UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~June~~September 30, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000—31977

CENTRAL VALLEY COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)



California		77-0539125
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



7100 N. Financial Dr., Suite 101, Fresno, California		93720
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number (559) 298-1775

Securities registered pursuant to Section 12(b) of the Act:



Common Stock, no par value	CVCY	NASDAQ Capital Market
(Title of Each Class)	(Trading Symbol)	(Name of Each Exchange on which Registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer ý

Non-accelerated filer o		~~(Do not check if a smaller reporting company)~~
		Small reporting company ý
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of ~~August 2,~~November 1, 2019 there were ~~13,447,553~~13,198,414 shares of the registrant’s common stock outstanding.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

2019 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



PART 1	FINANCIAL INFORMATION	3

ITEM 1	FINANCIAL STATEMENTS (Unaudited)	4

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3334

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	6162

ITEM 4	CONTROLS AND PROCEDURES	6162

PART II	OTHER INFORMATION	6162

ITEM 1	LEGAL PROCEEDINGS	6162

ITEM 1A	RISK FACTORS	6162

ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6263

ITEM 3	DEFAULTS UPON SENIOR SECURITIES	6263

ITEM 4	MINE SAFETY DISCLOSURES	6263

ITEM 5	OTHER INFORMATION	6263

ITEM 6	EXHIBITS	6364

SIGNATURES		6465

PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(In thousands, except share amounts)	June 30, 2019		December 31, 2018			September 30, 2019		December 31, 2018

ASSETS
Cash and due from banks	$	33,787	$	24,954		$	38,344	$	24,954
Interest-earning deposits in other banks	14,739		6,725			4,603		6,725
Federal funds sold	77		48			90		48
Total cash and cash equivalents	48,603		31,727			43,037		31,727
Available-for-sale debt securities	476,211		463,905			469,927		463,905
Equity securities	7,458		7,254			7,507		7,254
Loans, less allowance for credit losses of $9,405 at June 30, 2019 and $9,104 at December 31, 2018	950,806		909,591
Loans, less allowance for credit losses of $9,495 at September 30, 2019 and $9,104 at December 31, 2018						933,008		909,591
Bank premises and equipment, net	7,742		8,484			7,804		8,484
Bank-owned life insurance	29,863		28,502			30,047		28,502
Federal Home Loan Bank stock	6,062		6,843			6,062		6,843
Goodwill	53,777		53,777			53,777		53,777
Core deposit intangibles	2,225		2,572			2,051		2,572
Accrued interest receivable and other assets	30,480		25,181			30,907		25,181
Total assets	$	1,613,227	$	1,537,836		$	1,584,127	$	1,537,836
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	558,000	$	550,657		$	572,736	$	550,657
Interest bearing	736,087		731,641			737,010		731,641
Total deposits	1,294,087		1,282,298			1,309,746		1,282,298

Short-term borrowings	54,000		10,000			5,000		10,000
Junior subordinated deferrable interest debentures	5,155		5,155			5,155		5,155
Accrued interest payable and other liabilities	28,305		20,645			31,044		20,645
Total liabilities	1,381,547		1,318,098			1,350,945		1,318,098
Commitments and contingencies (Note 7)
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: 13,488,983 at June 30, 2019 and 13,754,965 at December 31, 2018	98,210		103,851
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 13,301,395 at September 30, 2019 and 13,754,965 at December 31, 2018						94,516		103,851
Retained earnings	128,723		120,294			132,935		120,294
Accumulated other comprehensive income (loss), net of tax	4,747		(4,407		)	5,731		(4,407		)
Total shareholders’ equity	231,680		219,738			233,182		219,738
Total liabilities and shareholders’ equity	$	1,613,227	$	1,537,836		$	1,584,127	$	1,537,836

See notes to unaudited consolidated financial statements.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In thousands, except share and per-share amounts)	2019		2018		2019		2018		2019			2018			2019		2018
INTEREST INCOME:
Interest and fees on loans	$	12,955	$	12,519	$	25,509	$	24,525	$	13,238		$	12,691		$	38,747	$	37,216
Interest on deposits in other banks	59		44		209		142		74			170			283		312
Interest and dividends on investment securities:
Taxable	3,337		2,185		6,360		4,744		3,462			2,533			9,821		7,277
Exempt from Federal income taxes	429		1,045		991		2,112		153			896			1,144		3,008
Total interest income	16,780		15,793		33,069		31,523		16,927			16,290			49,995		47,813
INTEREST EXPENSE:
Interest on deposits	469		252		862		490		566			320			1,428		810
Interest on junior subordinated deferrable interest debentures	55		52		112		95		51			52			163		147
Other	310		92		314		115		105			11			419		126
Total interest expense	834		396		1,288		700		722			383			2,010		1,083
Net interest income before provision for credit losses	15,946		15,397		31,781		30,823		16,205			15,907			47,985		46,730
PROVISION FOR CREDIT LOSSES	300		50		275		50		250			—			525		50
Net interest income after provision for credit losses	15,646		15,347		31,506		30,773		15,955			15,907			47,460		46,680
NON-INTEREST INCOME:
Service charges	713		726		1,403		1,481		672			739			2,075		2,220
Appreciation in cash surrender value of bank-owned life insurance	190		176		361		347		184			175			545		522
Interchange fees	384		380		727		725		374			381			1,101		1,106
Net realized gains on sale of credit card portfolio	—		578		—		578
Net realized gains (loss) on sale of credit card portfolio									—			(116		)	—		462
Net realized gains on sales of investment securities	2,459		82		3,511		897		1,685			380			5,196		1,277
Federal Home Loan Bank dividends	118		118		239		239		109			119			348		358
Loan placement fees	220		173		359		339		288			207			647		546
Other income	514		453		974		851		410			578			1,384		1,429
Total non-interest income	4,598		2,686		7,574		5,457		3,722			2,463			11,296		7,920
NON-INTEREST EXPENSES:
Salaries and employee benefits	6,912		6,833		13,402		13,249		6,731			6,387			20,133		19,636
Occupancy and equipment	1,452		1,577		2,931		3,114		1,317			1,489			4,248		4,603
Professional services	280		363		607		801		404			343			1,011		1,144
Data processing	401		370		796		850		390			409			1,186		1,259
Regulatory assessments	134		160		286		322		(69		)	154			217		476
ATM/Debit card expenses	186		176		377		377		270			192			647		569
License and maintenance contracts	605		222		1,382		434
Information technology									614			186			1,996		620
Directors’ expenses	193		133		369		223		184			158			552		381
Advertising	198		188		400		377		190			192			590		569
Internet banking expense	199		175		393		370		215			172			608		542
Acquisition and integration	—		—		—		217
Amortization of core deposit intangibles	173		93		347		187		174			94			521		281
Other	1,039		1,209		2,149		2,346		1,114			1,015			3,263		3,578
Total non-interest expenses	11,772		11,499		23,439		22,867		11,534			10,791			34,972		33,658
Income before provision for income taxes	8,472		6,534		15,641		13,363		8,143			7,579			23,784		20,942
Provision for income taxes	2,385		1,569		4,338		3,107		2,452			1,827			6,790		4,934
Net income	$	6,087	$	4,965	$	11,303	$	10,256	$	5,691		$	5,752		$	16,994	$	16,008
Earnings per common share:
Basic earnings per share	$	0.45	$	0.36	$	0.84	$	0.75	$	0.43		$	0.42		$	1.26	$	1.17
Weighted average common shares used in basic computation	13,533,724		13,692,358		13,515,752		13,681,229		13,360,030			13,715,141			13,515,109		13,692,657
Diluted earnings per share	$	0.45	$	0.36	$	0.83	$	0.74	$	0.42		$	0.42		$	1.25	$	1.16
Weighted average common shares used in diluted computation	13,635,834		13,823,278		13,612,866		13,814,087		13,450,187			13,836,828			13,615,552		13,821,828
Cash dividend per common share	$	0.11	$	0.07	$	0.21	$	0.14	$	0.11		$	0.08		$	0.32	$	0.22

See notes to unaudited consolidated financial statements.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Net income	$	6,087		$	4,965		$	11,303		$	10,256		$	5,691		$	5,752		$	16,994		$	16,008
Other Comprehensive Income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	7,890			(1,259		)	16,508			(9,831		)	3,081			(3,509		)	19,589			(13,340		)
Less: reclassification for net gains included in net income	2,459			82			3,511			897
Reclassification for net (gains) and losses included in net income													(1,685		)	(380		)	(5,196		)	(1,277		)
Other comprehensive income (loss), before tax	5,431			(1,341		)	12,997			(10,728		)	1,396			(3,889		)	14,393			(14,617		)
Tax (expense) benefit related to items of other comprehensive income	(1,606		)	335			(3,843		)	3,111			(412		)	1,210			(4,255		)	4,321
Total other comprehensive income (loss)	3,825			(1,006		)	9,154			(7,617		)	984			(2,679		)	10,138			(10,296		)
Comprehensive income (loss)	$	9,912		$	3,959		$	20,457		$	2,639
Comprehensive income													$	6,675		$	3,073		$	27,132		$	5,712

See notes to unaudited consolidated financial statements.

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(Unaudited)


	Common Stock								Accumulated Other Comprehensive Income (Loss) (Net of Taxes)				Total Shareholders’ Equity				Common Stock									Accumulated Other Comprehensive Income (Loss) (Net of Taxes)			Total Shareholders’ Equity
						Retained Earnings																	Retained Earnings
(In thousands, except share amounts)	Shares		Amount													Shares			Amount				Retained Earnings
Balance, March 31, 2018	13,752,037		$	103,980		Retained Earnings	$	107,544		$	(3,581	)		$	207,943
Balance, June 30, 2018																	13,785,591			$	104,226		$	111,605		$	(4,647	)	$	211,184
Net income	—		—			4,965			—				4,965				—			—			5,752			—			5,752
Other comprehensive loss	—		—			—			(1,006		)		(1,006		)		—			—			—			(2,679		)	(2,679		)
Restricted stock granted, net of forfeitures, and related tax benefit	20,448		—			—			—				—				609			—			—			—			—
Stock issued under employee stock purchase plan	2,606		45										45				7,570			79									79
Stock-based compensation expense	—		110			—			—				110				—			148			—			—			148
Cash dividend	—		—			(964		)	—				(964		)		—			—			(1,102		)	—			(1,102		)
Stock options exercised	10,500		91			—			—				91				2,719			53			—			—			53
Balance, June 30, 2018	13,785,591		$	104,226		$	111,545		$	(4,587	)		$	211,184
Balance, September 30, 2018																	13,796,489			$	104,506		$	116,255		$	(7,326	)	$	213,435



Balance, March 31, 2019	13,680,930		$	102,395		$	124,138		$	922			$	227,455
Balance, June 30, 2019																	13,488,983			$	98,210		$	128,723		$	4,747		$	231,680
Net income	—		—			6,087			—				6,087				—			—			5,691			—			5,691
Other comprehensive income	—		—			—			3,825				3,825				—			—			—			984			984
Restricted stock granted, net of forfeitures, and related tax benefit	20,125		—			—			—				—
Restricted stock forfeited																	(1,770	)		—			—			—			—
Stock issued under employee stock purchase plan	2,865		51			—			—				51				2,265			41			—			—			41
Stock-based compensation expense	—		151			—			—				151				—			136			—			—			136
Cash dividend	—		—			(1,502		)	—				(1,502		)		—			—			(1,479		)	—			(1,479		)
Stock options exercised	8,184		65			—			—				65				300			2			—			—			2
Repurchase and retirement of common stock	(223,121	)	(4,452		)	—			—				(4,452		)		(188,383	)		(3,873		)	—			—			(3,873		)
Balance, June 30, 2019	13,488,983		$	98,210		$	128,723		$	4,747			$	231,680
Balance, September 30, 2019																	13,301,395			$	94,516		$	132,935		$	5,731		$	233,182

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(Unaudited)


	Common Stock								Accumulated Other Comprehensive Income (Loss) (Net of Taxes)			Total Shareholders’ Equity				Common Stock									Accumulated Other Comprehensive Income (Loss) (Net of Taxes)				Total Shareholders’ Equity
						Retained Earnings																Retained Earnings
(In thousands, except share amounts)	Shares		Amount												Shares			Amount				Retained Earnings
Balance, January 1, 2018	13,696,722		$	103,314		Retained Earnings	$	103,419		$	2,826		$	209,559			13,696,722			$	103,314		$	103,419		$	2,826			$	209,559
Cumulative-effect adjustment						(204		)	204													(144		)	144
Balance, January 1, 2018, adjusted	13,696,722		103,314			103,215			3,030			209,559				13,696,722			103,314			103,275			2,970				209,559
Net income	—		—			10,256			—			10,256				—			—			16,008			—				16,008
Other comprehensive loss	—		—			—			(7,617		)	(7,617		)		—			—			—			(10,296		)		(10,296		)
Restricted stock granted, net of forfeitures, and related tax benefit	19,910		—			—			—			—				20,519			—			—			—				—
Stock issued under employee stock purchase plan	5,059		88									88				7,778			141										141
Stock-based compensation expense	—		184			—			—			184				—			332			—			—				332
Cash dividend	—		—			(1,926		)	—			(1,926		)		—			—			(3,028		)	—				(3,028		)
Stock options exercised	63,900		640			—			—			640				71,470			719			—			—				719
Balance, June 30, 2018	13,785,591		$	104,226		$	111,545		$	(4,587	)	$	211,184
Balance, September 30, 2018																13,796,489			$	104,506		$	116,255		$	(7,326	)		$	213,435



Balance, January 1, 2019	13,754,965		$	103,851		$	120,294		$	(4,407	)	$	219,738			13,754,965			$	103,851		$	120,294		$	(4,407	)		$	219,738
Net income	—		—			11,303			—			11,303				—			—			16,994			—			��	16,994
Other comprehensive income	—		—			—			9,154			9,154				—			—			—			10,138				10,138
Restricted stock granted, net of forfeitures, and related tax benefit	20,035		—			—			—			—				18,265			—			—			—				—
Stock issued under employee stock purchase plan	7,468		131			—			—			131				9,733			171			—			—				171
Stock awarded to employees	5,295		100			—			—			100				5,295			100			—			—				100
Stock-based compensation expense	—		294			—			—			294				—			430			—			—				430
Cash dividend	—		—			(2,874		)	—			(2,874		)		—			—			(4,353		)	—				(4,353		)
Stock options exercised	21,820		160			—			—			160				22,120			163			—			—				163
Repurchase and retirement of common stock	(320,600	)	(6,326		)	—			—			(6,326		)		(508,983	)		(10,199		)	—			—				(10,199		)
Balance, June 30, 2019	13,488,983		$	98,210		$	128,723		$	4,747		$	231,680
Balance, September 30, 2019																13,301,395			$	94,516		$	132,935		$	5,731			$	233,182

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,						For the Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,303		$	10,256		$	16,994		$	16,008
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease in deferred loan costs	132			5,948
Net (increase) decrease in deferred loan costs							(16		)	83
Depreciation	1,046			915			1,410			1,282
Accretion	(406		)	(530		)	(620		)	(694		)
Amortization	2,545			3,848			3,556			5,183
Stock-based compensation	294			184			430			332
Provision for credit losses	275			50			525			50
Net realized gains on sales of available-for-sale investment securities	(3,511		)	(897		)	(5,196		)	(1,277		)
Net loss on disposal of premises and equipment							—			2
Net change in equity securities	(204		)	42			(253		)	112
Increase in bank-owned life insurance, net of expenses	(361		)	(347		)	(545		)	(522		)
Net gain on sale of credit card portfolio	—			(578		)	—			(462		)
Net (increase) decrease in accrued interest receivable and other assets	(8,485		)	3,332			(8,720		)	3,005
Net increase (decrease) in accrued interest payable and other liabilities	7,761			(1,772		)	10,500			(1,086		)
Deferred income tax (benefit) expense	(713		)	180			(1,345		)	227
Net cash provided by operating activities	9,676			20,631			16,720			22,243
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investment securities	(212,662		)	(116,785		)	(286,896		)	(176,842		)
Proceeds from sales or calls of available-for-sale investment securities	203,426			131,617			280,991			234,175
Proceeds from maturity and principal repayments of available-for-sale investment securities	11,701			23,668			17,140			31,063
Proceeds from sale of credit card portfolio	—			2,954			—			2,954
Net increase in loans	(41,622		)	(42,515		)	(23,925		)	(13,588		)
Purchases of premises and equipment	(304		)	(649		)	(730		)	(755		)
Purchases of bank-owned life insurance	(1,000		)	—			(1,000		)	—
FHLB stock redeemed	781			—			780			—
Net cash used in investing activities	(39,680		)	(1,710		)
Net cash (used in) provided by investing activities							(13,640		)	77,007
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest bearing and savings deposits	11,711			(84,636		)	27,003			(125,485		)
Net increase (decrease) in time deposits	78			(16,840		)	445			(24,673		)
Proceeds from short-term borrowings from Federal Home Loan Bank	274,500			502,000			505,500			550,000
Repayments of short-term borrowings to Federal Home Loan Bank	(230,500		)	(472,000		)	(510,500		)	(550,000		)
Proceeds of borrowings from other financial institutions	2,870			—			2,870			11,500
Repayments of borrowings from other financial institutions	(2,870		)	—			(2,870		)	(11,500		)
Purchase and retirement of common stock	(6,326		)	—			(10,199		)	—
Proceeds from stock issued under employee stock purchase plan	131			88			171			141
Proceeds from exercise of stock options	160			640			163			719
Cash dividend payments on common stock	(2,874		)	(1,926		)	(4,353		)	(3,028		)
Net cash provided by (used in) financing activities	46,880			(72,674		)	8,230			(152,326		)
Increase (decrease) in cash and cash equivalents	16,876			(53,753		)	11,310			(53,076		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	31,727			100,383			31,727			100,383
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	48,603		$	46,630		$	43,037		$	47,307


	For the Six Months Ended June 30,				For the Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest	$	1,238	$	688	$	1,957	$	1,074
Income taxes	$	4,720	$	1,080	$	6,580	$	1,530
Operating cash flows from operating leases	$	1,091	$	—	$	1,643	$	—
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets	$	10,129	$	—	$	10,129	$	—
Purchases of available-for-sale investment securities, not yet settled					$	—	$	5,150

See notes to unaudited consolidated financial statements.

Note 1. Basis of Presentation

The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2018 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at ~~June~~September 30, 2019, and the results of its operations and its cash flows for the ~~six-month~~nine-month interim periods ended ~~June~~September 30, 2019 and 2018 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year.

The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. 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 periods. Actual results could differ from those estimates.

Management has determined that since 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.

Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845), was issued February 2016. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 was effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow- Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability of approximately $10 million on the balance sheet for its operating leases where it is a lessee. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet.

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. ~~For~~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 ~~business entities~~companies additional time to implement the standards on CECL, leases, and hedging. On October 16, 2019, the FASB affirmed this proposal and directed the staff to draft a final ASU expected to be issued in November. The final ASU will extend the effective date for SEC filers, such as the Company, that are ~~SEC filers, the amendments of the update will become effective beginning~~classified as small reporting companies to January 1, ~~2020.~~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 2020 due to the ~~second half~~fact the Company elected to delay implementation of ~~2019.~~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 significant 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) 2017-04 - Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment, was issued January 2017. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-04 effective during the first quarter of 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date in order to avoid losses recognized upon call. For public business entities that are SEC filers, the amendments of the update become effective in fiscal years beginning after December 15, 2018. The Company adopted this ASU effective January 1, 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

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. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

Note 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. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:

Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date.

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3 — Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

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):


	June 30, 2019														September 30, 2019
	Carrying Amount			Fair Value											Carrying Amount			Fair Value
(In thousands)			Level 1			Level 2			Level 3			Total					Level 1			Level 2			Level 3			Total
Financial assets:
Cash and due from banks	$	33,787		$	33,787		$	—		$	—		$	33,787	$	38,344		$	38,344		$	—		$	—		$	38,344
Interest-earning deposits in other banks	14,739			14,739			—			—			14,739		4,603			4,603			—			—			4,603
Federal funds sold	77			77			—			—			77		90			90			—			—			90
Available-for-sale debt securities	476,211			—			476,211			—			476,211		469,927			—			469,927			—			469,927
Equity securities	7,458			7,458			—			—			7,458		7,507			7,507			—			—			7,507
Loans, net	950,806			—			—			947,248			947,248		933,008			—			—			929,307			929,307
Federal Home Loan Bank stock	6,062			N/A			N/A			N/A			N/A		6,062			N/A			N/A			N/A			N/A
Accrued interest receivable	5,528			11			1,809			3,708			5,528		5,630			16			1,850			3,764			5,630
Financial liabilities:
Deposits	1,294,087			1,102,613			96,319			—			1,198,932		1,309,746			1,147,010			96,853			—			1,243,863
Short-term borrowings	54,000			—			54,000			—			54,000		5,000			—			5,000			—			5,000
Junior subordinated deferrable interest debentures	5,155			—			—			4,129			4,129		5,155			—			—			3,884			3,884
Accrued interest payable	185			—			130			55			185		187			—			136			51			187



	December 31, 2018
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	24,954	$	24,954	$	—	$	—	$	24,954
Interest-earning deposits in other banks	6,725		6,725		—		—		6,725
Federal funds sold	48		48		—		—		48
Available-for-sale debt securities	463,905		—		463,905		—		463,905
Equity securities	7,254		7,254		—		—		7,254
Loans, net	909,591		—		—		899,214		899,214
Federal Home Loan Bank stock	6,843		N/A		N/A		N/A		N/A
Accrued interest receivable	6,429		32		2,323		4,074		6,429
Financial liabilities:
Deposits	1,282,298		1,031,369		95,633		—		1,127,002
Short-term borrowings	10,000		—		10,000		—		10,000
Junior subordinated deferrable interest debentures	5,155		—		—		4,114		4,114
Accrued interest payable	134		—		81		53		134

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:

(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.

(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 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 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 fair values of the Company’s federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, are based on the market rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Other Borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements 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.

(h) 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.

(i) 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 considered significant for financial reporting purposes.

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 ~~June~~September 30, 2019:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of ~~June~~September 30, 2019 (in thousands).


Description	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Government agencies	$	17,903	$	—	$	17,903	$	—	$	16,958	$	—	$	16,958	$	—
Obligations of states and political subdivisions	29,375		—		29,375		—		83,351		—		83,351		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	224,941		—		224,941		—		197,439		—		197,439		—
Private label mortgage and asset backed securities	194,813		—		194,813		—		162,959		—		162,959		—
Corporate debt securities	9,179		—		9,179		—		9,220		—		9,220		—
Equity securities	7,458		7,458		—		—		7,507		7,507		—		—
Total assets measured at fair value on a recurring basis	$	483,669	$	7,458	$	476,211	$	—	$	477,434	$	7,507	$	469,927	$	—

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 debt 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 ~~six~~nine months ended ~~June~~September 30, 2019, no transfers between levels occurred.

There were no Level 3 assets measured at fair value on a recurring basis at or during the ~~six~~nine months ended ~~June~~September 30, 2019. Also there were no liabilities measured at fair value on a recurring basis at ~~June~~September 30, 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. These include 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 ~~June~~September 30, 2019.



	Fair Value		Level 1		Level 2		Level 3
Impaired loans:
Consumer:
Consumer and installment	$	9	$	—	$	—	$	9
Total assets measured at fair value on a non-recurring basis	$	9	$	—	$	—	$	9

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 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 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 methods as prescribed by ASC Topic 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 ~~six~~nine months ended ~~June~~September 30, 2019.

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 ~~$22,000~~$20,000 with a valuation allowance of ~~$13,000~~$11,000 at ~~June~~September 30, 2019, and a resulting fair value of $9,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.

There were no charge-offs related to loans carried at fair value during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended ~~June~~September 30, 2019 and 2018 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at ~~June~~September 30, 2019.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2018:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2018 (in thousands).



Description	Fair Value		Level 1		Level 2		Level 3
Available-for-sale debt securities:
U.S. Government agencies	$	21,321	$	—	$	21,321	$	—
Obligations of states and political subdivisions	81,504		—		81,504		—
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	234,930		—		234,930		—
Private label mortgage and asset backed securities	126,150		—		126,150		—
Equity securities	7,254		7,254		—		—
Total assets measured at fair value on a recurring basis	$	471,159	$	7,254	$	463,905	$	—

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, 2018, no transfers between levels occurred.

There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2018. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2018.

Non-recurring Basis



Description	Fair Value		Level 1		Level 2		Level 3
Impaired loans:
Real estate:
Commercial real estate	$	134	$	—	$	—	$	134
Total assets measured at fair value on a non-recurring basis	$	134	$	—	$	—	$	134

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans in which the collateral value did not exceed the loan balance had a principal balance of $161,000 with a valuation allowance of $27,000 at December 31, 2018, resulting in a fair value of $134,000. The valuation allowance represent specific allocation for the allowance for credit losses for impaired loans.

During the year ended December 31, 2018 specific allocation for the allowance for credit losses related to loans carried at fair value was $27,000. During the year ended December 31, 2018, there was no net charge-offs related to loans carried at fair value.

There were no liabilities measured at fair value on a non-recurring basis at December 31, 2018.

Note 3. Investments

The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivisions securities. As of ~~June~~September 30, 2019, $~~72,924,000~~90,295,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.

The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $~~6,740,000~~8,136,000 at ~~June~~September 30, 2019 compared to an unrealized loss of $6,257,000 at December 31, 2018. The unrealized gain/(loss) recorded ~~is net of~~

~~$1,993,000~~is net of $2,405,000 and $(1,850,000) in tax liabilities (benefits) as accumulated other comprehensive income (loss) within shareholders’ equity at ~~June~~September 30, 2019 and December 31, 2018, respectively.

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):


	June 30, 2019									September 30, 2019
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	18,167	$	17	$	(281	)	$	17,903	$	17,216	$	21	$	(279	)	$	16,958
Obligations of states and political subdivisions	26,577		2,798		—			29,375		80,533		3,167		(349		)	83,351
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	225,045		1,559		(1,663		)	224,941		197,606		1,611		(1,778		)	197,439
Private label mortgage and asset backed securities	190,682		4,296		(165		)	194,813		157,436		5,635		(112		)	162,959
Corporate debt securities	9,000		179		—			9,179		9,000		220		—			9,220
Total available-for-sale	$	469,471	$	8,849	$	(2,109	)	$	476,211	$	461,791	$	10,654	$	(2,518	)	$	469,927



	December 31, 2018
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	21,723	$	—	$	(402	)	$	21,321
Obligations of states and political subdivisions	79,886		2,205		(587		)	81,504
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	239,388		253		(4,711		)	234,930
Private label mortgage and asset backed securities	129,165		756		(3,771		)	126,150
Total available-for-sale	$	470,162	$	3,214	$	(9,471	)	$	463,905

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended ~~June~~September 30, 2019 and 2018 are shown below (in thousands):


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Available-for-Sale Securities	2019			2018			2019			2018			2019			2018			2019			2018
Proceeds from sales or calls	$	150,441		$	62,301		$	203,426		$	131,617		$	77,375		$	102,555		$	280,991		$	234,175
Gross realized gains from sales or calls	2,508			249			3,607			1,316			1,709			580			5,316			1,896
Gross realized losses from sales or calls	(49		)	(167		)	(96		)	(419		)	(24		)	(200		)	(120		)	(619		)

Losses recognized in 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. 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 provision for income taxes includes ~~$1,038,000~~$1,536,000 and ~~$265,000~~$377,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The provision for income taxes includes ~~$727,000~~$498,000 and ~~$24,000~~$112,000 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 three months ended ~~June~~September 30, 2019 and 2018, respectively.

Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands):


	June 30, 2019															September 30, 2019
	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Government agencies	$	—	$	—		$	16,923	$	(281	)	$	16,923	$	(281	)	$	—	$	—		$	16,160	$	(279	)	$	16,160	$	(279	)
Obligations of states and political subdivisions	—		—			—		—			—		—			46,101		(349		)	—		—			46,101		(349		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	80,111		(953		)	40,549		(710		)	120,660		(1,663		)	90,401		(1,096		)	46,738		(682		)	137,139		(1,778		)
Private label mortgage and asset backed securities	19,089		(126		)	2,171		(39		)	21,260		(165		)	23,731		(98		)	2,140		(14		)	25,871		(112		)
Total available-for-sale	$	99,200	$	(1,079	)	$	59,643	$	(1,030	)	$	158,843	$	(2,109	)	$	160,233	$	(1,543	)	$	65,038	$	(975	)	$	225,271	$	(2,518	)



	December 31, 2018
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Government agencies	$	14,891	$	(254	)	$	6,430	$	(148	)	$	21,321	$	(402	)
Obligations of states and political subdivisions	10,056		(99		)	22,945		(488		)	33,001		(587		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	61,866		(424		)	124,673		(4,287		)	186,539		(4,711		)
Private label mortgage and asset backed securities	31,325		(195		)	84,784		(3,576		)	116,109		(3,771		)
Total available-for-sale	$	118,138	$	(972	)	$	238,832	$	(8,499	)	$	356,970	$	(9,471	)

The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of ~~June~~September 30, 2019, 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). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at ~~June~~September 30, 2019 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at ~~June~~September 30, 2019 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. The Company also analyzed any securities that may have been downgraded by credit rating agencies.

For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the ~~six~~nine months ended ~~June~~September 30, 2019. There were no OTTI losses recorded during the ~~six~~nine months ended ~~June~~September 30, 2018.

U.S. Government Agencies

At ~~June~~September 30, 2019, the Company held six U.S. Government agency securities of which none were in a loss position for less than 12 months and five had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019.

Obligations of States and Political Subdivisions

At ~~June~~September 30, 2019, the Company held 2841 obligations of states and political subdivision securities of which ~~none~~nine were in a loss position.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations

At ~~June~~September 30, 2019, the Company held ~~126~~123 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 2125 were in a loss position for less than 12 months and 1716 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed 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 has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019.

Private Label Mortgage and Asset Backed Securities

At ~~June~~September 30, 2019, the Company had a total of 4742 Private Label Mortgage and Asset Backed Securities (PLMABS). ~~Four~~Five of the PLMABS securities were in a loss position for less than 12 months and one has been in loss for more than 12 months at ~~June~~September 30, 2019. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

Corporate Debt Securities

At ~~June~~September 30, 2019, the Company held two corporate debt securities of which none were in a loss position.

The following tables provide a roll forward for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.


	For the Six Months Ended June 30,				For the Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Beginning balance	$	874	$	874	$	874	$	874
Amounts related to credit loss for which an OTTI charge was not previously recognized	—		—		—		—
Increases to the amount related to credit loss for which OTTI was previously recognized	—		—		—		—
Realized gain for securities sold	—		—		—		—
Ending balance	$	874	$	874	$	874	$	874

The amortized cost and estimated fair value of available-for-sale investment securities at ~~June~~September 30, 2019 by contractual maturity is shown 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.


	June 30, 2019				September 30, 2019
Available-for-Sale Securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	—	$	—	$	—	$	—
After one year through five years	2,496		2,642		2,457		2,600
After five years through ten years	9,145		9,763		20,312		21,320
After ten years	14,936		16,970		57,764		59,431
	26,577		29,375		80,533		83,351
Investment securities not due at a single maturity date:
U.S. Government agencies	18,167		17,903		17,216		16,958
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	225,045		224,941		197,606		197,439
Private label mortgage and asset backed securities	190,682		194,813		157,436		162,959
Corporate debt securities	9,000		9,179		9,000		9,220
Total available-for-sale	$	469,471	$	476,211	$	461,791	$	469,927

Note 4. Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:


Loan Type (Dollars in thousands)	June 30, 2019			% of Total Loans		December 31, 2018			% of Total Loans		September 30, 2019			% of Total Loans		December 31, 2018			% of Total Loans
Commercial:
Commercial and industrial	$	110,178		11.5	%	$	101,533		11.1	%	$	97,439		10.3	%	$	101,533		11.1	%
Agricultural production	25,987			2.7	%	7,998			0.9	%	19,995			2.2	%	7,998			0.9	%
Total commercial	136,165			14.2	%	109,531			12.0	%	117,434			12.5	%	109,531			12.0	%
Real estate:
Owner occupied	195,626			20.4	%	183,169			19.9	%	204,018			21.6	%	183,169			19.9	%
Real estate construction and other land loans	102,927			10.7	%	101,606			11.1	%	70,975			7.5	%	101,606			11.1	%
Commercial real estate	302,026			31.5	%	305,118			33.2	%	328,880			34.9	%	305,118			33.2	%
Agricultural real estate	75,077			7.8	%	76,884			8.4	%	76,469			8.1	%	76,884			8.4	%
Other real estate	33,214			3.6	%	32,799			3.6	%	32,084			3.6	%	32,799			3.6	%
Total real estate	708,870			74.0	%	699,576			76.2	%	712,426			75.7	%	699,576			76.2	%
Consumer:
Equity loans and lines of credit	71,107			7.4	%	69,958			7.6	%	68,427			7.3	%	69,958			7.6	%
Consumer and installment	42,345			4.4	%	38,038			4.2	%	42,641			4.5	%	38,038			4.2	%
Total consumer	113,452			11.8	%	107,996			11.8	%	111,068			11.8	%	107,996			11.8	%
Net deferred origination costs	1,724					1,592					1,575					1,592
Total gross loans	960,211			100.0	%	918,695			100.0	%	942,503			100.0	%	918,695			100.0	%
Allowance for credit losses	(9,405		)			(9,104		)			(9,495		)			(9,104		)
Total loans	$	950,806				$	909,591				$	933,008				$	909,591

At ~~June~~September 30, 2019 and December 31, 2018, loans originated under Small Business Administration (SBA) programs totaling ~~$23,386,000~~$23,060,000 and $22,297,000, respectively, were included in the real estate and commercial categories, of which, ~~$17,402,000~~$17,217,000 or ~~74%~~75% and $16,493,000 or 74%, respectively, are secured by government guarantees.

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 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.

The following table shows the summary of activities for the Allowance as of and for the three months ended ~~June~~September 30, 2019 and 2018 by portfolio segment (in thousands):


	Commercial			Real Estate			Consumer			Unallocated			Total			Commercial			Real Estate		Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, April 1, 2019	$	1,450		$	6,709		$	895		$	64		$	9,118
Beginning balance, July 1, 2019																$	1,800		$	6,553	$	911		$	141		$	9,405
(Reversal) provision charged to operations	372			(156		)	7			77			300			3			508		117			(378		)	250
Losses charged to allowance	(50		)	—			(6		)	—			(56		)	(122		)	—		(93		)	—			(215		)
Recoveries	28			—			15			—			43			37			—		18			—			55
Ending balance, June 30, 2019	$	1,800		$	6,553		$	911		$	141		$	9,405
Ending balance, September 30, 2019																$	1,718		$	7,061	$	953		$	(237	)	$	9,495

Allowance for credit losses:
Beginning balance, April 1, 2018	$	1,736		$	6,131		$	812		$	109		$	8,788
Beginning balance, July 1, 2018																$	1,938		$	6,155	$	793		$	34		$	8,920
(Reversal) provision charged to operations	206			(53		)	(28		)	(75		)	50			(273		)	203		16			54			—
Losses charged to allowance	(36		)	—			(23		)	—			(59		)	—			—		(23		)	—			(23		)
Recoveries	32			77			32			—			141			29			20		79			—			128
Ending balance, June 30, 2018	$	1,938		$	6,155		$	793		$	34		$	8,920
Ending balance, September 30, 2018																$	1,694		$	6,378	$	865		$	88		$	9,025

The following table shows the summary of activities for the Allowance as of and for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 by portfolio segment (in thousands):


	Commercial			Real Estate		Consumer			Unallocated			Total			Commercial			Real Estate		Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, January 1, 2019	$	1,671		$	6,539	$	826		$	68		$	9,104		$	1,671		$	6,539	$	826		$	68		$	9,104
(Reversal) provision charged to operations	120			14		68			73			275			123			522		185			(305		)	525
Losses charged to allowance	(50		)	—		(15		)	—			(65		)	(172		)	—		(108		)	—			(280		)
Recoveries	59			—		32			—			91			96			—		50			—			146
Ending balance, June 30, 2019	$	1,800		$	6,553	$	911		$	141		$	9,405
Ending balance, September 30, 2019															$	1,718		$	7,061	$	953		$	(237	)	$	9,495

Allowance for credit losses:
Beginning balance, January 1, 2018	$	2,071		$	5,795	$	825		$	87		$	8,778		$	2,071		$	5,795	$	825		$	87		$	8,778
(Reversal) provision charged to operations	(150		)	278		(25		)	(53		)	50			(422		)	481		(10		)	1			50
Losses charged to allowance	(86		)	—		(65		)	—			(151		)	(87		)	—		(88		)	—			(175		)
Recoveries	103			82		58			—			243			132			102		138			—			372
Ending balance, June 30, 2018	$	1,938		$	6,155	$	793		$	34		$	8,920
Ending balance, September 30, 2018															$	1,694		$	6,378	$	865		$	88		$	9,025

The following is a summary of the Allowance by impairment methodology and portfolio segment as of ~~June~~September 30, 2019 and December 31, 2018 (in thousands):


	Commercial		Real Estate		Consumer		Unallocated		Total		Commercial		Real Estate		Consumer		Unallocated			Total
Allowance for credit losses:
Ending balance, June 30, 2019	$	1,800	$	6,553	$	911	$	141	$	9,405
Ending balance, September 30, 2019											$	1,718	$	7,061	$	953	$	(237	)	$	9,495
Ending balance: individually evaluated for impairment	$	6	$	18	$	60	$	—	$	84	$	3	$	17	$	53	$	—		$	73
Ending balance: collectively evaluated for impairment	$	1,794	$	6,535	$	851	$	141	$	9,321	$	1,715	$	7,044	$	900	$	(237	)	$	9,422

Ending balance, December 31, 2018	$	1,671	$	6,539	$	826	$	68	$	9,104	$	1,671	$	6,539	$	826	$	68		$	9,104
Ending balance: individually evaluated for impairment	$	9	$	27	$	54	$	—	$	90	$	9	$	27	$	54	$	—		$	90
Ending balance: collectively evaluated for impairment	$	1,662	$	6,512	$	772	$	68	$	9,014	$	1,662	$	6,512	$	772	$	68		$	9,014


	Commercial		Real Estate		Consumer		Total		Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, June 30, 2019	$	136,165	$	708,870	$	113,452	$	958,487
Ending balance, September 30, 2019									$	117,434	$	712,426	$	111,068	$	940,928
Ending balance: individually evaluated for impairment	$	262	$	3,098	$	2,091	$	5,451	$	232	$	1,839	$	2,053	$	4,124
Ending balance: collectively evaluated for impairment	$	135,903	$	705,772	$	111,361	$	953,036	$	117,202	$	710,587	$	109,015	$	936,804

Loans:
Ending balance, December 31, 2018	$	109,531	$	699,576	$	107,996	$	917,103	$	109,531	$	699,576	$	107,996	$	917,103
Ending balance: individually evaluated for impairment	$	348	$	4,215	$	1,346	$	5,909	$	348	$	4,215	$	1,346	$	5,909
Ending balance: collectively evaluated for impairment	$	109,183	$	695,361	$	106,650	$	911,194	$	109,183	$	695,361	$	106,650	$	911,194

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at ~~June~~September 30, 2019 (in thousands):


	Pass		Special Mention		Sub-Standard		Doubtful		Total		Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	106,340	$	2,312	$	1,526	$	—	$	110,178	$	91,946	$	3,962	$	1,531	$	—	$	97,439
Agricultural production	19,996		2,991		3,000		—		25,987		12,544		4,551		2,900		—		19,995
Real Estate:
Owner occupied	191,944		2,796		886		—		195,626		194,266		6,907		2,845		—		204,018
Real estate construction and other land loans	99,994		1,347		1,586		—		102,927		69,069		—		1,906		—		70,975
Commercial real estate	296,459		4,038		1,529		—		302,026		307,223		21,118		539		—		328,880
Agricultural real estate	55,120		13,507		6,450		—		75,077		55,121		14,901		6,447		—		76,469
Other real estate	33,214		—		—		—		33,214		32,084		—		—		—		32,084
Consumer:
Equity loans and lines of credit	66,817		1,445		2,845		—		71,107		64,075		1,372		2,980		—		68,427
Consumer and installment	42,307		—		38		—		42,345		42,621		—		20		—		42,641
Total	$	912,191	$	28,436	$	17,860	$	—	$	958,487	$	868,949	$	52,811	$	19,168	$	—	$	940,928

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2018 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	86,876	$	12,072	$	2,585	$	—	$	101,533
Agricultural production	5,955		2,043		—		—		7,998
Real Estate:
Owner occupied	179,214		3,056		899		—		183,169
Real estate construction and other land loans	95,301		3,270		3,035		—		101,606
Commercial real estate	298,714		5,268		1,136		—		305,118
Agricultural real estate	57,544		165		19,175		—		76,884
Other real estate	32,799		—		—		—		32,799
Consumer:
Equity loans and lines of credit	68,016		380		1,562		—		69,958
Consumer and installment	38,036		—		2		—		38,038
Total	$	862,455	$	26,254	$	28,394	$	—	$	917,103

The following table shows an aging analysis of the loan portfolio by class and the time past due at ~~June~~September 30, 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		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	$	1,533	$	—	$	—	$	1,533	$	108,645	$	110,178	$	—	$	244	$	—	$	—	$	—	$	—	$	97,439	$	97,439	$	—	$	214
Agricultural production	—		—		—		—		25,987		25,987		—		—		—		—		—		—		19,995		19,995		—		—
Real estate:	—								—								—								—
Owner occupied	—		—		—		—		195,626		195,626		—		208		—		—		—		—		204,018		204,018		—		201
Real estate construction and other land loans	—		—		—		—		102,927		102,927		—		—		—		—		—		—		70,975		70,975		—		324
Commercial real estate	447		—		—		447		301,579		302,026		—		925		—		—		—		—		328,880		328,880		—		385
Agricultural real estate	—		—		—		—		75,077		75,077		—		—		—		—		—		—		76,469		76,469		—		—
Other real estate	—		—		—		—		33,214		33,214		—		—		—		—		—		—		32,084		32,084		—		—
Consumer:									—																—
Equity loans and lines of credit	—		—		—		—		71,107		71,107		—		1,029		—		902		—		902		67,525		68,427		—		1,013
Consumer and installment	7		—		—		7		42,338		42,345		—		36		23		—		—		23		42,618		42,641		—		20
Total	$	1,987	$	—	$	—	$	1,987	$	956,500	$	958,487	$	—	$	2,442	$	23	$	902	$	—	$	925	$	940,003	$	940,928	$	—	$	2,157

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2018 (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	$	255	$	—	$	—	$	255	$	101,278	$	101,533	$	—	$	298
Agricultural production	—		—		—		—		7,998		7,998		—		—
Real estate:	—
Owner occupied	215		—		—		215		182,954		183,169		—		215
Real estate construction and other land loans	—		—		1,439		1,439		100,167		101,606		—		1,439
Commercial real estate	—		—		—		—		305,118		305,118		—		418
Agricultural real estate	—		—		—		—		76,884		76,884		—		—
Other real estate	—		—		—		—		32,799		32,799		—		—
Consumer:
Equity loans and lines of credit	953		—		—		953		69,005		69,958		—		370
Consumer and installment	7		—		—		7		38,031		38,038		—		—
Total	$	1,430	$	—	$	1,439	$	2,869	$	914,234	$	917,103	$	—	$	2,740

The following table shows information related to impaired loans by class at ~~June~~September 30, 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	$	211	$	463	$	—	$	187	$	448	$	—
Real estate:
Owner occupied	$	207	$	213	$	—	$	201	$	209	$	—
Real estate construction and other land loans	1,018		1,018		—		324		329		—
Commercial real estate	1,672		1,939		—		1,123		1,369		—
Total real estate	2,897		3,170		—		1,648		1,907		—
Consumer:
Equity loans and lines of credit	960		1,007		—		947		1,002		—
Total with no related allowance recorded	4,068		4,640		—		2,782		3,357		—

With an allowance recorded:
Commercial:
Commercial and industrial	51		52		6		45		47		3
Real estate:
Commercial real estate	157		158		18		154		155		17
Agricultural real estate	44		44		—		37		37		—
Total real estate	201		202		18		191		192		17
Consumer:
Equity loans and lines of credit	1,095		1,105		44		1,086		1,099		42
Consumer and installment	36		36		16		20		21		11
Total consumer	1,131		1,141		60		1,106		1,120		53
Total with an allowance recorded	1,383		1,395		84		1,342		1,359		73
Total	$	5,451	$	6,035	$	84	$	4,124	$	4,716	$	73

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following table shows information related to impaired loans by class at December 31, 2018 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	259	$	493	$	—
Real estate:
Owner occupied	215		215		—
Real estate construction and other land loans	2,613		2,676		—
Commercial real estate	1,182		1,414		—
Total real estate	4,010		4,305		—
Consumer:
Equity loans and lines of credit	248		285		—
Total with no related allowance recorded	4,517		5,083		—

With an allowance recorded:
Commercial:
Commercial and industrial	89		90		9
Real estate:
Commercial real estate	161		162		27
Agricultural real estate	44		44		—
Total real estate	205		206		27
Consumer:
Equity loans and lines of credit	1,098		1,103		54
Total with an allowance recorded	1,392		1,399		90
Total	$	5,909	$	6,482	$	90

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended ~~June~~September 30, 2019 and 2018 (in thousands).


	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018				Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	223	$	—	$	327	$	—	$	202	$	—	$	298	$	—
Real estate:
Owner occupied	209		—		—		—		204		—		—		—
Real estate construction and other land loans	1,058		16		2,914		22		988		—		2,851		21
Commercial real estate	1,417		12		1,727		13		1,528		12		1,695		13
Agricultural real estate	—		—		2,288		119		—		—		2,288		—
Other real estate	—		—		1,142		—		—		—		836		—
Total real estate	2,684		28		8,071		154		2,720		12		7,670		34
Consumer:
Equity loans and lines of credit	739		1		197		—		942		1		224		—
Total with no related allowance recorded	3,646		29		8,595		154		3,864		13		8,192		34

With an allowance recorded:
Commercial:
Commercial and industrial	70		—		56		1		45		—		53		1
Real estate:
Commercial real estate	428		3		165		3		156		3		164		3
Agricultural real estate	44		1		51		1		42		1		50		1
Total real estate	472		4		216		4		198		4		493		4
Consumer:
Equity loans and lines of credit	1,099		14		1,020		14		1,099		14		1,111		14
Consumer and installment	17		—		3		—		31		—		3		—
Total consumer	1,116		14		1,023		14		1,130		14		1,114		14
Total with an allowance recorded	1,658		18		1,295		19		1,373		18		1,660		19
Total	$	5,304	$	47	$	9,890	$	173	$	5,237	$	31	$	9,852	$	53

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands).


	Six Months Ended June 30, 2019				Six Months Ended June 30, 2018				Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	236	$	—	$	337	$	—	$	225	$	—	$	324	$	—
Real estate:
Owner occupied	211		—		—		—		208		—		—		—
Real estate construction and other land loans	1,715		32		2,951		45		1,494		46		2,918		66
Commercial real estate	1,313		25		1,629		26		1,363		37		1,648		39
Agricultural real estate	—		—		1,307		119		—		—		1,525		119
Other real estate	—		—		985		—		—		—		913		—
Total real estate	3,239		57		6,872		190		3,065		83		7,004		224
Consumer:
Equity loans and lines of credit	527		2		196		—		650		3		207		—
Total with no related allowance recorded	4,002		59		7,405		190		3,940		86		7,535		224

With an allowance recorded:
Commercial:
Commercial and industrial	77		1		52		2		67		1		52		3
Agricultural land and production	—		—		—		—		—		—		—		—
Total commercial	77		1		52		2		67		1		52		3
Real estate:
Owner occupied	—		—		—		—
Commercial real estate	472		6		232		3		377		8		211		9
Agricultural real estate	44		1		51		1		44		2		50		2
Total real estate	516		7		283		4		421		10		373		11
Consumer:
Equity loans and lines of credit	1,102		28		1,010		29		1,101		42		1,040		43
Consumer and installment	9		—		6		—		15		—		4		—
Total consumer	1,111		28		1,016		29		1,116		42		1,044		43
Total with an allowance recorded	1,704		36		1,351		35		1,604		53		1,469		57
Total	$	5,706	$	95	$	8,756	$	225	$	5,544	$	139	$	9,004	$	281

Foregone interest on nonaccrual loans totaled ~~$85,000~~$105,000 and ~~$187,000~~$293,000 for the ~~six~~nine month periods ended ~~June~~September 30, 2019 and 2018, respectively. Foregone interest on nonaccrual loans totaled ~~53,000~~$39,000 and ~~89,000~~$106,000 for the three month periods ended ~~June~~September 30, 2019 and 2018, respectively.

Troubled Debt Restructurings:

As of ~~June~~September 30, 2019 and December 31, 2018, the Company has a recorded investment in troubled debt restructurings of ~~$3,125,000~~$2,079,000 and $3,220,000, respectively. The Company has allocated ~~$62,000~~$59,000 and $50,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The Company has committed to lend no additional amounts as of ~~June~~September 30, 2019 to customers with outstanding loans that are classified as troubled debt restructurings.

During the ~~six~~nine months ended ~~June~~September 30, 2019 two loans were modified as troubled debt restructuring. 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 period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.

The following table presents loans by class modified as troubled debt restructurings that occurred during the ~~six~~nine months ended ~~June~~September 30, 2019 (in thousands):


Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Consumer:
Equity loans and lines of credit	2	$	132	$	—	$	132	$	128	2	$	132	$	—	$	132	$	124
Total	2	$	132	$	—	$	132	$	128	2	$	132	$	—	$	132	$	124


(1)	Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.


(2)	Principal Modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate.


(3)	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 ~~six~~nine months ended ~~June~~September 30, 2018 (in thousands):


Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Commercial:
Commercial and Industrial	1	$	38	$	—	$	38	$	36	1	$	38	$	—	$	38	$	31
Real Estate:
Commercial real estate	1	166		—		166		165		1	166		—		166		163
Agricultural real estate	1	3,050		—		3,050		3,050
Total real estate	2	3,216		—		3,216		3,215
Total	3	$	3,254	$	—	$	3,254	$	3,251	2	$	204	$	—	$	204	$	194

~~The following table presents~~During the quarter ended September 30, 2019 and September 30, 2018 no loans ~~by class~~were modified as troubled debt ~~restructurings that occurred during the three months ended June 30, 2019 (in thousands):~~restructuring.

Troubled Debt Restructuring

Troubled Debt Restructuring Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment
Consumer:
Equity loans and lines of credit 1
$ 119
—
$ 119
$ 115

~~The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2018 (in thousands):~~

Troubled Debt Restructuring Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment
Real Estate:
Agricultural real estate 1
$ 3,050
$ 3,050
$ 3,050

Troubled Debt Restructuring

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 twelve months following the modification, during the ~~six~~nine months ended and three months ended ~~June~~September 30, 2019 or ~~June~~September 30, 2018.

Note 5. Borrowing Arrangements

As of ~~June~~September 30, 2019 and December 31, 2018, the Company had ~~$54,000,000~~$5,000,000 and $10,000,000 Federal Home Loan Bank (FHLB) of San Francisco advances, respectively.

Approximately ~~$451,576,000~~$423,811,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of ~~$245,911,000~~$276,197,000 as of ~~June~~September 30, 2019. FHLB advances are also secured by investment securities with amortized costs totaling ~~$300,000~~$287,000 and $326,000 and market values totaling ~~$310,000~~$297,000 and $337,000 at ~~June~~September 30, 2019 and December 31, 2018, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. As of ~~June~~September 30, 2019, and December 31, 2018 the Company had no Federal funds purchased.

Note 6. 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 minimum lease payments on noncancelable operating leases are as follows (in thousands):


Years Ending December 31,
2019 (remaining)	$	1,073		$	554
2020	1,864			2,102
2021	1,741			1,984
2022	1,409			1,655
2023	1,289			1,539
Thereafter	3,960			4,176
Total lease payments	11,336			12,010
Less: imputed interest	(1,121		)	(1,113		)
Present value of operating lease liabilities	$	10,215		$	10,897

Minimum future rental payments under noncancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, are as follows (in thousands):



	Minimum future rental payments
2019	$	2,384
2020	2,078
2021	1,805
2022	1,552
2023	1,448
Thereafter	4,334
	$	13,601

The table below summarizes the total lease cost:


(Dollars in thousands)	For the Three Months ending June 30, 2019		For the Six Months ending June 30, 2019		For the Three Months ending September 30, 2019		For the Nine Months ending September 30, 2019
Operating lease cost	$	557	$	1,110	$	558	$	1,667
Short-term lease cost	22		41		22		63
Variable lease cost	95		184		95		280
Total lease cost	$	674	$	1,335	$	675	$	2,010

The table below summarizes other information related to our operating leases:



	For the ~~Six~~Nine Months ending ~~June~~September 30, 2019
Weighted average remaining lease term, in years	7
Weighted average discount rate	~~2.91~~2.93	%

The table below shows operating lease right of use assets and operating lease liabilities as of ~~June~~September 30, 2019


(Dollars in thousands)
Operating lease right-of-use assets	$	9,542	$	9,550
Operating lease liabilities	10,215		10,228

Note 7. Commitments and Contingencies

Financial Instruments With Off-Balance-Sheet Risk - 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. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans.

Commitments to extend credit amounting to ~~$308,595,000~~$321,353,000 and $312,274,000 were outstanding at ~~June~~September 30, 2019 and December 31, 2018, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract unless waived by the Bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Included in commitments to extend credit are undisbursed lines of credit totaling ~~$306,105,000~~$319,118,000 and $309,824,000 at ~~June~~September 30, 2019 and December 31, 2018, respectively. Undisbursed lines of credit include credits whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months.

Included in undisbursed lines of credit are commitments for the undisbursed portions of construction loans totaling ~~$66,412,000~~$59,522,000 and $70,752,000 as of ~~June~~September 30, 2019 and December 31, 2018, respectively. These commitments are agreements to lend to customers, subject to meeting certain construction progress requirements established in the contracts. The underlying construction loans have fixed expiration dates.

Standby letters of credit and financial guarantees amounting to ~~$2,490,000~~$2,235,000 and $2,450,000 were outstanding at ~~June~~September 30, 2019 and December 31, 2018, respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private ~~borrowing~~financial arrangements. Most standby letters of credit and guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for their issuance, was not significant at ~~June~~September 30, 2019 or December 31, 2018. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees. At ~~June~~September 30, 2019 and December 31, 2018, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000 and $225,000, respectively. 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 allowance for credit losses and is

considered separately as a liability for accounting and regulatory reporting purposes, and is included in Other Liabilities on the Company’s balance sheet.

In 2018, the Company sold its credit card portfolio to a third party vendor. Part of the sale of the portfolio was to provide a guarantee of certain accounts beginning in March 2019. As of ~~June~~September 30, 2019, the total commitment was ~~$2,743,000.~~$2,289,000.

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.

Note 8. Earnings Per Share

Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders 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 restricted stock awards, result in the issuance of common stock which shares in the earnings of the Company. A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:


Basic Earnings Per Share	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands, except share and per share amounts)	2019		2018		2019		2018		2019		2018		2019		2018
Net income	$	6,087	$	4,965	$	11,303	$	10,256	$	5,691	$	5,752	$	16,994	$	16,008
Weighted average shares outstanding	13,533,724		13,692,358		13,515,752		13,681,229		13,360,030		13,715,141		13,515,109		13,692,657
Basic earnings per share	$	0.45	$	0.36	$	0.84	$	0.75	$	0.43	$	0.42	$	1.26	$	1.17


Diluted Earnings Per Share	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands, except share and per share amounts)	2019		2018		2019		2018		2019		2018		2019		2018
Net income	$	6,087	$	4,965	$	11,303	$	10,256	$	5,691	$	5,752	$	16,994	$	16,008
Weighted average shares outstanding	13,533,724		13,692,358		13,515,752		13,681,229		13,360,030		13,715,141		13,515,109		13,692,657
Effect of dilutive stock options	102,110		130,920		97,114		132,858		90,157		121,687		100,443		129,171
Weighted average shares of common stock and common stock equivalents	13,635,834		13,823,278		13,612,866		13,814,087		13,450,187		13,836,828		13,615,552		13,821,828
Diluted earnings per share	$	0.45	$	0.36	$	0.83	$	0.74	$	0.42	$	0.42	$	1.25	$	1.16

No outstanding options or restricted stock awards were anti-dilutive for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. During the three-month periods ended ~~June~~September 30, 2019 and 2018, Nono outstanding options or restricted stock awards were anti-dilutive.

Note 9. Share-Based Compensation

The Company has five share-based compensation plans as described below. Share-based compensation cost recognized for those plans was ~~$294,000~~$430,000 and ~~$184,000~~$332,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The recognized tax benefits for the share-based compensation expense, forfeitures of restricted stock, and exercise of stock options, resulted in the recognition of $25,000 and ~~$139,000,~~$142,000, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

The Central Valley Community Bancorp 2000 Stock Option Plan (2000 Plan) expired on November 15, 2010. 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 these plans, including options, continue in force until their expiration, no new options will be granted under these plans.

The Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) was adopted in May 2015. In October 2017, the Company assumed the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plans provide for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. Both plans allow for performance awards that may be in the form of cash or shares of the Company, including restricted stock. Outstanding arrangements to issue shares under this plan including options, will continue in force until expiration according to their respective terms.

Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan (ESPP) whereby our employees may purchase Company common stock through payroll deductions of between one percent and 15 percent of pay in each pay period.

Shares are purchased at the end of each of the three-month offering periods at a 10 percent discount 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 Company reserved 500,000 common shares to be set aside for the ESPP, and there were ~~478,510~~476,245 shares available for future purchase under the plan as of ~~June~~September 30, 2019.

Stock Option Plan

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 ~~six~~nine months ended ~~June~~September 30, 2019 ~~and~~or 2018.

A summary of the combined activity of the Company’s stock option compensation plans for the ~~six~~nine months ended ~~June~~September 30, 2019 follows (in thousands, except per share amounts):


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In thousands)		Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In thousands)
Options outstanding at January 1, 2019	154,440		$	8.68				154,440		$	8.68
Options exercised	(21,820	)	$	7.36				(22,120	)	$	7.37
Options forfeited	(1,000	)	$	5.06				(1,000	)	$	5.06
Options outstanding at March 31, 2019	131,620		$	8.92	2.58	$	1,652
Options vested or expected to vest at March 31, 2019	131,620		$	8.92	2.58	$	1,652
Options exercisable at March 31, 2019	131,620		$	8.92	2.58	$	1,652
Options outstanding at September 30, 2019								131,320		$	8.92	2.32	$	1,492
Options vested or expected to vest at September 30, 2019								131,320		$	8.69	2.30	$	1,492
Options exercisable at September 30, 2019								131,320		$	8.92	2.32	$	1,492

Information related to the stock option plan is as follows (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Intrinsic value of options exercised	$	98	$	129	$	265	$	652	$	4	$	83	$	269	$	736
Cash received from options exercised	$	65	$	91	$	160	$	640	$	3	$	79	$	163	$	719
Excess tax benefit realized for option exercises	$	8	$	33	$	25	$	139	$	—	$	3	$	25	$	142

As of ~~June~~September 30, 2019, there was no remaining unrecognized compensation cost related to stock options granted under all plans.

Restricted and Performance Common Stock Awards

The 2015 Plan provides for the issuance of restricted common stock to directors and officers. In addition, performance awards may be granted in the form of cash or shares. 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.

The following table summarizes restricted stock and performance award activity for the ~~six~~nine months ended ~~June~~September 30, 2019 as follows:


	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested outstanding shares at January 1, 2019	63,529		$	15.98	63,529		$	15.98
Granted	25,420		$	19.77	25,420		$	19.77
Vested	(24,763	)	$	18.28	(40,159	)	$	16.61
Forfeited	(90	)	$	12.95	(1,860	)	$	17.94
Nonvested outstanding shares at June 30, 2019	64,096		$	16.59
Nonvested outstanding shares at September 30, 2019					46,930		$	17.41

During the ~~six~~nine months ended ~~June~~September 30, 2019, 25,420 shares of restricted or performance common stock awards were granted. The restricted and performance common stock awards had a weighted average grant date fair market value of $19.77 per share on the date of grant during the ~~six~~nine months ended ~~June~~September 30, 2019. Restricted common stock awards’ fully vest after year 1, or vest ratably until fully vested in year 3 or year 5 depending on agreement terms. Performance common stock awards vest immediately.

As of ~~June~~September 30, 2019, there were ~~64,096~~46,930 shares of restricted stock that are nonvested and expected to vest. As of ~~June~~September 30, 2019, there was ~~$798,000~~$638,000 of total unrecognized compensation cost related to nonvested restricted common stock awards. 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 ~~1.91~~1.72 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of ~~$1,805,000~~$815,000 at ~~June~~September 30, 2019.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley; (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) 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; and (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The Internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.

There have been no material changes to the Company’s critical accounting policies during the ~~six~~nine months ended ~~June~~September 30, 2019. Please refer to the Company’s 2018 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

OVERVIEW

Central Valley Community Bancorp (Company)

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank). We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California. On April 20, 2018, the Company closed and consolidated the Caldwell office into the Company’s Floral office. On May 11, 2018, the Company closed and consolidated the Folsom Prairie office into the Company’s Folsom Sutter office. On July 12, 2018, the Company closed and consolidated the Tracy office into the Company’s Lodi office. After extensive evaluation, the Company consolidated the Rancho Cordova and Fair Oaks offices and opened a new full-service branch in Gold River during the second quarter of 2019. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.

Central Valley Community Bank (Bank)

The Bank commenced operations in January 1980 as a state-chartered bank. As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the California Department of Business Oversight (DBO). The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.

The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor. For this insurance, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment.

The Bank operates 2120 full-service branches which serve the communities of Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia, California. Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, ~~2018~~2019 FDIC data, the Bank’s branches in Fresno, Madera, San Joaquin, and Tulare Counties had a ~~3.42%~~3.31% combined deposit market share of all insured depositories. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus Counties), was less than 1.00% in ~~2018.~~2019.

Dividend Declared

On ~~July 17,~~October 16, 2019, the Board of Directors declared a $0.11 per share cash dividend payable on ~~August 16,~~November 15, 2019 to shareholders of record as of ~~August 2,~~November 1, 2019.

~~Second~~Third Quarter of 2019

In the ~~second~~third quarter of 2019, our consolidated net income was ~~$6,087,000~~$5,691,000 compared to net income of ~~$4,965,000~~$5,752,000 for the same period in 2018. Diluted EPS was ~~$0.45~~$0.42 for the quarter ended ~~June~~September 30, 2019 compared to ~~$0.36~~$0.42 for the same period in 2018. The ~~increase~~decrease in net income during the ~~second~~third quarter of 2019 compared to the same period in 2018 is primarily due ~~to an increase in net interest income before the provision for credit losses of $549,000, and~~ an increase in total non-interest ~~income of $1,912,000, partially offset by an increase in non-interest~~ expenses of ~~$273,000 and~~$743,000, an increase in the provision for income taxes of ~~$816,000.~~$625,000, and an increase in provision for credit losses of $250,000, offset by an increase in net interest income of $298,000, and an increase in non-interest income of $1,259,000. During the quarter ended ~~June~~September 30, 2019, the Company recorded a ~~$300,000~~$250,000 provision for credit losses, compared to ~~$50,000~~no provision during the quarter ended ~~June~~September 30, 2018.

Net interest margin (fully tax equivalent basis) ~~increased~~decreased to 4.50% for the quarter ended ~~June~~September 30, 2019 compared to ~~4.35%~~4.53% for the same period in 2018. The net interest margin period-to-period comparisons were impacted by the increase in the yield on total interest-bearing liabilities; partially offset by an increase in the yield on the average investment securities and an increase in the yield on the loan portfolio. The cost of deposits (calculated by dividing annualized interest expense on interest bearing

deposits by total deposits), increased to ~~0.15%~~0.17% for the quarter ended ~~June~~September 30, 2019 compared to ~~0.08%~~0.10% for the same period in 2018.

Non-interest income increased ~~$1,912,000~~$1,259,000 or ~~71.18%~~51.12% to ~~$4,598,000~~$3,722,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$2,686,000~~$2,463,000 in the same period in 2018, primarily driven by an increase of ~~$2,377,000~~$1,305,000 in net realized gains on sales and calls of investment securities, ~~an increase of $61,000 in other income,~~ and an increase in loan placement fees of ~~$47,000~~$81,000, offset by a decrease of $168,000 in ~~the gain on sale of credit card portfolio of $578,000~~other income, and a decrease in service charge income of ~~$13,000.~~$67,000. Credit card deconversion costs, which were deducted from the net gain on the sale of the credit card portfolio, were $116,000 during the quarter ended September 30, 2018. Non-interest expense ~~increased $273,000 or 2.37%~~ for the quarter ended September 30, 2019 increased $743,000 or 6.89% from the comparable ~~periods~~period primarily due to increases in information technology, salaries and employee benefits, telephone expenses, amortization of core deposit intangibles, ~~advertising expenses,~~ risk management, professional services, directors’ expenses, Internet banking, tax provision, personnel, ATM/debit card expenses, and ~~data processing,~~operating losses, partially offset by decreases in occupancy and equipment, ~~professional services, operating losses, credit card~~regulatory assessment, data processing, education and training, advertising expenses and other expenses.

Annualized return on average equity for the ~~second~~third quarter of 2019 ~~increased~~decreased to ~~10.68%~~9.77% compared to ~~9.53%~~10.80% for the same period in 2018. Annualized return on average assets was ~~1.54%~~1.43% and ~~1.25%~~1.48% for the ~~second~~third quarter ended ~~June~~September 30, 2019 and 2018, respectively. Total average equity increased to ~~$227,933,000~~$233,077,000 for the ~~second~~third quarter of 2019 compared to ~~$208,474,000~~$213,028,000 for the ~~second~~third quarter of 2018. The increase in shareholders’ equity was driven by the retention of earnings net of dividends paid, and an increase in accumulated other comprehensive income. The Company declared and paid $0.11 per share in cash dividends to holders of common stock during the ~~second~~third quarter of 2019, compared to ~~$0.07~~$0.08 in dividends declared and paid during the ~~second~~third quarter of 2018.

Our average total assets ~~decreased $4,522,000~~increased $32,663,000 or ~~0.28%~~2.10% to ~~$1,584,122,000~~$1,588,367,000 during the ~~second~~third quarter of 2019 compared to the same period in 2018. Total average interest-earning assets ~~decreased $13,794,000~~increased $19,019,000 or ~~0.95%~~1.35% in the ~~second~~third quarter of 2019 compared to the same period of 2018. Average total loans, including nonaccrual loans, increased ~~$20,784,000~~$34,388,000 or ~~2.26%~~3.76% in the ~~second~~third quarter of 2019 compared to the same period in 2018. Average total investments and interest-earning deposits decreased ~~$36,160,000~~$16,953,000 or ~~6.79%~~3.37% in the period ended ~~June~~September 30, 2019 compared to the same period in 2018. Average interest-bearing liabilities decreased ~~$27,852,000~~$6,455,000 or ~~3.42%~~0.84% in the period ended ~~June~~September 30, 2019 compared to the same period in 2018. Average

non-interest bearing demand deposits ~~decreased 0.91%~~increased 1.77% to ~~$540,868,000~~$563,498,000 in 2019 compared to ~~$545,854,000~~$553,714,000 in 2018. The ratio of average non-interest bearing demand deposits to average total deposits was ~~42.45%~~43.24% in the ~~second~~third quarter of 2019 compared to ~~40.85%~~42.09% in 2018.

First ~~Six~~Nine Months of 2019

For the ~~six~~nine months ended ~~June~~September 30, 2019, our consolidated net income was ~~$11,303,000~~$16,994,000 compared to ~~$10,256,000~~$16,008,000 for the same period in 2018. Diluted EPS was ~~$0.83~~$1.25 for the first ~~six~~nine months of 2019 compared to ~~$0.74~~$1.16 for the first ~~six~~nine months of 2018. Net income for the ~~six-month~~nine-month period ended September 30, 2019 increased ~~10.21% in 2019~~6.16%, compared to the nine-month period ended September 30, 2018, primarily driven by 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 provision for income taxes and an increase in non-interest expense. ~~During the six-month period ended June 30, 2019, our net interest margin (fully tax equivalent basis) increased 23 basis points to 4.56%~~. Net interest income before the provision for credit losses increased ~~$958,000~~$1,255,000 or ~~3.11%~~2.69%. Net interest income during the first ~~six~~nine months of 2019 and 2018 benefited by approximately ~~$183,000~~$593,000 and ~~$175,000,~~$355,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. Excluding these benefits, net interest income for the ~~six~~nine months ended ~~June~~September 30, 2019, increased by ~~$950,000~~$1,017,000 compared to the ~~six-month~~nine-month period ended ~~June~~September 30, 2018. Non-interest income increased ~~$2,117,000~~$3,376,000 or ~~38.79%~~42.63%, and non-interest expense increased ~~$572,000~~$1,314,000 or ~~2.50%~~3.90% in the first ~~six~~nine months of 2019 compared to first ~~six~~nine months of 2018. During the ~~six~~nine months ended ~~June~~September 30, 2019, the Company recorded a provision for credit losses of ~~$275,000~~$525,000 compared to ~~a provision of~~ $50,000 during same period in 2018. Net recoveries of previously charged-off loans totaling ~~$26,000~~$134,000 and ~~$92,000~~$197,000 during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

Annualized return on average equity for the ~~six~~nine months ended ~~June~~September 30, 2019 ~~increased~~decreased to ~~10.06%~~9.96% compared to ~~9.84%~~10.16% for the same period in 2018. The ~~increase~~decrease in return on average equity was primarily due to the increase in ~~net income, notwithstanding an increase in~~ average shareholders’ equity. Annualized return on average assets was ~~1.45%~~1.44% and ~~1.28%~~1.34% for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. Total average equity was ~~$224,742,000~~$227,551,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$208,536,000~~$210,050,000 for the same period in 2018. 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).

Our average total assets decreased ~~$43,934,000~~$18,120,000 or ~~2.73%~~1.14% in the first ~~six~~nine months of 2019 compared to the same period in 2018. Total average interest-earning assets decreased ~~$45,400,000~~$23,690,000 or ~~3.11%~~1.64% comparing the first ~~six~~nine months of 2019 to the same period in 2018. Average total loans, including nonaccrual loans, increased ~~$12,044,000~~$19,574,000 or ~~1.32%~~2.15% comparing the first ~~six~~nine months of 2019 to the same period in 2018. Average total investments (securities and interest-earning deposits) decreased ~~$58,933,000,~~$44,785,000, or ~~10.62%~~8.33% in the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 compared to the same period in 2018, with average interest-bearing liabilities ~~increasing $58,249,000~~decreasing $40,796,000 or ~~7.03%~~5.05% on a period to period comparison.

Our net interest margin (fully tax equivalent basis) for the first ~~six~~nine months ended ~~June~~September 30, 2019 increased to ~~4.56%~~4.54% compared to ~~4.33%~~4.40% for the same period in 2018. The increase in net interest margin in the period-to-period comparison resulted primarily from an increase in the effective yield on the Company’s investment portfolio, an increase in the yield on the loan portfolio, and an increase in the effective yield on interest-earning deposits in other banks and Federal funds sold, partially offset by an increase in the cost of total interest-bearing liabilities. The effective yield on interest-earning assets increased 3223 basis points to ~~4.75%~~4.73% for the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 compared to ~~4.43%~~4.50% for the same period in 2018. For the ~~six-month~~nine-month period ended ~~June~~September 30, 2019, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, increased 4330 basis points, compared to the same period in the prior year, and the effective yield on loans increased 1310 basis points. The cost of total interest-bearing liabilities increased 17 basis points to ~~0.34%~~0.35% compared to ~~0.17%~~0.18% for the same period in 2018. The cost of total deposits, including noninterest bearing accounts ~~decreased~~increased to ~~0.14%~~0.15% compared to ~~0.07%~~0.08% for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Net interest income before the provision for credit losses for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~$31,781,000~~$47,985,000 compared to ~~$30,823,000~~$46,730,000 for the same period in 2018, an increase of ~~$958,000~~$1,255,000 or ~~3.11%~~2.69%. Net interest income increased as a result of yield changes, asset mix changes, and a decrease in interest-bearing liabilities, offset by a decrease in average earning assets. The Bank recovered ~~$183,000~~$593,000 and ~~$175,000,~~$355,000, of foregone interest income and prepaid payment penalties in 2019 and 2018, respectively. The Bank had non-accrual loans totaling ~~$2,442,000~~$2,157,000 at ~~June~~September 30, 2019, compared to $2,740,000 at December 31, 2018 and ~~4,092,000~~4,133,000 at ~~June~~September 30, 2018. The Company had no other real estate owned or repossessed assets at ~~June~~September 30, 2019, December 31, 2018, or ~~June~~September 30, 2018.

At ~~June~~September 30, 2019, we had total net loans of ~~$950,806,000,~~$933,008,000, total assets of ~~$1,613,227,000,~~$1,584,127,000, total deposits of ~~$1,294,087,000,~~$1,309,746,000, and shareholders’ equity of ~~$231,680,000.~~$233,182,000.

Key Factors in Evaluating Financial Condition and Operating Performance

As a publicly traded community bank holding company, we focus on several key factors including:

· Return to our shareholders;

· Return on average assets;

· Development of revenue streams, including net interest income and non-interest income;

· Asset quality;

· Asset growth;

· Capital adequacy;

· Operating efficiency; and

· Liquidity

Return to Our Shareholders

Our return to shareholders is determined in a ratio that measures the return on average equity (ROE). ROE is a ratio that measures net income divided by average shareholders’ equity. Our annualized ROE was ~~10.06%~~9.96% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to 10.07% for the year ended December 31, 2018 and ~~9.84%~~10.16% for the ~~six~~nine months ended ~~June~~September 30, 2018. Our net income for the ~~six~~nine months ended ~~June~~September 30, 2019 increased ~~$1,047,000~~$986,000 or ~~10.21%~~6.16% to ~~$11,303,000~~$16,994,000 compared to ~~$10,256,000~~$16,008,000 for the ~~six~~nine months ended ~~June~~September 30, 2018, primarily driven by an increase in net realized gains on sales and calls of investment securities, and an increase in net interest income, partially offset by an increase in non-interest expenses and an increase in provision for income taxes. Net interest margin (NIM) increased 2314 basis points for the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 compared to the ~~six~~nine months ended ~~June~~September 30, 2018. Diluted EPS was ~~$0.83~~$1.25 for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~$0.74~~$1.16 for the same period in 2018.

Return on Average Assets

Our return on average assets (ROA) is a ratio that we use to compare our performance with other banks and bank holding companies. Our annualized ROA for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~1.45%~~1.44% compared to 1.35% for the year ended December 31, 2018 and ~~1.28%~~1.34% for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in ROA for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~June~~September 30, 2018 was due to the increase in net income, notwithstanding a decrease in in average assets. Average assets for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~$1,562,541,000~~$1,571,245,000 compared to $1,577,410,000 for the year ended December 31, 2018. Median ROA for our peer group was 1.31% for the year ended December 31, 2018. Peer group data from S&P Global Market Intelligence includes bank holding companies in central California with assets from $600 million to $3.5 billion.

Development of Revenue Streams

Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including ~~increases~~decreases in average interest earning assets, and minimizing the effects of the ~~continuing declines~~increase in interest rates on our net interest margin. The Company’s net interest margin (fully tax equivalent basis) increased to ~~4.56%~~4.54% for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~4.33%~~4.40% for the same period in 2018. The increase in net interest margin in the period-over-period comparison resulted primarily from the increase in the effective yield on average investment securities, an increase in the yield on the Company’s loan portfolio, and an increase in the effective yield on interest earning deposits in other banks and Federal Funds sold. ~~Interest bearing~~Interest-bearing liabilities continue to benefit from low interest rates. In comparing the two periods ending ~~June~~September 30, 2019 and 2018, the effective yield on total earning assets increased 3223 basis points, while the cost of total ~~interest bearing~~interest-bearing liabilities increased 17 basis points and the cost of total deposits increased to ~~0.14%~~0.15% compared to ~~0.07%~~0.08%. Net interest income before the provision for credit losses for the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 was ~~$31,781,000~~$47,985,000 compared to ~~$30,823,000~~$46,730,000 for the same period in 2018.

Our non-interest income generally consists of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank-owned life insurance, and net gains from sales of investment securities. Non-interest income for the ~~six~~nine months ended ~~June~~September 30, 2019 increased ~~$2,117,000~~$3,376,000 or ~~38.79%~~42.63%, to ~~$7,574,000~~$11,296,000 compared to ~~$5,457,000~~$7,920,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase resulted primarily from increases in net realized gains on sales and calls of investment securities and loan placement ~~fees, and other income;~~fees; offset by decreases in service charge income, ~~and~~ gain on sale of credit card portfolio, and other income, compared to the comparable 2018 period. Further detail of non-interest income is provided below.

Asset Quality

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of percentage of total loans and total assets and is a key element in estimating the future earnings of a company. Total nonperforming assets were ~~$2,442,000~~$2,157,000 and $2,740,000 at ~~June~~September 30, 2019 and December 31, 2018, respectively. Nonperforming assets totaled ~~0.25%~~0.23% of gross loans as of ~~June~~September 30, 2019 and 0.30% of gross loans as of December 31, 2018. The ratio of nonperforming assets to total assets was ~~0.15%~~0.14% as of ~~June~~September 30, 2019 and 0.18% as of December 31, 2018. The nonperforming assets at ~~June~~September 30, 2019 and December 31, 2018 consisted of nonaccrual loans of ~~$2,442,000~~$2,157,000 and $2,740,000, respectively. The Company had no other real estate owned (OREO) or repossessed assets at ~~June~~September 30, 2019 or December 31, 2018. 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 0.25% as of June 30, 2019 and 0.30% as of December 31, 2018. The~~ allowance for credit losses as a percentage of outstanding loan balance was ~~0.98%~~1.01% as of ~~June~~September 30, 2019 and 0.99% as of December 31, 2018. The ratio of net charge-off (recovery) to average loans was ~~(0.01)%~~0.02% as of ~~June~~September 30, 2019 and (0.03)% as of December 31, 2018.

Asset Growth

As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased by ~~$75,391,000~~$46,291,000 or ~~4.90%~~3.01% during the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$1,613,227,000~~$1,584,127,000 compared to $1,537,836,000 as of December 31, 2018. Total gross loans increased by ~~4.52%~~2.59% or ~~$41,516,000~~$23,808,000 to ~~$960,211,000~~$942,503,000 as of ~~June~~September 30, 2019 compared to $918,695,000 as of December 31, 2018. Total deposits increased ~~0.92%~~2.14% to ~~$1,294,087,000~~$1,309,746,000 as of ~~June~~September 30, 2019 compared to $1,282,298,000 as of December 31, 2018. Our loan-to-deposit ratio at ~~June~~September 30, 2019 was ~~74.20%~~71.96% compared to 71.64% at December 31, 2018. The loan-to-deposit ratio of our peers was 82.00% at December 31, 2018. Further discussion of loans and deposits is below.

Capital Adequacy

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.

The Company and the Bank are each subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements may cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by bank regulatory agencies to ensure capital adequacy. As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules are being phased in through 2019 under the Dodd-Frank Act and Basel III. As of ~~June~~September 30, 2019, 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 ~~June~~September 30, 2019. The Company’s regulatory capital ratios are presented in the table in the “Capital” section below.

Operating Efficiency

Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue. When measuring operating efficiency, a lower ratio is more favorable. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was ~~63.78%~~63.21% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~63.44%~~61.61% for the ~~six~~nine months ended ~~June~~September 30, 2018. The slight increase in the efficiency ratio iswas due to the growth in non-interest expense outpacing the growth in non-interest income. Further discussion of the change in net interest income and increase in operating expenses is below.

The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, less gain on sale of credit card portfolio, ~~and gain related~~increased 1.06% to ~~the collection of life insurance proceeds, increased 1.97% to $36,107,000~~$54,392,000 for the first ~~six~~nine months of 2019 compared to ~~$35,409,000~~$53,822,000 for the same period in 2018, while operating expenses, net of losses on sale of assets, acquisition and integration costs, and amortization of core deposit intangibles, increased ~~2.52%~~3.68% to ~~$23,030,000~~$34,379,000 from ~~$22,463,000~~$33,160,000 for the same period in 2018.

Liquidity

Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). We have available unsecured lines of credit with correspondent banks totaling approximately $40,000,000 and secured borrowing lines of approximately ~~$245,911,000~~$276,197,000 with the FHLB. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling ~~$532,272,000~~$520,471,000 or ~~32.99%~~32.86% of total assets at ~~June~~September 30, 2019 and $502,886,000 or 32.70% of total assets as of December 31, 2018.

RESULTS OF OPERATIONS

Net Income for the ~~Six~~Nine Months Ended ~~June~~September 30, 2019 Compared to the ~~Six~~Nine Months Ended ~~June~~September 30, 2018

Net income increased to ~~$11,303,000~~$16,994,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$10,256,000~~$16,008,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. Basic and diluted earnings per share for ~~June~~September 30, 2019 were ~~$0.84~~$1.26 and ~~$0.83,~~$1.25, respectively. Basic and diluted earnings per share for the same period in 2018 were ~~$0.75~~$1.17 and ~~$0.74,~~$1.16, respectively. Annualized ROE was ~~10.06%~~9.96% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~9.84%~~10.16% for the ~~six~~nine months ended ~~June~~September 30, 2018. Annualized ROA for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 was ~~1.45%~~1.44% and ~~1.28%~~1.34%, respectively.

The increase in net income for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same period in 2018 was primarily driven by 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 and an increase in the provision for income taxes. During the ~~six~~nine months

ended ~~June~~September 30, 2019, the Company recorded a ~~$275,000~~$525,000 provision for credit losses, compared to a $50,000 provision during the ~~six~~nine months ended ~~June~~September 30, 2018.

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~~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.

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES


	For the Six Months Ended June 30, 2019							For the Six Months Ended Six 30, 2018							For the Nine Months Ended September 30, 2019							For the Nine Months Ended September 30, 2018
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate
ASSETS
Interest-earning deposits in other banks	$	17,846		$	209	2.34	%	$	18,208		$	142	1.56	%	$	16,531		$	283	2.28	%	$	23,509		$	312	1.77	%
Securities:
Taxable securities	415,209			6,358		3.06	%	404,168			4,744		2.35	%	429,489			9,821		3.05	%	388,055			7,276		2.50	%
Non-taxable securities (1)	62,909			1,255		3.99	%	132,585			2,674		4.03	%	46,644			1,447		4.14	%	125,948			3,808		4.03	%
Total investment securities	478,118			7,613		3.18	%	536,753			7,418		2.76	%	476,133			11,268		3.16	%	514,003			11,084		2.88	%
Federal funds sold	112			1		2.39	%	48			—		1.61	%	102			2		2.32	%	39			—		1.79	%
Total securities and interest-earning deposits	496,076			7,823		3.15	%	555,009			7,560		2.72	%	492,766			11,553		3.13	%	537,551			11,396		2.83	%
Loans (2) (3)	920,099			25,509		5.59	%	906,566			24,525		5.46	%	928,874			38,747		5.58	%	907,779			37,216		5.48	%
Total interest-earning assets	1,416,175			$	33,332	4.75	%	1,461,575			$	32,085	4.43	%	1,421,640			$	50,300	4.73	%	1,445,330			$	48,612	4.50	%
Allowance for credit losses	(9,179		)					(8,806		)					(9,261		)					(8,873		)
Nonaccrual loans	2,575							4,064							2,562							4,083
Cash and due from banks	25,834							26,834							25,677							26,960
Bank premises and equipment	8,178							9,403							8,062							9,279
Other assets	118,958							113,405							122,565							112,586
Total average assets	$	1,562,541						$	1,606,475						$	1,571,245						$	1,589,365
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts	$	369,734		$	254	0.14	%	$	398,868		$	169	0.09	%	$	371,330		$	429	0.15	%	$	389,779		$	326	0.11	%
Money market accounts	272,673			304		0.22	%	291,889			183		0.13	%	271,491			499		0.25	%	289,140			280		0.13	%
Time certificates of deposit	97,638			304		0.63	%	119,692			138		0.23	%	97,129			500		0.69	%	115,114			204		0.24	%
Total interest-bearing deposits	740,045			862		0.23	%	810,449			490		0.12	%	739,950			1,428		0.26	%	794,033			810		0.14	%
Other borrowed funds	29,992			426		2.84	%	17,837			210		2.35	%	27,490			582		2.82	%	14,203			273		2.56	%
Total interest-bearing liabilities	770,037			$	1,288	0.34	%	828,286			$	700	0.17	%	767,440			$	2,010	0.35	%	808,236			$	1,083	0.18	%
Non-interest bearing demand deposits	541,996							549,870							549,242							551,165
Other liabilities	25,766							19,783							27,012							19,914
Shareholders’ equity	224,742							208,536							227,551							210,050
Total average liabilities and shareholders’ equity	$	1,562,541						$	1,606,475						$	1,571,245						$	1,589,365
Interest income and rate earned on average earning assets				$	33,332	4.75	%				$	32,085	4.43	%				$	50,300	4.73	%				$	48,612	4.50	%
Interest expense and interest cost related to average interest-bearing liabilities				1,288		0.34	%				700		0.17	%				2,010		0.35	%				1,083		0.18	%
Net interest income and net interest margin (4)				$	32,044	4.56	%				$	31,385	4.33	%				$	48,290	4.54	%				$	47,529	4.40	%


(1)	Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling ~~$264~~$305 and ~~$562~~$800 in 2019 and 2018, respectively.


(2)	Loan interest income includes loan fees (costs) of ~~$(16)~~$56 in 2019 and ~~$228~~$404 in 2018.


(3)	Average loans do not include nonaccrual loans but do include interest income recovered from previously charged off loans.


(4)	Net interest margin is computed by dividing net interest income by total average interest-earning assets.

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.


Changes in Volume/Rate	For the Six Months Ended June 30, 2019 and 2018									For the Nine Months Ended September 30, 2019 and 2018
(In thousands)	Volume			Rate			Net			Volume			Rate		Net
Increase (decrease) due to changes in:
Interest income:
Interest-earning deposits in other banks	$	(2	)	$	69		$	67		$	(92	)	$	63	$	(29	)
Investment securities:
Taxable	130			1,484			1,614			777			1,768		2,545
Non-taxable (1)	(1,406		)	(13		)	(1,419		)	(2,397		)	38		(2,359		)
Total investment securities	(1,276		)	1,471			195			(1,620		)	1,806		186
Federal funds sold	1			—			1			2			—		2
Loans	366			618			984			864			667		1,531
Total earning assets (1)	(911		)	2,158			1,247			(846		)	2,536		1,690
Interest expense:
Deposits:
Savings, NOW and MMA	(24		)	230			206			(32		)	354		322
Time certificate of deposits	(25		)	191			166			(31		)	327		296
Total interest-bearing deposits	(49		)	421			372			(63		)	681		618
Other borrowed funds	141			75			216			254			55		309
Total interest bearing liabilities	92			496			588
Total interest-bearing liabilities										191			736		927
Net interest income (1)	$	(1,003	)	$	1,662		$	659		$	(1,037	)	$	1,800	$	763

(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased ~~$984,000~~$1,531,000 or ~~4.01%~~4.11% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same period in 2018. Net interest income during the first ~~six~~nine months of 2019 was positively impacted by an increase in average total loans of ~~$13,533,000~~$21,095,000 or ~~1.49%~~2.32% to ~~$920,099,000~~$928,874,000 compared to ~~$906,566,000~~$907,779,000 for the same period in 2018. The yield on average loans, excluding nonaccrual loans, was ~~5.59%~~5.58% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~5.46%~~5.48% for the same period in 2018. Net interest income for the period ending ~~June~~September 30, 2019 was benefited by approximately ~~$183,000~~$593,000 in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, compared to a ~~$175,000~~$355,000 in income reversals recorded in the same period in 2018. The impact to interest income from the accretion of the loan marks on acquired loans was ~~$451,000~~$750,000 and ~~$590,000~~$906,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The remaining balance of accretable loan marks on acquired loans as of ~~June~~September 30, 2019 was ~~$4,455,000.~~$4,155,000.

Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) increased ~~$562,000~~$651,000 in the first ~~six~~nine months of 2019 to ~~$7,560,000~~$11,248,000 compared to ~~$6,998,000,~~$10,597,000, for the same period in 2018. The yield on average total investments (total securities and interest-earning deposits) increased 4330 basis points to ~~3.15%~~3.13% for the ~~six~~nine month period ended ~~June~~September 30, 2019 compared to ~~2.72%~~2.83% for the same period in 2018. Average total securities and interest-earning deposits for the first ~~six~~nine months of 2019 decreased ~~$58,933,000~~$44,785,000 or ~~10.62%~~8.33% to ~~$496,076,000~~$492,766,000 compared to ~~$555,009,000~~$537,551,000 for the same period in 2018. Income from investments represents ~~23.79%~~23.44% of net interest income for the first ~~six~~nine months of 2019 compared to ~~22.70%~~22.68% for the same period in 2018.

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in residential mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At ~~June~~September 30, 2019, we held ~~$419,754,000~~$360,398,000 or ~~88.14%~~76.69% of the total fair value of the investment portfolio in MBS and CMOs with an average yield of ~~3.12%~~3.09% as compared to $361,080,000 and $311,198,000 with average yields of 2.81% and 2.69% at December 31, 2018 and ~~June~~September 30, 2018, respectively. We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin. CMOs and MBS by their nature react to changes in interest rates. In a normal declining rate environment, prepayments from 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. However, in the current economic environment, prepayments may not behave according to historical norms. Premium amortization and discount accretion of these investments affects our net interest income. Management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium

amortization and discount accretion represents management’s reasonable estimate of principal pay downs inherent in the total investment portfolio.

The net-of-tax unrealized gain on the investment portfolio was ~~$4,747,000~~$5,731,000 at ~~June~~September 30, 2019 and is reflected in the Company’s equity. At ~~June~~September 30, 2019, the average life of the investment portfolio was 6.85 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of ~~$6,740,000.~~$8,136,000. Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI). Refer to Note 3 of the Notes to Consolidated Financial Statements (unaudited) for more detail. For the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, no OTTI was recorded. Additional deterioration in the market values of our investment securities, if any, may require the Company to recognize OTTI losses in future periods.

A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. At ~~June~~September 30, 2019, we estimate an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately ~~$36,000,000~~$35,000,000 or ~~7.56%~~7.46%. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be ~~$35,000,000~~$30,000,000 or ~~7.35%~~6.40%. Our modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and risk tolerance policy limits established by the Board of Directors to measure the possible future risk in the investment portfolio.

Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, impairment, and prohibited practices.

Total interest income on a non-tax equivalent basis for the ~~six~~nine months ended ~~June~~September 30, 2019 increased ~~$1,546,000~~$2,182,000 or ~~4.90%~~4.56% to ~~$33,069,000~~$49,995,000 compared to ~~$31,523,000~~$47,813,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The yield on interest earning assets increased 3223 basis points to ~~4.75%~~4.73% on a fully tax equivalent basis for the ~~six~~nine months ended ~~June~~September 30, 2019 from ~~4.43%~~4.50% for the period ended ~~June~~September 30, 2018. The increase was the result of yield changes, increase in interest rates, and asset mix changes. Average interest earning assets decreased to ~~$1,416,175,000~~$1,421,640,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$1,461,575,000~~$1,445,330,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The ~~$45,400,000~~$23,690,000 decrease in average earning assets was attributed to the ~~$58,933,000~~$44,785,000 decrease in average investments, offset by the ~~$13,533,000~~$21,095,000 or ~~1.49%~~2.32% increase in average loans.

Interest expense on deposits for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 was ~~$862,000~~$1,428,000 and ~~$490,000,~~$810,000, respectively. The average interest rate on interest bearing deposits increased to ~~0.23%~~0.26% for the nine months ended September 30, 2019 compared to ~~0.12%~~0.14% for the ~~six months~~same period ended ~~June~~September 30, ~~2019 and~~ 2018. Average interest-bearing deposits decreased ~~8.69%~~6.81% or ~~$70,404,000~~$54,083,000 to ~~$740,045,000~~$739,950,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$810,449,000~~$794,033,000 for the same period ended ~~June~~September 30, 2018.

Average other borrowed funds increased ~~$12,155,000~~$13,287,000 or ~~68.14%~~93.55% to ~~$29,992,000~~$27,490,000 with an effective rate of ~~2.84%~~2.82% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$17,837,000~~$14,203,000 with an effective rate of ~~2.35%~~2.56% for the ~~six~~nine months ended ~~June~~September 30, 2018. Total interest expense on other borrowed funds was ~~$426,000~~$582,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~$210,000~~$273,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. Other borrowings include advances from the Federal Home Loan Bank (FHLB), advances on available unsecured lines of credit with correspondent banks, and junior subordinated deferrable interest debentures. The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rates were ~~4.20%~~3.90% and 3.95% at ~~June~~September 30, 2019 and 2018, respectively. See the section on “Financial Condition” for more detail.

The cost of interest-bearing liabilities increased 17 basis points to ~~0.34%~~0.35% for the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 compared to ~~0.17%~~0.18% for the same period in 2018. The cost of total deposits increased to ~~0.14%~~0.15% compared to ~~0.07%~~0.08% for the ~~six-month~~nine-month periods ended ~~June~~September 30, 2019 and 2018. Average non-interest bearing demand deposits decreased ~~1.43%~~0.35% to ~~$541,996,000~~$549,242,000 in 2019 compared to ~~$549,870,000~~$551,165,000 for 2018. The ratio of average non-interest bearing demand deposits to average total deposits increased to ~~42.28%~~42.60% in the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 compared to ~~40.42%~~40.97% for the same period in 2018.

Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for the ~~six~~nine months ended ~~June~~September 30, 2019 increased by ~~$958,000~~$1,255,000 or ~~3.11%~~2.69% to ~~$31,781,000~~$47,985,000 compared to ~~$30,823,000~~$46,730,000 for the same period in 2018. The increase was a result of yield changes, asset mix changes, and a decrease in average interest bearing liabilities, offset by a decrease in average earning assets. In addition, net interest income before the provision for credit losses for the ~~six~~nine months ended ~~June~~September 30, 2019 increased by approximately ~~$183,000~~$593,000 due to nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, compared to ~~$175,000~~$355,000 reversal of income for the ~~six~~nine months ended ~~June~~September 30, 2018. Excluding these reversals and benefits, net interest income for the ~~six~~nine months ended ~~June~~September 30, 2019 increased by ~~$950,000~~$1,017,000 compared to the ~~six~~nine months ended ~~June~~September 30, 2018. Average interest earning assets were ~~$1,416,175,000~~$1,421,640,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 with a net interest margin (fully tax equivalent basis) of ~~4.56%~~4.54% compared to ~~$1,461,575,000~~$1,445,330,000 with a net interest margin (fully tax equivalent basis) of ~~4.33%~~4.40% for the ~~six~~nine months ended ~~June~~September 30, 2018. The ~~$45,400,000~~$23,690,000 decrease in average earning assets

was attributed to the ~~$58,933,000~~$44,785,000 decrease in average total investments, offset by the ~~$13,533,000~~$21,095,000 or ~~1.49%~~2.32% increase in average loans. For the ~~six~~nine months ended ~~June~~September 30, 2019, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 43

30 basis points. The effective yield on loans increased 1310 basis points. Average interest bearing liabilities decreased ~~7.03%~~5.05% to ~~$770,037,000~~$767,440,000 for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$828,286,000~~$808,236,000 for the same period in 2018.

Provision for Credit Losses

We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses, and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted.

The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools. The Board of Directors have established initial responsibility for the accuracy of credit risk grades with the individual credit officer. The Credit Review Officer (CRO) will review loans to ensure the accuracy of the risk grade and is empowered to change any risk grade, as appropriate. The CRO is not involved in loan originations. Quarterly, the credit officers must certify the current risk grade of the loans in their portfolio. The CRO reviews the certifications. At least quarterly the CRO reports his activities to the Board of Directors Audit Committee; and at least annually the loan portfolio is reviewed by a third party credit reviewer and by various regulatory agencies.

Quarterly, the Chief Credit Officer (CCO) sets the specific reserve for all impaired credits. Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter. This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves.

The allowance for credit losses is reviewed at least quarterly by the Board of Directors Audit Committee and by the Board of Directors. General reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance calculation and other portfolio trending analysis.

The allocation of the allowance for credit losses is set forth below (in thousands):


Loan Type	June 30, 2019		December 31, 2018		September 30, 2019			December 31, 2018
Commercial:
Commercial and industrial	$	1,473	$	1,604	$	1,412		$	1,604
Agricultural production	327		67		306			67
Total commercial	1,800		1,671		1,718			1,671
Real estate:
Owner occupied	1,199		1,131		1,412			1,131
Real estate construction and other land loans	1,295		1,271		931			1,271
Commercial real estate	2,971		3,017		3,524			3,017
Agricultural real estate	908		947		1,035			947
Other real estate	180		173		159			173
Total real estate	6,553		6,539		7,061			6,539
Consumer:
Equity loans and lines of credit	458		419		474			419
Consumer and installment	453		407		479			407
Total consumer	911		826		953			826
Unallocated reserves	141		68		(237		)	68
Total allowance for credit losses	$	9,405	$	9,104	$	9,495		$	9,104

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include

reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

Managing high-risk credits includes developing a business strategy with the customer to mitigate our potential losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly.

During the ~~six~~nine months ended ~~June~~September 30, 2019, the Company recorded a ~~$275,000~~$525,000 provision for credit losses, compared to $50,000 provision during the ~~six~~nine months ended ~~June~~September 30, 2018. The provision to the allowance for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section.

The Company had net recoveries totaling ~~$26,000~~$134,000 for the ~~six~~nine months ended ~~June~~September 30, 2019, and ~~$92,000~~$197,000 for the same period in 2018.

Nonperforming loans, consisting entirely of nonaccrual loans, were ~~$2,442,000~~$2,157,000 and $2,740,000 at ~~June~~September 30, 2019 and December 31, 2018, respectively, and ~~$4,092,000~~$4,133,000 at ~~June~~September 30, 2018. Nonperforming loans as a percentage of total loans were ~~0.25%~~0.23% at ~~June~~September 30, 2019 compared to 0.30% at December 31, 2018 and ~~0.44%~~0.45% at ~~June~~September 30, 2018. The Company had no other real estate owned (OREO) at ~~June~~September 30, 2019 or December 31, 2018. The Company held no repossessed assets at ~~June~~September 30, 2019 or December 31, 2018.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was ~~(0.01)%~~0.02% for the ~~six~~nine months ended ~~June~~September 30, 2019, and ~~(0.02)~~(0.03)% for the same period in 2018.

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 financial performance, results of operation and cash flows. 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 on our business, results of operation and financial condition. The agricultural industry has been affected by declines in prices and ~~the rates of price growth~~yields for 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 ~~June~~September 30, 2019, there were ~~$17.9~~$19.2 million in classified loans of which ~~$6.5~~$6.4 million related to agricultural real estate, $1.5 million to commercial and industrial loans, ~~$0.9~~$2.8 million to real estate owner occupied, ~~$1.5~~$0.5 million in commercial real estate, ~~$1.6~~$1.9 million to real estate construction and other land loans, and ~~$2.8~~$3.0 million to consumer equity loans and lines of credit. This compares to $28.4 million in classified loans of which $19.2 million related to agricultural real estate, $2.6 million to commercial and industrial loans, $0.9 million to real estate owner occupied, $1.1 million to commercial real estate, $1.6 million to consumer equity and lines of credit, and $3.0 million to real estate construction and other land loans as of December 31, 2018.

As of ~~June~~September 30, 2019, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio. However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period. Refer to the “Allowance for Credit Losses” section for further information.

Net Interest Income after Provision for Credit Losses

Net interest income, after the provision for credit losses, was ~~$31,506,000~~$47,460,000 for the ~~six~~nine months period ended ~~June~~September 30, 2019 and ~~$30,773,000~~$46,680,000 for the same period in 2018.

Non-Interest Income

Non-interest income is comprised of customer service charges, loan placement fees, net gains on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, Federal Home Loan Bank dividends, and other income. Non-interest income was ~~$7,574,000~~$11,296,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$5,457,000~~$7,920,000 for the

same period in 2018. The ~~$2,117,000~~$3,376,000 or ~~38.79%~~42.63% increase in non-interest income during the ~~six~~nine months ended ~~June~~September 30, 2019 was primarily driven by an increase of ~~$2,614,000~~$3,919,000 in net realized gains on sales and calls of investment securities ~~an increase of~~

~~$123,000 in other income,~~ and an increase in loan placement fees of ~~$20,000,~~$101,000, offset by decrease in gain on sale of credit card portfolio of ~~$578,000 and~~$462,000, a decrease in service charge income of ~~$78,000.~~$145,000, and a decrease of $45,000 in other income.

During the ~~six~~nine months ended ~~June~~September 30, 2019, we realized a net gain on sales and calls of investment securities of ~~$3,511,000~~$5,196,000 compared to ~~$897,000~~$1,277,000 for the same period in 2018. The net gains realized on sales and calls of investment securities in 2019 and 2018 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.

Customer service charges decreased ~~$78,000~~$145,000 or ~~5.27%~~6.53% to ~~$1,403,000~~$2,075,000 for the first ~~six~~nine months of 2019 compared to ~~$1,481,000~~$2,220,000 for the same period in 2018. Interchange fees ~~increased $2,000~~decreased $5,000 to ~~$727,000~~$1,101,000 the first ~~six~~nine months of 2019 compared to ~~$725,000~~$1,106,000 for the same period in 2018. Loan placement fees increased ~~$20,000~~$101,000 or ~~5.90%~~18.50% to ~~$359,000~~$647,000 for the first ~~six~~nine months of 2019 compared to ~~$339,000~~$546,000 for the same period in 2018. Other income ~~increased $123,000~~decreased $45,000 the first ~~six~~nine months of 2019 compared to the same period in 2018.

The Bank holds stock from the Federal Home Loan Bank of San Francisco in conjunction with our borrowing capacity and generally earns quarterly dividends. We currently hold $6,062,000 in FHLB stock. We received dividends totaling ~~$239,000~~$348,000 in the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$239,000~~$358,000 for the same period in 2018.

Non-Interest Expenses

Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, acquisition and integration expenses, Internet banking, and data processing are the major categories of non-interest expenses. Non-interest expenses increased ~~$572,000~~$1,314,000 or ~~2.50%~~3.90% to ~~$23,439,000~~$34,972,000 for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$22,867,000~~$33,658,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The net increase for the first ~~six~~nine months of 2019 was a result of increases in information technology of ~~$948,000,~~$1,376,000, salaries and employee benefits of ~~$153,000,~~$497,000, amortization of intangibles of ~~$160,000,~~$240,000, directors’ expenses of ~~$146,000,~~$171,000, telephone expenses of $120,000, and advertising of ~~$23,000,~~$21,000, partially offset by decreases in occupancy and equipment expenses of $355,000, regulatory assessments of $259,000, acquisition and integration expenses of $217,000, professional services of ~~$194,000,~~$133,000, data processing expenses of ~~$54,000, occupancy and equipment expenses of $183,000,~~$73,000, other non-interest expenses of ~~$197,000,~~$315,000, and ~~regulatory assessments~~operating losses of ~~$36,000.~~$112,000. The increase in the information technology expenses was a result of the Company outsourcing its network maintenance and IT support during the fourth quarter of ~~2018, which also produced decreases~~2018. The increase in the salaries and employee ~~benefits. The increase in the~~benefits as well as directors’ expenses was related to the change in the discount rate used to calculate the liability for deferred compensation and split dollar plans.

The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO related gains and losses, and gains related to the collection of life insurance proceeds) was ~~63.78%~~63.21% for the ~~six~~nine months ofended September 30, 2019 compared to ~~63.44%~~61.61% for the ~~six~~nine months ended ~~June~~September 30, 2018. The slight increase in the efficiency ratio is due to the growth in non-interest expense outpacing the growth in non-interest income.

Salaries and employee benefits increased ~~$153,000~~$497,000 or ~~1.15%~~2.53% to ~~$13,402,000~~$20,133,000 for the first ~~six~~nine months of 2019 compared to ~~$13,249,000~~$19,636,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. Full time equivalent employees were ~~287~~282 for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~324~~320 for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase of salaries and employee benefits in 2019 compared to the same period in 2018 is a result of normal cycles and salary increases, higher deferred compensation interest expense, and higher compensation expense, offset by a decrease of full time equivalent employees for the ~~six~~nine months ended ~~June~~September 30, 2019.

Occupancy and equipment expense decreased ~~$183,000~~$355,000 or ~~5.88%~~7.71% to ~~$2,931,000~~$4,248,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$3,114,000~~$4,603,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at ~~June~~September 30, 2019 compared to 2220 at ~~June~~September 30, 2018. The Company ~~opened~~closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a ~~new~~newly opened banking office in Gold River during the second quarter of 2019. ~~The Company also closed two banking offices - on in Rancho Cordova and one in Fair Oaks.~~ Subsequent to the end of the second quarter of 2018, the Company closed its Tracy office and sold a portion of the customer deposits to another financial institution. The Company also consolidated two banking offices into branches currently serving the same communities, - one in Visalia and one in Folsom, during the second quarter of 2018.

Data processing expense decreased to ~~$796,000~~$1,186,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$850,000~~$1,259,000 for the same period in 2018. Regulatory assessments decreased to ~~$286,000~~$217,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$322,000~~$476,000 for the same period in 2018. The assessment base for calculating the amount owed is average assets minus average tangible equity. The decrease in regulatory assessments was the result of the Company receiving a portion of its small bank assessment credit. The FDIC automatically applies small bank assessment credits to offset regular deposit insurance assessments for assessment periods where the Deposit Insurance Fund (DIF) reserve ratio is at or above 1.38 percent.

Professional services decreased by ~~$194,000~~$133,000 in the first ~~six~~nine months of 2019 compared to the same period in 2018 due to lower legal expenses and consulting fees. The following table shows significant components of other non-interest expense as a percentage of average assets.


	For the Six Months Ended June 30,								For the Nine Months Ended September 30,
	2019				2018				2019				2018
(Dollars in thousands)	Other Expense		% Average Assets		Other Expense		% Average Assets		Other Expense		% Average Assets		Other Expense		% Average Assets
Stationery/supplies	$	112	0.01	%	$	149	0.02	%	$	176	0.01	%	$	202	0.02	%
Amortization of software	172		0.02	%	150		0.02	%	262		0.02	%	226		0.02	%
Postage	113		0.01	%	104		0.01	%	165		0.01	%	157		0.01	%
Risk management expense	110		0.01	%	85		0.01	%	164		0.01	%	136		0.01	%
Shareholder services	58		0.01	%	87		0.01	%	77		0.01	%	106		0.01	%
Personnel other	86		0.01	%	87		0.01	%	117		0.01	%	106		0.01	%
Armored courier fees	133		0.02	%	138		0.02	%	210		0.02	%	208		0.02	%
Credit card expense	116		0.01	%	121		0.02	%	114		0.01	%	121		0.01	%
Telephone	111		0.01	%	110		0.01	%	287		0.02	%	167		0.01	%
Alarm	45		0.01	%	45		0.01	%	64		0.01	%	65		0.01	%
Donations	118		0.02	%	126		0.02	%	162		0.01	%	181		0.02	%
Acquisition and integration									—		—	%	217		0.02	%
Education/training	66		0.01	%	66		0.01	%	107		0.01	%	126		0.01	%
Loan related expenses	33		—	%	52		0.01	%	41		—	%	62		0.01	%
General insurance	83		0.01	%	84		0.01	%	124		0.01	%	126		0.01	%
Travel and mileage Expense	121		0.02	%	62		0.01	%	186		0.02	%	197		0.02	%
Operating losses	41		0.01	%	168		0.02	%	81		0.01	%	193		0.02	%
Other	631		0.08	%	712		0.09	%	926		0.08	%	982		0.08	%
Total other non-interest expense	$	2,149	0.28	%	$	2,346	0.29	%	$	3,263	0.28	%	$	3,578	0.30	%

Provision for Income Taxes

Our effective income tax rate was ~~27.73%~~28.55% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~23.25%~~23.56% for the ~~six~~nine months ended ~~June~~September 30, 2018. The Company reported an income tax provision of ~~$4,338,000~~$6,790,000 for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$3,107,000~~$4,934,000 for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in the effective tax rate was the result of a decrease in tax exempt interest. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income. If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria. As of ~~June~~September 30, 2019 and December 31, 2018, there was no reserve for uncertain tax positions.

Net Income for the ~~Second~~Third Quarter of 2019 Compared to the ~~Second~~Third Quarter of 2018

Net income was ~~$6,087,000~~$5,691,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$4,965,000~~$5,752,000 for the quarter ended ~~June~~September 30, 2018. Basic earnings per share was ~~$0.45~~$0.43 for the quarter ended ~~June~~September 30, 2019 compared to ~~$0.36~~$0.42 for the same period in 2018. Diluted earnings per share was ~~$0.45~~$0.42 for the quarter ended ~~June~~September 30, 2019 compared to ~~$0.36~~$0.42 for the same period in 2018 For the quarter ended September 30, 2019, 188,383 shares had been repurchased and retired under the share repurchase programs. Annualized ROE was ~~10.68%~~9.77% for the quarter ended ~~June~~September 30, 2019 compared to ~~9.53%~~10.80% for the quarter ended ~~June~~September 30, 2018. Annualized ROA for the three months ended ~~June~~September 30, 2019 was ~~1.54%~~1.43% compared to ~~1.25%~~1.48% for the quarter ended ~~June~~September 30, 2018.

The ~~increase~~decrease in net income during the ~~second~~third quarter of 2019 compared to the same period in 2018 is primarily due to an increase in the provision for income taxes of $625,000, an increase in non-interest expenses of $743,000, and an increase in provision for credit losses of $250,000, partially offset by an increase in net interest income before the provision for credit losses of ~~$549,000~~$298,000 and an increase in total non-interest income of ~~$1,912,000, partially offset by an increase in the provision for income taxes of $816,000 and an increase in non-interest expenses of $273,000.~~$1,259,000. During the quarter ended ~~June~~September 30, 2019, the Company recorded ~~$300,000~~a $250,000 provision for credit losses, compared to a ~~$50,000~~no provision during the quarter ended ~~June~~September 30, 2018. Non-interest income increased ~~$1,912,000~~$1,259,000 or ~~71.18%~~51.12% to ~~$4,598,000~~$3,722,000 for the quarter ended ~~June~~September 30,

2019 compared to ~~$2,686,000~~$2,463,000 in the same period in 2018, primarily due to an increase in net realized gains on sales and calls of investment securities of ~~$2,377,000, offset by~~$1,305,000. Credit card deconversion costs, which were deducted from the ~~decrease in~~ net ~~realized gains~~gain on the sale of ~~our~~the credit card portfolio, ~~of $578,000.~~were $116,000 during the quarter ended September 30, 2018. In addition, during the ~~second~~third quarter 2019 there was ~~an increase~~a decrease in other income of ~~$61,000,~~$168,000, a decrease of $67,000 in service charge income, and a decrease of $7,000 in interchange fees, offset by an increase in loan placement fees of ~~$47,000, and an increase of $4,000 in interchange fees, offset by a decrease of $13,000 in service charge income,~~$81,000, compared to the same period in 2018.

Interest Income and Expense

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES


	For the Three Months Ended June 30, 2019							For the Three Months Ended June 30, 2018							For the Three Months Ended September 30, 2019							For the Three Months Ended September 30, 2018
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate		Average Balance			Interest Income/ Expense		Average Interest Rate
ASSETS
Interest-earning deposits in other banks	$	11,195		$	59	2.11	%	$	11,037		$	45	1.63	%	$	13,943		$	74	2.12	%	$	33,939		$	169	1.99	%
Securities
Taxable securities	431,373			3,335		3.09	%	389,342			2,184		2.24	%	457,582			3,462		3.03	%	356,355			2,534		2.84	%
Non-taxable securities (1)	53,658			543		4.05	%	132,091			1,323		4.01	%	14,645			194		5.30	%	112,889			1,134		4.02	%
Total investment securities	485,031			3,878		3.20	%	521,433			3,507		2.69	%	472,227			3,656		3.10	%	469,244			3,668		3.13	%
Federal funds sold	119			1		2.40	%	35			—		1.78	%	82			—		2.15	%	22			—		1.95	%
Total securities and interest-earning deposits	496,345			3,938		3.17	%	532,505			3,552		2.67	%	486,252			3,730		3.07	%	503,205			3,837		3.05	%
Loans (2) (3)	936,602			12,955		5.55	%	914,236			12,519		5.49	%	946,136			13,238		5.55	%	910,164			12,691		5.53	%
Total interest-earning assets	1,432,947			$	16,893	4.73	%	1,446,741			$	16,071	4.46	%	1,432,388			$	16,968	4.70	%	1,413,369			$	16,528	4.64	%
Allowance for credit losses	(9,234		)					(8,822		)					(9,423		)					(9,005		)
Non-accrual loans	2,453							4,035							2,537							4,121
Cash and due from banks	25,659							26,377							25,369							27,206
Bank premises and equipment	7,965							9,337							7,835							9,036
Other assets	124,332							110,976							129,661							110,977
Total average assets	$	1,584,122						$	1,588,644						$	1,588,367						$	1,555,704
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts	$	367,042		$	142	0.16	%	$	389,441		$	88	0.09	%	$	374,469		$	175	0.19	%	$	371,897		$	158	0.17	%
Money market accounts	268,711			157		0.23	%	285,848			91		0.13	%	269,167			195		0.29	%	283,733			97		0.14	%
Time certificates of deposit	97,538			170		0.70	%	115,107			73		0.25	%	96,129			196		0.81	%	106,106			66		0.25	%
Total interest-bearing deposits	733,291			469		0.26	%	790,396			252		0.13	%	739,765			566		0.30	%	761,736			321		0.17	%
Other borrowed funds	53,952			365		2.71	%	24,699			144		2.33	%	22,568			156		2.76	%	7,052			62		3.52	%
Total interest-bearing liabilities	787,243			$	834	0.42	%	815,095			$	396	0.19	%	762,333			$	722	0.38	%	768,788			$	383	0.20	%
Non-interest bearing demand deposits	540,868							545,854							563,498							553,714
Other liabilities	28,078							19,221							29,459							20,174
Shareholders’ equity	227,933							208,474							233,077							213,028
Total average liabilities and shareholders’ equity	$	1,584,122						$	1,588,644						$	1,588,367						$	1,555,704
Interest income and rate earned on average earning assets				$	16,893	4.73	%				$	16,071	4.46	%				$	16,968	4.70	%				$	16,528	4.64	%
Interest expense and interest cost related to average interest-bearing liabilities				834		0.42	%				396		0.19	%				722		0.38	%				383		0.20	%
Net interest income and net interest margin (4)				$	16,059	4.50	%				$	15,675	4.35	%				$	16,246	4.50	%				$	16,145	4.53	%


(1)	Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling ~~$114~~$41 and ~~$278~~$238 in 2019 and 2018, respectively.


(2)	Loan interest income includes loan fees ~~(costs)~~ of ~~$(42)~~$72 in 2019 and ~~$107~~$176 in 2018.


(3)	Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans.


(4)	Net interest margin is computed by dividing net interest income by total average interest-earning assets.


Changes in Volume/Rate	For the Three Months Ended June 30, 2019 and 2018								For the Three Months Ended September 30, 2019 and 2018
(In thousands)	Volume			Rate		Net			Volume			Rate			Net
Increase (decrease) due to changes in:
Interest income:
Interest-earning deposits in other banks	$	—		$	14	$	14		$	(99	)	$	4		$	(95	)
Investment securities:
Taxable	235			916		1,151			719			209			928
Non-taxable (1)	(785		)	5		(780		)	(986		)	46			(940		)
Total investment securities	(550		)	921		371			(267		)	255			(12		)
Federal funds sold	—			1		1			—			—			—
Loans	307			129		436			502			45			547
Total earning assets (1)	(243		)	1,065		822			136			304			440
Interest expense:
Deposits:
Savings, NOW and MMA	(10		)	130		120			(3		)	118			115
Time certificate of deposits	(11		)	108		97			(6		)	136			130
Total interest-bearing deposits	(21		)	238		217			(9		)	254			245
Other borrowed funds	171			50		221			136			(42		)	94
Total interest bearing liabilities	150			288		438
Total interest-bearing liabilities									127			212			339
Net interest income (1)	$	(393	)	$	777	$	384		$	9		$	92		$	101

(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased ~~$436,000~~$547,000 or ~~3.48%~~4.31% to ~~$12,955,000~~$13,238,000 for the ~~second~~third quarter of 2019 compared to ~~$12,519,000~~$12,691,000 for the same period in 2018. Average total loans, including nonaccrual loans, for the ~~second~~third quarter of 2019 increased ~~$20,784,000~~$34,388,000 or ~~2.26%~~3.76% to ~~$939,055,000~~$948,673,000 compared to ~~$918,271,000~~$914,285,000 for the same period in 2018. Yield on the loan portfolio, excluding nonaccrual loans, was 5.55% and ~~5.49%~~5.53% for the ~~second~~third quarters ending ~~June~~September 30, 2019 and 2018, respectively. Net interest income during the ~~second~~third quarters of 2019 and 2018 benefited by approximately ~~$56,000~~$250,000 and ~~$196,000,~~$180,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. The accretion of the loan marks on acquired loans increased interest income by ~~$192,000~~$299,000 and ~~$332,000~~$316,000 during the quarters ended ~~June~~September 30, 2019 and 2018, respectively.

Income from investments represents ~~23.99%~~22.76% of net interest income for the ~~second~~third quarter of 2019 compared to ~~21.26%~~22.63% for the same quarter in 2018. Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) increased ~~$551,000~~$90,000 in the ~~second~~third quarter of 2019 to ~~$3,825,000~~$3,689,000 compared to ~~$3,274,000,~~$3,599,000, for the same period in 2018. The yield on average total investments increased ~~fifty-one~~two basis points to ~~3.20%~~3.07% on a fully tax equivalent basis for the ~~second~~third quarter of 2019 compared to ~~2.69%~~3.05% on a fully tax equivalent basis for the ~~second~~third quarter of 2018. Average total investments and interest bearing deposits in other banks for the ~~second~~third quarter of 2019 decreased ~~$36,160,000~~$16,953,000 or ~~6.79%~~3.37% to ~~$496,345,000~~$486,252,000 compared to ~~$532,505,000~~$503,205,000 for the ~~second~~third quarter of 2018.

Total interest income for the ~~second~~third quarter of 2019 increased ~~$987,000~~$637,000 or ~~6.25%~~3.91% to ~~$16,780,000~~$16,927,000 compared to ~~$15,793,000~~$16,290,000 for the ~~second~~third quarter ended ~~June~~September 30, 2018. The yield on interest earning assets increased to ~~4.73%~~4.70% on a fully tax equivalent basis for the ~~second~~third quarter ended ~~June~~September 30, 2019 from ~~4.46%~~4.64% on a fully tax equivalent basis for the ~~second~~third quarter ended ~~June~~September 30, 2018. Average interest earning assets ~~decreased~~increased to ~~$1,432,947,000~~$1,432,388,000 for the ~~second~~third quarter ended ~~June~~September 30, 2019 compared to ~~$1,446,741,000~~$1,413,369,000 for the ~~second~~third quarter ended ~~June~~September 30, 2018. The ~~$13,794,000 decrease~~$19,019,000 increase in average earning assets was attributed to the ~~$22,366,000~~$35,972,000 increase in average loans, offset by the ~~$36,160,000~~$16,953,000 decrease in total investments.

Interest expense on deposits for the quarter ended ~~June~~September 30, 2019 increased ~~$217,000~~$246,000 or ~~86.11%~~76.88% to ~~$469,000~~$566,000 compared to ~~$252,000~~$320,000 for the quarter ended ~~June~~September 30, 2018. The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was ~~0.15%~~0.17% and ~~0.08%~~0.10% for the quarters ended ~~June~~September 30, 2019 and ~~2018.~~2018, respectively. Average interest bearing deposits decreased ~~7.22%~~2.88% or ~~$57,105,000~~$21,971,000 in the ~~second~~third quarter of 2019 compared to the

same period in 2018. Average interest-bearing deposits were ~~$733,291,000~~$739,765,000 for the quarter ended ~~June~~September 30, 2019, with an effective rate paid of ~~0.26%~~0.30%, compared to ~~$790,396,000~~$761,736,000 for the same period in 2018, with an effective rate paid of ~~0.13%~~0.17%.

Average other borrowed funds totaled ~~$53,952,000~~$22,568,000 for the quarter ended ~~June~~September 30, 2019, with an effective rate of ~~2.71%~~2.76% for the quarter ended ~~June~~September 30, 2019 compared to ~~$24,699,000~~$7,052,000 and ~~2.33%~~3.52% for the quarter ended ~~June~~September 30, 2018. As a result, interest expense on borrowed funds increased ~~$221,000~~$94,000 to ~~$365,000~~$156,000 for the quarter ended ~~June~~September 30, 2019, from ~~$144,000~~$62,000 for the quarter ended ~~June~~September 30, 2018. Other borrowings are comprised of advances from the Federal Home Loan Bank, junior subordinated deferrable interest debentures and advances on available unsecured lines of credit with correspondent banks.

The cost of our interest bearing liabilities was ~~0.42%~~0.38% and ~~0.19%~~0.20% for the quarters ended ~~June~~September 30, 2019 and 2018. The cost of total deposits was ~~0.15%~~0.17% and ~~0.08%~~0.10% for the quarters ended ~~June~~September 30, 2019 and 2018. Average non-interest bearing demand deposits ~~decreased 0.91%~~increased 1.77% to ~~$540,868,000~~$563,498,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$545,854,000~~$553,714,000 for the quarter ended ~~June~~September 30, 2018. The ratio of average non-interest bearing demand deposits to average total deposits was ~~42.45%~~43.24% in the ~~second~~third quarter of 2019 compared to ~~40.85%~~42.09% for the same period in 2018.

Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for the quarter ended ~~June~~September 30, 2019, increased ~~$549,000~~$298,000 or ~~3.57%~~1.87% to ~~$15,946,000~~$16,205,000 compared to ~~$15,397,000~~$15,907,000 for the quarter ended ~~June~~September 30, 2018. The increase was due to asset mix changes, and a decrease in average interest-bearing liabilities, partially offset by the ~~decrease~~increase in average interest earning assets. Average interest earning assets were ~~$1,432,947,000~~$1,432,388,000 for the quarter ended ~~June~~September 30, 2019, with a net interest margin (fully tax equivalent basis) of 4.50% compared to ~~$1,446,741,000~~$1,413,369,000 with a net interest margin (fully tax equivalent basis) of ~~4.35%~~4.53% for the quarter ended ~~June~~September 30, 2018. The ~~$13,794,000 decrease~~$19,019,000 increase in average earning assets can be attributed to the ~~$36,160,000~~$34,388,000 increase in loans, offset by the $16,953,000 decrease in total ~~investments, offset by the $20,784,000 increase in loans.~~investments. Average interest bearing liabilities decreased ~~3.42%~~0.84% to ~~$787,243,000~~$762,333,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$815,095,000~~$768,788,000 for the same period in 2018.

Provision for Credit Losses

During the quarter ended ~~June~~September 30, 2019, the Company recorded ~~$300,000~~a $250,000 provision for credit losses, compared to ~~a $50,000~~no provision during the quarter ended ~~June~~September 30, 2018. The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was ~~0.01%~~0.07% for the quarter ended ~~June~~September 30, 2019 compared to ~~(0.04)~~(0.05)% for the quarter ended ~~June~~September 30, 2018. During the quarter ended ~~June~~September 30, 2019, the Company had net charge-offs totaling ~~$13,000~~$160,000 compared to net recoveries of ~~$82,000~~$105,000 for the same period in 2018. Gross recoveries of previously charged off loan balances during the quarters ended ~~June~~September 30, 2019 and 2018 were ~~$43,000~~$55,000 and ~~$141,000,~~$128,000, respectively. Gross charge-offs during the quarters ended ~~June~~September 30, 2019 and 2018 were ~~$56,000~~$215,000 and ~~$59,000,~~$23,000, respectively. The majority of the loans charged off were previously classified and sufficient specific reserves related to these impaired credits were held in the allowance for credit losses in reporting periods prior to the date of charge-off.

Non-Interest Income

Non-interest income was ~~$4,598,000~~$3,722,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$2,686,000~~$2,463,000 for the same period ended ~~June~~September 30, 2018. The ~~$1,912,000~~$1,259,000 or ~~71.18%~~51.12% increase in non-interest income for the quarter ended ~~June~~September 30, 2019 was primarily due to recording a ~~$2,377,000~~$1,305,000 increase in net realized gains on sales and calls of investment securities, a ~~$47,000~~$81,000 increase in loan placement fees, and a ~~$14,000~~$9,000 increase in appreciation in cash surrender value of bank-owned life insurance, ~~and a $4,000 increase in interchange fees,~~ partially offset by ~~$578,000~~a $67,000 decrease onin service charge income and a $7,000 decrease in interchange fees. Credit card deconversion costs, which were deducted from the net gain on the sale of the ~~Company’s~~ credit card portfolio, ~~and a $13,000 decrease in service charge income,~~were $116,000 during the quarter ended September 30, 2018

Customer service charges decreased ~~$13,000~~$67,000 or ~~1.79%~~9.07% to ~~$713,000~~$672,000 for the ~~second~~third quarter of 2019 compared to ~~$726,000~~$739,000 for the same period in 2018, due primarily to a decrease in overdraft and ~~chargeback~~analysis fee income. Other income ~~increased $61,000~~decreased $168,000 or ~~13.47%~~29.07% to ~~$514,000~~$410,000 for the ~~second~~third quarter of 2019 compared to ~~$453,000~~$578,000 for the same period in 2018.

Non-Interest Expenses

Salaries and employee benefits, occupancy and equipment, regulatory assessments, data processing, acquisition and integration expenses, Internet banking, license and maintenance contracts, and professional services are the major categories of non-interest expenses. Non-interest expenses increased ~~$273,000~~$743,000 or ~~2.37%~~6.89% to ~~$11,772,000~~$11,534,000 for the quarter ended ~~June~~September 30, 2019 compared to ~~$11,499,000~~$10,791,000 for the same period in 2018. The net increase quarter over quarter was a result of increases of ~~$383,000~~$428,000 in information technology expenses, increases in salaries and employee benefits of ~~$79,000,~~$344,000, increases in amortization of core deposit intangibles of $80,000, increases in ~~data processing~~ATM/Debit card expenses of ~~$31,000,~~$78,000, increases in professional fees of $61,000, increases in Internet banking of ~~$24,000, increases in advertising expenses of $10,000,~~$43,000, and increases in ~~ATM/Debit card expenses~~operating losses of ~~$10,000.~~$16,000. The increases were partially offset by the decreases in occupancy and equipment of ~~$125,000, decreases in operating losses of $114,000 decreases in professional fees of $83,000, and~~$172,000, decreases in regulatory assessments of ~~$26,000.~~$223,000, decreases in data processing expenses of $19,000, and decreases in advertising expenses of $2,000.

The Company’s efficiency ratio ~~decreased~~increased to ~~63.64%~~62.07% for the ~~second~~third quarter of 2019 compared to ~~64.28%~~58.65% for the ~~second~~third quarter of 2018. The ~~improvement~~increase in the efficiency ratio is due to the growth in ~~revenues~~non-interest expense outpacing the growth in ~~non-interest expense.~~operating revenue.

Salaries and employee benefits increased ~~$79,000~~$344,000 or ~~1.16%~~5.39% to ~~$6,912,000~~$6,731,000 for the ~~second~~third quarter of 2019 compared to ~~$6,833,000~~$6,387,000 for the ~~second~~third quarter of 2018. The increase in salaries and employee benefits for the ~~second~~third quarter of 2019 was attributed to a higher interest on deferred compensation plans. The number of full time equivalent (FTE) employees as of ~~June~~September 30, 2019, December 31, 2018 and ~~June~~September 30, 2018 was ~~281,~~272, 301, and ~~314,~~307, respectively. The salaries and employee benefits increase was attributed to higher profit sharing expense, restricted stock compensation expense, and 401K match expenses, offset by lower health insurance expense and lower loan origination costs.

Other non-interest expenses included decreases of ~~$114,000~~$20,000 in ~~operating losses, $57,000~~education/training expenses, $1,000 in ~~credit card processing expenses, $4,000 in personnel expenses, $25,000~~postage, $2,000 in loan related expenses, ~~$8,000 in stationary~~ and ~~supplies, $4,000 in appraisal fees, and $3,000~~$12,000 in donations, partially offset by an increase of ~~$24,000~~$16,000 in operating losses, $11,000 in personnel expenses, $11,000 in stationary and supplies, $14,000 in appraisal fees, $3,000 in risk management expense, ~~$21,000~~$6,000 in armored courier expenses, ~~$17,000~~$14,000 in amortization of software, ~~$12,000 in education/training expenses, $7,000 in postage, $4,000~~and $14,000 in check printing expense, as compared to the same period in 2018.

Provision for Income Taxes

The effective income tax rate was ~~28.15%~~30.11% for the ~~second~~third quarter of 2019 compared to ~~24.01%~~24.11% for the same period in 2018. Provision for income taxes totaled ~~$2,385,000~~$2,452,000 and ~~$1,569,000~~$1,827,000 for the quarters ended ~~June~~September 30, 2019 and 2018, respectively. The decrease in the effective tax rate was the result of a decrease in tax exempt interest.

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

~~June~~September 30, 2019 compared to December 31, 2018

Total assets were $~~1,613,227,000~~1,584,127,000 as of ~~June~~September 30, 2019, compared to $1,537,836,000 at December 31, 2018, an increase of ~~4.90%~~3.01% or $~~75,391,000~~46,291,000. Total gross loans were $~~960,211,000~~942,503,000 at ~~June~~September 30, 2019, compared to $918,695,000 at December 31, 2018, an increase of $~~41,516,000~~23,808,000 or ~~4.52%~~2.59%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased ~~4.30%~~0.88% or $~~20,553,000~~4,195,000 to $~~498,485,000~~482,127,000 at ~~June~~September 30, 2019 compared to $477,932,000 at December 31, 2018. Total deposits increased ~~0.92%~~2.14% or $~~11,789,000~~27,448,000 to $~~1,294,087,000~~1,309,746,000 at ~~June~~September 30, 2019, compared to $1,282,298,000 at December 31, 2018. Shareholders’ equity increased $~~11,942,000~~13,444,000 or ~~5.43%~~6.12% to $~~231,680,000~~233,182,000 at ~~June~~September 30, 2019, compared to $219,738,000 at December 31, 2018. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, and an increase in unrealized gains on available-for-sale securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI). Accrued interest payable and other liabilities was ~~$28,305,000~~$31,044,000 at ~~June~~September 30, 2019, compared to $20,645,000 at December 31, 2018, an increase of ~~$7,660,000.~~$10,399,000.

Fair Value

The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

Investments

Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity. As of ~~June~~September 30, 2019, investment securities with a fair value of ~~$72,924,000~~,$90,295,000, or ~~15.31%~~19.21% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment policies are established by the Board of Directors and implemented by management. 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.

The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at ~~June~~September 30, 2019 was ~~74.20%~~71.96% compared to 71.64% at December 31, 2018. The loan-to-deposit ratio of our peers was 82.00% at December 31, 2018. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased ~~4.30%~~0.88% or $~~20,553,000~~4,195,000 to $~~498,485,000~~482,127,000 at ~~June~~September 30, 2019, from $477,932,000 at December 31, 2018. The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of ~~$6,740,000~~$8,136,000 at ~~June~~September 30, 2019,, compared to a net unrealized loss of $6,257,000 at December 31, 2018.

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 minimizing the risk of rising interest rates on the fair value of the overall portfolio. We have restructured the portfolio a few times by selling off securities and investing in variable rate securities with shorter duration.

Management evaluated all available-for-sale investment securities with an unrealized loss at ~~June~~September 30, 2019 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at ~~June~~September 30, 2019 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 securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those securities. For those securities that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded there were no OTTI losses recorded during the ~~six~~nine months ended ~~June~~September 30, 2019. There were no OTTI losses recorded during the ~~six~~nine months ended ~~June~~September 30, 2018.

At ~~June~~September 30, 2019, the Company held six U.S. Government agency securities of which none were in a loss position for less than 12 months and five had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019.

At ~~June~~September 30, 2019, the Company held 2841 obligations of states and political subdivision securities of which ~~none~~nine were in a loss position. At ~~June~~September 30, 2019, the Company held two corporate debt securities of which none were in a loss position.

At ~~June~~September 30, 2019, the Company held ~~126~~123 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 2125 were in a loss position for less than 12 months and 1716 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019.

At ~~June~~September 30, 2019, the Company had a total of 4742 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of ~~$190,682,000~~$157,436,000 and a net unrealized gain of approximately ~~$4,131,000. Four~~$5,523,000. Five of the PLMABS securities were in a loss position for less than 12 months and one has been in loss for more than 12 months at ~~June~~September 30, 2019. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at ~~June~~September 30, 2019. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

See Note 3 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.

Loans

Total gross loans increased $~~41,516,000~~23,808,000 or ~~4.52%~~2.59% to $~~960,211,000~~942,503,000 as of ~~June~~September 30, 2019, compared to $918,695,000 as of December 31, 2018.

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:


Loan Type (dollars in thousands)	June 30, 2019			% of Total Loans		December 31, 2018			% of Total Loans		September 30, 2019			% of Total Loans		December 31, 2018			% of Total Loans
Commercial:
Commercial and industrial	$	110,178		11.5	%	$	101,533		11.1	%	$	97,439		10.3	%	$	101,533		11.1	%
Agricultural production	25,987			2.7	%	7,998			0.9	%	19,995			2.2	%	7,998			0.9	%
Total commercial	136,165			14.2	%	109,531			12.0	%	117,434			12.5	%	109,531			12.0	%
Real estate:
Owner occupied	195,626			20.4	%	183,169			19.9	%	204,018			21.6	%	183,169			19.9	%
Real estate construction and other land loans	102,927			10.7	%	101,606			11.1	%	70,975			7.5	%	101,606			11.1	%
Commercial real estate	302,026			31.5	%	305,118			33.2	%	328,880			34.9	%	305,118			33.2	%
Agricultural real estate	75,077			7.8	%	76,884			8.4	%	76,469			8.1	%	76,884			8.4	%
Other real estate	33,214			3.6	%	32,799			3.6	%	32,084			3.6	%	32,799			3.6	%
Total real estate	708,870			74.0	%	699,576			76.2	%	712,426			75.7	%	699,576			76.2	%
Consumer:
Equity loans and lines of credit	71,107			7.4	%	69,958			7.6	%	68,427			7.3	%	69,958			7.6	%
Consumer and installment	42,345			4.4	%	38,038			4.2	%	42,641			4.5	%	38,038			4.2	%
Total consumer	113,452			11.8	%	107,996			11.8	%	111,068			11.8	%	107,996			11.8	%
Net deferred origination costs	1,724					1,592					1,575					1,592
Total gross loans	960,211			100.0	%	918,695			100.0	%	942,503			100.0	%	918,695			100.0	%
Allowance for credit losses	(9,405		)			(9,104		)			(9,495		)			(9,104		)
Total loans	$	950,806				$	909,591				$	933,008				$	909,591

As of ~~June~~September 30, 2019, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately ~~95.6%~~95.5% of total loans, of which ~~14.2%~~12.5% were commercial and ~~81.4%~~83.0% were real-estate-related. This level of concentration of commercial loans and loans collateralized by real estate is consistent with 95.8% of total loans at December 31, 2018. Although management believes the loans within this concentration have no more than the normal risk of collectibility, 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 collectibility, increase the level of

real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows. The Company was not involved in any sub-prime mortgage lending activities during the ~~six~~nine months or twelve months ended ~~June~~September 30, 2019 or December 31, 2018, respectively.

At ~~June~~September 30, 2019, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of ~~$168,792,000,~~$160,455,000, of which ~~$4,723,000~~$4,356,000 were commercial loans, ~~$141,561,000~~$135,666,000 were real estate loans, and ~~$22,508,000~~$20,433,000 were consumer loans. At December 31, 2018, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $189,719,000, of which $5,875,000 were commercial loans, $158,025,000 were real estate loans, and $25,819,000 were consumer loans.

We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks.

The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.

Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when (i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest under the original contractual terms is not expected; or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.

At ~~June~~September 30, 2019, total nonperforming assets totaled ~~$2,442,000,~~$2,157,000, or ~~0.15%~~0.14% of total assets, compared to $2,740,000, or 0.18% of total assets at December 31, 2018. Total nonperforming assets at ~~June~~September 30, 2019, included nonaccrual loans totaling ~~$2,442,000,~~$2,157,000, no OREO, and no other repossessed assets. Nonperforming assets at December 31, 2018 consisted of $2,740,000 in nonaccrual loans, no OREO, and no other repossessed assets. At ~~June~~September 30, 2019, we had one ~~loans~~loan considered to be troubled debt restructurings (“TDRs”) included in nonaccrual loans totaling ~~$115,000~~$112,000 compared to one TDR totaling $50,000 at December 31, 2018.

A summary of nonperforming loans at ~~June~~September 30, 2019 and December 31, 2018 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at ~~June~~September 30, 2019 or at December 31, 2018. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

Composition of Nonperforming Loans


(In thousands)	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Nonaccrual loans:
Commercial and industrial	$	244		$	298		$	214		$	298
Owner occupied real estate	208			215			201			215
Real estate construction and other land loans	—			1,439			324			1,439
Commercial real estate	925			418			385			418
Equity loans and lines of credit	914			320			901			320
Consumer and installment	36			—			20			—
Troubled debt restructured loans (non-accruing):
Equity loans and lines of credit	115			50			112			50
Total nonaccrual	2,442			2,740			2,157			2,740
Accruing loans past due 90 days or more	—			—			—			—
Total nonperforming loans	$	2,442		$	2,740		$	2,157		$	2,740
Ratio of nonperforming loans to total loans	0.25		%	0.30		%	0.23		%	0.30		%
Ratio of allowance for credit losses to nonperforming loans	385.1		%	332.3		%	440.2		%	332.3		%
Loans considered to be impaired	$	5,451		$	5,909		$	4,124		$	5,909
Related allowance for credit losses on impaired loans	$	84		$	90		$	73		$	90

We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not

collateral dependent. As of ~~June~~September 30, 2019 and December 31, 2018, we had impaired loans totaling ~~$5,451,000~~$4,124,000 and $5,909,000, respectively. For collateral dependent loans secured by real estate, we obtain external valuations which are updated at least annually to determine the fair value of the collateral, and we record an immediate charge off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

The following table provides a reconciliation of the change in nonaccrual loans for the first ~~six~~nine months of 2019.


(In thousands)	Balance, December 31, 2018		Additions to Nonaccrual Loans		Net Pay Downs			Transfers to Foreclosed Collateral and OREO		Returns to Accrual Status			Charge- Offs		Balance, June 30, 2019		Balance, December 31, 2018		Additions to Nonaccrual Loans		Net Pay Downs			Transfers to Foreclosed Collateral and OREO		Returns to Accrual Status			Charge- Offs			Balance, September 30, 2019
Nonaccrual loans:
Commercial and industrial	$	298	$	—	$	(54	)	$	—	$	—		$	—	$	244	$	298	$	—	$	(84	)	$	—				$	—		$	214
Real estate	633		559		(59		)	—		—			—		1,133		633		559		(85		)	—		(521		)	—			586
Real estate construction and other land loans	1,439		—		(1,439		)	—		—			—		—		1,439		329		(1,444		)	—		—			—			324
Agricultural real estate	—		—		—			—		—			—		—		—		—		—			—		—			—			—
Equity loans and lines of credit	198		937		(28		)	—		(193		)	—		914		198		937		(41		)	—		(193		)	—			901
Consumer	—		37		(1		)	—		—			—		36		—		37		(3		)	—		—			(14		)	20
Restructured loans (non-accruing):
Equity loans and lines of credit	172		—		(9		)	—		(48		)	—		115		172		—		(12		)	—		(48		)	—			112
Total nonaccrual	$	2,740	$	1,533	$	(1,590	)	$	—	$	(241	)	$	—	$	2,442	$	2,740	$	1,862	$	(1,669	)	$	—	$	(762	)	$	(14	)	$	2,157

OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is initially recorded at fair value less costs to sell and thereafter carried at the lower of cost or fair value, less selling costs. We had no OREO properties at ~~June~~September 30, 2019 or December 31, 2018. The Company held no repossessed assets at ~~June~~September 30, 2019 or December 31, 2018.

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 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 20 quarters was an appropriate look back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look back period.

In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received.

The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of

asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.

The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (i) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (ii) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans 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.

The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:


	For the Six Months Ended June 30,			For the Year Ended December 31,			For the Six Months Ended June 30,			For the Nine Months Ended September 30,			For the Year Ended December 31,			For the Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2018			2019			2018			2018
Balance, beginning of period	$	9,104		$	8,778		$	8,778		$	9,104		$	8,778		$	8,778
(Reversal of) Provision for credit losses	275			50			50
Provision for credit losses										525			50			50
Losses charged to allowance	(65		)	(210		)	(151		)	(280		)	(210		)	(175		)
Recoveries	91			486			243			146			486			372
Balance, end of period	$	9,405		$	9,104		$	8,920		$	9,495		$	9,104		$	9,025
Allowance for credit losses to total loans at end of period	0.98		%	0.99		%	0.95		%	1.01		%	0.99		%	0.99		%

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Risks and uncertainties exist in all lending transactions and our management and Board of Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.

The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.

As of ~~June~~September 30, 2019, the balance in the allowance for credit losses (ALLL) was ~~$9,405,000~~$9,495,000 compared to $9,104,000 as of December 31, 2018. The increase is attributed to the additional provision of ~~$275,000~~$525,000 during the ~~six~~nine months ended ~~June~~September 30, 2019. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was ~~$308,595,000~~$321,353,000 as of ~~June~~September 30, 2019, compared to $312,274,000 as of December 31, 2018. At ~~June~~September 30, 2019 and December 31, 2018, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000 and $225,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Risks and uncertainties exist in all lending transactions and our management and Board of Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.

As of ~~June~~September 30, 2019, the ALLL was ~~0.98%~~1.01% of total gross loans compared to 0.99% as of December 31, 2018. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of ~~$168,792,000~~$160,455,000 at ~~June~~September 30, 2019 and $189,719,000 at December 31, 2018. Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was ~~1.19%~~1.21% and 1.25% at ~~June~~September 30, 2019 and December 31, 2018, respectively and general reserves associated with non-impaired loans to total non-impaired loans was ~~1.18%~~1.21% and 1.25%, respectively. The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL for those loans.

The Company’s loan portfolio balances for the ~~six~~nine months ended ~~June~~September 30, 2019 increased through organic growth. Management believes that the change in the allowance for credit losses to total loans ratio is directionally consistent

with the composition of loans and the level of nonperforming and classified loans, partially offset by the general economic conditions

experienced in the central California communities serviced by the Company and recent improvements in real estate collateral values.

Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of ~~June~~September 30, 2019. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio.


	June 30, 2019				December 31, 2018				June 30, 2018				September 30, 2019				December 31, 2018				September 30, 2018
(Dollars in thousands)	Balance		% to Total Loans		Balance		% to Total Loans		Balance		% to Total Loans		Balance		% to Total Loans		Balance		% to Total Loans		Balance		% to Total Loans
Impaired loans with specific reserves	$	1,383	0.14	%	$	1,392	0.15	%	$	1,396	0.15	%	$	1,342	0.14	%	$	1,392	0.15	%	$	1,367	0.15	%
Past due loans	1,987		0.21	%	2,869		0.31	%	1,840		0.20	%	925		0.10	%	2,869		0.31	%	2,575		0.28	%
Nonaccrual loans	2,422		0.25	%	2,740		0.30	%	4,092		0.44	%	2,157		0.23	%	2,740		0.30	%	4,133		0.45	%

Goodwill and Intangible Assets

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at ~~June~~September 30, 2019, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings 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.

Management performed an annual impairment test in the third quarter of ~~2018~~2019 utilizing various qualitative factors. Management believes these factors are sufficient and comprehensive and as such, no further factors need to be assessed at this time. Based on management’s analysis performed, no impairment was required. Goodwill is 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. No such events or circumstances arose during the first ~~six~~nine months of 2019.

The intangible assets represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of Folsom Lake Bank of $1,879,000, the 2016 acquisition of Sierra Vista Bank of $508,000, and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method (which approximates the effective interest method) over estimated lives of five to 10 years from the date of acquisition. The carrying value of intangible assets at ~~June~~September 30, 2019 was $~~2,225,000~~2,051,000, net of $~~1,527,000~~1,701,000 in accumulated amortization expense. The carrying value at December 31, 2018 was $2,572,000, net of $1,180,000 accumulated amortization expense. We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required in the first ~~six~~nine months of 2019. Amortization expense recognized was $~~347,000~~521,000 and ~~$187,000~~$281,000 for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018, respectively.

The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands):


Years Ended	Estimated Core Deposit Intangible Amortization		Estimated Core Deposit Intangible Amortization
2019	$	349	$	175
2020	696		696
2021	661		661
2022	453		453
2023	66		66
Thereafter	—		—
	$	2,225	$	2,051

Deposits and Borrowings

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.

Total deposits increased $~~11,789,000~~27,448,000 or ~~0.92%~~2.14% to $~~1,294,087,000~~1,309,746,000 as of ~~June~~September 30, 2019, compared to $1,282,298,000 as of December 31, 2018, primarily due to recurring seasonal patterns. Interest-bearing deposits increased $~~4,446,000~~5,369,000 or ~~0.61%~~0.73% to $~~736,087,000~~737,010,000 as of ~~June~~September 30, 2019, compared to $731,641,000 as of December 31, 2018. Non-interest bearing deposits increased $~~7,343,000~~22,079,000 or ~~1.33%~~4.01% to $~~558,000,000~~572,736,000 as of ~~June~~September 30, 2019, compared to $550,657,000 as of December 31, 2018. Average non-interest bearing deposits to average total deposits was ~~42.28%~~42.60% for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~40.42%~~40.97% for the same period in 2018.

The composition of the deposits and average interest rates paid at ~~June~~September 30, 2019 and December 31, 2018 is summarized in the table below.


(Dollars in thousands)	June 30, 2019		% of Total Deposits		Average Effective Rate		December 31, 2018		% of Total Deposits		Average Effective Rate		September 30, 2019		% of Total Deposits		Average Effective Rate		December 31, 2018		% of Total Deposits		Average Effective Rate
NOW accounts	$	263,193	20.3	%	0.19	%	$	252,439	19.7	%	0.16	%	$	258,632	19.8	%	0.21	%	$	252,439	19.7	%	0.16	%
MMA accounts	259,963		20.1	%	0.22	%	267,820		20.9	%	0.15	%	267,379		20.4	%	0.25	%	267,820		20.9	%	0.15	%
Time deposits	96,895		7.5	%	0.63	%	96,817		7.6	%	0.25	%	97,262		7.4	%	0.69	%	96,817		7.6	%	0.25	%
Savings deposits	116,036		9.0	%	0.03	%	114,565		8.9	%	0.03	%	113,737		8.7	%	0.03	%	114,565		8.9	%	0.03	%
Total interest-bearing	736,087		56.9	%	0.23	%	731,641		57.1	%	0.15	%	737,010		56.3	%	0.26	%	731,641		57.1	%	0.15	%
Non-interest bearing	558,000		43.1	%			550,657		42.9	%			572,736		43.7	%			550,657		42.9	%
Total deposits	$	1,294,087	100.0	%			$	1,282,298	100.0	%			$	1,309,746	100.0	%			$	1,282,298	100.0	%

Other Borrowings

As of ~~June~~September 30, 2019 the Company had ~~$54,000,000~~$5,000,000 Federal Home Loan Bank (FHLB) of San Francisco advances. As of December 31, 2018, the Company had $10,000,000 FHLB of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to the Liquidity section below for further discussion of FHLB advances.

Capital

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary source of capital for the Company has been through retained earnings.

The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.

Our shareholders’ equity was ~~$231,680,000~~$233,182,000 at ~~June~~September 30, 2019, compared to $219,738,000 at December 31, 2018. The increase from December 31, 2018 in shareholders’ equity is the result of an increase in retained earnings from net income of

~~$11,303,000,~~of $16,994,000, the exercise of stock options of ~~$160,000,~~$163,000, stock issued under the employee stock purchase plan of ~~$131,000,~~$171,000, the effect of share based compensation expense of ~~$294,000,~~$430,000, stock awarded to employees of $100,000, and an increase in accumulated other comprehensive income (AOCI) of ~~$9,154,000,~~$10,138,000, offset by common stock cash dividends of ~~$2,874,000~~$4,353,000 and stock repurchase of ~~$6,326,000.~~$10,199,000.

On July 18, 2018, the Board of Directors of the Company approved the adoption of a program to effect repurchases of the Company’s common stock. Under the program, the Company ~~may repurchase~~was authorized up to $10 million of the Company’s outstanding shares of common stock, which represents approximately 3% of the Company’s outstanding shares of common ~~stock, or approximately 465,766 shares based on the closing stock price of the Company’s common stock on June 30, 2019 of $21.47.~~stock. The share repurchase program began on July 19, 2018 and ~~will end~~ended on July 18, 2019. The shares ~~will be~~were repurchased in open market transactions through brokers, subject to availability. As of ~~June 30,~~July 18, 2019, ~~368,462~~385,172 shares had been repurchased and retired under the this program at an average price paid per share of ~~$19.60.~~$19.61.

On July 17, 2019, the Board of Directors of the Company approved the adoption of a new program to effect repurchases of the Company’s common stock. Under this program, the Company may repurchase up to $10 million of the Company’s outstanding shares of common stock, which represents approximately 3% of the Company’s outstanding shares of common stock, or approximately ~~479,616~~491,400 shares based on the closing stock price of the Company’s common stock on ~~July 16,~~on September 30, 2019 of ~~$20.85.~~$20.35. The share repurchase program began on July 22, 2019 and will end on July 17, 2020. The shares will be repurchased in open market transactions through brokers, subject to availability. As of September 30, 2019, 171,673 shares had been repurchased and retired under the July 17, 2019 program at an average price paid per share of $20.53. For the nine months ended September 30, 2019, 508,983 shares had been repurchased and retired under the two programs at an average price paid per share of $20.01.

During the first ~~six~~nine months of 2019, the Company declared and paid ~~$2,874,000~~$4,353,000 in cash dividends ($~~0.21~~0.32 per common share) to holders of common stock. The Company declared and paid a total of $4,270,000 in cash dividends ($0.31 per common share) to holders of common stock during the year ended December 31, 2018.

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 ~~June~~September 30, 2019 and December 31, 2018.


(Dollars in thousands)	Actual Ratio				Minimum regulatory requirement (1)		Actual Ratio				Minimum regulatory requirement (1)
March 31, 2019	Amount		Ratio		Amount	Ratio	Amount		Ratio		Amount	Ratio
Tier 1 Leverage Ratio	$	174,323	11.43	%	N/A	N/A	$	174,963	11.47	%	N/A	N/A
Common Equity Tier 1 Ratio (CET 1)	$	169,323	14.72	%	N/A	N/A	$	169,963	14.84	%	N/A	N/A
Tier 1 Risk-Based Capital Ratio	$	174,323	15.16	%	N/A	N/A	$	174,963	15.28	%	N/A	N/A
Total Risk-Based Capital Ratio	$	183,978	16.00	%	N/A	N/A	$	184,708	16.13	%	N/A	N/A

December 31, 2018
Tier 1 Leverage Ratio	$	171,149	11.48	%	N/A	N/A	$	171,149	11.48	%	N/A	N/A
Common Equity Tier 1 Ratio (CET 1)	$	166,149	15.13	%	N/A	N/A	$	166,149	15.13	%	N/A	N/A
Tier 1 Risk-Based Capital Ratio	$	171,149	15.59	%	N/A	N/A	$	171,149	15.59	%	N/A	N/A
Total Risk-Based Capital Ratio	$	180,478	16.44	%	N/A	N/A	$	180,478	16.44	%	N/A	N/A
(1) Effective August 30, 2018, the minimum regulatory requirements were eliminated for bank holding companies with less than $3 billion of assets.

The following table presents the Bank’s regulatory capital ratios as of ~~June~~September 30, 2019 and December 31, 2018.


(Dollars in thousands)	Actual Ratio				Minimum regulatory requirement (1)				Minimum requirement for “Well-Capitalized” Institution					Actual Ratio				Minimum regulatory requirement (1)				Minimum requirement for “Well-Capitalized” Institution
March 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		��	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Leverage Ratio	$	173,302	11.36	%	$	61,009	4.00	%	$	76,262	5.00	%		$	173,270	11.36	%	$	60,985	4.00	%	$	76,231	5.00	%
Common Equity Tier 1 Ratio (CET 1)	$	173,302	15.08	%	$	51,732	7.00	%	$	74,723	6.50	%		$	173,270	15.13	%	$	51,527	7.00	%	$	74,428	6.50	%
Tier 1 Risk-Based Capital Ratio	$	173,302	15.08	%	$	68,975	8.50	%	$	91,967	8.00	%		$	173,270	15.13	%	$	68,703	8.50	%	$	91,603	8.00	%
Total Risk-Based Capital Ratio	$	182,957	15.91	%	$	91,967	10.50	%	$	114,959	10.00	%		$	183,015	15.98	%	$	91,603	10.50	%	$	114,504	10.00	%

December 31, 2018
Tier 1 Leverage Ratio	$	168,770	11.32	%	$	59,639	4.00	%	$	74,549	5.00	%		$	168,770	11.32	%	$	59,639	4.00	%	$	74,549	5.00	%
Common Equity Tier 1 Ratio (CET 1)	$	168,770	15.38	%	$	49,388	6.38	%	$	71,338	6.50	%		$	168,770	15.38	%	$	49,388	6.38	%	$	71,338	6.50	%
Tier 1 Risk-Based Capital Ratio	$	168,770	15.38	%	$	65,850	7.88	%	$	87,800	8.00	%		$	168,770	15.38	%	$	65,850	7.88	%	$	87,800	8.00	%
Total Risk-Based Capital Ratio	$	178,099	16.23	%	$	87,800	9.88	%	$	109,750	10.00	%		$	178,099	16.23	%	$	87,800	9.88	%	$	109,750	10.00	%
(1) The 2019 and 2018 minimum regulatory requirement threshold includes the capital conservation buffer of 2.50% and 1.875%, respectively.

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 ~~June~~September 30, 2019, 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 ~~June~~September 30, 2019, the rate was ~~4.20%~~3.90%.

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Board of Director’s Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments.

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of ~~June~~September 30, 2019, the Company had unpledged securities totaling $~~410,745,000~~387,139,000 available as a secondary source of liquidity and total cash and cash equivalents of $~~48,603,000~~43,037,000. Cash and cash equivalents at ~~June~~September 30, 2019 increased ~~53.19%~~35.65% compared to $31,727,000 at December 31, 2018. Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses.

As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks. At ~~June~~September 30, 2019, our available borrowing capacity includes approximately $40,000,000 in unsecured credit lines with our correspondent banks, ~~$245,911,000~~$276,197,000 in unused FHLB advances and a $~~433,000~~293,000 secured credit line at the Federal Reserve Bank. We believe our liquidity sources to be stable and adequate. At ~~June~~September 30, 2019, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at ~~June~~September 30, 2019 and December 31, 2018:


Credit Lines (In thousands)	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Unsecured Credit Lines
(interest rate varies with market):
Credit limit	$	40,000	$	40,000	$	40,000	$	40,000
Balance outstanding	$	—	$	—	$	—	$	—
Federal Home Loan Bank
(interest rate at prevailing interest rate):
Credit limit	$	245,911	$	286,934	$	276,197	$	286,934
Balance outstanding	$	54,000	$	10,000	$	5,000	$	10,000
Collateral pledged	$	451,876	$	448,083	$	424,098	$	448,083
Fair value of collateral	$	403,471	$	399,027	$	378,643	$	399,027
Federal Reserve Bank
(interest rate at prevailing discount interest rate):
Credit limit	$	433	$	4,364	$	293	$	4,364
Balance outstanding	$	—	$	—	$	—	$	—
Collateral pledged	$	438	$	4,498	$	296	$	4,498
Fair value of collateral	$	441	$	4,475	$	298	$	4,475

The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by the regulations.

OFF-BALANCE SHEET ITEMS

In the ordinary course of business, the Company is a party to financial instruments with off-balance risk. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the

financial statements when they are funded or related fees are incurred or received. For an expanded discussion of these

financial instruments, refer to Note 7 of the Notes to Consolidated Financial Statements included herein and Note 12 of the Notes to Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K.

In the ordinary course of business, the Company is party to various operating leases. For a fuller discussion of these financial instruments, refer to Note 12 of the Notes to Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports provided by a number of executives. Based upon, and as of the date of the evaluation of the disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal controls over financial reporting during the quarter ended ~~June~~September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

In designing and evaluating disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None to report.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. There are no material changes from the risk factors previously disclosed in our 2018 Annual report on Form 10-K. The risks described in our Annual Report on Form 10-K ~~and below~~ are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

A summary of the repurchase activity of the Company’s common stock for the ~~six~~nine months ended ~~June~~September 30, 2019 follows.


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans (1) (2)		Approximate dollar value of shares that may yet be purchased under current plans (in thousands)		Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans (1) (2) (3)		Approximate dollar value of shares that may yet be purchased under current plans (in thousands)
01/1/2019 - 01/31/2019	46,281	$	18.71	$	46,281	$	8,238	46,281	$	18.71	$	46,281	$	8,238
02/1/2019 - 02/28/2019	17,505	$	19.69	17,505		$	7,893	17,505	$	19.69	17,505		$	7,893
03/1/2019 - 03/31/2019	33,693	$	19.60	33,693		7,232		33,693	$	19.60	33,693		$	7,232
04/1/2019 - 04/30/2019	23,262	$	19.90	23,262		$	6,769	23,262	$	19.90	23,262		$	6,769
05/1/2019 - 05/31/2019	145,199	$	20.02	145,199		$	3,861	145,199	$	20.02	145,199		$	3,861
06/1/2019 - 06/30/2019	54,660	$	19.67	54,660		$	2,784	54,660	$	19.67	54,660		$	2,784
07/1/2019 - 07/31/2019								40,310	$	20.88	40,310		$	9,501
08/1/2019 - 08/31/2019								71,928	$	20.01	71,928		$	8,060
09/1/2019 - 09/30/2019								76,145	$	20.83	76,145		$	6,471
Total	320,600	$	19.70	320,600				508,983	$	20.01	508,983

(1) The Company approved a stock repurchase program effective July 18, 2018 with the intent to purchase up to $10,000,000 worth of the Company’s outstanding common stock, or approximately 470,810 shares. During the ~~quarter~~nine months ended ~~June~~September 30, 2019, the Company repurchased and retired a total of ~~320,600~~337,310 shares at an approximate cost of ~~$4,448,000.~~$6,672,000. During the year ended December 31, 2018, the Company repurchased and retired a total of 47,862 shares at an approximate cost of $894,000. As adopted, the stock repurchase program ~~will expire~~expired on July 18, 2019.

(2) The Company approved a stock repurchase program effective July 17, 2019 with the intent to purchase up to $10,000,000 worth of the Company’s outstanding common stock, or approximately 479,616 shares. During the nine months ended September 30, 2019, the Company repurchased and retired a total of 171,673 shares at an approximate cost of $3,529,000. As adopted, the stock repurchase program will expire on July 17, 2020.

(3) All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None to report.

ITEM 4. MINE SAFETY DISCLOSURES

None to report.

ITEM 5. OTHER INFORMATION

None to report.

ITEM 6 EXHIBITS




3.1			Amended and Restated Articles of Incorporation of Central Valley Community Bancorp (incorporated by reference to the Registrant’s Quarterly Report on Form 10Q filed with the Commission on August 16, 2010).

3.2			Bylaws of the Company as amended to date, filed as Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, and incorporated herein by reference.

31.1			Certification of Principal Executive Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.

31.2			Certification of Principal Financial Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.

32.1			Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2			Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation document

101.DEF			XBRL Taxonomy Extension Definition Linkbase

101.LAB			XBRL Taxonomy Extension labels Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Link Document

’

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Central Valley Community Bancorp

Date: ~~August 7,~~November 6, 2019	/s/ James M. Ford
	James M. Ford
	President and Chief Executive Officer

Date: ~~August 7,~~November 6, 2019	/s/ David A. Kinross
	David A. Kinross
	Executive Vice President and Chief Financial Officer



~~EXHIBIT INDEX~~
~~Exhibit~~ ~~Number~~			~~Description~~

~~3.1~~			Amended and Restated Articles of Incorporation of Central Valley Community Bancorp (incorporated by reference to the Registrant’s Annual Report on Form 10Q filed with the Commission on August 16, 2016).

~~3.2~~			~~Bylaws of the Company as amended to date, filed as Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, and incorporated herein by reference.~~

~~31.1~~			~~Certification of Principal Executive Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.~~

~~31.2~~			~~Certification of Principal Financial Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.~~

~~32.1~~			~~Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.~~

~~32.2~~			~~Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.~~

~~101.INS~~			~~XBRL Instance Document~~

~~101.SCH~~			~~XBRL Taxonomy Extension Schema Document~~

~~101.CAL~~			~~XBRL Taxonomy Extension Calculation Document~~

~~101.DEF~~			~~XBRL Taxonomy Extension Definition Linkbase~~

~~101.LAB~~			~~XBRL Taxonomy Extension labels Linkbase Document~~

~~101.PRE~~			~~XBRL Taxonomy Extension Presentation Link Document~~