing to the decrease during 2020 compared to 2019 was an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. During 2019, net income compared to 2018 was positively impacted by an increase in net interest income and an increase in net realized gains on sales and calls of investment securities. During 2018 net income was positively impacted by the decrease in tax expense. Net interest income increased primarily because of increases in loan and fee income, decreases in interest expense, partially offset by decreases in interest income on investments. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. For 2020, our net interest margin (NIM) decreased 64 basis points to 3.87% compared to 2019 as a result of yield changes and asset mix changes. The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest-earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans. Net interest income during 2020 was positively impacted by from the Our ROA is a ratio that measures our performance compared with other banks and bank holding companies. Our ROA for the year ended 2020 was 1.11% compared to 1.36% and 1.35% for the years ended December 31, 2019 and 2018, respectively. The 2020 decrease in ROA is primarily due to the decrease in net income and an increase in average assets. Annualized ROA for our peer group was 1.06% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion. Development of Revenue Streams Over the past several years, we have focused on not only our net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of strategies, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin by focusing on core deposits and managing our cost of funds. Our net interest margin (fully tax equivalent basis) was 3.87% for the year ended December 31, 2020, compared to 4.51% and 4.44% for the years ended December 31, 2019 and 2018, respectively. The decrease in 2020 net interest margin compared to 2019, resulted from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. The effective tax equivalent yield on total earning assets decreased 72 basis points, while the cost of total interest-bearing liabilities decrease 15 basis points to 0.19% for the year ended December 31, 2020. Our cost of total deposits in 2020 and 2019 was 0.09% and 0.15%, respectively, compared to 0.09% for the same period in 2018. Our net interest income before provision for credit losses increased $651,000 or 1.02% to $64,423,000 for the year ended 2020 compared to $63,772,000 and $62,703,000 for the years ended 2019 and 2018, respectively. Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank-owned life insurance, and net gains from sales and calls of investment securities. Non-interest income in 2020 increased $492,000 or 3.70% to $13,797,000 compared to $13,305,000 in 2019 and $10,324,000 in 43 Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW (Continued) Operating Efficiency 2018. The increase resulted primarily from an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends compared to 2019. Further detail on non-interest income is provided below. Asset Quality For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of classified and nonperforming loans, and is a key element in estimating the future earnings of a company. Total nonperforming assets were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively. Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Nonperforming loans were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively. The Company had no other real estate owned at December 31, 2020, or December 31, 2019. No foreclosed assets were recorded at December 31, 2020 or December 31, 2019. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. The ratio of nonperforming loans to total loans was 0.30% as of December 31, 2020 and 0.18% as of December 31, 2019. The allowance for credit losses as a percentage of outstanding loan balance was 1.17% as of December 31, 2020 and 0.97% as of December 31, 2019. The ratio of net recoveries (charge-offs) to average loans was 0.05% as of December 31, 2020 and (0.11)% as of December 31, 2019. Asset Growth As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased 25.51% during 2020 to $2,004,096,000 as of December 31, 2020 from $1,596,755,000 as of December 31, 2019. Total gross loans increased 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 at December 31, 2019. Total investment securities increased 50.08% to $717,726,000 as of December 31, 2020 compared to $478,218,000 as of December 31, 2019. Total deposits increased 29.21% to $1,722,710,000 as of December 31, 2020 compared to $1,333,285,000 as of December 31, 2019. Our loan to deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019. The loan to deposit ratio of our peers was 80.00% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion. Capital Adequacy At December 31, 2020, we had a total capital to risk-weighted assets ratio of 15.58%, a Tier 1 risk-based capital ratio of 14.50%, common equity Tier 1 ratio of 14.10%, and a leverage ratio of 9.28%. At December 31, 2019, we had a total capital to risk-weighted assets ratio of 15.79%, a Tier 1 risk-based capital ratio of 14.98%, common equity Tier 1 ratio of 14.55%, and a leverage ratio of 11.38%. At December 31, 2020, on a stand-alone basis, the Bank had a total risk-based capital ratio of 15.48%, a Tier 1 risk based capital ratio of 14.41%, common equity Tier 1 ratio of 14.41%, and a leverage ratio of 9.23%. At December 31, 2019, the Bank had a total risk-based capital ratio of 15.66%, Tier 1 risk-based capital of 14.85% and a leverage ratio of 11.27%. Note 13 of the audited Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios. As of January 1, 2015, bank holding companies with consolidated assets of $1 billion or more ($3 Billion or more effective August 30, 2018) and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of December 31, 2020, the Bank met or exceeded all of their capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2020. Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. A lower ratio represents greater efficiency. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income plus non-interest income, excluding net gains and losses from sale of securities) was 64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018. The slight increase in the efficiency ratios in 2020 and 2019 was due to the growth in non-interest expense outpacing the growth in non-interest income. The Company’s net interest income before provision for credit losses plus non-interest income increased 1.48% to $78,220,000 in 2020 compared to $77,077,000 in 2019 and $73,027,000 in 2018, while operating expenses increased 3.44% in 2020, 2.29% in 2019, and 1.49% in 2018. Liquidity Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco. We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $235,371,000 with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses. We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, equity securities, and available-for-sale securities) totaling $788,004,000 or 39.32% of total assets at December 31, 2020 and $530,792,000 or 33.24% of total assets as of December 31, 2019. RESULTS OF OPERATIONS NET INCOME Net income was $20,347,000 in 2020 compared to $21,443,000 and $21,289,000 in 2019 and 2018, respectively. Basic earnings per share was $1.62, $1.60, and $1.55 for 2020, 2019, and 2018, respectively. Diluted earnings per share was $1.62, $1.59, and $1.54 for 2020, 2019, and 2018, respectively. ROE was 8.85% for 2020 compared to 9.39% for 2019 and 10.07% for 2018. ROA for 2020 was 1.11% compared to 1.36% for 2019 and 1.35% for 2018. The decrease in net income for 2020 compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. The increase in net income for 2019 compared to 2018 was primarily due to an increase in net interest income and an increase in net realized gains on sales and calls of investment securities, partially offset by an increase in non-interest expense, an increase in the provision for credit losses, and an increase in the provision for income taxes. INTEREST INCOME AND EXPENSE Net interest income is the most significant component of our income from operations. Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities. The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are not included as interest-earning assets for purposes of this table. 44 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) 10,254 4,478 14,732 15,192 49,936 65,128 451 419 283 1,153 331 1,484 1.91% 2.62% 4.04% 2.93% 2.88% 5.50% 4.54% 0.12% 0.15% 0.25% 0.15% 2.72% 0.19% SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES (Dollars in thousands) ASSETS Interest-earning deposits in other banks Securities Taxable securities Non-taxable securities (1) Total investment securities Total securities and interest-earning deposits Loans (2) (3) 479,894 66,299 546,193 623,117 1,053,450 Total interest-earning assets 1,676,567 $ Allowance for credit losses Nonaccrual loans Cash and due from banks Bank premises and equipment Other assets (12,242) 2,262 27,575 7,476 131,349 Year Ended December 31, 2020 Interest Income/ Expense Average Balance Average Interest Rate Year Ended December 31, 2019 Interest Income/ Expense Average Balance Average Interest Rate Year Ended December 31, 2018 Interest Income/ Expense Average Balance Average Interest Rate $ 76,924 $ 246 0.32% $ 17,893 $ 375 2.10% $ 24,095 $ 460 11,740 2,489 14,229 14,475 52,066 66,541 2.45% 3.75% 2.61% 2.32% 4.94% 3.97% 13,197 1,639 14,836 15,211 51,464 66,675 3.01% 4.25% 3.11% 3.08% 5.54% 4.69% 438,042 38,520 476,562 494,455 928,560 1,423,015 $ (9,337) 2,323 25,726 7,983 124,379 391,549 110,962 502,511 526,606 908,419 1,435,025 $ (8,924) 3,709 27,199 9,148 111,253 Total average assets $ 1,832,987 $ 1,574,089 $ 1,577,410 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts Money market accounts Time certificates of deposit Total interest-bearing deposits Other borrowed funds $ 433,742 $ 300,603 89,610 823,955 5,155 Total interest-bearing liabilities 829,110 $ Non-interest bearing demand deposits Other liabilities Shareholders’ equity 744,239 29,831 229,807 Total average liabilities and shareholders’ equity $ 1,832,987 341 542 582 1,465 130 1,595 0.08% 0.18% 0.65% 0.18% 2.52% 0.19% $ 370,378 $ 270,918 97,136 738,432 21,943 760,375 $ 557,348 28,014 228,352 566 656 706 1,928 631 2,559 0.15% 0.24% 0.73% 0.26% 2.88% 0.34% $ 383,667 $ 285,568 111,214 780,449 12,180 792,629 $ 553,305 20,152 211,324 $ 1,574,089 $ 1,577,410 Interest income and rate earned on average earning assets Interest expense and interest cost related to average interest- bearing liabilities Net interest income and net interest margin (4) $ 66,541 3.97% $ 66,675 4.69% $ 65,128 4.54% 1,595 0.19% 2,559 0.34% 1,484 0.19% $ 64,946 3.87% $ 64,116 4.51% $ 63,644 4.44% (1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $523, $344, and $940 in 2020, 2019, and 2018, respectively. (2) Loan interest income includes loan fees of $2,234 in 2020, $164 in 2019, and $397 in 2018. (3) Average loans do not include nonaccrual loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 45 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate. (In thousands) Changes in Volume/Rate Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks Investment securities: Taxable Non-taxable (1) Total investment securities Loans Total earning assets (1) Interest expense: Deposits: Savings, NOW and MMA Time certificate of deposits Total interest- bearing deposits Other borrowed funds Total interest bearing liabilities For the Years Ended December 31, 2020 Compared to 2019 For the Years Ended December 31, 2019 Compared to 2018 Volume Rate Net Volume Rate Net $ 1,237 $ (1,366) $ (129) $ (118) $ 34 $ (84) 1,260 1,181 (2,717) (331) (1,457) 850 1,218 (2,923) 1,725 84 2,943 (2,839) 2,441 6,921 (3,048) (6,319) (607) 602 (1,705) 1,107 1,809 421 104 1,528 10,599 (10,733) (134) (716) 2,264 1,548 167 (506) (339) (54) (70) (124) 113 (483) (576) (18) (463) (501) (36) (35) (71) 265 388 458 846 35 352 423 775 300 (370) (594) (964) 194 881 1,075 Net interest income (1) $ 10,969 $ (10,139) $ 830 $ (910) $ 1,383 $ 473 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. Interest and fee income from loans increased $602,000 or 1.17% in 2020 compared to 2019. Interest and fee income from loans increased $1,528,000 or 3.06% in 2019 compared to 2018. The increase in 2020 is primarily attributable to an increase in average total loans outstanding, offset by a decrease in the yield on loans of 60 basis points. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans. Average total loans for 2020 increased $124,829,000 to $1,055,712,000 compared to $930,883,000 for 2019 and $912,128,000 for 2018. The yield on loans for 2020 was 4.94% compared to 5.54% and 5.50% for 2019 and 2018, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the years ended December 31, 2020 and 2019, 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), decreased $915,000 or 6.15% in 2020 compared to 2019. The yield on average investments decreased 76 basis points to 2.32% for the year ended December 31, 2020 from 3.08% for the year ended December 31, 2019. Average total investments increased $128,662,000 to $623,117,000 in 2020 compared to $494,455,000 in 2019. In 2019, total investment income on a non tax-equivalent basis increased $616,000 or 4.32% compared to 2018. Our investment portfolio consists primarily of securities issued by U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities. However, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At December 31, 2020, we held $299,806,000 or 42.22% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 2.15%. We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin. CMOs and MBS by their nature are affected by prepayments which are impacted by changes in interest rates. In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten. Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend. Premium amortization and discount accretion of these investments affects our net interest income. Our management monitors the prepayment trends of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio. The cumulative net-of-tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 2020 was an unrealized gain of $14,856,000 and is reflected in the Company’s equity. At December 31, 2020, the effective duration of the investment portfolio was 4.65 years and the market value reflected a pre-tax unrealized gain of $21,091,000. Management reviews market value declines on individual investment securities to determine whether they represent other-than-temporary impairment (OTTI). For the years ended December 31, 2020, 2019, and 2018, no OTTI was recorded. Future deterioration in the market values of our investment securities may require the Company to recognize additional OTTI losses. A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. Measured at December 31, 2020, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $72,000,000. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $66,000,000. The modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio. For further discussion of the Company’s market risk, refer to Quantitative and Qualitative Disclosures about Market Risk. Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices. Total interest income in 2020 decreased $313,000 to $66,018,000 compared to $66,331,000 in 2019 and $64,187,000 in 2018, respectively. The decrease in 2020 was the result of yield changes, decrease in interest rates, and asset mix changes. The tax-equivalent yield on interest earning assets decreased to 3.97% for the year ended December 31, 2020 from 4.69% for the year ended December 31, 2019. Average interest earning assets increased to $1,676,567,000 for the year ended December 31, 2020 compared to $1,423,015,000 for the year ended December 31, 2019. Average interest-earning deposits in other banks increased $59,031,000 in 2020 compared to 2019. Average yield on these deposits was 0.32% compared to 2.10% on December 31, 2020 and December 31, 2019 respectively. Average investments and interest-earning deposits increased $128,662,000 but the tax equivalent yield on those assets decreased 76 basis points. Average total loans increased $124,829,000 and the yield on average loans decreased 60 basis points. The increase in total interest income for 2019 was the result of yield changes and asset mix changes. The tax-equivalent yield on interest-earning assets increased to 4.69% for the year ended December 31, 2019 from 4.54% for the year ended December 31, 2018. Average interest-earning assets decrease to $1,423,015,000 for the year ended December 31, 2019 compared to $1,435,025,000 for the year ended December 31, 2018. Average total loans increased and the yield on average loans increased four basis points. Interest expense on deposits in 2020 decreased $463,000 or 24.01% to $1,465,000 compared to $1,928,000 in 2019 and increased $312,000 as 46 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) compared to 2018. The yield on interest-bearing deposits decreased 8 basis points to 0.18% in 2020 from 0.26% in 2019. The yield on interest-bearing deposits increased 11 basis points to 0.26% in 2019 from 0.15% in 2018. Average interest-bearing deposits were $823,955,000 for 2020 compared to $738,432,000 and $780,449,000 for 2019 and 2018, respectively. Average other borrowings were $5,155,000 with an effective rate of 2.52% for 2020 compared to $21,943,000 with an effective rate of 2.88% for 2019. In 2018, the average other borrowings were $12,180,000 with an effective rate of 2.72%. Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings. The debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 1.84% for 2020, 3.59% for 2019, and 4.04% for 2018. The cost of all interest-bearing liabilities was 0.19% and 0.34% basis points for 2020 and 2019, respectively, compared to 0.19% for 2018. The cost of total deposits decreased to 0.09% for the year ended December 31, 2020, compared to 0.15% and 0.09% for the years ended December 31, 2019 and 2018, respectively. Average demand deposits increased 33.53% to $744,239,000 in 2020 compared to $557,348,000 for 2019 and $553,305,000 for 2018. The ratio of average non-interest demand deposits to average total deposits increased to 47.46% for 2020 compared to 43.01% and 41.48% for 2019 and 2018, respectively. NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES Net interest income before provision for credit losses for 2020 increased $651,000 or 1.02% to $64,423,000 compared to $63,772,000 for 2019 and $62,703,000 for 2018. The increase in 2020 was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in average interest bearing liabilities. Our net interest margin (NIM) decreased 64 basis points. Yield on interest earning assets decreased 72 basis points. The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. Net interest income before provision for credit losses increased $1,069,000 in 2019 compared to 2018, primarily due to the increase in average earning assets, asset mix changes, and a decrease in average interest bearing liabilities. Average interest-earning assets were $1,676,567,000 for the year ended December 31, 2020 with a NIM of 3.87% compared to $1,423,015,000 with a NIM of 4.51% in 2019, and $1,435,025,000 with a NIM of 4.44% in 2018. For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk. PROVISION FOR CREDIT LOSSES Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses on loans is determined by conducting a quarterly evaluation of the adequacy of the Company’s allowance for credit losses on loans and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The provision for credit losses on loans and level of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company’s market area. The establishment of an adequate credit allowance is based on an allowance model that utilizes qualitative and quantitative factors, historical losses, loan level risk ratings and portfolio management tools. The Board of Directors has established initial responsibility for the accuracy of credit risk ratings with the individual credit officer and oversight from Credit Administration who ensures the accuracy of the risk ratings. Quarterly, the credit officers must certify the current risk ratings of the loans in their portfolio. Credit Administration reviews the certifications and reports to the Board of Directors Audit Committee. At least annually the loan portfolio, including risk ratings, is reviewed by a third party credit reviewer. Regulatory agencies also review the loan portfolio on a periodic basis. See ‘‘Allowance for Credit Losses’’ for more information on the Company’s Allowance for Loan Loss. During the year ended December 31, 2020, the Company recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 and $50,000 for the same periods in 2019 and 2018, respectively. The recorded provisions to the allowance for credit losses are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the ‘‘Allowance for Credit Losses’’ section. During the years ended December 31, 2020, 2019 and 2018 the Company had net charge-offs (recoveries) totaling $(510,000), $999,000, and $(276,000), respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.05)%, 0.11% and (0.03)% for 2020, 2019, and 2018, respectively. Economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result when negative economic conditions are anticipated, we may be required to make significant provisions to the allowance for credit losses. The Bank conducts banking operation principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our business, financial performance and results of operations. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operations and financial condition. The agricultural industry has been affected by declines in prices and the changes in yields on various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure. We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of December 31, 2020, there were $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $7.3 million to real estate owner occupied, $3.3 million to agricultural production, $3.2 million to real estate construction, and $9.6 million to commercial real estate. This compares to $33.8 million in classified loans as of December 31, 2019 of which $7.3 million related to agricultural real estate, $1.6 million to real estate construction, $13.2 million to commercial and industrial, $4.3 million to agricultural production, $1.1 million to commercial real estate, and $4.7 million to real estate owner occupied. As of December 31, 2020, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period. Refer to ‘‘Allowance for Credit Losses’’ below for further information. NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES Net interest income, after the provision for credit losses was $61,148,000 for 2020 compared to $62,747,000 and $62,653,000 for 2019 and 2018, respectively. 47 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NON-INTEREST INCOME Non-interest income is comprised of customer service charges, gains on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income. Non-interest income was $13,797,000 in 2020 compared to $13,305,000 and $10,324,000 in 2019 and 2018, respectively. The $492,000 or 3.70% increase in non-interest income in 2020 primarily driven by an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends. The $2,981,000 or 28.87% increase in non-interest income in 2019 resulted primarily from increases in net realized gains on sales and calls of investment securities, loan placement fees, appreciation in cash surrender value of the bank owned life insurance, partially offset by a decrease in service charge income, net gain on the sale of the Company’s credit card portfolio, interchange fees, and Federal Home Loan bank dividends compared to 2018. Customer service charges decreased $685,000 to $2,071,000 in 2020 compared to $2,756,000 in 2019 and $2,986,000 in 2018. The decreases in 2020 and 2019 resulted from decreases in our NSF fees and lower analysis service charge income. During the year ended December 31, 2020, we realized net gains on sales and calls of investment securities of $4,252,000, compared to $5,199,000 in 2019 and $1,314,000 in 2018. The net gains in 2020, 2019, and 2018 were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. See Note 3 to the audited Consolidated Financial Statements for more detail. Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $711,000 in 2020 compared to $728,000 and $695,000 in 2019 and 2018, respectively. The Bank’s salary continuation and deferred compensation plans and the related BOLI are used as retention tools for directors and key executives of the Bank. Interchange fees totaled $1,347,000 in 2020 compared to $1,446,000 and $1,462,000 in 2019 and 2018, respectively. We earn loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers. Loan placement fees increased $1,313,000 in 2020 to $2,291,000 compared to $978,000 in 2019 and $708,000 in 2018. The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends. As of December 31, 2020 and 2019, we held FHLB stock totaling $5,595,000 and $6,062,000, respectively. Dividends in 2020 decreased to $323,000 compared to $455,000 in 2019 and $590,000 in 2018. Other income increased to $2,802,000 in 2020 compared to $1,743,000 and $2,107,000 in 2019 and 2018, respectively. The increase in other income during the year ended December 31, 2020 resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds. A net gain of $462,000 on the sale of the Company’s credit card portfolio was recorded during the year ended December 31, 2018. NON-INTEREST EXPENSES Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, information technology, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses. Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019, and $45,068,000 in 2018. Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018. The increase in the efficiency ratio in 2020 and 2019 was due to the growth in non-interest expense outpacing the growth in non-interest income. Salaries and employee benefits increased $1,949,000 or 7.31% to $28,603,000 in 2020 compared to $26,654,000 in 2019 and $26,221,000 in 2018. Full time equivalents were 273 for the year ended December 31, 2020 compared to 281 for the year ended December 31, 2019. The increase in salaries and employee benefits in 2020 compared to 2019 was the result of an increase of $2,426,000 in salaries and benefits (of which $525,000 related to the payment of employee incentive compensation), as well as an increase of $185,000 for directors’ and officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split-dollar plans; offset by higher loan origination costs of approximately $913,000 relating to the PPP loans processed during the second quarter of 2020. For the years ended December 31, 2020, 2019, and 2018, the compensation cost recognized for equity-based compensation was $470,000, $555,000 and $482,000, respectively. As of December 31, 2020, there was $225,000 of total unrecognized compensation cost related to non-vested equity-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted average period of 0.85 years. See Notes 1 and 14 to the audited Consolidated Financial Statements for more detail. No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 2020 and 2019. Restricted common stock awards of 21,397 and 25,420 shares were awarded in 2020 and 2019, respectively. Occupancy and equipment expense decreased $813,000 or 14.95% to $4,626,000 in 2020 compared to $5,439,000 in 2019 and $5,972,000 in 2018. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at December 31,2020 and at December 31, 2019. The Company closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a newly opened banking office in Gold River during the second quarter of 2019. Regulatory assessments were $490,000 in 2020 compared to $251,000 and $619,000 in 2019 and 2018, respectively. The assessment base for calculating the amount owed is based on the formula of average assets minus average tangible equity. The 2019 lower assessments were the result of the Company receiving its small business bank credit. Information technology expense decreased $220,000 to $2,391,000 for the year ended December 31, 2020 compared to $2,611,000 and $1,113,000 in 2019 and 2018, respectively. Data processing expenses were $2,046,000 in 2020 compared to $1,557,000 in 2019 and $1,666,000 in 2018. No acquisition and integration expenses related to the Folsom Lake Bank (‘‘FLB’’) and Sierra Vista Bank (‘‘SVB’’) mergers were recorded in 2020 or 2019, compared to $217,000 in 2018. Professional services increased $1,093,000 in 2020 compared to 2019 due to higher legal expenses and consulting fees. Amortization of core deposit intangibles was $695,000 for 2020, $695,000 for 2019, and $455,000 for 2018. During 2020, amortization expense related to FLB core deposit intangibles (‘‘CDI’’) was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to Visalia Community Bank (‘‘VCB’’) CDI was $137,000. During 2019, amortization expense related to FLB CDI was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to VCB CDI was $137,000. During 2018, amortization expense related to FLB CDI was $247,000, amortization expense related to SVB CDI was $72,000, and amortization expense related to VCB CDI was $136,000. ATM/Debit card expenses decreased $101,000 to $819,000 for the year ended December 31, 2020 compared to $920,000 in 2019 and $739,000 in 2018. Other non-interest expenses decreased $698,000 or 15.91% to $3,688,000 in 2020 compared to $4,386,000 in 2019 and $4,636,000 in 2018. 48 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NON-INTEREST EXPENSES (Continued) The following table describes significant components of other non-interest expense as a percentage of average assets. more likely than not that the net deferred tax assets at December 31, 2020 and 2019 will be fully realized in future years. FINANCIAL CONDITION For the years ended December 31, SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS % Other Expense Average Assets 2020 % Other Expense Average Assets 2019 % Other Expense Average Assets 2018 Stationery/supplies Amortization of software Telephone Alarm Postage Armored courier fees Risk management expense Donations Personnel other Credit card expense Education/training Loan related expenses General insurance Travel and mileage expense Operating losses Shareholder services Other Total other non-interest expense $ 228 123 193 115 191 280 149 152 161 - 156 58 171 127 142 109 1,333 (Dollars in thousands) 0.01% $ 0.01% 0.01% 0.01% 0.01% 0.02% 0.01% 0.01% 0.01% -% 0.01% -% 0.01% 0.01% 0.01% 0.01% 0.07% 240 350 342 100 218 284 232 212 177 114 155 52 165 256 102 101 1,286 0.02% $ 0.02% 0.02% 0.01% 0.01% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% -% 0.01% 0.02% 0.01% 0.01% 0.08% 281 303 217 101 209 274 195 243 167 121 172 77 165 267 452 129 1,263 0.02% 0.02% 0.01% 0.01% 0.01% 0.02% 0.01% 0.02% 0.01% 0.01% 0.01% -% 0.01% 0.02% 0.03% 0.01% 0.08% $ 3,688 0.20% $ 4,386 0.28% $ 4,636 0.29% PROVISION FOR INCOME TAXES Our effective income tax rate was 25.4% for 2020 compared to 28.4% for 2019 and 23.7% for 2018. The Company reported an income tax provision of $6,914,000, $8,509,000, and $6,620,000 for the years ended December 31, 2020, 2019, and 2018, respectively. With the Tax Cuts and Jobs Act (the ‘‘Act’’) enacted on December 22, 2017, the Company’s federal income tax rate changed from 35% to 21% effective as of the beginning of 2018. The decrease in the 2018 effective tax rate was the result of the change in the federal rate offset by a sizable decrease in tax-exempt interest. As part of the Act for tax years beginning after December 31, 2017, alternative minimum tax credit carryforwards are refundable and are expected to be fully refunded by 2022. As such, they are not dependent on future taxable income to be realized and have been classified as an other receivable. Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the ‘‘deferred’’ portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse. Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is ‘‘more likely than not’’ that the deferred tax assets will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax-planning strategies, and assessments of current and future economic and business conditions. The Company had the net deferred tax assets of $4.74 million and $8.74 million at December 31, 2020 and 2019, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is Total assets were $2,004,096,000 as of December 31, 2020, compared to $1,596,755,000 as of December 31, 2019, an increase of 25.51% or $407,341,000. Total gross loans were $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019, an increase of $158,967,000 or 16.85%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 48.80% or $247,232,000 to $753,829,000. Total deposits increased 29.21% or $389,425,000 to $1,722,710,000 as of December 31, 2020, compared to $1,333,285,000 as of December 31, 2019. Shareholders’ equity increased $16,893,000 or 7.41% to $245,021,000 as of December 31, 2020, compared to $228,128,000 as of December 31, 2019. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, and an increase in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI), offset by the decrease in common stock as a result of the share repurchase program. Accrued interest payable and other liabilities were $31,210,000 as of December 31, 2020, compared to $30,187,000 as of December 31, 2019, an increase of $1,023,000. FAIR VALUE The Company measures the fair value of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value. INVESTMENTS The following table reflects the balances for each category of securities at year end: Available-for-Sale Securities (In thousands) U.S. Government agencies Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label mortgage and asset backed securities Corporate debt securities Amortized Cost at December 31, 2020 2019 2018 $ 651 $ 361,734 14,740 $ 89,574 21,723 79,886 214,203 82,413 30,000 198,125 155,308 9,000 239,388 129,165 — Total Available-for-Sale Securities $ 689,001 $ 466,747 $ 470,162 Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations 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 December 31, 2020, investment securities with a fair value of $185,053,000, or 26.06% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment 49 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INVESTMENTS (Continued) policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee. They 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. Our investment portfolio as a percentage of total assets is generally higher than our peers due primarily to our comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019. The loan to deposit ratio of our peers was 80.00% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 48.80% or $247,232,000 to $753,829,000 at December 31, 2020, from $506,597,000 at December 31, 2019. The market value of the portfolio reflected an unrealized gain of $21,091,000 at December 31, 2020, compared to an unrealized gain of $3,999,000 at December 31, 2019. Losses recognized in 2020, 2019, and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment. As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company. The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. INVESTMENTS (Continued) We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of December 31, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2020, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed. There were no OTTI losses recorded during the twelve months ended December 31, 2020, 2019, or 2018. At December 31, 2020, the Company had a total of 31 Private Label Mortgage and Asset Backed Securities (PLMBS) with a remaining principal balance of $82,413,000 and a net unrealized gain of approximately $1,095,000. Seven of these PLMBS with a remaining principal balance of $812,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. No credit related OTTI charges related to PLMBS were recorded during the years ended December 31, 2020 or December 31, 2019. The amortized cost, maturities and weighted average yield of investment securities at December 31, 2020 are summarized in the following table. (Dollars in thousands) Available-for-Sale Securities Debt securities(1) U.S. Government agencies Obligations of states and political subdivisions (2) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage and asset backed securities Corporate debt securities In one year or less After one through After five through five years ten years After ten years Total Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) $ - 298 - - $ - 3,254 - - $ - 18,330 - 651 $ 3.68% 339,852 4.25% $ 651 3.86% 361,734 4.25% 3.81% - 47 - - 54 4.75% 7,683 - - 5.85% 7,062 3.99% 8,932 30,000 - 1.68% 207,087 0.86% 65,751 - 5.10% 2.16% 214,203 2.54% 82,413 30,000 - 2.15% 2.50% 5.10% $ 345 0.65% $10,991 2.82% $64,324 3.73% $613,341 3.15% $689,001 3.20% (1) Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs. (2) Not computed on a tax equivalent basis. LOANS Total gross loans increased $158,967,000 or 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019. 50 Management’s Discussion and Analysis of Financial Condition and Results of Operations. LOANS (Continued) The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2020, 2019, 2018, 2017, and 2016. Loan Type (Dollars in thousands) Commercial: Commercial and industrial Agricultural production Total commercial Real estate: Owner occupied Real estate-construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Deferred loan fees, net Total gross loans (1) Allowance for credit losses Total loans (1) (1) Includes nonaccrual loans of: 2020 2019 2018 2017 2016 Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans $ 273,994 21,971 295,965 24.9% $ 2.0% 26.9% 102,541 23,159 125,700 10.9% $ 2.6% 13.5% 101,533 7,998 109,531 11.1% $ 0.9% 12.0% 100,856 14,956 115,812 11.2% $ 1.7% 88,652 25,509 12.9% 114,161 11.7% 3.4% 15.1% 208,843 18.9% 197,946 21.0% 183,169 19.9% 204,452 22.7% 191,665 25.3% 55,419 338,886 84,258 28,718 716,124 55,634 37,236 92,870 (2,612) 1,102,347 (12,915) 1,089,432 3,278 $ $ 5.0% 30.7% 7.6% 2.6% 64.8% 5.0% 3.3% 8.3% 100.0% $ $ 73,718 329,333 76,304 31,241 708,542 64,841 42,782 107,623 1,515 943,380 (9,130) 934,250 1,693 7.8% 34.9% 8.1% 3.3% 75.1% 6.9% 4.5% 11.4% 100.0% $ $ 101,606 305,118 76,884 32,799 699,576 69,958 38,038 107,996 1,592 918,695 (9,104) 909,591 2,740 11.1% 33.2% 8.4% 3.6% 76.2% 7.6% 4.2% 11.8% 100.0% $ $ 96,460 269,254 76,081 31,220 677,467 76,404 29,637 106,041 1,359 900,679 (8,778) 891,901 2,875 10.7% 29.9% 8.4% 3.5% 75.2% 8.5% 3.4% 11.9% 100.0% $ $ 69,200 184,225 86,761 18,945 550,796 64,494 25,910 90,404 1,267 756,628 (9,326) 747,302 2,180 9.1% 24.3% 11.5% 2.7% 72.9% 8.5% 3.5% 12.0% 100.0% At December 31, 2020, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $127,186,000, of which $2,529,000 were commercial loans, $110,616,000 were real estate loans, and $14,041,000 were consumer loans, and at December 31, 2019, the acquired loans had a balance of $152,735,000, of which $4,009,000 were commercial loans, $130,656,000 were real estate loans, and $18,070,000 were consumer loans. At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related. This level of concentration is consistent with 95.5% at December 31, 2019. Although we believe 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 nonperforming 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 was not involved in any sub-prime mortgage lending activities during the years ended December 31, 2020 and 2019. We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of December 31, 2020, gross loans included $192,916,000 in PPP loans which are fully guaranteed by the SBA. The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly. 51 Management’s Discussion and Analysis of Financial Condition and Results of Operations. LOAN MATURITIES The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2020. (In thousands) (net of deferred costs) Loan Maturities: Commercial and agricultural Real estate construction and other land loans Other real estate Consumer and installment Sensitivity to Changes in Interest Rates: Loans with fixed interest rates Loans with floating interest rates (1) (1) Includes floating rate loans which are currently at their floor rate in accordance with their respective One Year or Less After One Through Five Years After Five Years Total $ $ $ $ $ 243,230 12,717 85,485 6,319 347,751 64,324 283,427 347,751 46,111 $ $ $ $ $ 29,128 9,431 126,413 14,256 179,228 119,241 59,987 179,228 43,401 $ $ $ $ $ 23,607 33,271 448,806 72,296 $ 295,965 55,419 660,704 92,871 577,980 $ 1,104,959 103,716 474,264 $ 287,281 817,678 577,980 $ 1,104,959 370,460 $ 459,972 loan agreement 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 1) it is maintained on a cost recovery method because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) 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. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows. Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans. Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received. Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due. Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due. These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred. See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report. At December 31, 2020, total nonperforming assets totaled $3,278,000, or 0.16% of total assets, compared to $1,693,000, or 0.11% of total assets at December 31, 2019. Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Total nonperforming assets at December 31, 2020, included nonaccrual loans totaling $3,278,000, no OREO, and no repossessed assets. Nonperforming assets at December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2020, we had no loan considered a troubled debt restructuring (‘‘TDR’’) included in nonaccrual loans compared to one TDR totaling $322,000 at December 31, 2019. See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized. A summary of nonaccrual, restructured, and past due loans at December 31, 2020, 2019, 2018, 2017, and 2016 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at December 31, 2020 and 2019. Management is not aware of any potential problem loans, which were current and accruing at December 31, 2020, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future. 52 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NONPERFORMING ASSETS (Continued) Composition of Nonaccrual, Past Due and Restructured Loans (As of December 31, Dollars in thousands) Nonaccrual Loans: Commercial and industrial Owner occupied real estate Real estate construction and other land loans Agricultural real estate Commercial real estate Equity loans and line of credit Consumer and installment Restructured loans (non-accruing): Owner occupied Equity loans and line of credit Total nonaccrual Accruing loans past due 90 days or more Total nonperforming loans Interest foregone Nonperforming loans to total loans Accruing loans past due 90 days or more Accruing troubled debt restructurings Ratio of nonperforming loans to allowance for credit losses Loans considered to be impaired Related allowance for credit losses on impaired loans 2020 2019 2018 2017 2016 $ $ $ $ $ $ $ 752 370 1,556 - 512 - 88 - - 3,278 - 3,278 177 0.30% - 7,908 25.38% 11,186 631 $ $ $ $ $ $ $ 187 416 - 321 381 66 - - 322 1,693 - 1,693 85 0.18% - 2,040 18.54% 3,734 40 $ $ $ $ $ $ $ 298 215 1,439 - 418 320 - - 50 2,740 - 2,740 267 0.30% - 3,170 30.10% 5,909 90 $ $ $ $ $ $ $ 356 - 1,397 - 976 87 - - 59 2,875 - 2,875 210 0.32% - 3,491 32.75% 6,366 36 $ $ $ $ $ $ $ 447 87 - - 1,082 526 18 20 - 2,180 - 2,180 245 0.29% - 3,089 23.38% 5,269 307 As of December 31, 2020 and 2019, we had impaired loans totaling $11,186,000 and $3,734,000, respectively. We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent. Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of examination. Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For collateral dependent loans secured by real estate, we obtain external appraisals which are updated periodically, but generally no less than annually to determine the fair value of the collateral, and we record an immediate charge-off for the difference between the book value of the loan and the net realizable value, which is generally defined as appraised value less costs to dispose of the collateral. We perform quarterly internal reviews on all criticized and classified loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive the full amount of interest and principal under the original contractual terms, or when loans are delinquent 90 days or more, unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. Foregone interest on nonaccrual loans totaled $177,000 for the year ended December 31, 2020 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $85,000 for the year ended December 31, 2019 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $267,000 for the year ended December 31, 2018, of which $4,000 was attributable to troubled debt restructurings. 53 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NONPERFORMING ASSETS (Continued) The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2020. (In thousands) Non-accrual loans: Balances December 31, 2019 Additions to Nonaccrual Loans Net Pay Downs Transfer to Foreclosed Collateral Returns to Accrual Status Charge- Offs Balances December 31, 2020 Commercial and industrial Real estate Real estate construction and other land $ loans Agricultural real estate Equity loans and lines of credit Consumer Restructured loans (non-accruing): Equity loans and lines of credit 187 797 - 321 66 - 322 $ $ 798 532 1,769 - - 95 - $ (69) (447) (213) (321) (24) (7) (322) Total non-accrual $ 1,693 $ 3,194 $ (1,403) $ - - - - - - - - $ $ (164) - - - (42) - - $ (206) $ - - - - - - - - $ 752 882 1,556 - - 88 - $ 3,278 OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or fair market value less selling costs. As of December 31, 2020, 2019, and 2018, the Bank had no OREO properties. The Company held no repossessed assets at December 31, 2020, 2019, and 2018, which is included in other assets on the consolidated balance sheets. ALLOWANCE FOR CREDIT LOSSES We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management including, but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative and quantitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 48 quarters was an appropriate look-back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look-back period. In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received. The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit/ Compliance Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors. The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (1) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (2) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Management adheres to an internal review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories. The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual. 54 Management’s Discussion and Analysis of Financial Condition and Results of Operations. ALLOWANCE FOR CREDIT LOSSES (Continued) The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for 2020 2019 2018 2017 2016 the periods indicated: (Dollars in thousands) Loans outstanding at December 31, Average loans outstanding during the year Allowance for credit losses: Balance at beginning of year Deduct loans charged off: Commercial and industrial Agricultural production Owner occupied Consumer loans Total loans charged off Add recoveries of loans previously charged off: Commercial and industrial Agricultural production Owner occupied Real estate construction and other land loans Commercial real estate Consumer loans Total recoveries Net (charge-offs) recoveries Provision (reversal) charged to credit losses $ $ $ $ $ $ 1,104,959 1,055,712 9,130 (121) - - (108) (229) 612 - - - - 127 739 510 3,275 Balance at end of year $ 12,915 $ Allowance for credit losses as a percentage of outstanding loan balance Net recoveries (charge-offs) to average loans outstanding 1.17% 0.05% 941,865 930,883 9,104 (1,032) - - (164) (1,196) 134 - - - - 63 197 (999) 1,025 9,130 0.97% (0.11)% $ $ $ $ $ $ 917,103 912,128 8,778 (94) - - (116) (210) 207 - 21 - 81 177 486 276 50 $ $ $ 899,320 793,343 9,326 (197) (10) (22) (235) (464) 850 10 49 - 17 140 1,066 602 (1,150) $ 9,104 $ 8,778 $ 0.99% 0.03% 0.98% 0.08% 755,361 646,573 9,610 (621) - - (262) (883) 3,656 1,631 - 702 283 177 6,449 5,566 (5,850) 9,326 1.23% 0.86% Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit/Compliance Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure. 55 Management’s Discussion and Analysis of Financial Condition and Results of Operations. ALLOWANCE FOR CREDIT LOSSES (Continued) The allocation of the allowance for credit losses is set forth below: 2020 2019 2018 2017 2016 Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount 1,764 255 2,128 1,204 4,781 838 223 457 634 631 24.9% $ 2.0% 18.9% 5.0% 30.7% 7.6% 2.6% 5.0% 3.3% 1,115 313 1,319 932 3,453 925 140 425 472 36 10.9% $ 2.6% 21.0% 7.8% 34.9% 8.1% 3.3% 6.9% 4.5% 1,604 67 1,131 1,271 3,017 947 173 419 407 68 11.1% $ 0.9% 19.9% 11.1% 33.2% 8.4% 3.6% 7.6% 4.2% 1,784 287 1,252 1,004 1,958 1,441 140 464 361 87 11.2% $ 1.7% 22.7% 10.7% 29.9% 8.4% 3.5% 8.5% 3.4% 1,884 296 1,408 698 1,969 1,969 156 483 369 94 11.7% 3.4% 25.3% 9.1% 24.3% 11.5% 2.7% 8.5% 3.5% Loan Type (Dollars in thousands) Commercial: Commercial and industrial Agricultural production Real estate: Owner occupied Real estate construction and other land $ loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Unallocated reserves Total allowance for credit losses $ 12,915 100.0% $ 9,130 100.0% $ 9,104 100.0% $ 8,778 100.0% $ 9,326 100.0% Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge-offs that exist in the portfolio at that time. We assign qualitative and quantitative factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, experience, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. As of December 31, 2020, the allowance for credit losses (ALLL) was $12,915,000, compared to $9,130,000 at December 31, 2019, a net increase of $3,785,000. The net increase in the ALLL reflected the provisioning and net recoveries during the year ended December 31, 2020 which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio. Net recoveries totaled $510,000 while the provision for credit losses was $3,275,000 for the year ended December 31, 2020. The Company’s provision for credit losses during the year ended December 31, 2020 is primarily due to an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The balance of classified loans and loans graded special mention, totaled $36,136,000 and $36,406,000 at December 31, 2020 and $33,838,000 and $28,183,000 at December 31, 2019, respectively. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $326,179,000 as of December 31, 2020, compared to $291,182,000 as of December 31, 2019. At December 31, 2020 and 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period. The ALLL as a percentage of total loans was 1.17% at December 31, 2020, and 0.97% at December 31, 2019. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $127,186,000 at December 31, 2020 and $152,735,000 at December 31, 2019. Excluding these acquired loans from the calculation, the ALLL to total gross loans was 1.32% and 1.15% as of December 31, 2020 and 2019, respectively, and general reserves associated with non-impaired loans to total non-impaired loans was 1.59% and 1.16%, respectively. The loan portfolio acquired in the mergers was booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL. The Company’s loan portfolio balances in 2020 increased from 2019 through organic growth and through participation in the PPP loan program. The PPP loans held in the loan portfolio are backed by the SBA at 100%; thus, no allowance is required. Management believes that the change in the allowance for credit losses to total loans ratios is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values. Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative and quantitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of December 31, 2020. Non-performing loans totaled $3,278,000 as of December 31, 2020, and $1,693,000 as of December 31, 2019. Nonperforming loans as a percentage of total loans were 0.30% at December 31, 2020 compared to 0.18% at December 31, 2019. The Company had no other real estate owned at December 31, 2020, December 31, 2019, and December 31, 2018. No foreclosed assets were recorded at December 31, 2020, December 31, 2019, and December 31, 2018. The allowance for credit losses as a percentage of nonperforming loans was 393.99% and 539.28% as of December 31, 2020 and December 31, 2019, respectively. In addition, management believes that the likelihood of recoveries on previously charged-off loans continues to improve based on the collection efforts of management combined with improvements in the value of real estate which serves as the primary source of collateral for loans. Management believes the allowance at December 31, 2020 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. 56 Management’s Discussion and Analysis of Financial Condition and Results of Operations. GOODWILL AND INTANGIBLE ASSETS Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2020 was $53,777,000 consisting of $13,466,000, $10,394,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of FLB, SVB, VCB, Service 1st Bancorp, and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. Goodwill is assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Based upon this assessment, it was determined that it was more likely than not that the fair value of the Company was more than its carrying value and therefore no quantitative impairment test was required. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the nine months ended September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. With the economic risks and uncertainties associated with the COVID-19 pandemic continuing during the fourth quarter of 2020, management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment as of December 31, 2020. The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of FLB of $1,879,000, the 2016 acquisition of SVB of $508,000 and the 2013 acquisition of VCB of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. The carrying value of intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense. The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2020 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 2020 which would necessitate further analysis. Amortization expense recognized was $695,000 for 2020, $695,000 for 2019 and $455,000 for 2018. The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands): Years Ending December 31, 2021 2022 2023 Thereafter Total Estimated Core Deposit Intangible Amortization $ $ 662 455 66 - 1,183 DEPOSITS AND BORROWINGS The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. Total deposits increased $389,425,000 or 29.21% to $1,722,710,000 as of December 31, 2020, compared to $1,333,285,000 as of December 31, 2019. Interest-bearing deposits increased $159,163,000 or 21.55% to $897,821,000 as of December 31, 2020, compared to $738,658,000 as of December 31, 2019. Non-interest bearing deposits increased $230,262,000 or 38.72% to $824,889,000 as of December 31, 2020, compared to $594,627,000 as of December 31, 2019. The Company’s deposit balances for the year ended December 31, 2020 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. Average non-interest bearing deposits to average total deposits was 47.46% for the year ended December 31, 2020 compared to 43.01% for the same period in 2019. Based on FDIC deposit market share information published as of June 2020, our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020 compared to 3.31% in 2019. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2020 and 2019. The composition of the deposits and average interest rates paid at December 31, 2020 and December 31, 2019 is summarized in the table below. (Dollars in thousands) NOW accounts MMA accounts Time deposits Savings deposits Total interest-bearing Non-interest bearing % of % of December 31, Total Effective December 31, Total Effective 2020 Deposits Rate 2019 Deposits Rate $ 310,697 341,088 89,846 156,190 897,821 824,889 18.0% 0.11% $ 19.8% 0.18% 5.2% 0.65% 9.1% 0.02% 52.1% 0.18% 47.9% 266,048 266,609 93,730 112,271 738,658 594,627 20.0% 0.21% 20.0% 0.24% 7.0% 0.73% 8.4% 0.02% 55.4% 0.26% 44.6% Total deposits $ 1,722,710 100.0% $ 1,333,285 100.0% We have no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2020, 2019, and 2018. (Dollars in thousands) Savings and NOW accounts Money market accounts Non-interest $ $ 2020 2019 2018 Balance Rate Balance Rate Balance Rate 433,742 0.08% $ 370,378 0.15% $ 383,667 0.12% 300,603 0.18% $ 270,918 0.24% $ 285,568 0.15% bearing demand $ 744,239 - $ 557,348 - $ 553,305 - Total deposits $ 1,568,194 0.09% $ 1,295,780 0.15% $ 1,333,754 0.09% 57 Management’s Discussion and Analysis of Financial Condition and Results of Operations. DEPOSITS AND BORROWINGS (Continued) The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2020. (In thousands) Three months or less Over 3 through 6 months Over 6 through 12 months Over 12 months $ $ 28,113 10,542 15,756 8,385 62,796 As of December 31, 2020 and 2019, the Company had no short-term or long-term Federal Home Loan Bank (FHLB) of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to Liquidity section below for further discussion of FHLB advances. The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 and $70,000,000 at December 31, 2020 and 2019, respectively, at interest rates which vary with market conditions. As of December 31, 2020 and 2019, the Company had no overnight borrowings outstanding under these credit facilities. CAPITAL RESOURCES Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary sources of capital for the Company have been internally generated capital through retained earnings and the issuance of common and preferred stock. 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 $245,021,000 as of December 31, 2020, compared to $228,128,000 as of December 31, 2019. The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000. During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000. During 2019, the Bank declared and paid cash dividends to the Company in the amount of $20,100,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,805,000 or $0.43 per common share cash dividend to shareholders of record during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repurchased and retired common stock in the amount of $15,619,000. During 2018 the Bank declared and paid cash dividends to the Company in the amount of $2,850,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $4,270,000 or $0.31 per common share cash dividend to shareholders of record during the year ended December 31, 2018. During the year ended December 31, 2018, the Company repurchased and retired common stock in the amount of $894,000. The following table sets forth certain financial ratios for the years ended December 31, 2020, 2019, and 2018. Net income: To average assets To average shareholders’ equity Dividends declared per share to net income per share Average shareholders’ equity to average assets 2020 2019 2018 1.11% 8.85% 1.36% 9.39% 1.35% 10.07% 26.99% 26.22% 20.00% 12.54% 14.51% 13.40% Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. The following table presents the Company’s regulatory capital ratios as of December 31, 2020 and December 31, 2019. December 31, 2020 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio December 31, 2019 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Actual Ratio Amount Ratio (Dollars in thousands) $ $ $ $ $ $ $ $ 178,407 173,407 178,407 191,572 172,945 167,945 172,945 182,325 9.28% 14.10% 14.50% 15.58% 11.38% 14.55% 14.98% 15.79% 58 Management’s Discussion and Analysis of Financial Condition and Results of Operations. CAPITAL RESOURCES (Continued) LIQUIDITY The following table presents the Bank’s regulatory capital ratios as of December 31, 2020 and December 31, 2019 Actual Ratio Minimum regulatory requirement (1) Minimum requirement for ‘‘Well-Capitalized’’ Institution Amount Ratio Amount Ratio Amount Ratio December 31, 2020 Tier 1 Leverage Ratio $ 177,269 9.23% $ 76,852 4.00% $ 96,065 5.00% Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio December 31, 2019 Tier 1 Leverage $ 177,269 14.41% $ 55,346 7.00% $ 79,945 6.50% $ 177,269 14.41% $ 73,795 8.50% $ 98,394 8.00% $ 190,434 15.48% $ 98,394 10.50% $ 122,992 10.00% Ratio $ 171,332 11.27% $ 60,810 4.00% $ 76,012 5.00% Common Equity Tier 1 Ratio (CET 1) Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio $ 171,332 14.85% $ 51,930 7.00% $ 75,010 6.50% $ 171,332 14.85% $ 69,240 8.50% $ 92,320 8.00% $ 180,712 15.66% $ 92,320 10.50% $ 115,400 10.00% (1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three-month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2020, the rate was 1.84%. Interest expense recognized by the Company for the years ended December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000, respectively. 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 Directors’ Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). 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 December 31, 2020, the Company had unpledged securities totaling $532,673,000 available as a secondary source of liquidity and total cash and cash equivalents of $70,278,000. Cash and cash equivalents at December 31, 2020 increased 33.67% compared to December 31, 2019. Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses. To augment our liquidity, we have established Federal funds lines with various correspondent banks. At December 31, 2020, our available borrowing capacity includes approximately $110,000,000 in Federal funds lines with our correspondent banks and $235,371,000 in unused FHLB advances. At December 31, 2020, 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 December 31, 2020 and 2019: Credit Lines (In thousands) Unsecured Credit Lines (interest rate varies with market): Credit limit Balance outstanding Federal Home Loan Bank (interest rate at prevailing interest rate): Credit limit Balance outstanding Collateral pledged Fair value of collateral Federal Reserve Bank (interest rate at prevailing discount interest rate): Credit limit Balance outstanding Collateral pledged Fair value of collateral December 31, December 31, 2020 2019 $ $ $ $ $ $ $ $ $ $ 110,000 $ - $ 70,000 - 235,371 $ - $ 435,152 $ 379,831 $ 304,987 - 446,742 410,788 13,323 $ - $ 13,538 $ 13,703 $ 4,931 - 5,065 5,036 The liquidity of our 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 state and federal regulations. OFF-BALANCE SHEET ITEMS In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $326,179,000 as of December 31, 2020 compared to $291,182,000 as of December 31, 2019. For a more detailed discussion of these financial instruments, see Note 12 to the audited Consolidated Financial Statements in this Annual Report. 59 Management’s Discussion and Analysis of Financial Condition and Results of Operations. OFF-BALANCE SHEET ITEMS (Continued) Allowance for Credit Losses Contractual Obligations The contractual obligations of the Company, summarized by type of obligation and contractual maturity at December 31, 2020, are as follows: Less Than One Year One to Three Years Three to Five Years After Five Years Total $ 1,709,300 $ 11,071 $ 1,453 $ 886 $ 1,722,710 - 1,753 - 3,564 - 2,406 5,155 1,944 5,155 9,667 (In thousands) Deposits Subordinated Notes Operating leases Our allowance for credit losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risks. The allowance is only an estimate of the inherent loss in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. Our accounting for estimated loan losses is discussed and disclosed primarily in Note 1 and 4 to the consolidated financial statements under the heading ‘‘Allowance for Credit Losses’’. Total $ 1,711,053 $ 14,635 $ 3,859 $ 7,985 $ 1,737,532 Goodwill Deposits represent both non-interest bearing and interest bearing deposits. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit. Deposits with indeterminate maturities, such as demand, savings and money market accounts are reflected as obligations due in less than one year. Subordinated notes issued to a capital trust which was formed solely for the purpose of issuing trust preferred securities. These subordinated notes were acquired as a part of the merger with Service 1st. All of these securities are variable rate instruments. The trust preferred securities mature on October 7, 2036, and are redeemable quarterly at the Company’s option. See ‘‘Capital Resources.’’ In the ordinary course of business, the Company is party to various operating leases. For operating leases, the dollar balances reflected in the table above are categorized by the due date of the lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases. see Note 9—Leases in the financial statements included in this Form 10-K. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with the accounting principles generally accepted in the United States (‘‘U.S. GAAP’’) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements. We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, see Note 1—Summary of Significant Accounting Policies in the financial statements included in this Form 10-K. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For acquisitions, we are required to record the assets acquired, including identified intangible assets such as goodwill, and the liabilities assumed at their fair value. The carrying value of goodwill recorded must be reviewed for impairment at the reporting unit level, on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. Management has determined that the Company has one reporting unit. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides. The Company performs its annual evaluation of goodwill impairment in the third quarter of each year and may elect to perform a quantitative impairment analysis or first conduct a qualitative analysis to determine if a quantitative analysis is necessary. Additionally, the Company evaluates goodwill impairment on an interim basis if events or changes in circumstances between annual tests indicate additional testing may be warranted to determine if goodwill might be impaired. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. In the third quarter 2020, the Company engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in response to continued macroeconomic deterioration and the ongoing impacts to the banking industry and markets in which the Company operates. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value. As of December 31, 2020, based on our qualitative assessment, it was determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount, including goodwill. See Note 6 ‘‘Goodwill and Intangible Assets’’ in the financial statements in this Form 10-K for further discussion. INFLATION The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items. However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates. At December 31, 2020, we do not believe that inflation will have a material impact on our consolidated financial position or results of operations. However, if inflation concerns cause short term rates to rise in the near future, we may benefit by immediate repricing of a portion of our loan portfolio. Refer to Quantitative and Qualitative Disclosures About Market Risk for further discussion. 60 Quantitative and Qualitative Disclosures about Market Risk Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions that operate like we do. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve. We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of December 31, 2020, 74.00% of our loan portfolio was tied to adjustable-rate indices. The majority of our adjustable rate loans are tied to prime and reprice within 90 days. Several of our loans, tied to prime, are at their floors and will not reprice until prime plus the factor is greater than the floor. The majority of our time deposits have a fixed rate of interest. As of December 31, 2020, 86.06% of our time deposits mature within one year or less. Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings. Our management and Board of Directors’ Asset/Liability Committees (ALCO) are responsible for managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity. The ALCO operates under policies and within risk limits prescribed, reviewed, and approved by the Board of Directors. The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by an increasing interest rate environment and positively impacted by a decreasing interest rate environment. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by an increasing interest rate environment and negatively impacted by a decreasing interest rate environment. Our mix of assets consists primarily of loans and securities, none of which are held for trading purposes. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these assets if interest rates rise in the future. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest rate caps and floors. Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Earnings simulations are produced using a software model that is based on actual cash flows and repricing characteristics for all of our financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments. Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are normally subjected to up to 400 basis point increases and decreases in interest rates in 100 basis point increments. Under each interest rate scenario, we project our net interest income. From these results, we can then develop alternatives in dealing with the tolerance thresholds. The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses. Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the company’s future earnings in the event those pressures become more prevalent. As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $5.2 million in subordinated notes issued by the Company’s subsidiary, Service 1st Capital Trust I. As a result, all significant interest rate risk procedures are performed at the Bank level. The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effects of interest rate changes under various interest rate scenarios. Management employs asset and liability management software and engages consultants to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of December 31, 2020. This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies. Management will continue to perform this analysis each quarter. The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly. The results of these models indicate how much of the Company’s net interest income is ‘‘at risk’’ from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s December 31, 2020 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (‘‘bps’’), 200 bps, 300 bps, and 400 bps rate increase and a 100 bps decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, 200 bps, 300 bps, and 400 bps decreases are not considered a realistic possibility and are therefore not modeled. The results in the table below indicate the change in net interest income the Company would expect to see as of December 31, 2020, if interest rates were to change in the amounts set forth: Sensitivity Analysis of Impact of Rate Changes on Interest Income $ Change from % Change from Hypothetical Change in Rates (Dollars in thousands) Up 400 bps Up 300 bps Up 200 bps Up 100 bps Unchanged Down 100 bps Rates at Projected Net December 31, December 31, 2020 Interest Income Rates at 2020 $ 59,700 $ 62,300 63,000 63,100 62,800 61,200 (3,100) (500) 200 300 - (1,600) (4.94)% (0.80)% 0.32% 0.48% - (2.55)% It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and 61 Quantitative and Qualitative Disclosures about Market Risk assumptions made by management, and that may turn out to be different, and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results. The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily, and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Rate Type (Dollars in thousands) Balance Percent of Total Balance Percent of Total Variable rate Fixed rate $ 817,678 287,281 74.00% $ 26.00% 646,070 295,793 68.59% 31.41% Total gross loans $ 1,104,959 100.00% $ 941,863 100.00% Approximately 74.00% of our loan portfolio is tied to adjustable rate indices and 32.79% of our loan portfolio reprices within 90 days. As of December 31, 2020, we had 1,702 commercial and real estate loans totaling $527,265,000 with floors ranging from 3.25% to 6.75% and ceilings ranging from 5.00% to 25.00%. The following table shows the repricing categories of the Company’s loan portfolio at December 31, 2020 and 2019: Repricing (Dollars in thousands) < 1 Year 1-3 Years 3-5 Years > 5 Years December 31, 2020 December 31, 2019 Balance $ 455,859 233,153 274,800 141,147 Percent of Total Balance Percent of Total 41.26% $ 21.10% 24.87% 12.77% 313,922 224,591 275,342 128,008 33.33% 23.85% 29.23% 13.59% Total gross loans $ 1,104,959 100.00% $ 941,863 100.00% Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations. 62 Stock Price Information The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 5, 2021, the Company had approximately 934 shareholders of record. The following table shows the high and low sales prices for the common stock for each quarter as reported by NASDAQ. Quarter Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 $ Sales Prices for the Company’s Common Stock High 20.35 21.48 21.75 22.15 21.69 16.81 15.68 16.70 Low 18.10 19.08 18.97 19.24 10.68 10.59 11.51 12.25 $ The Company paid common share cash dividends of $0.44 and $0.43 per share in 2020 and 2019, respectively. The Company’s primary source of income with which to pay cash dividends are dividends from the Bank. See Note 13 in the audited Consolidated Financial Statements in Item 8 of this Annual Report. SHAREHOLDER INQUIRIES Inquiries regarding Central Valley Community Bancorp’s accounting, internal accounting controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com, anonymously at www.ethicspoint.com or by calling Ethics Point, Inc. at (866) 294-9588. General inquiries about the Company or the Bank should be directed to LeAnn Ruiz, Assistant Corporate Secretary at (800) 298-1775. 63 Investing in Our Community Ag Lenders Society of California American Bankers Association American Cancer Society American Heart Association American Pistachio Growers Ann’s Kids For Christmas Associated Students, Inc. Food Pantry - Sacramento State Atwater Ag Boosters Boys & Girls Club El Dorado County Western Slope Building Industry Association of Tulare/Kings Counties Building Owners & Managers Association of Sacramento Business Organization of Old Town California Agricultural Leadership Foundation California Armenian Home California Bankers Association California Financial Crimes Investigators Association California Fresh Fruit Association California Society of Association Executives California Society of Certified Public Accountants California State University, Fresno – Ag One Foundation California State University, Fresno – Bulldog Foundation California State University, Fresno – Craig School of Business California State University, Fresno – Maddy Institute California Tomato Growers Association California Women For Agriculture - Merced Chapter Catholic Charities Diocese of Fresno Centers For Living Central California Food Bank Central Sierra Historical Society Central Sierra Resiliency Fund Central Valley Community Foundation Central Valley SCORE City of Kerman Clovis Chamber of Commerce Community Medical Foundation Construction Industry Education Foundation - Sacramento Regional Builders Exchange Clovis Rodeo Association Doug McDonald Scholarship Economic Development Corporation El Dorado Hills Chamber of Commerce Emergency Food Bank of Stockton/San Joaquin Exeter Chamber of Commerce Exeter Lions Club FED Corp Folsom Chamber of Commerce Folsom Cordova Community Partnership Folsom Cordova Unified School District Folsom Garden Club Folsom High School Folsom Historic District Folsom, El Dorado & Sacramento Historical Railroad Association FoodLink For Tulare County Inc. Fresno Association of REALTORS Fresno Business Council Fresno Chamber Of Commerce Fresno County Farm Bureau Fresno County Economic Development Corporation Fresno Metro Black Chamber of Commerce Fresno Police Chaplaincy Girl Scouts of Central California South Greater Stockton Chamber of Commerce Habitat For Humanity Greater Fresno Area Independent Community Bankers Of America Institute of Real Estate Management - Sacramento Valley Kerman 4-H Club Kerman Lions Basketball Boosters Club Kings County Farm Bureau Kings/Tulare Homeless Alliance Kiwanis Club of Fresno Kiwanis Club of Stockton Lighthouse Counseling & Family Resource Center Lodi Chamber of Commerce Loel Senior Center and Gardens Love Inc. of Fresno Love Inc. of Merced Madera Chamber of Commerce Madera Community Hospital Foundation Madera County Farm Bureau Madera County Food Bank Make-A-Wish Northeastern & Central California and Northern Nevada Marjaree Mason Center Merced County Fair Merced County Farm Bureau Merced County Food Bank Modesto Chamber of Commerce National Association of Government Guaranteed Lenders New Beginnings For Merced County Animals North State Building Industry Association 64 Oakhurst Area Chamber of Commerce Orangevale-Fair Oaks Food Bank Placer Food Bank Placer Society for Prevention of Cruelty to Animals Poverello House Radiant Church Rancho Cordova Chamber of Commerce Rebuilding Together Sacramento Rodeo Tough Productions Ronald McDonald House Charities of The Central Valley Roseville Area Chamber of Commerce Rotary Club of Clovis Rotary Club of Fair Oaks Rotary Club of Fig Garden Rotary Club of Fresno Rotary Club of Kerman Rotary Club of Madera Sacramento Food Bank & Family Services Sacramento Master Singers Sacramento Metro Chamber of Commerce Sacramento Regional Builders Exchange Sacramento Self-Help Housing Inc. San Joaquin Farm Bureau Federation San Joaquin River Parkway and Conservation Trust, Inc. Second Harvest Food Bank Self-Help Enterprises Sequoia Council of the Boy Scouts of America Shingle Springs Cameron Park Chamber of Commerce Sierra Pacific High School Booster Club Signature User Group Spring Valley Elementary School St. Albans Country Day School St. Joachim Catholic Church St. Joachim’s Catholic School St. Jude Children’s Research Hospital STAND Affordable Housing Program Stanislaus County Farm Bureau Stockton Athletic Hall Of Fame Stockton Shelter For The Homeless The Bank CEO Network The Downtown Fresno Partnership The Exeter Art Gallery & Museum The First Tee of Greater Sacramento  The Impact Foundry The Risk Management Association The Salvation Army The Salvation Army - Tulare Corps Tulare County Farm Bureau Twin Lakes Food Bank Valley Children’s Healthcare Foundation Valley Crime Stoppers Valley Teen Ranch Visalia Chamber of Commerce Visalia Economic Development Corporation West Visalia Kiwanis Club Western Payments Alliance 65 Investing In Relationships. www.cvcb.com River Park 8375 North Fresno Street Fresno, CA 93720 (559) 447-3350 Gold River 11230 Gold Express Drive, Suite 311 Gold River, CA 95670 (916) 235-4588 Kerman 360 South Madera Avenue Kerman, CA 93630 (559) 842-2265 Lodi 1901 West Kettleman Lane, Suite 100 Lodi, CA 95242 (209) 333-5000 Madera 1919 Howard Road Madera, CA 93637 (559) 673-0395 Merced 3337 G Street, Suite B Merced, CA 95340 (209) 725-2820 Modesto 2020 Standiford Avenue, Suite H Modesto, CA 95350 (209) 576-1402 Oakhurst 40004 Highway 41, Suite 101 Oakhurst, CA 93644 (559) 642-2265 Prather 29430 Auberry Road Prather, CA 93651 (559) 855-4100 Customer Service (800) 298-1775 (559) 298-1775 Cameron Park 3311 Coach Lane Suite A Cameron Park, CA 95682 (530) 676-3400 Clovis Clovis Main 600 Pollasky Avenue Clovis, CA 93612 (559) 323-3480 Herndon & Fowler 1795 Herndon Avenue, Suite 101 Clovis, CA 93611 (559) 323-2200 Exeter 300 East Pine Street Exeter, CA 93221 (559) 594-9919 Folsom 905 Sutter Street, Suite 100 Folsom, CA 95630 (916) 985-8700 Fresno Corporate Office 7100 North Financial Drive, Suite 101 Fresno, CA 93720 (559) 298-1775 Fig Garden Village 5180 North Palm, Suite 105 Fresno, CA 93704 (559) 221-2760 Fresno Downtown 2404 Tulare Street Fresno, CA 93721 (559) 268-6806 Roseville 2999 Douglas Boulevard, Suite 160 Roseville, CA 95661 (916) 859-2550 Stockton 2800 West March Lane, Suite 120 Stockton, CA 95219 (209) 956-7800 Visalia Floral 120 North Floral Street Visalia, CA 93291 (559) 625-8733 Mission Oaks Plaza 5412 Avenida de los Robles Visalia, CA 93291 (559) 730-2851 Commercial Lending Agribusiness (559) 323-3319 Real Estate (559) 323-3346 SBA (559) 323-3376 Greater Sacramento (916) 859-2556 Mid-Valley (209) 644-7824 Central Valley (559) 323-3481 South Valley (559) 594-9919 Ext. 6504 66 Investing In Relationships. 

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