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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-K 
☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2020 
OR
☐  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)
CALIFORNIA77-0539125
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
7100 N. Financial Dr., Suite 101, Fresno, CA
93720
(Address of principal executive offices)(Zip Code)
 559-298-1775
(Registrant’s telephone number, including area code)
[None]
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on which Registered
Common Stock, no par valueCVCYNASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:  None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐ No ☒ 
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 preceding 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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 x 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 reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
  ☐
Accelerated filer
☐
Non-accelerated filer
  ☒
Smaller reporting company
 ☒
Emerging reporting company
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
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 June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $164,349,000 based on the price at which the stock was last sold on June 30, 2020. 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, No Par ValueOutstanding at March 5, 2021
12,524,259 shares
 DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2021 Annual Meeting of Shareholders to be held on May 19, 2021 are incorporated by reference into Part III of this Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2020.

Table of Contents
TABLE OF CONTENTS
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 

 

Table of Contents
PART I

ITEM 1 -DESCRIPTION OF BUSINESS
 
General
 
Central Valley Community Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Company”). The Company was incorporated on February 7, 2000 as a California corporation, for the purpose of becoming the holding company for Central Valley Community Bank (the “Bank”), formerly known as Clovis Community Bank, a California state chartered bank, through a corporate reorganization.  In the reorganization, the Bank became the wholly-owned subsidiary of the Company, and the shareholders of the Bank became the shareholders of the Company.  The Company made a decision in the first half of 2002 to change the name of its one subsidiary, Clovis Community Bank, to Central Valley Community Bank.
At December 31, 2020, the Bank was our only banking subsidiary.  The Bank is a multi-community bank that offers a full range of commercial banking services to small and medium size businesses, and their owners, managers and employees in the central valley area of California.  We serve nine contiguous counties in California’s central valley including Fresno County, El Dorado County, Madera County, Merced County, Placer County, Sacramento County, San Joaquin County, Stanislaus County, and Tulare County, and their surrounding areas.  We do not currently conduct any operations other than through the Bank.  Unless the context otherwise requires, references to “us,” “we,” or “our” refer to the Company and the Bank on a consolidated basis.  At December 31, 2020, we had consolidated total assets of approximately $2,004,096,000.  See Items 7 and 8, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Financial Statements.
The Company is regulated by the Board of Governors of the Federal Reserve. The Bank is regulated by the California Department of Financial Protection and Innovation (“DFPI”) and its primary Federal regulator is the Federal Deposit Insurance Corporation (“FDIC”).
As of March 1, 2021, we had a total of 281 employees and 267 full time equivalent employees, including the employees of the Bank.
 
The Bank
 
The Bank was organized in 1979 and commenced business as a California state chartered bank in 1980.  The deposits of the Bank are insured by the FDIC up to applicable limits.  The Bank is not a member of the Federal Reserve System.
The Bank operates 20 full-service banking offices in Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia. The Bank conducts a commercial banking business, which includes accepting demand, savings and time deposits and making commercial, real estate and consumer loans.  It also provides domestic and international wire transfer services and provides safe deposit boxes and other customary banking services.  The Bank also offers Internet banking that consists of inquiry, account status, bill paying, account transfers, and cash management.  The Bank does not offer trust services or international banking services and does not currently plan to do so in the near future.  The Bank has a Real Estate Division, an Agribusiness Center, and an SBA Lending Division.  The Real Estate Division processes or assists in processing the majority of the Bank’s real estate related transactions, including interim construction loans for single family residences and commercial buildings.  We offer permanent single family residential loans through our mortgage broker services.  Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020 compared to 3.31% in 2019 based on FDIC deposit market share information published as of June 30, 2020. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2020 and 2019. We have a diversified loan portfolio. At December 31, 2020, we had total loans of $1,102,347,000.  Total commercial and industrial loans outstanding were $273,994,000 which included $192,916,000 in PPP loans , total agricultural land and production loans outstanding were $21,971,000, total real estate construction and other land loans outstanding were $55,419,000; total other real estate loans outstanding were $660,705,000, total equity loans and lines of credit were $55,634,000 and total consumer installment loans outstanding were $37,236,000.  Our loans are collateralized by real estate, listed securities, savings and time deposits, automobiles, inventory, accounts receivable, machinery and equipment.
In addition to acquisitions, we have experienced organic growth by expanding our branch network. Opening new branches provides us with opportunities to expand our loan and deposit base; however, based on past experience, management expects these new offices may initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.  Management of the Bank analyzes its branch network on an ongoing basis to determine whether to open new branches or consolidate or eliminate existing branches in the future. In 2019, we consolidated two banking offices into branches currently serving the same communities - one in Fair Oaks and one in Rancho Cordova. The Bank opened a full-service branch in Gold River, California in June 2019.
3
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The Bank has provided investment services since 1995 through a third party provider and in November 2017, the Bank ended its relationship with Investment Centers of America and entered into a new agreement with Raymond James Financial Services, Inc. to provide Bank customers with access to investment services.
No individual or single group of related accounts is considered material in relation to the Bank’s assets or deposits, or in relation to our overall business.  We attract deposits from individual and commercial customers.  No single customer or group of related customers accounts for a material portion of our deposits such that the loss of any one or more would have a material adverse effect on our business. However, at December 31, 2020 approximately 69.8% of our loan portfolio held for investment consisted of loans secured by real estate, including construction loans, equity loans and lines of credit and commercial loans secured by real estate and 26.9% consisted of commercial loans.  See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.  Currently, our business activities are primarily concentrated in Fresno, El Dorado, Madera, Merced, Placer, Sacramento, San Joaquin, Stanislaus, and Tulare Counties in California.  Consequently, our results of operations and financial condition are dependent upon the general economic trends in our market area and, in particular, the residential and commercial real estate markets.  Further, our concentration of operations in this area of California exposes us to greater risk than other banking companies with a wider geographic base.


Competition

The banking business in California generally, and our primary service area specifically, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area.  Among the advantages such major banks have over us is their ability to finance wide-ranging advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand.  Major banks offer certain services such as international banking and trust services which we do not offer directly but which we usually can offer indirectly through correspondent institutions.  To compete effectively, we rely substantially on local promotional activity, personal contacts by our officers, directors and employees, referrals by our shareholders, personalized service and our reputation in the communities we serve.
Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020 compared to 3.31% in 2019 based on FDIC deposit market share information published as of June 2020. In Fresno and Madera Counties, in addition to our 10 full-service branch locations serving the Bank’s primary service areas, as of June 30, 2020 there were 129 operating banking and credit union offices in our primary service area, which consists of the cities of Clovis, Fresno, Kerman, Oakhurst, Madera, and Prather, California. Prather does not contain any banking offices other than our office. In San Joaquin County, in addition to our two full service branch locations, as of June 30, 2020 there were 99 operating banking and credit union offices. In Tulare County, in addition to our three branches there were 52 operating banking and credit union offices in our primary service area. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2020 and 2019.  In Merced County, in addition to our one branch, as of June 30, 2020 there were 28 operating banking and credit union offices in our primary service area. In Sacramento County, in addition to our two branches, as of June 30, 2020 there were 202 operating banking and credit union offices in our primary service area.  In Stanislaus County, in addition to our one branch, there were 82 operating banking and credit union offices in our primary service area. In El Dorado County, in addition to our one branch, there were 38 operating banking and credit union offices in our primary service area. In Placer County, in addition to our one branch, there were 86 operating banking and credit union offices in our primary service area. Business activity in our primary service area is oriented toward light industry, small business and agriculture.
By virtue of their greater total capitalization, larger banks have substantially higher lending limits than we do.  Legal lending limits to an individual customer are limited to a percentage of our total capital. As of December 31, 2020, the Bank’s legal lending limits to individual customers were $28,528,000 for unsecured loans and $47,546,000 for unsecured and secured loans combined.
For borrowers desiring loans in excess of the Bank’s lending limits, the Bank seeks to make such loans on a participation basis with other financial institutions. Banks also compete with money market funds and other money market instruments, which are not subject to interest rate ceilings.  In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software.  Competition for deposit and loan products remains strong, from both banking and non-banking firms, and affects the rates of those products as well as the terms on which they are offered to customers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.  Technological innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously have been traditional banking products.  In addition, customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, remote deposit, mobile banking applications, self-service branches, and in-store branches.
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Mergers between financial institutions have placed additional pressure on banks to streamline their operations, reduce expenses, and increase revenues to remain competitive.  In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past.  Such laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in our market.  The competitive environment also is significantly impacted by federal and state legislation, which may make it easier for non-bank financial institutions to compete with us.

Supervision and Regulation
 
GENERAL
 
Banking is a complex, highly regulated industry. Regulation and supervision by federal and state banking agencies are intended to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including the Federal Reserve, FDIC, DFPI and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the U.S. Department of the Treasury, or Treasury, and mortgage related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and Urban Development and agencies such as Fannie Mae and Freddie Mac, also impact our business. The effect of these statutes, regulations, regulatory policies and rules are significant to our financial condition and results of operations. Further, the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of banks, their holding companies and their affiliates. These laws are intended primarily for the protection of the FDIC’s Deposit Insurance Fund and bank customers rather than shareholders. Federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire other financial institutions, dealings with insiders and affiliates, and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its bank subsidiary. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provision.

 
BANK HOLDING COMPANY REGULATION
 
The Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to the supervision and examination of the Federal Reserve.  Pursuant to the BHC Act, we are required to obtain the prior approval of the Federal Reserve before we may acquire all or substantially all of the assets of any bank, or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than five percent of such bank.
Under the BHC Act, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the Federal Reserve deems to be so closely related to banking as to be a proper incident to banking.  Bank holding companies that qualify and elect to be treated as “financial holding companies” may engage in a broad range of additional activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. We have not elected to be treated as a financial holding company and currently have no plans to make a financial holding company election.
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We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company unless the company is engaged in banking activities or the Federal Reserve determines that the activity is so closely related to banking to be a proper incident to banking.  The Federal Reserve’s approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.
The BHC Act and the Federal Reserve regulations also impose certain constraints on the payment of dividends and the redemption or purchase by a bank holding company of its own shares of stock.
Pursuant to Dodd-Frank, bank holding companies are required to act as a source of financial and managerial strength to their subsidiary banks. As such, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to do so. The Company must stand ready to use its available resources to provide adequate capital to the subsidiary bank during periods of financial stress or adversity. The Company must also maintain the financial flexibility and capital raising capacity to obtain additional resources to assist the Bank. The Company’s failure to meet its source of strength obligations may constitute an unsafe and unsound practice or a violation of the applicable regulations or both. The source of strength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to maintain adequate capital levels. In such a situation, the subsidiary bank will be required by the bank’s federal regulator to take “prompt corrective action.” Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such bank.
In addition, banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates.  Transactions between affiliates are subject to Sections 23A and 23B of the Federal Reserve Act. Regulation W codifies interpretive guidance with respect to affiliate transactions. Subject to certain exceptions set forth in the Federal Reserve Act and Regulation W, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company, issue a guarantee, or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary’s capital stock and surplus on a per affiliate basis or 20 percent of such subsidiary’s capital stock and surplus on an aggregate affiliate basis.  Such transactions must be on terms and conditions that are consistent with safe and sound banking practices and on terms that are not more favorable than those provided to a non-affiliate. A bank and its subsidiaries generally may not purchase a “low-quality asset,” as that term is defined in the Federal Reserve Act, from an affiliate.  Such restrictions also generally prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.
A holding company and its banking subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services.  For example, with certain exceptions a bank may not condition an extension of credit on a customer obtaining other services provided by it, a holding company or any of its other bank affiliates, or on a promise by the customer not to obtain other services from a competitor.
The Federal Reserve has cease and desist powers over parent bank holding companies and non-banking subsidiaries where actions of a parent bank holding company or its non-financial institution subsidiaries represent an unsafe or unsound practice or violation of law. 
The Federal Reserve has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.
We are also a bank holding company within the meaning of Section 1280 of the California Financial Code.  As such, we and our subsidiaries are subject to examination by the DFPI.
Further, we are required by the Federal Reserve to maintain certain capital levels.  See “Capital Standards.”
 
REGULATION OF THE BANK

Banks are extensively regulated under both federal and state law.  The Bank, as a California state-chartered bank, is subject to primary supervision, regulation and periodic examination by the DFPI and the FDIC.  The Bank is not a member of the Federal Reserve System, but is nevertheless subject to certain Federal Reserve regulations.
If during an examination the FDIC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California state-chartered bank would result in a revocation of the Bank’s charter. The DFPI has many of the same remedial powers.
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 protection, 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 semi-annual statutory assessment. All of a depositor’s accounts at an insured
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depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including standards for safety and soundness, reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities, and loans to affiliates.
Depositor Preference. In the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors including the parent bank holding company with respect to any extensions of credit they have made to such insured depository institution.
Brokered Deposit Restrictions. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. The Bank is eligible to accept brokered deposits without limitations.
Loans to Directors, Executive Officers and Principal Shareholders. The authority of the Bank to extend credit to its directors, executive officers and principal shareholders, including their immediate family members and corporations and other entities that they control, is subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of loans the Bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed certain amounts. In addition, all loans the Bank makes to directors and other insiders must satisfy the following requirements:
•the loans must be made on substantially the same terms, including interest rates and collateral, as prevailing at the time for comparable transactions with persons not affiliated with the Bank;
•the Bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with the Bank; and
•the loans must not involve a greater than normal risk of non-payment or include other features not favorable to the Bank.
Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be pre-approved by the Bank’s board of directors with the interested director abstaining from voting.
PAYMENT OF DIVIDENDS AND STOCK REPURCHASES
 
The Company’s shareholders are entitled to receive dividends when and as declared by our Board of Directors, out of funds legally available, subject to the dividends preference, if any, on preferred shares that may be outstanding. The principal source of cash revenue to the Company is dividends received from the Bank.  The Bank’s ability to make dividend payments to the Company is subject to state and federal regulatory restrictions.
The Company’s ability to pay dividends to its shareholders is affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; or (ii) the prospective rate of earnings retention is inconsistent with the bank holding company’s capital needs and overall current and prospective financial condition. If the Company fails to adhere to these policies, the Federal Reserve could find that the Company is operating in an unsafe and unsound manner. See “Supervision and Regulation-Regulatory Capital Requirements” below.
Subject to exceptions for well-capitalized and well-managed holding companies, Federal Reserve regulations also require approval of holding company purchases and redemptions of its securities if the gross consideration paid exceeds 10 percent of consolidated net worth for any 12-month period. In addition, Federal Reserve policy requires that bank holding companies consult with and inform the Federal Reserve in advance of (i) redeeming or repurchasing capital instruments when experiencing financial weakness and (ii) redeeming or repurchasing common stock and perpetual preferred stock if the result will be a net reduction in the amount of such capital instruments outstanding for the quarter in which the reduction occurs.
As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (i) the amount of the distribution plus (ii) the
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amount, if any, of dividends in arrears on shares with preferential dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. In addition, the Company may not make distributions if it is, or as a result of the distribution would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature.
Dividends payable by the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings, or the Bank’s net income for the latest three fiscal years, less dividends paid during that period, or, with the approval of the DFPI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year or the net income of the Bank for its current fiscal year.
In addition to the regulations concerning minimum uniform capital adequacy requirements described below, the FDIC has established guidelines regarding the maintenance of an adequate allowance for credit losses.  Therefore, the future payment of cash dividends by the Bank will generally depend, in addition to regulatory constraints, upon the Bank’s earnings during any fiscal period, the assessment of the Board of Directors of the capital requirements of the Bank and other factors, including the maintenance of an adequate allowance for credit losses.
 
REGULATORY CAPITAL REQUIREMENTS
 
    The Company and the Bank are subject to the comprehensive capital framework for U.S. banking organizations known as the Basel III Capital Rules adopted by the federal banking agencies. The Basel III Capital Rules are risk-based, meaning that they provide a measure of capital adequacy that reflects the perceived degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.
The Basel III Capital Rules require the Bank to comply with several minimum capital standards. The Bank must maintain a Tier 1 leverage ratio of at least 4.0%; a common equity Tier 1, which we refer to as CET1, to risk-weighted assets of 4.5%; a Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets of at least 6.0% and a total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%. CET1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as CET1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (CET1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan loss limited to a maximum of 1.25% of risk-weighted assets. We exercised the opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”) in part to avoid significant variations in our capital levels resulting from changes in the fair value of our available-for-sale investment securities portfolio as interest rates fluctuate. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into CET1 capital (including unrealized gains and losses on available-for-sale-securities). The calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and was phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).
In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of an additional 2.5% of CET1, on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. As of January 1, 2019, the capital conservation buffer requirement is at its fully phased-in level of 2.5%.
On Aug. 28, 2018, the Federal Reserve issued an interim final rule, “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement and Related Regulations; Changes to Reporting Requirements,” as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). The rule expands the applicability of its small-bank holding company policy statement from $1 billion to $3 billion total consolidated assets. The policy statement exempts holding companies with total consolidated assets of less than $3 billion that meet certain qualitative requirements from consolidated capital requirements.
In 2020, banking organizations were required to maintain a CET1 capital ratio of at least 6.375%, a Tier 1 capital ratio of at least 7.875%, and a total capital ratio of at least 9.875% to avoid limitations on capital distributions and certain discretionary incentive compensation payments. As phased-in on January 1, 2019, the Bank is required to meet a minimum
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Tier 1 leverage ratio of 4.0%, a minimum CET1 to risk-weighted assets of 4.5% (7% with the capital conservation buffer), a Tier 1 capital to risk-weighted assets of 6.0% (8.5% including the capital conservation buffer) and a minimum total capital to risk-weighted assets of 8.0% (10.5% including the capital conservation buffer).
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent in the type of asset. As a result, higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien 1-4 family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. The Basel III Capital Rules increased the risk weights for a variety of asset classes, including certain commercial real estate mortgages. Additional aspects of the Basel III Capital Rules’ risk weighting requirements that are relevant to the Bank include:
•assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;
•providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (increased from 0% under the previous risk-based capital rules);
•assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (increased from 100% under the previous risk-based capital rules), except for those secured by single-family residential properties, which will be assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;
•applying a 150% risk weight instead of a 100% risk weight for certain high volatility CRE acquisition, development and construction loans; and
•applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital (increased from 100% under the previous Basel I risk-based capital rules).
As of December 31, 2020, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III Capital Rules on a fully phased-in basis.
On September 17, 2019, the federal bank regulatory agencies adopted a final rule implementing Section 201 of the EGRRCPA that provides for an optional simplified measure of capital adequacy. The final rule provides certain community banking organizations the ability to opt into a new community bank leverage ratio (“CBLR”) intended to simplify regulatory capital requirements. Starting on January 1, 2020, community banking organizations with less than $10 billion in total consolidated assets may elect the new community banking leverage framework if they have a CBLR of greater than 8% in 2020, 8.5% in 2021, and 9% beginning on January 1, 2022, and hold 25 percent or less of assets in off-balance sheet exposures and 5 percent or less of assets in trading assets and liabilities. The CBLR is determined by dividing a banking organization’s tangible equity capital by its average total consolidated assets. Upon opt into the community banking leverage framework, a qualifying community banking organization would not be subject to other risk-based and capital leverage requirements (including the Basel III and Basel IV requirements) and would be considered to have met the well capitalized ratio requirements. Opting into the community banking leverage framework could ease the process of determining the Company and the Bank’s capital requirements. The Company has chosen not to opt in.

BANK SECRECY ACT/ANTI-MONEY LAUNDERING REGULATIONS
 
We are subject to federal laws aiming to counter money laundering and terrorist financing, as well as transactions with persons, companies and foreign governments sanctioned by the United States. These laws include, among others, the USA PATRIOT Act, the Bank Secrecy Act (“BSA”), and the Money Laundering Act. Financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and identifying customers when establishing new relationships and standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities. The Customer Due Diligence final rule, which became effective in 2018, clarified and strengthened customer due diligence requirements for U.S. financial institutions, aiming to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains. The Bank has extensive controls in place to comply with these requirements.

OFFICE OF FOREIGN ASSETS CONTROL

The Office of Foreign Assets Control (“OFAC”) is a financial intelligence and enforcement agency of the U.S. Treasury Department. It administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes. The OFAC regulations require financial institutions to block or reject payments, transfers, withdrawals or other dealings with respect to accounts and assets of countries that are identified by
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the president as being a threat to national security. This may also include dealings with accounts and assets of nationals of a sanctioned country and with other specially designated individuals (such as designated narcotics traffickers). Financial institutions are also required to report all blocked transactions to OFAC within 10 business days of the occurrence. The Bank has extensive controls in place to comply with these requirements.

PRIVACY AND DATA SECURITY

The Gramm-Leach Bliley Act of 1999 (“GLBA”) imposes requirements on financial institutions with respect to consumer privacy and disclosure of non-public personal information. The GLBA generally prohibits disclosure of consumer information to most nonaffiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. In addition, the California Financial Information Privacy Act (“CFIPA”) also requires a financial institution to provide specific information to a consumer related to the sharing of that consumer’s nonpublic personal information.  The CFIPA allows a consumer to direct the financial institution not to share his or her nonpublic personal information with affiliated or nonaffiliated companies with which a financial institution has contracted to provide financial products and services, and requires that permission from each such consumer be acquired by a financial institution prior to sharing such information. Financial institutions are required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information. Similar to the CFIPA, the State of California recently enacted the California Consumer Privacy Act (“CCPA”) which gives consumers more control over the personal information that businesses collect about them. The CCPA includes new privacy rights including the right to know about the personal information a business collects about them and how it is used and shared; the right to delete personal information collected from them (with some exceptions); the right to opt-out of the sale of their personal information; and the right to non-discrimination for exercising their CCPA rights. Businesses (including Financial Institutions) are required to give consumers certain notices explaining their privacy rights. The Bank has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.
The federal bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program to comply with such requirements.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states, including California where we conduct substantially all our banking business, have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many such states (including California) have also recently implemented or modified their data breach notification and data privacy requirements. We continue to monitor relevant legislative and regulatory developments in California where nearly all our customers are located and evaluate their impact on the Bank.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

COMMUNITY REINVESTMENT ACT

The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low-and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations. The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent regulatory examination.
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The federal banking agencies have expressed support for modernizing the CRA regulatory framework. In December 2019, the FDIC and the OCC issued a joint proposed rule that would amend the CRA regulations. The proposed rule sought to clarify what qualifies for credit under the CRA, update the definition of a small business loan and create an additional definition of “assessment area” tied to where deposits are located, partly to address changes that have occurred due to the rise in digital banking, ensuring that banks continue to serve low- and moderate-income customers in their communities. It is unclear at this time whether and to what extent any changes will be made to the applicable CRA requirements.

CONSUMER PROTECTION LAWS AND REGULATIONS
 
The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations.  Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations.  The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably.  As a result of TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (FHA) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.  A number of lending practices have been found by the courts to be, or may be considered, illegal under the FHA, including some that are not specifically mentioned in the FHA itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods. It seeks to provide public information showing whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located.  HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements.  RESPA also prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.  Penalties under the above laws may include fines, reimbursements and other civil money penalties.
Due to heightened regulatory concern related to compliance with the consumer protection laws, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.

CONSUMER FINANCIAL PROTECTION BUREAU

Dodd-Frank created a new, independent federal agency, the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of the Bank and enforcement with respect to federal consumer protection laws so long as the Bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as the Bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.
The consumer protection provisions of Dodd-Frank and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, Dodd-Frank provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits
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lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. Dodd-Frank does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
Under the newly adopted California legislation that went into effect on January 1, 2021, the DFPI was given broad jurisdiction and sweeping new authorities that closely resemble those of the CFPB. The DFPI stated that it intends to exercise its powers to protect consumers from unlawful, unfair, deceptive, and abusive practices in connection with consumer financial products or services. The DFPI also as a matter of state law can now enforce the Dodd-Frank Act’s UDAAP provisions against any person offering or providing consumer financial products in the state of California. Going forward, financial institutions in California are likely to be faced with a powerful state financial services regulatory regime with expansive enforcement authority, and it is unclear how the DFPI and its enforcement activities will affect the Bank in the future.

DEPOSIT INSURANCE

The FDIC is an independent federal agency that insures deposits up to prescribed statutory limits of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures the Bank’s customer deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount was increased to $250,000. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.
The Bank is subject to deposit insurance assessments to maintain the DIF. Dodd-Frank increased the minimum designated reserve ratio of the DIF to 1.35% of the estimated amount of total insured deposits as of September 30, 2020, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect on the value of or market for our common stock.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank would also result in the revocation of the bank’s charter by the DFPI.
OTHER PENDING AND PROPOSED LEGISLATION
 
Other legislative and regulatory initiatives which could affect the Company and the Bank and the banking industry in general may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company or the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.
    Many aspects of Dodd-Frank are subject to continued rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. Although the reforms primarily target systemically important financial service providers, Dodd-Frank’s influence has and is expected to continue to filter down in varying degrees to smaller institutions over time. In addition, some of the recent financial laws and regulations aiming to ease regulatory and compliance burden on financial institutions that were adopted during the last presidential administration could be rolled back in the near future. We will continue to evaluate the effect of Dodd-Frank, as it may be amended from time to time, and other pending and proposed legislation. The impact of any future legislative or regulatory changes cannot be predicted, but they could affect the Company and the Bank, and no current assurance may be given that they will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

Human Capital Resources
 
Our success as a financial institution in our market areas is dependent on a workforce that embrace and are dedicated to our mission and culture. Our culture is grounded in a set of core values –teamwork, respect, accountability, integrity and leadership. In order to continue to deliver on our mission and maintain our culture, it is crucial that we attract and retain talent who desire and have the experience to provide creative and innovative financial solutions and options for the diverse
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communities we serve. Through our hiring and retention programs we aim to create an inclusive workforce with diversified backgrounds and experiences. We strive to maintain an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by advantageous compensation, benefits, health, and welfare programs.
As of December 31, 2020, we had approximately 287 total employees, which included 275 full-time employees and 12 part-time employees. As a financial institution, approximately 62% of our employees are employed at our banking center and loan production offices, and another 38% are employed at our Headquarters. We believe our relationship with our employees to be generally good. None of these employees are represented by a collective bargaining agreement.
As of December 31, 2020, approximately 74% of our current workforce is female, 26% male, and our average tenure is six years, no change from the average tenure of six years as of December 31, 2019.
As part of our compensation philosophy, we offer market competitive total rewards programs for our employees in order to attract and retain superior talent. These programs, include annual bonus opportunities, an Employee Stock Ownership Plan, a matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, adoption assistance, education reimbursement program, and employee assistance programs.
We encourage and support the growth and development of our associates and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Additionally, all our employees are expected to display and encourage honest, ethical, and respectful conduct in the workplace. Our employees must adhere to our Code of Business Conduct and Ethics that sets standards for appropriate behavior and includes periodic training on preventing, identifying, reporting, and stopping discrimination of any kind.
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. During 2020, in response to the COVID-19 pandemic, we implemented safety protocols and procedures to protect our employees, customers, homeowners and trade partners. These procedures include complying with social distancing and other health and safety standards as required by federal, state, and local government agencies. Additionally, we modified the way in which we conduct many aspects of our business to reduce the amount of in-person contact and interactions. We significantly expanded the use of virtual interactions in all aspects of our business, including customer facing activities. Our teams across all facets of the Company were able and continue to adapt to these changes in our work environment and have successfully managed our business during the pandemic.

ADDITIONAL INFORMATION
 
Copies of the annual report on Form 10-K for the year ended December 31, 2020 may be obtained without charge upon written request to David A. Kinross, Chief Financial Officer, at the Company’s administrative offices,  7100 N. Financial Dr., Suite 101, Fresno, CA  93720. The Form 10-K is available on our website: www.cvcb.com.
Inquiries regarding Central Valley Community Bancorp’s accounting, internal controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com or anonymously at www.ethicspoint.com or EthicsPoint, Inc. at 1-866-294-9588.
General inquiries about Central Valley Community Bancorp or Central Valley Community Bank should be directed to LeAnn Ruiz, Assistant Corporate Secretary at 1-800-298-1775.
 
ITEM 1A -RISK FACTORS
 
An investment in our common stock is subject to risks inherent to our business.  The material risks and uncertainties that management believes may affect our business are described below.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Annual Report.  The risks and uncertainties described below are not the only ones facing our business.  Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.  This Annual Report is qualified in its entirety by these risk factors.
 
General Business and Industry Risks
 
Worsening economic conditions could adversely affect our business.

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 operations 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 our business, results of operations and financial condition. The agricultural industry has been affected by declines in prices and changes in yields of various crops and other agricultural commodities. Weaker prices
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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. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure.

Risks relating to the impact of COVID-19 could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world and the economic environments in which they operate. In March 2020, the United States declared a federal state of emergency in response to the COVID-19 pandemic, which continues to spread throughout the United States. The outbreak of this virus has disrupted global financial markets and negatively affected supply and demand across a broad range of industries. There are a number of factors associated with the outbreak and its impact on global economies including the United States that have had and could continue to have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions.
The COVID-19 pandemic has caused disruption to our customers, vendors and employees. California where we primarily operate has implemented restrictions on the movement of its citizens, with a resultant significant impact on economic activity in the state. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in California, including our primary market area. As a result, the demand for our products and services has been and may continue to be significantly impacted. The circumstances around this pandemic are evolving rapidly and will continue to impact our business in future periods. In the United States, the federal government has taken action to provide financial support to parts of the economy most impacted by the COVID-19 pandemic. The details of how these actions will impact our customers and therefore the impact on the Company remains uncertain at this stage. The actions taken by the U.S. Government and the Federal Reserve may indicate a view on the potential severity of a downturn and post recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. The pandemic has led to a weakening in gross domestic product and employment in the United States.
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, or 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;
•our allowance for credit losses on loans 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;
•the goodwill we recorded in connection with business acquisitions could become impaired and require charges to earnings;
•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
•FDIC premiums may increase if the agency experiences additional resolution costs.

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.
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Furthermore, if the U.S. economy experiences a recession as a result of the pandemic, our business could be materially and adversely affected. To the extent the pandemic adversely affects our business, financial condition, or results of operations, it may also have the effect of heightening many of the other risks described in this report. The extent of such impact will depend on the outcome of certain developments, including but not limited to, the duration and spread of the pandemic as well as its continuing impact on our customers, vendors and employees, all of which are uncertain.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our customers or other parties regarding our 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, starting on April 3, 2020, 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. We are participating as a lender in the PPP.
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. We may be exposed to the risk of litigation from both customers and non-customers that approached us regarding PPP loans regarding our 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 us 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 or results of operations.
We also have 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 us, 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 us, 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 us.

Governmental monetary policies and intervention to stabilize the U.S. financial system may affect our business and are beyond our control.

The business of banking is affected significantly by the fiscal and monetary policies of the Federal government and its agencies. Such policies are beyond our control. We are particularly affected by the policies established by the Federal Reserve Board in relation to the supply of money and credit in the United States. The instruments of monetary policy available to the Federal Reserve Board can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can and does have a material effect on our business.
 
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income. We also rely on alternative funding sources including unsecured borrowing lines with correspondent banks, secured borrowing lines with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco, and public time certificates of deposits.  Our ability to access these sources could be impaired by deterioration in our financial condition as well as factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations for the financial services industry or serious dislocation in the general credit markets.  In the event such a disruption should occur, our ability to access these sources could be adversely affected, both as to price and availability, which would limit or potentially raise the cost of the funds available to us. Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our business, financial condition and results of operations.
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Fluctuations in interest rates could reduce our profitability.

We realize income primarily from the difference between interest earned on loans and securities and the interest paid on deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected. We are unable to predict fluctuations of market interest rates, which are affected by the following factors outside our control.
Our asset/liability management strategy is designed to address the risk from changes in market interest rates and the shape of the yield curve. However, this strategy may not prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.
Additionally, increasing levels of competition in the banking and financial services business may decrease our net interest spread as well as net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Significant fluctuations in interest rates (such as a sudden and substantial increase in Overnight Fed Funds rates) as well as increasing competition may require us to increase rates on deposits at a faster pace than the yield we receive on interest earning assets increases.
When interest rates decline, borrowers tend to refinance higher, fixed-rate loans to lower rates, prepaying their existing loans. Under those circumstances we would not be able to reinvest those prepayments in assets earning interest rates as high as the rates on the prepaid loans. In addition, our commercial real estate and commercial loans, which carry interest rates that, in general, adjust in accordance with changes in the market rates, will adjust to lower rates. We are also significantly affected by the level of loan demand available in our market. Lower loan demand will generally result in lower interest income realized as we place funds in lower yielding investments. The impact of any sudden and substantial move in interest rates and/or increased competition may have a material adverse effect on our business, financial condition and results of operation.

Reforms to and uncertainty regarding LIBOR may adversely affect our business.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it will no longer compel banks to submit rates for the calculation of LIBOR in the future. Until recently, it was generally expected that LIBOR would be discontinued on December 31, 2021. However, in November 2020, the ICE Benchmark Administrator (“IBA”), which publishes the LIBOR rates and is regulated by the FCA, announced that it would initiate a consultation that would end 1-week and 2-month LIBOR by December 31, 2021 and continue to publish all other LIBOR rates through June 30, 2023. The consultation period ended on January 25, 2021 and the IBA and FCA are discussing the results now. While the 18-month extension of certain LIBOR rates is generally expected to be implemented, the FCA has not yet issued a final decision on the matter. As such, the U.S. Federal Reserve Bank's Alternative Reference Rates Committee (“ARRC”) continues to urge parties to implement the preferred alternative to LIBOR, which is SOFR, in all new contracts and use the potential 18-month extension to allow time for existing agreements that use LIBOR to either expire or be re-negotiated. ARRC selected SOFR in June 2017 as the preferred alternative rate to LIBOR. SOFR differs from LIBOR in two respects: SOFR is a single overnight rate, while LIBOR includes rates of several tenors; and SOFR is deemed a credit risk-free rate while LIBOR incorporates an evaluation of credit risk. The ARRC and other entities intend for the transition to be economically neutral. The Federal Reserve Bank of New York has proposed a methodology for generating SOFRs of three different tenors and an index is currently published with daily, 30, 90 and 180 day SOFR tenors. The ARRC has developed a methodology for adjusting SOFR to reflect the risk considerations that underlie LIBOR. On July 12, 2019, the SEC issued a statement on LIBOR transition, indicating the significant impact that the discontinuation of LIBOR could have on financial markets and market participants. Since the volume of our products that are indexed to LIBOR is not significant, the transition, if not sufficiently planned for and managed by our cross-functional teams, is not expected to adversely affect the Company’s financial condition and results of operations. Although implementation of the SOFR benchmark is intended to have minimal economic effect on the parties to a LIBOR-based contract, the transition from LIBOR to a new benchmark rate could result in significant operational, systems, increased compliance, legal and operational costs. This transition may also result in our customers challenging the determination of their interest payments or entering into fewer transactions or postponing their financing needs, which could reduce the Company’s revenue and adversely impact our business. In addition, the uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect the Company’s financial condition and results of operations.

The effects of changes to FDIC insurance coverage limits are uncertain and increased premiums may adversely affect us.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of ($250,000) for each deposit insurance
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ownership category. Increases in FDIC insurance premiums will add to our cost of operations and could have a significant impact on the Bank. Depending on any future losses that the FDIC insurance fund may suffer due to failed institutions, there can be no assurance that there will not be additional significant premium increases in order to replenish the fund.

Competition with other financial institutions could adversely affect our profitability.

We face vigorous competition from banks and other financial institutions, including finance companies and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies, and fintech companies. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition. Additionally, we face competition primarily from other banks in attracting, developing and retaining qualified banking professionals.
Whenever new banks open in our service areas, we see price competition from these new banks, as they work to establish their markets. The existence of competitors, large and small, is a normal and expected part of our operations, but in responding to the particular short-term impact on business of new entrants to the marketplace, we could see a negative impact on revenue and income. Moreover, these near term impacts could be accentuated by the seasonal impact on revenue and income generated by the borrowing and deposit habits of the agricultural community that comprises a significant component of our customer base.

The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.

In the aftermath of the 2007-2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance for credit loss calculation, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for the Bank for the fiscal year beginning after December 15, 2022 in which financial institutions will be required to use historical information, current conditions, and reasonable forecasts to estimate the expected loss over the life of the loan. Management established a task force to begin the implementation process. The transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected losses. The Bank will likely be required to increase its allowance for credit losses as a result of the implementation of CECL. An increase in the allowance would increase the provision for credit losses, decreasing net income and retained earnings.

We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.

The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses.

Risks Related to our Lending Activities

Agribusiness lending presents unique credit risks.

As of December 31, 2020, approximately 2.0% of our total gross loan portfolio was comprised of agribusiness loans. Repayment of agribusiness loans depends primarily on the successful planting and harvest of crops and marketing the harvested commodity or raising and feeding of livestock (including milk production). Collateral securing these loans may be illiquid. In addition, the limited purpose of some agricultural-related collateral affects credit risk because such collateral may have limited or no other uses to support values when loan repayment problems emerge. Many external factors can impact our agricultural borrowers’ ability to repay their loans, including adverse weather conditions, water issues, commodity price volatility, diseases, land values, production costs, changing government regulations and subsidy programs, changing tax treatment, technological changes, labor market shortages/increased wages, and changes in consumers’ preferences, over which our borrowers may have no control. These factors, as well as recent volatility in certain commodity prices, could adversely impact the ability of those to whom we have made agribusiness loans to perform under the terms of their borrowing arrangements with us, which in turn could result in credit losses and materially and adversely affect our business, financial condition and results of operations.

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Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

At December 31, 2020, $772 million, or 69.8% of our total loan and lease portfolio, consisted of real estate related loans. The real estate securing our loan portfolio is concentrated in California. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and natural disasters. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, financial condition and results of operations. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired.

Small Business Administration lending is an important part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.

Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could adversely affect our business, results of operations and financial condition.
Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely business, financial condition and results of operation.

If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment.  We may experience significant credit losses that could have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses for probable incurred losses in our loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy. The allowance is also appropriately increased for new loan growth. The allowance is based upon a number of factors, including the size of the loan portfolio, asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management’s assessment of the credit risk inherent in the portfolio, historical loan loss experience and loan underwriting policies. The allowance is only an estimate of the probable incurred losses in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. If our assumptions prove to be incorrect, our current allowance my not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Our bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.

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Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.

At December 31, 2020, our non-performing loans and leases were 0.30% of total loans and leases compared to 0.18% at December 31, 2019, and 0.30% at December 31, 2018, and our non-performing assets (which include foreclosed real estate) were 0.16% of total assets compared to 0.11% at December 31, 2019.  The allowance for credit losses as a percentage of non-performing loans and leases was 393.99% as of December 31, 2020 compared to 539.28% at December 31, 2019.  Non-performing assets adversely affect our net income in various ways.  We generally do not record interest income on non-performing loans or other real estate owned, thereby adversely affecting our income and increasing our loan administration costs.  When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair value of the collateral, which may ultimately result in a loss.  An increase in the level of non-performing assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile, which could result in a request to reduce our level of non-performing assets.  When we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition.  In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.  There can be no assurance that we will not experience future increases in non-performing assets or that the disposition of such non-performing assets will not have a material adverse effect on our business, financial condition and results of operations.
 
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

Commercial real estate and commercial business loans generally are considered riskier than single-family residential loans because they have larger balances to a single borrower or group of related borrowers.  Commercial real estate and commercial business loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses or the properties securing the loans.  Most of the Bank’s commercial real estate and commercial business loans are made to small to medium sized businesses who may have a heightened vulnerability to economic conditions.  Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle.  Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our business, financial condition and results of operations.
 
We are exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. While we will take steps to mitigate this risk, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at one or more properties. The costs associated with investigation or remediation activities could be substantial. In addition, while there are certain statutory protections afforded lenders who take title to property through foreclosure on a loan, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

We may suffer losses in our loan portfolio despite our underwriting practices.

We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior credit history, financial statements, tax returns, and cash flow projections, valuations of collateral based on reports of independent appraisers and verifications of liquid assets. Nonetheless, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan loss.

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Risks Related to Our Securities Portfolio

We have and in the future we may be required to recognize impairment with respect to investment securities, including the FHLB stock we hold.

Our securities portfolio contains whole loan private mortgage-backed securities and currently includes securities with unrecognized losses and securities that have been downgraded to below investment grade by national rating agencies. We may continue to observe declines in the fair market value of these securities. We evaluate the securities portfolio for any other-than-temporary impairment each reporting period, as required by generally accepted accounting principles. Numerous factors, including the lack of liquidity for re-sales of certain securities, the absence of reliable pricing information for securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our securities portfolio and results of operations in future periods. There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize further impairment charges with respect to these and other holdings.
In addition, as a condition to membership in the Federal Home Loan Bank of San Francisco (the FHLB), we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 2020, we held stock in the FHLB totaling $5,595,000 as compared to our minimum required stock holding of $4,865,000. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. To date, the FHLB has not discontinued the distribution of dividends on its shares. However, there can be no assurance the FHLB’s dividend-paying practices will continue. As of December 31, 2020, we did not recognize an impairment charge related to our FHLB stock holdings. There can be no assurance, however, that future negative changes to the financial condition of the FHLB may not require us to recognize an impairment charge with respect to such holdings.

Risks Related to our Management

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, financial condition and results of operations.

Our success depends, in large degree, on the skills of our management team and our ability to retain, recruit and motivate key officers and employees. Our senior management team has significant industry experience, and their knowledge and relationships would be difficult to replace. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the financial services and banking industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel may continue to increase. We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of relationship-based commercial banking services, we must attract and retain qualified banking personnel to continue to grow our business, and competition for such personnel can be intense. The loss of the services of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business, financial condition and results of operations. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Capital

    As a result of the Dodd-Frank Act and other regulations, we are subject to more stringent capital requirements.

    In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms, or Basel III, and issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3 billion). Basel III not only increased most of the required minimum regulatory capital ratios, it introduced a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a Tier 1 leverage ratio of 5% or more. The Basel III capital rules became effective as applied to the Company and the Bank on January 1, 2015 with a phase-in period that generally extended through January 1, 2019 for many of the changes. The failure to meet applicable
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regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and have a material adverse effect on our business, financial conditions and results of operations.

We may not be successful in raising additional capital needed in the future.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business strategies. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time which are outside of our control, and our financial performance. We cannot be assured that such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Growth

We may not be able to maintain our historical growth rate which may adversely impact our results of operations and financial condition.

We have initiated internal asset growth programs, completed various acquisitions and opened additional offices in prior years. We may not be able to sustain our historical rate of asset growth or may not even be able to grow at all. We may not be able to obtain the financing necessary to fund additional asset growth and may not be able to find suitable candidates for acquisition. Various factors, such as economic conditions and competition, may impede or prohibit the opening of new branch offices. Further, our inability to attract and retain experienced bankers may adversely affect our internal asset growth. A significant decrease in our historical rate of asset growth could have a material adverse impact on our business, financial condition and results of operations.

We may be unable to complete future acquisitions, and once complete, may not be able to integrate our acquisitions successfully.

Our growth strategy includes our desire to acquire other financial institutions. We may not be able to complete any future acquisitions and, for completed acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities we acquire. We may not realize expected cost savings or make revenue enhancements. Following each acquisition, we must expend substantial managerial, operating, financial and other resources to integrate these entities. In particular, we may be required to install and standardize adequate operational and control systems, deploy or modify equipment, implement marketing efforts in new as well as existing locations and employ and maintain qualified personnel. Our failure to successfully integrate the entities we acquire into our existing operations could have a material and adverse affect on our business, financial condition and results of operations.

If the goodwill we have recorded in connection with our acquisitions becomes impaired, it could have an adverse impact on our earnings and capital.

At December 31, 2020, we had approximately $53,777,000 of goodwill on our balance sheet attributable to our acquisitions of the Bank of Madera County in January 2005, Service 1st Bancorp in November 2008, Visalia Community Bank in July 2013, Sierra Vista Bank in October 2016, and Folsom Lake Bank in October 2017. In accordance with generally accepted accounting principles, our goodwill is not amortized but rather evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of factors, including the quoted price of our common stock, market prices of the common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be material.

Risks Related to Our Reputation and Operations

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially and adversely affect our business and the value of our common stock.

We are a community bank, and our reputation is one of the most valuable components of our business. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
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employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. Negative publicity regarding our industry, Bank, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be adversely affected.

Our risk management framework may not be effective in mitigating risks and/or losses to us.

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

Technology is continually changing and we must effectively implement new technologies.

Our future growth prospects will be highly dependent on our ability to implement changes in technology that affect the delivery of banking services such as the increased demand for computer or mobile access to bank accounts and the availability to perform banking transactions electronically.  Our ability to compete will depend upon our ability to continue to adapt technology on a timely and cost-effective basis to meet such demands.  In addition, our business and operations could be susceptible to adverse effects from computer failures, communication and energy disruption, and activities such as fraud of unethical individuals with the technological ability to cause disruptions or failures of our data processing system.
 
If our information systems were to experience a system failure, our business and reputation could suffer.

We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to minimize service disruptions by protecting our computer equipment, systems, and network infrastructure from physical damage due to fire, power loss, telecommunications failure, or a similar catastrophic event. We have protective measures in place to prevent or limit the effect of the failure or interruption of our information systems, and will continue to upgrade our security technology and update procedures to help prevent such events. However, if such failures or interruptions were to occur, they could result in damage to our reputation, a loss of customers, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations.

As a financial institution we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer information, misappropriation of assets, privacy breaches against our customers, litigation, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, online banking, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our customers, denial or degradation of service attacks, and malware or other cyber-attacks. There continues to be a rise in electronic fraudulent activity, security breaches, and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our customers may have been affected by these breaches which increase their risks of identity theft, credit card fraud, and other fraudulent activity that could involve their accounts with us.
Information pertaining to us and our customers is maintained and transactions are executed on the networks and systems of ours, our customers, and certain of our third party partners, such as our online banking or core systems. The secure maintenance and transmission of confidential information as well as execution of transactions over these systems are essential to protect us and our customers against fraud and security breaches and to maintain our customers’ confidence. Breaches of information security also may occur, and in infrequent, incidental, cases have occurred, through intentional or unintentional acts
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by those having access to our systems or our customers’ or counterparties’ confidential information, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions as well as the technology used by our customers to access our systems. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our customers; our loss of business and/or customers; damage to our reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability - any of which could have a material adverse effect on our business, financial condition and results of operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition and results of operations could be materially and adversely affected.

 Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information.

We are subject to an increasing number of federal and state privacy, information security and data protection laws, and we could be negatively impacted by these laws. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, as well as on our collection, use, sharing, retention and safeguarding of consumer or employee information.
The effects of these privacy and data protection laws, including the cost of compliance and required changes in the manner in which the Company conducts its business, are not fully known and are potentially significant, and the failure to comply could adversely affect the Company. Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition and results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

Finance and Accounting Risks

Our controls over financial reporting and related governance procedures may fail or be circumvented.

Management regularly reviews and updates our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures.  We maintain controls and procedures to mitigate risks such as processing system failures or errors and customer or employee fraud, and we maintain insurance coverage for certain of these risks.  Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and provides only reasonable, not absolute, assurances that the objectives of the system are met.  Events could occur which are not prevented or detected by our internal controls, are not insured against, or are in excess of our insurance limits.  Any failure or circumvention of our controls and procedures, or failure to comply with regulations related to controls and procedures, could have a material adverse effect on our business.

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes we use to estimate our inherent loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future
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charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition, and results of operations.

    We have a significant deferred tax asset and cannot assure that it will be fully realized.

    Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities computed using enacted tax rates. We regularly assess available positive and negative evidence to determine whether it is more likely than not that our net deferred tax asset will be realized. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty. At December 31, 2020, we had a net deferred tax asset of $4.74 million. If we were to determine at some point in the future that we will not achieve sufficient future taxable income to realize our net deferred tax asset, we would be required, under generally accepted accounting principles, to establish a full or partial valuation allowance which would require us to incur a charge to operations for the period in which the determination was made.
 
Risks Related to Legislative and Regulatory Developments

We are subject to extensive government regulation that could limit or restrict our activities, which, in turn, may hamper our ability to increase our assets and earnings.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and we are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Similarly, the lending, credit and deposit products we offer are subject to broad oversight and regulation. Because our business is highly regulated, the laws, rules, regulations and supervisory guidance and policies applicable to us are subject to regular modification and change. Perennially, various laws, rules and regulations are proposed, which, if adopted, could impact our operations by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or further restricting the amount of interest or other charges or fees earned on loans or other products. Current and future legal and regulatory requirements, restrictions and regulations, including those imposed under Dodd-Frank, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, and results of operations, may require us to invest significant management attention and resources to evaluate and make any changes required by the legislation and accompanying rules, and may make it more difficult for us to attract and retain qualified executive officers and employees.
 
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. If our policies, procedures, and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition and results of operations.

Risks Related to Our Common Stock

We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We frequently evaluate opportunities to access the capital markets taking into account our regulatory capital ratios, financial condition and other relevant considerations, and subject to market conditions, we may take further capital actions. Such actions could include, among other things, the issuance
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of additional shares of common stock in public or private transactions in order to further increase our capital levels above the requirements for a well-capitalized institution established by the Federal bank regulatory agencies as well as other regulatory targets.
The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities including, without limitation, securities issued upon exercise of outstanding stock options under our stock option plans, could be substantially dilutive to shareholders of our common stock. With the exception of one major shareholder, holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders. The market price of our common stock could decline as a result of sales of shares of our common stock or the perception that such sales could occur.

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.

At times, the stock market and, in particular, the market for financial institution stocks, has experienced significant volatility, which has reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength.  As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur.  This may make it difficult for shareholders to resell shares of common stock at times or at prices you find attractive.  The low trading volume in our common shares on the NASDAQ Capital Market means that our shares may have less liquidity than other publicly traded companies.  We cannot ensure that the volume of trading in our common shares will be maintained or will increase in the future.
The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control including the other factors identified above in the forward-looking statement discussion under the section titled “Cautionary Statements Regarding Forward-Looking Statements” and below.  Broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
•actual or anticipated quarterly fluctuations in our operating results and financial condition;
•changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;
•failure to meet analysts’ revenue or earnings estimates;
•speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;
•strategic actions by us or our competitors, such as acquisitions;
•actions by our institutional shareholders;
•fluctuations in the stock price and operating results of our competitors;
•future sales of our equity, equity-related or debt securities;
•changes in the frequency or amount of dividends or share repurchases;
•trading activities in our common stock, including short-selling;
•domestic and international economic factors unrelated to our performance; and
•general market conditions and, in particular, developments related to market conditions for the financial services industry.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline.

Various provisions of our articles of incorporation and by-laws and certain other actions we have taken could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our shareholders. The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, regulatory approval and/or appropriate regulatory filings may be required from either or all the Federal Reserve, the FDIC, and the DFPI prior to any person or entity acquiring “control” (as defined in the
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applicable regulations) of a state non-member bank, such as the Bank. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing to pay in the future for our common stock.

The Company is a holding company and depends on the Bank for dividends, distributions, and other payments

The Company is a legal entity separate and distinct from the Bank. The Company’s principal source of cash flow, including cash flow to pay dividends to our shareholders, is dividends from the Bank. The Company’s ability to pay dividends to its stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Federal and state law imposes limits on the ability of the Bank to pay dividends and make other distributions and payments. If the Bank is unable to meet regulatory requirements to pay dividends or make other distributions to the Company, the Company will be unable to pay dividends to its shareholders.

ITEM 1B -    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2 -DESCRIPTION OF PROPERTY
 
The Company owns the property on which full-service branch offices are situated at the following California locations: the Clovis Main office in Clovis, the Foothill office in Prather, the Modesto office, the Kerman office, the Floral office in Visalia, and the Exeter office.
All other property is leased by the Company, including the principal executive offices in Fresno, which houses the Company’s corporate offices, comprised of various departments, including accounting, information services, human resources, real estate department, loan servicing, credit administration, branch support operations, and compliance.
The Company continually evaluates the suitability and adequacy of the Company’s offices and has a program of relocating or remodeling them as necessary to be efficient and attractive facilities. Management believes that its existing facilities are adequate for its present purposes.
Properties owned by the Bank are held without loans or encumbrances. All of the property leased is leased directly from independent parties. Management considers the terms and conditions of each of the existing leases to be in the aggregate favorable to the Company. See Note 9 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.
 
ITEM 3 -LEGAL PROCEEDINGS
 
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.
 
ITEM 4 -MINE SAFETY DISCLOSURES

None to report.
  

PART II

ITEM 5 -MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is listed for trading on the Nasdaq Capital Market under the ticker symbol CVCY. As of March 5, 2021, we had approximately 934 shareholders of record.
The following table shows the high and low sales prices for the common stock for each quarter as reported by The NASDAQ Stock Market and cash dividend payment for each quarter presented.
 
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Common Stock Prices and Dividends
 
Quarter 1
2019		Quarter 2
2019		Quarter 3
2019		Quarter 4
2019		Quarter 1
2020		Quarter 2
2020		Quarter 3
2020		Quarter 4
2020
High$20.35 $21.48 $21.75 $22.15 $21.69 $16.81 $15.68 $16.70 
Low$18.10 $19.08 $18.97 $19.24 $10.68 $10.59 $11.51 $12.25 
Dividends per share$0.10 $0.11 $0.11 $0.11 $0.11 $0.11 $0.11 $0.11 
 
We paid common share cash dividends of $0.44 and $0.43 per share in 2020 and 2019, respectively. The Company’s primary source of income with which to pay cash dividends is dividends from the Bank.  See Note 13 in the audited Consolidated Financial Statements in Item 8 of this Annual Report.
The amount of future dividends will depend upon our earnings, financial condition, capital requirements and other factors, and will be determined by our board of directors on a quarterly basis. It is Federal Reserve policy that bank holding companies generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also Federal Reserve policy that bank holding companies not maintain dividend levels that undermine the holding company’s ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Under the federal Prompt Corrective Action regulations, the Federal Reserve or the FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as undercapitalized.
As a holding company, our ability to pay cash dividends is affected by the ability of our bank subsidiary, to pay cash dividends. The ability of the Bank (and our ability) to pay cash dividends in the future and the amount of any such cash dividends is and could be in the future further influenced by bank regulatory requirements and approvals and capital guidelines.
The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition, business conditions, regulatory capital requirements and covenants under any applicable contractual arrangements, including agreements with regulatory authorities.
The Company has outstanding trust preferred securities from special purpose trust and accompanying subordinated debt. The subordinated debt is senior to our shares of common stock. As a result, we must make payments on the subordinated debt before any dividends can be paid on our common stock. Under the terms of the subordinated debt, we may defer interest payments for up to five years. If the Company should ever defer such interest payments, we would be prohibited from declaring or paying any cash dividends on any shares of our common stock.
For information on the statutory and regulatory limitations on the ability of the Company to pay dividends and on the Bank to pay dividends to Company see “Item 1 - Business - Supervision and Regulation - Dividends.”
ISSUER PURCHASES OF EQUITY SECURITIES
 
A summary of the repurchase activity of the Company’s common stock for the year ended December 31, 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 - 02/29/2020211,233 $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 year ended December 31, 2019, the Company repurchased and retired a total of 431,444 shares at an approximate cost of $8,948,000. Under this program, the Company repurchased and retired a total of 49,269 shares at an approximate cost of $1,052,000, during the year ended December 31, 2020, completing the stock repurchase program.
(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 year ended
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December 31, 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 program.
(3) All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act.

EQUITY COMPENSATION PLAN INFORMATION
 
The following chart sets forth information for the year ended December 31, 2020, regarding equity-based compensation plans of the Company.
 Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights		Weighted-
average exercise
price of
outstanding
options, warrants
and rights		Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
Plan Category(a)(b)(c)
Equity compensation plans approved by security holders77,070 (1)$10.06 768,560 (2)
Equity compensation plans not approved by security holders
N/AN/AN/A
Total77,070 $10.06 768,560 
(1)    Under the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) and the Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan), the Company is authorized to issue restricted stock awards. Restricted stock awards are not included in the total in column (a). See Note 14 in the audited Consolidated Financial Statements in Item 8 of this Annual Report.
(2)    Includes securities available for issuance of stock options and restricted stock.
At December 31, 2020, there were 30,013 shares of restricted common stock issued and outstanding. No options to purchase shares of the Company’s common stock were issued during the years ended December 31, 2020 and 2019 from any of the Company’s equity-based compensation plans. During the year ended December 31, 2020, 21,397 shares of restricted common stock were granted under the 2015 Plan, and 25,420 shares of restricted common stock were granted during the year ended December 31, 2019.

ITEM 6 -SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
(In thousands, except per-share amounts)20202019201820172016
Statements of Income     
Total interest income$66,018 $66,331 $64,187 $57,376 $46,676 
Total interest expense1,595 2,559 1,484 1,137 1,096 
Net interest income before provision for credit losses64,423 63,772 62,703 56,239 45,580 
Provision for (reversal of) credit losses3,275 1,025 50 (1,150)(5,850)
Net interest income after provision for credit losses61,148 62,747 62,653 57,389 51,430 
Non-interest income13,797 13,305 10,324 10,836 9,591 
Non-interest expenses47,684 46,100 45,068 44,406 38,922 
Income before provision for income taxes27,261 29,952 27,909 23,819 22,099 
Provision for income taxes6,914 8,509 6,620 9,793 6,917 
Net income$20,347 $21,443 $21,289 $14,026 $15,182 
Basic earnings per share$1.62 $1.60 $1.55 $1.12 $1.34 
Diluted earnings per share$1.62 $1.59 $1.54 $1.10 $1.33 
Cash dividends declared per common share$0.44 $0.43 $0.31 $0.24 $0.24 
 
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December 31,
(In thousands)20202019201820172016
Balances at end of year:     
Investment securities, Federal funds sold and deposits in other banks
$753,829 $506,597 $477,932 $604,801 $558,132 
Net loans1,089,432 934,250 909,591 891,901 747,302 
Total deposits1,722,710 1,333,285 1,282,298 1,425,687 1,255,979 
Total assets2,004,096 1,596,755 1,537,836 1,661,655 1,443,323 
Shareholders’ equity245,021 228,128 219,738 209,559 164,033 
Earning assets1,837,402 1,450,347 1,406,987 1,505,436 1,319,065 
Average balances:     
Investment securities, Federal funds sold and deposits in other banks
$623,117 $494,455 $526,606 $568,426 $560,860 
Net loans1,043,470 921,546 903,204 784,085 636,475 
Total deposits1,568,194 1,295,780 1,333,754 1,284,305 1,144,231 
Total assets1,832,987 1,574,089 1,577,410 1,491,696 1,321,007 
Shareholders’ equity229,807 228,352 211,324 182,507 154,325 
Earning assets1,676,567 1,423,015 1,435,025 1,358,930 1,205,142 
 
Data from 2017 reflects the partial year impact of the acquisition of Folsom Lake Bank on October 1, 2017. Data from 2016 reflects the partial year impact of the acquisition of Sierra Vista Bank on October 1, 2016.


ITEM 7 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report.
 
Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations.  These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business;  (14) the uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.
 
When the Company uses in this Annual Report the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report.  Should one or more of these risks or uncertainties materialize, or
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should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  See also the discussion of risk factors in Item 1A, “Risk Factors.”

We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.

INTRODUCTION
 
Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was incorporated on February 7, 2000.  The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves.  The Company currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Company’s market area includes the central valley area from Sacramento, California to Bakersfield, California.
During 2020, we focused on managing the COVID-19 affects on businesses, customers and employees.  We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry.
As of December 31, 2020, the Bank operated 20 full-service offices. Additionally, the Bank maintains a Commercial Real Estate Division, an Agribusiness Center and a SBA Lending Division.  The Real Estate Division processes or assists in processing the majority of the Bank’s real estate related transactions, including interim construction loans for single family residences and commercial buildings. We offer permanent single family residential loans through our mortgage broker services.
 
ECONOMIC CONDITIONS
 
For the years leading up to 2020, the economy, as evidenced by the California, Central Valley, and Greater Sacrament Region unemployment rates, and housing prices, were showing moderate and steady improvement.
During 2020, the outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in California, including our primary market area. As a result, the demand for our products and services has been and may continue to be significantly impacted. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.
    The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience an adverse effect on its business, financial condition and results of operations.
Agriculture and agricultural-related businesses remain a critical part of the Central Valley’s economy.  The Valley’s agricultural production is widely diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton.  The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. From time to time, California experiences severe droughts or adverse weather issues, which could significantly harm the business of our customers and the credit quality of the loans to those customers. We closely monitor the water resources and the related issues affecting our customers, and will remain vigilant for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.

OVERVIEW
 
Diluted earnings per share (EPS) for the year ended December 31, 2020 was $1.62 compared to $1.59 and $1.54 for the years ended December 31, 2019 and 2018, respectively.  Net income for 2020 was $20,347,000 compared to $21,443,000 and $21,289,000 for the years ended December 31, 2019 and 2018, respectively.  The decrease in net income for 2020
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compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. Total assets at December 31, 2020 were $2,004,096,000 compared to $1,596,755,000 at December 31, 2019.
Return on average equity (“ROE”) for 2020 was 8.85% compared to 9.39% and 10.07% for 2019 and 2018, respectively.  Return on average assets (“ROA”) for 2020 was 1.11% compared to 1.36% and 1.35% for 2019 and 2018, respectively.  Total equity was $245,021,000 at December 31, 2020 compared to $228,128,000 at December 31, 2019.  The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000.
Average total loans increased $124,829,000 or 13.41% to $1,055,712,000 in 2020 compared to $930,883,000 in 2019.  In 2020, we recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 in 2019 and a provision of $50,000 in 2018.  The Company had nonperforming assets consisting of $3,278,000 in nonaccrual loans at December 31, 2020.  At December 31, 2019, nonperforming assets totaled $1,693,000.  Net loan loss recoveries for 2020 were $510,000 compared to net loan loss charge-offs in the amount of $999,000 for 2019 and net loan loss recoveries of $276,000 for 2018.  Refer to “Asset Quality” below for further information.

Dividend Declared

    The Company declared a $0.11 per common share cash dividend, payable on February 26, 2021 to shareholders of record on February 12, 2021.
  
Key Factors in Evaluating Financial Condition and Operating Performance
 
In evaluating our financial condition and operating performance, we focus on several key factors including:

•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
 
One measure of our return to our shareholders is the return on average equity (ROE), which is a ratio that measures net income divided by average shareholders’ equity. Our ROE was 8.85% for the year ended 2020 compared to 9.39% and 10.07% for the years ended 2019 and 2018, respectively. 
Our net income for the year ended December 31, 2020 decreased $1,096,000 compared to 2019 and increased $154,000 in 2019 compared to 2018.  Contributing to the decrease during 2020 compared to 2019 was an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. During 2019, net income compared to 2018 was positively impacted by an increase in net interest income and an increase in net realized gains on sales and calls of investment securities.  During 2018 net income was positively impacted by the decrease in tax expense.
Net interest income increased primarily because of increases in loan and fee income, decreases in interest expense, partially offset by decreases in interest income on investments. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. For 2020, our net interest margin (NIM) decreased 64 basis points to 3.87% compared to 2019 as a result of yield changes and asset mix changes. The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest-earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans. Net interest income during 2020 was positively impacted by from the accretion of the loan marks on acquired loans in the amount of $1,321,000 and $989,000 for the year ended December 31, 2020 and 2019, respectively. In addition, net interest income before the provision for credit losses
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for the year ended December 31, 2020 benefited by approximately $805,000 in nonrecurring income from prepayment penalties and payoff of loans, as compared to $619,000 in nonrecurring income for the year ended December 31, 2019. Excluding these reversals and benefits, net interest income for the year ended December 31, 2020 decreased by $133,000 compared to the year ended December 31, 2019.
Non-interest income increased 3.70% in 2020 compared to 2019 primarily due to an increase in loan placement fees of $1,313,000, an increase of $1,059,000 in other income, partially offset by a $947,000 decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income of $685,000, and a $132,000 decrease in Federal Home Loan Bank dividends. The increase in other income resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds.
Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019. The net increase year over year resulted from increases in salaries and employee benefits of $1,949,000, professional services of $1,093,000, data processing of $489,000, regulatory assessments of $239,000, and operating losses of $40,000, offset by decreases in occupancy and equipment expenses of $813,000, information technology of $220,000, amortization of software of $227,000, internet banking of $166,000, credit card expenses of $114,000, and directors’ expenses of $95,000, in 2020 compared to 2019. The Company recorded an income tax provision of $6,914,000 for the year ended December 31, 2020, compared to $8,509,000 for the year ended December 31, 2019, and $6,620,000 for the year ended December 31, 2018. Basic EPS was $1.62 for 2020 compared to $1.60 and $1.55 for 2019 and 2018, respectively.  Diluted EPS was $1.62 for 2020 compared to $1.59 and $1.54 for 2019 and 2018, respectively. 

Return on Average Assets
 
Our ROA is a ratio that measures our performance compared with other banks and bank holding companies.  Our ROA for the year ended 2020 was 1.11% compared to 1.36% and 1.35% for the years ended December 31, 2019 and 2018, respectively.  The 2020 decrease in ROA is primarily due to the decrease in net income and an increase in average assets.  Annualized ROA for our peer group was 1.06% at December 31, 2020.  Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion.
 
Development of Revenue Streams
 
Over the past several years, we have focused on not only our net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income.  Specifically, we have focused on net interest income through a variety of strategies, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin by focusing on core deposits and managing our cost of funds.  Our net interest margin (fully tax equivalent basis) was 3.87% for the year ended December 31, 2020, compared to 4.51% and 4.44% for the years ended December 31, 2019 and 2018, respectively.  The decrease in 2020 net interest margin compared to 2019, resulted from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio.  The effective tax equivalent yield on total earning assets decreased 72 basis points, while the cost of total interest-bearing liabilities decrease 15 basis points to 0.19% for the year ended December 31, 2020. Our cost of total deposits in 2020 and 2019 was 0.09% and 0.15%, respectively, compared to 0.09% for the same period in 2018. Our net interest income before provision for credit losses increased $651,000 or 1.02% to $64,423,000 for the year ended 2020 compared to $63,772,000 and $62,703,000 for the years ended 2019 and 2018, respectively.
Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank-owned life insurance, and net gains from sales and calls of investment securities.  Non-interest income in 2020 increased $492,000 or 3.70% to $13,797,000 compared to $13,305,000 in 2019 and $10,324,000 in 2018.  The increase resulted primarily from an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends compared to 2019.  Further detail on non-interest income is provided below.
 
Asset Quality
 
For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations.  Asset quality is measured in terms of classified and nonperforming loans, and is a key element in estimating the future earnings of a company.  Total nonperforming assets were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively.  Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Nonperforming loans were $3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively.  The Company had no other real estate owned at December 31, 2020, or December 31, 2019. No foreclosed
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assets were recorded at December 31, 2020 or December 31, 2019. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.
The ratio of nonperforming loans to total loans was 0.30% as of December 31, 2020 and 0.18% as of December 31, 2019. The allowance for credit losses as a percentage of outstanding loan balance was 1.17% as of December 31, 2020 and 0.97% as of December 31, 2019. The ratio of net recoveries (charge-offs) to average loans was 0.05% as of December 31, 2020 and (0.11)% as of December 31, 2019.
 
Asset Growth
 
As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA.  The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.  Total assets increased 25.51% during 2020 to $2,004,096,000 as of December 31, 2020 from $1,596,755,000 as of December 31, 2019.  Total gross loans increased 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 at December 31, 2019.  Total investment securities increased 50.08% to $717,726,000 as of December 31, 2020 compared to $478,218,000 as of December 31, 2019.  Total deposits increased 29.21% to $1,722,710,000 as of December 31, 2020 compared to $1,333,285,000 as of December 31, 2019.  Our loan to deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019.  The loan to deposit ratio of our peers was 80.00% at December 31, 2020. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion.

Capital Adequacy
 
At December 31, 2020, we had a total capital to risk-weighted assets ratio of 15.58%, a Tier 1 risk-based capital ratio of 14.50%, common equity Tier 1 ratio of 14.10%, and a leverage ratio of 9.28%.  At December 31, 2019, we had a total capital to risk-weighted assets ratio of 15.79%, a Tier 1 risk-based capital ratio of 14.98%, common equity Tier 1 ratio of 14.55%, and a leverage ratio of 11.38%.  At December 31, 2020, on a stand-alone basis, the Bank had a total risk-based capital ratio of 15.48%, a Tier 1 risk based capital ratio of 14.41%, common equity Tier 1 ratio of 14.41%, and a leverage ratio of 9.23%.  At December 31, 2019, the Bank had a total risk-based capital ratio of 15.66%, Tier 1 risk-based capital of 14.85% and a leverage ratio of 11.27%.  Note 13 of the audited Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios. As of January 1, 2015, bank holding companies with consolidated assets of $1 billion or more ($3 Billion or more effective August 30, 2018) and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of December 31, 2020, the Bank met or exceeded all of their capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2020.

Operating Efficiency
 
Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue.  A lower ratio represents greater efficiency.  The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income plus non-interest income, excluding net gains and losses from sale of securities) was 64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018.  The slight increase in the efficiency ratios in 2020 and 2019 was due to the growth in non-interest expense outpacing the growth in non-interest income. The Company’s net interest income before provision for credit losses plus non-interest income increased 1.48% to $78,220,000 in 2020 compared to $77,077,000 in 2019 and $73,027,000 in 2018, while operating expenses increased 3.44% in 2020, 2.29% in 2019, and 1.49% in 2018.
 
Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco.  We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $235,371,000
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with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities.  Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.
We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, equity securities, and available-for-sale securities) totaling $788,004,000 or 39.32% of total assets at December 31, 2020 and $530,792,000 or 33.24% of total assets as of December 31, 2019.


RESULTS OF OPERATIONS
 
Net Income
 
Net income was $20,347,000 in 2020 compared to $21,443,000 and $21,289,000 in 2019 and 2018, respectively.  Basic earnings per share was $1.62, $1.60, and $1.55 for 2020, 2019, and 2018, respectively.  Diluted earnings per share was $1.62, $1.59, and $1.54 for 2020, 2019, and 2018, respectively.  ROE was 8.85% for 2020 compared to 9.39% for 2019 and 10.07% for 2018.  ROA for 2020 was 1.11% compared to 1.36% for 2019 and 1.35% for 2018.
The decrease in net income for 2020 compared to 2019 was primarily due to an increase in provision for credit losses, a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in loan placement fees, and a decrease in the provision for income taxes. The increase in net income for 2019 compared to 2018 was primarily due to an increase in net interest income and an increase in net realized gains on sales and calls of investment securities, partially offset by an increase in non-interest expense, an increase in the provision for credit losses, and an increase in the provision for income taxes.

Interest Income and Expense
 
Net interest income is the most significant component of our income from operations.  Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities.
 
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and nonaccrual loans are not included as interest-earning assets for purposes of this table.

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SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES
 Year Ended December 31, 2020Year Ended December 31, 2019Year Ended December 31, 2018
(Dollars in thousands)Average
Balance		Interest
Income/
Expense		Average
Interest
Rate		Average
Balance		Interest
Income/
Expense		Average
Interest
Rate		Average
Balance		Interest
Income/
Expense		Average
Interest
Rate
ASSETS      
Interest-earning deposits in other banks
$76,924 $246 0.32 %$17,893 $375 2.10 %$24,095 $460 1.91 %
Securities
Taxable securities479,894 11,740 2.45 %438,042 13,197 3.01 %391,549 10,254 2.62 %
Non-taxable securities (1)66,299 2,489 3.75 %38,520 1,639 4.25 %110,962 4,478 4.04 %
Total investment securities
546,193 14,229 2.61 %476,562 14,836 3.11 %502,511 14,732 2.93 %
Total securities and interest-earning deposits
623,117 14,475 2.32 %494,455 15,211 3.08 %526,606 15,192 2.88 %
Loans (2) (3)1,053,450 52,066 4.94 %928,560 51,464 5.54 %908,419 49,936 5.50 %
Total interest-earning assets
1,676,567 $66,541 3.97 %1,423,015 $66,675 4.69 %1,435,025 $65,128 4.54 %
Allowance for credit losses
(12,242)  (9,337)  (8,924)
Nonaccrual loans
2,262   2,323   3,709 
Cash and due from banks
27,575   25,726   27,199 
Bank premises and equipment
7,476   7,983   9,148 
Other assets
131,349   124,379   111,253 
Total average assets$1,832,987   $1,574,089   $1,577,410 
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
Interest-bearing liabilities:      
Savings and NOW accounts
$433,742 $341 0.08 %$370,378 $566 0.15 %$383,667 $451 0.12 %
Money market accounts
300,603 542 0.18 %270,918 656 0.24 %285,568 419 0.15 %
Time certificates of deposit
89,610 582 0.65 %97,136 706 0.73 %111,214 283 0.25 %
Total interest-bearing deposits
823,955 1,465 0.18 %738,432 1,928 0.26 %780,449 1,153 0.15 %
Other borrowed funds5,155 130 2.52 %21,943 631 2.88 %12,180 331 2.72 %
Total interest-bearing liabilities
829,110 $1,595 0.19 %760,375 $2,559 0.34 %792,629 $1,484 0.19 %
Non-interest bearing demand deposits
744,239   557,348   553,305 
Other liabilities29,831   28,014   20,152 
Shareholders’ equity229,807   228,352   211,324 
Total average liabilities and shareholders’ equity
$1,832,987   $1,574,089   $1,577,410 
Interest income and rate earned on average earning assets
 $66,541 3.97 % $66,675 4.69 %$65,128 4.54 %
Interest expense and interest cost related to average interest-bearing liabilities
 1,595 0.19 % 2,559 0.34 %1,484 0.19 %
Net interest income and net interest margin (4)
 $64,946 3.87 % $64,116 4.51 %$63,644 4.44 %
(1)Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $523, $344, and $940 in 2020, 2019, and 2018, respectively.
(2)Loan interest income includes loan fees of $2,234 in 2020, $164 in 2019, and $397 in 2018.
(3)Average loans do not include nonaccrual loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.
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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. The change in interest due to both rate and volume has been allocated to the change in rate.
Changes in Volume/RateFor the Years Ended December 31, 2020 Compared to 2019For the Years Ended December 31, 2019 Compared to 2018
(In thousands)VolumeRateNetVolumeRateNet
Increase (decrease) due to changes in:   
Interest income:   
Interest-earning deposits in other banks$1,237 $(1,366)$(129)$(118)$34 $(84)
Investment securities:
Taxable1,260 (2,717)(1,457)1,218 1,725 2,943 
Non-taxable (1)1,181 (331)850 (2,923)84 (2,839)
Total investment securities2,441 (3,048)(607)(1,705)1,809 104 
Loans6,921 (6,319)602 1,107 421 1,528 
Total earning assets (1)10,599 (10,733)(134)(716)2,264 1,548 
Interest expense:      
Deposits:      
Savings, NOW and MMA167 (506)(339)(36)388 352 
Time certificate of deposits(54)(70)(124)(35)458 423 
Total interest-bearing deposits113 (576)(463)(71)846 775 
Other borrowed funds(483)(18)(501)265 35 300 
Total interest bearing liabilities(370)(594)(964)194 881 1,075 
Net interest income (1)$10,969 $(10,139)$830 $(910)$1,383 $473 
(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $602,000 or 1.17% in 2020 compared to 2019.  Interest and fee income from loans increased $1,528,000 or 3.06% in 2019 compared to 2018.  The increase in 2020 is primarily attributable to an increase in average total loans outstanding, offset by a decrease in the yield on loans of 60 basis points. The decrease in the loan yield was impacted by the Company’s issuance of low-interest PPP loans.
Average total loans for 2020 increased $124,829,000 to $1,055,712,000 compared to $930,883,000 for 2019 and $912,128,000 for 2018.  The yield on loans for 2020 was 4.94% compared to 5.54% and 5.50% for 2019 and 2018, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,321,000 and $989,000 for the years ended December 31, 2020 and 2019, respectively.
Interest income from total investments on a non tax-equivalent basis, (total investments include investment securities, Federal funds sold, interest-bearing deposits in other banks, and other securities), decreased $915,000 or 6.15% in 2020 compared to 2019. The yield on average investments decreased 76 basis points to 2.32% for the year ended December 31, 2020 from 3.08% for the year ended December 31, 2019. Average total investments increased $128,662,000 to $623,117,000 in 2020 compared to $494,455,000 in 2019.  In 2019, total investment income on a non tax-equivalent basis increased $616,000 or 4.32% compared to 2018.
Our investment portfolio consists primarily of securities issued by U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities. However, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  At December 31, 2020, we held $299,806,000 or 42.22% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 2.15%.  We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin.  CMOs and MBS by their nature are affected by prepayments which are impacted by changes in interest rates.  In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend.  Premium amortization and discount accretion of these investments affects our net interest income.  Our management monitors the prepayment trends of these investments and adjusts premium amortization and discount accretion based on several factors.  These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.  The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio.
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The cumulative net-of-tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 2020 was an unrealized gain of $14,856,000 and is reflected in the Company’s equity.  At December 31, 2020, the effective duration of the investment portfolio was 4.65 years and the market value reflected a pre-tax unrealized gain of $21,091,000.  Management reviews market value declines on individual investment securities to determine whether they represent other-than-temporary impairment (OTTI). For the years ended December 31, 2020, 2019, and 2018, no OTTI was recorded. Future deterioration in the market values of our investment securities may require the Company to recognize additional OTTI losses.
A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.  Measured at December 31, 2020, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $72,000,000.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $66,000,000.  The modeling environment assumes management would take no action during an immediate shock of 200 basis points.  However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio.  For further discussion of the Company’s market risk, refer to Quantitative and Qualitative Disclosures about Market Risk.
Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy.  The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices.
Total interest income in 2020 decreased $313,000 to $66,018,000 compared to $66,331,000 in 2019 and $64,187,000 in 2018, respectively.  The decrease in 2020 was the result of yield changes, decrease in interest rates, and asset mix changes.  The tax-equivalent yield on interest earning assets decreased to 3.97% for the year ended December 31, 2020 from 4.69% for the year ended December 31, 2019.  Average interest earning assets increased to $1,676,567,000 for the year ended December 31, 2020 compared to $1,423,015,000 for the year ended December 31, 2019.  Average interest-earning deposits in other banks increased $59,031,000 in 2020 compared to 2019.  Average yield on these deposits was 0.32% compared to 2.10% on December 31, 2020 and December 31, 2019 respectively.  Average investments and interest-earning deposits increased $128,662,000 but the tax equivalent yield on those assets decreased 76 basis points.  Average total loans increased $124,829,000 and the yield on average loans decreased 60 basis points.
The increase in total interest income for 2019 was the result of yield changes and asset mix changes. The tax-equivalent yield on interest-earning assets increased to 4.69% for the year ended December 31, 2019 from 4.54% for the year ended December 31, 2018.  Average interest-earning assets decrease to $1,423,015,000 for the year ended December 31, 2019 compared to $1,435,025,000 for the year ended December 31, 2018.  Average total loans increased and the yield on average loans increased four basis points.
Interest expense on deposits in 2020 decreased $463,000 or 24.01% to $1,465,000 compared to $1,928,000 in 2019 and increased $312,000 as compared to 2018.  The yield on interest-bearing deposits decreased 8 basis points to 0.18% in 2020 from 0.26% in 2019.  The yield on interest-bearing deposits increased 11 basis points to 0.26% in 2019 from 0.15% in 2018.  Average interest-bearing deposits were $823,955,000 for 2020 compared to $738,432,000 and $780,449,000 for 2019 and 2018, respectively. 
Average other borrowings were $5,155,000 with an effective rate of 2.52% for 2020 compared to $21,943,000 with an effective rate of 2.88% for 2019.  In 2018, the average other borrowings were $12,180,000 with an effective rate of 2.72%.  Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings.  The debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 1.84% for 2020, 3.59% for 2019, and 4.04% for 2018.
The cost of all interest-bearing liabilities was 0.19% and 0.34% basis points for 2020 and 2019, respectively, compared to 0.19% for 2018.  The cost of total deposits decreased to 0.09% for the year ended December 31, 2020, compared to 0.15% and 0.09% for the years ended December 31, 2019 and 2018, respectively.  Average demand deposits increased 33.53% to $744,239,000 in 2020 compared to $557,348,000 for 2019 and $553,305,000 for 2018. The ratio of average non-interest demand deposits to average total deposits increased to 47.46% for 2020 compared to 43.01% and 41.48% for 2019 and 2018, respectively.
 
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Net Interest Income before Provision for Credit Losses
 
Net interest income before provision for credit losses for 2020 increased $651,000 or 1.02% to $64,423,000 compared to $63,772,000 for 2019 and $62,703,000 for 2018.  The increase in 2020 was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in average interest bearing liabilities. Our net interest margin (NIM) decreased 64 basis points. Yield on interest earning assets decreased 72 basis points.  The decrease in net interest margin in the period-to-period comparison resulted primarily from the decrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio.  Net interest income before provision for credit losses increased $1,069,000 in 2019 compared to 2018, primarily due to the increase in average earning assets, asset mix changes, and a decrease in average interest bearing liabilities. Average interest-earning assets were $1,676,567,000 for the year ended December 31, 2020 with a NIM of 3.87% compared to $1,423,015,000 with a NIM of 4.51% in 2019, and $1,435,025,000 with a NIM of 4.44% in 2018.  For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.

Provision for Credit Losses
 
Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance.
The provision for credit losses on loans is determined by conducting a quarterly evaluation of the adequacy of the Company’s allowance for credit losses on loans and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The provision for credit losses on loans and level of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company’s market area.
The establishment of an adequate credit allowance is based on an allowance model that utilizes qualitative and quantitative factors, historical losses, loan level risk ratings and portfolio management tools.  The Board of Directors has established initial responsibility for the accuracy of credit risk ratings with the individual credit officer and oversight from Credit Administration who ensures the accuracy of the risk ratings. Quarterly, the credit officers must certify the current risk ratings of the loans in their portfolio. Credit Administration reviews the certifications and reports to the Board of Directors Audit Committee. At least annually the loan portfolio, including risk ratings, is reviewed by a third party credit reviewer. Regulatory agencies also review the loan portfolio on a periodic basis. See “Allowance for Credit Losses” for more information on the Company’s Allowance for Loan Loss.
    During the year ended December 31, 2020, the Company recorded a provision for credit losses of $3,275,000 compared to a provision of $1,025,000 and $50,000 for the same periods in 2019 and 2018, respectively. The recorded provisions to the allowance for credit losses are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section.
During the years ended December 31, 2020, 2019 and 2018 the Company had net charge-offs (recoveries) totaling $(510,000), $999,000, and $(276,000), respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.05)%, 0.11% and (0.03)% for 2020, 2019, and 2018, respectively.
Economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result when negative economic conditions are anticipated, we may be required to make significant provisions to the allowance for credit losses. The Bank conducts banking operation principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our business, financial performance and results of operations. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operations and financial condition. The agricultural industry has been affected by declines in prices and the changes in yields on various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure.
We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of December 31, 2020, there were $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $7.3 million to real estate owner occupied, $3.3 million to agricultural production, $3.2 million to real estate
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construction, and $9.6 million to commercial real estate. This compares to $33.8 million in classified loans as of December 31, 2019 of which $7.3 million related to agricultural real estate, $1.6 million to real estate construction, $13.2 million to commercial and industrial, $4.3 million to agricultural production, $1.1 million to commercial real estate, and $4.7 million to real estate owner occupied.
As of December 31, 2020, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to “Allowance for Credit Losses” below for further information.
 
Net Interest Income after Provision for Credit Losses
 
Net interest income, after the provision for credit losses was $61,148,000 for 2020 compared to $62,747,000 and $62,653,000 for 2019 and 2018, respectively.
 
Non-Interest Income 

Non-interest income is comprised of customer service charges, gains on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income.  Non-interest income was $13,797,000 in 2020 compared to $13,305,000 and $10,324,000 in 2019 and 2018, respectively. The $492,000 or 3.70% increase in non-interest income in 2020 primarily driven by an increase in loan placement fees, and an increase in other income, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and a decrease in FHLB dividends. The $2,981,000 or 28.87% increase in non-interest income in 2019 resulted primarily from increases in net realized gains on sales and calls of investment securities, loan placement fees, appreciation in cash surrender value of the bank owned life insurance, partially offset by a decrease in service charge income, net gain on the sale of the Company’s credit card portfolio, interchange fees, and Federal Home Loan bank dividends compared to 2018.
Customer service charges decreased $685,000 to $2,071,000 in 2020 compared to $2,756,000 in 2019 and $2,986,000 in 2018.  The decreases in 2020 and 2019 resulted from decreases in our NSF fees and lower analysis service charge income.
During the year ended December 31, 2020, we realized net gains on sales and calls of investment securities of $4,252,000, compared to $5,199,000 in 2019 and $1,314,000 in 2018. The net gains in 2020, 2019, and 2018 were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.  See Note 3 to the audited Consolidated Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $711,000 in 2020 compared to $728,000 and $695,000 in 2019 and 2018, respectively.  The Bank’s salary continuation and deferred compensation plans and the related BOLI are used as retention tools for directors and key executives of the Bank.
Interchange fees totaled $1,347,000 in 2020 compared to $1,446,000 and $1,462,000 in 2019 and 2018, respectively.
We earn loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers.  Loan placement fees increased $1,313,000 in 2020 to $2,291,000 compared to $978,000 in 2019 and $708,000 in 2018. 
The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends.  As of December 31, 2020 and 2019, we held FHLB stock totaling $5,595,000 and $6,062,000, respectively.  Dividends in 2020 decreased to $323,000 compared to $455,000 in 2019 and $590,000 in 2018.
Other income increased to $2,802,000 in 2020 compared to $1,743,000 and $2,107,000 in 2019 and 2018, respectively. The increase in other income during the year ended December 31, 2020 resulted from a $1,167,000 gain related to the collection of tax-exempt life insurance proceeds. A net gain of $462,000 on the sale of the Company’s credit card portfolio was recorded during the year ended December 31, 2018.

Non-Interest Expenses
 
Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, information technology, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses.  Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020 compared to $46,100,000 in 2019, and $45,068,000 in 2018.
Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018. The increase in the efficiency ratio in 2020 and 2019 was due to the growth in non-interest expense outpacing the growth in non-interest income.
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Salaries and employee benefits increased $1,949,000 or 7.31% to $28,603,000 in 2020 compared to $26,654,000 in 2019 and $26,221,000 in 2018.  Full time equivalents were 273 for the year ended December 31, 2020 compared to 281 for the year ended December 31, 2019. The increase in salaries and employee benefits in 2020 compared to 2019 was the result of an increase of $2,426,000 in salaries and benefits (of which $525,000 related to the payment of employee incentive compensation), as well as an increase of $185,000 for directors’ and officers’ expenses related to the change in the discount rate used to calculate the liability for salary continuation, deferred compensation, and split-dollar plans; offset by higher loan origination costs of approximately $913,000 relating to the PPP loans processed during the second quarter of 2020.
For the years ended December 31, 2020, 2019, and 2018, the compensation cost recognized for equity-based compensation was $470,000, $555,000 and $482,000, respectively. As of December 31, 2020, there was $225,000 of total unrecognized compensation cost related to non-vested equity-based compensation arrangements granted under all plans.  The cost is expected to be recognized over a weighted average period of 0.85 years.  See Notes 1 and 14 to the audited Consolidated Financial Statements for more detail. No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 2020 and 2019. Restricted common stock awards of 21,397 and 25,420 shares were awarded in 2020 and 2019, respectively.
Occupancy and equipment expense decreased $813,000 or 14.95% to $4,626,000 in 2020 compared to $5,439,000 in 2019 and $5,972,000 in 2018. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at December 31,2020 and at December 31, 2019. The Company closed two banking offices, one in Rancho Cordova and one in Fair Oaks, and consolidated both branches into a newly opened banking office in Gold River during the second quarter of 2019.
Regulatory assessments were $490,000 in 2020 compared to $251,000 and $619,000 in 2019 and 2018, respectively.  The assessment base for calculating the amount owed is based on the formula of average assets minus average tangible equity. The 2019 lower assessments were the result of the Company receiving its small business bank credit.
Information technology expense decreased $220,000 to $2,391,000 for the year ended December 31, 2020 compared to $2,611,000 and $1,113,000 in 2019 and 2018, respectively. Data processing expenses were $2,046,000 in 2020 compared to $1,557,000 in 2019 and $1,666,000 in 2018. No acquisition and integration expenses related to the Folsom Lake Bank (“FLB”) and Sierra Vista Bank (“SVB”) mergers were recorded in 2020 or 2019, compared to $217,000 in 2018. Professional services increased $1,093,000 in 2020 compared to 2019 due to higher legal expenses and consulting fees.
Amortization of core deposit intangibles was $695,000 for 2020, $695,000 for 2019, and $455,000 for 2018. During 2020, amortization expense related to FLB core deposit intangibles (“CDI”) was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to Visalia Community Bank (“VCB”) CDI was $137,000. During 2019, amortization expense related to FLB CDI was $423,000, amortization expense related to SVB CDI was $135,000, and amortization expense related to VCB CDI was $137,000. During 2018, amortization expense related to FLB CDI was $247,000, amortization expense related to SVB CDI was $72,000, and amortization expense related to VCB CDI was $136,000.
ATM/Debit card expenses decreased $101,000 to $819,000 for the year ended December 31, 2020 compared to $920,000 in 2019 and $739,000 in 2018. Other non-interest expenses decreased $698,000 or 15.91% to $3,688,000 in 2020 compared to $4,386,000 in 2019 and $4,636,000 in 2018.
 
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The following table describes significant components of other non-interest expense as a percentage of average assets.
For the years ended December 31,
(Dollars in thousands)		Other
Expense
2020		%
Average
Assets		Other
Expense
2019		%
Average
Assets		Other
Expense
2018		%
Average
Assets
Stationery/supplies$228 0.01 %$240 0.02 %$281 0.02 %
Amortization of software123 0.01 %350 0.02 %303 0.02 %
Telephone193 0.01 %342 0.02 %217 0.01 %
Alarm115 0.01 %100 0.01 %101 0.01 %
Postage191 0.01 %218 0.01 %209 0.01 %
Armored courier fees280 0.02 %284 0.02 %274 0.02 %
Risk management expense149 0.01 %232 0.01 %195 0.01 %
Donations152 0.01 %212 0.01 %243 0.02 %
Personnel other161 0.01 %177 0.01 %167 0.01 %
Credit card expense— — %114 0.01 %121 0.01 %
Education/training156 0.01 %155 0.01 %172 0.01 %
Loan related expenses58 — %52 — %77 — %
General insurance171 0.01 %165 0.01 %165 0.01 %
Travel and mileage expense127 0.01 %256 0.02 %267 0.02 %
Operating losses142 0.01 %102 0.01 %452 0.03 %
Shareholder services109 0.01 %101 0.01 %129 0.01 %
Other1,333 0.07 %1,286 0.08 %1,263 0.08 %
Total other non-interest expense$3,688 0.20 %$4,386 0.28 %$4,636 0.29 %
 
Provision for Income Taxes
 
Our effective income tax rate was 25.4% for 2020 compared to 28.4% for 2019 and 23.7% for 2018.  The Company reported an income tax provision of $6,914,000, $8,509,000, and $6,620,000 for the years ended December 31, 2020, 2019, and 2018, respectively.  With the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017, the Company’s federal income tax rate changed from 35% to 21% effective as of the beginning of 2018. The decrease in the 2018 effective tax rate was the result of the change in the federal rate offset by a sizable decrease in tax-exempt interest. As part of the Act for tax years beginning after December 31, 2017, alternative minimum tax credit carryforwards are refundable and are expected to be fully refunded by 2022. As such, they are not dependent on future taxable income to be realized and have been classified as an other receivable.
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax-planning strategies, and assessments of current and future economic and business conditions.
The Company had the net deferred tax assets of $4.74 million and $8.74 million at December 31, 2020 and 2019, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at December 31, 2020 and 2019 will be fully realized in future years.




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FINANCIAL CONDITION
 
Summary of Changes in Consolidated Balance Sheets
  
Total assets were $2,004,096,000 as of December 31, 2020, compared to $1,596,755,000 as of December 31, 2019, an increase of 25.51% or $407,341,000.  Total gross loans were $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019, an increase of $158,967,000 or 16.85%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 48.80% or $247,232,000 to $753,829,000.  Total deposits increased 29.21% or $389,425,000 to $1,722,710,000 as of December 31, 2020, compared to $1,333,285,000 as of December 31, 2019.  Shareholders’ equity increased $16,893,000 or 7.41% to $245,021,000 as of December 31, 2020, compared to $228,128,000 as of December 31, 2019. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, and an increase in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI), offset by the decrease in common stock as a result of the share repurchase program. Accrued interest payable and other liabilities were $31,210,000 as of December 31, 2020, compared to $30,187,000 as of December 31, 2019, an increase of $1,023,000.

Fair Value
 
The Company measures the fair value of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
 See Note 2 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
 
Investments
 
The following table reflects the balances for each category of securities at year end:
Available-for-Sale SecuritiesAmortized Cost at December 31,
(In thousands)202020192018
U.S. Government agencies$651 $14,740 $21,723 
Obligations of states and political subdivisions361,734 89,574 79,886 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
214,203 198,125 239,388 
Private label mortgage and asset backed securities82,413 155,308 129,165 
Corporate debt securities30,000 9,000 — 
Total Available-for-Sale Securities$689,001 $466,747 $470,162 
Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities and are classified at the date of acquisition as available-for-sale or held-to-maturity.  As of December 31, 2020, investment securities with a fair value of $185,053,000, or 26.06% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee.  They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.
Our investment portfolio as a percentage of total assets is generally higher than our peers due primarily to our comparatively low loan-to-deposit ratio.  Our loan-to-deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at December 31, 2019.  The loan to deposit ratio of our peers was 80.00% at December 31, 2020.  Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $1 billion to $3.5 billion. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 48.80% or $247,232,000 to $753,829,000 at December 31, 2020, from $506,597,000 at December 31, 2019.  The market value
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of the portfolio reflected an unrealized gain of $21,091,000 at December 31, 2020, compared to an unrealized gain of $3,999,000 at December 31, 2019.
    Losses recognized in 2020, 2019, and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.
The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. 
We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
As of December 31, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2020, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.
For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed. There were no OTTI losses recorded during the twelve months ended December 31, 2020, 2019, or 2018. 
At December 31, 2020, the Company had a total of 31 Private Label Mortgage and Asset Backed Securities (PLMBS) with a remaining principal balance of $82,413,000 and a net unrealized gain of approximately $1,095,000.  Seven of these PLMBS with a remaining principal balance of $812,000 had credit ratings below investment grade.  The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. No credit related OTTI charges related to PLMBS were recorded during the years ended December 31, 2020 or December 31, 2019.
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2020 are summarized in the following table.
(Dollars in thousands)In one year or lessAfter one through five
years		After five through ten yearsAfter ten yearsTotal
Available-for-Sale SecuritiesAmountYield(1)AmountYield(1)AmountYield(1)AmountYield(1)AmountYield(1)
Debt securities(1)          
U.S. Government agencies
$— — $— — $— — $651 4.25 %$651 4.25 %
Obligations of states and political subdivisions (2)
298 — 3,254 — 18,330 3.68 %339,852 3.86 %361,734 3.81 %
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
— — 54 5.85 %7,062 1.68 %207,087 2.16 %214,203 2.15 %
Private label residential mortgage and asset backed securities
47 4.75 %7,683 3.99 %8,932 0.86 %65,751 2.54 %82,413 2.50 %
Corporate debt securities
— — — — 30,000 5.10 %— — 30,000 5.10 %
 $345 0.65 %$10,991 2.82 %$64,324 3.73 %$613,341 3.15 %$689,001 3.20 %
(1)Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.  Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2)Not computed on a tax equivalent basis.

Loans
 
Total gross loans increased $158,967,000 or 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019.
 
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The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2020, 2019, 2018, 2017, and 2016.
20202019201820172016
Loan Type (Dollars in thousands)Amount% of Total LoansAmount% of Total LoansAmount% of Total LoansAmount% of Total LoansAmount% of Total Loans
Commercial:    
Commercial and industrial$273,994 24.9 %$102,541 10.9 %$101,533 11.1 %$100,856 11.2 %$88,652 11.7 %
Agricultural production21,971 2.0 %23,159 2.6 %7,998 0.9 %14,956 1.7 %25,509 3.4 %
Total commercial295,965 26.9 %125,700 13.5 %109,531 12.0 %115,812 12.9 %114,161 15.1 %
Real estate:    
Owner occupied208,843 18.9 %197,946 21.0 %183,169 19.9 %204,452 22.7 %191,665 25.3 %
Real estate-construction and other land loans
55,419 5.0 %73,718 7.8 %101,606 11.1 %96,460 10.7 %69,200 9.1 %
Commercial real estate338,886 30.7 %329,333 34.9 %305,118 33.2 %269,254 29.9 %184,225 24.3 %
Agricultural real estate84,258 7.6 %76,304 8.1 %76,884 8.4 %76,081 8.4 %86,761 11.5 %
Other real estate28,718 2.6 %31,241 3.3 %32,799 3.6 %31,220 3.5 %18,945 2.7 %
Total real estate716,124 64.8 %708,542 75.1 %699,576 76.2 %677,467 75.2 %550,796 72.9 %
Consumer:    
Equity loans and lines of credit55,634 5.0 %64,841 6.9 %69,958 7.6 %76,404 8.5 %64,494 8.5 %
Consumer and installment37,236 3.3 %42,782 4.5 %38,038 4.2 %29,637 3.4 %25,910 3.5 %
Total consumer92,870 8.3 %107,623 11.4 %107,996 11.8 %106,041 11.9 %90,404 12.0 %
Deferred loan fees, net(2,612) 1,515  1,592 1,359 1,267 
Total gross loans (1)1,102,347 100.0 %943,380 100.0 %918,695 100.0 %900,679 100.0 %756,628 100.0 %
Allowance for credit losses(12,915) (9,130) (9,104)(8,778)(9,326)
Total loans (1)$1,089,432  $934,250  $909,591 $891,901 $747,302 
(1) Includes nonaccrual loans of:$3,278 $1,693 $2,740 $2,875 $2,180 

At December 31, 2020, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $127,186,000, of which $2,529,000 were commercial loans, $110,616,000 were real estate loans, and $14,041,000 were consumer loans, and at December 31, 2019, the acquired loans had a balance of $152,735,000, of which $4,009,000 were commercial loans, $130,656,000 were real estate loans, and $18,070,000 were consumer loans.
At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related.  This level of concentration is consistent with 95.5% at December 31, 2019.  Although we believe the loans within this concentration have no more than the normal risk of collectability, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The Company was not involved in any sub-prime mortgage lending activities during the years ended December 31, 2020 and 2019.
We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.  Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of December 31, 2020, gross loans included $192,916,000 in PPP loans which are fully guaranteed by the SBA.
The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.
 
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Loan Maturities
 
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2020.
(In thousands) (net of deferred costs)One Year or
Less		After One
Through Five
Years		After Five
Years		Total
Loan Maturities:
Commercial and agricultural$243,230 $29,128 $23,607 $295,965 
Real estate construction and other land loans12,717 9,431 33,271 55,419 
Other real estate85,485 126,413 448,806 660,704 
Consumer and installment6,319 14,256 72,296 92,871 
 $347,751 $179,228 $577,980 $1,104,959 
Sensitivity to Changes in Interest Rates:    
Loans with fixed interest rates$64,324 $119,241 $103,716 $287,281 
Loans with floating interest rates (1)283,427 59,987 474,264 817,678 
 $347,751 $179,228 $577,980 $1,104,959 
(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective loan agreement
$46,111 $43,401 $370,460 $459,972 
Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is maintained on a cost recovery method because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows.
Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans.  Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due.  Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due.  These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred.  See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.
At December 31, 2020, total nonperforming assets totaled $3,278,000, or 0.16% of total assets, compared to $1,693,000, or 0.11% of total assets at December 31, 2019.  Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Total nonperforming assets at December 31, 2020, included nonaccrual loans totaling $3,278,000, no OREO, and no repossessed assets. Nonperforming assets at December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2020, we had no loan considered a troubled debt restructuring (“TDR”) included in nonaccrual loans compared to one TDR totaling $322,000 at December 31, 2019. See Note 4 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized. 
A summary of nonaccrual, restructured, and past due loans at December 31, 2020, 2019, 2018, 2017, and 2016 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at December 31, 2020 and 2019.  Management is not aware of any potential problem loans, which were current and accruing at December 31, 2020, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.
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Composition of Nonaccrual, Past Due and Restructured Loans
 
(As of December 31, Dollars in thousands)20202019201820172016
Nonaccrual Loans:  
Commercial and industrial$752 $187 $298 $356 $447 
Owner occupied real estate370 416 215 — 87 
Real estate construction and other land loans
1,556 — 1,439 1,397 — 
Agricultural real estate
— 321 — — — 
Commercial real estate512 381 418 976 1,082 
Equity loans and line of credit— 66 320 87 526 
Consumer and installment88 — — — 18 
Restructured loans (non-accruing):  
Owner occupied— — — — 20 
Equity loans and line of credit— 322 50 59 — 
Total nonaccrual3,278 1,693 2,740 2,875 2,180 
Accruing loans past due 90 days or more— — — — — 
Total nonperforming loans$3,278 $1,693 $2,740 $2,875 $2,180 
Interest foregone
$177 $85 $267 $210 $245 
Nonperforming loans to total loans0.30 %0.18 %0.30 %0.32 %0.29 %
Accruing loans past due 90 days or more
$— $— $— $— $— 
Accruing troubled debt restructurings$7,908 $2,040 $3,170 $3,491 $3,089 
Ratio of nonperforming loans to allowance for credit losses25.38 %18.54 %30.10 %32.75 %23.38 %
Loans considered to be impaired$11,186 $3,734 $5,909 $6,366 $5,269 
Related allowance for credit losses on impaired loans$631 $40 $90 $36 $307 
 
As of December 31, 2020 and 2019, we had impaired loans totaling $11,186,000 and $3,734,000, respectively.  We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent.  Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of examination.  Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.  For collateral dependent loans secured by real estate, we obtain external appraisals which are updated periodically, but generally no less than annually to determine the fair value of the collateral, and we record an immediate charge-off for the difference between the book value of the loan and the net realizable value, which is generally defined as appraised value less costs to dispose of the collateral.  We perform quarterly internal reviews on all criticized and classified loans. 
We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive the full amount of interest and principal under the original contractual terms, or when loans are delinquent 90 days or more, unless the loan is both well secured and in the process of collection.  Management maintains certain loans that have been
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brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.  Foregone interest on nonaccrual loans totaled $177,000 for the year ended December 31, 2020 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $85,000 for the year ended December 31, 2019 of which none was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $267,000 for the year ended December 31, 2018, of which $4,000 was attributable to troubled debt restructurings.
The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2020.
(In thousands)Balances December 31, 2019Additions to Nonaccrual LoansNet Pay DownsTransfer to Foreclosed CollateralReturns to Accrual StatusCharge-OffsBalances December 31, 2020
Non-accrual loans:
Commercial and industrial
$187 $798 $(69)$— $(164)$— $752 
Real estate
797 532 (447)— — — 882 
Real estate construction and other land loans
— 1,769 (213)— — — 1,556 
Agricultural real estate
321 — (321)— — — — 
Equity loans and lines of credit
66 — (24)— (42)— — 
Consumer
— 95 (7)— — — 88 
Restructured loans (non-accruing):
Equity loans and lines of credit
322 — (322)— — — — 
Total non-accrual$1,693 $3,194 $(1,403)$— $(206)$— $3,278 

OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or fair market value less selling costs. As of December 31, 2020, 2019, and 2018, the Bank had no OREO properties. The Company held no repossessed assets at December 31, 2020, 2019, and 2018, which is included in other assets on the consolidated balance sheets.

Allowance for Credit Losses

    We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations.  The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans.  The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.
    For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management including, but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative and quantitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 48 quarters was an appropriate look-back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look-back period.
In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan.  The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs.  Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible.  Recoveries are generally recorded only when cash payments are received.
The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio.  The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit/Compliance Committee.  They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past
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experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.
The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio.  The allowance is based on principles of accounting: (1) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (2) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
Management adheres to an internal review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses.  The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories.  The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets.  In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual.
The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for the periods indicated:
(Dollars in thousands)20202019201820172016
Loans outstanding at December 31,$1,104,959 $941,865 $917,103 $899,320 $755,361 
Average loans outstanding during the year$1,055,712 $930,883 $912,128 $793,343 $646,573 
Allowance for credit losses: 
Balance at beginning of year$9,130$9,104 $8,778 $9,326 $9,610 
Deduct loans charged off:
Commercial and industrial(121)(1,032)(94)(197)(621)
Agricultural production— — — (10)— 
Owner occupied— — — (22)— 
Consumer loans(108)(164)(116)(235)(262)
Total loans charged off(229)(1,196)(210)(464)(883)
Add recoveries of loans previously charged off:    
Commercial and industrial612 134 207 850 3,656 
Agricultural production— — — 10 1,631 
Owner occupied— — 21 49 — 
Real estate construction and other land loans— — — — 702 
Commercial real estate— — 81 17 283 
Consumer loans127 63 177 140 177 
Total recoveries739 197 486 1,066 6,449 
Net (charge-offs) recoveries510 (999)276 602 5,566 
Provision (reversal) charged to credit losses3,275 1,025 50 (1,150)(5,850)
Balance at end of year$12,915 $9,130 $9,104 $8,778 $9,326 
Allowance for credit losses as a percentage of outstanding loan balance
1.17 %0.97 %0.99 %0.98 %1.23 %
Net recoveries (charge-offs) to average loans outstanding0.05 %(0.11)%0.03 %0.08 %0.86 %

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses.  Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. 
The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit/Compliance Committee.  Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.
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The allocation of the allowance for credit losses is set forth below:
20202019201820172016
Loan Type 
(Dollars in thousands)		AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans		AmountPercent
of Loans
in Each
Category
to Total
Loans
Commercial:
Commercial and industrial$1,764 24.9 %$1,115 10.9 %$1,604 11.1 %$1,784 11.2 %$1,884 11.7 %
Agricultural production
255 2.0 %313 2.6 %67 0.9 %287 1.7 %296 3.4 %
Real estate:
Owner occupied2,128 18.9 %1,319 21.0 %1,131 19.9 %1,252 22.7 %1,408 25.3 %
Real estate construction and other land loans
1,204 5.0 %932 7.8 %1,271 11.1 %1,004 10.7 %698 9.1 %
Commercial real estate4,781 30.7 %3,453 34.9 %3,017 33.2 %1,958 29.9 %1,969 24.3 %
Agricultural real estate838 7.6 %925 8.1 %947 8.4 %1,441 8.4 %1,969 11.5 %
Other real estate223 2.6 %140 3.3 %173 3.6 %140 3.5 %156 2.7 %
Consumer:
Equity loans and lines of credit
457 5.0 %425 6.9 %419 7.6 %464 8.5 %483 8.5 %
Consumer and installment634 3.3 %472 4.5 %407 4.2 %361 3.4 %369 3.5 %
Unallocated reserves631 36 68 87 94 
Total allowance for credit losses
$12,915 100.0 %$9,130 100.0 %$9,104 100.0 %$8,778 100.0 %$9,326 100.0 %

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge-offs that exist in the portfolio at that time. We assign qualitative and quantitative factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, experience, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.
As of December 31, 2020, the allowance for credit losses (ALLL) was $12,915,000, compared to $9,130,000 at December 31, 2019, a net increase of $3,785,000.  The net increase in the ALLL reflected the provisioning and net recoveries during the year ended December 31, 2020 which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio.  Net recoveries totaled $510,000 while the provision for credit losses was $3,275,000 for the year ended December 31, 2020. The Company’s provision for credit losses during the year ended December 31, 2020 is primarily due to an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The balance of classified loans and loans graded special mention, totaled $36,136,000 and $36,406,000 at December 31, 2020 and $33,838,000 and $28,183,000 at December 31, 2019, respectively.  The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $326,179,000 as of December 31, 2020, compared to $291,182,000 as of December 31, 2019. At December 31, 2020 and 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes.  While related to credit losses, this allocation is not a part of ALLL and is considered separately as a liability for accounting and regulatory reporting purposes.  Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.
    The ALLL as a percentage of total loans was 1.17% at December 31, 2020, and 0.97% at December 31, 2019. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $127,186,000 at December 31, 2020 and $152,735,000 at December 31, 2019. Excluding these acquired loans from the calculation, the ALLL to total gross loans was 1.32% and 1.15% as of December 31, 2020 and 2019, respectively, and general reserves associated with non-impaired loans to total non-impaired loans was 1.59% and 1.16%, respectively. The loan portfolio acquired in the mergers was booked at fair value with no associated allocation in the ALLL.  The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL. 
    The Company’s loan portfolio balances in 2020 increased from 2019 through organic growth and through participation in the PPP loan program.  The PPP loans held in the loan portfolio are backed by the SBA at 100%; thus, no allowance is required. Management believes that the change in the allowance for credit losses to total loans ratios is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions
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experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values.
    Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods.  The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative and quantitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of December 31, 2020.
Non-performing loans totaled $3,278,000 as of December 31, 2020, and $1,693,000 as of December 31, 2019.  Nonperforming loans as a percentage of total loans were 0.30% at December 31, 2020 compared to 0.18% at December 31, 2019.  The Company had no other real estate owned at December 31, 2020, December 31, 2019, and December 31, 2018. No foreclosed assets were recorded at December 31, 2020, December 31, 2019, and December 31, 2018. The allowance for credit losses as a percentage of nonperforming loans was 393.99% and 539.28% as of December 31, 2020 and December 31, 2019, respectively.  In addition, management believes that the likelihood of recoveries on previously charged-off loans continues to improve based on the collection efforts of management combined with improvements in the value of real estate which serves as the primary source of collateral for loans. Management believes the allowance at December 31, 2020 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.  However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

Goodwill and Intangible Assets
 
    Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at December 31, 2020 was $53,777,000 consisting of $13,466,000, $10,394,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of FLB, SVB, VCB, Service 1st Bancorp, and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability.  A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. Goodwill is assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first and second quarters of 2020. Based upon this assessment, it was determined that it was more likely than not that the fair value of the Company was more than its carrying value and therefore no quantitative impairment test was required. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the nine months ended September 30, 2020. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. With the economic risks and uncertainties associated with the COVID-19 pandemic continuing during the fourth quarter of 2020, management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment as of December 31, 2020.
    The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of FLB of $1,879,000, the 2016 acquisition of SVB of $508,000 and the 2013 acquisition of VCB of $1,365,000.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition.  The carrying value of intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense.  The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events
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or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 2020 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 2020 which would necessitate further analysis. Amortization expense recognized was $695,000 for 2020, $695,000 for 2019 and $455,000 for 2018.
    The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31,Estimated Core Deposit Intangible Amortization
2021$662 
2022455 
202366 
Thereafter— 
Total$1,183 
  
Deposits and Borrowings
 
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
Total deposits increased $389,425,000 or 29.21% to $1,722,710,000 as of December 31, 2020, compared to $1,333,285,000 as of December 31, 2019.  Interest-bearing deposits increased $159,163,000 or 21.55% to $897,821,000 as of December 31, 2020, compared to $738,658,000 as of December 31, 2019.  Non-interest bearing deposits increased $230,262,000 or 38.72% to $824,889,000 as of December 31, 2020, compared to $594,627,000 as of December 31, 2019.  The Company’s deposit balances for the year ended December 31, 2020 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. Average non-interest bearing deposits to average total deposits was 47.46% for the year ended December 31, 2020 compared to 43.01% for the same period in 2019. Based on FDIC deposit market share information published as of June 2020, our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020 compared to 3.31% in 2019. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2020 and 2019.
The composition of the deposits and average interest rates paid at December 31, 2020 and December 31, 2019 is summarized in the table below.
(Dollars in thousands)December 31,
2020		% of Total
Deposits		Effective
Rate		December 31,
2019		% of Total
Deposits		Effective
Rate
NOW accounts$310,697 18.0 %0.11 %$266,048 20.0 %0.21 %
MMA accounts341,088 19.8 %0.18 %266,609 20.0 %0.24 %
Time deposits89,846 5.2 %0.65 %93,730 7.0 %0.73 %
Savings deposits156,190 9.1 %0.02 %112,271 8.4 %0.02 %
Total interest-bearing897,821 52.1 %0.18 %738,658 55.4 %0.26 %
Non-interest bearing824,889 47.9 % 594,627 44.6 % 
Total deposits$1,722,710 100.0 % $1,333,285 100.0 % 
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We have no known foreign deposits.  The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2020, 2019, and 2018.
 202020192018
(Dollars in thousands)BalanceRateBalanceRateBalanceRate
Savings and NOW accounts$433,742 0.08 %$370,378 0.15 %$383,667 0.12 %
Money market accounts$300,603 0.18 %$270,918 0.24 %$285,568 0.15 %
Non-interest bearing demand$744,239 — $557,348 — $553,305 — 
Total deposits$1,568,194 0.09 %$1,295,780 0.15 %$1,333,754 0.09 %
The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2020.
(In thousands) 
Three months or less$28,113 
Over 3 through 6 months10,542 
Over 6 through 12 months15,756 
Over 12 months8,385 
 $62,796 

As of December 31, 2020 and 2019, the Company had no short-term or long-term Federal Home Loan Bank (FHLB) of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans.  Refer to Liquidity section below for further discussion of FHLB advances. The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 and $70,000,000 at December 31, 2020 and 2019, respectively, at interest rates which vary with market conditions. As of December 31, 2020 and 2019, the Company had no overnight borrowings outstanding under these credit facilities.

Capital Resources
 
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  Historically, the primary sources of capital for the Company have been internally generated capital through retained earnings and the issuance of common and preferred stock. 
The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.
Our shareholders’ equity was $245,021,000 as of December 31, 2020, compared to $228,128,000 as of December 31, 2019.  The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $20,347,000, the exercise of stock options in the amount of $279,000, the effect of share-based compensation expense of $470,000, stock issued under our employee stock purchase plan of $199,000, and an increase in accumulated other comprehensive income (AOCI) of $12,039,000, partially offset by the payment of common stock cash dividends of $5,530,000 and the repurchase and retirement of common stock of $11,052,000.
During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000.
During 2019, the Bank declared and paid cash dividends to the Company in the amount of $20,100,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,805,000 or $0.43 per common share cash dividend to shareholders of record during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repurchased and retired common stock in the amount of $15,619,000.
During 2018 the Bank declared and paid cash dividends to the Company in the amount of $2,850,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $4,270,000 or $0.31 per common share cash dividend to shareholders of record during the year
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ended December 31, 2018. During the year ended December 31, 2018, the Company repurchased and retired common stock in the amount of $894,000.
The following table sets forth certain financial ratios for the years ended December 31, 2020, 2019, and 2018.
 202020192018
Net income:   
To average assets1.11 %1.36 %1.35 %
To average shareholders’ equity8.85 %9.39 %10.07 %
Dividends declared per share to net income per share26.99 %26.22 %20.00 %
Average shareholders’ equity to average assets12.54 %14.51 %13.40 %
Management considers capital requirements as part of its strategic planning process.  The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings.  The ability to obtain capital is dependent upon the capital markets as well as our performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. 
The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. 
The following table presents the Company’s regulatory capital ratios as of December 31, 2020 and December 31, 2019.
(Dollars in thousands)Actual Ratio
December 31, 2020AmountRatio
Tier 1 Leverage Ratio$178,407 9.28 %
Common Equity Tier 1 Ratio (CET 1)$173,407 14.10 %
Tier 1 Risk-Based Capital Ratio$178,407 14.50 %
Total Risk-Based Capital Ratio$191,572 15.58 %
December 31, 2019
Tier 1 Leverage Ratio$172,945 11.38 %
Common Equity Tier 1 Ratio (CET 1)$167,945 14.55 %
Tier 1 Risk-Based Capital Ratio$172,945 14.98 %
Total Risk-Based Capital Ratio$182,325 15.79 %
The following table presents the Bank’s regulatory capital ratios as of December 31, 2020 and December 31, 2019
Actual RatioMinimum regulatory requirement (1)
Minimum requirement for “Well-Capitalized”
 Institution
December 31, 2020AmountRatioAmountRatioAmountRatio
Tier 1 Leverage Ratio$177,269 9.23 %$76,852 4.00 %$96,065 5.00 %
Common Equity Tier 1 Ratio (CET 1)$177,269 14.41 %$55,346 7.00 %$79,945 6.50 %
Tier 1 Risk-Based Capital Ratio$177,269 14.41 %$73,795 8.50 %$98,394 8.00 %
Total Risk-Based Capital Ratio$190,434 15.48 %$98,394 10.50 %$122,992 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 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
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trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At December 31, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three-month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.  Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of December 31, 2020, the rate was 1.84%.  Interest expense recognized by the Company for the years ended December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000, respectively.

LIQUIDITY
 
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committees.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments.
Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB).  These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.  As of December 31, 2020, the Company had unpledged securities totaling $532,673,000 available as a secondary source of liquidity and total cash and cash equivalents of $70,278,000.  Cash and cash equivalents at December 31, 2020 increased 33.67% compared to December 31, 2019.  Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses. 
To augment our liquidity, we have established Federal funds lines with various correspondent banks.  At December 31, 2020, our available borrowing capacity includes approximately $110,000,000 in Federal funds lines with our correspondent banks and $235,371,000 in unused FHLB advances.  At December 31, 2020, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. 
The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at December 31, 2020 and 2019:
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Credit Lines (In thousands)December 31, 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$235,371 $304,987 
Balance outstanding$— $— 
Collateral pledged$435,152 $446,742 
Fair value of collateral$379,831 $410,788 
Federal Reserve Bank (interest rate at prevailing discount interest rate):  
Credit limit$13,323 $4,931 
Balance outstanding$— $— 
Collateral pledged$13,538 $5,065 
Fair value of collateral$13,703 $5,036 
 
The liquidity of our parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by state and federal regulations.

OFF-BALANCE SHEET ITEMS
 
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $326,179,000 as of December 31, 2020 compared to $291,182,000 as of December 31, 2019.  For a more detailed discussion of these financial instruments, see Note 12 to the audited Consolidated Financial Statements in this Annual Report.

Contractual Obligations

The contractual obligations of the Company, summarized by type of obligation and contractual maturity at December 31, 2020, are as follows:

(In thousands)Less Than One YearOne to Three YearsThree to Five YearsAfter Five YearsTotal
Deposits$1,709,300 $11,071 $1,453 $886 $1,722,710 
Subordinated Notes— — — 5,155 5,155 
Operating leases1,753 3,564 2,406 1,944 9,667 
Total$1,711,053 $14,635 $3,859 $7,985 $1,737,532 

Deposits represent both non-interest bearing and interest bearing deposits. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit. Deposits with indeterminate maturities, such as demand, savings and money market accounts are reflected as obligations due in less than one year.
Subordinated notes issued to a capital trust which was formed solely for the purpose of issuing trust preferred securities. These subordinated notes were acquired as a part of the merger with Service 1st. All of these securities are variable rate instruments. The trust preferred securities mature on October 7, 2036, and are redeemable quarterly at the Company’s option. See “Capital Resources.”
In the ordinary course of business, the Company is party to various operating leases.  For operating leases, the dollar balances reflected in the table above are categorized by the due date of the lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases. see Note 9 - Leases in the financial statements included in this Form 10‑K.

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CRITICAL ACCOUNTING POLICIES
 
The preparation of financial statements in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.
We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10‑K.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Allowance for Credit Losses
 
Our allowance for credit losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risks. The allowance is only an estimate of the inherent loss in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. Our accounting for estimated loan losses is discussed and disclosed primarily in Note 1 and 4 to the consolidated financial statements under the heading “Allowance for Credit Losses”.

Goodwill
 
For acquisitions, we are required to record the assets acquired, including identified intangible assets such as goodwill, and the liabilities assumed at their fair value. The carrying value of goodwill recorded must be reviewed for impairment at the reporting unit level, on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. Management has determined that the Company has one reporting unit. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides. The Company performs its annual evaluation of goodwill impairment in the third quarter of each year and may elect to perform a quantitative impairment analysis or first conduct a qualitative analysis to determine if a quantitative analysis is necessary. Additionally, the Company evaluates goodwill impairment on an interim basis if events or changes in circumstances between annual tests indicate additional testing may be warranted to determine if goodwill might be impaired.
A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. In the third quarter 2020, the Company engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in response to continued macroeconomic deterioration and the ongoing impacts to the banking industry and markets in which the Company operates. The third party specialist estimated the fair value of the reporting unit by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value.
As of December 31, 2020, based on our qualitative assessment, it was determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount, including goodwill.
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See Note 6 “Goodwill and Intangible Assets” in the financial statements in this Form 10‑K for further discussion.
 
INFLATION
 
The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items.  However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates.
At December 31, 2020, we do not believe that inflation will have a material impact on our consolidated financial position or results of operations.  However, if inflation concerns cause short term rates to rise in the near future, we may benefit by immediate repricing of a portion of our loan portfolio.  Refer to Quantitative and Qualitative Disclosures About Market Risk for further discussion.

ITEM 7A -             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions that operate like we do.  IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII).  Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.
We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings.  The volumes and yields on loans, deposits and borrowings are affected by market interest rates.  As of December 31, 2020, 74.00% of our loan portfolio was tied to adjustable-rate indices.  The majority of our adjustable rate loans are tied to prime and reprice within 90 days.  Several of our loans, tied to prime, are at their floors and will not reprice until prime plus the factor is greater than the floor.  The majority of our time deposits have a fixed rate of interest.  As of December 31, 2020, 86.06% of our time deposits mature within one year or less. 
Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability.  Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings.
Our management and Board of Directors’ Asset/Liability Committees (ALCO) are responsible for managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity.  The ALCO operates under policies and within risk limits prescribed, reviewed, and approved by the Board of Directors.
The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment.  When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by an increasing interest rate environment and positively impacted by a decreasing interest rate environment.  Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by an increasing interest rate environment and negatively impacted by a decreasing interest rate environment.  Our mix of assets consists primarily of loans and securities, none of which are held for trading purposes. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these assets if interest rates rise in the future. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest rate caps and floors.
Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes.  Earnings simulations are produced using a software model that is based on actual cash flows and repricing characteristics for all of our financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments.
Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios.  All assets and liabilities are normally subjected to up to 400 basis point increases and decreases in interest rates in 100 basis point increments.  Under each interest rate scenario, we project our net interest income.  From these results, we can then develop alternatives in dealing with the tolerance thresholds.
The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses. Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the company’s future earnings in the event those pressures become more prevalent.
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As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $5.2 million in subordinated notes issued by the Company’s subsidiary, Service 1st Capital Trust I. As a result, all significant interest rate risk procedures are performed at the Bank level.
The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effects of interest rate changes under various interest rate scenarios.
Management employs asset and liability management software and engages consultants to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of December 31, 2020. This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies. Management will continue to perform this analysis each quarter.
The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly. The results of these models indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s December 31, 2020 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bps”), 200 bps, 300 bps, and 400 bps rate increase and a 100 bps decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, 200 bps, 300 bps, and 400 bps decreases are not considered a realistic possibility and are therefore not modeled.
The results in the table below indicate the change in net interest income the Company would expect to see as of December 31, 2020, if interest rates were to change in the amounts set forth:
 
Sensitivity Analysis of Impact of Rate Changes on Interest Income
Hypothetical Change in Rates (Dollars in thousands)Projected Net Interest Income$  Change from Rates at December 31, 2020% Change from Rates at December 31, 2020
Up 400 bps$59,700 $(3,100)(4.94)%
Up 300 bps62,300 (500)(0.80)%
Up 200 bps63,000 200 0.32 %
Up 100 bps63,100 300 0.48 %
Unchanged62,800 — — 
Down 100 bps61,200 (1,600)(2.55)%
It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management, and that may turn out to be different, and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results.
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The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily, and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at December 31, 2020 and 2019:
December 31, 2020December 31, 2019
Rate Type (Dollars in thousands)BalancePercent of TotalBalancePercent of Total
Variable rate$817,678 74.00 %$646,070 68.59 %
Fixed rate287,281 26.00 %295,793 31.41 %
Total gross loans$1,104,959 100.00 %$941,863 100.00 %
Approximately 74.00% of our loan portfolio is tied to adjustable rate indices and 32.79% of our loan portfolio reprices within 90 days.  As of December 31, 2020, we had 1,702 commercial and real estate loans totaling $527,265,000 with floors ranging from 3.25% to 6.75% and ceilings ranging from 5.00% to 25.00%.
The following table shows the repricing categories of the Company’s loan portfolio at December 31, 2020 and 2019:
December 31, 2020December 31, 2019
Repricing (Dollars in thousands)BalancePercent of TotalBalancePercent of Total
< 1 Year$455,859 41.26 %$313,922 33.33 %
1-3 Years233,153 21.10 %224,591 23.85 %
3-5 Years274,800 24.87 %275,342 29.23 %
> 5 Years141,147 12.77 %128,008 13.59 %
Total gross loans$1,104,959 100.00 %$941,863 100.00 %
Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations.
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ITEM 8 -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California

 
Opinions on the Financial Statements and Internal Control over Financial Reporting

    We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and Subsidiary (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinions

    These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

    The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses – Qualitative Factors and General Reserve Allocation

As described in Notes 1 – Summary of Significant Accounting Policies and 4 – Loans and Allowance for Credit Losses to the consolidated financial statements, the allowance for credit losses is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. At December 31, 2020, the allowance for credit losses was $12.9 million, which consists of two primary components, $0.6 million of specific reserves related to impaired loans and $12.3 million of general reserves for probable incurred losses related to loans that are not impaired. The determination of the allowance for credit losses involves significant assumptions which require a high degree of judgment relating to the Company’s loan portfolio and the evaluation of the general economic conditions and other qualitative factors, and how those assumptions impact the probable
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incurred losses within the loan portfolio. Changes in these assumptions could have a material effect on the Company’s financial results. The qualitative factors for the general reserve allocation include consideration of economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

Auditing management’s determination of the qualitative factor component within the general reserve allocation was identified as a critical audit matter because of the significant auditor judgments needed to evaluate the significant subjective and complex judgments made by management.

The primary procedures we performed to address this critical audit matter included:

•Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors.
•Evaluation of the reasonableness of management’s judgments related to the data and assumptions used in the determination of qualitative factors.
•Analytically evaluating the qualitative factors year over year for directional consistency and testing for reasonableness.
•Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
•Analytical evaluation of the overall adequacy of the allowance for credit losses, including the qualitative factors.

Goodwill Impairment Evaluation

As described in Note 1 – Summary of Significant Accounting Policies and Note 6 – Goodwill and Intangible Assets to the consolidated financial statements, the Company’s goodwill balance was $53.8 million at December 31, 2020, which is allocated to the Company’s single reporting unit. Goodwill is assessed for impairment in the third quarter of each year, or on an interim basis if there are conditions that could more likely than not reduce the fair value of the Company below its carrying value. The Company engaged a third party valuation specialist to assist in performing a quantitative goodwill impairment test. The estimated fair value of the reporting unit was calculated by weighting results from various market approaches and the income approach. Significant assumptions inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in the Company’s industry. The calculation to test for goodwill impairment involves significant estimates and subjective assumptions, which require a high degree of management judgment.

Auditing the quantitative goodwill impairment test was identified as a critical audit matter as the audit procedures used to evaluate the methodologies and assumptions used involved a high degree of auditor judgment and the level of complexity required the use of more experienced audit personnel and valuation specialists.

The primary procedures we performed to address this critical audit matter included:

•Testing the completeness and accuracy of data inputs used in, and the mathematical accuracy of, the valuation analysis.
•Utilization of Crowe LLP employed valuation specialists to assist in the evaluation of the appropriateness of the methodologies and assumptions utilized in management’s valuation, including the reasonableness of significant assumptions, weighting allocation and the reasonableness of the overall fair value.
•Evaluating the sensitivity of the fair value based on various forecasted scenarios.
•Evaluating the knowledge, skill and ability of the Company’s specialist related to the analysis performed.

 /s/ Crowe LLP
We have served as the Company’s auditor since 2011.
  
Sacramento, California 
March 10, 2021 
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS 
December 31, 2020 and 2019
(In thousands, except share amounts)20202019
ASSETS  
Cash and due from banks$34,175 $24,195 
Interest-earning deposits in other banks36,103 28,379 
Total cash and cash equivalents70,278 52,574 
Available-for-sale debt securities710,092 470,746 
Equity securities7,634 7,472 
Loans, less allowance for credit losses of $12,915 at December 31, 2020 and $9,130 at December 31, 2019
1,089,432 934,250 
Bank premises and equipment, net8,228 7,618 
Bank owned life insurance28,713 30,230 
Federal Home Loan Bank stock5,595 6,062 
Goodwill53,777 53,777 
Core deposit intangibles1,183 1,878 
Accrued interest receivable and other assets29,164 32,148 
Total assets$2,004,096 $1,596,755 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Deposits:  
Non-interest bearing$824,889 $594,627 
Interest bearing897,821 738,658 
Total deposits1,722,710 1,333,285 
Junior subordinated deferrable interest debentures5,155 5,155 
Accrued interest payable and other liabilities31,210 30,187 
Total liabilities1,759,075 1,368,627 
Commitments and contingencies (Note 12)
Shareholders’ equity:
  
Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding
— — 
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 12,509,848 at December 31, 2020 and 13,052,407 at December 31, 201979,416 89,379 
Retained earnings
150,749 135,932 
Accumulated other comprehensive income, net of tax14,856 2,817 
Total shareholders’ equity245,021 228,128 
Total liabilities and shareholders’ equity$2,004,096 $1,596,755 
The accompanying notes are an integral part of these consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME 
For the Years Ended December 31, 2020, 2019, and 2018
(In thousands, except per share amounts)202020192018
Interest income:   
Interest and fees on loans$52,066 $51,464 $49,936 
Interest on deposits in other banks246 375 459 
Interest and dividends on investment securities:
Taxable11,740 13,197 10,254 
Exempt from Federal income taxes1,966 1,295 3,538 
Total interest income66,018 66,331 64,187 
Interest expense:   
Interest on deposits1,465 1,928 1,153 
Interest on junior subordinated deferrable interest debentures130 210 199 
Other— 421 132 
Total interest expense1,595 2,559 1,484 
Net interest income before provision for credit losses64,423 63,772 62,703 
Provision for credit losses3,275 1,025 50 
Net interest income after provision for credit losses61,148 62,747 62,653 
Non-interest income:   
Service charges2,071 2,756 2,986 
Appreciation in cash surrender value of bank owned life insurance711 728 695 
Interchange fees1,347 1,446 1,462 
Loan placement fees2,291 978 708 
Net realized gain on sale of credit card portfolio— — 462 
Net realized gains on sales and calls of investment securities4,252 5,199 1,314 
Federal Home Loan Bank dividends323 455 590 
Other income2,802 1,743 2,107 
Total non-interest income13,797 13,305 10,324 
Non-interest expenses:   
Salaries and employee benefits28,603 26,654 26,221 
Occupancy and equipment4,626 5,439 5,972 
Regulatory assessments490 251 619 
Data processing expense2,046 1,557 1,666 
Professional services2,398 1,305 1,475 
ATM/Debit card expenses819 920 739 
Information technology2,391 2,611 1,113 
Directors’ expenses615 710 465 
Advertising663 756 758 
Internet banking expenses650 816 732 
Acquisition and integration expenses— — 217 
Amortization of core deposit intangibles695 695 455 
Other expense3,688 4,386 4,636 
Total non-interest expenses47,684 46,100 45,068 
Income before provision for income taxes27,261 29,952 27,909 
Provision for income taxes6,914 8,509 6,620 
Net income$20,347 $21,443 $21,289 
Basic earnings per common share$1.62 $1.60 $1.55 
Diluted earnings per common share$1.62 $1.59 $1.54 
Cash dividends per common share$0.44 $0.43 $0.31 
The accompanying notes are an integral part of these consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018
(In thousands)202020192018
Net income$20,347 $21,443 $21,289 
Other Comprehensive Income (Loss):
Unrealized gains (losses) on securities:
Unrealized holdings gains (losses) arising during the period
21,344 15,455 (9,159)
Less: reclassification for net (gains) losses included in net income(4,252)(5,199)(1,314)
Other comprehensive income (loss), before tax17,092 10,256 (10,473)
Tax (expense) benefit related to items of other comprehensive income(5,053)(3,032)3,096 
Total other comprehensive income (loss) 12,039 7,224 (7,377)
Comprehensive income$32,386 $28,667 $13,912 
The accompanying notes are an integral part of these consolidated financial statements.


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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
For the Years Ended December 31, 2020, 2019, and 2018
  Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)		Total Shareholders’ Equity
 Common StockRetained Earnings
(In thousands, except share amounts)SharesAmount
Balance, January 1, 201813,696,722 $103,314 $103,275 $2,970 $209,559 
Net income— — 21,289 — 21,289 
Other comprehensive loss— — — (7,377)(7,377)
Restricted stock granted net of forfeitures
20,494 — — — — 
Cash dividend ($0.31 per common share)— — (4,270)— (4,270)
Stock issued under employee stock purchase plan
11,581 211 — — 211 
Stock-based compensation expense
— 482 — — 482 
Repurchase and retirement of common stock
(47,862)(894)— — (894)
Stock options exercised74,030 738 — — 738 
Balance, December 31, 201813,754,965 103,851 120,294 (4,407)219,738 
Net income— — 21,443 — 21,443 
Other comprehensive income— — — 7,224 7,224 
Stock issued under employee stock purchase plan
12,286 216 — — 216 
Restricted stock granted net of forfeitures
16,495 — — — — 
Stock awarded to employees5,295 100 — — 100 
Stock-based compensation expense
— 555 — — 555 
Cash dividend ($0.43 per common share)— — (5,805)— (5,805)
Repurchase and retirement of common stock
(768,754)(15,619)— — (15,619)
Stock options exercised32,120 276 — — 276 
Balance, December 31, 201913,052,407 89,379 135,932 2,817 228,128 
Net income
— — 20,347 — 20,347 
Other comprehensive income
— — — 12,039 12,039 
Restricted stock granted, net of forfeitures13,008 — — — — 
Stock issued under employee stock purchase plan
15,764 199 — — 199 
Stock awarded to employees6,548 141 — — 141 
Stock-based compensation expense
— 470 — — 470 
Cash dividend ($0.44 per common share)— — (5,530)— (5,530)
Stock options exercised43,500 279 — — 279 
Repurchase and retirement of common stock
(621,379)(11,052)— (11,052)
Balance, December 31, 202012,509,848 $79,416 $150,749 $14,856 $245,021 
 
The accompanying notes are an integral part of these consolidated financial statements.
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019, and 2018
(In thousands)202020192018
Cash flows from operating activities:   
Net income$20,347 $21,443 $21,289 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Net (increase) decrease in deferred loan costs(4,127)(77)233 
Depreciation
881 1,742 1,703 
Accretion
(1,326)(917)(898)
Amortization
4,622 4,564 6,457 
Stock-based compensation
470 555 482 
Provision for credit losses3,275 1,025 50 
Net realized gains on sales and calls of available-for-sale investment securities
(4,252)(5,199)(1,314)
Net (gain) loss on sale and disposal of equipment(6)— 2 
Net change in equity investments
(162)(218)42 
Increase in bank owned life insurance, net of expenses
(551)(728)(695)
Net gain on sale of credit card portfolio
— — (462)
Net gain on bank owned life insurance
(1,167)— — 
Net (increase) decrease in accrued interest receivable and other assets
(1,128)(9,521)3,218 
Net increase (decrease) in accrued interest payable and other liabilities
1,165 9,641 (599)
(Provision) benefit for deferred income taxes(1,051)(589)403 
Net cash provided by operating activities16,990 21,721 29,911 
Cash Flows From Investing Activities:   
Purchases of available-for-sale investment securities(540,362)(301,254)(225,970)
Proceeds from sales or calls of available-for-sale investment securities283,956 281,906 246,824 
Proceeds from maturity and principal repayment of available-for-sale investment securities35,914 25,120 36,495 
Proceeds from sale of credit card portfolio— — 2,954 
Net increase in loans(154,331)(25,606)(20,477)
Purchases of premises and equipment(1,492)(876)(791)
Purchases of bank owned life insurance(250)(1,000)— 
FHLB stock redeemed 467 781 — 
Proceeds from bank owned life insurance3,485 — — 
Proceeds from sale of premises and equipment6 — — 
Net cash (used in) provided by investing activities(372,607)(20,929)39,035 
Cash Flows From Financing Activities:   
Net increase (decrease) in demand, interest-bearing and savings deposits393,308 54,074 (112,134)
Net decrease in time deposits(3,883)(3,087)(31,253)
Proceeds from short-term borrowings from Federal Home Loan Bank— 725,500 568,500 
Repayments of short-term borrowings to Federal Home Loan Bank— (735,500)(558,500)
Proceeds of borrowings from other financial institutions— 2,870 19,705 
Repayments of borrowings from other financial institutions— (2,870)(19,705)
Purchase and retirement of common stock(11,052)(15,619)(894)
Proceeds from stock issued under employee stock purchase plan199 216 211 
Proceeds from exercise of stock options279 276 738 
Cash dividend payments on common stock(5,530)(5,805)(4,270)
Net cash provided by (used in) financing activities
373,321 20,055 (137,602)
Increase (decrease) in cash and cash equivalents
17,704 20,847 (68,656)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR52,574 31,727 100,383 
CASH AND CASH EQUIVALENTS AT END OF YEAR$70,278 $52,574 $31,727 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest$1,706 $2,517 $1,460 
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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019, and 2018
Income taxes$5,120 $9,140 $2,700 
Operating cash flows from operating leases$2,240 $1,643 $— 
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets$— $10,129 $— 
The accompanying notes are an integral part of these consolidated financial statements.
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Central Valley Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
General - Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the “Bank”).  The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities.  The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st.  The Trust is a wholly-owned subsidiary of the Company.
The Bank operates 20 full service offices throughout California’s San Joaquin Valley and Greater Sacramento Region.  The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.
The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
The accounting and reporting policies of the Company and the Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.  No customer accounts for more than 10 percent of revenues for the Company or the Bank.
 
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. Intercompany transactions and balances are eliminated in consolidation.
For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability on the Company’s consolidated financial statements.  The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet. 

Risks and Uncertainties - In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. COVID-19 continues to aggressively spread globally, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate, could adversely affect our operations. While the spread of COVID-19 has minimally affected our operations as of December 31, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely affect several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, or deferred tax assets.

Use of Estimates - The preparation of these financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses.  On an ongoing basis, management evaluates the estimates used.  Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions.
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Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.  Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased.

Investment Securities - Investments are classified into the following categories:
 
•Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.
 
•Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.
 
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.  All transfers between categories are accounted for at fair value in the period which the transfer occurs. During the year ended December 31, 2020, there were no transfers between categories.
Gains or losses on the sale of investment securities are computed on the specific identification method.  Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.
An investment security is impaired when its carrying value is greater than its fair value.  Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary.  Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.  Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income.  If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Loans - All loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses.  Interest is accrued daily based upon outstanding loan principal balances.  However, when a loan becomes impaired and the future collectability of interest and principal is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest income is suspended.  Any loan delinquent 90 days or more is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income.  Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred.
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan.  The unamortized balance of deferred fees and costs is reported as a component of net loans.

Acquired loans and Leases - Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date.  Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date.  Should the Company’s allowance for credit losses methodology
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indicate that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company will establish an allowance for those loans through a charge to provision for credit losses.  At the time of an acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which collection of all contractual payments was not considered probable at the date of acquisition. This determination is made by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate the timing and amount of future cash flows, or if the loan is acquired primarily for the rewards of ownership of the underlying collateral, the loan is classified as non-accrual. An acquired loan previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status.
    All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan.

Allowance for Credit Losses - The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio.  The allowance is established through a provision for credit losses which is charged to expense.  Additions to the allowance are made to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment.  When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to come solely from the sale or operation of underlying collateral.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
When determining the allowance for loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the allowance on acquired loans, the Company estimates probable incurred credit losses as compared to the Company’s recorded investment, with the recorded investment being net of any unaccreted discounts from the acquisition.
The determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of a simple average of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company segregates the allowance by portfolio segment.  These portfolio segments include commercial, real estate, and consumer loans.  The relative significance of risk considerations vary by portfolio segment. For commercial and real estate loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for real estate loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.

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Commercial:
Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses.  Additionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Past due payments may indicate the borrower’s capacity to repay their obligations may be deteriorating.
Agricultural production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Real Estate:
Owner-occupied commercial real estate - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows.  To meet this classification, the owner’s operation must occupy no less than 50% of the real estate held.  Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential.
Real estate construction and other land loans - Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  A major risk arises from the necessity to complete projects within specified costs and time lines.  Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity.  In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Agricultural real estate - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S. dollar affecting the export of commodities.
Investor commercial real estate - Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans.  Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans.  Trends in vacancy rates of commercial properties impact the credit quality of these loans.  High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flows to service debt obligations.
Other real estate - Primarily loans secured by agricultural real estate for development and production of permanent plantings that have not reached maximum yields.  Also real estate loans where agricultural vertical integration exists in packing and shipping of commodities.  Risk is primarily based on the liquidity of the borrower to sustain payment during the development period. 

Consumer:
Equity loans and lines of credit - The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion.  These loans generally possess a lower inherent risk of loss than other real estate portfolio segments.  Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.  Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Installment and other consumer loans - An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period.  Most installment loans are made directly for consumer purchases. Other consumer loans include other open ended unsecured consumer loans. Open ended unsecured loans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends.  Open ended unsecured loans in homogeneous loan portfolio segments are not evaluated for specific impairment.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates.  At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors.  If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.  In addition, the Company’s primary regulators, the FDIC and California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance.  These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Risk Rating - The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2020. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators.  During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans.  These credit quality indicators are used to assign a risk rating to each individual loan.  The risk ratings can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
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Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date.  Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the project’s failure to fulfill economic expectations.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  Doubtful classification is considered temporary and short term.
Loss - Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.  Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans.

Bank Premises and Equipment - Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation.  Depreciation is determined using the straight-line method over the estimated useful lives of the related assets.  The useful lives of Bank premises are estimated to be between 20 and 40 years.  The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter.  When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to expense as incurred.
The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
 
Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Investments in Low Income Housing Tax Credit Funds - The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), we elected to account for the investments in qualified affordable housing tax credit funds using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized as part of income tax expense (benefit). Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. The Company’s investment in Low Income Housing Tax Credit Funds is reported in other assets on the consolidated balance sheet.

Other Real Estate Owned - Other real estate owned (OREO) is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure.  Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses.  OREO, when acquired, is initially recorded at fair value less estimated disposition costs, establishing a new cost basis.  Fair value of OREO is generally based on an independent appraisal of the property.  Subsequent to initial measurement, OREO is carried at the lower of the recorded investment or fair value less disposition costs.  If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Revenues and expenses associated with OREO are reported as a component of noninterest expense when incurred.
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Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in noninterest expense. The carrying value of foreclosed assets was $0 at December 31, 2020 and at December 31, 2019.
 
Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Business Combinations - The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques included discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill - Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Goodwill represents the excess of the purchase price of acquired businesses over the net fair value of assets, including identified intangible assets, acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. During the fourth quarter, management performed a qualitative assessment including an evaluation of performance trends, market information and economic data and determined it was more likely than not that the fair value of the reporting unit exceeded the carrying value. As such, no quantitative goodwill impairment test was required as of December 31, 2020. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
 
Intangible Assets - The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in business combinations. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 2019 and determined no impairment was necessary. Core deposit intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount.  No such events or circumstances arose during the fourth quarter of 2020, so core deposit intangibles were not required to be retested. 
 
Loan Commitments and Related Financial Instruments - Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Income Taxes - The Company files its income taxes on a consolidated basis with the Bank.  The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.
Income tax expense represents the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized.  “More likely than not” is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. 
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Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return.  A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income.

Retirement Plans - Employee 401(k) plan expense is the amount of employer matching contributions. Profit sharing plan expense is the amount of employer contributions. Contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Deferred compensation and supplemental retirement plan expense is allocated over years of service.

Earnings Per Common Share - Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders (net income after deducting dividends, if any, on preferred stock and accretion of discount) by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, result in the issuance of common stock which shares in the earnings of the Company.  All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and splits and the treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS.
 
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Share-Based Compensation - Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Additionally, the compensation expense for the Company’s employee stock ownership plan is based on the market price of the shares as they are committed to be released to participant accounts. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Dividend Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.

Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 2. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Recently Issued Accounting Standards:

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

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

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

FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company believes the adoption of this guidance on activities subsequent to December 31,2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.

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


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2.FAIR VALUE MEASUREMENTS
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
 
Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active markets that the entity has the ability to access as of the measurement date.
 
Level 2 —Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 — Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

    Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period.
    The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):
 December 31, 2020
Carrying
Amount		Fair Value
Level 1Level 2Level 3Total
Financial assets:    
Cash and due from banks$34,175 $34,175 $— $— $34,175 
Interest-earning deposits in other banks36,103 36,103 — — 36,103 
Available-for-sale investment securities710,092 — 710,092 — 710,092 
Equity securities7,634 7,634 ——7,634 
Loans, net1,089,432 — — 1,087,124 1,087,124 
Federal Home Loan Bank stock5,595 N/AN/AN/AN/A
Accrued interest receivable8,834 9 3,617 5,208 8,834 
Financial liabilities:    
Deposits1,722,710 1,691,647 90,008 — 1,781,655 
Junior subordinated deferrable interest debentures5,155 — — 3,693 3,693 
Accrued interest payable65 — 41 24 65 
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 December 31, 2019
Carrying
Amount		Fair Value
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 investment 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 
Short-term borrowings— — — — — 
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 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 a follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors.

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(d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(e) Deposits — Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification.

(f) Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(g) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability.

(h) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2020:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):
Fair ValueLevel 1Level 2Level 3
Available-for-sale investment securities    
Debt Securities:    
U.S. Government agencies
$680 $— $680 $— 
Obligations of states and political subdivisions379,565 — 379,565 — 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
216,298 — 216,298 — 
Private label mortgage and asset backed securities83,508 — 83,508 — 
Corporate debt securities30,041 — 30,041 — 
Equity Securities7,634 7,634 ——
Total assets measured at fair value on a recurring basis$717,726 $7,634 $710,092 $— 
 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
    Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2020, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2020. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2020.
 
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Non-recurring Basis
 
    The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2020 (in thousands):
Fair ValueLevel 1Level 2Level 3
Impaired loans:    
Real estate:    
Real estate-construction and other land loans$1,260 $— $— $1,260 
Total assets measured at fair value on a non-recurring basis
$1,260 $— $— $1,260 
    At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2020.
    Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans
had a principal balance of $1,528,000 with a valuation allowance of $268,000 at December 31, 2020, and a resulting fair value
of $1,260,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
    During the year ended December 31, 2020 specific allocation for the allowance for credit losses related to loans carried at fair value was $268,000, compared to $0 during the year ended December 31, 2019. There were no net charge-offs related to loans carried at fair value at December 31, 2020 and 2019.
The following two tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2019:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):
Fair ValueLevel 1Level 2Level 3
Available-for-sale securities    
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 obligations
196,719 — 196,719 — 
Private label residential mortgage and asset backed securities
159,378 — 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 $— 
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    Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
    Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2019, no transfers between levels occurred.
    There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2019. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2019.

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

3.INVESTMENT SECURITIES
  
The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $21,091,000 at December 31, 2020 compared to an unrealized gain of $3,999,000 at December 31, 2019. The unrealized gain recorded is net of $6,235,000 and $1,182,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 2020 and 2019, respectively.
The following tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):
 December 31, 2020
 Amortized
Cost		Gross Unrealized
Gains		Gross Unrealized
Losses		Estimated
Fair Value
Available-for-Sale Securities    
Debt Securities:    
U.S. Government agencies$651 $29 $— $680 
Obligations of states and political subdivisions361,734 18,170 (339)379,565 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
214,203 3,575 (1,480)216,298 
Private label mortgage and asset backed securities82,413 1,337 (242)83,508 
Corporate debt securities30,000 260 (219)30,041 
 $689,001 $23,371 $(2,280)$710,092 
 December 31, 2019
 Amortized
Cost
Gross Unrealized
 Gains
Gross Unrealized
Losses
Estimated
 Fair Value
Available-for-Sale Securities    
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 obligations
198,125 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 
`$466,747 $8,688 $(4,689)$470,746 
 
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    Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2020, 2019, and 2018 are shown below (in thousands):
 Years Ended December 31,
202020192018
Available-for-Sale Securities   
Proceeds from sales or calls$283,956 $281,906 $246,824 
Gross realized gains from sales or calls$7,123 $5,319 $1,976 
Gross realized losses from sales or calls$(2,871)$(120)$(662)
    Losses recognized in 2020, 2019, and 2018 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fit with the Company’s current risk profile.
    The provision for income taxes includes $1,257,000, $1,537,000, and $388,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2020, 2019, and 2018, respectively.
Investment securities with unrealized losses at December 31, 2020 and 2019 are summarized and classified according to the duration of the loss period as follows (in thousands):
 December 31, 2020
 Less than 12 Months12 Months or MoreTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Available-for-Sale Securities      
Debt Securities:      
Obligations of states and political subdivisions$36,209 $(339)$— $— $36,209 $(339)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
30,755 (385)77,337 (1,095)108,092 (1,480)
Private label residential mortgage and asset backed securities
25,407 (242)— — 25,407 (242)
Corporate debt securities12,881 (119)3,900 (100)16,781 (219)
 $105,252 $(1,085)$81,237 $(1,195)$186,489 $(2,280)
 
 December 31, 2019
 Less than 12 Months12 Months or MoreTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Available-for-Sale Securities      
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 obligations
71,650 (932)69,518 (1,883)141,168 (2,815)
Private label residential mortgage backed securities
17,811 (81)5,624 (72)23,435 (153)
Corporate debt securities3,965 (35)— — 3,965 (35)
 $159,032 $(2,476)$88,855 $(2,213)$247,887 $(4,689)
 
    We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
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    As of December 31, 2020, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2020, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2020 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.
    For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.  There were no OTTI losses recorded during the twelve months ended December 31, 2020, 2019, or 2018.  
    
U.S. Government Agencies - At December 31, 2020, the Company held one U.S. Government agency securities of which was in a gain position.

Obligations of States and Political Subdivisions - At December 31, 2020, the Company held 106 obligations of states and political subdivision securities of which six were in a loss position for less than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2020, the Company held 113 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which nine were in a loss position for less than 12 months and 16 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

Private Label Mortgage and Asset Backed Securities - At December 31, 2020, the Company had a total of 31 Private Label Mortgage and Asset Backed Securities (PLMBS) with a remaining principal balance of $82,413,000 and a net unrealized gain of approximately $1,095,000.  Six of these securities were in a loss position for less than 12 months and none have been in a loss position for more than 12 months at December 31, 2020.  Seven of these PLMBS with a remaining principal balance of $812,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

Corporate Debt Securities
 
    At December 31, 2020, the Company held nine corporate debt securities of which three were in a loss position for less than 12 months and one has been in a loss position for more than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2020 and 2019 by contractual maturity are shown in the two tables below (in thousands).  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
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December 31, 2020December 31, 2019
 Amortized 
Cost		Estimated 
Fair Value		Amortized 
Cost		Estimated 
Fair Value
Within one year$298 $305 $— $— 
After one year through five years3,254 3,631 1,561 1,697 
After five years through ten years18,330 20,644 20,280 21,088 
After ten years339,852 354,985 67,733 68,326 
 361,734 379,565 89,574 91,111 
Investment securities not due at a single maturity date:  
U.S. Government agencies651 680 14,740 14,494 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
214,203 216,298 198,125 196,719 
Private label mortgage and asset backed securities
82,413 83,508 155,308 159,378 
Corporate debt securities
30,000 30,041 9,000 9,044 
 $689,001 $710,092 $466,747 $470,746 
 
Investment securities with amortized costs totaling $178,561,000 and $89,158,000 and fair values totaling $185,053,000 and $91,677,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2020 and 2019, respectively.  


4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized as follows (in thousands):
Loan Type December 31,
2020		% of Total 
loans		December 31,
2019		% of Total 
loans
Commercial:    
Commercial and industrial$273,994 24.9 %$102,541 10.9 %
Agricultural production21,971 2.0 %23,159 2.6 %
Total commercial295,965 26.9 %125,700 13.5 %
Real estate:
Owner occupied208,843 18.9 %197,946 21.0 %
Real estate construction and other land loans55,419 5.0 %73,718 7.8 %
Commercial real estate338,886 30.7 %329,333 34.9 %
Agricultural real estate84,258 7.6 %76,304 8.1 %
Other real estate28,718 2.6 %31,241 3.3 %
716,124 64.8 %708,542 75.1 %
Consumer:
Equity loans and lines of credit55,634 5.0 %64,841 6.9 %
Consumer and installment37,236 3.3 %42,782 4.5 %
Total consumer92,870 8.3 %107,623 11.4 %
Net deferred origination costs(2,612)1,515 
Total gross loans1,102,347 100.0 %943,380 100.0 %
Allowance for credit losses(12,915) (9,130) 
Total loans$1,089,432  $934,250  
At December 31, 2020 and 2019, loans originated under Small Business Administration (SBA) programs totaling $24,220,000 and $21,910,000, respectively, were included in the real estate and commercial categories. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At December 31, 2020, PPP loans totaling $192,916,000 were outstanding and
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included in the commercial and industrial category above. Approximately $434,983,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $235,371,000 as of December 31, 2020.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.
Salaries and employee benefits totaling $2,782,000, $2,116,000, and $2,453,000 have been deferred as loan origination costs for the years ended December 31, 2020, 2019, and 2018, respectively.

Allowance for Credit Losses

    The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.
    For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 48 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

Changes in the allowance for credit losses were as follows (in thousands):
 Years Ended December 31,
202020192018
Balance, beginning of year$9,130 $9,104 $8,778 
Provision charged to operations3,275 1,025 50 
Losses charged to allowance(229)(1,196)(210)
Recoveries739 197 486 
Balance, end of year$12,915 $9,130 $9,104 

The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2020, 2019, and 2018 by portfolio segment (in thousands):
 CommercialReal EstateConsumerUnallocatedTotal
Allowance for credit losses:     
Beginning balance, January 1, 2020$1,428 $6,769 $897 $36 $9,130 
Provision charged to operations100 2,405 175 595 3,275 
Losses charged to allowance(121)— (108)— (229)
Recoveries612 — 127 — 739 
Ending balance, December 31, 2020$2,019 $9,174 $1,091 $631 $12,915 
Allowance for credit losses:     
Beginning balance, January 1, 2019$1,671 $6,539 $826 $68 $9,104 
Provision (reversal) charged to operations655 230 172 (32)1,025 
Losses charged to allowance(1,032)— (164)— (1,196)
Recoveries134 — 63 — 197 
Ending balance, December 31, 2019$1,428 $6,769 $897 $36 $9,130 
Allowance for credit losses:     
Beginning balance, January 1, 2018$2,071 $5,795 $825 $87 $8,778 
Provision (reversal) charged to operations(513)642 (60)(19)50 
Losses charged to allowance(94)— (116)— (210)
Recoveries207 102 177 — 486 
Ending balance, December 31, 2018$1,671 $6,539 $826 $68 $9,104 
    
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The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2020 and December 31, 2019 (in thousands):
 CommercialReal EstateConsumerUnallocatedTotal
Allowance for credit losses:     
Ending balance, December 31, 2020$2,019 $9,174 $1,091 $631 $12,915 
Ending balance: individually evaluated for impairment$339 $271 $21 $— $631 
Ending balance: collectively evaluated for impairment$1,680 $8,903 $1,070 $631 $12,284 
Ending balance, December 31, 2019$1,428 $6,769 $897 $36 $9,130 
Ending balance: individually evaluated for impairment$2 $3 $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 December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands):
 CommercialReal EstateConsumerTotal
Loans:    
Ending balance, December 31, 2020$295,965 $716,124 $92,870 $1,104,959 
Ending balance: individually evaluated for impairment
$7,402 $2,616 $1,168 $11,186 
Ending balance: collectively evaluated for impairment
$288,563 $713,508 $91,702 $1,093,773 
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 

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2020 (in thousands):
PassSpecial MentionSubstandardDoubtfulTotal
Commercial:
Commercial and industrial$258,587 $5,004 $10,403 $— $273,994 
Agricultural production18,289 377 3,305 — 21,971 
Real Estate:
Owner occupied197,721 3,870 7,252 — 208,843 
Real estate construction and other land loans
50,560 1,622 3,237 — 55,419 
Commercial real estate314,710 14,537 9,639 — 338,886 
Agricultural real estate72,875 10,195 1,188 — 84,258 
Other real estate28,557 161 — — 28,718 
Consumer:
Equity loans and lines of credit54,034 640 960 — 55,634 
Consumer and installment37,084 — 152 — 37,236 
Total$1,032,417 $36,406 $36,136 $— $1,104,959 

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    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 MentionSubstandardDoubtfulTotal
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 loans
72,142 — 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 
    The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2020 (in thousands):
 30-59 Days
Past Due		60-89
Days Past
Due
Greater
Than
 90 Days
Past Due
Total Past
Due		CurrentTotal
Loans		Recorded
Investment
> 90 Days
Accruing		Non-accrual
Commercial:        
Commercial and industrial
$— $— $60 $60 $273,934 $273,994 $— $752 
Agricultural production
— — — — 21,971 21,971 — — 
Real estate:—   — —  
Owner occupied— — — — 208,843 208,843 — 370 
Real estate construction and other land loans
— — — — 55,419 55,419 — 1,556 
Commercial real estate— — — — 338,886 338,886 — 512 
Agricultural real estate— — — — 84,258 84,258 — — 
Other real estate— — — — 28,718 28,718 — — 
Consumer:  — —  
Equity loans and lines of credit
— 24 — 24 55,610 55,634 — — 
Consumer and installment
5 — — 5 37,231 37,236 — 88 
Total$5 $24 $60 $89 $1,104,870 $1,104,959 $— $3,278 
 
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    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 production
— — — — 23,159 23,159 — — 
Real estate:—    —  
Owner occupied— 218 — 218 197,728 197,946 — 416 
Real estate construction and other land loans
— — — — 73,718 73,718 — — 
Commercial real estate— 381 — 381 328,952 329,333 — 381 
Agricultural real estate— — — — 76,304 76,304 — 321 
Other real estate— — — — 31,241 31,241 — — 
Consumer:    —  
Equity loans and lines of credit
— — — — 64,841 64,841 — 388 
Consumer and installment
168 — — 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 December 31, 2020 (in thousands):
Recorded
Investment		Unpaid
Principal
Balance		Related
Allowance
With no related allowance recorded:   
Commercial:   
Commercial and industrial$60 $61 $— 
Real estate:   
Owner occupied370 409 — 
Real estate construction and other land loans28 28 — 
Commercial real estate512 561 — 
Total real estate910 998 — 
Consumer:   
Equity loans and lines of credit144 180 — 
Total with no related allowance recorded1,114 1,239 — 
With an allowance recorded:   
Commercial:   
Commercial and industrial7,342 7,373 339 
Real estate:   
Real estate construction and other land loans1,528 1,552 268 
Commercial real estate148 149 3 
Agricultural real estate30 29 — 
Total real estate1,706 1,730 271 
Consumer:   
Equity loans and lines of credit936 936 9 
Consumer and installment88 93 12 
Total consumer1,024 1,029 21 
Total with an allowance recorded10,072 10,132 631 
Total$11,186 $11,371 $631 

    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 — 
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 2 
Real estate:   
Commercial real estate152 153 3 
Agricultural real estate37 37 — 
Total real estate189 190 3 
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 presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2020, 2019, and 2018 (in thousands):
Year Ended
December 31, 2020		Year Ended
December 31, 2019		Year Ended
December 31, 2018
Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
With no related allowance recorded:      
Commercial:      
Commercial and industrial$1,322 $— $214 $— $311 $— 
Agricultural production104 — — — — — 
Total commercial1,426 — 214 — 311 — 
Real estate:      
Owner occupied394 — 223 — 17 — 
Real estate construction and other land loans
8 — 1,174 45 2,857 85 
Commercial real estate779 — 1,306 50 1,542 51 
Agricultural real estate146 — 25 — 1,173 159 
Other real estate— — — — 702 — 
Total real estate1,327 — 2,728 95 6,291 295 
Consumer:      
Equity loans and lines of credit216 12 593 13 217 — 
Total with no related allowance recorded2,969 12 3,535 108 6,819 295 
—      
With an allowance recorded:—      
Commercial:— 
Commercial and industrial6,139 582 57 1 55 4 
Agricultural production430 — — — — — 
Total commercial6,569 582 57 1 55 4 
Real estate: — — — 
Real estate construction and other land loans
586 — — — — — 
Commercial real estate206 11 325 12 200 12 
Agricultural real estate27 2 42 2 49 3 
Other real estate— — — — 86 — 
Total real estate819 13 367 14 335 15 
Consumer:      
Equity loans and lines of credit1,001 55 1,139 56 1,054 57 
Consumer and installment64 — 20 — 3 — 
Total consumer1,065 55 1,159 56 1,057 57 
Total with an allowance recorded8,453 650 1,583 71 1,447 76 
Total$11,422 $662 $5,118 $179 $8,266 $371 
    Foregone interest on nonaccrual loans totaled $177,000, $85,000, and $267,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes.
    
Troubled Debt Restructurings:

As of December 31, 2020 and 2019, the Company has a recorded investment in troubled debt restructurings of $7,908,000 and, $2,362,000, respectively. The Company has allocated $20,000 and $38,000 of specific reserves for those loans at December 31, 2020 and 2019, respectively. The Company has committed to lend no additional amounts as of December 31, 2020 to customers with outstanding loans that are classified as troubled debt restructurings.
    For the years ended December 31, 2020, 2019, and 2018 the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the
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stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.
As discussed in Note 1 to these financial statements, Section 4013 of the CARES Act and the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. The remaining TDRs disclosed below were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $25 million resulting from the COVID-19 pandemic that were not classified as a TDRs at December 31, 2020.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2020 (dollars in thousands):
Troubled Debt Restructurings:Number of LoansPre-Modification Outstanding Recorded Investment (1)Principal ModificationPost Modification Outstanding Recorded Investment (2)Outstanding Recorded Investment
Commercial:
Commercial and industrial1 $12,925 $— $12,925 $6,650 
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2019 (dollars in thousands):
Troubled Debt Restructurings:Number of LoansPre-Modification Outstanding Recorded Investment (1)Principal ModificationPost Modification Outstanding Recorded Investment (2)Outstanding Recorded Investment
Consumer
Equity loans and line of credit3 $532 $— $532 $446 
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2018 (dollars in thousands):
Troubled Debt Restructurings:Number of LoansPre-Modification Outstanding Recorded Investment (1)Principal ModificationPost Modification Outstanding Recorded Investment (2)Outstanding Recorded Investment
Commercial:
Commercial and Industrial1 $38 $— $38 $30 
Real Estate:
Commercial real estate1 166 — 166 161 
Total
2 $204 $— $204 $191 
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

    A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 2020, 2019, and 2018.


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5. BANK PREMISES AND EQUIPMENT
 
Bank premises and equipment consisted of the following (in thousands): 
 December 31,
20202019
Land$1,131 $1,131 
Buildings and improvements6,948 6,948 
Furniture, fixtures and equipment12,473 11,045 
Leasehold improvements4,248 4,198 
 24,80023,322 
Less accumulated depreciation and amortization(16,572)(15,704)
 $8,228$7,618 
 
Depreciation and amortization included in occupancy and equipment expense totaled $881,000, $1,742,000 and $1,703,000 for the years ended December 31, 2020, 2019, and 2018, respectively.



6.  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 December 31, 2020 and 2019 was $53,777,000. Total goodwill at December 31, 2020 consisted of $13,466,000, $10,394,000, $6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management determined it appropriate to perform a quantitative goodwill impairment test in the third quarter of 2020. A third party valuation specialist was engaged to assist with the performance of the test. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020. Therefore, there was no impairment of goodwill recorded during the nine months ended September 30, 2020.
    Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. With the economic risks and uncertainties associated with the COVID-19 pandemic continuing during the fourth quarter of 2020, management performed a qualitative assessment including performance trends, market information and economic data and determined it was more likely than not that the fair value of the reporting unit exceeded the carrying value. As such no quantitative goodwill impairment test was required as of December 31, 2020.
    The intangible assets at December 31, 2020 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Folsom Lake Bank in 2017 of $1,879,000, Sierra Vista Bank in 2016 of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. At December 31, 2020, the weighted average remaining amortization period is two years.  The carrying value of intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in accumulated amortization expense.  The carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 2020 and determined no impairment was necessary.  Amortization expense recognized was $695,000 for 2020, $695,000 for 2019, and $455,000 for 2018.

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    The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31,Estimated Core Deposit Intangible Amortization
2021$662 
2022455 
202366 
Thereafter— 
Total$1,183 
 

7. DEPOSITS
 
Interest-bearing deposits consisted of the following (in thousands):
 December 31,
20202019
Savings$156,190 $112,271 
Money market341,088 266,609 
NOW accounts310,697 266,048 
Time, $250,000 or more19,790 22,729 
Time, under $250,00070,056 71,001 
$897,821 $738,658 
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2021$76,436 
20228,372 
20232,699 
2024760 
2025693 
Thereafter886 
 $89,846 
 
Interest expense recognized on interest-bearing deposits consisted of the following (in thousands):
 Years Ended December 31,
202020192018
Savings$25 $28 $37 
Money market542 656 419 
NOW accounts316 538 414 
Time certificates of deposit582 706 283 
$1,465 $1,928 $1,153 

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8. BORROWING ARRANGEMENTS
 
Federal Home Loan Bank Advances - As of December 31, 2020 and December 31, 2019 , the Company had no Federal Home Loan Bank (FHLB) of San Francisco advances. Approximately $434,983,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $235,371,000 as of December 31, 2020. FHLB advances are also secured by investment securities with amortized costs totaling $169,000 and $248,000 and market values totaling $178,000 and $256,000 at December 31, 2020 and 2019, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

Lines of Credit - The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 and $70,000,000 at December 31, 2020 and 2019, respectively, at interest rates which vary with market conditions. As of December 31, 2020 and 2019, the Company had no Federal funds purchased.

Federal Reserve Line of Credit - The Bank has a line of credit in the amount of $13,323,000 and $4,931,000 with the Federal Reserve Bank of San Francisco (FRB) at December 31, 2020 and 2019, respectively, which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $13,538,000 and $5,065,000 and market values totaling $13,703,000 and $5,036,000, respectively.  At December 31, 2020 and 2019, the Bank had no outstanding borrowings with the FRB.

 
Note 9.  Leases
 
Leases - The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases with terms extending through 2028.  Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease cost is comprised of lease expense recognized on a straight-line basis, the amortization of the right-of-use asset and the implicit interest accreted on the operating lease liability. Operating lease cost is included in occupancy and equipment expense on our consolidated statements of income. We evaluate the lease term by assuming the exercise of options to extend that are reasonably assured and those option periods covered by an option to terminate the lease, if deemed not reasonably certain to be exercised. The lease term is used to determine the straight-line expense and limits the depreciable life of any related leasehold improvements. Certain leases require us to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are classified in occupancy and equipment expense on our consolidated statements of income, consistent with similar costs for owned locations, but is not included in operating lease cost below. We calculate the lease liability using a discount rate that represents our incremental borrowing rate at the lease commencement date.

Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2020 are as follows (in thousands):
Years Ending December 31,
2021$1,753 
20221,843 
20231,721 
20241,383 
20251,023 
Thereafter1,944 
Total lease payments9,667 
Less: imputed interest(786)
Present value of operating lease liabilities$8,881 



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The table below summarizes the total lease cost for the period ending:
(Dollars in thousands)December 31, 2020December 31, 2019
Operating lease cost$2,243 $2,226 
Short-term lease cost13 68 
Variable lease cost288 375 
Total lease cost$2,544 $2,669 

The table below summarizes other information related to our operating leases:
 December 31, 2020December 31, 2019
Weighted average remaining lease term, in years67
Weighted average discount rate2.77 %2.93 %
The table below shows operating lease right of use assets and operating lease liabilities as of :
(Dollars in thousands)December 31, 2020December 31, 2019
Operating lease right-of-use assets$8,195 $9,735 
Operating lease liabilities$8,881 $10,418 

The right-of-use-assets and lease liabilities are included with other assets and other liabilities on the balance sheet, respectively.

10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
 
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.  The Company succeeded to all of the rights and obligations of Service 1st in connection with the merger with Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At December 31, 2020, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.
Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of December 31, 2020, the rate was 1.84%.  Interest expense recognized by the Company for the years ended December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000, respectively.

 
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11. INCOME TAXES
 
The provision for income taxes for the years ended December 31, 2020, 2019, and 2018 consisted of the following (in thousands):
FederalStateTotal
2020
Current$4,915 $3,050 $7,965 
Deferred(656)(395)(1,051)
Provision for income taxes$4,259 $2,655 $6,914 
2019
Current$5,747 $3,351 $9,098 
Deferred(387)(202)(589)
Provision for income taxes$5,360 $3,149 $8,509 
2018
Current$3,995 $2,689 $6,684 
Deferred(140)76 (64)
Provision for income taxes$3,855 $2,765 $6,620 
 
Deferred tax assets (liabilities) consisted of the following (in thousands):
 December 31,
20202019
Deferred tax assets:  
Allowance for credit losses$3,818 $2,638 
Deferred compensation4,729 4,490 
Net operating loss carryovers2,148 2,266 
Mark-to-market adjustment21 58 
Other deferred tax assets303 374 
Other-than-temporary impairment192 192 
Loan and investment impairment851 1,158 
Operating lease liabilities2,625 3,080 
Partnership income105 200 
State taxes674 692 
Total deferred tax assets15,466 15,148 
Deferred tax liabilities:  
Operating lease right-of-use assets(2,423)(2,878)
Finance leases(275)(175)
Unrealized gain on available-for-sale investment securities(6,235)(1,182)
Core deposit intangible(350)(555)
FHLB stock(191)(234)
Loan origination costs(849)(925)
Bank premises and equipment(405)(459)
Total deferred tax liabilities(10,728)(6,408)
Net deferred tax assets$4,738 $8,740 
The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors.  The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  More likely than not is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether,
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based on the weight of the evidence, a valuation allowance is needed.  Thus, management concludes no valuation allowance is necessary against deferred tax assets as of December 31, 2020 and 2019.
The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes.  The significant items comprising these differences for the years ended December 31, 2020, 2019, and 2018 consisted of the following:
 202020192018
Federal income tax, at statutory rate21.0 %21.0 %21.0 %
State taxes, net of Federal tax benefit7.7 %8.3 %7.8 %
Tax exempt investment security income, net(1.5)%(0.9)%(2.7)%
Bank owned life insurance, net(1.2)%(0.4)%(0.6)%
Compensation - Stock Compensation(0.2)%(0.2)%(0.6)%
Change in uncertain tax positions— %— %(0.3)%
Other(0.4)%0.6 %(0.9)%
Effective tax rate25.4 %28.4 %23.7 %
 
As of December 31, 2020, the Company had Federal and California net operating loss (“NOL”) carry-forwards of $7,093,000 and $7,692,000, respectively. These NOLs were acquired through business combinations and are subject to IRC 382 will begin expiring at various dates between 2029 and 2035, for federal purposes and various dates between 2029 and 2036 for California purposes. While they are subject to IRC Section 382, management has determined that all of the NOLs are more than likely than not to be utilized before they expire.
    The Company and its subsidiary file income tax returns in the U.S. federal, California, and Georgia jurisdictions.  The Company conducts all of its business activities in the State of California.  There are no pending U.S. federal or state income tax examinations by those taxing authorities.  The Company is no longer subject to the examination by U.S. federal taxing authorities for the years ended before December 31, 2017 and by the state taxing authorities for the years ended before December 31, 2016.
As of December 31, 2020, the Company has no unrecognized tax benefits and does not expect any material changes in the next 12 months.
During the years ended December 31, 2020 and 2019, the Company recorded no interest or penalties related to uncertain tax positions.


12. COMMITMENTS AND CONTINGENCIES

Federal Reserve Requirements - Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits. The amount of such reserve balances required at December 31, 2020 was zero .
 
Correspondent Banking Agreements - The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $9,628,000 at December 31, 2020.
 
Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.  These financial instruments consist of commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit risk (in thousands):
 December 31,
20202019
Commitments to extend credit$314,774 $289,465 
Standby letters of credit$11,405 $1,717 
 
Commitments to extend credit consist primarily of unfunded commercial loan commitments and revolving lines of credit, single-family residential equity lines of credit and commercial and residential real estate construction loans. 
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Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction.  Commercial revolving lines of credit have a high degree of industry diversification.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are generally secured and are issued by the Bank to guarantee the financial obligation or performance of a customer to a third party.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2020 and 2019.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.
At December 31, 2020, commercial loan commitments represent 48% of total commitments and are generally secured by collateral other than real estate or unsecured.  Real estate loan commitments represent 42% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%.  Consumer loan commitments represent the remaining 10% of total commitments and are generally unsecured.  In addition, the majority of the Bank’s loan commitments have variable interest rates.
At December 31, 2020 and 2019, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process.  While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Changes in this contingent allocation are recorded in other non-interest expense.

Concentrations of Credit Risk - At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related.
At December 31, 2019, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 95.5% of total loans of which 13.5% were commercial and 82% were real-estate-related.
Management believes the loans within these concentrations have no more than the typical risks of collectability.  However, in light of the current economic environment, additional declines in the performance of the economy in general, or a continued decline in real estate values or drought-related decline in agricultural business in the Company’s primary market area could have an adverse impact on collectability, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition, results of operations and cash flows of the Company.
 
Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.


13. SHAREHOLDERS’ EQUITY
 
Regulatory Capital - The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC.  Failure to meet these minimum capital requirements could result in mandatory or, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.  The most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines.  Management knows of no conditions or events since that notification that would change the Bank’s category.
Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of well capitalized under the regulatory framework for prompt correct action and the Company’s ratios exceed the required minimum ratios for capital adequacy purposes.
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Effective August 30, 2018, bank holding companies with consolidated assets of $3 billion or more and banks like Central Valley Community Bank must comply with minimum capital ratio requirements which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition, a “capital conversation buffer” is established which requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2020 and 2019.  There are no conditions or events since those notifications that management believes have changed those categories. The capital ratios for the Company and the Bank are presented in the table below (exclusive of the capital conservation buffer).

The following table presents the Company’s and the Bank’s actual capital ratios as of December 31, 2020 and December 31, 2019, as well as the minimum capital ratios for capital adequacy for the Bank.
(Dollars in thousands)Actual Ratio
December 31, 2020AmountRatio
Tier 1 Leverage Ratio$178,407 9.28 %
Common Equity Tier 1 Ratio (CET 1)$173,407 14.10 %
Tier 1 Risk-Based Capital Ratio$178,407 14.50 %
Total Risk-Based Capital Ratio$191,572 15.58 %
December 31, 2019
Tier 1 Leverage Ratio$172,945 11.38 %
Common Equity Tier 1 Ratio (CET 1)$167,945 14.55 %
Tier 1 Risk-Based Capital Ratio$172,945 14.98 %
Total Risk-Based Capital Ratio$182,325 15.79 %

The following table presents the Bank’s regulatory capital ratios as of December 31, 2020 and December 31, 2019.
(Dollars in thousands)Actual RatioMinimum regulatory requirement (1)
December 31, 2020AmountRatioAmountRatio
Tier 1 Leverage Ratio$177,269 9.23 %$76,852 4.00 %
Common Equity Tier 1 Ratio (CET 1)$177,269 14.41 %$55,346 7.00 %
Tier 1 Risk-Based Capital Ratio$177,269 14.41 %$73,795 8.50 %
Total Risk-Based Capital Ratio$190,434 15.48 %$98,394 10.50 %
December 31, 2019
Tier 1 Leverage Ratio$171,332 11.27 %$60,810 4.00 %
Common Equity Tier 1 Ratio (CET 1)$171,332 14.85 %$51,930 7.00 %
Tier 1 Risk-Based Capital Ratio$171,332 14.85 %$69,240 8.50 %
Total Risk-Based Capital Ratio$180,712 15.66 %$92,320 10.50 %
(1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%.
Dividends - During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the
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year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000.
    During 2019, the Bank declared and paid cash dividends to the Company in the amount of $20,100,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,805,000 or $0.43 per common share cash dividend to shareholders of record during the year ended December 31, 2019. During the year ended December 31, 2019, the Company repurchased and retired common stock in the amount of $15,619,000
    During 2018, the Bank declared and paid cash dividends to the Company in the amount of $2,850,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $4,270,000 or $0.31 per common share cash dividend to shareholders of record during the year ended December 31, 2018. During the year ended December 31, 2018, the Company repurchased and retired common stock in the amount of $894,000.
The Company’s primary source of income with which to pay cash dividends is dividends from the Bank.  The California Financial Code restricts the total amount of dividends payable by a bank at any time without obtaining the prior approval of the California Department of Business Oversight to the lesser of (1) the Bank’s retained earnings or (2) the Bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2020, $26,191,000 of the Bank’s retained earnings were free of these restrictions.
A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations is as follows (in thousands, except share and per-share amounts):
 For the Years Ended December 31,
202020192018
Basic Earnings Per Common Share:   
Net income$20,347 $21,443 $21,289 
Weighted average shares outstanding12,534,078 13,415,118 13,699,823 
Net income per common share$1.62 $1.60 $1.55 
Diluted Earnings Per Common Share:   
Net income$20,347 $21,443 $21,289 
Weighted average shares outstanding12,534,078 13,415,118 13,699,823 
Effect of dilutive stock options and warrants42,241 98,489 125,185 
Weighted average shares of common stock and common stock equivalents
12,576,319 13,513,607 13,825,008 
Net income per diluted common share
$1.62 $1.59 $1.54 
 
No outstanding options and restricted stock awards were anti-dilutive at December 31, 2020, 2019, and 2018.

14. EQUITY-BASED COMPENSATION
 
On December 31, 2020, the Company had four equity-based compensation plans, which are described below. The Plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise or restricted share grants. 
    The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years.
In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company’s common stock, including restricted stock. The 2015 plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is over one to five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, 768,560 shares remain reserved for future grants as of December 31, 2020.
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Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan whereby our employees may purchase Company common shares through payroll deductions of between one percent and 15 percent percent of pay in each pay period. Shares are purchased at the end of an offering period at a discount of ten percent from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The plan calls for 500,000 common shares to be set aside for employee purchases, and there were 457,928 shares available for future purchase under the plan as of December 31, 2020.
In October 2017, the Company adopted the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. The maximum number of shares that can be issued with respect to all awards under the plan is 38,400.
For the years ended December 31, 2020, 2019, and 2018, the compensation cost recognized for share-based compensation was $470,000, $555,000, and $482,000, respectively. The recognized tax benefit for share-based compensation expense was $76,000, $46,000, and $142,000 for 2020, 2019, and 2018 respectively.

Stock Options - The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.
No options to purchase shares of the Company’s common stock were granted during the years ending December 31, 2020, 2019 and 2018 from any of the Company’s stock based compensation plans.
A summary of the combined activity of the Plans during the years then ended is presented below (dollars in thousands, except per-share amounts):
SharesWeighted 
Average
Exercise
Price		Weighted
Average
Remaining
Contractual
Term (Years)		Aggregate
Intrinsic Value
Options outstanding at January 1, 2018232,870 $9.13 
Options exercised(74,030)$9.97 
Options forfeited(4,400)$10.85 
Options outstanding at December 31, 2018154,440 $8.68 2.81$1,554 
Options exercised(32,120)$8.59   
Options forfeited(1,200)$5.55   
Options outstanding at December 31, 2019121,120 $8.73 2.06$1,567 
Options exercised(43,500)$6.39   
Options forfeited(550)$7.40   
Options outstanding at December 31, 202077,070 $10.06 1.51$382,291 
Options vested or expected to vest at December 31, 202077,070 $10.06 1.51$382,291 
Options exercisable at December 31, 202077,070 $10.06 1.51$382,291 
 
Information related to the stock option plan during each year follows (in thousands):
202020192018
Intrinsic value of options exercised$433 $366 $767 
Cash received from options exercised$279 $276 $738 
Excess tax benefit realized for option exercises$76 $46 $142 
As of December 31, 2020, there is no unrecognized compensation cost related to stock options granted under all Plans. All options are fully vested.
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Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for the issuance of shares to directors and officers. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant.
    The following table presents the restricted common stock activity during the years presented: 
 SharesWeighted
Average
Grant Date Fair Value
Nonvested outstanding shares at January 1, 201863,768 $13.33 
Vested(20,733)$13.09 
Forfeited(1,710)$14.37 
Nonvested outstanding shares at December 31, 201863,529 $15.98 
Granted25,420 $19.77 
Vested(40,159)$16.61 
Forfeited(3,630)$18.06 
Nonvested outstanding shares at December 31, 201945,160 $17.38 
Granted21,397 $16.42 
Vested(34,703)$18.23 
Forfeited(1,841)$19.16 
Nonvested outstanding shares at December 31, 202030,013 $15.60 
    The shares awarded to employees and directors under the restricted stock agreements vest on applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.
    As of December 31, 2020, there were 30,013 shares of restricted stock that are nonvested and expected to vest. Share-based compensation cost charged against income for restricted stock awards was $449,000, $533,000, and $459,000 for the year ended December 31, 2020, 2019, and 2018 respectively.
    As of December 31, 2020, there was $225,000 of total unrecognized compensation cost related to nonvested restricted common stock.  Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 0.85 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $2,507,000 at December 31, 2020.


15. EMPLOYEE BENEFITS
 
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit sharing plan.  The 401(k) plan covers substantially all employees who have completed a one-month employment period.  Participants in the profit sharing plan are eligible to receive employer contributions after completion of 2 years of service.  Bank contributions to the profit sharing plan are determined at the discretion of the Board of Directors.  Participants are automatically vested 100% in all employer contributions.  The Bank contributed $370,000, $750,000, and $900,000 to the profit sharing plan in 2020, 2019, and 2018, respectively.  
Additionally, the Bank may elect to make a matching contribution to the participants’ 401(k) plan accounts.  The amount to be contributed is announced by the Bank at the beginning of the plan year. For the years ended December 31, 2020 and 2019, the Bank made a 100% matching contribution on all deferred amounts up to 5% of eligible compensation.  For the year ended December 31, 2018, the Bank made a 100% matching contribution on all deferred amounts up to 3% of eligible compensation and a 50% matching contribution on all deferred amounts above 3% to a maximum of 5%.  For the years ended December 31, 2020, 2019, and 2018, the Bank made matching contributions totaling $1,008,000, $959,000, and $748,000, respectively.

Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation Plan which provides directors with an unfunded, deferred compensation program.  Under the plan, eligible participants may elect to defer some or all of their current compensation or director fees.  Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.49% at December 31, 2020).  At December 31, 2020 and 2019, the total net deferrals included in accrued interest payable and other liabilities were $4,292,000 and $4,177,000, respectively.
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In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is the beneficiary and owner of the policies.  The cash surrender value of the policies totaled $9,464,000 and $9,686,000 and at December 31, 2020 and 2019, respectively.  Income recognized on these policies, net of related expenses, for the years ended December 31, 2020, 2019, and 2018, was $245,000, $250,000, and $249,000, respectively.
In October 2015, the Board of Directors of the Company and the Bank adopted a board resolution to create the Central Valley Community Bank Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all eligible executives of the Bank may elect to defer up to 50 percent of their compensation for each deferral year. Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.49% at December 31, 2020).  At December 31, 2020 and 2019, the total net deferrals included in accrued interest payable and other liabilities were $209,000 and $145,000, respectively.
 
Salary Continuation Plans - The Board of Directors has approved salary continuation plans for certain key executives.  Under these plans, the Bank is obligated to provide the executives with annual benefits for 10-15 years after retirement.  In connection with the acquisitions of Folsom Lake Bank (FLB), Service 1st Bank, and Visalia Community Bank (VCB), the Bank assumed a liability for the estimated present value of future benefits payable to former key executives of FLB, Service 1st, and VCB.  The liability relates to change in control benefits associated with their salary continuation plans.  The benefits are payable to the individuals when they reach retirement age. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives.  The expense recognized under these plans for the years ended December 31, 2020, 2019, and 2018, totaled $1,624,000, $1,465,000, and $15,000, respectively.  Accrued compensation payable under the salary continuation plans totaled $11,389,000 and $10,716,000 at December 31, 2020 and 2019, respectively. These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired.
In connection with these plans, the Bank purchased single-premium life insurance policies with cash surrender values totaling $19,249,000 and $20,544,000 at December 31, 2020 and 2019, respectively.  Income recognized on these policies, net of related expense, for the years ended December 31, 2020, 2019, and 2018 totaled $466,000, $478,000, and $446,000, respectively.
 
Employee Stock Purchase Plan - During 2017, the Company adopted an Employee Stock Purchase Plan which allows employees to purchase the Company’s stock at a discount to fair market value as of the date of purchase. The Company bears all costs of administering the plan, including broker’s fees, commissions, postage and other costs actually incurred.


16. LOANS TO RELATED PARTIES
 
During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors.  The following is a summary of the aggregate activity involving related-party borrowers (in thousands):
Balance, January 1, 2020$11,111 
Disbursements240 
Effects of changes in composition of related parties(1)
Amounts repaid(855)
Balance, December 31, 2020$10,495 
Undisbursed commitments to related parties, December 31, 2020$269 
 
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17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
 
CONDENSED BALANCE SHEETS
 
December 31, 2020 and 2019
(In thousands)20202019
ASSETS  
Cash and cash equivalents$896 $1,675 
Investment in Bank subsidiary249,037 231,671 
Other assets354 220 
Total assets$250,287 $233,566 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Liabilities:  
Junior subordinated debentures due to subsidiary grantor trust$5,155 $5,155 
Other liabilities111 283 
Total liabilities5,266 5,438 
Shareholders’ equity:  
Common stock79,416 89,379 
Retained earnings150,749 135,932 
Accumulated other comprehensive income, net of tax14,856 2,817 
Total shareholders’ equity245,021 228,128 
Total liabilities and shareholders’ equity$250,287 $233,566 
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CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
For the Years Ended December 31, 2020, 2019, and 2018
(In thousands)202020192018
Income:   
Dividends declared by Subsidiary - eliminated in consolidation$15,622 $20,100 $2,850 
Other income4 6 6 
Total income15,626 20,106 2,856 
Expenses:   
Interest on junior subordinated deferrable interest debentures130 210 199 
Professional fees283 209 217 
Other expenses555 437 548 
Total expenses968 856 964 
Income before equity in undistributed net income of Subsidiary14,658 19,250 1,892 
Equity in undistributed net income of Subsidiary, net of distributions5,328 1,932 19,075 
Income before income tax benefit19,986 21,182 20,967 
Benefit from income taxes361 261 322 
Net income$20,347 $21,443 $21,289 
Comprehensive income$32,386 $28,667 $13,912 
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CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019, and 2018
 
(In thousands)202020192018
Cash flows from operating activities:   
Net income$20,347 $21,443 $21,289 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Undistributed net income of subsidiary, net of distributions(5,328)(1,932)(19,075)
Equity-based compensation470 555 482 
Net (increase) decrease in other assets(208)136 372 
Net (decrease) increase in other liabilities(31)69 166 
Benefit for deferred income taxes75 10 11 
Net cash provided by operating activities15,325 20,281 3,245 
Cash flows used in investing activities:   
Investment in subsidiary— — — 
Cash flows from financing activities:   
Cash dividend payments on common stock(5,530)(5,805)(4,270)
Purchase and retirement of common stock(11,052)(15,619)(894)
Proceeds from exercise of stock options279 276 738 
Proceeds from stock issued under employee stock purchase plan199 216 211 
Net cash used in financing activities(16,104)(20,932)(4,215)
Decrease in cash and cash equivalents(779)(651)(970)
Cash and cash equivalents at beginning of year1,675 2,326 3,296 
Cash and cash equivalents at end of year$896 $1,675 $2,326 
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest$153 $215 $185 


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SUPPLEMENTARY FINANCIAL INFORMATION
 
The following supplementary financial information is not a part of the Company’s financial statements.
 
Unaudited Quarterly Statement of Operations Data
(In thousands, except per share amounts)
 
 Q4 2020Q3 2020Q2 2020Q1 2020Q4 2019Q3 2019Q2 2019Q1 2019
Net interest income$16,777 $16,043 $15,574 $16,029 $15,786 $16,205 $15,946 $15,835 
Provision for (Reversal of) credit losses
(1,700)600 3,000 1,375 500 250 300 (25)
Net interest income after provision for credit losses
18,477 15,443 12,574 14,654 15,286 15,955 15,646 15,860 
Other non-interest income3,083 2,014 2,105 2,343 2,006 2,037 2,139 1,924 
Net realized gains on investment securities
55 57 (58)4,198 3 1,685 2,459 1,052 
Total non-interest expense12,379 11,728 11,499 12,078 11,127 11,534 11,772 11,667 
Provision for income taxes
2,157 1,442 821 2,494 1,719 2,452 2,385 1,953 
Net income$7,079 $4,344 $2,301 $6,623 $4,449 $5,691 $6,087 $5,216 
Basic earnings per share$0.57 $0.35 $0.18 $0.52 $0.34 $0.43 $0.45 $0.38 
Diluted earnings per share$0.57 $0.35 $0.18 $0.52 $0.34 $0.42 $0.45 $0.38 

ITEM 9 -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

ITEM 9A -CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures

    Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report.
    In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
    Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in this report is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
 
(b) Management’s Report on Internal Control Over Financial Reporting

    Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a- l 5(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the guidelines established in the Internal Control--Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting
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purposes in accordance with U.S. generally accepted accounting principles.
    Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. We reviewed the results of management’s assessment with our Audit Committee.
    The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.

(c) Changes in Internal Control over Financial Reporting

    There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(d) Inherent Limitations on Effectiveness of Controls

    Our management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B -OTHER INFORMATION
 
Not Applicable.
 
PART III

ITEM 10 -DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

For information concerning directors and executive officers of the Company, see “ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
ITEM 11 -EXECUTIVE COMPENSATION.
 
The information required by this Item can be found in the definitive Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
ITEM 12 -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
For information concerning security ownership of certain beneficial owners and management, see “PRINCIPAL SHAREHOLDERS” and “ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
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ITEM 13 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
For information concerning certain relationships and related transactions, see “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “INDEBTEDNESS OF MANAGEMENT” in the definitive Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
ITEM 14 -PRINCIPAL ACCOUNTING FEES AND SERVICES
 
For information concerning principal accounting fees and services, see “PRINCIPAL ACCOUNTING FEES AND SERVICES” in the definitive Proxy Statement for the Company’s 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) FINANCIAL STATEMENTS

The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 and incorporated by reference herein.

(a)(2) FINANCIAL STATEMENT SCHEDULES

All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Financial Statements or accompanying notes.

(a)(3) EXHIBITS

The exhibits filed as part of this report and exhibits incorporated by reference to other documents are as follows:

Exhibit  
Number Exhibit
  
1
2
3
3.1
3.2 
  
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3.2 
  
3.3
3.5
3.6
4.1 
  
4.2 
4.3
  
10.1 
  
10.2 
  
10.3 
  
10.4 
10.5 
   
10.6 
   
10.7 
   
10.8 
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10.9 
   
10.10 
   
10.11 
   
10.12 
   
10.13 
   
10.14 
   
10.15 
   
10.16 
   
10.17 
   
10.18 
   
10.19 
   
10.20 
   
10.21 
   
10.22 
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10.23 
   
10.24 
   
10.25 
10.26 
   
10.27 
   
10.28 
   
10.29 
   
10.30 
   
10.31 
   
10.32 
   
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10.33 
   
10.34 
   
10.35 
   
10.36 
   
10.37 
   
10.38 
10.39 
   
10.40 
   
10.41 
   
10.42 
   
10.43 
   
10.44 
   
10.45 
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10.46 
   
10.47 
   
10.48 
   
10.49 
   
10.50 
   
10.51 
   
10.52 
   
10.53 
   
10.54 
10.55 
   
10.56 
10.57
   
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10.58 
   
10.59 
   
10.60 
   
10.61 
   
10.62 
   
10.63 
   
10.64 
   
10.65 
   
10.66 
   
10.67 
   
10.68 
   
10.69 
   
10.70 
   
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10.71 
   
10.72 
   
10.73 
   
10.74 
10.75 
   
10.76 
   
10.77 
   
10.78 
   
10.79 
10.80
10.81
10.82
10.83
10.84
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10.85
10.86
10.87
10.88
10.89
10.90
10.91
21 
   
22 N/A
   
23 
   
24 
   
31.1 
   
31.2 
   
32.1 
   
32.2 
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Document
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101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Link Document
*              Management contract and compensatory plans.

ITEM 16     FORM 10-K SUMMARY

Omitted at registrant’s option
    
SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  CENTRAL VALLEY COMMUNITY BANCORP
  
  
Date:March 10, 2021By:/s/ James M. Ford
  James M. Ford
  President and Chief Executive Officer
  (principal executive officer)
  
Date:March 10, 2021By:/s/ David A. Kinross
  David A. Kinross
  Executive Vice President and Chief Financial Officer
  (principal accounting officer and principal financial officer)
POWER OF ATTORNEY AND SIGNATURES

    KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints James M. Ford, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
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/s/ James M. Ford Date: March 10, 2021
James M. Ford,  
President and Chief Executive Officer and Director (principal executive officer)  
  
/s/ David A. Kinross Date: March 10, 2021
David A. Kinross,  
Executive Vice President and Chief Financial Officer  
(principal accounting officer and principal financial officer)  
  
/s/ Daniel J. Doyle  Date: March 10, 2021
Daniel J. Doyle,  
Chairman of the Board and Director
/s/ Daniel N. Cunningham Date: March 10, 2021
Daniel N. Cunningham, Vice Chairman of the Board and Director  
  
/s/ F.T. “Tommy” Elliott, IV Date: March 10, 2021
F.T. “Tommy” Elliott, IV, Director
/s/ Robert J. Flautt Date: March 10, 2021
Robert J. Flautt, Director
/s/ Gary D. Gall  Date: March 10, 2021
Gary D. Gall, Director  
/s/ Andriana D. MajarianDate: March 10, 2021
Andriana D. Majarian, Director
/s/ Steven D. McDonald Date: March 10, 2021
Steven D. McDonald, Director  
  
/s/ Louis McMurray Date: March 10, 2021
Louis McMurray, Director  
/s/ Karen Musson  Date: March 10, 2021
Karen Musson, Director  
/s/ Dorothea D. Silva  Date: March 10, 2021
Dorothea D. Silva, Director  
  
/s/ William S. Smittcamp Date: March 10, 2021
William S. Smittcamp, Director  
  
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