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CVCY Central Valley Community Bancorp

Filed: 4 Nov 20, 3:40pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
 
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 valueCVCYNASDAQ 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    No  
 
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    No  
 
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
 
Accelerated filer
   
Non-accelerated filer
 
Small reporting company
Emerging growth company
 
1

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  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  
As of November 2, 2020 there were 12,507,611 shares of the registrant’s common stock outstanding.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
 
2020 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 

2

PART 1: FINANCIAL INFORMATION
 

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share amounts)September 30, 2020December 31, 2019
  
ASSETS  
Cash and due from banks$33,447 $24,195 
Interest-earning deposits in other banks53,563 28,379 
Total cash and cash equivalents87,010 52,574 
Available-for-sale debt securities631,854 470,746 
Equity securities7,655 7,472 
Loans, less allowance for credit losses of $14,657 at September 30, 2020 and $9,130 at December 31, 20191,095,232 934,250 
Bank premises and equipment, net7,257 7,618 
Bank-owned life insurance29,769 30,230 
Federal Home Loan Bank stock5,595 6,062 
Goodwill53,777 53,777 
Core deposit intangibles1,356 1,878 
Accrued interest receivable and other assets31,055 32,148 
Total assets$1,950,560 $1,596,755 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Deposits:  
Non-interest bearing$804,893 $594,627 
Interest bearing876,321 738,658 
Total deposits1,681,214 1,333,285 
Junior subordinated deferrable interest debentures5,155 5,155 
Accrued interest payable and other liabilities28,411 30,187 
Total liabilities1,714,780 1,368,627 
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: 12,507,658 at September 30, 2020 and 13,052,407 at December 31, 201979,269 89,379 
Retained earnings145,045 135,932 
Accumulated other comprehensive income, net of tax11,466 2,817 
Total shareholders’ equity235,780 228,128 
Total liabilities and shareholders’ equity$1,950,560 $1,596,755 
 
See notes to unaudited consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months Ended September 30,For the Nine Months
Ended September 30,
(In thousands, except share and per-share amounts) 2020201920202019
INTEREST INCOME:  
Interest and fees on loans$13,190 $13,238 $38,688 $38,747 
Interest on deposits in other banks26 74 222 283 
Interest and dividends on investment securities:
Taxable2,771 3,462 8,996 9,821 
Exempt from Federal income taxes444 153 1,015 1,144 
Total interest income16,431 16,927 48,921 49,995 
INTEREST EXPENSE:  
Interest on deposits363 566 1,169 1,428 
Interest on junior subordinated deferrable interest debentures25 51 106 163 
Other105 419 
Total interest expense388 722 1,275 2,010 
Net interest income before provision for credit losses16,043 16,205 47,646 47,985 
PROVISION FOR CREDIT LOSSES600 250 4,975 525 
Net interest income after provision for credit losses15,443 15,955 42,671 47,460 
NON-INTEREST INCOME:  
Service charges463 672 1,556 2,075 
Appreciation in cash surrender value of bank-owned life insurance178 184 536 545 
Interchange fees355 374 995 1,101 
Net realized gains on sales of investment securities57 1,685 4,197 5,196 
Federal Home Loan Bank dividends71 109 253 348 
Loan placement fees685 288 1,545 647 
Other income262 410 1,577 1,384 
Total non-interest income2,071 3,722 10,659 11,296 
NON-INTEREST EXPENSES:  
Salaries and employee benefits6,729 6,731 21,053 20,133 
Occupancy and equipment1,196 1,317 3,479 4,248 
Professional services715 404 1,695 1,011 
Data processing594 390 1,484 1,186 
Regulatory assessments147 (69)340 217 
ATM/Debit card expenses144 270 625 647 
Information technology594 614 1,804 1,996 
Directors’ expenses140 184 468 552 
Advertising167 190 507 590 
Internet banking expense167 215 545 608 
Amortization of core deposit intangibles174 174 521 521 
Other961 1,114 2,784 3,263 
Total non-interest expenses11,728 11,534 35,305 34,972 
Income before provision for income taxes5,786 8,143 18,025 23,784 
Provision for income taxes1,442 2,452 4,757 6,790 
Net income$4,344 $5,691 $13,268 $16,994 
Earnings per common share:  
Basic earnings per share$0.35 $0.43 $1.06 $1.26 
Weighted average common shares used in basic computation12,471,070 13,360,030 12,551,480 13,515,109 
Diluted earnings per share$0.35 $0.42 $1.05 $1.25 
Weighted average common shares used in diluted computation12,496,174 13,450,187 12,596,172 13,615,552 
Cash dividend per common share$0.11 $0.11 $0.33 $0.32 
 
See notes to unaudited consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(In thousands)2020201920202019
Net income$4,344 $5,691 $13,268 $16,994 
Other Comprehensive Income:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period5,798 3,081 16,477 19,589 
Reclassification of net (gains) losses included in net income(57)(1,685)(4,197)(5,196)
Other comprehensive income, before tax5,741 1,396 12,280 14,393 
Tax effect(1,698)(412)(3,631)(4,255)
Total other comprehensive income4,043 984 8,649 10,138 
Comprehensive income$8,387 $6,675 $21,917 $27,132 

See notes to unaudited consolidated financial statements.


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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
 (Unaudited)
 Common Stock Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
Total Shareholders’ Equity
   Retained Earnings
(In thousands, except share amounts)SharesAmount
Balance, June 30, 201913,488,983 $98,210 $128,723 $4,747 $231,680 
Net income— — 5,691 — 5,691 
Other comprehensive income— — — 984 984 
Restricted stock granted net of forfeitures(1,770)— — — 
Stock issued under employee stock purchase plan2,265 41 41 
Stock-based compensation expense— 136 — — 136 
Cash dividend— — (1,479)— (1,479)
Stock options exercised300 — — 
Repurchase and retirement of common stock(188,383)(3,873)(3,873)
Balance, September 30, 201913,301,395 $94,516 $132,935 $5,731 $233,182 
Balance, June 30, 202012,494,597 $79,059 $142,076 $7,423 $228,558 
Net income— — 4,344 — 4,344 
Other comprehensive income— — — 4,043 4,043 
Restricted stock granted net of forfeitures392 — — — — 
Stock issued under employee stock purchase plan4,319 47 — — 47 
Stock-based compensation expense— 113 — — 113 
Cash dividend— — (1,375)— (1,375)
Stock options exercised8,350 50 — — 50 
Balance, September 30, 202012,507,658 $79,269 $145,045 $11,466 $235,780 

See notes to unaudited consolidated financial statements.






















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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
 (Unaudited)
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
Total Shareholders’ Equity
Common StockRetained Earnings
(In thousands, except share amounts)SharesAmount
Balance, January 1, 201913,754,965 $103,851 $120,294 $(4,407)219,738 
Net income— — 16,994 — 16,994 
Other comprehensive income— — — 10,138 10,138 
Stock issued under employee stock purchase plan9,733 171 — — 171 
Stock awarded to employees5,295 100 — — 100 
Restricted stock granted net of forfeitures18,265 — — — — 
Stock-based compensation expense— 430 — — 430 
Cash dividend— — (4,353)— (4,353)
Repurchase and retirement of common stock(508,983)(10,199)— — (10,199)
Stock options exercised22,120 163 — — 163 
Balance, September 30, 201913,301,395 $94,516 $132,935 $5,731 $233,182 
Balance, January 1, 202013,052,407 $89,379 $135,932 $2,817 $228,128 
Net income— — 13,268 — 13,268 
Other comprehensive income— — — 8,649 8,649 
Restricted stock granted net of forfeitures14,482 — — — — 
Stock issued under employee stock purchase plan12,300 162 — — 162 
Stock awarded to employees6,548 141 — — 141 
Stock-based compensation expense— 362 — — 362 
Cash dividend— — (4,155)— (4,155)
Stock options exercised43,300 277 — — 277 
Repurchase and retirement of common stock(621,379)(11,052)— — (11,052)
Balance, September 30, 202012,507,658 $79,269 $145,045 $11,466 $235,780 

See notes to unaudited consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 For the Nine Months
Ended September 30,
(In thousands)20202019
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$13,268 $16,994 
Adjustments to reconcile net income to net cash provided by operating activities: 
Net increase in deferred loan fees(5,304)(16)
Depreciation668 1,410 
Accretion(994)(620)
Amortization3,328 3,556 
Stock-based compensation362 430 
Provision for credit losses4,975 525 
Net realized gains on sales of available-for-sale investment securities(4,197)(5,196)
Net gain on disposal of premises and equipment(6)
Increase in fair value of equity securities(183)(253)
Increase in bank-owned life insurance, net of expenses(376)(545)
Net gain on bank-owned life insurance(462)
Net increase in accrued interest receivable and other assets(1,394)(8,720)
Net increase in accrued interest payable and other liabilities(1,636)10,500 
Provision for deferred income taxes(1,227)(1,345)
Net cash provided by operating activities6,822 16,720 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchases of available-for-sale investment securities(319,707)(286,896)
Proceeds from sales or calls of available-for-sale investment securities147,811 280,991 
Proceeds from maturity and principal repayments of available-for-sale investment securities25,536 17,140 
Net increase in loans(160,653)(23,925)
Purchases of premises and equipment(307)(730)
Purchases of bank-owned life insurance(250)(1,000)
FHLB stock redeemed467 780 
Proceeds from bank-owned life insurance1,550 
Proceeds from sale of premises and equipment
Net cash used in investing activities(305,547)(13,640)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase in demand, interest bearing and savings deposits353,622 27,003 
Net (decrease) increase in time deposits(5,693)445 
Proceeds from short-term borrowings from Federal Home Loan Bank505,500 
Repayments of short-term borrowings to Federal Home Loan Bank(510,500)
Proceeds of borrowings from other financial institutions2,870 
Repayments of borrowings from other financial institutions(2,870)
Purchase and retirement of common stock(11,052)(10,199)
Proceeds from stock issued under employee stock purchase plan162 171 
Proceeds from exercise of stock options277 163 
Cash dividend payments on common stock(4,155)(4,353)
Net cash provided by financing activities333,161 8,230 
Increase in cash and cash equivalents34,436 11,310 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD52,574 31,727 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$87,010 $43,037 
 
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 For the Nine Months
Ended September 30,
(In thousands)20202019
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:  
Cash paid during the period for:
  
Interest$1,354 $1,957 
Income taxes$5,120 $6,580 
Operating cash flows from operating leases$1,678 $1,643 
Non-cash investing and financing activities:  
Initial recognition of operating lease right-of-use assets$$10,129 

See notes to unaudited consolidated financial statements.

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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 2019 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 September 30, 2020, and the results of its operations and its cash flows for the nine-month interim periods ended September 30, 2020 and 2019 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.

Risks and Uncertainties

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. COVID-19 continues to aggressively spread globally, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate, could adversely affect our operations. While the spread of COVID-19 has minimally affected our operations as of September 30, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely affect several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, or deferred tax assets.

Impact of New Financial Accounting Standards:

FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL, reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. On August 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial
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Instruments -Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” that would provide private entities and certain small public companies additional time to implement the standards on CECL, leases, and hedging. The final ASU extends the effective date for SEC filers, such as the Company, that are classified as smaller reporting companies to January 1, 2023.

    The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2021 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans as well as the economic conditions as of the date of adoption. The Company also anticipates changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements.

    FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement (Subtopic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this ASU effective January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements and disclosures.

    FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

    In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (“TDRs”). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.


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:
 
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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):
 September 30, 2020
Carrying
Amount
Fair Value
(In thousands)Level 1Level 2Level 3Total
Financial assets:    
Cash and due from banks$33,447 $33,447 $$$33,447 
Interest-earning deposits in other banks53,563 53,563 53,563 
Available-for-sale debt securities631,854 631,854 631,854 
Equity securities7,655 7,655 7,655 
Loans, net1,095,232 1,086,793 1,086,793 
Federal Home Loan Bank stock5,595 N/AN/AN/AN/A
Accrued interest receivable8,308 11 2,919 5,378 8,308 
Financial liabilities:    
Deposits1,681,214 1,668,057 88,264 1,756,321 
Junior subordinated deferrable interest debentures5,155 3,504 3,504 
Accrued interest payable98 73 25 98 
 December 31, 2019
Carrying
Amount
Fair Value
(In thousands)Level 1Level 2Level 3Total
Financial assets:  
Cash and due from banks$24,195 $24,195 $$$24,195 
Interest-earning deposits in other banks28,379 28,379 28,379 
Available-for-sale debt securities470,746 470,746 470,746 
Equity securities7,472 7,472 7,472 
Loans, net934,250 928,807 928,807 
Federal Home Loan Bank stock6,062 N/AN/AN/AN/A
Accrued interest receivable5,591 33 1,798 3,760 5,591 
Financial liabilities:  
Deposits1,333,285 1,160,224 93,395 1,253,619 
Junior subordinated deferrable interest debentures5,155 3,976 3,976 
Accrued interest payable176 129 47 176 
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business
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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.

13

(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 September 30, 2020:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of September 30, 2020 (in thousands). 
DescriptionFair ValueLevel 1Level 2Level 3
Available-for-sale debt securities:    
U.S. Government agencies$40,628 $$40,628 $
Obligations of states and political subdivisions294,873 294,873 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations217,282 217,282 
Private label mortgage and asset backed securities55,222 55,222 
Corporate debt securities23,849 23,849 
Equity securities7,655 7,655 
Total assets measured at fair value on a recurring basis$639,509 $7,655 $631,854 $
 
    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 nine months ended September 30, 2020, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at or during the nine months ended September 30, 2020. Also there were no liabilities measured at fair value on a recurring basis at September 30, 2020.

Non-recurring Basis
 
    The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include 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 September 30, 2020.

Fair ValueLevel 1Level 2Level 3
Impaired loans:
Real estate:
Real estate-construction and other land loans$1,248 $$$1,248 
Total assets measured at fair value on a non-recurring basis$1,248 $$$1,248 
14

    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 nine months ended ended September 30, 2020.
    Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $1,735,000 with a valuation allowance of $487,000 at September 30, 2020, and a resulting fair value of $1,248,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
    There were 0 charge-offs related to loans carried at fair value during the nine months ended September 30, 2020 and 2019. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended September 30, 2020 and 2019 was not considered significant for disclosure purposes. There were 0 liabilities measured at fair value on a non-recurring basis at September 30, 2020.
    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, 2019:

Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2019 (in thousands).
DescriptionFair ValueLevel 1Level 2Level 3
Available-for-sale debt securities:    
U.S. Government agencies$14,494 $$14,494 $
Obligations of states and political subdivisions91,111 91,111 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations196,719 196,719 
Private label mortgage and asset backed securities159,378 159,378 
Corporate debt securities9,044 9,044 
Equity securities7,472 7,472 
Total assets measured at fair value on a recurring basis$478,218 $7,472 $470,746 $
 
    Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale 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 year ended December 31, 2019, no transfers between levels occurred.
    There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2019. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2019.

15

Non-recurring Basis
 
    The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  As of December 31, 2019 there were no loans or assets that were measured at the lower of cost or fair value.
There were 0 liabilities measured at fair value on a non-recurring basis at December 31, 2019.

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 September 30, 2020, $157,758,000 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 $16,279,000 at September 30, 2020 compared to an unrealized gain of $3,999,000 at December 31, 2019. The unrealized gain/(loss) recorded is net of $4,813,000 and $1,182,000 in tax liabilities (benefits) as accumulated other comprehensive income (loss) within shareholders’ equity at September 30, 2020 and December 31, 2019, respectively.
     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 
 September 30, 2020
Available-for-Sale SecuritiesAmortized Cost
Gross
Unrealized
 Gains
Gross
Unrealized
Losses
Estimated
 Fair Value
Debt securities:    
U.S. Government agencies$40,913 $32 $(317)$40,628 
Obligations of states and political subdivisions280,506 14,930 (563)294,873 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations216,084 3,985 (2,787)217,282 
Private label mortgage and asset backed securities54,072 1,253 (103)55,222 
Corporate debt securities24,000 145 (296)23,849 
Total available-for-sale$615,575 $20,345 $(4,066)$631,854 
 December 31, 2019
Available-for-Sale SecuritiesAmortized Cost
Gross
Unrealized
 Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Debt securities:    
U.S. Government agencies$14,740 $12 $(258)$14,494 
Obligations of states and political subdivisions89,574 2,965 (1,428)91,111 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations198,125 1,409 (2,815)196,719 
Private label mortgage and asset backed securities155,308 4,223 (153)159,378 
Corporate debt securities9,000 79 (35)9,044 
Total available-for-sale$466,747 $8,688 $(4,689)$470,746 
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    Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2020 and 2019 are shown below (in thousands):
For the Three Months Ended September 30,For the Nine Months
Ended September 30,
Available-for-Sale Securities2020201920202019
Proceeds from sales or calls$25,442 $77,375 $147,811 $280,991 
Gross realized gains from sales or calls1,035 1,709 5,539 5,316 
Gross realized losses from sales or calls(978)(24)(1,342)(120)
    Losses recognized in 2020 and 2019 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.
    The provision for income taxes includes $1,241,000 and $1,536,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the nine months ended September 30, 2020 and 2019, respectively. The provision (benefit) for income taxes includes $17,000 and $498,000 income tax impact from the reclassification of unrealized net gains/(losses) on available-for-sale securities to realized net gains/(losses) on available-for-sale securities for the three months ended September 30, 2020 and 2019, 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): 
 September 30, 2020
 Less than 12 Months12 Months or MoreTotal
 FairUnrealizedFairUnrealizedFairUnrealized
Available-for-Sale SecuritiesValueLossesValueLossesValueLosses
Debt securities:      
U.S. Government agencies$27,125 $(132)$12,812 $(185)$39,937 $(317)
Obligations of states and political subdivisions50,672 (563)50,672 (563)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations32,953 (287)81,338 (2,500)114,291 (2,787)
Private label mortgage and asset backed securities12,698 (103)12,698 (103)
Corporate debt securities8,704 (296)8,704 (296)
Total available-for-sale$132,152 $(1,381)$94,150 $(2,685)$226,302 $(4,066)
 December 31, 2019
 Less than 12 Months12 Months or MoreTotal
 FairUnrealizedFairUnrealizedFairUnrealized
Available-for-Sale SecuritiesValueLossesValueLossesValueLosses
Debt securities:      
U.S. Government agencies$$$13,713 $(258)$13,713 $(258)
Obligations of states and political subdivisions65,606 (1,428)65,606 (1,428)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations71,650 (932)69,518 (1,883)141,168 (2,815)
Private label mortgage and asset backed securities17,811 (81)5,624 (72)23,435 (153)
Corporate debt securities3,965 (35)3,965 (35)
Total available-for-sale$159,032 $(2,476)$88,855 $(2,213)$247,887 $(4,689)
     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
17

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 September 30, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at September 30, 2020 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2020 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 0 OTTI losses recorded during the nine months ended September 30, 2020.

U.S. Government Agencies

    At September 30, 2020, the Company held 11 U.S. Government agency securities of which 5 were in a loss position for less than 12 months and 5 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 September 30, 2020.

Obligations of States and Political Subdivisions
 
    At September 30, 2020, the Company held 87 obligations of states and political subdivision securities of which 10 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
    At September 30, 2020, the Company held 118 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 12 were in a loss position for less than 12 months and 17 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 September 30, 2020.
 
Private Label Mortgage and Asset Backed Securities
 
    At September 30, 2020, the Company had a total of 24 Private Label Mortgage and Asset Backed Securities (PLMABS). NaN of the PLMABS securities were in a loss position for less than 12 months and NaN have been in loss for more than 12 months at September 30, 2020. 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 September 30, 2020. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

18

Corporate Debt Securities
 
    At September 30, 2020, the Company held 7 corporate debt securities of which 2 were in a loss position for less than 12 months. The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
    The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2020 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.
September 30, 2020
Available-for-Sale SecuritiesAmortized CostEstimated Fair
Value
Within one year$295 $304 
After one year through five years1,314 1,454 
After five years through ten years31,221 34,368 
After ten years247,676 258,747 
 280,506 294,873 
Investment securities not due at a single maturity date:  
U.S. Government agencies40,913 40,628 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations216,084 217,282 
Private label mortgage and asset backed securities54,072 55,222 
Corporate debt securities24,000 23,849 
Total available-for-sale$615,575 $631,854 
 

Note 4.  Loans and Allowance for Credit Losses
 
Outstanding loans are summarized as follows:
Loan Type (Dollars in thousands)September 30, 2020% of Total
Loans
December 31, 2019% of Total
Loans
Commercial:    
Commercial and industrial$296,338 26.7 %$102,541 10.9 %
Agricultural production22,902 2.1 %23,159 2.6 %
Total commercial319,240 28.8 %125,700 13.5 %
Real estate:    
Owner occupied195,189 17.6 %197,946 21.0 %
Real estate construction and other land loans72,612 6.5 %73,718 7.8 %
Commercial real estate318,766 28.7 %329,333 34.9 %
Agricultural real estate75,747 6.7 %76,304 8.1 %
Other real estate34,883 3.1 %31,241 3.3 %
Total real estate697,197 62.6 %708,542 75.1 %
Consumer:    
Equity loans and lines of credit58,614 5.3 %64,841 6.9 %
Consumer and installment38,627 3.3 %42,782 4.5 %
Total consumer97,241 8.6 %107,623 11.4 %
Net deferred origination (fees) costs(3,789) 1,515  
Total gross loans1,109,889 100.0 %943,380 100.0 %
Allowance for credit losses(14,657) (9,130) 
Total loans$1,095,232  $934,250  
19

 
    At September 30, 2020 and December 31, 2019, loans originated under Small Business Administration (SBA) programs totaling $24,816,000 and $21,910,000, respectively, were included in the real estate and commercial categories, of which, $18,618,000 or 75% and $16,372,000 or 75%, respectively, are secured by government guarantees. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At September 30, 2020, 1,076 PPP loans totaling $210,057,000 were outstanding and included in the commercial and industrial line item above.

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 2 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 data) over the most recent 47 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
    The following table shows the summary of activities for the Allowance as of and for the three months ended September 30, 2020 and 2019 by portfolio segment (in thousands):
 CommercialReal EstateConsumerUnallocatedTotal
Allowance for credit losses:     
Beginning balance, July 1, 2020$2,087 $10,389 $1,280 $181 $13,937 
Provision (reversal) charged to operations(30)267 60 303 600 
Losses charged to allowance(43)(2)(45)
Recoveries146 19 165 
Ending balance, September 30, 2020$2,160 $10,656 $1,357 $484 $14,657 
Allowance for credit losses:     
Beginning balance, July 1, 2019$1,800 $6,553 $911 $141 $9,405 
Provision (reversal) charged to operations508 117 (378)250 
Losses charged to allowance(122)(93)(215)
Recoveries37 18 55 
Ending balance, September 30, 2019$1,718 $7,061 $953 $(237)$9,495 
20

 
The following table shows the summary of activities for the Allowance as of and for the nine month ended September 30, 2020 and 2019 by portfolio segment (in thousands):

CommercialReal EstateConsumerUnallocatedTotal
Allowance for credit losses:
Beginning balance, January 1, 2020$1,428 $6,769 $897 $36 $9,130 
Provision charged to operations203 3,887 437 448 4,975 
Losses charged to allowance(72)(97)(169)
Recoveries601 120 721 
Ending balance, September 30, 2020$2,160 $10,656 $1,357 $484 $14,657 
Allowance for credit losses:
Beginning balance, January 1, 2019$1,671 $6,539 $826 $68 $9,104 
Provision (reversal) charged to operations123 522 185 (305)525 
Losses charged to allowance(172)(108)(280)
Recoveries96 50 146 
Ending balance, September 30, 2019$1,718 $7,061 $953 $(237)$9,495 

    The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2020 and December 31, 2019 (in thousands):
 CommercialReal EstateConsumerUnallocatedTotal
Allowance for credit losses:     
Ending balance, September 30, 2020$2,160 $10,656 $1,357 $484 $14,657 
Ending balance: individually evaluated for impairment$223 $489 $27 $$739 
Ending balance: collectively evaluated for impairment$1,937 $10,167 $1,330 $484 $13,918 
Ending balance, December 31, 2019$1,428 $6,769 $897 $36 $9,130 
Ending balance: individually evaluated for impairment$$$35 $$40 
Ending balance: collectively evaluated for impairment$1,426 $6,766 $862 $36 $9,090 
    The following table shows the ending balances of loans as of September 30, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands):
 CommercialReal EstateConsumerTotal
Loans:    
Ending balance, September 30, 2020$319,240 $697,197 $97,241 $1,113,678 
Ending balance: individually evaluated for impairment$8,670 $2,838 $1,178 $12,686 
Ending balance: collectively evaluated for impairment$310,570 $694,359 $96,063 $1,100,992 
Loans:    
Ending balance, December 31, 2019$125,700 $708,542 $107,623 $941,865 
Ending balance: individually evaluated for impairment$187 $2,036 $1,511 $3,734 
Ending balance: collectively evaluated for impairment$125,513 $706,506 $106,112 $938,131 







21

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2020 (in thousands):
PassSpecial MentionSub-StandardDoubtfulTotal
Commercial:
Commercial and industrial$270,642 $15,004 $10,692 $$296,338 
Agricultural production14,386 1,352 7,164 22,902 
Real Estate:
Owner occupied180,786 8,706 5,697 195,189 
Real estate construction and other land loans66,216 2,226 4,170 72,612 
Commercial real estate307,645 9,149 1,972 318,766 
Agricultural real estate61,960 6,896 6,891 75,747 
Other real estate34,722 161 34,883 
Consumer:
Equity loans and lines of credit57,250 399 965 58,614 
Consumer and installment38,535 92 38,627 
Total$1,032,142 $43,893 $37,643 $$1,113,678 
    The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2019 (in thousands):
PassSpecial MentionSub-StandardDoubtfulTotal
Commercial:
Commercial and industrial$86,705 $2,635 $13,201 $$102,541 
Agricultural production18,814 4,345 23,159 
Real Estate:
Owner occupied186,370 6,881 4,695 197,946 
Real estate construction and other land loans72,142 1,576 73,718 
Commercial real estate310,982 17,202 1,149 329,333 
Agricultural real estate68,032 946 7,326 76,304 
Other real estate31,241 31,241 
Consumer:
Equity loans and lines of credit62,776 519 1,546 64,841 
Consumer and installment42,782 42,782 
Total$879,844 $28,183 $33,838 $$941,865 

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The following table shows an aging analysis of the loan portfolio by class and the time past due at September 30, 2020 (in thousands):
 30-59 Days
Past Due
60-89
Days Past
Due
Greater
Than
 90 Days
Past Due
Total Past
Due
CurrentTotal
Loans
Recorded
Investment
> 90 Days
Accruing
Non-accrual
Commercial:        
Commercial and industrial$64 $$$64 $296,274 $296,338 $$715 
Agricultural production22,902 22,902 
Real estate:—   —  
Owner occupied195,189 195,189 380 
Real estate construction and other land loans186 186 72,426 72,612 1,764 
Commercial real estate318,766 318,766 507 
Agricultural real estate75,747 75,747 
Other real estate34,883 34,883 
Consumer:   —  
Equity loans and lines of credit58,614 58,614 
Consumer and installment38,621 38,627 92 
Total$70 $$186 $256 $1,113,422 $1,113,678 $$3,458 
    The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2019 (in thousands):
 30-59 Days
Past Due
60-89
Days Past
Due
Greater
Than
 90 Days
Past Due
Total Past
Due
CurrentTotal
Loans
Recorded
Investment
> 90 Days
Accruing
Non-
accrual
Commercial:        
Commercial and industrial$17 $$$17 $102,524 $102,541 $$187 
Agricultural production23,159 23,159 
Real estate:—       
Owner occupied218 218 197,728 197,946 416 
Real estate construction and other land loans73,718 73,718 
Commercial real estate381 381 328,952 329,333 381 
Agricultural real estate76,304 76,304 0 321 
Other real estate31,241 31,241 
Consumer:       
Equity loans and lines of credit64,841 64,841 388 
Consumer and installment168 168 42,614 42,782 
Total$185 $599 $$784 $941,081 $941,865 $$1,693 
 
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The following table shows information related to impaired loans by class at September 30, 2020 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:   
Commercial:   
Commercial and industrial$7,175 $7,175 $— 
Real estate:   
Owner occupied$380 $412 $— 
Real estate construction and other land loans29 29 — 
Commercial real estate507 544 — 
Total real estate916 985 — 
Consumer:   
Equity loans and lines of credit145 181 — 
Total with no related allowance recorded8,236 8,341 — 
With an allowance recorded:   
Commercial:   
Commercial and industrial716 738 206 
Agricultural production779 779 17 
Total commercial1,495 1,517 223 
Real estate:   
Real estate construction and other land loans1,735 1,743 487 
Commercial real estate150 151 
Agricultural real estate37 37 
Total real estate1,922 1,931 489 
Consumer:   
Equity loans and lines of credit941 941 13 
Consumer and installment92 95 14 
  Total consumer1,033 1,036 27 
Total with an allowance recorded4,450 4,484 739 
Total$12,686 $12,825 $739 
    The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.
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    The following table shows information related to impaired loans by class at December 31, 2019 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:   
Commercial:   
Commercial and industrial$163 $432 $— 
Real estate:   
Owner occupied416 426 — 
Real estate construction and other land loans— 
Commercial real estate1,110 1,361 — 
Agricultural real estate321 321 — 
Total real estate1,847 2,108 — 
Consumer:   
Equity loans and lines of credit220 256 — 
Total with no related allowance recorded2,230 2,796 — 
With an allowance recorded:   
Commercial:   
Commercial and industrial24 27 
Real estate:   
Commercial real estate152 153 
Agricultural real estate37 37 
Total real estate189 190 
Consumer:   
Equity loans and lines of credit1,291 1,292 35 
Total with an allowance recorded1,504 1,509 40 
Total$3,734 $4,305 $40 
 
    The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.
    





















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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 September 30, 2020 and 2019 (in thousands).
 Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:    
Commercial:    
Commercial and industrial$4,157 $$202 $
Agricultural production
Total commercial4,157 202 
Real estate:    
Owner occupied385 204 
Real estate construction and other land loans988 
Commercial real estate689 1,528 12 
Agricultural real estate120 
Total real estate1,201 2,720 12 
Consumer:    
Equity loans and lines of credit178 942 
Total with no related allowance recorded5,536 3,864 13 
With an allowance recorded:    
Commercial:    
Commercial and industrial5,440 138 45 
Agricultural production778 11 
Total commercial6,218 149 45 
Real estate:    
Real estate construction and other land loans656 
Commercial real estate150 156 
Agricultural real estate28 42 
Total real estate834 198 
Consumer:    
Equity loans and lines of credit944 14 1,099 14 
Consumer and installment70 31 
Total consumer1,014 14 1,130 14 
Total with an allowance recorded8,066 167 1,373 18 
Total$13,602 $170 $5,237 $31 














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The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2020 and 2019 (in thousands).
 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:    
Commercial:    
Commercial and industrial$1,712 $$225 $
Agricultural production85 
Total commercial1,797 225 
Real estate:    
Owner occupied400 208 
Real estate construction and other land loans1,494 46 
Commercial real estate860 1,363 37 
Agricultural real estate189 
Total real estate1,452 3,065 83 
Consumer:    
Equity loans and lines of credit237 650 
Total with no related allowance recorded3,486 3,940 86 
With an allowance recorded:    
Commercial:    
Commercial and industrial5,743 482 67 
Agricultural production481 36 
Total commercial6,224 518 67 
Real estate:    
Real estate construction and other land loans281 
Commercial real estate223 377 
Agricultural real estate26 44 
Total real estate530 10 421 10 
Consumer:    
Equity loans and lines of credit1,019 41 1,101 42 
Consumer and installment45 15 
Total consumer1,064 41 1,116 42 
Total with an allowance recorded7,818 569 1,604 53 
Total$11,304 $578 $5,544 $139 
    
Foregone interest on nonaccrual loans totaled $135,000 and $105,000 for the nine month period ended September 30, 2020 and 2019, respectively. Foregone interest on nonaccrual loans totaled $82,000 and $39,000 for the three month periods ended September 30, 2020 and 2019, respectively.
Troubled Debt Restructurings:
    As of September 30, 2020 and December 31, 2019, the Company has a recorded investment in troubled debt restructurings of $9,228,000 and $2,362,000, respectively. The Company has allocated $33,000 and $38,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively. The Company has committed to lend 0 additional amounts as of September 30, 2020 to customers with outstanding loans that are classified as troubled debt restructurings.
    During the nine months ended September 30, 2020, 2 loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with
27

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.
As discussed in Note 1 to these financial statements, Section 4013 of the CARES Act and the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. The remaining TDRs disclosed below were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $60.083 million resulting from the COVID-19 pandemic that were not classified as a TDRs at September 30, 2020.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2020 (in thousands):
Troubled Debt Restructurings:Number of LoansPre-Modification Outstanding Recorded Investment (1)Principal Modification (2)Post Modification Outstanding Recorded Investment (3)Outstanding Recorded Investment
Commercial:
Commercial and industrial$12,925 $$12,925 $7,175 
Agricultural production850 850 779 
Total$13,775 $$13,775 $7,954 
(1)Amounts represent the recorded investment in loans before recognizing effects of the Troubled Debt Restructurings, 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 nine months ended September 30, 2019 (in thousands):
Troubled Debt Restructurings:Number of LoansPre-Modification Outstanding Recorded Investment (1)Principal Modification (2)Post Modification Outstanding Recorded Investment (3)Outstanding Recorded Investment
Consumer:
Equity loans and lines of credit$132 $$132 $124 
Total$132 $$132 $124 

Troubled Debt Restructurings:
During three months ended September 30, 2020 and September 30, 2019, no loans were modified as 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 0 defaults on troubled debt restructurings, within twelve months following the modification, during the nine months ended and three months ended September 30, 2020 or September 30, 2019.

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Note 5. Goodwill

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at September 30, 2020, 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 acquisition method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment. The Company’s annual goodwill test is completed as of September 30 each year.
Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020.
    

Note 6. Borrowing Arrangements

As of September 30, 2020 and December 31, 2019, the Company had 0 Federal Home Loan Bank (“FHLB”) of San Francisco advances.
    Approximately $431,925,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $241,964,000 as of September 30, 2020. FHLB advances are also secured by investment securities with amortized costs totaling $176,000 and $248,000 and market values totaling $185,000 and $256,000 at September 30, 2020 and December 31, 2019, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. As of September 30, 2020, and December 31, 2019 the Company had 0 Federal funds purchased.



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 $317,461,000 and $291,182,000 were outstanding at September 30, 2020 and December 31, 2019, 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 $316,958,000 and $289,465,000 at September 30, 2020 and December 31, 2019, 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 $86,098,000 and $74,019,000 as of September 30, 2020 and December 31, 2019, 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 $503,000 and $1,717,000 were outstanding at September 30, 2020 and December 31, 2019, 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 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 September 30, 2020 or December 31, 2019.  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
29

of credit and financial guarantees. At September 30, 2020 and December 31, 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process.  While related to credit losses, this allocation is not a part of the 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 which as of September 30, 2020, the total guarantee was $2,475,000.
     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 ShareFor the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(In thousands, except share and per share amounts)2020201920202019
Net income$4,344 $5,691 $13,268 $16,994 
Weighted average shares outstanding12,471,070 13,360,030 12,551,480 13,515,109 
Basic earnings per share$0.35 $0.43 $1.06 $1.26 
 
Diluted Earnings Per ShareFor the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(In thousands, except share and per share amounts)2020201920202019
Net income$4,344 $5,691 $13,268 $16,994 
Weighted average shares outstanding12,471,070 13,360,030 12,551,480 13,515,109 
Effect of dilutive stock options25,104 90,157 44,692 100,443 
Weighted average shares of common stock and common stock equivalents12,496,174 13,450,187 12,596,172 13,615,552 
Diluted earnings per share$0.35 $0.42 $1.05 $1.25 

        NaN outstanding options or restricted stock awards were anti-dilutive for the nine months ended September 30, 2020 and 2019. During the three-month periods ended September 30, 2020 and 2019, 0 outstanding options or restricted stock awards were anti-dilutive.

Note 9.  Share-Based Compensation
 
The Company has 4 share-based compensation plans as described below. Share-based compensation cost recognized for those plans was $362,000 and $430,000 for the nine months ended September 30, 2020 and 2019, 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 $78,000 and $25,000, respectively, for the nine months ended September 30, 2020 and 2019.
     The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan.
    The 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.
30

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 1 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 461,392 shares available for future purchase under the plan as of September 30, 2020.

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.
     NaN options to purchase shares of the Company’s common stock were granted during the nine months ended September 30, 2020 and 2019.
    A summary of the combined activity of the Company’s stock option compensation plans for the nine months ended September 30, 2020 follows (in thousands, except per share amounts): 
 SharesWeighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value (In thousands)
Options outstanding at January 1, 2020121,120 $8.73   
Options exercised(43,300)$6.38   
Options forfeited(550)$7.40   
Options outstanding at September 30, 202077,270 $10.05 1.77$182,699 
Options vested or expected to vest at September 30, 202077,270 $10.05 1.77$182,699 
Options exercisable at September 30, 202077,270 $10.05 1.77$182,699 

Information related to the stock option plan is as follows (in thousands):
For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
2020201920202019
Intrinsic value of options exercised$51 $$432 $269 
Cash received from options exercised$50 $$277 $163 
Excess tax benefit realized for option exercises$$$78 $25 
    As of September 30, 2020, there was 0 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.
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    The following table summarizes restricted stock and performance award activity for the nine months ended September 30, 2020 as follows: 
 SharesWeighted
Average
Grant-Date Fair Value
Nonvested outstanding shares at January 1, 202045,160 $17.38 
Granted21,397 $16.42 
Vested(34,703)$18.23 
Forfeited(367)$18.42 
Nonvested outstanding shares at September 30, 202031,487 $15.78 

    During the nine months ended September 30, 2020, 21,397 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 $16.42 per share on the date of grant during the nine months ended September 30, 2020. Restricted common stock awards fully vest after year one, or vest ratably until fully vested in year three or year five depending on agreement terms. Performance common stock awards vest immediately.
    As of September 30, 2020, there were 31,487 shares of restricted stock that are nonvested and expected to vest. As of September 30, 2020, there was $349,000 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 1.03 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $2,403,000 at September 30, 2020.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations.  These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; (14) the rapidly changing uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.
    When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.  Should one or more of these risks or 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.
32

    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 nine months ended September 30, 2020.  Please refer to the Company’s 2019 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.
    This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.
 
OVERVIEW

Central Valley Community Bancorp (Company)
 
We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank).  We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.
 
Central Valley Community Bank (Bank)
 
The Bank commenced operations in January 1980 as a state-chartered bank.  As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the California Department of Financial Protection and Innovation (DFPI).  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.
    The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor.  For this insurance, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment.
    The Bank operates 20 full-service branches which serve the communities of Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia, California.  Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2020 FDIC data, the Bank’s branches in Fresno, Madera, San Joaquin, and Tulare Counties had a 3.40% 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 2020.

Dividend Declared

On October 28, 2020, the Board of Directors declared an $0.11 per share cash dividend payable on November 27, 2020 to shareholders of record as of November 13, 2020.

COVID-19 Pandemic

The COVID-19 pandemic has impacted the local economy in the San Joaquin Valley and greater Sacramento area. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020, causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates are increasing in our local market area as compared to the prior quarter end.
    The Company is closely monitoring the effects of the pandemic on our loan and deposit customers. Our management team is focused on assessing the risks in our loan portfolio and working with our customers to minimize our losses. While some industry segments are being more impacted by the COVID-19 pandemic than others, we believe that our credit risk
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related to the loans outstanding to customers in the higher risk categories is well managed. This is primarily due to the existence of SBA and other loan guarantee programs, personal guarantees, and adequate collateralization.
    Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). Pursuant to these new capabilities, we have implemented a loan program to allow customers who may be negatively impacted by the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days.
    The CARES Act established a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors, and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. As a preferred SBA lender, we are participating in the PPP to help provide loans to our business customers to provide them with additional working capital. The Company has worked diligently with the SBA to qualify clients to receive PPP loans. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest. Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.
The federal bank regulatory agencies, along with their state counterparts, have issued guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
    We have also taken measures to protect the health and safety of our employees by implementing remote work arrangements to the full extent possible, and by adjusting banking center hours and operational measures to promote social distancing. Management is closely monitoring credit metrics. Additional resources have been shifted to credit administration to closely analyze higher risk segments within the loan portfolio, monitor and track loan payment deferrals and customer liquidity, and provide timely reporting to management and the board of directors. The management team continues to analyze economic conditions in our geographic markets and perform stress testing of our investment portfolio as well as our loan portfolio. Based on the Company’s capital levels, conservative underwriting policies, low loan-to-deposit ratio, loan concentration diversification, and suburban geographical marketplace, management expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain adequately capitalized.

Risks and Uncertainties
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.
    The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

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Financial position and results of operations

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.
    The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
    COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020.
    
Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its borrowing clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to 90 days. As of September 30, 2020, based on the Bank’s discussion with these customers, loan customer requests to defer payments on loans totaling approximately $60.1 million were outstanding, of which, approximately $4.0 million or 7% expect to require up to an additional 90-day deferral, and $4.1 million or 6% expect they will require a loan modification. In accordance with interagency guidance issued in March 2020 and Section 4013 of the Cares Act, these short-term deferrals are not considered troubled debt restructurings.
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    With the passage of the PPP administered by the SBA, the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. During the nine months ended September 30, 2020, the Company closed 1,077 PPP loans representing $211,575,000 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit losses charged to earnings.

Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by COVID-19, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses and record additional provisions for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Third Quarter of 2020

For the third quarter of 2020, our consolidated net income was $4,344,000 compared to $5,691,000 for the same period in 2019. Diluted EPS was $0.35 for the quarter ended September 30, 2020 compared to $0.42 for the same period in 2019. The decrease in net income during the third quarter of 2020 compared to the same period in 2019 is primarily due to a decrease in non-interest income of $1,651,000, an increase in provision for credit losses of $350,000, an increase in total non-interest expenses of $194,000, and a decrease in net interest income of $162,000, partially offset by a decrease in the provision for income taxes of $1,010,000. During the quarter ended September 30, 2020, the Company recorded a decrease of $1,628,000 in net realized gains on sales and calls of investment securities. During the quarter ended September 30, 2020, the Company recorded a $600,000 provision for credit losses, compared to a $250,000 provision during the quarter ended September 30, 2019. During the first quarter of 2020, we adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
    Net interest margin (fully tax equivalent basis) decreased to 3.63% for the quarter ended September 30, 2020 compared to 4.50% for the same period in 2019. The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, the decrease in the yield on the loan portfolio, the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, and the decrease in the cost of total interest-bearing liabilities. The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, decreased to 2.07% for the three months ended September 30, 2020, compared to 3.07% for the three months ended September 30, 2019. The effective yield on average loans decreased to 4.68% for the three months ended September 30, 2020, compared to 5.55% for the three months ended September 30, 2019. The decrease in the loan yield was impacted by Company’s issuance of PPP loans. Total average PPP loans, which yield 1.00%, were $211,559,000 for the three months ended September 30, 2020. The cost of deposits (calculated by dividing annualized interest expense on interest bearing deposits by total deposits), decreased to 0.09% for the quarter ended September 30, 2020 compared to 0.17% for the same period in 2019. 
    Non-interest income decreased $1,651,000 or 44.36% to $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 for the same period in 2019, primarily driven by a decrease of $1,628,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $209,000, a decrease of $148,000 in other income, a decrease in interchange fees of $19,000, and a decrease in Federal Home Loan Bank (“FHLB”) dividends of $38,000, offset by an increase in loan placement fees of $397,000. Non-interest expense for the quarter ended September 30, 2020 increased $194,000 or 1.68% from the comparable period due to increases in professional services, regulatory assessment, data processing, loan related expenses, and alarm expenses, partially offset by decreases occupancy and equipment, information technology, directors’ expenses, tax provision, amortization of software, education and training, mileage and travel, armored courier fees, risk management expenses, stationery/supplies, telephone expenses, personnel, operating losses, advertising expenses, other expenses, and ATM/debit card expenses.
    Annualized return on average equity for the third quarter of 2020 decreased to 7.50% compared to 9.77% for the same period in 2019. The decrease in return on average equity reflects a decrease in net income compared to the prior year. Annualized return on average assets was 0.90% and 1.43% for the quarter ended September 30, 2020 and 2019, respectively. Total average equity decreased to $231,656,000 for the third quarter of 2020 compared to $233,077,000 for the third quarter of 2019. The Company declared and paid $0.11 per share in cash dividends to holders of common stock during the third quarter of 2020, compared to $0.11 in dividends declared and paid during the third quarter of 2019.
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    Our average total assets increased $340,227,000 or 21.42% to $1,928,594,000 during the third quarter of 2020 compared to the same period in 2019.  Total average interest-earning assets increased $338,229,000 or 23.61% in the third quarter of 2020 compared to the same period of 2019.  Average total loans, including nonaccrual loans, increased $174,643,000 or 18.41% in the third quarter of 2020 compared to the same period in 2019. Average total investments and interest-earning deposits in other banks increased $163,709,000 or 33.67% in the period ended September 30, 2020 compared to the same period in 2019.  Average interest-bearing liabilities increased $97,855,000 or 12.84% in the period ended September 30, 2020 compared to the same period in 2019. Average non-interest bearing demand deposits increased 43.22% to $807,052,000 in 2020 compared to $563,498,000 in 2019.  The ratio of average non-interest bearing demand deposits to average total deposits was 48.56% in the third quarter of 2020 compared to 43.24% in 2019.

First Nine Months of 2020

For the nine months ended September 30, 2020, our consolidated net income was $13,268,000 compared to $16,994,000 for the same period in 2019.  Diluted EPS was $1.05 for the first nine months of 2020 compared to $1.25 for the first nine months of 2019.  Net income for the nine-month period ended September 30, 2020 decreased 21.93%, compared to the nine-month period ended September 30, 2019, primarily driven by a decrease in net interest income, an increase in non-interest expense, and an increase in the provision for credit losses, partially offset by a decrease in net realized gains on sales and calls of investment securities, an increase in loan placement fees, and a decrease in provision for income taxes. Net interest income before the provision for credit losses decreased $339,000 or 0.71%.  Net interest income during the first nine months of 2020 and 2019 benefited by approximately $505,000 and $593,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. Excluding these benefits, net interest income for the nine months ended September 30, 2020, decreased by $540,000 compared to the nine-month period ended September 30, 2019. Non-interest income decreased $637,000 or 5.64%, and non-interest expense increased $333,000 or 0.95% in the first nine months ended of 2020 compared to first nine months ended of 2019. During the nine months ended September 30, 2020, the Company recorded a provision for credit losses of $4,975,000 compared to $525,000 during same period in 2019. Net recoveries of previously charged-off loans totaling $552,000 and $134,000 during the nine months ended September 30, 2020 and 2019, respectively.
Annualized return on average equity for the nine months ended September 30, 2020 decreased to 7.78% compared to 9.96% for the same period in 2019.  The decrease in return on average equity reflects the decrease in net income compared to the prior year. Annualized return on average assets was 0.99% and 1.44% for the nine months ended September 30, 2020 and 2019, respectively.  Total average equity was $227,394,000 for the nine months ended September 30, 2020 compared to $227,551,000 for the same period in 2019.  The change 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 increased $209,471,000 or 13.33% in the first nine months of 2020 compared to the same period in 2019.  Total average interest-earning assets increased $205,691,000 or 14.47% comparing the first nine months of 2020 to the same period in 2019.  Average total loans, including nonaccrual loans, increased $110,574,000 or 11.87% comparing the first nine months of 2020 to the same period in 2019. The effective yield on average loans decreased to 4.97% for the nine months September 30, 2020, compared to 5.58% for the nine months September 30, 2019. Total average PPP loans, which yield 1.00%, were $124,303,000 for the nine months ended September 30, 2020. Excluding PPP loans from total average loans, the effective yield on average loans for the nine months ended September 30, 2020 was 5.34%. Average total investments (securities and interest-earning deposits) increased $94,449,000, or 19.17% in the nine-month period ended September 30, 2020 compared to the same period in 2019, with average interest-bearing liabilities decreasing $38,803,000 or 5.06% on a period to period comparison.
Our net interest margin (fully tax equivalent basis) for the first nine months ended September 30, 2020 decreased to 3.93% compared to 4.54% for the same period in 2019. The decrease in net interest margin in the period-to-period comparison resulted primarily from a decrease in the effective yield on the Company’s average investment securities, the decrease in the yield on the loan portfolio, and the decrease in the effective yield on interest-earning deposits in other banks and Federal funds sold, partially offset by the decrease in the cost of total interest-bearing liabilities.  The effective yield on interest-earning assets decreased 69 basis points to 4.04% for the nine-month period ended September 30, 2020 compared to 4.73% for the same period in 2019. For the nine-month period ended September 30, 2020, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, decreased 75 basis points, compared to the same period in the prior year, and the effective yield on loans decreased 61 basis points. The cost of total interest-bearing liabilities decreased 14 basis points to 0.21% compared to 0.35% for the same period in 2019.  The cost of total deposits, including noninterest bearing accounts decreased to 0.10% compared to 0.15% for the nine months ended September 30, 2020 and 2019.
Net interest income before the provision for credit losses for the nine months ended September 30, 2020 was $47,646,000 compared to $47,985,000 for the same period in 2019, a decrease of $339,000 or 0.71%.  Net interest income decreased as a result of yield changes, asset mix changes, and an increase in interest-bearing liabilities, offset by an increase in average earning assets. The Bank recovered $505,000 and $593,000, of foregone interest income and prepaid payment penalties in 2020 and 2019, respectively. The Bank had non-accrual loans totaling $3,458,000 at September 30, 2020,
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compared to $1,693,000 at December 31, 2019 and 2,157,000 at September 30, 2019.  The Company had no other real estate owned or repossessed assets at September 30, 2020, December 31, 2019, or September 30, 2019.
At September 30, 2020, we had total net loans of $1,095,232,000, total assets of $1,950,560,000, total deposits of $1,681,214,000, and shareholders’ equity of $235,780,000.

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 7.78% for the nine months ended September 30, 2020 compared to 10.07% for the year ended December 31, 2019 and 9.96% for the nine months ended September 30, 2019.  Our net income for the nine months ended September 30, 2020 decreased $3,726,000 or 21.93% to $13,268,000 compared to $16,994,000 for the nine months ended September 30, 2019, primarily driven by a decrease in net interest income, a decrease in net realized gains on sales and calls of investment securities, an increase in non-interest expenses, and an increase in the provision for credit losses, partially offset by an increase in loan placement fees, and a decrease in provision for income taxes. Net interest margin (NIM) decreased 61 basis points for the nine-month period ended September 30, 2020 compared to the nine months ended September 30, 2019.  Diluted EPS was $1.05 for the nine months ended September 30, 2020 and $1.25 for the same period in 2019.
 
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 nine months ended September 30, 2020 was 0.99% compared to 1.35% for the year ended December 31, 2019 and 1.44% for the nine months ended September 30, 2019.  The decrease in ROA for the nine months ended September 30, 2020 compared to September 30, 2019 was due to the decrease in net income, notwithstanding an increase in in average assets.  Average assets for the nine months ended September 30, 2020 was $1,780,716,000 compared to $1,574,089,000 for the year ended December 31, 2019.  Median ROA for our peer group was 1.37% for the year ended December 31, 2019.  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 in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin.  The Company’s net interest margin (fully tax equivalent basis) decreased to 3.93% for the nine months ended September 30, 2020, compared to 4.54% for the same period in 2019.  The decrease in net interest margin in the period-over-period comparison resulted primarily from the decrease in the effective yield on average investment securities (including interest-earning deposits in other banks and Federal funds sold), and a decrease in the yield on the Company’s loan portfolio. Interest-bearing liabilities continue to benefit from low interest rates. In comparing the two periods ending September 30, 2020 and 2019, the effective yield on total earning assets decreased 69 basis points, while the cost of total interest-bearing liabilities decreased 14 basis points and the cost of total deposits decreased to 0.10% compared to 0.15%.  Net interest income before the provision for credit losses for the nine-month period ended September 30, 2020 was $47,646,000 compared to $47,985,000 for the same period in 2019.
    Our non-interest income generally consists of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank-owned life insurance, net gains from sales of
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investment securities, FHLB dividends, and other income. Non-interest income for the nine months ended September 30, 2020 decreased $637,000 or 5.64%, to $10,659,000 compared to $11,296,000 for the nine months ended September 30, 2019.  The decrease resulted primarily from decreases in net realized gains on sales and calls of investment securities, service charge income, interchange fees, and FHLB dividends; offset by increases in loan placement fees, and gain related to the collection of life insurance proceeds, compared to the comparable 2019 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 $3,458,000 and $1,693,000 at September 30, 2020 and December 31, 2019, respectively.  Nonperforming assets totaled 0.31% of gross loans as of September 30, 2020 and 0.18% of gross loans as of December 31, 2019. The ratio of nonperforming assets to total assets was 0.18% as of September 30, 2020 and 0.11% as of December 31, 2019. The nonperforming assets at September 30, 2020 and December 31, 2019 consisted of nonaccrual loans of $3,458,000 and $1,693,000, respectively. The Company had no other real estate owned (OREO) or repossessed assets at September 30, 2020 or December 31, 2019. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. 
    The allowance for credit losses as a percentage of outstanding loan balance was 1.32% as of September 30, 2020 and 0.97% as of December 31, 2019. The ratio of net charge-off (recovery) to average loans was (0.07)% as of September 30, 2020 and 0.11% as of December 31, 2019.
 
Asset Growth
 
As revenues from both net interest income and non-interest income are a function of asset size, the 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 $353,805,000 or 22.16% during the nine months ended September 30, 2020 to $1,950,560,000 compared to $1,596,755,000 as of December 31, 2019, primarily due to the Company’s participation in the PPP.  Total gross loans increased by 17.65% or $166,509,000 to $1,109,889,000 as of September 30, 2020 compared to $943,380,000 as of December 31, 2019.  Total deposits increased 26.10% to $1,681,214,000 as of September 30, 2020 compared to $1,333,285,000 as of December 31, 2019. The Company’s deposit balances for thenine months ended September 30, 2020 increased through organic growth and PPP loan proceeds retained in customer deposit
accounts. Our loan-to-deposit ratio at September 30, 2020 was 66.02% compared to 70.76% at December 31, 2019.  The loan-to-deposit ratio of our peers was 82.00% at December 31, 2019.  Further discussion of loans and deposits is below.
 
Capital Adequacy
 
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.
    The Company and the Bank are each subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements may cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by bank regulatory agencies to ensure capital adequacy. As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of September 30, 2020, the Bank met or exceeded all regulatory capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2020. The Company’s regulatory capital ratios are presented in the table in the “Capital” section below.

Operating Efficiency
 
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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 64.52% for the nine months ended September 30, 2020 compared to 62.07% for the nine months ended September 30, 2019.  The increase in the efficiency ratio was 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, increased 194.87% to $53,914,000 for the first nine months of 2020 compared to $18,284,000 for the same period in 2019, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, increased 206.49% to $34,784,000 from $11,349,000 for the same period in 2019.
 
Liquidity
 
Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee.  This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments.  Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (“FHLB”).  We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $241,964,000 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 $726,519,000 or 37.25% of total assets at September 30, 2020 and $530,792,000 or 33.24% of total assets as of December 31, 2019.

 
RESULTS OF OPERATIONS
 
Net Income for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
 
Net income decreased to $13,268,000 for the nine months ended September 30, 2020 compared to $16,994,000 for the nine months ended September 30, 2019.  Basic and diluted earnings per share for September 30, 2020 were $1.06 and $1.05, respectively. Basic and diluted earnings per share for the same period in 2019 were $1.26 and $1.25, respectively. Annualized ROE was 7.78% for the nine months ended September 30, 2020 compared to 9.96% for the nine months ended September 30, 2019.  Annualized ROA for the nine months ended September 30, 2020 and 2019 was 0.99% and 1.44%, respectively.
    The decrease in net income for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily driven by a decrease in net interest income, an increase in non-interest expense, a decrease in net realized gains on sales and calls of investment securities, and an increase in the provision for credit losses, partially offset by an increase in loan placement fees, and a decrease in provision for income taxes. During the nine months ended September 30, 2020, the Company recorded a $4,975,000 provision for credit losses, compared to a $525,000 provision during the nine months ended September 30, 2019. The provision was recorded in anticipation of the potential effects of the COVID-19 pandemic on our loan portfolio. We adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
 
Interest Income and Expense
 
Net interest income is the most significant component of our income from operations.  Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest-bearing liabilities.
    The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and nonaccrual loans are not included as interest earning assets for purposes of this table.
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CENTRAL VALLEY COMMUNITY BANCORP
SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES
 
 For the Nine Months Ended
September 30, 2020
For the Nine Months Ended
September 30, 2019
(Dollars in thousands)Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
ASSETS      
Interest-earning deposits in other banks$70,418 $222 0.42 %$16,633 $285 2.28 %
Securities: 
Taxable securities478,238 8,996 2.51 %429,489 9,821 3.05 %
Non-taxable securities (1)38,559 1,284 4.44 %46,644 1,447 4.14 %
Total investment securities516,797 10,280 2.65 %476,133 11,268 3.16 %
Total securities and interest-earning deposits587,215 10,502 2.38 %492,766 11,553 3.13 %
Loans (2) (3)1,040,116 38,688 4.97 %928,874 38,747 5.58 %
Total interest-earning assets1,627,331 $49,190 4.04 %1,421,640 $50,300 4.73 %
Allowance for credit losses(11,439)  (9,261)  
Nonaccrual loans1,894   2,562   
Cash and due from banks25,526   25,677   
Bank premises and equipment7,412   8,062   
Other assets129,992   122,565   
Total average assets$1,780,716   $1,571,245   
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Interest-bearing liabilities:      
Savings and NOW accounts$417,075 $273 0.09 %$371,330 $429 0.15 %
Money market accounts293,764 417 0.19 %271,491 499 0.25 %
Time certificates of deposit90,249 479 0.71 %97,129 500 0.69 %
Total interest-bearing deposits801,088 1,169 0.19 %739,950 1,428 0.26 %
Other borrowed funds5,155 106 2.74 %27,490 582 2.82 %
Total interest-bearing liabilities806,243 $1,275 0.21 %767,440 $2,010 0.35 %
Non-interest bearing demand deposits717,162   549,242   
Other liabilities29,917   27,012   
Shareholders’ equity227,394   227,551   
Total average liabilities and shareholders’ equity$1,780,716   $1,571,245   
Interest income and rate earned on average earning assets $49,190 4.04 % $50,300 4.73 %
Interest expense and interest cost related to average interest-bearing liabilities 1,275 0.21 % 2,010 0.35 %
Net interest income and net interest margin (4) $47,915 3.93 % $48,290 4.54 %

(1)Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $269 and $305 in 2020 and 2019, respectively.
(2)Loan interest income includes loan fees (costs) of $884 in 2020 and $56 in 2019.
(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.

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The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated.
Changes in Volume/RateFor the Nine Months Ended September 30, 2020 and 2019
(In thousands)VolumeRateNet
Increase (decrease) due to changes in:   
Interest income:   
Interest-earning deposits in other banks$921 $(984)$(63)
Investment securities:
Taxable1,114 (1,939)(825)
Non-taxable (1)(250)87 (163)
Total investment securities864 (1,852)(988)
Federal funds sold— — — 
Loans4,640 (4,699)(59)
Total earning assets (1)6,425 (7,535)(1,110)
Interest expense:   
Deposits:   
Savings, NOW and MMA92 (330)(238)
Time certificate of deposits(35)14 (21)
Total interest-bearing deposits57 (316)(259)
Other borrowed funds(473)(3)(476)
Total interest-bearing liabilities(416)(319)(735)
Net interest income (1)$6,841 $(7,216)$(375)
(1)    Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans decreased $59,000 or 0.15% for the nine months ended September 30, 2020 compared to the same period in 2019. Net interest income during the first nine months of 2020 was positively impacted by an increase in average total loans of $111,242,000 or 11.98% to $1,040,116,000 compared to $928,874,000 for the same period in 2019. The yield on average loans, excluding nonaccrual loans, was 4.97% for the nine months ended September 30, 2020 compared to 5.58% for the same period in 2019. Net interest income for the period ending September 30, 2020 was benefited by approximately $505,000 in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, compared to $593,000 recorded in the same period in 2019.  The impact to interest income from the accretion of the loan marks on acquired loans was $1,039,000 and $750,000 for the nine months ended September 30, 2020 and 2019, respectively. The remaining balance of accretable loan marks on acquired loans as of September 30, 2020 was $2,877,000.
    Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) decreased $1,015,000 in the first nine months of 2020 to $10,233,000 compared to $11,248,000 for the same period in 2019.  The yield on average total investments (total securities and interest-earning deposits) decreased 75 basis points to 2.38% for the three month period ended September 30, 2020 compared to 3.13% for the same period in 2019. Average total securities and interest-earning deposits for the first nine months of 2020 increased $94,449,000 or 19.17% to $587,215,000 compared to $492,766,000 for the same period in 2019.  Income from investments represents 21.48% of net interest income for the first nine months of 2020 compared to 23.44% for the same period in 2019.
    In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in collateralized mortgage obligations (CMOs).  At September 30, 2020, we held $272,504,000 or 43.13% of the total fair value of the investment portfolio in CMOs with an average yield of 2.30% as compared to $356,097,000 and $360,398,000 with average yields of 3.06% and 3.09% at December 31, 2019 and September 30, 2019, respectively.  We invest in CMOs as part of our overall strategy to increase our net interest margin.  CMOs by their nature react to changes in interest rates.  In a normal declining rate environment, prepayments from 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 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,
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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 $11,466,000 at September 30, 2020 and is reflected in the Company’s equity.  At September 30, 2020, the average life of the investment portfolio was 5.07 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of $16,279,000.  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 nine months ended September 30, 2020 and 2019, 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 September 30, 2020, 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 $61,000,000 or 9.65%.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $73,000,000 or 11.55%.  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 nine months ended September 30, 2020 decreased $1,074,000 or 2.15% to $48,921,000 compared to $49,995,000 for the nine months ended September 30, 2019.  The yield on interest earning assets decreased 69 basis points to 4.04% on a fully tax equivalent basis for the nine months ended September 30, 2020 from 4.73% for the period ended September 30, 2019. The decrease was the result of yield changes, decrease in interest rates, and asset mix changes. Average interest earning assets increased to $1,627,331,000 for the nine months ended September 30, 2020 compared to $1,421,640,000 for the nine months ended September 30, 2019.  The $205,691,000 increase in average earning assets was attributed to the $94,449,000 increase in average investments and a $111,242,000 or 11.98% increase in average loans.
    Interest expense on deposits for the nine months ended September 30, 2020 and 2019 was $1,169,000 and $1,428,000, respectively. The average interest rate on interest bearing deposits increased to 0.19% for the nine months ended September 30, 2020 compared to 0.26% for the same period ended September 30, 2019.  Average interest-bearing deposits increased 8.26% or $61,138,000 to $801,088,000 for the nine months ended September 30, 2020 compared to $739,950,000 for the same period ended September 30, 2019.
    Average other borrowed funds decreased $22,335,000 or 81.25% to $5,155,000 with an effective rate of 2.74% for the nine months ended September 30, 2020 compared to $27,490,000 with an effective rate of 2.82% for the nine months ended September 30, 2019.  Total interest expense on other borrowed funds was $106,000 for the nine months ended September 30, 2020 and $582,000 for the nine months ended September 30, 2019.  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 1.88% and 3.90% at September 30, 2020 and 2019, respectively.  See the section on “Financial Condition” for more detail.
    The cost of interest-bearing liabilities decreased 14 basis points to 0.21% for the nine-month period ended September 30, 2020 compared to 0.35% for the same period in 2019. The cost of total deposits decreased to 0.10% compared to 0.15% for the three-month periods ended September 30, 2020 and 2019.  Average non-interest bearing demand deposits increased 30.57% to $717,162,000 in 2020 compared to $549,242,000 for 2019.  The ratio of average non-interest bearing demand deposits to average total deposits increased to 47.24% in the nine-month period ended September 30, 2020 compared to 42.60% for the same period in 2019.
 
Net Interest Income before Provision for Credit Losses
 
Net interest income before provision for credit losses for the nine months ended September 30, 2020 decreased by $339,000 or 0.71% to $47,646,000 compared to $47,985,000 for the same period in 2019.  The decrease was a result of yield changes, asset mix changes, and an increase in average interest bearing liabilities, offset by an increase in average earning assets. The impact to interest income from the accretion of the loan marks on acquired loans was $1,039,000 and $750,000 for the nine months ended September 30, 2020 and 2019, respectively. In addition, net interest income before the provision for credit losses for the nine months ended September 30, 2020 was benefited by approximately $505,000 in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status, as compared to $593,000 in nonrecurring income for the nine months ended September 30, 2019. Excluding these reversals and benefits, net interest income for the nine months ended
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September 30, 2020 decreased by $540,000 compared to the nine months ended September 30, 2019. Average interest earning assets were $1,627,331,000 for the nine months ended September 30, 2020 with a net interest margin (fully tax equivalent basis) of 3.93% compared to $1,421,640,000 with a net interest margin (fully tax equivalent basis) of 4.54% for the nine months ended September 30, 2019.  The $205,691,000 increase in average earning assets was attributed to the $94,449,000 increase in average total investments and the $111,242,000 or 11.98% increase in average loans.  For the nine months ended September 30, 2020, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 75 basis points. The effective yield on loans decreased 61 basis points. Average interest bearing liabilities increased 5.06% to $806,243,000 for the nine months ended September 30, 2020, compared to $767,440,000 for the same period in 2019. 
 
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 lending officer.  Then 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 lending officers must certify the current risk grade of the loans in their portfolio. The CRO reviews these 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. The regulatory agencies will also review the loan portfolio on a periodic basis..
    Quarterly, the Chief Credit Officer (CCO) reviews the specific reserve calculations for all impaired credits.  Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter.  This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. 
    The allowance for credit losses is reviewed at least quarterly by the Board of Directors Audit 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.
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    The allocation of the allowance for credit losses is set forth below (in thousands):
Loan Type September 30, 2020December 31, 2019
Commercial:
Commercial and industrial$1,863 $1,115 
Agricultural production297 313 
   Total commercial2,160 1,428 
Real estate:
Owner occupied2,163 1,319 
Real estate construction and other land loans2,060 932 
Commercial real estate5,164 3,453 
Agricultural real estate932 925 
Other real estate337 140 
   Total real estate10,656 6,769 
Consumer:
Equity loans and lines of credit619 425 
Consumer and installment738 472 
   Total consumer1,357 897 
Unallocated reserves484 36 
Total allowance for credit losses$14,657 $9,130 
 
    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 nine months ended September 30, 2020, the Company recorded a $4,975,000 provision for credit losses, compared to a $525,000 provision during the nine months ended September 30, 2019. 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. During the nine months ended September 30, 2020, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
    The Company had net recoveries totaling $552,000 for the nine months ended September 30, 2020, and $134,000 for the same period in 2019.
    Nonperforming loans, consisting entirely of nonaccrual loans, were $3,458,000 and $1,693,000 at September 30, 2020 and December 31, 2019, respectively, and $2,157,000 at September 30, 2019.  Nonperforming loans as a percentage of total loans were 0.31% at September 30, 2020 compared to 0.18% at December 31, 2019 and 0.23% at September 30, 2019.  The Company had no other real estate owned (OREO) at September 30, 2020 or December 31, 2019. The Company held no repossessed assets at September 30, 2020 or December 31, 2019.
    The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.07)% for the nine months ended September 30, 2020, and 0.02% for the same period in 2019.
    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 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
45

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 September 30, 2020, there were $37.6 million in classified loans of which $6.9 million related to agricultural real estate, $10.7 million to commercial and industrial loans, $7.2 million to agricultural production, $5.7 million to real estate owner occupied, $2.0 million in commercial real estate, $4.2 million to real estate construction and other land loans, and $1.0 million to consumer equity loans and lines of credit. This compares to $33.8 million in classified loans of which $7.3 million related to agricultural real estate, $13.2 million to commercial and industrial loans, $4.3 million to agricultural production, $4.7 million to real estate owner occupied, $1.1 million to commercial real estate, $1.5 million to consumer equity and lines of credit, and $1.6 million to real estate construction and other land loans as of December 31, 2019.
    As of September 30, 2020, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio.  However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to 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 $42,671,000 for the nine months period ended September 30, 2020 and $47,460,000 for the same period in 2019.
 
Non-Interest Income
 
Non-interest income is comprised of customer service charges, loan placement fees, net gains on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, FHLB dividends, and other income.  Non-interest income was $10,659,000 for the nine months ended September 30, 2020 compared to $11,296,000 for the same period in 2019.  The $637,000 or 5.64% decrease in non-interest income during the nine months ended September 30, 2020 was primarily driven by a decrease of $999,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $519,000, a decrease of $106,000 in interchange fees, and a decrease in FHLB dividends of $95,000, offset by an increase in loan placement fees of $898,000 and an increase of $193,000 in other income.
    During the nine months ended September 30, 2020, we realized a net gain on sales and calls of investment securities of $4,197,000 compared to $5,196,000 for the same period in 2019.  The net gains realized on sales and calls of investment securities in 2020 and 2019 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.
    Customer service charges decreased $519,000 or 25.01% to $1,556,000 for the first nine months of 2020 compared to $2,075,000 for the same period in 2019. Interchange fees decreased $106,000 to $995,000 the first nine months of 2020 compared to $1,101,000 for the same period in 2019. Loan placement fees increased $898,000 or 138.79% to $1,545,000 for the first nine months of 2020 compared to $647,000 for the same period in 2019. Other income increased $193,000 the first nine months of 2020 compared to the same period in 2019. The increase in other income resulted from a $463,000 gain related to the collection of life insurance proceeds.
    The Bank holds stock from the Federal Home Loan Bank (“FHLB”) of San Francisco in conjunction with our borrowing capacity and generally earns quarterly dividends.  We currently hold $5,595,000 in FHLB stock.  We received dividends totaling $253,000 in the nine months ended September 30, 2020, compared to $348,000 for the same period in 2019.
 

Non-Interest Expenses
 
Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, Internet banking, and data processing are the major categories of non-interest expenses.  Non-interest expenses increased $333,000 or 0.95% to $35,305,000 for the nine months ended September 30, 2020, compared to $34,972,000 for the nine months ended September 30, 2019.  The net increase for the first nine months of 2020 was primarily the result of increases in salaries and employee benefits of $920,000, professional services of $684,000, data processing expenses of $298,000, and regulatory assessments of $123,000, partially offset by decreases in occupancy and equipment expenses of $769,000, information technology of $192,000, other non-interest expenses of $479,000, credit card expenses of $114,000, amortization of software of $155,000, advertising of $83,000, and directors’ expenses of $84,000.
    The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO related gains and losses, and gains related to the collection of life insurance proceeds) was 64.52% for the nine months ended
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September 30, 2020 compared to 62.07% for the nine months ended September 30, 2019. The increase in the efficiency ratio was due to the growth in non-interest expense outpacing the growth in non-interest income.
    Salaries and employee benefits increased $920,000 or 4.57% to $21,053,000 for the first nine months of 2020 compared to $20,133,000 for the nine months ended September 30, 2019.  Full time equivalent employees were 271 for the nine months ended September 30, 2020, compared to 282 for the nine months ended September 30, 2019. The increase in salaries and employee benefits was the result of higher loan origination costs relating to the PPP loans processed during the second quarter of 2020 of approximately $913,000, offset by an increase of $1,379,000 in salaries and benefits (of which $525,000 related to the payment of a nonrecurring employee incentive), as well as an increase of $253,000 for directors’ and officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split dollar plans.
    Occupancy and equipment expense decreased $769,000 or 18.10% to $3,479,000 for the nine months ended September 30, 2020 compared to $4,248,000 for the nine months ended September 30, 2019. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at September 30, 2020 and at September 30, 2019. The Company closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a newly opened banking office in Gold River during the second quarter of 2019.
    Data processing expense increased to $1,484,000 for the nine months ended September 30, 2020 compared to $1,186,000 for the same period in 2019. Regulatory assessments increased to $340,000 for the nine months ended September 30, 2020 compared to $217,000 for the same period in 2019.  The assessment base for calculating the amount owed is average assets minus average tangible equity.
    Professional services increased by $684,000 in the first nine months of 2020 compared to the same period in 2019 due to higher legal expenses and consulting fees.  The following table shows significant components of other non-interest expense as a percentage of average assets.
For the Nine Months
Ended September 30,
20202019
(Dollars in thousands)Other Expense% Average
Assets
Other Expense% Average
Assets
Stationery/supplies$185 0.01 %$176 0.01 %
Amortization of software107 0.01 %262 0.02 %
Postage147 0.01 %165 0.01 %
Risk management expense126 0.01 %164 0.01 %
Shareholder services87 0.01 %77 0.01 %
Personnel other104 0.01 %117 0.01 %
Armored courier fees213 0.02 %210 0.02 %
Credit card expense— — %114 0.01 %
Telephone147 0.01 %287 0.02 %
Alarm73 0.01 %64 0.01 %
Donations103 0.01 %162 0.01 %
Education/training115 0.01 %107 0.01 %
Loan related expenses50 — %41 — %
General insurance125 0.01 %124 0.01 %
Travel and mileage expense101 0.01 %186 0.02 %
Operating losses86 0.01 %81 0.01 %
Other1,015 0.08 %926 0.08 %
Total other non-interest expense$2,784 0.21 %$3,263 0.28 %
 
Provision for Income Taxes
 
Our effective income tax rate was 26.39% for the nine months ended September 30, 2020 compared to 28.55% for the nine months ended September 30, 2019. The Company reported an income tax provision of $4,757,000 for the nine months ended September 30, 2020, compared to $6,790,000 for the nine months ended September 30, 2019.  The effective tax rate was affected by the large provision for credit losses, which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds, offset by 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
47

amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria. As of September 30, 2020 and December 31, 2019, there was no reserve for uncertain tax positions.

Net Income for the Third Quarter of 2020 Compared to the Third Quarter of 2019

Net income decreased to $4,344,000 for the quarter ended September 30, 2020 compared to $5,691,000 for the quarter ended September 30, 2019.  Basic earnings per share was $0.35 for the quarter ended September 30, 2020 compared to $0.43 for the same period in 2019. Diluted earnings per share was $0.35 for the quarter ended September 30, 2020 compared to $0.42 for the same period in 2019. Annualized ROE was 7.50% for the quarter ended September 30, 2020 compared to 9.77% for the quarter ended September 30, 2019.  Annualized ROA for the three months ended September 30, 2020 was 0.90% compared to 1.43% for the quarter ended September 30, 2019.
 
The decrease in net income during the third quarter of 2020 compared to the same period in 2019 is primarily due to a a decrease in net interest income before the provision for credit losses of $162,000, a decrease in total non-interest income of $1,651,000, an increase in provision for credit losses of $350,000, and an increase in non-interest expenses of $194,000, partially offset by a decrease in the provision for income taxes of $1,010,000. During the quarter ended September 30, 2020, the Company recorded a $600,000 provision for credit losses, compared to a $250,000 provision during the quarter ended September 30, 2019. Non-interest income decreased $1,651,000 or 44.36% to $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 in the same period in 2019, primarily due to a decrease in net realized gains on sales and calls of investment securities of $1,628,000. In addition, during the third quarter 2020 there was a decrease of $209,000 in service charge income , a decrease in other income of $148,000, and a decrease of $19,000 in interchange fees, offset by an increase in loan placement fees of $397,000, compared to the same period in 2019.

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.

48

CENTRAL VALLEY COMMUNITY BANCORP
SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES
 For the Three Months Ended
September 30, 2020
For the Three Months Ended
September 30, 2019
(Dollars in thousands)Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
ASSETS      
Interest-earning deposits in other banks$98,869 $26 0.11 %$14,025 $74 2.11 %
Securities
Taxable securities501,462 2,771 2.21 %457,582 3,462 3.03 %
Non-taxable securities (1)49,630 561 4.52 %14,645 194 5.30 %
Total investment securities551,092 3,332 2.42 %472,227 3,656 3.10 %
Total securities and interest-earning deposits649,961 3,358 2.07 %486,252 3,730 3.07 %
Loans (2) (3)1,120,656 13,190 4.68 %946,136 13,238 5.55 %
Total interest-earning assets1,770,617 $16,548 3.72 %1,432,388 $16,968 4.70 %
Allowance for credit losses(14,261)  (9,423)  
Non-accrual loans2,660   2,537   
Cash and due from banks26,993   25,369   
Bank premises and equipment7,327   7,835   
Other assets135,258   129,661   
Total average assets$1,928,594   $1,588,367   
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Interest-bearing liabilities:      
Savings and NOW accounts$457,848 $89 0.08 %$374,469 $175 0.19 %
Money market accounts307,832 136 0.18 %269,167 195 0.29 %
Time certificates of deposit89,353 138 0.61 %96,129 196 0.81 %
Total interest-bearing deposits855,033 363 0.17 %739,765 566 0.30 %
Other borrowed funds5,155 25 1.94 %22,568 156 2.76 %
Total interest-bearing liabilities860,188 $388 0.18 %762,333 $722 0.38 %
Non-interest bearing demand deposits807,052   563,498   
Other liabilities29,698   29,459   
Shareholders’ equity231,656   233,077   
Total average liabilities and shareholders’ equity$1,928,594   $1,588,367   
Interest income and rate earned on average earning assets $16,548 3.72 % $16,968 4.70 %
Interest expense and interest cost related to average interest-bearing liabilities 388 0.18 % 722 0.38 %
Net interest income and net interest margin (4) $16,160 3.63 % $16,246 4.50 %
(1)Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $118 and $41 in 2020 and 2019, respectively.
(2)Loan interest income includes loan fees (costs) of $658 in 2020 and $72 in 2019.
(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.

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.
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Changes in Volume/RateFor the Three Months Ended September 30, 2020 and 2019
(In thousands)VolumeRateNet
Increase (decrease) due to changes in:   
Interest income:   
Interest-earning deposits in other banks$447 $(495)$(48)
Investment securities:
Taxable331 (1,022)(691)
Non-taxable (1)463 (96)367 
Total investment securities794 (1,118)(324)
Federal funds sold— — — 
Loans2,441 (2,489)(48)
Total earning assets (1)3,682 (4,102)(420)
Interest expense:   
Deposits:   
Savings, NOW and MMA66 (211)(145)
Time certificate of deposits(14)(44)(58)
Total interest-bearing deposits52 (255)(203)
Other borrowed funds(121)(10)(131)
Total interest-bearing liabilities(69)(265)(334)
Net interest income (1)$3,751 $(3,837)$(86)
(1)    Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans decreased $48,000 or 0.36% to $13,190,000 for the third quarter of 2020 compared to $13,238,000 for the same period in 2019.  Average total loans, including nonaccrual loans, for the third quarter of 2020 increased $174,643,000 or 18.41% to $1,123,316,000 compared to $948,673,000 for the same period in 2019.  Yield on the loan portfolio, excluding nonaccrual loans, was 4.68% and 5.55% for the third quarters ending September 30, 2020 and 2019, respectively.  Net interest income during the third quarters of 2020 and 2019 benefited by approximately $52,000 and $250,000, 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 $172,000 and $299,000 during the quarters ended September 30, 2020 and 2019, respectively.
Income from investments represents 20.20% of net interest income for the third quarter of 2020 compared to 22.76% for the same quarter in 2019. 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) decreased $448,000 in the third quarter of 2020 to $3,241,000 compared to $3,689,000, for the same period in 2019.  The yield on average total investments decreased 100 basis points to 2.07% on a fully tax equivalent basis for the third quarter of 2020 compared to 3.07% on a fully tax equivalent basis for the third quarter of 2019. Average total investments and interest bearing deposits in other banks for the third quarter of 2020 increased $163,709,000 or 33.67% to $649,961,000 compared to $486,252,000 for the third quarter of 2019.
Total interest income for the third quarter of 2020 decreased $496,000 or 2.93% to $16,431,000 compared to $16,927,000 for the third quarter ended September 30, 2019.  The yield on interest earning assets decreased to 3.72% on a fully tax equivalent basis for the third quarter ended September 30, 2020 from 4.70% on a fully tax equivalent basis for the third quarter ended September 30, 2019.  Average interest earning assets increased to $1,770,617,000 for the third quarter ended September 30, 2020 compared to $1,432,388,000 for the third quarter ended September 30, 2019.  The $338,229,000 increase in average earning assets was attributed to the $174,520,000 increase in average loans, offset by the $163,709,000 increase in total investments.
Interest expense on deposits for the quarter ended September 30, 2020 decreased $203,000 or 35.87% to $363,000 compared to $566,000 for the quarter ended September 30, 2019.  The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.09% and 0.17% for the quarters ended September 30, 2020 and 2019, respectively.  Average interest bearing deposits increased 15.58% or $115,268,000 in the third quarter of 2020 compared to the same period in 2019.  Average interest-bearing deposits were $855,033,000 for the quarter ended September 30, 2020, with an effective rate paid of 0.17%, compared to $739,765,000 for the same period in 2019, with an effective rate paid of 0.30%.
Average other borrowed funds totaled $5,155,000 for the quarter ended September 30, 2020, with an effective rate of 1.94% for the quarter ended September 30, 2020 compared to $22,568,000 and 2.76% for the quarter ended September 30,
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2019.  As a result, interest expense on borrowed funds decreased $131,000 to $25,000 for the quarter ended September 30, 2020, from $156,000 for the quarter ended September 30, 2019.  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 0.18% and 0.38% for the quarters ended September 30, 2020 and 2019.  The cost of total deposits was 0.09% and 0.17% for the quarters ended September 30, 2020 and 2019.  Average non-interest bearing demand deposits increased 43.22% to $807,052,000 for the quarter ended September 30, 2020 compared to $563,498,000 for the quarter ended September 30, 2019.  The ratio of average non-interest bearing demand deposits to average total deposits was 48.56% in the third quarter of 2020 compared to 43.24% for the same period in 2019.

Net Interest Income before Provision for Credit Losses
 
Net interest income before provision for credit losses for the quarter ended September 30, 2020, decreased $162,000 or 1.00% to $16,043,000 compared to $16,205,000 for the quarter ended September 30, 2019.  The decrease was due to asset mix changes, and an increase in average interest-bearing liabilities, partially offset by the increase in average interest earning assets. Average interest earning assets were $1,770,617,000 for the quarter ended September 30, 2020, with a net interest margin (fully tax equivalent basis) of 3.63% compared to $1,432,388,000 with a net interest margin (fully tax equivalent basis) of 4.50% for the quarter ended September 30, 2019.  The $338,229,000 increase in average earning assets can be attributed to the $174,643,000 increase in loans, and the $163,709,000 increase in total investments.  Average interest bearing liabilities increased 12.84% to $860,188,000 for the quarter ended September 30, 2020 compared to $762,333,000 for the same period in 2019.
 
Provision for Credit Losses

During the quarter ended September 30, 2020, the Company recorded a $600,000 provision for credit losses, compared to $250,000 provision during the quarter ended September 30, 2019.  The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.04)% for the quarter ended September 30, 2020 compared to 0.07% for the quarter ended September 30, 2019.  During the quarter ended September 30, 2020, the Company had net recoveries totaling $120,000 compared to net charge-offs of $160,000 for the same period in 2019. Gross recoveries of previously charged off loan balances during the quarters ended September 30, 2020 and 2019 were $165,000 and $55,000, respectively. Gross charge-offs during the quarters ended September 30, 2020 and 2019 were $45,000 and $215,000, 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 $2,071,000 for the quarter ended September 30, 2020 compared to $3,722,000 for the same period ended September 30, 2019.  The $1,651,000 or 44.36% decrease in non-interest income for the quarter ended September 30, 2020 was primarily due to recording a $1,628,000 decrease in net realized gains on sales and calls of investment securities, a $209,000 decrease in service charge income, a $148,000 decrease in other income, a $38,000 decrease in Federal Home Loan Bank dividends, a $19,000 decrease in interchange fees, and a $6,000 decrease in appreciation in cash surrender value of bank-owned life insurance, partially offset by a $397,000 increase in loan placement fees.
Customer service charges decreased $209,000 or 31.10% to $463,000 for the third quarter of 2020 compared to $672,000 for the same period in 2019, due primarily to a decrease in overdraft and analysis fee income.  Other income decreased $148,000 or 36.10% to $262,000 for the third quarter of 2020 compared to $410,000 for the same period in 2019. 
 
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 $194,000 or 1.68% to $11,728,000 for the quarter ended September 30, 2020 compared to $11,534,000 for the same period in 2019. The net increase quarter over quarter was a result of increases in professional fees of $311,000, increases in data processing expenses of $204,000, and increases in regulatory assessments of $216,000. During the quarter ended September 30, 2020, nonrecurring expenses included $292,000 related to PPP loan forgiveness processing, and $46,000 related to additional accruals for salary continuation plans due to decreases in interest rates. The increases were partially offset by the decreases in occupancy and equipment of $121,000, decreases in salaries and employee benefits of $2,000, decreases in directors’ expenses of $44,000, decreases in mileage and travel of $51,000, decreases in advertising expenses of $23,000, decreases in Internet banking of $48,000, decreases in operating losses of $20,000, and decreases of $20,000 in information technology expenses.
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The Company’s efficiency ratio increased to 63.58% for the third quarter of 2020 compared to 62.07% for the third quarter of 2019. The increase in the efficiency ratio is due to the growth in non-interest expense outpacing the growth in operating revenue.
Salaries and employee benefits decreased $2,000 or 0.03% to $6,729,000 for the third quarter of 2020 compared to $6,731,000 for the third quarter of 2019.  The number of full time equivalent (FTE) employees as of September 30, 2020, December 31, 2019 and September 30, 2019 was 269, 281, and 272, respectively.
Other non-interest expenses included decreases of $23,000 in risk management expense, $3,000 in armored courier expenses, $70,000 in amortization of software, $3,000 in education/training expenses, $2,000 in postage, $19,000 in donations, 127,000 in telephone expenses, $20,000 in operating losses, $3,000 in personnel expenses, and $6,000 in stationary and supplies, partially offset by an increase of $18,000 in loan related expenses and $1,000 in check printing expense, as compared to the same period in 2019.

Provision for Income Taxes
 
The effective income tax rate was 24.92% for the third quarter of 2020 compared to 30.11% for the same period in 2019.  Provision for income taxes totaled $1,442,000 and $2,452,000 for the quarters ended September 30, 2020 and 2019, respectively.  The effective tax rate was affected by the large provision for credit losses which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds.

FINANCIAL CONDITION
 
Summary of Changes in Consolidated Balance Sheets
 
September 30, 2020 compared to December 31, 2019

Total assets were $1,950,560,000 as of September 30, 2020, compared to $1,596,755,000 at December 31, 2019, an increase of 22.16% or $353,805,000.  Total gross loans were $1,109,889,000 at September 30, 2020, compared to $943,380,000 at December 31, 2019, an increase of $166,509,000 or 17.65%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 36.81% or $186,475,000 to $693,072,000 at September 30, 2020 compared to $506,597,000 at December 31, 2019.  Total deposits increased 26.10% or $347,929,000 to $1,681,214,000 at September 30, 2020, compared to $1,333,285,000 at December 31, 2019.  Shareholders’ equity increased $7,652,000 or 3.35% to $235,780,000 at September 30, 2020, compared to $228,128,000 at December 31, 2019. The increase in shareholders’ equity was driven by retention of earnings, net of dividends paid, and an increase in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI), offset by the decrease in common stock as a result of the share repurchase program. Accrued interest payable and other liabilities was $28,411,000 at September 30, 2020, compared to $30,187,000 at December 31, 2019, a decrease of $1,776,000.

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 September 30, 2020, investment securities with a fair value of $157,758,000, or 24.97% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by management.  Our policies are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and
52

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 September 30, 2020 was 66.02% compared to 70.76% at December 31, 2019.  The loan-to-deposit ratio of our peers was 82.00% at December 31, 2019.  The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 36.81% or $186,475,000 to $693,072,000 at September 30, 2020, from $506,597,000 at December 31, 2019.  The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $16,279,000 at September 30, 2020, compared to a net unrealized gain of $3,999,000 at December 31, 2019.
    The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. 
    The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations.  The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the original yield expected at time of purchase.
    Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2020 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies. 
     For those 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 nine months ended September 30, 2020. There were no OTTI losses recorded during the nine months ended September 30, 2019.
    At September 30, 2020, the Company held 11 U.S. Government agency securities of which five 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 September 30, 2020.
    At September 30, 2020, the Company held 87 obligations of states and political subdivision securities of which 10 were in a loss position for less than 12 months. At September 30, 2020, the Company held seven corporate debt securities of which two were in a loss position for less than twelve months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities and corporate debt securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
    At September 30, 2020, the Company held 118 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which twelve were in a loss position for less than 12 months and 17 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 September 30, 2020.
    At September 30, 2020, the Company had a total of 24 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of $54,072,000 and a net unrealized gain of approximately $1,146,000.  Four of the PLMABS securities were in a loss position for less than 12 months and none have been in loss for more than 12 months at September 30, 2020. 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
53

be other-than-temporarily impaired at September 30, 2020. 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 $166,509,000 or 17.65% to $1,109,889,000 as of September 30, 2020, compared to $943,380,000 as of December 31, 2019.

    The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:
Loan Type (dollars in thousands)September 30, 2020% of Total
Loans
December 31, 2019% of Total
Loans
Commercial:    
Commercial and industrial$296,338 26.7 %$102,541 10.9 %
Agricultural production22,902 2.1 %23,159 2.6 %
Total commercial319,240 28.8 %125,700 13.5 %
Real estate:    
Owner occupied195,189 17.6 %197,946 21.0 %
Real estate construction and other land loans72,612 6.5 %73,718 7.8 %
Commercial real estate318,766 28.7 %329,333 34.9 %
Agricultural real estate75,747 6.7 %76,304 8.1 %
Other real estate34,883 3.1 %31,241 3.3 %
Total real estate697,197 62.6 %708,542 75.1 %
Consumer:    
Equity loans and lines of credit58,614 5.3 %64,841 6.9 %
Consumer and installment38,627 3.3 %42,782 4.5 %
Total consumer97,241 8.6 %107,623 11.4 %
Net deferred origination costs(3,789) 1,515  
Total gross loans1,109,889 100.0 %943,380 100.0 %
Allowance for credit losses(14,657) (9,130) 
Total loans$1,095,232  $934,250  

    As of September 30, 2020, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.7% of total loans.  This level of concentration of commercial loans and loans collateralized by real estate is consistent with 95.5% of total loans at December 31, 2019.  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 does not engage in any sub-prime mortgage lending activities.
    At September 30, 2020, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $137,177,000, of which $2,646,000 were commercial loans, $118,843,000 were real estate loans, and $15,688,000 were consumer loans. At December 31, 2019, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $152,735,000, of which $4,009,000 were commercial loans, $130,656,000 were real estate loans, and $18,070,000 were consumer loans.
    We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.  Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of September 30, 2020, gross loans included $210,057,000 in PPP loans which are fully guaranteed by the SBA.
    The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.
 
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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 September 30, 2020, total nonperforming assets totaled $3,458,000, or 0.18% of total assets, compared to $1,693,000, or 0.11% of total assets at December 31, 2019.  Total nonperforming assets at September 30, 2020, included nonaccrual loans totaling $3,458,000, no OREO, and no other repossessed assets. Nonperforming assets at December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO, and no other repossessed assets. At September 30, 2020, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans compared to one TDR totaling $322,000 at December 31, 2019.
    A summary of nonperforming loans at September 30, 2020 and December 31, 2019 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at September 30, 2020 or at December 31, 2019.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

Composition of Nonperforming Loans
(In thousands)September 30, 2020December 31, 2019
Nonaccrual loans:  
Commercial and industrial$715 $187 
Owner occupied real estate380 416 
Agricultural real estate— 321 
Commercial real estate507 381 
Equity loans and lines of credit— 66 
Troubled debt restructured loans (non-accruing):  
Equity loans and lines of credit— 322 
Total nonaccrual3,458 1,693 
Accruing loans past due 90 days or more— — 
Total nonperforming loans$3,458 $1,693 
Ratio of nonperforming loans to total loans0.31 %0.18 %
Ratio of allowance for credit losses to nonperforming loans423.9 %539.3 %
Loans considered to be impaired$12,686 $3,734 
Related allowance for credit losses on impaired loans$739 $40 

    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 September 30, 2020 and December 31, 2019, we had impaired loans totaling $12,686,000 and $3,734,000, respectively.  For collateral dependent loans secured by real estate, we obtain external valuations which are updated at least annually to determine the fair value of the collateral, and we record a charge-off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral, unless there is an extenuating circumstance that may positively affect the amount collected. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.
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    The following table provides a reconciliation of the change in nonaccrual loans for the first nine months of 2020.
(In thousands)Balance, December 31, 2019Additions
 to
Nonaccrual
Loans
Net Pay
Downs
Transfers
to
Foreclosed
Collateral and
 OREO
Returns to
Accrual
Status
Charge-
Offs
Balance, September 30, 2020
Nonaccrual loans:       
Commercial and industrial$187 $738 $(46)$— $(164)$— $715 
Real estate797 515 (425)— — — 887 
Real estate construction and other land loans— 1,769 (5)— — — 1,764 
Agricultural real estate321 — (321)— — — — 
Equity loans and lines of credit66 — (24)— (42)— — 
Consumer— 95 (3)— — — 92 
Restructured loans (non-accruing):       
Equity loans and lines of credit322 — (322)— — — — 
Total nonaccrual$1,693 $3,117 $(1,146)$— $(206)$— $3,458 
 
    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 September 30, 2020 or December 31, 2019. The Company held no repossessed assets at September 30, 2020 or December 31, 2019.

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 47 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 47 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
56

monitoring process includes the use of asset classifications to segregate the assets, largely loans, into various risk categories.  The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets.  In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual.
    The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:
For the Nine Months
Ended September 30,
For the Year Ended
December 31,
For the Nine Months
Ended September 30,
(Dollars in thousands)202020192019
Balance, beginning of period$9,130 $9,104 $9,104 
Provision for credit losses4,975 1,025 525 
Losses charged to allowance(169)(1,196)(280)
Recoveries721 197 146 
Balance, end of period$14,657 $9,130 $9,495 
Allowance for credit losses to total loans at end of period1.32 %0.97 %1.01 %
 
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. We adjusted the economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic. 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 September 30, 2020, the balance in the allowance for credit losses (ALLL) was $14,657,000 compared to $9,130,000 as of December 31, 2019.  The increase is attributed to the additional provision of $4,975,000 during the nine months ended September 30, 2020.  The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $317,461,000 as of September 30, 2020, compared to $291,182,000 as of December 31, 2019.  At September 30, 2020 and December 31, 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes.  While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes.
    As of September 30, 2020, the ALLL was 1.32% of total gross loans compared to 0.97% as of December 31, 2019.  Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $137,177,000 at September 30, 2020 and $152,735,000 at December 31, 2019. Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.51% and 1.15% at September 30, 2020 and December 31, 2019, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.84% and 1.16%, respectively. As of September 30, 2020, gross loans included $210,057,000 related to PPP loans which are fully guaranteed by the SBA. Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.92% and 1.15% as of September 30, 2020 and December 31, 2019, respectively. The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at September 30, 2020. 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 nine months ended September 30, 2020 increased through organic growth and through participation in the PPP loan program.  Management believes that the change in the allowance for credit losses to total loans ratio is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values.
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    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 September 30, 2020. 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.
September 30, 2020December 31, 2019September 30, 2019
(Dollars in thousands)Balance% to Total LoansBalance% to Total LoansBalance% to Total Loans
Impaired loans with specific reserves$4,450 0.40 %$1,504 0.16 %$1,342 0.14 %
Past due loans256 0.02 %784 0.08 %925 0.10 %
Nonaccrual loans3,458 0.31 %1,693 0.18 %2,157 0.23 %

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 September 30, 2020, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability.  A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. Goodwill is assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Based upon this assessment, it was determined that it was more likely than not that the fair value of the Company was more than its carrying value and therefore no quantitative impairment test was required. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the three and nine months ended September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.
    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 September 30, 2020 was $1,356,000, net of $2,396,000 in accumulated amortization expense.  The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 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 nine months of 2020.  Amortization expense recognized was $521,000 and $521,000 for the nine months ended September 30, 2020 and September 30, 2019, respectively.
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    The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands):
Years EndedEstimated Core Deposit Intangible Amortization
2020$174 
2021661 
2022455 
202366 
$1,356 
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 $347,929,000 or 26.10% to $1,681,214,000 as of September 30, 2020, compared to $1,333,285,000 as of December 31, 2019, primarily due to recurring seasonal patterns.  Interest-bearing deposits increased $137,663,000 or 18.64% to $876,321,000 as of September 30, 2020, compared to $738,658,000 as of December 31, 2019.  Non-interest bearing deposits increased $210,266,000 or 35.36% to $804,893,000 as of September 30, 2020, compared to $594,627,000 as of December 31, 2019.  Average non-interest bearing deposits to average total deposits was 47.24% for the nine months ended September 30, 2020 compared to 42.60% for the same period in 2019. The Company’s deposit balances for the nine months ended September 30, 2020 increased through organic growth, PPP loan proceeds retained in customer deposit accounts, and deferred tax payments.
    The composition of the deposits and average interest rates paid at September 30, 2020 and December 31, 2019 is summarized in the table below.
(Dollars in thousands)September 30, 2020% of
Total
Deposits
Average Effective
Rate
December 31, 2019% of
Total
Deposits
Average Effective
Rate
NOW accounts$318,061 18.9 %0.12 %$266,048 20.0 %0.21 %
MMA accounts314,543 18.7 %0.19 %266,609 20.0 %0.24 %
Time deposits88,037 5.2 %0.71 %93,730 7.0 %0.73 %
Savings deposits155,680 9.3 %0.02 %112,271 8.4 %0.02 %
Total interest-bearing876,321 52.1 %0.19 %738,658 55.4 %0.26 %
Non-interest bearing804,893 47.9 %594,627 44.6 %
Total deposits$1,681,214 100.0 %$1,333,285 100.0 %
Other Borrowings
 
As of September 30, 2020 and December 31, 2019, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to the Liquidity section below for further discussion of FHLB advances.

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 $235,780,000 at September 30, 2020, compared to $228,128,000 at December 31, 2019.  The increase from December 31, 2019 in shareholders’ equity is the result of an increase in retained earnings from net income of $13,268,000, an increase in accumulated other comprehensive income (AOCI) of $8,649,000, the exercise of stock options of $277,000, stock issued under the employee stock purchase plan of $162,000, the effect of share based compensation expense
59

of $362,000, and stock awarded to employees of $141,000, offset by common stock cash dividends of $4,155,000 and stock repurchases of $11,052,000.
    On July 17, 2019, the Board of Directors of the Company approved the adoption of a program to effect repurchases of the Company’s common stock with the intent to purchase up to $10 million worth of the Company’s outstanding common stock, or approximately 479,616 shares.  During the nine months ended September 30, 2020, the Company repurchased and retired 49,269 shares related to the July 17, 2019 stock repurchase plan at an approximate cost of $1,052,000, completing the plan. During the year ended December 31, 2019, the Company repurchased and retired a total of 431,444 shares at an approximate cost of $8,948,000. The stock repurchase program expired earlier than the set expiration date of July 17, 2020.
    On January 15, 2020, the Board of Directors of the Company approved the adoption of a new program to effect repurchases of the Company’s common stock with the intent to purchase up to $10,000,000 of the Company’s outstanding common stock, or approximately 487,805 shares. During the nine months ended September 30, 2020, the Company repurchased and retired a total of 572,110 shares at an approximate cost of $17.45 per share, completing the stock repurchase plan.
    During the first nine months of 2020, the Company declared and paid $4,155,000 in cash dividends ($0.33 per common share) to holders of common stock. The Company declared and paid a total of $5,805,000 in cash dividends ($0.43 per common share) to holders of common stock during the year ended December 31, 2019.
    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 September 30, 2020 and December 31, 2019.
(Dollars in thousands)Actual RatioMinimum regulatory requirement (1)
September 30, 2020AmountRatioAmountRatio
Tier 1 Leverage Ratio$172,417 9.26 %N/AN/A
Common Equity Tier 1 Ratio (CET 1)$167,417 14.23 %N/AN/A
Tier 1 Risk-Based Capital Ratio$172,417 14.65 %N/AN/A
Total Risk-Based Capital Ratio$187,131 15.90 %N/AN/A
December 31, 2019
Tier 1 Leverage Ratio$172,945 11.38 %N/AN/A
Common Equity Tier 1 Ratio (CET 1)$167,945 14.55 %N/AN/A
Tier 1 Risk-Based Capital Ratio$172,945 14.98 %N/AN/A
Total Risk-Based Capital Ratio$182,325 15.79 %N/AN/A
(1) Effective August 30, 2018, the minimum regulatory requirements were eliminated for bank holding companies with less than $3 billion of assets.
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The following table presents the Bank’s regulatory capital ratios as of September 30, 2020 and December 31, 2019.
(Dollars in thousands)Actual RatioMinimum regulatory requirement (1)
Minimum requirement for Well-Capitalized
 Institution
September 30, 2020AmountRatioAmountRatioAmountRatio
Tier 1 Leverage Ratio$171,257 9.20 %$74,485 4.00 %$93,106 5.00 %
Common Equity Tier 1 Ratio (CET 1)$171,257 14.56 %$52,949 4.50 %$76,482 6.50 %
Tier 1 Risk-Based Capital Ratio$171,257 14.56 %$70,599 6.00 %$94,132 8.00 %
Total Risk-Based Capital Ratio$185,965 15.81 %$94,132 8.00 %$117,665 10.00 %
December 31, 2019
Tier 1 Leverage Ratio$171,332 11.27 %$60,810 4.00 %$76,012 5.00 %
Common Equity Tier 1 Ratio (CET 1)$171,332 14.85 %$51,930 7.00 %$75,010 6.50 %
Tier 1 Risk-Based Capital Ratio$171,332 14.85 %$69,240 8.50 %$92,320 8.00 %
Total Risk-Based Capital Ratio$180,712 15.66 %$92,320 10.50 %$115,400 10.00 %
(1) The 2019 minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%.
The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At September 30, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes; (ii) in the event the Trust is deemed an investment company; or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.  Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of September 30, 2020, the rate was 1.88%. 

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 September 30, 2020, the Company had unpledged securities totaling $481,751,000 available as a secondary source of liquidity and total cash and cash equivalents of $87,010,000.  Cash and cash equivalents at September 30, 2020 increased 65.50% compared to $52,574,000 at December 31, 2019.  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.
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    As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks.  At September 30, 2020, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $241,964,000 in unused FHLB secured advances and a $14,196,000 secured credit line at the Federal Reserve Bank.  We believe our liquidity sources to be stable and adequate.  At September 30, 2020, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.
    The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at September 30, 2020 and December 31, 2019:
Credit Lines (In thousands)September 30, 2020December 31, 2019
Unsecured Credit Lines  
(interest rate varies with market):  
Credit limit$110,000 $70,000 
Balance outstanding$— $— 
Federal Home Loan Bank  
(interest rate at prevailing interest rate):  
Credit limit$241,964 $304,987 
Balance outstanding$— $— 
Collateral pledged$432,101 $446,742 
Fair value of collateral$385,188 $410,788 
Federal Reserve Bank  
(interest rate at prevailing discount interest rate):  
Credit limit$14,196 $4,931 
Balance outstanding$— $— 
Collateral pledged$14,402 $5,065 
Fair value of collateral$14,593 $5,036 
 
    The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by California statutes and the regulations.
 
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 7of the Notes to Consolidated Financial Statements included herein and Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2019 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 10 of the Notes to Consolidated Financial Statements in the Company’s 2019 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, 2019.

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
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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 September 30, 2020 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 contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10- K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
 
The Impact of the COVID-19 Pandemic may have a material adverse affect on our business and financial performance and financial condition.

The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations. In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.
    As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

demand for our products and services may decline, making it difficult to grow assets and income;
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
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our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

    Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
    Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

As a participating lender in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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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 nine months ended September 30, 2020 follows.
PeriodTotal number of shares purchasedAverage price paid per shareTotal 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)
01/1/2020 - 01/31/2020167,223 $20.05 167,223 $7,694 
02/1/2020 - 02/28/2020211,233 $19.31 211,233 $3,610 
03/1/2020 - 03/31/2020242,923 $14.83 242,923 $— 
Total621,379 $17.76 621,379 
(1) The Company approved a stock repurchase program effective July 17, 2019 with the intent to purchase up to $10,000,000 of the Company’s outstanding common stock, or approximately 479,616 shares. During the nine months ended September 30, 2020, the Company repurchased and retired a total of 49,269 shares at an approximate cost of $1,052,000, completing the stock repurchase plan. During the year ended December 31, 2019, the Company repurchased and retired a total of 431,444 shares at an approximate cost of $8,948,000.
(2) The Company approved a stock repurchase program effective January 15, 2020 with the intent to purchase an additional $10,000,000 of the Company’s outstanding common stock, or approximately 487,805 shares. During the nine months ended September 30, 2020, the Company repurchased and retired a total of 572,110 shares at an approximate cost of $17.45 per share, completing the stock repurchase plan.
(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.

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ITEM 6 EXHIBITS
 
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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: November 4, 2020/s/ James M. Ford
 James M. Ford
 President and Chief Executive Officer
  
Date: November 4, 2020/s/ David A. Kinross
 David A. Kinross
 Executive Vice President and Chief Financial Officer
 

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