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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED June 30, 2021
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                        TO
 
COMMISSION FILE NUMBER: 000-31977
 
CENTRAL VALLEY COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
 
California   77-0539125
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
7100 N. Financial Dr., Suite 101, Fresno, California
  93720
(Address of principal executive offices)   (Zip code)
 
Registrant’s telephone number (559) 298-1775

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value CVCY NASDAQ Capital Market
(Title of Each Class) (Trading Symbol) (Name of Each Exchange on which Registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
  ☐
 
Accelerated filer
☐
Non-accelerated filer
  ☒
 
Small reporting company
 ☒
Emerging growth company
☐
 
1

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No  ☒
As of August 2, 2021 there were 11,984,214 shares of the registrant’s common stock outstanding.

2


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
 
2021 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
2
   
3
   
31
   
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
61
61
   
62
   
62
   
62
   
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
62
   
62
   
62
   
62
   
63
   
64
 

2

PART 1: FINANCIAL INFORMATION
 

ITEM 1: FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share amounts) June 30, 2021 December 31, 2020
   
ASSETS    
Cash and due from banks $ 39,346  $ 34,175 
Interest-earning deposits in other banks 81,320  36,103 
Total cash and cash equivalents 120,666  70,278 
Available-for-sale debt securities 952,416  710,092 
Equity securities 7,522  7,634 
Loans, less allowance for credit losses of $10,439 at June 30, 2021 and $12,915 at December 31, 2020 1,059,506  1,089,432 
Bank premises and equipment, net 8,465  8,228 
Bank-owned life insurance 39,062  28,713 
Federal Home Loan Bank stock 5,595  5,595 
Goodwill 53,777  53,777 
Core deposit intangibles 835  1,183 
Accrued interest receivable and other assets 32,706  29,164 
Total assets $ 2,280,550  $ 2,004,096 
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Deposits:    
Non-interest bearing $ 899,406  $ 824,889 
Interest bearing 1,079,688  897,821 
Total deposits 1,979,094  1,722,710 
Junior subordinated deferrable interest debentures 5,155  5,155 
Accrued interest payable and other liabilities 45,252  31,210 
Total liabilities 2,029,501  1,759,075 
Commitments and contingencies (Note 7)
Shareholders’ equity:    
Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding
—  — 
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 12,329,089 at June 30, 2021 and 12,509,848 at December 31, 2020 75,265  79,416 
Retained earnings 162,910  150,749 
Accumulated other comprehensive income, net of tax 12,874  14,856 
Total shareholders’ equity 251,049  245,021 
Total liabilities and shareholders’ equity $ 2,280,550  $ 2,004,096 
 
See notes to unaudited consolidated financial statements.
3


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
(In thousands, except share and per-share amounts)  2021 2020 2021 2020
INTEREST INCOME:    
Interest and fees on loans $ 13,556  $ 12,600  $ 27,321  $ 25,498 
Interest on deposits in other banks 29  13  61  196 
Interest and dividends on investment securities:
Taxable 3,361  2,959  6,094  6,225 
Exempt from Federal income taxes 1,409  412  2,726  571 
Total interest income 18,355  15,984  36,202  32,490 
INTEREST EXPENSE:    
Interest on deposits 252  374  520  806 
Interest on junior subordinated deferrable interest debentures 22  36  46  81 
Total interest expense 274  410  566  887 
Net interest income before provision for credit losses 18,081  15,574  35,636  31,603 
(REVERSAL OF) PROVISION FOR CREDIT LOSSES (1,500) 3,000  (3,300) 4,375 
Net interest income after provision for credit losses 19,581  12,574  38,936  27,228 
NON-INTEREST INCOME:    
Service charges 467  447  899  1,093 
Appreciation in cash surrender value of bank-owned life insurance
176  176  349  358 
Interchange fees 471  307  841  640 
Net realized gains (losses) on sales of investment securities (79) (58) (79) 4,140 
Federal Home Loan Bank dividends 83  75  153  182 
Loan placement fees 510  561  1,167  860 
Other income 449  537  746  1,315 
Total non-interest income 2,077  2,045  4,076  8,588 
NON-INTEREST EXPENSES:    
Salaries and employee benefits 6,979  6,812  13,917  14,324 
Occupancy and equipment 1,201  1,139  2,314  2,283 
Professional services 475  522  831  980 
Data processing 625  554  1,242  890 
Regulatory assessments 172  146  333  193 
ATM/Debit card expenses 191  187  416  481 
Information technology 611  602  1,170  1,210 
Directors’ expenses 113  136  154  328 
Advertising 128  167  257  340 
Internet banking expense 84  182  208  378 
Amortization of core deposit intangibles 173  173  347  347 
Other 878  878  1,829  1,823 
Total non-interest expenses 11,630  11,498  23,018  23,577 
Income before provision for income taxes 10,028  3,121  19,994  12,239 
Provision for income taxes 2,465  820  4,952  3,315 
Net income $ 7,563  $ 2,301  $ 15,042  $ 8,924 
Earnings per common share:    
Basic earnings per share $ 0.61  $ 0.18  $ 1.20  $ 0.71 
Weighted average common shares used in basic computation 12,498,809  12,449,283  12,497,217  12,592,126 
Diluted earnings per share $ 0.60  $ 0.18  $ 1.20  $ 0.71 
Weighted average common shares used in diluted computation 12,548,044  12,486,681  12,548,101  12,646,403 
Cash dividend per common share $ 0.12  $ 0.11  $ 0.23  $ 0.22 
 
See notes to unaudited consolidated financial statements.
4


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
(In thousands) 2021 2020 2021 2020
Net income $ 7,563  $ 2,301  $ 15,042  $ 8,924 
Other Comprehensive Income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period 10,729  12,366  (2,892) 10,679 
Reclassification of net (gains) losses included in net income 79  58  79  (4,140)
Other comprehensive income, before tax 10,808  12,424  (2,813) 6,539 
Tax effect (3,196) (3,673) 831  (1,933)
Total other comprehensive loss 7,612  8,751  (1,982) 4,606 
Comprehensive income $ 15,175  $ 11,052  $ 13,060  $ 13,530 

See notes to unaudited consolidated financial statements.


5

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2021 AND 2020
 (Unaudited)
  Common Stock   Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes) 		Total Shareholders’ Equity
      Retained Earnings
(In thousands, except share amounts) Shares Amount
Balance, March 31, 2020 12,472,939  $ 78,854  $ 141,147  $ (1,328) $ 218,673 
Net income —  —  2,301  —  2,301 
Other comprehensive income —  —  —  8,751  8,751 
Restricted stock granted net of forfeitures
14,090  —  —  —  — 
Stock issued under employee stock purchase plan
4,348  58  58 
Stock-based compensation expense
—  128  —  —  128 
Cash dividend
—  —  (1,372) —  (1,372)
Stock options exercised
3,220  19  —  —  19 
Balance, June 30, 2020 12,494,597  $ 79,059  $ 142,076  $ 7,423  $ 228,558 
Balance, March 31, 2021 12,524,609  $ 79,732  $ 156,851  $ 5,262  $ 241,845 
Net income
—  —  7,563  —  7,563 
Other comprehensive income —  —  —  7,612  7,612 
Restricted stock granted net of forfeitures
20,967  —  —  —  — 
Stock issued under employee stock purchase plan
3,292  54  —  —  54 
Stock-based compensation expense
—  109  —  —  109 
Cash dividend
—  —  (1,504) —  (1,504)
Stock options exercised
19,900  212  —  —  212 
Repurchase and retirement of common stock
(239,679) (4,842) —  —  (4,842)
Balance, June 30, 2021 12,329,089  $ 75,265  $ 162,910  $ 12,874  $ 251,049 

See notes to unaudited consolidated financial statements.
























6

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2021 AND 2020
Common Stock Retained Earnings Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes) 		Total Shareholders’ Equity
(In thousands, except share amounts) Shares Amount
Balance, January 1, 2020 13,052,407  $ 89,379  $ 135,932  $ 2,817  228,128 
Net income —  —  8,924  —  8,924 
Other comprehensive income
—  —  —  4,606  4,606 
Stock issued under employee stock purchase plan
7,981  115  —  —  115 
Stock awarded to employees 6,548  141  —  —  141 
Restricted stock granted net of forfeitures
14,090  —  —  —  — 
Stock-based compensation expense
—  248  —  —  248 
Cash dividend
—  —  (2,780) —  (2,780)
Repurchase and retirement of common stock
(621,379) (11,052) —  —  (11,052)
Stock options exercised
34,950  228  —  —  228 
Balance, June 30, 2020 12,494,597  $ 79,059  $ 142,076  $ 7,423  $ 228,558 
Balance, January 1, 2021 12,509,848  $ 79,416  $ 150,749  $ 14,856  $ 245,021 
Net income
—  —  15,042  —  15,042 
Other comprehensive income
—  —  —  (1,982) (1,982)
Restricted stock granted net of forfeitures
20,720  —  —  —  — 
Stock issued under employee stock purchase plan
7,671  110  —  —  110 
Stock awarded to employees 10,529  158  —  —  158 
Stock-based compensation expense
—  210  —  —  210 
Cash dividend
—  —  (2,881) —  (2,881)
Stock options exercised
20,000  213  —  —  213 
Repurchase and retirement of common stock
(239,679) (4,842) —  —  (4,842)
Balance, June 30, 2021 12,329,089  $ 75,265  $ 162,910  $ 12,874  $ 251,049 


7

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
  For the Six Months
Ended June 30,
(In thousands) 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 15,042  $ 8,924 
Adjustments to reconcile net income to net cash provided by operating activities:  
Net (increase) decrease in deferred loan fees 1,222  (5,975)
Depreciation 467  462 
Accretion (693) (666)
Amortization 3,578  2,128 
Stock-based compensation 210  248 
(Reversal of) provision for credit losses (3,300) 4,375 
Net realized losses (gains) on sales and calls of available-for-sale investment securities 79  (4,140)
Net gain on disposal of premises and equipment (8) (6)
Net change in equity securities 112  (183)
Increase in bank-owned life insurance, net of expenses (349) (198)
Net gain on bank-owned life insurance —  (462)
Net increase in accrued interest receivable and other assets (3,767) (1,418)
Net increase in accrued interest payable and other liabilities 14,199  417 
Benefit (provision) for deferred income taxes 983  (1,735)
Net cash provided by operating activities 27,775  1,771 
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of available-for-sale investment securities (271,930) (202,390)
Proceeds from sales or calls of available-for-sale investment securities 590  122,151 
Proceeds from maturity and principal repayments of available-for-sale investment securities 23,660  16,103 
Net decrease (increase) in loans 32,004  (176,105)
Purchases of premises and equipment (704) (101)
Purchases of bank-owned life insurance (10,000) (250)
FHLB stock redeemed —  467 
Proceeds from bank-owned life insurance —  1,550 
Proceeds from sale of premises and equipment 9  6 
Net cash used in investing activities (226,371) (238,569)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Net increase in demand, interest bearing and savings deposits 256,426  319,263 
Net decrease in time deposits (42) (2,993)
Purchase and retirement of common stock (4,842) (11,052)
Proceeds from stock issued under employee stock purchase plan
110  115 
Proceeds from exercise of stock options 213  228 
Cash dividend payments on common stock (2,881) (2,780)
Net cash provided by financing activities 248,984  302,781 
Increase in cash and cash equivalents 50,388  65,983 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 70,278  52,574 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 120,666  $ 118,557 
 
  For the Six Months
Ended June 30,
(In thousands) 2021 2020
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:    
Cash paid during the period for:
   
Interest $ 576  $ 937 
Income taxes $ 6,105  $ 2,810 
Operating cash flows from operating leases $ 1,124  $ 1,120 

See notes to unaudited consolidated financial statements.

8

Note 1.  Basis of Presentation
 
The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2020 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at June 30, 2021, and the results of its operations and its cash flows for the six-month interim periods ended June 30, 2021 and 2020 have been included. The results of operations for interim periods are not necessarily indicative of results for the full year.
     The preparation of these interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
     Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment, and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

Impact of New Financial Accounting Standards:

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

    The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2022 due to the fact the Company elected to delay
9

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) 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 June 30, 2021 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.


Note 2.  Fair Value Measurements
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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):
10

  June 30, 2021
Carrying
Amount 		Fair Value
(In thousands) Level 1 Level 2 Level 3 Total
Financial assets:        
Cash and due from banks $ 39,346  $ 39,346  $ —  $ —  $ 39,346 
Interest-earning deposits in other banks 81,320  81,320  —  —  81,320 
Available-for-sale debt securities 952,416  —  952,416  —  952,416 
Equity securities 7,522  7,522  —  —  7,522 
Loans, net 1,059,506  —  —  1,053,137  1,053,137 
Federal Home Loan Bank stock 5,595  N/A N/A N/A N/A
Accrued interest receivable 9,417  10  5,754  3,653  9,417 
Financial liabilities:        
Deposits 1,979,094  1,898,736  89,843  —  1,988,579 
Junior subordinated deferrable interest debentures 5,155  —  —  4,234  4,234 
Accrued interest payable 55  —  33  22  55 
  December 31, 2020
Carrying
Amount 		Fair Value
(In thousands) Level 1 Level 2 Level 3 Total
Financial assets:    
Cash and due from banks $ 34,175  $ 34,175  $ —  $ —  $ 34,175 
Interest-earning deposits in other banks 36,103  36,103  —  —  36,103 
Available-for-sale debt securities 710,092  —  710,092  —  710,092 
Equity securities 7,634  7,634  —  —  7,634 
Loans, net 1,089,432  —  —  1,087,124  1,087,124 
Federal Home Loan Bank stock 5,595  N/A N/A N/A N/A
Accrued interest receivable 8,834  9  3,617  5,208  8,834 
Financial liabilities:    
Deposits 1,722,710  1,691,647  90,008  —  1,781,655 
Junior subordinated deferrable interest debentures 5,155  —  —  3,693  3,693 
Accrued interest payable 65  —  41  24  65 

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
11

impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors.

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

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

(f) Subordinated Debentures — 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 considered significant for financial reporting purposes.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2021:
 
Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of June 30, 2021 (in thousands). 
Description Fair Value Level 1 Level 2 Level 3
Available-for-sale debt securities:        
U.S. Treasury securities $ 19,994  $ —  $ 19,994  $ — 
U.S. Government agencies 653  —  653  — 
Obligations of states and political subdivisions 473,658  —  473,658  — 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
227,042  —  227,042  — 
Private label mortgage and asset backed securities
180,781  —  180,781  — 
Corporate debt securities 50,288  —  50,288  — 
Equity securities
7,522  7,522  —  — 
Total assets measured at fair value on a recurring basis
$ 959,938  $ 7,522  $ 952,416  $ — 
12

 
    Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
    Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the six months ended June 30, 2021, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at or during the six months ended June 30, 2021. Also there were no liabilities measured at fair value on a recurring basis at June 30, 2021.

Non-recurring Basis
 
    The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at
fair value which was below cost at June 30, 2021.

    At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow methods as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the six months ended June 30, 2021.
    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. As of June 30, 2021, there were no loans measured using the fair value of the collateral for the collateral dependent loans.
    There were no charge-offs related to loans carried at fair value during the six months ended June 30, 2021 and 2020. Activity related to changes in the allowance for loan losses related to impaired loans for the three months ended June 30, 2021 and 2020 was not considered significant for disclosure purposes. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2021.
13

    The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2020:

Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis as of December 31, 2020 (in thousands).
Description Fair Value Level 1 Level 2 Level 3
Available-for-sale debt securities:        
U.S. Government agencies $ 680  $ —  $ 680  $ — 
Obligations of states and political subdivisions 379,565  —  379,565  — 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
216,298  —  216,298  — 
Private label mortgage and asset backed securities
83,508  —  83,508  — 
Corporate debt securities 30,041  —  30,041  — 
Equity securities
7,634  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 debt securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
     Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2020, no transfers between levels occurred.
    There were no Level 3 assets measured at fair value on a recurring basis at or during the year ended December 31, 2020. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2020.

Non-recurring Basis
 
    The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2020 (in thousands):

Fair Value Level 1 Level 2 Level 3
Impaired loans:
Real estate:
Real estate-construction and other land loans $ 1,260  $ —  $ —  $ 1,260 
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.
There were no liabilities measured at fair value on a non-recurring basis at December 31, 2020.

Note 3.  Investments
 
The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivisions securities.  As of June 30, 2021, $191,882,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.
     The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $18,278,000 at June 30, 2021 compared to an unrealized gain of $21,091,000 at December 31, 2020. The unrealized gain/(loss) recorded is net of $5,404,000,000 and $6,235,000 in tax liabilities (benefits) as accumulated other comprehensive income (loss) within shareholders’ equity at June 30, 2021 and December 31, 2020, respectively.
14

     The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): 
  June 30, 2021
Available-for-Sale Securities Amortized Cost
Gross
Unrealized
 Gains
Gross
Unrealized
Losses
Estimated
 Fair Value
Debt securities:        
U.S. Treasury securities $ 19,987  $ 10  $ (3) $ 19,994 
U.S. Government agencies 637  16  —  653 
Obligations of states and political subdivisions 458,250  17,447  (2,039) 473,658 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
224,920  3,131  (1,009) 227,042 
Private label mortgage and asset backed securities
180,844  1,293  (1,356) 180,781 
Corporate debt securities 49,500  883  (95) 50,288 
Total available-for-sale $ 934,138  $ 22,780  $ (4,502) $ 952,416 
  December 31, 2020
Available-for-Sale Securities Amortized Cost
Gross
Unrealized
 Gains
Gross
Unrealized
Losses 		Estimated
Fair Value
Debt securities:        
U.S. Government agencies $ 651  $ 29  $ —  $ 680 
Obligations of states and political subdivisions 361,734  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 securities
82,413  1,337  (242) 83,508 
Corporate debt securities 30,000  260  (219) 30,041 
Total available-for-sale $ 689,001  $ 23,371  $ (2,280) $ 710,092 
    Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended June 30, 2021 and 2020 are shown below (in thousands):
For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
Available-for-Sale Securities 2021 2020 2021 2020
Proceeds from sales or calls $ 590  $ 16,114  $ 590  $ 122,151 
Gross realized gains from sales or calls —  306  —  4,504 
Gross realized losses from sales or calls (79) (364) (79) (364)
    As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.
    The provision for income taxes includes $1,224,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the six months ended June 30, 2020.
15

    Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands): 
  June 30, 2021
  Less than 12 Months 12 Months or More Total
  Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-Sale Securities Value Losses Value Losses Value Losses
Debt securities:            
U.S. Treasury securities
$ 9,997  $ (3) $ —  $ —  $ 9,997  $ (3)
Obligations of states and political subdivisions
79,759  (2,039) —  —  79,759  (2,039)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
47,184  (573) 52,818  (436) 100,002  (1,009)
Private label mortgage and asset backed securities
91,811  (1,327) 4,203  (29) 96,014  (1,356)
Corporate debt securities 16,405  (95) —  —  16,405  (95)
Total available-for-sale $ 245,156  $ (4,037) $ 57,021  $ (465) $ 302,177  $ (4,502)
  December 31, 2020
  Less than 12 Months 12 Months or More Total
  Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-Sale Securities Value Losses Value Losses Value Losses
Debt securities:            
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 mortgage and asset backed securities
25,407  (242) —  —  25,407  (242)
Corporate debt securities 12,881  (119) 3,900  (100) 16,781  (219)
Total available-for-sale $ 105,252  $ (1,085) $ 81,237  $ (1,195) $ 186,489  $ (2,280)
     The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations.  The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the original yield expected at time of purchase.
     As of June 30, 2021, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at June 30, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at June 30, 2021 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.  The Company also analyzed any securities that may have been downgraded by credit rating agencies. 
    For those investment securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those investment securities.  There were no OTTI losses recorded during the six months ended June 30, 2021.

U.S. Treasury Securities

At June 30, 2021, the Company held two U.S. Treasury securities of which one security was in a loss position for less than 12 months. The unrealized loss on the Company’s investment in direct obligations of U.S. Treasury securities is associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuer. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
16


U.S. Government Agencies

    At June 30, 2021, the Company held one U.S. Government agency security which was in a gain position.

Obligations of States and Political Subdivisions
 
    At June 30, 2021, the Company held 122 obligations of states and political subdivision securities of which 16 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
    At June 30, 2021, the Company held 115 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which eight were in a loss position for less than 12 months and 11 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
 
Private Label Mortgage and Asset Backed Securities
 
    At June 30, 2021, the Company had a total of 49 Private Label Mortgage and Asset Backed Securities (PLMABS). 18 of the PLMABS securities were in a loss position for less than 12 months and two have been in loss for more than 12 months at June 30, 2021. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

Corporate Debt Securities
 
    At June 30, 2021, the Company held 14 corporate debt securities of which five were in a loss position for less than 12 months. The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.

17

    The amortized cost and estimated fair value of available-for-sale investment securities at June 30, 2021 by contractual maturity is shown below (in thousands).  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2021
Available-for-Sale Securities Amortized Cost Estimated Fair
Value
Within one year $ 304  $ 305 
After one year through five years 3,317  3,627 
After five years through ten years 84,162  86,564 
After ten years 390,454  403,156 
  478,237  493,652 
Investment securities not due at a single maturity date:    
U.S. Government agencies 637  653 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
224,920  227,042 
Private label mortgage and asset backed securities 180,844  180,781 
Corporate debt securities 49,500  50,288 
Total available-for-sale $ 934,138  $ 952,416 
 

Note 4.  Loans and Allowance for Credit Losses
 
Outstanding loans are summarized as follows:
Loan Type (Dollars in thousands) June 30, 2021 % of Total
Loans 		December 31, 2020 % of Total
Loans
Commercial:        
Commercial and industrial $ 208,919  19.4  % $ 273,994  24.9  %
Agricultural production 32,918  3.1  % 21,971  2.0  %
Total commercial 241,837  22.5  % 295,965  26.9  %
Real estate:        
Owner occupied 200,232  18.7  % 208,843  18.9  %
Real estate construction and other land loans 65,282  6.1  % 55,419  5.0  %
Commercial real estate 357,519  33.4  % 338,886  30.7  %
Agricultural real estate 88,110  8.2  % 84,258  7.6  %
Other real estate 29,750  2.8  % 28,718  2.6  %
Total real estate 740,893  69.2  % 716,124  64.8  %
Consumer:        
Equity loans and lines of credit 51,364  4.8  % 55,634  5.0  %
Consumer and installment 37,241  3.5  % 37,236  3.3  %
Total consumer 88,605  8.3  % 92,870  8.3  %
Net deferred origination (fees) costs (1,390)   (2,612)  
Total gross loans 1,069,945  100.0  % 1,102,347  100.0  %
Allowance for credit losses (10,439)   (12,915)  
Total loans $ 1,059,506    $ 1,089,432   
 
    At June 30, 2021 and December 31, 2020, loans originated under Small Business Administration (SBA) programs totaling $23,685,000 and $24,220,000, respectively, were included in the real estate and commercial categories, of which, $18,029,000 or 76% and $18,180,000 or 75%, respectively, are secured by government guarantees. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At June 30, 2021, 630 PPP loans totaling $109,502,000 were outstanding and included in the commercial and industrial line item above. At December 31, 2020, 989 PPP loans totaling $192,916,000 were outstanding and included in the commercial and industrial line item above.
18


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 data) over the most recent 50 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
    The following table shows the summary of activities for the Allowance as of and for the three months ended June 30, 2021 and 2020 by portfolio segment (in thousands):
  Commercial Real Estate Consumer Unallocated Total
Allowance for credit losses:          
Beginning balance, April 1, 2021 $ 2,483  $ 8,352  $ 888  $ 333  $ 12,056 
(Reversal) provision charged to operations (307) (1,302) 91  18  (1,500)
Charge-offs —  —  (171) —  (171)
Recoveries 34  —  20  —  54 
Ending balance, June 30, 2021 $ 2,210  $ 7,050  $ 828  $ 351  $ 10,439 
Allowance for credit losses:          
Beginning balance, April 1, 2020 $ 1,657  $ 7,555  $ 1,236  $ 98  $ 10,546 
Provision charged to operations 7  2,834  76  83  3,000 
Charge-offs —  —  (80) —  (80)
Recoveries 423  —  48  —  471 
Ending balance, June 30, 2020 $ 2,087  $ 10,389  $ 1,280  $ 181  $ 13,937 

The following table shows the summary of activities for the Allowance as of and for the six months ended June 30, 2021 and 2020 by portfolio segment (in thousands):
  Commercial Real Estate Consumer Unallocated Total
Allowance for credit losses:          
Beginning balance, January 1, 2021 $ 2,019  $ 9,174  $ 1,091  $ 631  $ 12,915 
Reversal charged to operations (439) (2,443) (138) (280) (3,300)
Charge-offs (31) —  (197) —  (228)
Recoveries 661  319  72  —  1,052 
Ending balance, June 30, 2021 $ 2,210  $ 7,050  $ 828  $ 351  $ 10,439 
Allowance for credit losses:          
Beginning balance, January 1, 2020 $ 1,428  $ 6,769  $ 897  $ 36  $ 9,130 
Provision charged to operations 233  3,620  377  145  4,375 
Charge-offs (29) —  (94) —  (123)
Recoveries 455  —  100  —  555 
Ending balance, June 30, 2020 $ 2,087  $ 10,389  $ 1,280  $ 181  $ 13,937 
19


    The following is a summary of the Allowance by impairment methodology and portfolio segment as of June 30, 2021 and December 31, 2020 (in thousands):
  Commercial Real Estate Consumer Unallocated Total
Allowance for credit losses:          
Ending balance, June 30, 2021 $ 2,210  $ 7,050  $ 828  $ 351  $ 10,439 
Ending balance: individually evaluated for impairment $ 865  $ 10  $ 5  $ —  $ 880 
Ending balance: collectively evaluated for impairment $ 1,345  $ 7,040  $ 823  $ 351  $ 9,559 
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 
    The following table shows the ending balances of loans as of June 30, 2021 and December 31, 2020 by portfolio segment and by impairment methodology (in thousands):
  Commercial Real Estate Consumer Total
Loans:        
Ending balance, June 30, 2021 $ 241,837  $ 740,893  $ 88,605  $ 1,071,335 
Ending balance: individually evaluated for impairment $ 6,503  $ 971  $ 1,065  $ 8,539 
Ending balance: collectively evaluated for impairment $ 235,334  $ 739,922  $ 87,540  $ 1,062,796 
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 

20

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at June 30, 2021 (in thousands):
Pass Special Mention Sub-Standard Doubtful Total
Commercial:
Commercial and industrial $ 196,108  $ 745  $ 12,066  $ —  $ 208,919 
Agricultural production 28,520  1,430  2,968  —  32,918 
Real Estate:
Owner occupied 189,898  3,360  6,974  —  200,232 
Real estate construction and other land loans 60,603  4,679  —  —  65,282 
Commercial real estate 341,805  6,161  9,553  —  357,519 
Agricultural real estate 84,870  2,087  1,153  —  88,110 
Other real estate 29,589  —  161  —  29,750 
Consumer:
Equity loans and lines of credit 51,116  248  —  —  51,364 
Consumer and installment 37,178  —  63  —  37,241 
Total $ 1,019,687  $ 18,710  $ 32,938  $ —  $ 1,071,335 
    The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2020 (in thousands):
Pass Special Mention Sub-Standard Doubtful Total
Commercial:
Commercial and industrial $ 258,587  $ 5,004  $ 10,403  $ —  $ 273,994 
Agricultural production 18,289  377  3,305  —  21,971 
Real Estate:
Owner occupied 197,721  3,870  7,252  —  208,843 
Real estate construction and other land loans
50,560  1,622  3,237  —  55,419 
Commercial real estate 314,710  14,537  9,639  —  338,886 
Agricultural real estate 72,875  10,195  1,188  —  84,258 
Other real estate 28,557  161  —  —  28,718 
Consumer:
Equity loans and lines of credit 54,034  640  960  —  55,634 
Consumer and installment 37,084  —  152  —  37,236 
Total $ 1,032,417  $ 36,406  $ 36,136  $ —  $ 1,104,959 


21

The following table shows an aging analysis of the loan portfolio by class and the time past due at June 30, 2021 (in thousands):
  30-59 Days
Past Due 		60-89
Days Past
Due
Greater
Than
 90 Days
Past Due
Total Past
Due 		Current Total
Loans 		Recorded
Investment
> 90 Days
Accruing 		Non-accrual
Commercial:                
Commercial and industrial $ 16  $ —  $ —  $ 16  $ 208,903  $ 208,919  $ —  $ 347 
Agricultural production —  —  —  —  32,918  32,918  —  1,205 
Real estate: —      —   
Owner occupied —  —  —  —  200,232  200,232  —  — 
Real estate construction and other land loans —  —  —  —  65,282  65,282  —  — 
Commercial real estate 294  —  —  294  357,225  357,519  —  483 
Agricultural real estate —  —  —  —  88,110  88,110  —  — 
Other real estate —  —  —  —  29,750  29,750  —  — 
Consumer:       —   
Equity loans and lines of credit —  —  —  —  51,364  51,364  —  — 
Consumer and installment 81  —  —  81  37,160  37,241  —  — 
Total $ 391  $ —  $ —  $ 391  $ 1,070,944  $ 1,071,335  $ —  $ 2,035 
    The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2020 (in thousands):
  30-59 Days
Past Due 		60-89
Days Past
Due
Greater
Than
 90 Days
Past Due
Total Past
Due 		Current Total
Loans 		Recorded
Investment
> 90 Days
Accruing 		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 
 
22

The following table shows information related to impaired loans by class at June 30, 2021 (in thousands):
Recorded
Investment 		Unpaid
Principal
Balance 		Related
Allowance
With no related allowance recorded:      
Real estate:      
Real estate construction and other land loans $ 316  $ 316  $ — 
Commercial real estate 483  544  — 
Total real estate 799  860  — 
Consumer:      
Equity loans and lines of credit 140  176  — 
Total with no related allowance recorded 939  1,036  — 
With an allowance recorded:      
Commercial:      
Commercial and industrial 5,298  5,328  659 
Agricultural production 1,205  1,248  206 
Total commercial 6,503  6,576  865 
Real estate:      
Real estate construction and other land loans —  —  — 
Commercial real estate 142  143  3 
Agricultural real estate 30  30  7 
Total real estate 172  173  10 
Consumer:      
Equity loans and lines of credit 925  925  5 
Total with an allowance recorded 7,600  7,674  880 
Total $ 8,539  $ 8,710  $ 880 
    The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.
23

    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 occupied 370  409  — 
Real estate construction and other land loans 28  28  — 
Commercial real estate 512  561  — 
Total real estate 910  998  — 
Consumer:      
Equity loans and lines of credit 144  180  — 
Total with no related allowance recorded 1,114  1,239  — 
With an allowance recorded:      
Commercial:      
Commercial and industrial 7,342  7,373  339 
Real estate:      
Real estate construction and other land loans 1,528  1,552  268 
Commercial real estate 148  149  3 
Agricultural real estate 30  29  — 
Total real estate 1,706  1,730  271 
Consumer:      
Equity loans and lines of credit 936  936  9 
Consumer and installment 88  93  12 
Total consumer 1,024  1,029  21 
Total with an allowance recorded 10,072  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.
    



















24

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended June 30, 2021 and 2020 (in thousands).
 Three Months Ended June 30, 2021  Three Months Ended June 30, 2020
Average
Recorded
Investment 		Interest
Income
Recognized 		Average
Recorded
Investment 		Interest
Income
Recognized
With no related allowance recorded:        
Commercial:        
Commercial and industrial $ —  $ —  $ 7  $ — 
Agricultural production —  —  212  — 
Total commercial —  —  219  — 
Real estate:        
Owner occupied —  —  401  — 
Real estate construction and other land loans 333  5  —  — 
Commercial real estate 490  —  848  — 
Agricultural real estate —  —  199  — 
Total real estate 823  5  1,448  — 
Consumer:        
Equity loans and lines of credit 142  3  232  3 
Total with no related allowance recorded 965  8  1,899  3 
With an allowance recorded:        
Commercial:        
Commercial and industrial 5,831  67  11,516  171 
Agricultural production 1,328  619  12 
Total commercial 7,159  67  12,135  183 
Real estate:        
Real estate construction and other land loans 746  —  95  — 
Commercial real estate 144  2  331  2 
Agricultural real estate 30  1  28  1 
Total real estate 920  3  454  3 
Consumer:        
Equity loans and lines of credit 928  14  957  14 
Consumer and installment —  —  38  — 
Total consumer 928  14  995  14 
Total with an allowance recorded 9,007  84  13,584  200 
Total $ 9,972  $ 92  $ 15,483  $ 203 










25

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the six months ended June 30, 2021 and 2020 (in thousands).

 Six Months Ended June 30, 2021  Six Months Ended June 30, 2020
Average
Recorded
Investment 		Interest
Income
Recognized 		Average
Recorded
Investment 		Interest
Income
Recognized
With no related allowance recorded:        
Commercial:        
Commercial and industrial $ 9  $ —  $ 71  $ — 
Agricultural land and production —  —  121  — 
Total commercial 9  —  192  — 
Real estate:        
Owner occupied 103  —  407  — 
Real estate construction and other land loans 201  11  —  — 
Commercial real estate 498  —  959  — 
Agricultural real estate —  —  228  — 
Total real estate 802  11  1,594  — 
Consumer:        
Equity loans and lines of credit 142  6  264  6 
Total with no related allowance recorded 953  17  2,050  6 
With an allowance recorded:        
Commercial:        
Commercial and industrial 6,475  153  6,589  344 
Agricultural land and production 969  —  354  24 
Total commercial 7,444  153  6,943  368 
Real estate:        
Real estate construction and other land loans 1,077  —  54  — 
Commercial real estate 145  5  254  5 
Agricultural real estate 30  1  26  1 
Total real estate 1,252  6  334  6 
Consumer:        
Equity loans and lines of credit 931  27  1,052  28 
Consumer and installment 25  —  24  — 
Total consumer 956  27  1,076  28 
Total with an allowance recorded 9,652  186  8,353  402 
Total $ 10,605  $ 203  $ 10,403  $ 408 
Foregone interest on nonaccrual loans totaled $72,000 and $74,000 for the six month period ended June 30, 2021 and 2020, respectively. Foregone interest on nonaccrual loans totaled 34,000 and 55,000 for the three month period ended June 30, 2021 and 2020, respectively.
Troubled Debt Restructurings:
    As of June 30, 2021 and December 31, 2020, the Company has a recorded investment in troubled debt restructurings of $6,504,000 and $7,908,000, respectively. The Company has allocated $515,000 and $20,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of June 30, 2021 and December 31, 2020, respectively.
    During the six months ended June 30, 2021, one loan was modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.
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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 $1.37 million resulting from the COVID-19 pandemic that were not classified as a TDRs at June 30, 2021.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2021 (in thousands):
Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment
Real Estate:
Real estate-construction and other land loans 1 $ 333  $ —  $ 333  $ 317 
(1)Amounts represent the recorded investment in loans before recognizing effects of the Troubled Debt Restructurings, if any.
(2)Principal modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate.
(3)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

    The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2020 (in thousands):
Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification (2) Post Modification Outstanding Recorded Investment (3) Outstanding Recorded Investment
Commercial:
Commercial and Industrial 1  $ 12,925  $ —  $ 12,925  $ 9,725 
Agricultural production 1 850 —  850 775
Total 2  $ 13,775  $ —  $ 13,775  $ 10,500 

During the quarters ended June 30, 2021 and 2020, no loans were modified as troubled debt restructurings.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the six months ended and three months ended June 30, 2021 or June 30, 2020.

Note 5. Goodwill

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at June 30, 2021, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment. The Company’s annual goodwill test is completed as of September 30 each year.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the first six months of 2021.

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Note 6. Borrowing Arrangements

As of June 30, 2021 and December 31, 2020, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances.
    Approximately $447,170,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $245,311,000 as of June 30, 2021. FHLB advances are also secured by investment securities with amortized costs totaling $151,000 and $169,000 and market values totaling $159,000 and $178,000 at June 30, 2021 and December 31, 2020, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. As of June 30, 2021, and December 31, 2020 the Company had no Federal funds purchased.



Note 7.  Commitments and Contingencies

Financial Instruments With Off-Balance-Sheet Risk - In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans.
    Commitments to extend credit amounting to $316,702,000 and $326,179,000 were outstanding at June 30, 2021 and December 31, 2020, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract unless waived by the Bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
     Included in commitments to extend credit are undisbursed lines of credit totaling $306,144,000 and $314,774,000 at June 30, 2021 and December 31, 2020, respectively.  Undisbursed lines of credit include credits whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months.
     Included in undisbursed lines of credit are commitments for the undisbursed portions of construction loans totaling $52,007,000 and $79,669,000 as of June 30, 2021 and December 31, 2020, respectively. These commitments are agreements to lend to customers, subject to meeting certain construction progress requirements established in the contracts. The underlying construction loans have fixed expiration dates.
     Standby letters of credit and financial guarantees amounting to $10,558,000 and $11,405,000 were outstanding at June 30, 2021 and December 31, 2020, respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private financial arrangements. Most standby letters of credit and guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for their issuance, was not significant at June 30, 2021 or December 31, 2020.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.
    The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees. At June 30, 2021 and December 31, 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process.  While related to credit losses, this allocation is not a part of the allowance for credit losses and is considered separately as a liability for accounting and regulatory reporting purposes, and is included in Other Liabilities on the Company’s balance sheet.
    In 2018, the Company sold its credit card portfolio to a third party vendor. Part of the sale of the portfolio was to provide a guarantee of certain accounts which as of June 30, 2021, the total guarantee was $2,475,000.
     The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.

Note 8. Earnings Per Share
 
Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock awards, result in the
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issuance of common stock which shares in the earnings of the Company.  A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:
Basic Earnings Per Share For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
(In thousands, except share and per share amounts) 2021 2020 2021 2020
Net income $ 7,563  $ 2,301  $ 15,042  $ 8,924 
Weighted average shares outstanding 12,498,809  12,449,283  12,497,217  12,592,126 
Basic earnings per share $ 0.61  $ 0.18  $ 1.20  $ 0.71 
 
Diluted Earnings Per Share For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
(In thousands, except share and per share amounts) 2021 2020 2021 2020
Net income $ 7,563  $ 2,301  $ 15,042  $ 8,924 
Weighted average shares outstanding 12,498,809  12,449,283  12,497,217  12,592,126 
Effect of dilutive stock options 49,235  37,398  50,884  54,277 
Weighted average shares of common stock and common stock equivalents
12,548,044  12,486,681  12,548,101  12,646,403 
Diluted earnings per share $ 0.60  $ 0.18  $ 1.20  $ 0.71 

        No outstanding options or restricted stock awards were anti-dilutive for the six months ended June 30, 2021 and 2020.

Note 9.  Share-Based Compensation
 
The Company has four share-based compensation plans as described below. Share-based compensation cost recognized for those plans was $210,000 and $248,000 for the six months ended June 30, 2021 and 2020, respectively. The recognized tax expense (benefits) for the share-based compensation expense, forfeitures of restricted stock, and exercise of stock options, resulted in the recognition of $46,000 and $72,000, respectively, for the six months ended June 30, 2021 and 2020.
     The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan.
    The Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) was adopted in May 2015. In October 2017, the Company assumed the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plans provide for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. Both plans allow for performance awards that may be in the form of cash or shares of the Company, including restricted stock. Outstanding arrangements to issue shares under this plan including options, will continue in force until expiration according to their respective terms.
    Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan (ESPP) whereby our employees may purchase Company common stock through payroll deductions of between one percent and 15 percent of pay in each pay period. Shares are purchased at the end of each of the three-month offering periods at a 10 percent discount from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The Company reserved 500,000 common shares to be set aside for the ESPP, and there were 450,257 shares available for future purchase under the plan as of June 30, 2021.

Stock Option Plan

    The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.
     No options to purchase shares of the Company’s common stock were granted during the six months ended June 30, 2021 and 2020.
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    A summary of the combined activity of the Company’s stock option compensation plans for the six months ended June 30, 2021 follows (in thousands, except per share amounts): 
  Shares Weighted
Average
Exercise Price 		Weighted
Average
Remaining
Contractual
Term (Years) 		Aggregate
Intrinsic Value
Options outstanding at December 31, 2020 77,070  $ 10.06     
Options exercised (20,000) $ 10.63     
Options outstanding at June 30, 2021 57,070  $ 9.86  1.06 $ 587 
Options vested or expected to vest at June 30, 2021 57,070  $ 9.86  1.06 $ 587 
Options exercisable at June 30, 2021 57,070  $ 9.86  1.06 $ 587 

Information related to the stock option plan is as follows (in thousands):
For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
2021 2020 2021 2020
Intrinsic value of options exercised $ 204  $ 32  $ 206  $ 381 
Cash received from options exercised $ 212  $ 19  $ 213  $ 228 
Excess tax benefit realized for option exercises $ 46  $ —  $ 46  $ 72 
    As of June 30, 2021, there was no remaining unrecognized compensation cost related to stock options granted under all plans. 
 
Restricted and Performance Common Stock Awards

    The 2015 Plan provides for the issuance of restricted common stock to directors and officers. In addition, performance awards may be granted in the form of cash or shares. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant.
    The following table summarizes restricted stock and performance award activity for the six months ended June 30, 2021 as follows: 
  Shares Weighted
Average
Grant-Date Fair Value
Nonvested outstanding shares at December 31, 2020 30,013  $ 15.60 
Granted 31,496  $ 18.83 
Vested (30,834) $ 15.18 
Forfeited (247) $ 20.26 
Nonvested outstanding shares at June 30, 2021 30,428  $ 19.33 

    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. Performance common stock awards vest immediately.
        As of June 30, 2021, there were 30,428 shares of restricted stock that are nonvested and expected to vest. As of June 30, 2021, there was $458,000 of total unrecognized compensation cost related to nonvested restricted common stock awards.  Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted-average remaining period of 1.72 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $2,880,000 at June 30, 2021.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations.  These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline in quality of the Company’s earning assets; (7) a decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses; (13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; (14) the uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.
    When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe,” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.  For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
    The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The Internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.
    There have been no material changes to the Company’s critical accounting policies during the six months ended June 30, 2021.  Please refer to the Company’s 2020 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.
    This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.
 
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OVERVIEW

Central Valley Community Bancorp (Company)
 
We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank).  We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, El Dorado, Madera, Merced, Placer, Sacramento, Stanislaus, San Joaquin, and Tulare Counties of central California. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.
 
Central Valley Community Bank (Bank)
 
The Bank commenced operations in January 1980 as a state-chartered bank.  As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the California Department of Financial Protection and Innovation (DFPI).  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.
    The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor.  For this insurance, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment.
    The Bank operates 20 full-service branches which serve the communities of Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Sacramento, Stockton, and Visalia, California.  Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2020 FDIC data, the Bank’s branches in Fresno, Madera, San Joaquin, and Tulare Counties had a 3.40% combined deposit market share of all insured depositories. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus Counties), was less than 1.00% in 2020.

Dividend Declared

On July 21, 2021, the Board of Directors declared a $0.12 per share cash dividend payable on August 20, 2021 to shareholders of record as of August 6, 2021.

COVID-19 Pandemic

The COVID-19 pandemic has impacted the local economy in the San Joaquin Valley and greater Sacramento area. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020, causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates are increasing in our local market area as compared to the prior quarter end.
    The Company is closely monitoring the effects of the pandemic on our loan and deposit customers. Our management team is focused on assessing the risks in our loan portfolio and working with our customers to minimize our losses. While some industry segments are being more impacted by the COVID-19 pandemic than others, we believe that our credit risk related to the loans outstanding to customers in the higher risk categories is well managed. This is primarily due to the existence of SBA and other loan guarantee programs, personal guarantees, and adequate collateralization.
    Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). Pursuant to these new capabilities, we have implemented a loan program to allow customers who may be negatively impacted by the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days.
    The CARES Act established a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors, and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. As a preferred SBA lender, we are participating in the PPP to help provide loans to our business customers to provide them with additional working capital. The Company has worked diligently with the SBA to qualify clients to receive PPP loans. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest.
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Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.
On January 13, 2021, the SBA reopened the PPP for second draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion has been set aside for second draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, businesses with more than 300 employees and/or less than a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for second draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses. As of June 30, 2021 we have received approximately 512 applications totaling $78 million.
The federal bank regulatory agencies, along with their state counterparts, have issued guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
    Management is closely monitoring credit metrics. Additional resources have been shifted to credit administration to closely analyze higher risk segments within the loan portfolio, monitor and track loan payment deferrals and customer liquidity, and provide timely reporting to management and the board of directors. The management team continues to analyze economic conditions in our geographic markets and perform stress testing of our investment portfolio as well as our loan portfolio. Based on the Company’s capital levels, conservative underwriting policies, low loan-to-deposit ratio, loan concentration diversification, and suburban geographical marketplace, management expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain adequately capitalized.

Capital and liquidity

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

Asset valuation

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

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

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its borrowing clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to 90 days. As of June 30, 2021, based on the Bank’s discussion with these customers, loan customers with deferred payments of principal, interest, or both on loans totaling approximately $1.4 million were outstanding. In accordance with interagency guidance issued in March 2020 and Section 4013 of the Cares Act, these short-term deferrals are not considered troubled debt restructurings.
    With the passage of the PPP administered by the SBA, the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. During the year ended December 31, 2020 and the six months ended June 30, 2021, the Company closed 1,601 PPP loans representing $295,644,000 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit losses charged to earnings.

Credit

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

Second Quarter of 2021

For the second quarter of 2021, our consolidated net income was $7,563,000 compared to $2,301,000 for the same period in 2020. Diluted EPS was $0.60 for the quarter ended June 30, 2021 compared to $0.18 for the same period in 2020. The increase in net income during the second quarter of 2021 compared to the same period in 2020 is primarily driven by a decrease in provision for credit losses of $4,500,000, an increase in net interest income of $2,507,000, and an increase in non-interest income of $32,000, partially offset by an increase in total non-interest expenses of $132,000, and an increase in the provision for income taxes of $1,645,000. During the quarter ended June 30, 2021, the Company recorded a $1,500,000 reversal of provision for credit losses, compared to a $3,000,000 provision during the quarter ended June 30, 2020. Throughout 2020 and the first six months of of 2021, we adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
    Net interest margin (fully tax equivalent basis) decreased to 3.60% for the quarter ended June 30, 2021 compared to 3.79% for the same period in 2020. The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, offset by the increase in the yield on the loan portfolio, the increase in the effective yield on interest earning deposits in other banks and Federal Funds sold, and the decrease in the cost of total interest-bearing liabilities. The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, decreased to 2.11% for the three months ended June 30, 2021, compared to 2.37% for the three months ended June 30, 2020. The effective yield on average loans increased to 5.04% for the three months ended June 30, 2021, compared to 4.71% for the three months ended June 30, 2020. The increase in the loan yield was impacted by Company’s issuance of PPP loans. Total average PPP loans, which have an annual interest rate of 1.00%, were $158,490,000 and $160,392,000 for the three months ended June 30, 2021 and 2020, respectively. The cost of deposits (calculated by dividing annualized interest
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expense on interest bearing deposits by total deposits), decreased to 0.05% for the quarter ended June 30, 2021 compared to 0.10% for the same period in 2020. 
    Non-interest income increased $32,000 or 1.56% to $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 for the same period in 2020, primarily driven by an increase in interchange fees of $164,000, an increase in service charge income of $20,000, and a increase in Federal Home Loan Bank (“FHLB”) dividends of $8,000, offset by a decrease of $88,000 in other income, a decrease in loan placement fees of $51,000, and a decrease of $21,000 in net realized gains on sales and calls of investment securities. Non-interest expense for the quarter ended June 30, 2021 increased $132,000 or 1.15% from the comparable period due to increases in salaries and employee benefits, data processing, occupancy and equipment, personnel, regulatory assessments, appraisal fees, alarm monitoring, operating losses, information technology expenses, tax provision, postage, donations, education and training, armored courier fees, telephone expenses, loan related expenses, and ATM/debit card expenses, partially offset by decreases in professional services, internet banking expenses, risk management expenses, advertising, stationery and supplies, directors’ expenses, check printing, mileage and travel, and amortization of software.
    Annualized return on average equity (ROE) for the second quarter of 2021 increased to 12.25% compared to 4.14% for the same period in 2020. The increase in ROE reflects the increase in net income, as well as the increase in average shareholders’ equity compared to the prior year. Annualized return on average assets (ROA) was 1.36% and 0.51% for the quarter ended June 30, 2021 and 2020, respectively. Total average equity increased to $246,959,000 for the second quarter of 2021 compared to $222,479,000 for the second quarter of 2020. The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the second quarter of 2021, compared to $0.11 in dividends declared and paid during the second quarter of 2020.
    Our average total assets increased $413,767,000 or 22.81% to $2,227,632,000 during the second quarter of 2021 compared to the same period in 2020.  Total average interest-earning assets increased $393,188,000 or 23.62% in the second quarter of 2021 compared to the same period of 2020.  Total average loans, including nonaccrual loans, increased $3,217,000 or 0.30% in the second quarter of 2021 compared to the same period in 2020. Average total investments and interest-earning deposits in other banks increased $391,002,000 or 66.35% in the period ended June 30, 2021 compared to the same period in 2020.  Average interest-bearing liabilities increased $251,149,000 or 31.06% in the period ended June 30, 2021 compared to the same period in 2020. Average non-interest bearing demand deposits increased 18.61% to $893,441,000 in 2021 compared to $753,265,000 in 2020.  The ratio of average non-interest bearing demand deposits to average total deposits was 45.86% in the second quarter of 2021 compared to 48.39% in 2020.

First Six Months of 2021

For the six months ended June 30, 2021, our consolidated net income was $15,042,000 compared to $8,924,000 for the same period in 2020.  Diluted EPS was $1.20 for the first six months of 2021 compared to $0.71 for the first six months of 2020.  Net income for the six-month period ended June 30, 2021 increased 68.56%, compared to the six-month period ended June 30, 2020, primarily driven by an increase in net interest income, an increase in loan placement fees, a decrease in non-interest expense, and a decrease in the provision for credit losses, partially offset by a decrease in net realized gains on sales and calls of investment securities, a decrease in service charge income, and an increase in provision for income taxes. Net interest income before the provision for credit losses increased $4,033,000 or 12.76%.  Net interest income during the first six months of 2021 and 2020 benefited by approximately $434,000 and $453,000, respectively, in nonrecurring income from prepayment penalties. Excluding these benefits, net interest income for the six months ended June 30, 2021, decreased by $4,570,000 compared to the six-month period ended June 30, 2020. Non-interest income decreased $4,512,000 or 52.54%, and non-interest expense decreased $559,000 or 2.37% in the first six months ended of 2021 compared to first six months ended of 2020. During the six months ended June 30, 2021, the Company recorded a reversal of provision for credit losses of $3,300,000 compared to $4,375,000 provision during same period in 2020. Net recoveries of previously charged-off loans totaling $824,000 and $432,000 during the six months ended June 30, 2021 and 2020, respectively.
Annualized return on average equity for the six months ended June 30, 2021 increased to 12.21% compared to 7.92% for the same period in 2020.  The increase in ROE reflects the increase in net income, notwithstanding the increase in average shareholders’ equity compared to the prior year. Annualized return on average assets was 1.39% and 1.05% for the six months ended June 30, 2021 and 2020, respectively.  Total average equity was $246,439,000 for the six months ended June 30, 2021 compared to $225,240,000 for the same period in 2020.  The change in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in net unrealized gains on available-for-sale (AFS) securities, and share repurchases.
Our average total assets increased $460,232,000 or 26.98% in the first six months of 2021 compared to the same period in 2020.  Total average interest-earning assets increased $441,383,000 or 28.39% comparing the first six months of 2021 to the same period in 2020.  Average total loans, including nonaccrual loans, increased $79,727,000 or 7.97% comparing the first six months of 2021 to the same period in 2020. The effective yield on average loans decreased to 5.11% for the six months June 30, 2021, compared to 5.13% for the six months June 30, 2020. Total average PPP loans, which yield 1.00%,
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were $169,553,000 and $80,196,000 for the six months ended June 30, 2021 and 2020, respectively. Excluding PPP loans from total average loans, the effective yield on average loans for the six months ended June 30, 2021 and 2020 was 4.99% and 5.42%, respectively. Average total investments (securities and interest-earning deposits) increased $363,326,000, or 65.41% in the six-month period ended June 30, 2021 compared to the same period in 2020, with average interest-bearing liabilities decreasing $242,059,000 or 31.07% on a period to period comparison.
Our net interest margin (fully tax equivalent basis) for the first six months ended June 30, 2021 decreased to 3.67% compared to 4.11% for the same period in 2020. The decrease in net interest margin in the period-to-period comparison resulted primarily from a decrease in the effective yield on the Company’s average investment securities, the decrease in the yield on the loan portfolio, and the decrease in the effective yield on interest-earning deposits in other banks and Federal funds sold, partially offset by the decrease in the cost of total interest-bearing liabilities.  The effective yield on interest-earning assets decreased 49 basis points to 3.73% for the six-month period ended June 30, 2021 compared to 4.22% for the same period in 2020. For the six-month period ended June 30, 2021, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, decreased 48 basis points, compared to the same period in the prior year, and the effective yield on loans decreased 2 basis points. The cost of total interest-bearing liabilities decreased 12 basis points to 0.11% compared to 0.23% for the same period in 2020.  The cost of total deposits, including noninterest bearing accounts decreased to 0.06% compared to 0.11% for the six months ended June 30, 2021 and 2020.
Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2021 was $35,636,000 compared to $31,603,000 for the same period in 2020, an increase of $4,033,000 or 12.76%.  Net interest income increased as a result of yield changes, asset mix changes, and an increase in interest-bearing liabilities, offset by an increase in average earning assets. The Bank recovered $434,000 and $453,000, of foregone interest income and prepaid payment penalties in 2021 and 2020, respectively. The Bank had non-accrual loans totaling $2,035,000 at June 30, 2021, compared to $3,278,000 at December 31, 2020 and $2,406,000 at June 30, 2020.  The Company had no other real estate owned or repossessed assets at June 30, 2021, December 31, 2020, or June 30, 2020.
At June 30, 2021, we had total net loans of $1,059,506,000, total assets of $2,280,550,000, total deposits of $1,979,094,000, and shareholders’ equity of $251,049,000.

Key Factors in Evaluating Financial Condition and Operating Performance
 
As a publicly traded community bank holding company, we focus on several key factors including:
 
·                                          Return to our shareholders;
·                                          Return on average assets;
·                                          Development of revenue streams, including net interest income and non-interest income;
·                                          Asset quality;
·                                          Asset growth;
·                                          Capital adequacy;
·                                          Operating efficiency; and
·                                          Liquidity
 
Return to Our Shareholders
 
Our return to shareholders is determined in a ratio that measures the return on average equity (ROE).  ROE is a ratio that measures net income divided by average shareholders’ equity. Our annualized ROE was 12.21% for the six months ended June 30, 2021 compared to 8.85% for the year ended December 31, 2020 and 7.92% for the six months ended June 30, 2020.  Our net income for the six months ended June 30, 2021 increased $6,118,000 or 68.56% to $15,042,000 compared to $8,924,000 for the six months ended June 30, 2020, primarily driven by an increase in net interest income, a decrease in non-interest expenses, a reversal of the provision for credit losses, and an increase in loan placement fees, offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income. Net interest margin (NIM) decreased 44 basis points for the six-month period ended June 30, 2021 compared to the six months ended June 30, 2020.  Diluted EPS was $1.20 for the six months ended June 30, 2021 and $0.71 for the same period in 2020.
 
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Return on Average Assets
 
Our return on average assets (ROA) is a ratio that we use to compare our performance with other banks and bank holding companies.  Our annualized ROA for the six months ended June 30, 2021 was 1.39% compared to 1.11% for the year ended December 31, 2020 and 1.05% for the six months ended June 30, 2020.  The increase in ROA for the six months ended June 30, 2021 compared to June 30, 2020 was due to the increase in net income, notwithstanding the increase in average assets.  Average assets for the six months ended June 30, 2021 was $2,166,196,000 compared to $1,832,987,000 for the year ended December 31, 2020.  Median ROA for our peer group was 1.06% for the year ended December 31, 2020.  Peer group data from S&P Global Market Intelligence 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 improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income.  Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin.  The Company’s net interest margin (fully tax equivalent basis) decreased to 3.67% for the six months ended June 30, 2021, compared to 4.11% for the same period in 2020.  The decrease in net interest margin in the period-over-period comparison resulted primarily from the decrease in the effective yield on average investment securities (including interest-earning deposits in other banks and Federal funds sold), and a decrease in the yield on the Company’s loan portfolio. Interest-bearing liabilities continue to benefit from low interest rates. In comparing the two periods ending June 30, 2021 and 2020, the effective yield on total earning assets decreased 49 basis points, while the cost of total interest-bearing liabilities decreased 12 basis points and the cost of total deposits decreased to 0.06% compared to 0.11%.  Net interest income before the reversal of provision for credit losses for the six-month period ended June 30, 2021 was $35,636,000 compared to $31,603,000 for the same period in 2020.
    Our non-interest income generally consists of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank-owned life insurance, net gains from sales of investment securities, FHLB dividends, and other income. Non-interest income for the six months ended June 30, 2021 decreased $4,512,000 or 52.54%, to $4,076,000 compared to $8,588,000 for the six months ended June 30, 2020.  The decrease resulted primarily from decreases in net realized gains on sales and calls of investment securities, service charge income, gain related to the collection of life insurance proceeds, and FHLB dividends; offset by increases in loan placement fees, and interchange fees, compared to the comparable 2020 period. Further detail of non-interest income is provided below.
 
Asset Quality
 
For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations.  Asset quality is measured in terms of percentage of total loans and total assets and is a key element in estimating the future earnings of a company.  Total nonperforming assets were $2,035,000 and $3,278,000 at June 30, 2021 and December 31, 2020, respectively.  Nonperforming assets totaled 0.19% of gross loans as of June 30, 2021 and 0.30% of gross loans as of December 31, 2020. The ratio of nonperforming assets to total assets was 0.09% as of June 30, 2021 and 0.16% as of December 31, 2020. The nonperforming assets at June 30, 2021 and December 31, 2020 consisted of nonaccrual loans of $2,035,000 and $3,278,000, respectively. The Company had no other real estate owned (OREO) or repossessed assets at June 30, 2021 or December 31, 2020. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. 
    The allowance for credit losses as a percentage of outstanding loan balance was 0.98% as of June 30, 2021 and 1.17% as of December 31, 2020. The ratio of net charge-off (recovery) to average loans was (0.15)% as of June 30, 2021 and (0.05)% as of December 31, 2020.
 
Asset Growth
 
As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA.  The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.  Total assets increased by $276,454,000 or 13.79% during the six months ended June 30, 2021 to $2,280,550,000 compared to $2,004,096,000 as of December 31, 2020, primarily due to the Company’s participation in the PPP.  Total gross loans decreased by 2.94% or $32,402,000 to $1,069,945,000 as of June 30, 2021 compared to $1,102,347,000 as of December 31, 2020.  The gross loan decrease consisted of a decrease of $83,414,000 in the PPP loans, offset by an increase of $51,012,000 in non-PPP loan growth.Total deposits increased 14.88% to $1,979,094,000 as
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of June 30, 2021 compared to $1,722,710,000 as of December 31, 2020. The Company’s deposit balances for the six months ended June 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts. Our loan-to-deposit ratio at June 30, 2021 was 54.06% compared to 63.99% at December 31, 2020.  The loan-to-deposit ratio of our peers was 80.00% at December 31, 2020.  Further discussion of loans and deposits is below.
 
Capital Adequacy
 
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.
    The Company and the Bank are each subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements may cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by bank regulatory agencies to ensure capital adequacy. As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III. As of June 30, 2021, the Bank met or exceeded all regulatory capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2021. The Company’s regulatory capital ratios are presented in the table in the “Capital” section below.

Operating Efficiency
 
Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue.  When measuring operating efficiency, a lower ratio is more favorable.  The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was 55.96% for the six months ended June 30, 2021 compared to 65.00% for the six months ended June 30, 2020.  The improvement in the efficiency ratio was due to the growth in non-interest income along with the decrease in non-interest expense. Further discussion of the change in net interest income and decrease in operating expenses is below.
    The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, increased 13.36% to $40,516,000 for the first six months of 2021 compared to $35,740,000 for the same period in 2020, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, decreased 2.41% to $22,671,000 from $23,230,000 for the same period in 2020.
 
Liquidity
 
Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee.  This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments.  Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (“FHLB”).  We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $245,311,000 with the FHLB.  These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities.  Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.
We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling $1,080,604,000 or 47.38% of total assets at June 30, 2021 and $788,004,000 or 39.32% of total assets as of December 31, 2020.

 
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RESULTS OF OPERATIONS
 
Net Income for the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
 
Net income increased to $15,042,000 for the six months ended June 30, 2021 compared to $8,924,000 for the six months ended June 30, 2020.  Basic and diluted earnings per share for June 30, 2021 were $1.20 and $1.20, respectively. Basic and diluted earnings per share for the same period in 2020 were $0.71 and $0.71, respectively. Annualized ROE was 12.21% for the six months ended June 30, 2021 compared to 7.92% for the six months ended June 30, 2020.  Annualized ROA for the six months ended June 30, 2021 and 2020 was 1.39% and 1.05%, respectively.
    The increase in net income for the six months ended June 30, 2021 compared to the same period in 2020 was primarily driven by an increase in net interest income, a decrease in non-interest expense, a reversal of provision for credit losses, and an increase in loan placement fees, partially offset by a decrease in net realized gains on sales and calls of investment securities, an increase in provision for income taxes, and a decrease in service charge income. During the six months ended June 30, 2021, the Company recorded a $3,300,000 reversal of provision for credit losses, compared to a $4,375,000 provision during the six months ended June 30, 2020. The reversal of provision to the allowance for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section. During the six months ended June 30, 2021, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
 
Interest Income and Expense
 
Net interest income is the most significant component of our income from operations.  Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest-bearing liabilities.
    The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and nonaccrual loans are not included as interest earning assets for purposes of this table.

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CENTRAL VALLEY COMMUNITY BANCORP
SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES
 
  For the Six Months Ended
June 30, 2021 		For the Six Months Ended
June 30, 2020
(Dollars in thousands) Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate 		Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate
ASSETS            
Interest-earning deposits in other banks $ 121,848  $ 61  0.10  % $ 56,037  $ 196  0.70  %
Securities:  
Taxable securities 570,132  6,094  2.14  % 466,498  6,225  2.67  %
Non-taxable securities (1) 226,843  3,450  3.04  % 32,962  723  4.39  %
Total investment securities 796,975  9,544  2.40  % 499,460  6,948  2.78  %
Total securities and interest-earning deposits
918,823  9,605  2.09  % 555,497  7,144  2.57  %
Loans (2) (3) 1,077,455  27,321  5.11  % 999,398  25,498  5.13  %
Total interest-earning assets 1,996,278  $ 36,926  3.73  % 1,554,895  $ 32,642  4.22  %
Allowance for credit losses (12,687)     (10,013)    
Nonaccrual loans 3,182      1,512     
Cash and due from banks 35,356      24,784     
Bank premises and equipment 8,349      7,455     
Other assets 135,718      127,331     
Total average assets $ 2,166,196      $ 1,705,964     
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Interest-bearing liabilities:            
Savings and NOW accounts $ 507,143  $ 93  0.04  % $ 396,465  $ 184  0.09  %
Money market accounts 418,781  320  0.15  % 286,653  281  0.20  %
Time certificates of deposit 89,955  107  0.24  % 90,702  341  0.76  %
Total interest-bearing deposits 1,015,879  520  0.10  % 773,820  806  0.21  %
Other borrowed funds 5,155  46  1.78  % 5,155  81  3.14  %
Total interest-bearing liabilities
1,021,034  $ 566  0.11  % 778,975  $ 887  0.23  %
Non-interest bearing demand deposits 869,386      671,723     
Other liabilities 29,337      30,026     
Shareholders’ equity 246,439      225,240     
Total average liabilities and shareholders’ equity $ 2,166,196      $ 1,705,964     
Interest income and rate earned on average earning assets
  $ 36,926  3.73  %   $ 32,642  4.22  %
Interest expense and interest cost related to average interest-bearing liabilities
  566  0.11  %   887  0.23  %
Net interest income and net interest margin (4)   $ 36,360  3.67  %   $ 31,755  4.11  %

(1)Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $724 and $152 in 2021 and 2020, respectively.
(2)Loan interest income includes loan fees of $3,890 in 2021 and $226 in 2020.
(3)Average loans do not include nonaccrual loans but do include interest income recovered from previously charged off loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.

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The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated.
Changes in Volume/Rate For the Six Months Ended June 30, 2021 and 2020
(In thousands) Volume Rate Net
Increase (decrease) due to changes in:      
Interest income:      
Interest-earning deposits in other banks $ 230  $ (365) $ (135)
Investment securities:
Taxable 1,382  (1,513) (131)
Non-taxable (1) 4,252  (1,525) 2,727 
Total investment securities 5,634  (3,038) 2,596 
Federal funds sold —  —  — 
Loans 1,991  (168) 1,823 
Total earning assets (1) 7,855  (3,571) 4,284 
Interest expense:      
Deposits:      
Savings, NOW and MMA 180  (232) (52)
Time certificate of deposits (2) (232) (234)
Total interest-bearing deposits 178  (464) (286)
Other borrowed funds (1) (34) (35)
Total interest-bearing liabilities 177  (498) (321)
Net interest income (1) $ 7,678  $ (3,073) $ 4,605 
(1)    Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $1,823,000 or 7.15% for the six months ended June 30, 2021 compared to the same period in 2020. Net interest income during the first six months of 2021 was positively impacted by an increase in average total loans of $78,057,000 or 7.81% to $1,077,455,000 compared to $999,398,000 for the same period in 2020. The yield on average loans, excluding nonaccrual loans, was 5.11% for the six months ended June 30, 2021 compared to 5.13% for the same period in 2020. Net interest income for the period ending June 30, 2021 was benefited by approximately $434,000 in nonrecurring income from prepayment penalties, compared to $453,000 recorded in the same period in 2020.  The impact to interest income from the accretion of the loan marks on acquired loans was $349,000 and $867,000 for the six months ended June 30, 2021 and 2020, respectively. The remaining balance of accretable loan marks on acquired loans as of June 30, 2021 was $2,247,000.
    Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $1,889,000 in the first six months of 2021 to $8,881,000 compared to $6,992,000 for the same period in 2020.  The yield on average total investments (total securities and interest-earning deposits) decreased 48 basis points to 2.09% for the six month period ended June 30, 2021 compared to 2.57% for the same period in 2020. Average total securities and interest-earning deposits for the first six months of 2021 increased $363,326,000 or 65.41% to $918,823,000 compared to $555,497,000 for the same period in 2020.  Income from investments represents 24.92% of net interest income for the first six months of 2021 compared to 22.12% for the same period in 2020.
    In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  At June 30, 2021, we held $407,823,000 or 42.82% of the total fair value of the investment portfolio in CMOs with an average yield of 1.57% as compared to $299,806,000 and $254,338,000 with average yields of 2.15% and 2.57% at December 31, 2020 and June 30, 2020, respectively.  We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin.  CMOs and MBS by their nature react to changes in interest rates.  In a normal declining rate environment, prepayments from CMOs and MBS would be expected to increase and the expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the CMOs and MBS would be expected to extend.  However, in the current economic environment, prepayments may not behave according to historical norms.  Premium amortization and discount accretion of these investments affects our net interest income.  Management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors.  These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage
41

loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.  The calculation of premium amortization and discount accretion represents management’s reasonable estimate of principal pay downs inherent in the total investment portfolio.
    The net-of-tax unrealized gain on the investment portfolio was $12,874,000 at June 30, 2021 and is reflected in the Company’s equity.  At June 30, 2021, the average life of the investment portfolio was 5.22 years and the fair value of the portfolio reflected a net pre-tax unrealized gain of $18,278,000.  Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI). Refer to Note 3 of the Notes to Consolidated Financial Statements (unaudited) for more detail. For the six months ended June 30, 2021 and 2020, no OTTI was recorded.  Additional deterioration in the market values of our investment securities, if any, may require the Company to recognize OTTI losses in future periods.
    A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.  At June 30, 2021, we estimate an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $106,000,000 or 10.25%.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $107,000,000 or 10.35%.  Our modeling environment assumes management would take no action during an immediate shock of 200 basis points.  However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and risk tolerance policy limits established by the Board of Directors to measure the possible future risk in the investment portfolio. 
    Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy.  The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, impairment, and prohibited practices.
    Total interest income on a non-tax equivalent basis for the six months ended June 30, 2021 increased $3,712,000 or 11.43% to $36,202,000 compared to $32,490,000 for the six months ended June 30, 2020.  The yield on interest earning assets decreased 49 basis points to 3.73% on a fully tax equivalent basis for the six months ended June 30, 2021 from 4.22% for the period ended June 30, 2020. The decrease was the result of yield changes, decrease in interest rates, and asset mix changes. Average interest earning assets increased to $1,996,278,000 for the six months ended June 30, 2021 compared to $1,554,895,000 for the six months ended June 30, 2020.  The $441,383,000 increase in average earning assets was attributed to the $363,326,000 increase in average investments and a $78,057,000 or 7.81% increase in average loans.
    Interest expense on deposits for the six months ended June 30, 2021 and 2020 was $520,000 and $806,000, respectively. The average interest rate on interest bearing deposits decreased to 0.10% for the six months ended June 30, 2021 compared to 0.21% for the same period ended June 30, 2020.  Average interest-bearing deposits increased 31.28% or $242,059,000 to $1,015,879,000 for the six months ended June 30, 2021 compared to $773,820,000 for the same period ended June 30, 2020.
    Average other borrowed funds were $5,155,000 with an effective rate of 1.78% for the six months ended June 30, 2021 compared to $5,155,000 with an effective rate of 3.14% for the six months ended June 30, 2020.  Total interest expense on other borrowed funds was $46,000 for the six months ended June 30, 2021 and $81,000 for the six months ended June 30, 2020.  Other borrowings include advances from the Federal Home Loan Bank (“FHLB”), advances on available unsecured lines of credit with correspondent banks, and junior subordinated deferrable interest debentures.  The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month LIBOR plus a margin of 1.60%.  The rates were 1.78% and 3.90% at June 30, 2021 and 2020, respectively.  See the section on “Financial Condition” for more detail.
    The cost of interest-bearing liabilities decreased 12 basis points to 0.11% for the six-month period ended June 30, 2021 compared to 0.23% for the same period in 2020. The cost of total deposits decreased to 0.06% compared to 0.11% for the six-month periods ended June 30, 2021 and 2020.  Average non-interest bearing demand deposits increased 29.43% to $869,386,000 in 2021 compared to $671,723,000 for 2020.  The ratio of average non-interest bearing demand deposits to average total deposits decreased to 46.11% in the six-month period ended June 30, 2021 compared to 46.47% for the same period in 2020.
 
Net Interest Income before Provision for Credit Losses
 
Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2021 increased by $4,033,000 or 12.76% to $35,636,000 compared to $31,603,000 for the same period in 2020.  The increase was a result of yield changes, asset mix changes, an increase in average earning assets, offset by an increase in average interest bearing liabilities. The impact to interest income from the accretion of the loan marks on acquired loans was $349,000 and $867,000 for the six months ended June 30, 2021 and 2020, respectively. In addition, net interest income before the provision for credit losses for the six months ended June 30, 2021 was benefited by approximately $434,000 in nonrecurring income from prepayment penalties, as compared to $453,000 in nonrecurring income for the six months ended June 30, 2020. Excluding these reversals and benefits, net interest income for the six months ended June 30, 2021 increased by $4,570,000 compared to the six months ended June 30, 2020. Average interest earning assets were $1,996,278,000 for the six months ended June 30, 2021 with a net
42

interest margin (fully tax equivalent basis) of 3.67% compared to $1,554,895,000 with a net interest margin (fully tax equivalent basis) of 4.11% for the six months ended June 30, 2020.  The $441,383,000 increase in average earning assets was attributed to the $363,326,000 increase in average total investments and the $78,057,000 or 7.81% increase in average loans.  For the six months ended June 30, 2021, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 48 basis points. The effective yield on loans decreased 2 basis points. Average interest bearing liabilities increased 31.07% to $1,021,034,000 for the six months ended June 30, 2021, compared to $778,975,000 for the same period in 2020. 
 
Provision for Credit Losses
 
We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses, and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. 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. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted.
    The establishment of an adequate credit allowance is based on 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.
    Quarterly, the Chief Credit Officer (CCO) reviews the specific reserve calculations for all impaired credits.  Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter.  This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. 
    The allowance for credit losses is reviewed at least quarterly by the Board of Directors Audit Committee and by the Board of Directors.  General reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance calculation and other portfolio trending analysis.
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    The allocation of the allowance for credit losses is set forth below (in thousands):
Loan Type  June 30, 2021 December 31, 2020
Commercial:
Commercial and industrial $ 1,753  $ 1,764 
Agricultural production 457  255 
   Total commercial 2,210  2,019 
Real estate:
Owner occupied 1,396  2,128 
Real estate construction and other land loans 1,101  1,204 
Commercial real estate 3,794  4,781 
Agricultural real estate 625  838 
Other real estate 134  223 
   Total real estate 7,050  9,174 
Consumer:
Equity loans and lines of credit 332  457 
Consumer and installment 496  634 
   Total consumer 828  1,091 
Unallocated reserves 351  631 
Total allowance for credit losses $ 10,439  $ 12,915 
 
    Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.
    Managing high-risk credits includes developing a business strategy with the customer to mitigate our potential losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly.
     During the six months ended June 30, 2021, the Company recorded a $3,300,000 reversal of provision for credit losses, compared to a $4,375,000 provision during the six months ended June 30, 2020. The reversal of provision to the allowance for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section. During the six months ended June 30, 2021, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.
    The Company had net recoveries totaling $824,000 for the six months ended June 30, 2021, and $432,000 for the same period in 2020.
    Nonperforming loans, consisting entirely of nonaccrual loans, were $2,035,000 and $3,278,000 at June 30, 2021 and December 31, 2020, respectively, and $2,406,000 at June 30, 2020.  Nonperforming loans as a percentage of total loans were 0.19% at June 30, 2021 compared to 0.30% at December 31, 2020 and 0.21% at June 30, 2020.  The Company had no other real estate owned (OREO) at June 30, 2021 or December 31, 2020. The Company held no repossessed assets at June 30, 2021 or December 31, 2020.
    The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.15)% for the six months ended June 30, 2021, and (0.09)% for the same period in 2020.
    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 operations 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
44

incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure.
    We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses. As of June 30, 2021, there were $32.9 million in classified loans of which $1.2 million related to agricultural real estate, $12.1 million to commercial and industrial loans, $3.0 million to agricultural production, $7.0 million to real estate owner occupied, $9.6 million in commercial real estate. This compares to $36.1 million in classified loans of which $1.2 million related to agricultural real estate, $10.4 million to commercial and industrial loans, $3.3 million to agricultural production, $7.3 million to real estate owner occupied, $9.6 million to commercial real estate, $1.0 million to consumer equity and lines of credit, and $3.2 million to real estate construction and other land loans as of December 31, 2020.
    As of June 30, 2021, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio.  However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to the “Allowance for Credit Losses” section for further information.
 
Net Interest Income after Provision for Credit Losses
 
Net interest income, after the provision for credit losses, was $38,936,000 for the six months period ended June 30, 2021 and $27,228,000 for the same period in 2020.
 
Non-Interest Income
 
Non-interest income is comprised of customer service charges, loan placement fees, net gains on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, FHLB dividends, and other income.  Non-interest income was $4,076,000 for the six months ended June 30, 2021 compared to $8,588,000 for the same period in 2020.  The $4,512,000 or 52.54% decrease in non-interest income during the six months ended June 30, 2021 was primarily driven by a decrease of $4,219,000 in net realized gains on sales and calls of investment securities, a decrease in service charge income of $194,000, a decrease of $569,000 in other income, and a decrease in FHLB dividends of $29,000, offset by an increase in loan placement fees of $307,000 and an increase of $201,000 in interchange fees.
    During the six months ended June 30, 2021, we realized a net loss on calls of investment securities of $79,000 compared to a $4,140,000 net gain for the same period in 2020.  The net gains realized on sales and calls of investment securities in 2020 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.
    Customer service charges decreased $194,000 or 17.75% to $899,000 for the first six months of 2021 compared to $1,093,000 for the same period in 2020. Interchange fees increased $201,000 to $841,000 the first six months of 2021 compared to $640,000 for the same period in 2020. Loan placement fees increased $307,000 or 35.70% to $1,167,000 for the first six months of 2021 compared to $860,000 for the same period in 2020. Other income decreased $569,000 the first six months of 2021 compared to the same period in 2020. The decrease in other income resulted from a $463,000 gain recorded the first six months of 2020 related to the collection of life insurance proceeds.
    The Bank holds stock from the Federal Home Loan Bank (“FHLB”) of San Francisco in conjunction with our borrowing capacity and generally earns quarterly dividends.  We currently hold $5,595,000 in FHLB stock.  We received dividends totaling $153,000 in the six months ended June 30, 2021, compared to $182,000 for the same period in 2020.
 

Non-Interest Expenses
 
Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, Internet banking, and data processing are the major categories of non-interest expenses.  Non-interest expenses decreased $559,000 or 2.37% to $23,018,000 for the six months ended June 30, 2021, compared to $23,577,000 for the six months ended June 30, 2020.  The net decrease for the first six months of 2021 was primarily the result of decreases in salaries and employee benefits of $407,000, directors’ expenses of $174,000, internet banking of $170,000, professional services of $149,000, advertising of $83,000, ATM/Debit card expenses of $65,000, information technology of $40,000, amortization of software of $47,000, stationary and supplies of $44,000, and operating losses of $19,000, partially offset by increases in data processing expenses of $352,000, regulatory assessments of $140,000, personnel of $131,000, occupancy and equipment expenses of $31,000, and donations of $26,000.
    The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO
45

related gains and losses, and gains related to the collection of life insurance proceeds) was 55.96% for the six months ended June 30, 2021 compared to 65.00% for the six months ended June 30, 2020. The decrease in the efficiency ratio was due to the decrease in non-interest expense as well as the growth in non-interest income.
    Salaries and employee benefits decreased $407,000 or 2.84% to $13,917,000 for the first six months of 2021 compared to $14,324,000 for the six months ended June 30, 2020.  Full time equivalent employees were 261 for the six months ended June 30, 2021, compared to 270 for the six months ended June 30, 2020. The decrease in total salaries and employee benefits was the result of a decrease of $1,286,000 in 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 an increase of approximately $879,000 in salaries and benefits and a decrease in loan issuance costs of $769,000. A portion of the salaries and benefits increase was related to $172,000 paid and/or accrued for severance pay.
    Occupancy and equipment expense increased $31,000 or 1.36% to $2,314,000 for the six months ended June 30, 2021 compared to $2,283,000 for the six months ended June 30, 2020. The Company made no changes in its depreciation expense methodology. The Company operated 20 full-service offices at June 30, 2021 and at June 30, 2020.
    Data processing expense increased to $1,242,000 for the six months ended June 30, 2021 compared to $890,000 for the same period in 2020. Regulatory assessments increased to $333,000 for the six months ended June 30, 2021 compared to $193,000 for the same period in 2020.  The assessment base for calculating the amount owed is average assets minus average tangible equity.
    Professional services decreased by $149,000 in the first six months of 2021 compared to the same period in 2020. Personnel expense included an accrual of $136,000 for an executive search firm to find a replacement for our retiring chief executive officer.

The following table shows significant components of other non-interest expense as a percentage of average assets.
For the Six Months
Ended June 30,
2021 2020
(Dollars in thousands) Other Expense % Average
Assets 		Other Expense % Average
Assets
Stationery/supplies $ 83  0.01  % $ 127  0.01  %
Amortization of software 41  —  % 88  0.01  %
Postage 98  0.01  % 98  0.01  %
Risk management expense 51  —  % 94  0.01  %
Shareholder services 61  0.01  % 65  0.01  %
Personnel other 207  0.02  % 76  0.01  %
Armored courier fees 141  0.01  % 140  0.02  %
Telephone 99  0.01  % 98  0.01  %
Alarm 73  0.01  % 43  0.01  %
Donations 104  0.01  % 78  0.01  %
Education/training 66  0.01  % 77  0.01  %
Loan related expenses 23  —  % 24  —  %
General insurance 92  0.01  % 82  0.01  %
Travel and mileage expense 25  —  % 87  0.01  %
Operating losses 47  —  % 66  0.01  %
Other 618  0.06  % 580  0.07  %
Total other non-interest expense $ 1,829  0.17  % $ 1,823  0.21  %
 
Provision for Income Taxes
 
Our effective income tax rate was 24.77% for the six months ended June 30, 2021 compared to 27.09% for the six months ended June 30, 2020. The Company reported an income tax provision of $4,952,000 for the six months ended June 30, 2021, compared to $3,315,000 for the six months ended June 30, 2020.  The effective tax rate was affected by the increase in tax-exempt interest. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income. If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would be ultimately sustained upon
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examination do not meet a more-likely-than-not criteria. As of June 30, 2021 and December 31, 2020, there was no reserve for uncertain tax positions.

Net Income for the Second Quarter of 2021 Compared to the Second Quarter of 2020
 
Net income increased to $7,563,000 for the quarter ended June 30, 2021 compared to $2,301,000 for the quarter ended June 30, 2020.  Basic earnings per share was $0.61 for the quarter ended June 30, 2021 compared to $0.18 for the same period in 2020. Diluted earnings per share was $0.60 for the quarter ended June 30, 2021 compared to $0.18 for the same period in 2020. Annualized ROE was 12.25% for the quarter ended June 30, 2021 compared to 4.14% for the quarter ended June 30, 2020.  Annualized ROA for the three months ended June 30, 2021 was 1.36% compared to 0.51% for the quarter ended June 30, 2020.
 
The increase in net income during the second quarter of 2021 compared to the same period in 2020 is primarily due to a decrease in provision for credit losses of $4,500,000, an increase in net interest income before the provision for credit losses of $2,507,000, and an increase in total non-interest income of $32,000, partially offset by an increase in the provision for income taxes of $1,645,000 and an increase in non-interest expenses of $132,000. During the quarter ended June 30, 2021, the Company recorded a $1,500,000 reversal of provision for credit losses, compared to a $3,000,000 provision during the quarter ended June 30, 2020. Non-interest income increased $32,000 or 1.56% to $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 in the same period in 2020. During the second quarter of 2021 interchange fees increased $164,000, service charge income increased $20,000 and Federal Home Loan Bank dividends increased $8,000, offset by a decrease in placement fees of $51,000, a decrease in other income of $88,000, and a decrease in net realized gains on sales and calls of investment securities of $21,000, compared to the same period in 2020. For the quarter ended June 30, 2020, non-interest income included a $166,000 gain related to the collection of tax-exempt life insurance proceeds.

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

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CENTRAL VALLEY COMMUNITY BANCORP
SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES
  For the Three Months Ended
June 30, 2021 		For the Three Months Ended
June 30, 2020
(Dollars in thousands) Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate 		Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate
ASSETS            
Interest-earning deposits in other banks $ 114,590  $ 29  0.10  % $ 58,277  $ 13  0.09  %
Securities
Taxable securities 629,284  3,361  2.14  % 481,439  2,960  2.46  %
Non-taxable securities (1) 236,455  1,784  3.02  % 49,611  522  4.21  %
Total investment securities 865,739  5,145  2.38  % 531,050  3,482  2.62  %
Total securities and interest-earning deposits
980,329  5,174  2.11  % 589,327  3,495  2.37  %
Loans (2) (3) 1,077,774  13,556  5.04  % 1,075,588  12,600  4.71  %
Total interest-earning assets 2,058,103  $ 18,730  3.65  % 1,664,915  $ 16,095  3.89  %
Allowance for credit losses (11,928)     (10,783)    
Non-accrual loans 2,651      1,620     
Cash and due from banks 35,997      23,963     
Bank premises and equipment 8,416      7,358     
Other assets 134,393      126,792     
Total average assets $ 2,227,632      $ 1,813,865     
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Interest-bearing liabilities:            
Savings and NOW accounts $ 522,209  $ 45  0.03  % $ 415,793  $ 83  0.08  %
Money market accounts 441,623  160  0.15  % 297,725  137  0.19  %
Time certificates of deposit 90,735  47  0.21  % 89,900  154  0.69  %
Total interest-bearing deposits 1,054,567  252  0.10  % 803,418  374  0.19  %
Other borrowed funds 5,155  22  1.71  % 5,155  36  2.79  %
Total interest-bearing liabilities 1,059,722  $ 274  0.10  % 808,573  $ 410  0.20  %
Non-interest bearing demand deposits 893,441      753,265     
Other liabilities 27,510      29,548     
Shareholders’ equity 246,959      222,479     
Total average liabilities and shareholders’ equity $ 2,227,632      $ 1,813,865     
Interest income and rate earned on average earning assets
  $ 18,730  3.65  %   $ 16,095  3.89  %
Interest expense and interest cost related to average interest-bearing liabilities
  274  0.10  %   410  0.20  %
Net interest income and net interest margin (4)   $ 18,456  3.60  %   $ 15,685  3.79  %
(1)Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $375 and $109 in 2021 and 2020, respectively.
(2)Loan interest income includes loan fees of $1,821 in 2021 and $291 in 2020.
(3)Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.
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Changes in Volume/Rate For the Three Months Ended June 30, 2021 and 2020
(In thousands) Volume Rate Net
Increase (decrease) due to changes in:      
Interest income:      
Interest-earning deposits in other banks $ 12  $ 4  $ 16 
Investment securities:
Taxable 908  (507) 401 
Non-taxable (1) 1,965  (703) 1,262 
Total investment securities 2,873  (1,210) 1,663 
Federal funds sold —  —  — 
Loans 25  931  956 
Total earning assets (1) 2,910  (275) 2,635 
Interest expense:      
Deposits:      
Savings, NOW and MMA 87  (102) (15)
Time certificate of deposits 1  (108) (107)
Total interest-bearing deposits 88  (210) (122)
Other borrowed funds —  (14) (14)
Total interest-bearing liabilities 88  (224) (136)
Net interest income (1) $ 2,822  $ (51) $ 2,771 
(1)    Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $956,000 or 7.59% to $13,556,000 for the second quarter of 2021 compared to $12,600,000 for the same period in 2020.  Total average loans, including nonaccrual loans, for the second quarter of 2021 increased $3,217,000 or 0.30% to $1,080,425,000 compared to $1,077,208,000 for the same period in 2020.  Yield on the loan portfolio, excluding nonaccrual loans, was 5.04% and 4.71% for the second quarters ending June 30, 2021 and 2020, respectively.  Net interest income during the second quarters of 2021 and 2020 benefited by approximately $4,000 and $288,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status. The accretion of the loan marks on acquired loans increased interest income by $176,000 and $174,000 during the quarters ended June 30, 2021 and 2020, respectively.
Income from investments represents 26.54% of net interest income for the second quarter of 2021 compared to 21.73% for the same quarter in 2020. Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) increased $1,415,000 in the second quarter of 2021 to $4,799,000 compared to $3,384,000, for the same period in 2020.  The yield on average total investments decreased 26 basis points to 2.11% on a fully tax equivalent basis for the second quarter of 2021 compared to 2.37% on a fully tax equivalent basis for the second quarter of 2020. Average total investments and interest bearing deposits in other banks for the second quarter of 2021 increased $391,002,000 or 66.35% to $980,329,000 compared to $589,327,000 for the second quarter of 2020.
Total interest income for the second quarter of 2021 increased $2,371,000 or 14.83% to $18,355,000 compared to $15,984,000 for the second quarter ended June 30, 2020.  The yield on interest earning assets decreased to 3.65% on a fully tax equivalent basis for the second quarter ended June 30, 2021 from 3.89% on a fully tax equivalent basis for the second quarter ended June 30, 2020.  Average interest earning assets increased to $2,058,103,000 for the second quarter ended June 30, 2021 compared to $1,664,915,000 for the second quarter ended June 30, 2020.  The $393,188,000 increase in average earning assets was attributed to the $2,186,000 increase in average loans and the $391,002,000 increase in total investments.
Interest expense on deposits for the quarter ended June 30, 2021 decreased $122,000 or 32.62% to $252,000 compared to $374,000 for the quarter ended June 30, 2020.  The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.05% and 0.10% for the quarters ended June 30, 2021 and 2020, respectively.  Average interest bearing deposits increased 31.26% or $251,149,000 in the second quarter of 2021 compared to the same period in 2020.  Average interest-bearing deposits were $1,054,567,000 for the quarter ended June 30, 2021, with an effective rate paid of 0.10%, compared to $803,418,000 for the same period in 2020, with an effective rate paid of 0.19%.
Average other borrowed funds totaled $5,155,000 for the quarter ended June 30, 2021, with an effective rate of 1.71% for the quarter ended June 30, 2021 compared to $5,155,000 and 2.79% for the quarter ended June 30, 2020.  As a result, interest expense on borrowed funds decreased $14,000 to $22,000 for the quarter ended June 30, 2021, from $36,000 for the
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quarter ended June 30, 2020.  Other borrowings are comprised of advances from the Federal Home Loan Bank, junior subordinated deferrable interest debentures and advances on available unsecured lines of credit with correspondent banks.
The cost of our interest bearing liabilities was 0.10% and 0.20% for the quarters ended June 30, 2021 and 2020.  The cost of total deposits was 0.05% and 0.10% for the quarters ended June 30, 2021 and 2020.  Average non-interest bearing demand deposits increased 18.61% to $893,441,000 for the quarter ended June 30, 2021 compared to $753,265,000 for the quarter ended June 30, 2020.  The ratio of average non-interest bearing demand deposits to average total deposits was 45.86% in the second quarter of 2021 compared to 48.39% for the same period in 2020.

Net Interest Income before Provision for Credit Losses
 
Net interest income before provision for credit losses for the quarter ended June 30, 2021, increased $2,507,000 or 16.10% to $18,081,000 compared to $15,574,000 for the quarter ended June 30, 2020.  The increase was due to asset mix changes, and the increase in average interest earning assets, partially offset by an increase in average interest-bearing liabilities. Average interest earning assets were $2,058,103,000 for the quarter ended June 30, 2021, with a net interest margin (fully tax equivalent basis) of 3.60% compared to $1,664,915,000 with a net interest margin (fully tax equivalent basis) of 3.79% for the quarter ended June 30, 2020.  The $393,188,000 increase in average earning assets can be attributed to the $3,217,000 increase in loans, and the $391,002,000 increase in total investments.  Average interest bearing liabilities increased 31.06% to $1,059,722,000 for the quarter ended June 30, 2021 compared to $808,573,000 for the same period in 2020.
 
Provision for Credit Losses

During the quarter ended June 30, 2021, the Company recorded a $1,500,000 reversal of provision for credit losses, compared to $3,000,000 provision during the quarter ended June 30, 2020.  The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was 0.04% for the quarter ended June 30, 2021 compared to (0.15)% for the quarter ended June 30, 2020.  During the quarter ended June 30, 2021, the Company had net charge-offs totaling $117,000 compared to net recoveries of $391,000 for the same period in 2020. Gross recoveries of previously charged off loan balances during the quarters ended June 30, 2021 and 2020 were $54,000 and $471,000, respectively. Gross charge-offs during the quarters ended June 30, 2021 and 2020 were $171,000 and $80,000, respectively. The majority of the loans charged off were previously classified and sufficient specific reserves related to these impaired credits were held in the allowance for credit losses in reporting periods prior to the date of charge-off.
 
Non-Interest Income
 
Non-interest income was $2,077,000 for the quarter ended June 30, 2021 compared to $2,045,000 for the same period ended June 30, 2020.  The $32,000 or 1.56% increase in non-interest income for the quarter ended June 30, 2021 was primarily due to recording a $164,000 increase in interchange fees, a $20,000 increase in service charge income, and a $8,000 increase in Federal Home Loan Bank dividends, partially offset by a $88,000 decrease in other income, a $51,000 decrease in loan placement fees, and a $21,000 decrease in net realized gains on sales and calls of investment securities,
Customer service charges increased $20,000 or 4.47% to $467,000 for the second quarter of 2021 compared to $447,000 for the same period in 2020, due primarily to an increase in overdraft fee income.  Other income decreased $88,000 or 16.39% to $449,000 for the second quarter of 2021 compared to $537,000 for the same period in 2020. For the quarter ended June 30, 2020, other income included a $166,000 gain related to the collection of tax-exempt life insurance proceeds.  
 
Non-Interest Expenses
 
Salaries and employee benefits, occupancy and equipment, regulatory assessments, data processing, acquisition and integration expenses, Internet banking, license and maintenance contracts, and professional services are the major categories of non-interest expenses.  Non-interest expenses increased $132,000 or 1.15% to $11,630,000 for the quarter ended June 30, 2021 compared to $11,498,000 for the same period in 2020. The net increase quarter over quarter was a result of a increases in salaries and employee benefits of $167,000, increases in data processing expense of $71,000, increases in occupancy and equipment expenses of $62,000, increases in regulatory assessments of $26,000, increases in appraisal fees of $25,000, increases in alarm monitoring expenses of 15,000, increases in operating losses of $10,000, and increases in Information technology expenses of $9,000. The increases were partially offset by the decreases in Internet banking expenses of $98,000, the decreases in professional services of $47,000, the decreases in advertising expenses of $39,000, the decreases in stationery and supplies of $29,000, the decreases in directors’ expenses of $23,000, and the decreases in amortization of software of $14,000 . During the quarter ended June 30, 2021, nonrecurring expenses included $106,000 related to PPP loan forgiveness processing.
The Company’s efficiency ratio decreased to 55.58% for the second quarter of 2021 compared to 64.27% for the second quarter of 2020. The improvement in the efficiency ratio is due to the growth in operating revenue outpacing the increase in non-interest expense.
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Salaries and employee benefits increased $167,000 or 2.45% to $6,979,000 for the second quarter of 2021 compared to $6,812,000 for the second quarter of 2020.  The number of full time equivalent (FTE) employees as of June 30, 2021, December 31, 2020 and June 30, 2020 was 247, 273, and 265, respectively.
Other non-interest expenses included increases of $20,000 in donations, $18,000 in personnel expenses, $8,000 in education/training expenses, $4,000 in telephone expenses, and $3,000 in armored courier expenses, partially offset by decreases of $29,000 in stationary and supplies, $14,000 in amortization of software, $13,000 in risk management expense, and $13,000 in check printing expense, as compared to the same period in 2020.

Provision for Income Taxes
 
The effective income tax rate was 24.58% for the second quarter of 2021 compared to 26.27% for the same period in 2020.  Provision for income taxes totaled $2,465,000 and $820,000 for the quarters ended June 30, 2021 and 2020, respectively.  The 2021 effective tax rate was affected by the increase in tax-exempt interest, as well as the reversal of provision for credit losses. The 2020 effective tax rate was affected by the large provision for credit losses which resulted in lower pretax and taxable income, as well as the gain related to the collection of life insurance proceeds.

FINANCIAL CONDITION
 
Summary of Changes in Consolidated Balance Sheets
 
June 30, 2021 compared to December 31, 2020

Total assets were $2,280,550,000 as of June 30, 2021, compared to $2,004,096,000 at December 31, 2020, an increase of 13.79% or $276,454,000.  Total gross loans were $1,069,945,000 at June 30, 2021, compared to $1,102,347,000 at December 31, 2020, a decrease of $32,402,000 or 2.94%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 38.13% or $287,429,000 to $1,041,258,000 at June 30, 2021 compared to $753,829,000 at December 31, 2020.  Total deposits increased 14.88% or $256,384,000 to $1,979,094,000 at June 30, 2021, compared to $1,722,710,000 at December 31, 2020.  Shareholders’ equity increased $6,028,000 or 2.46% to $251,049,000 at June 30, 2021, compared to $245,021,000 at December 31, 2020. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in unrealized gains on available-for-sale (AFS) securities, and share repurchases. Accrued interest payable and other liabilities was $45,252,000 at June 30, 2021, compared to $31,210,000 at December 31, 2020, a increase of $14,042,000.

Fair Value
 
The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
 
Investments
 
Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity.  As of June 30, 2021, investment securities with a fair value of $191,882,000, or 20.15% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by management.  Our policies are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.
    The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio.  Our loan-to-deposit ratio at June 30, 2021 was 54.06%
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compared to 63.99% at December 31, 2020.  The loan-to-deposit ratio of our peers was 80.00% at December 31, 2020.  The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 38.13% or $287,429,000 to $1,041,258,000 at June 30, 2021, from $753,829,000 at December 31, 2020.  The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $18,278,000 at June 30, 2021, compared to a net unrealized gain of $21,091,000 at December 31, 2020.
    The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance. 
    The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions, and interest rate fluctuations.  The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the original yield expected at time of purchase.
    Management evaluated all available-for-sale investment securities with an unrealized loss at June 30, 2021 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at June 30, 2021 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies. 
     For those securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those securities.  There were no OTTI losses recorded during the six months ended June 30, 2020.
At June 30, 2021, the Company held two U.S. Treasury securities of which one security was in a loss position for less than 12 months. The unrealized loss on the Company’s investment in direct obligations of U.S. Treasury securities is associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuer. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
    At June 30, 2021, the Company held one U.S. Government agency security which was in a gain position.
    At June 30, 2021, the Company held 122 obligations of states and political subdivision securities of which 16 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities and corporate debt securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
    At June 30, 2021, the Company held 115 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which eight were in a loss position for less than 12 months and 11 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
    At June 30, 2021, the Company had a total of 49 Private Label Mortgage and Asset Backed Securities (PLMABS) with a remaining principal balance of $180,844,000 and a net unrealized loss of approximately $63,000.  18 of the PLMABS securities were in a loss position for less than 12 months and two has been in loss for more than 12 months at June 30, 2021. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.
At June 30, 2021, the Company held 14 corporate debt securities of which five were in a loss position for less than 12 months. The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021.
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    See Note 3 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.
 
Loans
 
Total gross loans decreased $32,402,000 or 2.94% to $1,069,945,000 as of June 30, 2021, compared to $1,102,347,000 as of December 31, 2020.

    The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:
Loan Type (Dollars in thousands) June 30, 2021 % of Total
Loans 		December 31, 2020 % of Total
Loans
Commercial:        
Commercial and industrial $ 208,919  19.4  % $ 273,994  24.9  %
Agricultural production 32,918  3.1  % 21,971  2.0  %
Total commercial 241,837  22.5  % 295,965  26.9  %
Real estate:        
Owner occupied 200,232  18.7  % 208,843  18.9  %
Real estate construction and other land loans 65,282  6.1  % 55,419  5.0  %
Commercial real estate 357,519  33.4  % 338,886  30.7  %
Agricultural real estate 88,110  8.2  % 84,258  7.6  %
Other real estate 29,750  2.8  % 28,718  2.6  %
Total real estate 740,893  69.2  % 716,124  64.8  %
Consumer:        
Equity loans and lines of credit 51,364  4.8  % 55,634  5.0  %
Consumer and installment 37,241  3.5  % 37,236  3.3  %
Total consumer 88,605  8.3  % 92,870  8.3  %
Net deferred origination costs (1,390)   (2,612)  
Total gross loans 1,069,945  100.0  % 1,102,347  100.0  %
Allowance for credit losses (10,439)   (12,915)  
Total loans $ 1,059,506    $ 1,089,432   

    As of June 30, 2021, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.5% of total loans.  This level of concentration of commercial loans and loans collateralized by real estate is consistent with 96.7% of total loans at December 31, 2020.  Although management believes the loans within this concentration have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectibility, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The Company does not engage in any sub-prime mortgage lending activities.
    At June 30, 2021, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $109,932,000, of which $2,374,000 were commercial loans, $98,912,000 were real estate loans, and $8,646,000 were consumer loans. 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.
    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 June 30, 2021, gross loans included $109,502,000 in PPP loans which are fully guaranteed by the SBA.
    The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.
 
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Nonperforming Assets
 
Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets.  Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status.  A loan is classified as nonaccrual when (i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest under the original contractual terms is not expected; or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.
    At June 30, 2021, total nonperforming assets totaled $2,035,000, or 0.09% of total assets, compared to $3,278,000, or 0.16% of total assets at December 31, 2020.  Total nonperforming assets at June 30, 2021, included nonaccrual loans totaling $2,035,000, no OREO, and no other repossessed assets. Nonperforming assets at December 31, 2020 consisted of $3,278,000 in nonaccrual loans, no OREO, and no other repossessed assets. At June 30, 2021 and December 31, 2020, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans.
    A summary of nonperforming loans at June 30, 2021 and December 31, 2020 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at June 30, 2021 or at December 31, 2020.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

Composition of Nonperforming Loans
(In thousands) June 30, 2021 December 31, 2020
Nonaccrual loans:    
Commercial and industrial $ 348  $ 752 
Owner occupied real estate —  370 
Real estate construction and other land loans —  1,556 
Agricultural real estate 1,204  — 
Commercial real estate 483  512 
Consumer and installment —  88 
Total nonaccrual 2,035  3,278 
Accruing loans past due 90 days or more —  — 
Total nonperforming loans $ 2,035  $ 3,278 
Ratio of nonperforming loans to total loans 0.19  % 0.30  %
Ratio of allowance for credit losses to nonperforming loans 513.0  % 394.0  %
Loans considered to be impaired $ 8,539  $ 11,186 
Related allowance for credit losses on impaired loans $ 880  $ 631 

    We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent.  As of June 30, 2021 and December 31, 2020, we had impaired loans totaling $8,539,000 and $11,186,000, respectively.  For collateral dependent loans secured by real estate, we obtain external valuations which are updated at least annually to determine the fair value of the collateral, and we record a charge-off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral, unless there is an extenuating circumstance that may positively affect the amount collected. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.
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    The following table provides a reconciliation of the change in nonaccrual loans for the first six months of 2021.
(In thousands) Balance, December 31, 2020 Additions
 to
Nonaccrual
Loans 		Net Pay
Downs 		Transfers
to
Foreclosed
Collateral and
 OREO 		Returns to
Accrual
Status 		Charge-
Offs 		Balance, June 30, 2021
Nonaccrual loans:              
Commercial and industrial $ 752  $ —  $ (350) $ —  $ (55) $ —  $ 347 
Agricultural land and industrial —  2,141  (936) —  —  —  1,205 
Real estate 882  —  (225) —  (174) —  483 
Real estate construction and other land loans
1,556  —  (1,531) —  (25) —  — 
Consumer 88  —  (2) —  (86) —  — 
Total nonaccrual $ 3,278  $ 2,141  $ (3,044) $ —  $ (340) $ —  $ 2,035 
 
    OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower.  OREO is initially recorded at fair value less costs to sell and thereafter carried at the lower of cost or fair value, less selling costs. We had no OREO properties at June 30, 2021 or December 31, 2020. The Company held no repossessed assets at June 30, 2021 or December 31, 2020.

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 50 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 50 quarters was an appropriate look back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look back period.
    In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan.  The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs.  Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible.  Recoveries are generally recorded only when cash payments are received.
    The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio.  The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee.  They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.
    The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio.  The allowance is based on principles of accounting: (i) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (ii) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
    Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses.  The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans, 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.
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    The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:
For the Six Months
Ended June 30, 		For the Year Ended
December 31, 		For the Six Months
Ended June 30,
(Dollars in thousands) 2021 2020 2020
Balance, beginning of period $ 12,915  $ 9,130  $ 9,130 
(Reversal of) provision for credit losses (3,300) 3,275  4,375 
Losses charged to allowance (228) (229) (123)
Recoveries 1,052  739  555 
Balance, end of period $ 10,439  $ 12,915  $ 13,937 
Allowance for credit losses to total loans at end of period
0.98  % 1.17  % 1.24  %
 
Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses.  Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.  Risks and uncertainties exist in all lending transactions and our management and Board of Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.
The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit Committee.  Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. At the onset of COVID we established a dedicated qualitative factor to address the lagging effect on our quantitative data. We have begun reducing that factor’s impact on the ALLL given the passage of time. We adjusted the economic risk factor methodology to incorporate the improving economic conditions and decreasing unemployment rate. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.
    As of June 30, 2021, the balance in the allowance for credit losses (ALLL) was $10,439,000 compared to $12,915,000 as of December 31, 2020.  The decrease is attributed to the reversal of provision of $3,300,000 during the six months ended June 30, 2021.  The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $316,702,000 as of June 30, 2021, compared to $326,179,000 as of December 31, 2020.  At June 30, 2021 and December 31, 2020, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $250,000. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes.  While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes.
    As of June 30, 2021, the ALLL was 0.98% of total gross loans compared to 1.17% as of December 31, 2020.  Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $109,932,000 at June 30, 2021 and $127,186,000 at December 31, 2020. Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.09% and 1.32% at June 30, 2021 and December 31, 2020, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.13% and 1.41%, respectively. As of June 30, 2021, gross loans included $109,502,000 related to PPP loans which are fully guaranteed by the SBA. Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.23% and 1.65% as of June 30, 2021 and December 31, 2020, respectively. The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at June 30, 2021. The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL.  The size of the fair value discount remains adequate for all non-impaired acquired loans.
    The Company’s loan portfolio balances for the six months ended June 30, 2021 increased through organic growth.  Management believes that the change in the allowance for credit losses to total loans ratio is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values.
    Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods.  The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative 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
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charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of June 30, 2021. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.
    The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio.
June 30, 2021 December 31, 2020 June 30, 2020
(Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans
Impaired loans with specific reserves $ 7,600  0.71  % $ 10,072  0.91  % $ 12,555  1.12  %
Past due loans 391  0.04  % 89  0.01  % 853  0.08  %
Nonaccrual loans 2,035  0.19  % 3,278  0.30  % 2,406  0.21  %

Goodwill and Intangible Assets
 
Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at June 30, 2021, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability.  A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
During March 2020, the COVID-19 pandemic emerged and began impacting the state and local economies in our market due to local shelter-in-place orders and restrictions on businesses which caused many nonessential businesses to close and workers to be temporarily unemployed. COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Management considered the COVID-19 related economic downturn to be such a triggering event and therefore performed qualitative assessments at the end of the first, second and fourth quarters of 2020. Given the continued economic impact of the pandemic, management determined it appropriate to perform a quantitative test as of September 30, 2020. Management engaged a third party valuation specialist to assist with the performance of the quantitative goodwill impairment test in the third quarter of 2020. Significant assumptions inherent in the valuation methodologies for goodwill that were employed and included, but were not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on this quantitative test, it was determined that the fair value of the reporting unit exceeded the carrying value as of September 30, 2020.
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. No such events or circumstances arose during the first six months of 2021. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company’s operating results.
    The intangible assets represent the estimated fair value of the core deposit relationships acquired in the 2017 acquisition of Folsom Lake Bank of $1,879,000, the 2016 acquisition of Sierra Vista Bank of $508,000, and the 2013 acquisition of Visalia Community Bank of $1,365,000.  Core deposit intangibles are being amortized using the straight-line method (which approximates the effective interest method) over estimated lives of five to 10 years from the date of acquisition.  The carrying value of intangible assets at June 30, 2021 was $835,000, net of $2,744,000 in accumulated amortization expense.  The carrying value at December 31, 2020 was $1,183,000, net of $2,569,000 accumulated amortization expense.  We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required in the first six months of 2021.  Amortization expense recognized was $347,000 and $347,000 for the six months ended June 30, 2021 and June 30, 2020, respectively.
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    The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next five years (in thousands):
Years Ended Estimated Core Deposit Intangible Amortization
2021 $ 314 
2022 455 
2023 66 
$ 835 
Deposits and Borrowings
 
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
    Total deposits increased $256,384,000 or 14.88% to $1,979,094,000 as of June 30, 2021, compared to $1,722,710,000 as of December 31, 2020.  Interest-bearing deposits increased $181,867,000 or 20.26% to $1,079,688,000 as of June 30, 2021, compared to $897,821,000 as of December 31, 2020.  Non-interest bearing deposits increased $74,517,000 or 9.03% to $899,406,000 as of June 30, 2021, compared to $824,889,000 as of December 31, 2020.  Average non-interest bearing deposits to average total deposits was 46.11% for the six months ended June 30, 2021 compared to 46.47% for the same period in 2020. The Company’s deposit balances for the six months ended June 30, 2021 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.
    The composition of the deposits and average interest rates paid at June 30, 2021 and December 31, 2020 is summarized in the table below.
(Dollars in thousands) June 30, 2021 % of
Total
Deposits 		Average Effective
Rate 		December 31, 2020 % of
Total
Deposits 		Average Effective
Rate
NOW accounts $ 354,820  17.9  % 0.05  % $ 310,697  18.0  % 0.11  %
MMA accounts 444,083  22.4  % 0.15  % 341,088  19.8  % 0.18  %
Time deposits 89,805  4.5  % 0.24  % 89,846  5.2  % 0.65  %
Savings deposits 190,980  9.7  % 0.01  % 156,190  9.1  % 0.02  %
Total interest-bearing 1,079,688  54.5  % 0.11  % 897,821  52.1  % 0.18  %
Non-interest bearing 899,406  45.5  % 824,889  47.9  %
Total deposits $ 1,979,094  100.0  % $ 1,722,710  100.0  %
Other Borrowings
 
As of June 30, 2021 and December 31, 2020, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to the Liquidity section below for further discussion of FHLB advances.

Capital
 
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  Historically, the primary source of capital for the Company has been through retained earnings. 
The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.
Our shareholders’ equity was $251,049,000 at June 30, 2021, compared to $245,021,000 at December 31, 2020.  The increase from December 31, 2020 in shareholders’ equity is the result of a an increase in retained earnings from net income of $15,042,000, the exercise of stock options of $213,000, stock issued under the employee stock purchase plan of $110,000, the effect of share based compensation expense of $210,000, and stock awarded to employees of $158,000, offset by a decrease in accumulated other comprehensive income (AOCI) of $1,982,000, common stock cash dividends of $2,881,000, and stock repurchases of $4,842,000.
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    On March 17, 2021, the Board of Directors of the Company approved the adoption of a program to effect repurchases of the Company’s common stock with the intent to purchase up to $12 million worth of the Company’s outstanding common stock.  During the six months ended June 30, 2021, the Company repurchased and retired 239,679 shares at an approximate cost of $4,842,000. The share repurchase plan began on March 18, 2021 and will end on March 17, 2022.
    During the first six months of 2021, the Company declared and paid $2,881,000 in cash dividends ($0.23 per common share) to holders of common stock. The Company declared and paid a total of $5,530,000 in cash dividends ($0.44 per common share) to holders of common stock during the year ended December 31, 2020.
    Management considers capital requirements as part of its strategic planning process.  The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings.  The ability to obtain capital is dependent upon the capital markets as well as our performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. 
    The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking
organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of
credit and recourse arrangements, which are reported as off-balance-sheet items.
    The following table presents the Company’s regulatory capital ratios as of June 30, 2021 and December 31, 2020.
(Dollars in thousands)
June 30, 2021 Amount Ratio
Tier 1 Leverage Ratio $ 186,712  8.63  %
Common Equity Tier 1 Ratio (CET 1) $ 181,712  13.43  %
Tier 1 Risk-Based Capital Ratio $ 186,712  13.80  %
Total Risk-Based Capital Ratio $ 197,401  14.58  %
December 31, 2020
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  %
The following table presents the Bank’s regulatory capital ratios as of June 30, 2021 and December 31, 2020.
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
Minimum requirement for “Well-Capitalized”
 Institution
June 30, 2021 Amount Ratio Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $ 184,081  8.51  % $ 86,499  4.00  % $ 108,124  5.00  %
Common Equity Tier 1 Ratio (CET 1) $ 184,081  13.61  % $ 60,868  4.50  % $ 87,921  6.50  %
Tier 1 Risk-Based Capital Ratio $ 184,081  13.61  % $ 81,158  6.00  % $ 108,210  8.00  %
Total Risk-Based Capital Ratio $ 194,770  14.40  % $ 108,210  8.00  % $ 135,263  10.00  %
December 31, 2020
Tier 1 Leverage Ratio $ 177,269  9.23  % $ 76,852  4.00  % $ 96,065  5.00  %
Common Equity Tier 1 Ratio (CET 1) $ 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  %
(1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%.
The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At June 30, 2021, 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
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after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes; (ii) in the event the Trust is deemed an investment company; or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.  Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of June 30, 2021, the rate was 1.78%. 

Liquidity
 
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Board of Director’s Asset/Liability Committees.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments.
    Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco.  These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.  As of June 30, 2021, the Company had unpledged securities totaling $768,056,000 available as a secondary source of liquidity and total cash and cash equivalents of $120,666,000.  Cash and cash equivalents at June 30, 2021 increased 71.70% compared to $70,278,000 at December 31, 2020.  Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses.
    As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks.  At June 30, 2021, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $245,311,000 in unused FHLB secured advances and a $11,480,000 secured credit line at the Federal Reserve Bank.  We believe our liquidity sources to be stable and adequate.  At June 30, 2021, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.
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    The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at June 30, 2021 and December 31, 2020:
Credit Lines (In thousands) June 30, 2021 December 31, 2020
Unsecured Credit Lines    
(interest rate varies with market):    
Credit limit $ 110,000  $ 110,000 
Balance outstanding $ —  $ — 
Federal Home Loan Bank    
(interest rate at prevailing interest rate):    
Credit limit $ 245,311  $ 235,371 
Balance outstanding $ —  $ — 
Collateral pledged $ 447,321  $ 435,152 
Fair value of collateral $ 390,874  $ 379,831 
Federal Reserve Bank    
(interest rate at prevailing discount interest rate):    
Credit limit $ 11,480  $ 13,323 
Balance outstanding $ —  $ — 
Collateral pledged $ 11,892  $ 13,538 
Fair value of collateral $ 11,804  $ 13,703 
 
    The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by California statutes and the regulations.
 
OFF-BALANCE SHEET ITEMS
 
In the ordinary course of business, the Company is a party to financial instruments with off-balance risk.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  For an expanded discussion of these financial instruments, refer to Note 7of the Notes to Consolidated Financial Statements included herein and Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.
    In the ordinary course of business, the Company is party to various operating leases.  For a fuller discussion of these financial instruments, refer to Note 10 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 4. CONTROLS AND PROCEDURES
 
As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports provided by a number of executives.  Based upon, and as of the date of the evaluation of the disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
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    There was no change in the Company’s internal controls over financial reporting during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
    In designing and evaluating disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
PART II OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
None to report.
 
ITEM 1A. RISK FACTORS
 
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10- K for the fiscal year ended December 31, 2020 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
A summary of the repurchase activity of the Company’s common stock for the six months ended June 30, 2021 follows.
Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans (1) (2) Approximate dollar value of shares that may yet be purchased under current plans (in thousands)
06/1/2021 - 06/30/2021 239,679  $ 20.17  239,679  $ 7,158,000 
Total 239,679  $ 20.17  239,679 
(1) The Company approved a stock repurchase program effective March 17, 2021 with the intent to purchase up to $12,000,000 of the Company’s outstanding common stock, or approximately 636,943 shares. During the six months ended June 30, 2021, the Company repurchased and retired a total of 239,679 shares at an approximate cost of $20.17 per share.
(2) All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None to report.
 
ITEM 4. MINE SAFETY DISCLOSURES

None to report.
 
ITEM 5. OTHER INFORMATION
 
None to report.

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ITEM 6 EXHIBITS
 
3.1
3.2
10.93
10.94
31.1  
     
31.2  
     
32.1  
     
32.2  
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension labels Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Link Document
 
•Management contract and compensatory plans.

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SIGNATURES
 
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Central Valley Community Bancorp  
   
Date: August 4, 2021 /s/ James M. Ford
  James M. Ford
  President and Chief Executive Officer
   
Date: August 4, 2021 /s/ David A. Kinross
  David A. Kinross
  Executive Vice President and Chief Financial Officer
 

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EXHIBIT 10.93
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Executive Salary Continuation Agreement (the “Agreement”) is made effective July 1, 2021 (the “Effective Date”), and is entered into by and between Central Valley Community Bank (the “Bank”) and Patrick Luis (the “Executive”), each a “Party” and together the “Parties.”
RECITALS
A.The Executive is a valued executive of the Bank, and currently serves as the Bank’s EVP Chief Credit Officer.
B.The Bank’s Board of Directors (the “Board”) has determined that the Executive’s services to the Bank are valuable. The Bank and the Executive desire to enter into this Agreement under which the Bank has agreed to make certain payments to the Executive following the termination of employment.
C.The Parties intend that this Agreement shall constitute an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Executive under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The parties further intend that this Agreement shall constitute a nonqualified deferred compensation arrangement under the Internal Revenue Code (“Code”). The Executive is fully advised of the Bank’s financial status and has had substantial input in the design of and benefits provided under this Agreement.
AGREEMENT
In consideration of the mutual promises, covenants, and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
I.EMPLOYMENT
The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board. Subject to the terms of this Agreement and any current or future employment agreement between the Bank and the Executive, either the Bank or the Executive may terminate the employment relationship at any time, for any reason or for no reason.
II.FRINGE BENEFITS
The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of salary continuation benefits.
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EXHIBIT 10.93
III.RETIREMENT BENEFIT
If the Executive Retires on or after October 5, 2025, the Bank shall pay the Executive an annual retirement benefit equal to Forty Thousand Dollars and No/100 ($40,000.00), in equal monthly installments (each of which shall be 1/12 of the annual benefit), for a period of sixty (60) months, commencing on the first day of the month following the date of the Executive’s Retirement. Beginning with the thirteenth month that benefits are paid, and continuing thereafter until paid in full, the annual benefit shall be increased each year by three percent (3%) from the previous year’s benefit to account for cost of living increases. In the event of the Executive’s death prior to the date all payments have been made, Section IV of this Agreement shall control. Any benefit payable under this Section shall be subject to reduction or elimination as provided in Section VII.
For purposes of this Section, “Retirement” and “Retire” mean that the Executive remains in the continuous employ of the Bank from the Effective Date and then retires from active employment (and his Employment Terminates) with the Bank, after October 5, 2025.
If the Executive Terminates Employment before October 5, 2025, this Agreement shall immediately terminate and the Executive shall not be entitled to receive any benefits under this Agreement.
IV.DEATH BENEFIT
In the event of the Executive’s death, no benefits shall be payable hereunder and this Agreement shall automatically terminate. If the Executive is already in pay status at the time of his death, no further payments will be made, and his right to any additional payments will terminate. Notwithstanding the foregoing, in the event that the Policy(ies) described in that certain Life Insurance Endorsement Method Split Dollar Agreement between the Bank and the Executive of even date herewith (the “Split Dollar Agreement”) is/are surrendered, lapse or are otherwise terminated by the Bank, and the Bank does not replace such Policy(ies) with other comparable life insurance, such that no death benefits are payable under the Split Dollar Agreement, then in the event of the Executive’s death, the Executive’s beneficiaries under the Split Dollar Agreement shall be entitled to the payment of the benefits, if any, described in Section VI(A) or VI(B) of the Split Dollar Agreement, as applicable, in lieu of any other benefit under this Agreement.
V.TERMINATION OF EMPLOYMENT
A.Definitions and Construction.
“Termination of Employment” or “Employment Terminates” means that the Executive’s employment with the Bank is terminated and the Executive actually separates from service with the Bank and does not continue in his prior capacity. Termination of Employment does not include the Executive’s military leave, sick leave or other bona fide leave of absence (such as temporary employment with the government) if the period of leave does not exceed six months, or if longer, so long as his right to reemployment with the Bank is provided either in contract or by statute. Notwithstanding the foregoing, Executive’s employment shall be deemed to have terminated, and Executive shall have suffered an Employment Termination, when the Parties reasonably anticipate that Executive will have a permanent reduction in the level of bona fide
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EXHIBIT 10.93
services provided to the Bank, to a level of service that is less than fifty percent (50%) of the average level of bona fide services provided by Executive to the Bank in the immediately preceding thirty-six (36) month period. Notwithstanding anything to the contrary, the terms “Termination of Employment” and “Employment Terminates” shall be construed in accordance with Code Section 409A, together with regulations and guidance promulgated thereunder, as amended from time to time (collectively referred to as “Code Section 409A”).
B.Termination of Employment For Cause.
In the event the Executive’s Employment Terminates For Cause, then this Agreement shall immediately terminate and the Executive shall forfeit all benefits and shall not be entitled to receive any benefits under this Agreement. “For Cause” shall mean any of the following actions by the Executive that result in an adverse effect on the Bank: (1) gross negligence or gross neglect; (2) the commission of a felony or gross misdemeanor involving moral turpitude, fraud, or dishonesty; (3) the willful violation of any law, rule, or regulation (other than a traffic violation or similar offense); (4) an intentional failure to perform stated duties; or (5) a breach of fiduciary duty involving personal profit. If a dispute arises as to whether Termination of Employment was For Cause, such dispute shall be resolved by arbitration as set forth in this Agreement.
VI.CHANGE IN CONTROL
Upon a Change In Control, the Bank shall pay the Executive a lump sum payment equal to the present value (calculated using the assumptions set forth in Section IX(K), determined as of the date of payment) of one hundred percent (100%) of the benefit that the Executive would have received under Section III(A) had the Executive been employed by the Bank until October 5, 2025. The lump sum payment shall be made on the first day of the month following the date of Change In Control. The payment of a lump sum pursuant to this Section shall be in lieu of any other benefit under this Agreement. Any benefit payable under this Section shall be subject to reduction or elimination as provided in Section VII.
A “Change In Control” shall be deemed to have occurred on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the Bank that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Bank. However, if any one person or more than one person acting as a group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Bank, the acquisition of additional stock by the same person or persons will not be considered to cause a Change In Control. Further, an increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Bank acquires its stock in exchange for property will not be considered to cause a Change In Control. Transfers of Bank stock on account of death, gift, transfers between family members or transfers to a qualified retirement plan maintained by the Bank shall not be considered in determining whether there has been a Change In Control. For purposes of this Section, the term “Bank” shall include any holding company, meaning any corporation that is a majority shareholder of the Bank. A “Change In Control” shall be interpreted in accordance with the definition of “Change in Ownership” under Code Section 409A, and to the extent that an event or series of events does not constitute a
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“Change in Ownership” under Code Section 409A, the event or series of events will not constitute a “Change In Control” under this Agreement.

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VII.LEGAL AND REGULATORY RESTRICTIONS ON BENEFIT PAYMENTS
Benefit payments under this Agreement are subject to any restrictions imposed by applicable state or federal laws, rules, regulations, or orders or directives issued by regulatory authorities (referred to as “Payment Restrictions”). Bank shall not be required to make any payment to Executive or take any other action under this Agreement if such payment or action will or reasonably could result in any violation of any Payment Restrictions, including but not limited to the specific Payment Restrictions described in subsections (A) and (B) below.
A.Restrictions on Contracts and Payments for Insured Depository Institutions in Troubled Status.
The parties acknowledge and agree that while the restrictions contained in the Federal Deposit Insurance Act, Section 18(k) [12 U.S.C. §1828(k)], relating to contracts for and payment of executive compensation and benefits by insured depository institutions in “troubled” condition, do not currently apply to the Bank or the Executive, such provisions could apply in the future.
B.Delayed Payments to Certain Executives Under Code Section 409A.
If Executive is a Specified Employee as of the date of Termination of Employment, payments under this Agreement may not be made before the date that is six months after Termination of Employment (or, if earlier than the end of the six-month period, the date of death of the Executive). Payments to which the Executive would otherwise be entitled during the first six months following Termination of Employment, but for this Six-Month Delay provision, shall be accumulated and paid on the first day of the seventh month following Termination of Employment.
(i)Specified Employee.
Executive shall be deemed to be a “Specified Employee” if, as of the date of Executive’s Termination of Employment, Executive is a Key Employee of the Bank and the Bank (or its holding company, Central Valley Community Bancorp) has stock which is publicly traded on an established securities market or otherwise.
(ii)Key Employee.
If Executive meets each of the requirements of Internal Revenue Code Section 416(i)(1)(A)(i), (ii), and (iii) (applied in accordance with the regulations thereunder and disregarding Section 416(i)(5)) at any time during a twelve month period ending on December 31 (the “Specified Employee Identification Date”), then Executive shall be treated as a Key Employee for the entire twelve month period beginning on the following April 1. Such April 1 date shall be the “Specified Employee Effective Date” for purposes of Section 409A.
C.Clawback.
In the event that any Payment Restrictions or any contractual arrangement with or required by a regulatory authority require Bank to seek or demand repayment or return of any payments made to Executive under this Agreement for any reason, Executive agrees to repay to Bank the aggregate amount of such payments no later than thirty (30) days following Executive’s receipt
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of a written notice from Bank indicating that payments received by Executive under this Agreement are subject to recapture or clawback.
VIII.RESTRICTIONS ON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. To the extent the Executive or any successor in interest becomes eligible to receive benefits under this Agreement, he or she shall be and remain a general creditor of the Bank in the same manner as any other creditor having a general claim for unpaid compensation. The Bank reserves the absolute right, in its sole discretion, to purchase life insurance in conjunction with the benefits provided under this Agreement. The Bank further reserves the absolute right, in its sole discretion, to establish a grantor trust which may be used to hold Bank assets to be maintained as reserves against the Bank’s unfunded, unsecured obligations hereunder. Such reserves shall at all times be subject to the claims of the Bank’s creditors. If a trust or other vehicle is established, the Bank’s obligations hereunder shall be reduced to the extent assets are utilized to meet its obligations. Any trust established by the Bank and the assets held in trust shall conform in substance to the terms of the model trust described in Revenue Procedure 92-64, 1992-33 IRB 11 (8-17-92). The Bank reserves the absolute right, in its sole discretion, to terminate any life insurance purchased or any grantor trust established for these purposes at any time, in whole or in part. At no time shall the Executive have any lien or right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.
IX.MISCELLANEOUS
A.Prohibition Against Alienation or Assignment.
The Executive, his surviving spouse, and any other beneficiary(ies) under this Agreement shall not have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any benefit which may become payable hereunder. No benefits shall be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s beneficiary(ies), or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any beneficiary attempts to assign, commute, hypothecate, transfer or dispose of the benefits which may become payable hereunder, the Bank’s liabilities shall forthwith cease and terminate.
B.Binding Obligation of the Bank and Any Successor in Interest.
The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person agrees, in writing, to assume and discharge the Bank’s duties and obligations under this Agreement. This Agreement shall be binding upon the Parties, their successors, beneficiaries, heirs and personal representatives.
C.Amendment or Revocation.
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It is agreed by and between the Parties that, during the lifetime of the Executive, this Agreement may be amended or revoked at any time or times, in whole or in part, by the mutual written consent of the Executive and the Bank.
D.Gender.
Whenever in this Agreement words are used in the masculine, feminine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.
E.Effect on Other Bank Benefit Plans.
Except as provided in Section VII, nothing contained in this Agreement shall affect the Executive’s rights or shall create any rights to participate in or be covered by any qualified or non-qualified pension, profit-sharing, group, bonus or other supplemental compensation or fringe benefit plan sponsored or offered by the Bank.
F.Headings.
Headings and subheadings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement.
G.Applicable Law.
The validity and interpretation of this Agreement shall be governed by applicable federal law and the laws of the State of California.
H.Partial Invalidity.
If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.
I.Not a Contract of Employment.
This Agreement shall not be deemed to constitute a contract of employment between the Parties, nor shall any provision hereof restrict the right of the Bank to discharge the Executive or restrict the right of the Executive to terminate employment.
J.Effective Date.
This Agreement shall be effective on the Effective Date specified above.
K.Present Value.
All present value calculations under this Agreement shall be based on the following discount rate:
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Discount Rate:    The discount rate as used in the calculations for this Agreement shall comply with the accounting standards contained in ASC 715. The initial rate shall be three and 2/100 percent (3.02%) and shall be adjusted quarterly.

L.Contradiction in Terms of Agreement and Exhibits.
If there is a contradiction in the terms of this Agreement and the exhibits attached hereto with respect to the benefits payable, then the terms set forth in the Agreement shall control.
X.ERISA PROVISIONS
A.Named Fiduciary and Plan Administrator.
The “Named Fiduciary and Plan Administrator” of this Agreement shall be Central Valley Community Bank. The Board, in its discretion, may appoint one or more individuals to serve in this capacity. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of the Agreement. The Named Fiduciary may delegate to others certain aspects of the management and operation, including the employment of advisors and the delegation of ministerial duties to qualified individuals.
B.Claims Procedure and Arbitration.
In the event a dispute arises with respect to benefits under this Agreement and the disputed benefits are not paid, then the Executive or his beneficiaries may make a written claim to the Named Fiduciary and Plan Administrator named above within sixty (60) days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and, if the claim is denied in whole or in part, they shall respond in writing within sixty (60) days of receipt of such claim, stating specific reasons for the denial, and providing references to the provisions of this Agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimant(s) if a further review of the claim is desired. A claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the prescribed sixty (60) day period.
If claimants desire a second review they shall notify the Named Fiduciary and Plan Administrator in writing within sixty (60) days of the initial claim denial. Claimants may review this Agreement or any documents relating thereto and submit any written issues and comments that may be appropriate. In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of this Agreement upon which the decision is based.
If claimants continue to dispute the benefit denial based upon completed performance of this Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to an arbitrator for final arbitration. The arbitrator shall be selected by mutual agreement of the Bank and the claimants. The arbitrator shall operate under any generally
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recognized set of arbitration rules. The Parties agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitrator with respect to any controversy properly submitted to it for determination.
Where a dispute arises as to benefits forfeited as a result of the Bank’s discharge of the Executive For Cause, such dispute shall likewise be submitted to arbitration as described above and the Parties agree to be bound by the arbitrator’s decision.
XI.TERMINATION OR MODIFICATION OF AGREEMENT BY REASON OF CHANGES IN THE LAW, RULES OR REGULATIONS
The Bank is entering into this Agreement upon the assumption that certain existing tax laws, rules and regulations will continue in effect in their current form. If any such assumptions should change and the change has a detrimental effect on this Agreement, then the Bank reserves the right to terminate or modify this Agreement. This paragraph shall become null and void effective immediately upon a Change In Control.
XII.CODE SECTION 280G
Notwithstanding any provision of this Agreement to the contrary, if all or a portion of any benefit payment under this Agreement, alone or together with any other compensation or benefit, will be a non-deductible expense to the Bank by reason of Code Section 280G, the Bank shall reduce the benefits payable under this Agreement as necessary to avoid the application of Section 280G. The Bank shall have the power to reduce benefits payable under this Agreement to zero, if necessary.
XIII.USE OF TRADE SECRETS AND SOLICITATION AFTER TERMINATION OF EMPLOYMENT
In further consideration of this Agreement, Executive agrees not to use Bank’s trade secrets and confidential information to compete with Bank at any time, directly or indirectly.  As further consideration, for a period of one (1) year following termination of his employment, Executive agrees not to solicit, directly or indirectly, (A) any employees of Bank or consultants to Bank who are located within the state of California to terminate such employment or consulting arrangement or to work for anyone in competition with Bank; and (B) any Bank customers who are known to Executive as a result of his employment with Bank. In the event that Executive breaches his obligations under this section, Bank shall have the right, in its sole discretion, to not pay any benefit due Executive under this Agreement.
XIV.PROHIBITION AGAINST ACCELERATION
Notwithstanding anything to the contrary, neither the time nor the scheduling of payments under this Agreement may be accelerated unless such acceleration is permissible under Code Section 409A, other applicable law and the terms of this Agreement.
IN WITNESS WHEREOF, the Parties acknowledge that each has carefully read this Agreement and executed the original on the date written below and that, upon execution, each has received a conforming copy.
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BANK:

CENTRAL VALLEY COMMUNITY BANK


By:                         
    James Ford
    President and Chief Executive Officer

Dated:    July 1, 2021                
EXECUTIVE:

PATRICK LUIS


                        
Patrick Luis

Dated:    July 1, 2021                

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EXHIBIT A


BENEFICIARY DESIGNATION


I, Patrick Luis, designate the following as beneficiary of benefits under the Executive Salary Continuation Agreement payable following my death:

    Primary Beneficiary:                                

    Contingent Beneficiary:                                

NOTE:    To name a trust as beneficiary, please provide the name of the trustee and the exact date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with Central Valley Community Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary, in the event of the dissolution of our marriage.

Dated:    July 1, 2021                                            
Patrick Luis
EVP, Chief Credit Officer


ACCEPTED by Central Valley Community Bank


Dated:    July 1, 2021                By:                             
    James Ford
    President and Chief Executive Officer




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EXHIBIT 10.94
LIFE INSURANCE SPLIT DOLLAR
ENDORSEMENT METHOD AGREEMENT
Insurers and Policy Numbers:        Mass Mutual Insurance
                        Policy #39159856
                        Protective Life Insurance
                        Policy #85300605
Bank:                        Central Valley Community Bank
Insured:                    Patrick Luis
Relationship of Insured to Bank:        EVP Chief Credit Officer
This Life Insurance Split Dollar Endorsement Method Agreement (the “Agreement”) is made effective as of July 1, 2021, and is entered into by and between Central Valley Community Bank (the “Bank”) and Patrick Luis (the “Insured”), each a “Party” and together the “Parties.”
AGREEMENT
The respective rights and duties of the Bank and the Insured in the above-referenced policy shall be pursuant to the terms set forth below:
I.DEFINITIONS
Refer to the policy contract for the definition of all terms in this Agreement.
II.POLICY TITLE AND OWNERSHIP
Title and ownership shall reside in the Bank for its use and for the use of the Insured in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw on the policy cash values. Where the Bank and the Insured (or assignee, with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject Split Dollar policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement.
III.BENEFICIARY DESIGNATION RIGHTS
The Insured (or assignee) shall have the right and power to designate a beneficiary or beneficiaries to receive the Insured’s share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement.
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EXHIBIT 10.94
IV.PREMIUM PAYMENT METHOD
The Bank intends to pay an amount equal to the planned premiums and any other premium payments that might become necessary to keep the policy in force.
V.TAXABLE BENEFIT
Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income each year on Form W-2 or its equivalent.
VI.DIVISION OF DEATH PROCEEDS
Subject to Paragraphs VII and IX herein, the division of the death proceeds of the policy is as follows:
A.Upon death of the Insured prior to a Termination of Employment with the Bank, the Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to a lump sum payment equal to the present value of the Retirement Benefit under that certain Executive Salary Continuation Agreement between the Bank and Insured dated of even date herewith (the “Salary Continuation Agreement”), assuming that the payments would begin on the date of death and continue for sixty months, or one hundred percent (100%) of the total proceeds of the policy as of the date of death, whichever amount is less. Present value calculations shall be made using the assumptions set forth in Section IX(K) of the Salary Continuation Agreement.
B.Upon death of the Insured following Retirement or Termination of Employment with the Bank, the Insured's beneficiary(ies), designated in accordance with Paragraph III, shall be entitled to a lump sum payment equal to the present value of one hundred percent (100%) of the sum of all remaining payments, if any, that would have been made under the Salary Continuation Agreement but for the Insured’s death, or one hundred percent (100%) of the total proceeds of the policy as of the date of death, whichever amount is less. If no benefits are payable to the Insured pursuant to the Salary Continuation Agreement following Termination of Employment, no benefit shall be payable under this Agreement. Present value calculations shall be made using the assumptions set forth in Section IX(K) of the Salary Continuation Agreement.
C.The Bank shall be entitled to the remainder of such proceeds.
D.The Bank and the Insured (or assignees) shall share in any interest due on the death proceeds on a pro rata basis as the proceeds due each respectively bears to the total proceeds, excluding any such interest.
E.For purposes of this Agreement, “Termination of Employment”, “Retirement”, “Retirement Benefit” and “Change In Control” shall have the same meanings as set forth in the Salary Continuation Agreement.
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VII.DIVISION OF THE CASH SURRENDER VALUE OF THE POLICY
During the Insured’s life, the Bank shall at all times be entitled to an amount equal to the policy’s cash value, as that term is defined in the policy contract, less any policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable surrender charges. Such cash value shall be determined as of the date of surrender. Notwithstanding the foregoing, upon Insured’s death, the proceeds of the policy shall first be used to satisfy the obligations to Insured’s beneficiaries set forth in Paragraph VI.
VIII.RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS
In the event the policy involves an endowment or annuity element, the Bank’s right and interest in any endowment proceeds or annuity benefits, on expiration of the deferment period, shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the policy’s cash value. Such endowment proceeds or annuity benefits shall be considered to be like death proceeds for the purposes of division under this Agreement.
IX.TERMINATION OF AGREEMENT
This Agreement shall terminate upon the occurrence of any one of the following:
1.In the event benefits become payable to the Insured following a Change In Control pursuant to Section VI of the Salary Continuation Agreement;
2.The Insured shall be discharged from employment with the Bank for cause. The term for “cause” shall mean any of the following that result in an adverse effect on the Bank: (i) gross negligence or gross neglect; (ii) the commission of a felony or gross misdemeanor involving moral turpitude, fraud, or dishonesty; (iii) the willful violation of any law, rule, or regulation (other than a traffic violation or similar offense); (iv) an intentional failure to perform stated duties; or (v) a breach of fiduciary duty involving personal profit; or
3.Surrender, lapse, or other termination of the Policy by the Bank.
Upon termination of this Agreement pursuant to (2) or (3) above, the Insured (or assignee) shall have a fifteen (15) day option to receive from the Bank an absolute assignment of the policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment referred to above shall be the greater of:
(a)    The Bank’s share of the cash value of the policy on the date of such assignment, as defined in this Agreement; or
(b)    The amount of the premiums which have been paid by the Bank prior to the date of such assignment, plus interest.
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EXHIBIT 10.94
If within said fifteen (15) day period, the Insured fails to exercise the option, fails to tender the required cash payment, or dies, then the option shall terminate, and the Insured (or assignee) agrees that all of the Insured’s rights, interest and claims in the policy shall terminate as of the date of the termination of this Agreement.
The Insured expressly agrees that this Agreement shall constitute sufficient written notice to the Insured of the Insured’s option to receive an absolute assignment of the policy as set forth herein.
Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above.
X.INSURED’S OR ASSIGNEE’S ASSIGNMENT RIGHTS
The Insured may not, without the written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the subject policy nor any rights, options, privileges or duties created under this Agreement.
XI.AGREEMENT BINDING UPON THE PARTIES
This Agreement shall bind the Insured and the Bank, their heirs, successors, personal representatives and assigns.
XII.ERISA PROVISIONS
The following provisions are part of this Agreement and are intended to meet the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”):
A.Named Fiduciary and Plan Administrator
The “Named Fiduciary and Plan Administrator” of this Life Insurance Split Dollar Endorsement Method Agreement shall be Central Valley Community Bank. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may delegate to others certain management and operational responsibilities, including the employment of advisors and the delegation of any ministerial duties to qualified individuals.
B.Funding Policy
The funding policy for this Agreement shall be to maintain the subject policy in force by paying, when due, all premiums required.
C.Basis of Payment of Benefits
Direct payment by the Insurer is the basis of payment of benefits under this Agreement, with those benefits in turn being based on the payment of premiums as provided in this Agreement.
D.Claim Procedures
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EXHIBIT 10.94
Claim forms or claim information as to the subject policy can be obtained by contacting NFP at (831) 373-4614. When the Named Fiduciary has a claim which may be covered under the provisions described in the insurance policy, he or she should contact the office named above, and either complete a claim form and forward it to an authorized representative of the Insurer or advise the Named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued in accordance with the terms of this Agreement.
In the event that a claim is not eligible under the policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, he or she should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer.
XIII.GENDER
Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.
XIV.INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT
The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the policy provisions shall fully discharge the Insurer for any and all liability.
XV.AMENDMENT OR REVOCATION
It is agreed by and between the parties hereto that, during the lifetime of the Insured, this Agreement may be amended or revoked at any time or times, in whole or in part, by the mutual written consent of the Insured and the Bank, provided however that following a Change in Control of the Bank (as that term is defined in the Salary Continuation Agreement), this Agreement may only be modified by the mutual consent of the Bank and Insured.
XVI.EFFECTIVE DATE
The Effective Date of this Agreement shall be the date first stated above.
XVII.SEVERABILITY AND INTERPRETATION
If a provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nonetheless be enforceable according to their terms. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to law and enforced as amended.
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EXHIBIT 10.94
XVIII.APPLICABLE LAW
The validity and interpretation of this Agreement shall be governed by applicable federal law and the laws of the State of California.
XIX.USE OF TRADE SECRETS AND SOLICITATION AFTER TERMINATION OF EMPLOYMENT
In further consideration of this Agreement, Executive agrees not to use Bank's trade secrets and confidential information to compete with Bank at any time, directly or indirectly. As further consideration, for a period of one (1) year following termination of his employment, Executive agrees not to solicit, directly or indirectly, (A) any employees of Bank or consultants to Bank who are located within the state of California to terminate such employment or consulting arrangement or to work for anyone in competition with Bank; and (B) any Bank customers who are known to Executive as a result of his employment with Bank. In the event that Executive breaches his obligations under this section, Bank shall have the right, in its sole discretion, to not pay any benefit due Executive under this Agreement.
Executed at Fresno, California on July 1, 2021.

BANK

CENTRAL VALLEY COMMUNITY BANK


By:     
James Ford
President and Chief Executive Officer
INSURED

PATRICK LUIS


    
Patrick Luis
EVP Chief Credit Officer


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EXHIBIT 10.94

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BENEFICIARY DESIGNATION FORM
FOR LIFE INSURANCE SPLIT DOLLAR
ENDORSEMENT METHOD AGREEMENT

PRIMARY DESIGNATION:
Name                Address                Relationship
                                                    
                                                    
                                                    

SECONDARY (CONTINGENT) DESIGNATION:
                                                    
                                                    
                                                    

All sums payable under the Life Insurance Split Dollar Endorsement Method Agreement by reason of my death shall be paid to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary (Contingent) Beneficiary.

                                    July 1, 2021            
Patrick Luis                            Date



EXHIBIT 31.1
 
RULE 13a-14(a) [SECTION 302] CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, James M. Ford, certify that:
 
1.                 I have reviewed this Annual Report on Form 10-Q for the Quarter Ended June 30, 2021 of CENTRAL VALLEY COMMUNITY BANCORP;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) & 15d-15(f)) for the registrant and have:
 
a.               designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.              designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.               evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.              disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;
 
5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a.               all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
/s/ James M. Ford Date: August 4, 2021
James M. Ford,
President and Chief Executive Officer (principal executive officer)
 



EXHIBIT 31.2
 
RULE 13a-14(a) [SECTION 302] CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
I, David A. Kinross, certify that:
 
1.                I have reviewed this Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2021 of CENTRAL VALLEY COMMUNITY BANCORP;
 
2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) & 15d-15(f)) for the registrant and have:
 
a.               designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.              designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.               evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.              disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;
 
5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a.               all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
/s/ David A. Kinross Date: August 4, 2021
David A. Kinross,
Executive Vice President and Chief Financial Officer (principal accounting officer and principal financial officer)


EXHIBIT 32.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Central Valley Community Bancorp (CVCB) on Form 10-Q for the period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, James M. Ford, President and Chief Executive Officer of CVCB, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CVCB.
 
A signed original of this written statement required by Section 906 has been provided to Central Valley Community Bancorp and will be retained by Central Valley Community Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

 
Dated: August 4, 2021
 
/s/ James M. Ford
JAMES M. FORD
President and Chief Executive Officer
 



EXHIBIT 32.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
In connection with the Quarterly Report of Central Valley Community Bancorp (CVCB) on Form 10-Q for the period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David A. Kinross, Executive Vice President and Chief Financial Officer of CVCB, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CVCB.
 
A signed original of this written statement required by Section 906 has been provided to Central Valley Community Bancorp and will be retained by Central Valley Community Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

 
Dated: August 4, 2021
 
/s/ David A. Kinross
DAVID A. KINROSS
Executive Vice President and Chief Financial Officer